Heard in the Village: December 2009
Some comments he made that the villagers liked were: “We’re expecting 2010 to be at times difficult. The benefits of the stimulus are washing through the system…(But) for the most part, none of their costs are being felt yet.”
There are many good looking economic indicators going into 2010 that would usually be good news. The problem is which are “organic” and which are the benefits of the globally coordinated economic efforts of countries around the world. Many countries have provided fiscal and monetary stimulus. It is difficult to extract how much is happening from stimulus and how much would have happened anyway. In the U.S., growth is much more from stimulus than happening organically.
The other unknown is what happens when the fiscal and monetary stimulus are taken out of the economies. Some of the liquidity of the stimulus went into financial assets which continues to encourage speculative markets.
One villager came up with an “economic onion” concept to explain what is likely to happen in the next few years. We are going through the first layer currently. The economy appears to be good and then a major event happens to cause the market to drop and the next economic layer appears. The market recovers from that and starts up again only to find some other event appears and drops the market again.
There are many political, geo-political and investor attitude changes coming in the next few years creating a variety of uncertainty which the market hates. A possible new twist is how investors and policy makers think they can get the markets to behave the way they want them to behave.
The current financial situation is new to investors and policy makers but they have happened before when debt, speculation, and liquidity become excessive and interest rates stay low too long. It is unlikely that we can escape the “economic” onion.
The villagers decided to review their investment plans to make sure they knew how to tolerate, and profit from, the many risks from changes coming.
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