STOCK MARKET WATCH -- Monday, 16 January 2012

[Demeter]

35. The five stages of economic grief

http://www.macrobusiness.com.au/2012/01/the-five-stages-of-economic-grief/

So, we go on holiday expecting the worst and when we return it’s all good! Europe is fixed (at least it was before S&P interfered), the US is powering, property and equity markets are set to boom. Holidays are wonderful things. There is no substitute for the calm that comes with relaxation and the perspective that that brings...revelation has overtaken me during the holidays. With a perspective cleared of the day-to-day cut and thrust of global markets, it was much easier to find clarity in long term strategic thinking. And, like my peers in global markets, I have refreshed my outlook. The direction for the world economy I described last year, with its ceaseless crises and troubled growth, is no longer so salient to from my revitalised perspective. These crises are merely symptoms of a greater underlying shift. And that shift takes me not further from my thoughts of last year but more deeply into them.

The paradigm shift of which I speak is not some new crisis in Europe. Nor is it the US’ emergence from an older crisis. Neither is Australia facing some temporary shift away from its debt-driven growth of yesteryear. It’s not even China and its massive investment model that has driven the mining boom. The shift is that yesterday’s demand driven economy, that relied upon debt to inflate assets and drive private balance sheet growth as well as consumption, has ended. It is finished permanently (or for so long that it might as well be permanent). The global growth of the future will be driven by the forces of investment, production and intensified competition for limited demand. This is nothing new of course. In 2009, PIMCO described it in an investment sense as the “new normal”. But the big leap one must make – of imagination and logic – is to conclude that this is a permanent change, not a passing crisis. It is easy to lose sight of this when engaged with the hysteria of daily market moves.

If you accept, as I do, that this paradigm shift has taken place, then the European “crisis” is nothing more than the latest expression of the underlying reality that countries will now need to compete successfully to grow. It reframes as visionary Germany’s recalcitrant insistence that its southern peers reform their economies in return for fiscal support (even if its various tactics for achieving this end are self-defeating). It repositions the period of relatively stable economic growth currently enjoyed in the US as little more than an oasis of demand-driven calm before the real work begins of addressing its growing fiscal burden and ongoing credit excess. It renders China, with its leadership in savings, industrial capacity and exports, the unquestionable front-runner in ideological and political economics for the future. It is the interplay of these Great Power strategies with the extant force of increasingly conservative capital market structures that forms the foundations of the great shift. All will feel it in their currencies, in their markets and in their understanding of economics itself.

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If 2011 was the year of denial then 2012 will introduce the next phases of grief at the passing of an economic order. There will be anger, bargaining and depression as the interests of the old order seek to duck the nation’s fate. But there will also be the beginnings of acceptance amongst businesses far and wide and, with that, renewal.