Does this analysis have it right or wrong? Post-Lehman World Will Mean W-Shaped Recoveries http://www.bloomberg.com/apps/news?pid=20601039&sid=amB3ytMcNUW4 June 11 (Bloomberg) -- You can see it in the body language when speaking with Japanese officials. Itâs a kind of physical resignation that, well, here we go again: deflation, negligible growth, political maneuvering. There is also an air of lament that Japan is an example of what many economies donât want to become. I could see it in Hiroshi Nakasoâs eyes last week, as the Bank of Japan executive director explained, for the umpteenth time, why interest rates in Asiaâs biggest economy are near zero percent. The same goes for Hiroko Ota, Japanâs former economic and fiscal policy minister. âThe worst is over but I canât say the economy is heading for a recovery at all,â Ota said in a June 4 interview. Itâs probably even worse news that Ota, now vice president at the National Graduate Institute for Policy Studies in Tokyo, says Japanâs recovery may be âW-shaped,â instead of V-shaped. The reason for pessimism is that Japanâs experience with a W-shaped recovery may be a harbinger for the biggest economies. Concerns about a Japan-like âlost decadeâ in the U.S. and elsewhere are well-known. That specter is becoming less likely as trillions of dollars of stimulus work their way through the economy. Talk of another Great Depression is now giving way to fears of an historic inflation surge. What is becoming more likely, though, is the W-ization of the business cycle. Bear-Market Rallies The bear-market-rally argument making the rounds in Asia and the U.S. is preferable to this one. It would merely mean that todayâs rallies will look a bit overdone in the weeks ahead. The prevalence of W-shaped cycles could be with us for years. That would be terrible for the âgreen shootsâ supporters who claim the worst is over in global markets. Hereâs how it would look: Each increase in gross domestic product would fizzle as quickly as it began, undermining rallies in equity markets. Not a lost decade, yet not one that investors would enjoy. Such a scenario would reflect steps that policy makers are taking to restore growth. From Washington to Beijing, officials are still treating the symptoms of the crisis, not the cause. Throwing money at the problem was fine for a while. It is now time to revamp regulations, retool economies and restore trust in markets. Consumers worried they wonât have a job in a month need to rely on the economic outlook. Investors must be confident that the top-rated security they are buying wonât soon be worthless. Banks need to be sure that money they lend wonât lead to more bad loans. Restoring that trust will require bold action by governments and market regulators. Twilight Zone The price that Japan paid for avoiding tough decisions is now seen in the countryâs extreme vulnerability to global export trends. Japan is stuck in the economic equivalent of the âTwilight Zone.â Itâs often forgotten that Japanâs growth in the first half of this decade was underpinned by the largest public debt among developed nations and zero interest rates. Healthy and organic growth it was not. The risk of a W-shaped world economy has been a preoccupation of Stephen Roach, chairman of Morgan Stanley Asia Ltd. in Hong Kong, in recent years. Markets âthat want to price in a classic âV-shapedâ recovery, I think, are in fantasyland right now,â Roach said on June 4. Even China, the nation many view as best positioned to avoid the worst of the global recession, may be heading this way as the effects of stimulus efforts wear off. At that point, the fourth-biggest economy will face a dismal export environment. China Puzzle That scenario makes the debate over what New York economist Brad Setser calls âthe China puzzleâ all the more relevant. On his blog, the former U.S. Treasury official has been exploring why China is growing when other export powerhouses arenât. A particular area of focus has been shifts in Chinaâs policies before and after the September 2008 collapse of Lehman Brothers Holdings Inc. One preliminary conclusion: China had more capacity than most large exporters to stimulate domestic demand once the âLehman shockâ devastated global markets. The real post-Lehman surprise may be how economic cycles and markets gyrate and donât go very far for a while. Part of the problem is the âbubble fixâ phenomenon pervading financial centers such as London, New York and Tokyo. Central banks have slashed interest rates toward zero. Marc Faber, Hong Kong-based publisher of the Gloom, Boom & Doom report, rarely misses an opportunity to compare todayâs markets to a relapsing alcoholic, and central banks to irresponsible bartenders. To dole out more booze, as monetary officials have been doing, is the wrong medicine. Thatâs where markets find themselves, and investors are getting tipsier by the day. The MSCI Asia Pacific Index has surged 49 percent from a five-year low on March 9. Equities from Mumbai to Shanghai to Tokyo are rallying on rising confidence that the worst of the global recession has passed. Perhaps investors are right to revel in recent good news. If we are merely scaling the slope of a W-cycle, though, todayâs bulls wonât be happy a few months from now. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net Last Updated: June 10, 2009 15:00 EDT
A W bottom that then goes sideways until the next W or L simply mean that the structural issues were not resolved by an inflation or reflation. Frankly a possible V bottom in the US scares me more. It would mean that Tim and Ben have poured (are pouring) so much fertilizer that we are going to get an inflationary depression, resolving nothing. I think that history shows (hyper)inflationary depressions to be associated with greater societal destabilization, e.g. the rise of Hitler, the French Revolution, etc.
There will be no "V" shaped recovery, if there is then I would be very hesitant to believe for one second the economy is going to provide any real growth going forward due to money pumped into the system already, the growth would be based on nothing but stimulus money thrown at the economy. To me that's not real growth. I see a "L" shaped economy for the next decade, we will have a lost decade just like Japan went through. Where is real growth in our economy going to come from when the printing press shuts down, millions of jobs created over the last 2 decades will never exist again, the last 2 major bubbles alone created jobs that many will never see again. How is our economy going to sustain any kind of growth without any new type of catalyst going forward???