Almost exactly one year ago I predicted mayhem in the markets (see for instance Min intervju i Sydsvenska Dagbladet and Lundaforskare: Konkurserna kommer snart att dugga tätt and mayhem was what we got! Today, that seems to be history, however. Like most of you I am happy that the feeling of a deep pending crisis that we all felt in 2008 has turned to a wide-spread optimistic view of the future world economy. Like many of you, I have also profited from a roller-coaster-like stock market and feel richer than before the crisis. However, despite all this I again have a nagging feeling that not everything is what it seems to be. The reasons for my scepticism is simply that I don’t see how anyone could claim that we have tackled the problems at the heart of the crisis:
- government-, household- and company debt levels in many countries seem to continue to rise
- house prices remain stubbornly high due to artificially low interest rates
- there are clear trade-imbalances in the global economy
- bank-bonuses are back (they never actually disappeared)
- the government support world-wide is massive and probably the one very important factor behind the recovery in most markets over the last six months. This is not sustainable.
- many prudent firms actually do save rather than spend ==> less consumption, less investment and less jobs
My worry is simply that the high indebtedness (the debt seems to have been transferred [for free] rather than removed [at a cost]) coupled with an inevitable exit of the government as financier-cum-consumer might lead to a W-shaped recession with falling stock prices ahead. The only other options I can see is inflation followed by a postponed W- or L-recession. Increased government interference in the markets and raised taxes cannot be seen as a positive either and the only positive I can see at the moment is the optimism seen far and wide (by households, politicians, bankers, short-term investors....)!
To conclude, even if it is not the most probable scenario I think a W-scenario is more probable than what our old enemy consensus says.