Investors and consumers have struggled for the last 4 years. Prices of products and services are rapidly increasing and jobs are disappearing and lenders aren't lending. It's bad news. Some call it "economic doldrums"; some call it "a recession"; some even call it "a depression"!
At a recent conference, we heard Danielle Park report on the economy. Ms. Park is a lawyer-turned-accountant who provides insight on the markets and wealth. She's written a book, Juggling Dynamite, and provides asset management services and expert advice.
We've gathered some of the insights from her speech for this article and, where possible, we've provided direct quotations. One of the first things she talked about in her seminar was how cyclical recessions typically work: "Coming out of a recession, [banks] start cutting rates and there is a liquidity infusion into market when valuations are depressed and when consumers can be enticed to buy things on extended credit." This rate-cut gets people buying and that liquidity helps to improve the market.
But that's not how it is currently working. She explained: "Today we're in a different scenario than typical cycles. Throughout the last 4 years, central bankers of the world have already done things they typically do in the bottom of the cycle. For that reason, there is less opportunity for intervention to stop what I think is happening in the world."
She explained that, in a secular bear cycle, there is a recession every 3 to 4 years, which lasts about 18 to 24 months. So even though we've just gone through some very difficult times, Ms. Park says that we're now at the point in time when we should see a recession… And all of the indicators suggest that there is one. "The main story is this cyclical downturn, which is presenting again pretty much on the clock," she said.
In that past, some markets would experience ups and downs but other markets would be insulated from those waves. But now, it's different: "With globalization and [the level of global] trade that has gone on for the past couple of years, you have markets that are nearly perfectly correlated. So when you see a downturn in one part of the developed world, you see it all over the developed world."
"I suggest that we are already in a US recession," Ms. Park continued. "We certainly are [seeing a recession] in the UK and Europe and Japan. Even assuming the best possible outcome (of the fiscal cliff), the world is still contracting."
Although central banks have been trying to resolve the issue, such as with Quantitative Easing (QE), Ms. Park suggests that they are not helping and may even be making it worse. "At certain times in a cycle, central bank liquidity can have an impact like it did in 2010 [with QE1]. It was the first one, it was a surprise to the market, and we were coming out of the bottom of the market in 2009. Valuations were down so it wasn't that hard to have a positive surprise effect. It was something that seemed so novel and miraculous. Stocks traded higher with QE1. Then we saw that QE2 was much less effective because it was now expected. QE3 that was [recently] announced and already we're having negative results in the stock market."
Ms. Park explained that each Quantitative Easing has given diminishing returns and have dramatically impacted the supply and demand of commodities to the detriment of investors: "Commodities have been dramatically impacted by QE – mostly by QE1. But quantitative easing has not been a friend to commodities around the world. Quick money has had a negative effective: It has accelerated the stock price of a number of commodities well above the actual demand in the world. This has enticed more and more production instead of allowing the commodity price to give the producers information about demand, it broke that mechanism. There are more and more mines coming online and more and more companies drilling. We are awash in supply just as we are headed into another global recession. So companies that could be making money based on high commodity prices have struggled to make a profit."
Oil and copper are both inflated right now, she reported, but not iron ore: "The reality is that there are 5 times more US companies drilling for oil today than there was 5 years ago. You'll see a lot of people who come into the space – just like in the tech space, with varying levels of know-how – and they'll be attracted by all the liquidity but they won't understand the cycle they are in. So in 2007 and 2008, instead of realizing that things are a peak demand, they doubled down on leveraging and promising and capital commitments and expansion. We see the same trend in copper where you have a resurgence of capital into that particular metal. Inventories are at record highs; stories of stockpiling in China are accurate; there's a ton of copper in the world. Iron ore is less speculative and more reflective of actual demand. We're seeing production indicators and manufacturing indicators all over the world, contracting now for several months. This is reflected in iron ore where the price is down more than 40% over the last year."
Ms. Park points to other indicators – such as the S&P 500 or the recent announcement by Caterpillar that they are forecasting a downturn in global construction and mining.
Her next news will feel almost more depressing to hopeful investors and consumers: "Nothing from the Federal Reserve and nothing from the outcome of the US election, jobs won't come back for a number of years. There is no policy that can quickly address the issue of jobs. Too many jobs were created in the credit bubble. Too many people worked in construction and real estate and services and those jobs are not coming back until the next big credit cycle, which is a number of years away. It's not something that any one party will fix."
Then Ms. Park delivered the worst news, but provided a hint of optimism at the same time: "One of the things that will have to happen in the next downturn is a [weeding out] of the weak players… As an investor, you have to make sure that you are very aware of who has cash, who has no leverage, and who has a low break-even point. Those will be the ones who will make a dollar and will survive."
Fortunately, Ms. Park believes that there is a growing awareness among investors and consumers: “Fidelity announced today that they now have more money in their bond funds than they do in their equity fund. This is actually good. This trend has been reversing from the peak of the bubble in 2000. You get to the end of the secular bear, when people have turned their backs over a period of 15 to 17 years; they have a revulsion for equities. They want nothing to do with them. They stop seeing bankers as geniuses and they see them as criminals… People aren't interested in taking on debt. They feel extremely vulnerable. They realize that some of the things they were doing in 2007 was financially suicidal and they are coming to their senses. We're making progress by writing things off, going bankrupt and paying debt down; there's a behavioral shift there that's positive."
As she drew her speech to a close, she summarized her position which is definitely a mix of bad news and good news for investors. First the bad news: "What we want is to get through this next period of wash-out where prices are allowed to come back down to the reality of the global economy." People don't like to hear that because it sounds like it could be very difficult times. But then she delivered the good news: "And then you're going to have some wonderful opportunities. The dynamic of this next downturn will be that you have fewer players left but the ones who are there are the ones worth investing in. You'll have less price risk because prices will be lower. It will be a long, slow recovery at the bottom," Ms. Park said. "Have patience… I think we're getting there," she added.
Investors want to hear good news about uptrends in prices. And some experts focused on some areas of the market are predicting exactly that. But Danielle Park, who draws her insight from several global indicators, believes the economy needs to get worse before it can get better.