The latest glut of grim news is abating again. There are signs of another brief turn in the crisis. And with the breather comes another rash of bottom-calls. Even pessimists are calling a big bear rally.
Writes the FT’s chief economics commentator Martin Wolf today:
The good news is that, after an extended period of overvaluation, stock markets are, at last, attractively priced. This should have enticing implications for investors and even for audacious governments.
Is it worth being more circumspect? Looking historically, perhaps yes. We are told this crisis is unprecedented in scale and veracity. Comparisons are drawn between the depression and Japan’s lost decade. The outcome may well be much better than in both of those dramatic, bearish scenarios, but there’s a good takeaway lesson. After the severe crash(es) in both cases, markets continued to drift lower over a period of years because of grim economic fundamentals. Swift government action, the hope is, has nipped - or at least curtailed - that possibility this time around.
Though as Martin Wolf notes as a caveat to his call:
…valuations should not remain below current levels for more than, say, 15 years or so.
The point being that this is perhaps an attractive market for long term investors, though even then, “not sensationally attractive”.
Separately, the FT sums up today (”The vision thing”) the effectiveness of economic forecasts and more specifically, the failure of most to foresee the current crisis:
It has been a bad year for economic forecasters. So bad that royalty wants to know what went wrong. “Why did no one see it coming?” the Queen asked during a visit to the London School of Economics this month.
Her Majesty’s question has sparked a series of ludicrous claims about the prescience of individual forecasters.
Our favourite lesson is given by Kenneth Galbraith, recounting the efforts of the Harvard Economic Society during the Great Depression. Required reading:
The Harvard Economic society, it will be recalled, had come up to the summer of the crash with a valuable reputation for pessimism. This position it abandoned during the summer when the stock market kept on rising and business seemed strong. On November 2, after the crash, the Society concluded that “the present recession, both for stocks and business, is not the precursor of business depression.” On November 10 it made its notable estimate that “a serious depression like that of 1920-21 is outside the range of probability.” It repeated this judgement on November 23 and on December 21 gave its forecast for the new year: “A depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.” On January 18, 1930, the Society said, “There are indications that the severest phase of the recession is over”; on March 1, that “manufacturing activity is now - to judge from past periods of contraction - definitely on the road to recovery”, on March 22, “The outlook continues to be favorable”; on April 19, that “by May or June the spring recovery forecast in our letters of last December and November should be clearly apparent”; on May 17, that business “will turn for the better this month or next, recover vigorously in the third quarter and end the year at levels substantially above normal”; on May 24 it was suggested that conditions “continue to justify” the forecasts of May 17; on June 21, that “despite existing irregularities” there would soon be an improvement; on June 28 it stated that “irregular and conflicting movements of business should soon give way to sustained recovery”; on July 19 it pointed out that “untoward elements have operated to delay recovery but the evidence nonetheless points to substantial improvement”; and on August 30, 1930, the Society stated that “the present depression has about spent its force.” Thereafter the Society became less hopeful. On November 15, 1930, it said: “We are now near the end of the declining phase of the depression.” A year later, on October 31, 1931, it said: “Stabilization at [present] depression levels is clearly possible.” Even these last forecasts were wildly optimistic. Somewhat later, its reputation for infallibility rather dimmed, the Society was dissolved.
