Getting the big picture right is one of the most important things an investment manager/strategist can do. Anticipating and timing an inflection point, a move from one regime to another, is where reputations are made and the greatest value addition can be achieved.
Post global financial crisis (GFC), the world has been mired in a debt enduced deleveraging. This has undermined confidence, weighed upon the economic fabric, and forced governments to lever-up to make up for private sector slack. Fiscal sector tailwinds are coming to an end. Financial markets are hanging on continuing monetary stimulus to prop up markets. Confidence is in short supply. The hope is that the monetary authorities, in conjunction with sufficient deferment, obfuscation, and can kicking from their fiscal partners, will get us through to the other side. With potholes everywhere (cue Europe, China, US problems), the future is still highly uncertain.
One scenario that could play out is a recovery in credit. US bank balance sheets have largely been rebuilt (the same is not necessarily true of their European counterparts). At some point they will be tempted to take advantage of the competitive opportunities, and in classic follow the herd fashion look to put money out the door. A devolution of reserves and rapid credit creation by financial entities could well be the catalyst that helps turn the corner. With confidence being the most lacking ingredient, wealth and prosperity illusions created by money creation could be just what the doctor ordered.
Will this scenario transpire? Possibly. When is it likely to happen? In 2013 if we continue on our current economic trajectory (many commentators have pegged 2013 as an inflection point of a negative kind). How long will it last? If it happens, I suspect 2-4 years. Will a renewal in growth trend be sufficient to overcome secular headwinds further out (rising interest rates, deteriorating fiscal profile, higher taxes)? It'll be a battle.
As yet, I don't think we have solved our fundamental structural problems within the global financial system. That having been said, if a blast of confidence comes flowing through the system on the back of banks being more willing to take a risk, there is a chance we experience a positive feedback loop that translates to real growth, and the possibility of getting out ahead of our problems. A major catalyst for that scenario is resolution of the developed world's fiscal financial path. Not only does it require confidence, but it also requires real leadership. Two traits in fairly short supply at present.
No signs of it yet. But keep an eye out for a change in conditions.
