Recessions and Bear Markers are not created equal

Very often ‘This time it is different’ is true !

The causes, the length and the severity of recessions and Bear markets are not the same ! Depending on the cause and on the policy actions undertaken the depth and the duration CAN BE VERY DIFFERENT. This personal fundamental view is entirely at odds from the views of chartists maintaining that history is highly repetitive (double bottoms etc).

A) Recessions related to the business cycle and their Bear markets.

Post war thoughts of the death of the business cycle were indeed exaggerated !

Investment activity is highly unstable. It is based on the change in consumption.

Since practically and mathematically consumption can not continuously increase at an increasing rate, investment will eventually decline.

Government should intervene primarily through fiscal policy to stabilize the economy (Keynes,Samuelson and all the great Keynesians). Moreover, consumption might at times suffer. Full employment equilibrium might theoretically exist but practically often needs a budget deficit helping hand. The alternative view on fiscal policy is that if the Government intervenes it does not leave. It creates inefficiencies and eventually inflation. Finally, Fiscal policy can have only short term effects on the real economy if it takes people by surprise ( non anticipated). Verdicts depend also on political philosophy !

Plenty of such business cycles exist that create a substantial drop in earnings especially in cyclical industries and thus Bear markets. The forecasting difficulty is that the market is an anticipatory mechanism and might drop when the sun is out and appreciate when news and expectations are very dark. It is indeed looking ahead at the turning points.

B) Downturns related to monetary the structural causes

At times over leverage can create dislocations and excessive speculation leading to bubbles. Thy eventually burst. The dot com bubble of 2000, the housing bubble of 2008 or the bubble of the late 1920s are such examples. Tulip mania, south Sea bubble, Florida real estate etc are additional examples in the past . They were connected to expansion of credit ( Wiksell and H.Minsky) and self reinforcing optimism ( and eventually pessimism) by the media and the public. Fundamentals are interestingly completely neglected during the process.

C) Special unforeseen events, “Black swans” ..or of other color.

Wars, political disputes, pandemics, policy cooperation failures. Plenty of examples in our times : the great oil crises of the seventies, program trading in a1987, foreign exchange policy disagreements, bond failures in Latin America and in Russia,

The LTCM failure, The Iraq wars to name a few…The policy actions (Monetary, Fiscal and other) to face them and the resolution of the cause can create COMPLETELY DIFFERENT PATHS of recovery.

In the present we had a completely unforeseen pandemic in blue skies. The first one of this severity since 1918. Relative Stock market Valuations in a February were not excessive

Chinese actions are now scrutinized and hopefully will not re-ignite trade wars.

THE MEDICAL SOLUTIONS ( tests, drugs, vaccines) are key for the resolution.

The Duration and depth of the economic downturn are unknown. Indeed, Fiscal and monetary policy reactions were superb. However, Good international Coordinations , especially in Europe, are still questionable .

We are trying to guess the expectations of the others and whether they have been overly pessimistic or optimistic as reflected in the volatile prices. Let’s also not forget that the well functioning stock and bond markets are sources of Liquidity.

For the moment the PESSIMISTS HAD A BIG TIME MISS.

What about the short term future ???

In the Medium and Long run our vision is much more clear.

Best of luck to us !