bizzXceleration: Performance, Value and Profit

Current Economic Situation: Durable Goods

In the short-run the DG Orders look pretty decent. Based on these charts that optimism has something to and we'd have to judge that the economy has indeed turned the corner and is starting to move up. Not with standing the big downward revision that surprised everybody in GDP. The question will be what will GDP look like next year? Northern Trust has just published two major outlook updates which we link too in the readings. They're expecting a weak 2010 (~2.2%?) after the Q4 inventory surge. (NB: the global growth outlook is very good, a detailed worldwide survey and MUST read IOHO).

We're still waiting for the national accounts data to continue being revised back before 1995 but that'll take time. In the meantime we can still see the DG orders (xAC), Industrial Production and Capex relationship (bearing in mind the latter is only thru Q3). Something we've harped on - capital spending is not a leading indicator, it's a lagging indicator. That means that anybody making equipment and/or in Technology will not be seeing a very sanguine 2010, especially if the economy is as weak as we and others expect it to be.

The Demand Outlook: Wages, Employment, Consumption

We're still in a somewhat turbulent environment of course where consumer spending is largely being driven by government stimulus programs. Which creates some funny behavior and anomolies in the data. Of course we'd rather have bad data than a bad economy (at least on most days).

This next chart is pretty big so you definitely want to enlarge it - and then study it pretty carefully. It tracks the changes in Wages + Employment and the components vs. wider economic data (GDP, Consumption) on a monthly or quarterly basis in two timeframes. The monthlies tell us that Consumption flattened off - worrisome by itself while W+E is dropping. The pre-Xmas gift of oil prices driving inflation lower and real wages higher is getting swamped by the negative impacts of the job market. Real Wages dropped considerably. That's more than worrisome - that's scary.

The bet is that government spending, absolutely vital for pulling us out of a tailspin, would be able to hand off to organic growth driven by increased consumer demand. On that front this looks anything but encouraging. In the UR chart you can see the anomaly where GDP & Consumption have picked up from the Stimulus but W+E is headed down. Breaking a relationship that's otherwise consistent and constant going back, here, to 1965. Pretty well confirming our argument, or so we think.

So What? Crusin for a Brusin?

The bottom line, sorry to say, is that an optimistic outlook is for a weak recovery with significant downside exposure (think W please) and struggles to get back to self-sustaining growth. Given current valuations, which we've pointed out several times are way above historic levels using Shiller, others or our own analysis of S&P data, the markets are weigh over-valued, period. Let alone with this outlook. If you're still in the markets you're not even trading, you're speculating. As long as you know that and are positioned accordingly that's fine. If you're thinking we've returned to the Golden Age of buy-n-hold you could be in for a very big set of surprises. This is a time to pay careful, give some thought to what you'd do if those surprises come to pass and start re-thinking your portfolio strategies. The key thing to bear in mind is that good returns DO NOT come from buying during periods of high valuations. They come from buying at lows!

Just as a reminder of that earlier analysis we pop in one of the previous charts. The top shows PEs based on 12-month trailing earnings, a better indicator than future expecations. The bottom shows the difference between the PE and the average PE (the red line). PEs have never been more out of line!

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Markets & Investment News

Barry Ritholtz Is Still Bullish on Stocks, But Not for the Long-Term As the dollar has rallied and financial stocks have struggled, the S&P has gone sideways for the past month raising questions over whether a change of trend is afoot, or if fund managers are just playing it safe at the end of a strong year. "We haven't seen a change of trend yet," says Barry Ritholtz, CEO of Fusion IQ. "The market's bias is still to the upside. We're giving the rally the benefit of the doubt. Innocent until proven guilty." Ritholtz expects the market to continue to go higher in the first part of 2010, suggesting 1250-1300 as an upside target for the S&P 500. But Ritholtz, who correctly forecast  the "mother of all bear market rallies" was upon us in early March -- and has remained bullish since, does not believe a new secular (as in long-term) bull market has begun. He still thinks we're in a cyclical (short-term) bull market within a secular bear market, which began in 2000. While his 2010 S&P target would equate to around Dow 13,000, "we could very easily be at 10,000 [again] in two-three-four years from now [but] the way we get it is a lot of volatility - a lot of up and down," Ritholtz says. "The goal from now until let's call it 2015 is to preserve capital -- see if you can make a little money here or there - but be ready for the next 15-to-20 year bull market."

"The Great Recession Is Over," But Hold the Confetti, Barry Ritholtz Says "No one is expecting a rally in the dollar," he proclaims, and that's exactly why he "wouldn't be surprised to see the dollar rally 30-40% from here." A stronger dollar will be a headwind for stocks and "terrible for oil, terrible for gold," he says.  Ritholtz predicts gold will pull back "20-30%" next year.  Unlike many of the gold bugs, he doesn't think "the world is ending" and doesn't predict any social panic that would lead to a spike in gold prices. 

Stocks' 'Nightmare' Decade The U.S. stock market is wrapping up what is likely to be its worst decade ever. In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s. Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade. The period has provided a lesson for ordinary Americans who used stocks as their primary way of saving for retirement.

Many investors were lured to the stock market by the bull market that began in the early 1980s and gained force through the 1990s. But coming out of the 1990s—when a 17.6% average annual gain made it the second-best decade in history behind the 1950s—stocks simply had gotten too expensive. Companies also pared dividends, cutting into investor returns. And in a time of financial panic like 2008, stocks were a terrible place to invest. With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann. He estimates it would take a 3.6% rise between now and year end for the decade to come in better than the 0.2% decline suffered by stocks during the Depression years of the 1930s. The past decade also well underperformed other decades with major financial panics, such as in 1907 and 1893. Since the end of 1999, the Standard & Poor's 500-stock index has lost an average of 3.3% a year on an inflation-adjusted basis, compared with a 1.8% average annual gain during the 1930s when deflation afflicted the economy, according to data compiled by Charles Jones, finance professor at North Carolina State University. His data use dividend estimates for 2009 and the consumer price index for the 12 months through November.

Even the 1970s, when a bear market was coupled with inflation, wasn't as bad as the most recent period. The S&P 500 lost 1.4% after inflation during that decade. So what went wrong for the U.S. stock market? For starters, it turned out that the old rules of valuation matter."We came into this decade horribly overpriced," said Jeremy Grantham, co-founder of money managers GMO LLC. In late 1999, the stocks in the S&P 500 were trading at about an all-time high of 44 times earnings, based on Yale professor Robert Shiller's measure, which tracks prices compared with 10-year earnings and adjusts for inflation. That compares with a long-run average of about 16. Buying at those kinds of values, "you'd better believe you're going to get dismal returns for a considerable chunk of time," said Mr. Grantham, whose firm predicted 10 years ago that the S&P 500 likely would lose nearly 2% a year in the 10 years through 2009. Despite the woeful returns this decade, stocks today aren't a steal. The S&P is trading at a price-to-earnings ratio of about 20 on Mr. Shiller's measure. Mr. Grantham thinks U.S. large-cap stocks are about 30% overpriced, which means returns should be about 30% less than their long-term average for the next seven years. That means returns of just 1.6% a year before adding in inflation.

• Interactive Graphic: Worst Decade Ever

Another lost decade for investors? The past 10 years have been a lost decade for many investors. If you had invested $10,000 in the Standard & Poor's 500 Index ($INX) in October 1999, a decade later you would be looking at a loss of more than $900. Lock your money up in stocks for 10 years and lose 1% a year? It's not supposed to work that way. So what about the next 10 years? It might be just as grim for many investors, who are still sitting on portfolios that are likely to make the next decade as unrewarding as the last.But it doesn't have to be that way.

How to escape the next lost decade I can’t tell you what stocks or stock markets will perform best over the next ten years. But I can tell you that many U.S. investors are still sitting in portfolios that increase the odds that the next ten years will be as unrewarding as the last ten.The last ten years have been really, really painful for investors in U.S. stocks. Investors can’t go back in time and re-do the their under-exposure to overseas stocks in general and emerging markets stocks in particular, but sure can try not to make the same mistake in the next ten years that they made in the last ten. All the evidence, though, is that U.S. investors are about to do it to themselves again.

Treasury Yield Curve Steepens to Record Amid Growth Outlook The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented sales of government debt. The difference between 2- and 10-year Treasury note yields increased to 282 basis points before the government announces Dec. 23 how much it plans to auction in 2-, 5- and 7-year securities next week. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt. A report tomorrow is forecast to show the world’s largest economy expanded in the third quarter. The yield on the benchmark 10-year Treasury note may climb as high as 6 percent over the next two years, according to a Citigroup Inc. report citing technical indicators. “We continue to believe that we have entered a bear market that will see 10-year yields much higher over the next 12 to 24 months,” analysts led by Tom Fitzpatrick in New York wrote to clients in the report, dated Dec. 17. “This would be particularly true if the Fed were to move to adjust policy earlier than expected but could also be true if the fiscal picture remained stressed in the coming years.”

Dollar Strength Seen in Stocks 1st Since Lehman Died The dollar is rallying in tandem with stocks and commodities for the first time since before Lehman Brothers Holdings Inc.’s bankruptcy last year sparked the financial crisis, signaling the worst may be over for the greenback. The currency, equities and raw materials are on pace for their first simultaneous two-month gain since 2008 as the U.S. Dollar Index rises the fastest in 10 months. The gauge has moved in the opposite direction of either the Standard & Poor’s 500 Index or the Reuters/Jefferies CRB Index of commodities for 15 months straight and diverged from both in all but four. Correlated trading reflects growing confidence in the U.S. economy and increasing expectations that the Federal Reserve will start draining some of the $12 trillion used to battle the worst global recession since World War II. Until now, the dollar climbed when traders sought protection from turmoil created by the credit freeze that started in 2007. It weakened when they took advantage of record-low interest rates by selling the currency to finance holdings of higher-yielding overseas assets. The market’s “tremendous dollar-negative sentiment” is “being corrected,” said Adnan Akant, who helps oversee $39 billion and reversed bets against the currency two weeks ago as head of foreign exchange in New York at Fischer Francis Trees & Watts. “The regime is changing, definitely.” The Dollar Index -- which measures its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- dropped 4.1 percent this year. Its tendency to fall when stocks rise and vice versa, which has prevailed since Lehman’s September 2008 collapse, is breaking down. Until Dec. 1, stocks and the Intercontinental Exchange Inc. currency gauge moved in opposite directions on seven of every 10 days this year. They’re in sync more than half the time this month.

And now for something shocking: The dollar and stocks start to move up in tandem The reason for the shift, I’d speculate, is a change in the way that investors view the U.S. economy in both absolute and relative terms. In absolute terms the consensus after recent data is that the economy will grow strongly in 2010. In relative terms the U.S. dollar and U.S. stocks are getting a boost from troubles in the Euro Zone and Japan.

Oil to stay stuck at $70-$80 a barrel in 2010  So who ya’ gonna’ believe on oil prices in 2010? The economists at the International Energy Agency predict that oil demand will pick up sharply in 2010, rising about 1.5 million barrels a day from 2009 levels. Big oil traders, who handle about 15% of the world’s oil output, are significantly less optimistic, according to the Financial Times. They say, the newspaper reports, that demand will pick up more slowly than expected in the first half of 2010. These companies say the increase will be more on the order of 1 million barrels a day. And that won’t be enough to move oil prices currently stuck in a trading range of $70 to $80 a barrel. The problem, as the oil traders see it, is that although demand from China and India will increase strongly, growth in demand from developed economies will be anemic. OPEC (the Organization of Petroleum Exporting Countries) looks like it’s going with the traders. The organization meets tomorrow in Angola amid speculation that it might increase production quotas in anticipation of a pick-up in oil demand in 2010. “No, absolutely not,” Saudi Arabia’s Oil Minister Ali al-Naimi told reporters. The consensus is to extend the current production limit of 24.8 million barrels a day. OPEC, which accounts for about 40% of global oil supply, left quotas unchanged for the third time when it met in September.

The Equity Culture Loses Its Bloom The equity party is over. After a 25-year bender in which stocks catapulted Wall Street to such dizzying heights that financial firms managed to tip off a worldwide recession, the cult of equities is declining in earnest. The resulting hangover could fundamentally change the game for Wall Street. In the 1970s investors were disillusioned by a crushing bear market and high inflation. Large investors for the most part held conservative portfolios that were heavy on bonds and managed by the big banks; retail investors were yet to turn out in full force. The advent of the individual retirement account and other defined contribution plans would change that in the coming decade, creating a new class of investor eager to get into the equity game. In 1985 individuals held $750 billion in IRA and DC plans; by the market peak in 2007, that number had rocketed to $9.2 trillion. But stocks’ modern-day surge really began in the 1980s and led to a golden era for Wall Street. The crash of 1987 was a mere blip, after which equities continued their upward climb, nudged forward by a new class of stock investor who became hooked by how equities seemed to outperform other investments, often dramatically. Banks that issued, sold and traded stocks became huge generators of power and wealth, domestically and globally. The momentum continued virtually unabated (apart from the bear market that followed the tech bust in 2000) until the stock market hit all-time highs in 2007. It was a phenomenal 25-year jag for stocks — enriching many investors but also lining the pockets of Wall Street firms. The Standard & Poor’s 500 index soared from 131.05 to 1,565.153, or 1,194 percent. “If you questioned the basic notion that equities outperformed everything else, you couldn’t get an audience,” recalls John Rekenthaler, vice president of research at mutual-­fund-rater Morningstar. However, he adds: “There’s a lot of skepticism of equities out there today. It’s such a contrast to ten years ago.”  It used to be simple, recalls Lowell Bryan, a director in the financial services practice of McKinsey & Co. Portfolios were made up of stocks and bonds. Commodities were for speculators and farmers, not for investors. “Now there are more and more investable asset classes,” he says. “The big trend is that it’s not all about equities anymore.”

• Death Of Equities

Good Riddance to the '00s. History Suggests Things Will Be Better Over Next Ten Years Though it ended badly for some (i.e., Lehman Brothers, Bear Stearns and the U.S. taxpayer), the first decade of the new millennium ushered in a new Gilded Age on Wall Street. The last 10 years saw the rise of hedge funds, $100 million bonuses and bundles of billionaires from as near as Park Avenue and as distant as Siberia. Unfortunately, for the average American investor it was "deca horribilis," to paraphrase the Queen of England. Overall, the last 10 years were the worst on record for U.S. stocks, dating all the way back to 1820s. Stocks on the New York Stock Exchange fell on average 0.5% annually. The S&P 500 was even worse, losing an average of 3.3% a year. And the Nasdaq, after eclipsing 5,000 in the first quarter of 2000, lost about half its value throughout the decade. This secular bear market was especially cruel to many retail investors, who came to expect 10% annual returns after the raging bull markets of 1980s and 1990s when stocks rose on average 16.6% and 17.6%, respectively. Yet, it wasn't a total loss. Commodity investors made a fortune. Gold rose more than 15% per year and oil prices, though extremely volatile, proved to be a brilliant bet. And, let's not forget the emerging markets. Many of the best performing stock markets over the last 10 years hail from the former Soviet Union. Russian stocks are up more than 700% and the Ukraine has gained more than 900%. Hong Kong's Hang Seng Index, which has benefited from the rise of China, is up 545%. History suggests another bull market for U.S. stocks is coming and the ‘10s will likely be better than ‘00s. There have never been two consecutive decades of negative returns in U.S. stocks.  Unfortunately, as Tom Petty once said, "the waiting is the hardest part."

Economic News & Information

Outlook 2010: Staggered Return to Global Growth The U.S. economy is predicted to grow around 2.5% in 2010, reversing a decline in real gross domestic product of a similar magnitude in 2009. The pace of economic expansion envisioned for 2010 is roughly one-third of the historical average of economic growth that has occurred in the first year following recessions in the post-war period, excluding the 1990-91 and 2001 downturns. The severe recession of 1981-82 was followed by nearly 6.0% GDP growth in the first year of the recovery. Financial headwinds are the main reason for the projection of tepid growth in the U.S. economy during 2010.

Q4:2009 May Be as Good as It Gets Until Q4:2010 Why do we not see more robust growth for 2010? Because the private financial system appears to remain incapable of creating much, if any, net new credit for the private sector. Chart 1 shows the behavior of U.S. commercial bank credit to the private sector from January 1947 through November 2009. The contraction in credit provided to the private sector in the recent recessionary period is unprecedented in the post-war era. Although the rate of contraction slowed in November to 5.6% year over year, this still represents a decline not seen prior to the recent recession. It is generally believed that the U.S. economy needs to grow in the range of 2-3/4% to 3% annually to maintain the level of the unemployment rate. Given our forecast of 2.5% real GDP growth for 2010, we expect the annual average unemployment rate level to be higher in 2010 than it was in 2009. Although the reported decline in the unemployment rate from 10.2% in October to 10.0% in November was encouraging, we believe it was just statistical “noise.” Rather, we see the unemployment edging higher in the first half of 2010, peaking at about 10-1/2%, and then slowly falling in the second half of the year, ending up in the fourth quarter of 2010 about where it was in the fourth quarter of 2009.

More on Temporary Help First a chart that is being circulated by some of the more optimistic forecasters. This chart compares the monthly change in temporary help services (shifted 4 months into the future) and the monthly change in total employment. Sure enough temporary help tends to lead total employment. A number of analysts are now forecasting a surge in employment in early 2010 partially based on this chart. This surge in temporary help is following the usual pattern as Louis Uchitelle notes in the NY Times: Labor Data Show Surge in Hiring of Temp Workers . “The hiring of temporary workers has surged, suggesting that the nation’s employers might soon take the next step, bringing on permanent workers, if they can just convince themselves that the upturn in the economy will be sustained.” … .."When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business. And that is the real question: what comes next. I've been forecasting a strong second half for GDP since late Spring, so I'm not surprised about the pickup in Q3 and Q4 GDP. This increase in GDP has been driven by the stimulus spending, some inventory restocking, and some export growth. But my concern is about 2010. And this is the concern of the hiring managers mentioned in the article: “If this restocking of shelves and warehouses were to stop or slow next year, a possibility that concerns Mr. Littlefield and Ms. Baker, then the temps, freelancers and contract workers they and many other employers now use would have a harder time moving from casual to regular employment.” If the recovery stalls or even slows - as I expect - then employment will not pick up sharply. For more, including some cautionary comments from a BLS economist on using temporary help, see Tom Abate's article in the San Francisco Chronicle. And for a graph of temporary help vs. the unemployment rate, see my earlier post on Temporary Help.

OCC and OTS: Foreclosures, Delinquencies increase in Q3 This report covers about 65% of all mortgages. There are far more prime loans than subprime loans - and the percentage of delinquent prime loans is much lower than for subprime loans. However, there are now significantly more prime loans than subprime loans seriously delinquent. And prime loans tend to be larger than subprime loans, so the losses from each prime loan will probably be higher. The second graph shows foreclosure activity. Notice that foreclosure in process are increasing sharply, but completed foreclosures were only up slightly. The next wave of completed foreclosures is about to break, but the size of the wave depends on the modification programs.

• Existing Home Sales up Sharply in November Months of supply declined to 6.5 months in November. A normal market has under 6 months of supply, so this is still high - and especially considering sales were artificially boosted by the tax credit.
• More on Existing Home Sales What matters for the economy are new home sales, housing starts and residential investment. And there has been little improvement in these key indicators - and there will not be any until the huge overhang of excess inventory is reduced
• More on Falling House Prices This isn't like 2005 when prices were way out of the normal range by most measures - and it is possible that total prices have bottomed (although I think prices will fall further), but prices ex-foreclosures probably still have a ways to go - even with all the government programs aimed at supporting house prices.
• Mortgage Rates Move Higher
• Modifications: The Rentership Society There is no good solution, but at least we are acknowledging that many "homeowners" are really renters.
• MBA: Mortgage Applications Decrease Sharply
• New Home Sales Decrease Sharply in November
• Ratio of Existing to New Home Sales at Record High
• Residential Investment: Moving Sideways

Economic Thaw Stirs Employers The economy is primed for a stronger finish to 2009 than most forecasters and business executives expected just a few months ago, prompting tempered optimism that employers may resume hiring early in the next year. "Growth through October far outpaced our expectations," said Ben Herzon, an economist at Macroeconomic Advisers, a St. Louis forecasting firm that has been markedly optimistic. "It's not an aberration that is going to give way to contraction in 2010. It's the beginning of the recovery." While the economy's strength in 2010 is still a matter of debate, a weekly consensus of forecasters compiled by Macroeconomic Advisers shows steadily rising estimates of fourth-quarter economic growth. At the end of August, the consensus saw 2% growth, at an inflation adjusted annual rate. Today, they see 3.9%. If realized, that would make fourth-quarter growth the best since the first quarter of 2006. Forecasters at mutual-fund house T. Rowe Price have upped their forecast a full percentage point to 3.7% on stronger inventories. Macroeconomic Advisers have added a full percentage point, bringing its forecast to 4.1%. A broad swath of companies from shippers to makers of mining equipment, have reported signs of improvement in recent days. Software company Oracle Corp. reported sales and profit gains amid a rebound in tech spending, while the chief executive of FedEx Corp., the Memphis, Tenn., package-delivery company, declared the U.S. economy has reached a "turning point." With credit markets stabilizing and federal stimulus bolstering growth, economists have for months expected that 2009 would end with a growing economy, albeit a sluggish one. Incoming data over the past few weeks have bolstered optimism. Of course, the economy still has a long way to go before anyone declares it healthy. And some economists warn that restocking of shelves could boost production temporarily, but that oomph could fizzle out later in 2010. Investment in equipment such as machinery or computers remains wobbly. New orders for non-defense capital goods were down 2.9% in October. "The question is once we get past this point, what does the economy look like?" said Zach Pandl, an economist at Nomura Securities. "It remains the big question for the outlook." The Macroeconomic Advisers' consensus sees slower growth -- 3.3% -- in the first quarter.

Recovery on track to strengthen at end of 2009 The economy started the year in free-fall but is on track to end 2009 on stronger footing. After a record four straight quarters of declines, the economy returned to growth in the July-to-September period. The government is expected to estimate the economy expanded at a 2.8 percent pace in the third quarter when it releases its final projection of last quarter's growth on Tuesday at 8:30 a.m. EST. And many analysts think the economy appears headed for an even better finish in the current quarter. The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts say. If they're right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 -- well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29. Yet even such growth wouldn't be enough to quickly drive down the unemployment rate, now at 10 percent. High unemployment and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery. Many economists predict the economy's growth will slow to a pace of around 2 or 3 percent in the first three months of 2010. Growth in the final quarter is expected to be driven by companies restocking depleted inventories. Stocks of goods were slashed at a record pace during the recession. So even the smallest pickup in customer demand will force factories to step up production and boost overall economic activity in the final quarter. Stronger sales of exports to foreign customers, as well as spending by U.S. consumers and businesses, also will help underpin fourth-quarter growth.

November PCE and Saving Rate This graph shows the saving rate starting in 1959 (using a three month centered average for smoothing) through the November Personal Income report. The saving rate was 4.7% in November. I expect the saving rate to continue to rise - possibly to 8% or more - slowing the growth in PCE. The following graph shows real Personal Consumption Expenditures (PCE) through November (2005 dollars). The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter. The colored rectangles show the quarters, and the blue bars are the real monthly PCE. Using the two-month method for estimating Q4 PCE growth gives an estimate of just under 1%. However - note that PCE in August was distorted by the cash-for-clunkers program. So my guess is PCE growth in Q4 will be around 1.7%.

The world economy: The Great Stabilisation IT HAS become known as the “Great Recession”, the year in which the global economy suffered its deepest slump since the second world war. But an equally apt name would be the “Great Stabilisation”. For 2009 was extraordinary not just for how output fell, but for how a catastrophe was averted. Twelve months ago, the panic sown by the bankruptcy of Lehman Brothers had pushed financial markets close to collapse. Global economic activity, from industrial production to foreign trade, was falling faster than in the early 1930s. This time, though, the decline was stemmed within months. Big emerging economies accelerated first and fastest. China’s output, which stalled but never fell, was growing by an annualised rate of some 17% in the second quarter. By mid-year the world’s big, rich economies (with the exception of Britain and Spain) had started to expand again. Only a few laggards, such as Latvia and Ireland, are now likely still to be in recession.There has been a lot of collateral damage. Average unemployment across the OECD is almost 9%. In America, where the recession began much earlier, the jobless rate has doubled to 10%. In some places years of progress in poverty reduction have been undone as the poorest have been hit by the double whammy of weak economies and still-high food prices. But thanks to the resilience of big, populous economies such as China, India and Indonesia, the emerging world overall fared no worse in this downturn than in the 1991 recession. For many people on the planet, the Great Recession was not all that great. That outcome was not inevitable. It was the result of the biggest, broadest and fastest government response in history. Teetering banks were wrapped in a multi-trillion-dollar cocoon of public cash and guarantees. Central banks slashed interest rates; the big ones dramatically expanded their balance-sheets. Governments worldwide embraced fiscal stimulus with gusto. This extraordinary activism helped to stem panic, prop up the financial system and counter the collapse in private demand. Despite claims to the contrary, the Great Recession could have been a Depression without it.

Deflation’s back in Japan–and why investors should care Deflation has returned with a vengeance in Japan. And we’re not talking about some short-term dip in prices either.  The Bank of Japan is forecasting that prices in Japan will fall by 1.5% this year, by 1% in 2010, and by 0.7% in 2011. So much for any recovery in the Japanese economy. Deflation is indeed a symptom of the woes in the Japanese economy. It’s created by excess capacity that drives down prices since companies are willing to cut prices to keep factories running at even partial capacity. It’s a sign that Japan’s export-based economy is getting killed in competition with cheaper Asian exporters such as China and Korea. And it indicates that Japanese companies facing slow demand aren’t investing in new capacity or hiring more workers. But a period of prolonged deflation like Japan has suffered during long patches of the last decade and looks like it will suffer again for an extended period as the country moves from the “00s” to the “teens,” isn’t just a reflection of an economy’s woes. Deflation in this setting itself creates problems. For example, once consumers and CEOs become convinced that prices will keep falling they have a built in excuse for putting off buying decisions. Everything will be cheaper in the future, right? In addition, if prices are falling, low risk investments paying seemingly ridiculously low interest rates become reasonable choices