Amidst the deepening market gloom, Deutsche Bank is trying to inject some optimism. It is certainly an interesting inflection point. This kind of fear is different in that it is not fear of “normal” recession, it is fear that the system itself is fundmanetally broken. The GFC is rolling on, in other words. This fear is entirely rational. The system may not be broken, but it is going through a fundamental metamorphosis, which is making more conventional analyses appear, if not redundant, at least questionable. But as Deutsche points out, on that conventional analysis, things look pretty good:
Global economic data has been more positive of late, after disappointing expectations heavily through the middle of the year. The data flow from the US has been particularly solid. While sentiment indicators have remained weak, indicators of actual spending have held up. The ISM has stayed in expansionary territory, jobless claims have fallen below 400k while core durable goods orders have continued to grow solidly.
Equity market indices have been well correlated with economic data surprises in recent years. Negative data surprises have usually weighed on equities, while periods of positive surprises have been accompanied by rising markets. Given that developments in Europe have caused economists to downgrade their outlook for the global economy in recent months, we could expect these negative data surprises to abate moving forward.
Deutsche expects a softening in China, but argues that the earnings downgrades in the US are coming to an end and that this signals a buying opportunity:
Over the past 15 years, equity markets have typically only started to recover after the worst of the earnings downgrades have been seen (i.e. earnings downgrades can still persist in upswings, but at a slower pace than before). As downgrades have started to abate, markets may start to move higher in the next few months assuming that the situation in Europe does not materially worsen.
Yep, things are really positive as long as they stay, well, positive. The past will repeat itself as long as the past repeats itself. The trouble in this environment, however, is that we are seeing simultaneous rethinking of the role of the state, banks and markets, in Europe at least. That will inevitably have a global geo-political effect. In that sense, the endless demonisation of European politicians is missing the point. This is not just about the competence of individual politicians, it is about the future of certain political structures around the world. No surprise that leaders are struggling to deal with it. And it makes the investment environment unusually vexed.