The panda rally

A panda went into a Starbucks and ordered a coffee and muffin. On finishing, it took out a gun, shot the cashier and walked out. The store manager followed in hot pursuit, shouting “hey, you can’t do that, come back!” Without looking round, the panda replied, “yes I can, I’m a panda – look it up”. Completely flummoxed, the manager ran back and googled panda: ‘A large mammal; eats shoots and leaves’.

In fact, some online encylopedias describe the panda as ‘a large mammal, about the same size as a black bear’. It would therefore appear that what is currently underway in financial markets is not a simple ‘bear rally’, but a more dangerous variant that could aptly be labeled a ‘panda rally’.

After all, the buzzword being used about the indications that the economic and financial situation is improving is that we are seeing ‘the green shoots of recovery’. Unfortunately, they are likely to prove to be nothing of the sort, but in the interim they are the basis for the regeneration of optimism and risk appetite and hence for a massive rise in equity and commodity markets. The panda rally will continue to suck suckers into the markets, convinced that the slump is over and a new era of rising prices and accumulating wealth is at hand. Then, when confidence is again at effervescent peaks, the panda rally will eat the green shoots and leave, the mini-boom will collapse and the next stage of the slump will emerge, like a black bear, to maul and mangle everything in its path.

This is not a pleasant prospect, so it is hardly surprising that people don’t want to hear of it. They would rather listen to the brokers and government officials, who must convince themselves and others that the worst is indeed behind us, that the situation is truly stabilizing and the path forward points up. But, as this column has repeatedly noted, the great majority of objective, unbiased analysts are highly skeptical of the sustainability of the rally, of the green shoots and of the whole ‘worst is behind us’ argument.

Whether it’s fundamental analysis relating to corporations, sectors or economies that you prefer, or technical and chart-based stuff, the bottom line is the same: there is no basis for claiming that a real improvement is under way, but there are strong grounds for thinking that after a temporary bounce, the underlying forces pulling the economies and markets down will regain the upper hand.

All the talk of ‘green shoots’ looks like an orchestrated effort to make mountains out of molehills. To counteract the effect of statistical sleight of hand, just stand back and get a sense of proportion. Take one example, from the real economy: construction of new homes in the US rose by some 5% last month. Yay, hurrah, recovery in the hammered housing sector is underway! But consider this: if housing starts have fallen 80% from a peak of 100, they are now at 20. If they ‘jump’ 5% from the new base of 20, they are at now at 21 – 79% down from the peak. Is a decline of 79% better than a decline of 80%? Yes. Is it a recovery? Please define ‘recovery’ – from where, to where.

Take another example, from the stock market: bank shares, the most smashed sector of the market, have risen by 100% in the past two months. If you had bought at the bottom, on March 6, you would have doubled your money. But if you are still holding a portfolio of bank shares from 2007, you are down ‘only’ about 65%, instead of maybe 83% at the low. That is indeed an improvement, as far as it goes – but how far does it go? Recovery of losses is a good thing, but it should not be confused with economic recovery, which implies actual growth. The story is repeated for employment and other real economy indicators, and for prices other markets.

But the real problem is not the pretence that molehills are mountains and that pussy-cats are tigers. It is that the molehills may, instead of proving to be the base of proper hills and maybe eventually mountains, be squashed flat or even excavated into pits. The improvement that is taking place is mainly the result of massive government intervention. The jury is still out on whether that will work, but most of the expert witnesses think it won’t. Everyone agrees that the world is in uncharted territory. It surely follows, therefore, that the best place to be is safely sidelined, not in the vanguard of a headlong rush into the wild blue yonder.

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