The Existential Crises Of Contemporary Capitalism

George Greig, William Blair & Company's global strategist for Investment Management, recently provided his 11th Annual Global Market Outlook

Global Market Outlook: The Current Existential Crises of Contemporary Capitalism — Implications for Future Market Returns

The global market is in its third crisis episode since the peak of the tech bubble in early 2000. This third bear market follows closely on the heels of the global financial crisis of 2008, and in some ways echoes lingering concerns of unfinished business associated with that event. There are now concerns that many of the tacit assumptions made about the functioning of the world economy are not as accurate as expected.

For example, when Japan was hit by an earthquake in March, the world suddenly realised that the global supply chain that underpins globalisation is vulnerable to interruption. A growth scare resulted when multi-layered ceramic capacitors, a common component in electronics worldwide, were no longer available.

Assumptions about China are also being questioned. Just as investors were getting used to the idea that China can drive global growth for the next 50 years, there is the possibility that the Chinese investment-driven growth model might be obsolete before its time and may make the rest of the world vulnerable to a growth slowdown.

The other side of the coin is that some of the healing forces in the economy continued to remain active throughout this period. The consensus for US economic recovery and expansion collapsed in the third quarter amidst some evidence of a slowing economy, lingering high unemployment, the S&P US debt downgrade, and contentious developments in Washington.

However, at the same time the spectre of a double dip recession. Those individuals and institutions who believed they were on the verge of restoring asset values in pension funds and 401ks saw these assets fall 20%. The result was a significant erosion of confidence.

In the United States, there has been discussion of the possibility of a double dip recession since the recovery began almost three years ago. An increasing degree of malaise had developed about incremental bad news appears to be getting better.

In fact, in October, which was a recovery month in the stock market, US economic releases were skewed to the positive side. It is my observation that more of the positive surprises relate to actual activity and more of the negative surprises relate to sentiment and confidence.

This pattern reinforces the idea that investors are, in effect, trying to talk themselves into a recession simply because it seems like the right thing to do. Evidence, however, contradicts this impulse.

This financial/political nexus has significantly eroded confidence in what many believed was a fairly fixed ideology and consensus. An obvious example is the complete collapse in confidence in the European convergence model, where different states are integrated under a common currency. Investors no longer trust in the sustainability of that currency, bond market or even the entire social model that underlies Europe.

Business confidence has also weakened despite the fact that industrial production has remained stable at about 4% growth year over year. This is a pre-recession reading and does not indicate a collapse in activity in the near term.

Each major player in this global economy is in some degree of distress. It is the existential crisis of contemporary global capitalism.

The full commentary is available from William Blair at:
http://www.williamblair.com/documents/Global_Mkt_Overview_112011.pdf