A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Error of Pessimism

...So why the gloom?

One of the world's pre-eminent forecasters, Anirvan Banerji of the Economic Cycle Research Institute in New York, quotes words written long before he was born to explain the durability of the despondency: "The era of optimism dies in the crisis, but in dying it gives rise to the era of pessimism. This new era is born not an infant but a giant."

Banerji continues: "Those words were written in the 1920s by Wesley Mitchell, my mentor's mentor, and the giant era of pessimism is the issue right now.

"A lot of people say, 'No way there's any sign of recovery, we have seen this huge crisis and things will be horrible, it will be years, maybe decades', and they can't let go of it.

"One example: in New York stock prices have run up over 30 per cent since early March, and everybody I know says that it's a bear-market rally" - that is, a gain within a market whose overall direction is bearish, or negative.

Yet it's customary to define a bull market, a rising market, as a gain of 20 per cent. "No one is prepared to call it a bull market," marvels Banerji.

Why should we take Banerji seriously? Because he correctly forecast the recession. And because his institute has accurately picked all the downturns and upturns in the US economy for decades, based on the work of his mentor, an Australian, the late Geoffrey Moore.

Banerji expects a feeble but real US recovery will be under way within a few months, based on movements in the leading indexes of economic activity that he monitors. His institute has developed indexes for 20 of the world's major economies, including Australia.

What does he see for the world beyond America?

"In China and India growth has slowed but a rebound is already under way. In Korea and Taiwan, industrial production is rebounding. It's not so good in Japan and it's not so good in Europe."

And Australia: "Even assuming that Australia dips briefly into recession, the outlook for Australia will be bright later in the year."