Boom/Gloom Index slows as sentiment weakens

Index Oct12.pngHere we go again’ seems to be the reaction of financial markets to the US Federal Reserve’s latest push to expand liquidity. So far, policymakers have tried 4 times to return the economy to the world of the Supercycle between 1982-2007. As the chart shows:

• Major stimulus programmes were launched by the G-20 in March 2009
• These failed, and so the US Fed began its QE2 liquidity programme
• This failed, and so the Fed launched Operation Twist
• That failed, and so now we have QE3

The winners have been those who took the liquidity offered, and used it to speculate on a short-term basis in financial markets. Thus the US S&P 500 Index (red line) has risen with the wave of liquidity, and fallen every time it weakened.

The IeC Boom/Gloom Index (blue column) tracks wider sentiment readings. It rose strongly with the stimulus programmes after March 2009. But it has struggled since then. One problem, of course, is that the Fed’s money is not reaching the real economy.

But the real problem is more fundamental. As the Harvard Business Review notes:

“We need to ask if a significant portion of MBA thinking is based on a faulty assumption that global GDP will keep growing in perpetuity. Perhaps the growth we experienced in recent decades was based on a few extraordinary conditions.”

This question needs not only to be asked of MBA students. Many policy makers, investors and executives have fallen into the same trap:

• Growth was constant in the Supercycle, when they began their careers
• But now the BabyBoomers are ageing, and this fabulous growth engine is now going into reverse

This should not be a major problem. And anyway, it is one we have to accept. It is clearly impossible to suddenly create a whole new generation of wealthy 30-somethings.

But sadly, most policy makers (like MBAs) seem never to have learnt that demographics drive demand. Instead, we still await the arrival of people who understand that the idea of growth in perpetuity is simply wishful thinking.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

Leave a Reply