As we come to the end of 2011, I can't help but notice the uncomfortable similarities to the end of another recent year we'd rather forget: 2008.
We've got an unpredictable financial crisis that's threatening to strangle credit and bring banks to their knees, with no concrete solutions in sight. We're spending a lot of time talking about a recession. We've seen a flight to safety that has dragged stock and commodity prices into a hole. Policy makers are debating bailouts and quantitative easing. Canada looks healthier than most developed markets, but experts say we won't be able to avoid a global downturn.
Sound familiar? Take a look these excerpts from news items:
"Investors abandoned more risky, volatile, economic-cycle-sensitive regions and investments in favour of traditional safe havens. That meant falling back on tried-and-true U.S. government bonds and Treasury bills, which, despite the U.S. government's own problems, were still generally considered a more secure bet than most alternatives."
"The deeply oversold conditions and improving tone could sustain the rally for a few more weeks, but its staying power beyond that will depend largely on the state of economic and credit conditions."
"Economists believe the slump in global commodity prices is not yet over, and the continued downturn will weigh particularly heavily on Canada, not just in the resource sector but across the entire economy."
I penned those words at the start of 2009. I could just as easily have written them at the start of this month.
Okay, there's no way the markets are in as big a mess as they were three years ago, when we had just suffered a full-blown market crash, credit freeze and liquidity crisis. Because we saw so much of this before, so recently, our response has been more measured; we're less easily shocked.
But maybe this is a sign of complacency, or wishful thinking. We really have no idea how the European mess will play out; it's virgin territory for the global financial system.
All we know is that we enter 2012 with a lot of unanswered questions, a lot of things that could still go wrong, and how they could affect asset prices is pure guesswork. And as we've seen all too often over the past three years, markets that may or may not be mispriced tend to be unpredictable, prone to wild gyrations on every scrap of news.
"Investors should expect another turbulent year of market volatility during 2012, from a mix of heightened policy risk, political uncertainty, low growth and low interest rates, all of which translate into modest investment returns," said Merrill Lynch in its 2012 outlook this month.
That's not much different from early 2009 – when stocks continued to slide in the first quarter of the year. The markets finally turned around after the U.S. government unveiled massive lending, asset-purchase and stimulus packages.
We could well see a repeat in 2012. If and when Europe's leaders put together a plan to stabilize the euro zone's sovereign debt crisis and steer the region toward recovery, we can expect stocks to rebound enthusiastically.
But unlike 2008, when we were already near the bottom of a recession and had nowhere to go but up, we could still be on a downward economic path well into 2012 – and that could kill any market rebound.
"We believe stocks are expensive – that's based on their inability to sustain earnings and record [profit]margins," said Michael Lebowitz, principal head of U.S. advisory firm Absolute Investment Management LLC, in the firm's recent 2012-outlook conference call.
He believes the economic slowdown will likely prompt the U.S. Federal Reserve Board to launch another round of quantitative easing in 2012. That would temporarily boost stocks – but, he argued, the inflationary impact of this "money printing" by the Fed would ultimately hurt both the stock and bond markets.
We leave the last word to one of Mr. Lebowitz's partners at Absolute, economist Robert Wiedemer – co-author of 2006's America's Bubble Economy and 2009's Aftershock, two bestsellers that foresaw the mess we are currently in. He said rock-bottom interest rates and quantitative easing are symptoms of just how much economic risk remains.
"If everything is so fine with the economy, why are we using such strong medicine to keep it alive?" he said. "This is a cancer, not a cold."