Glimmers of hope vs. global meltdown
General Electric (GE) has started to see the first "glimmers of hope" in the world economy, according to Nani Beccalli, CEO of GE International, which is in charge of all its business outside the United States. George Soros, on the other hand, believes we could end up with a depression unless we handle the current crisis well, saying "the size of the problem is actually bigger than in the 1930s."
It's fascinating to see these two views clash, especially in light of Soros' own investment philosophy of reflexivity, in which people base their decisions on their own perception rather than on reality. Of course, it's difficult to know yet which is the reality, but three things are certain: GE is the world's largest industrial group; we would rather believe we're coming out of this recession soon; and Soros made a ton of money by identifying a disjunction between perception and reality.
As the world's largest industrial group, one cannot dismiss what GE sees. Quite the contrary. If GE says it sees several encouraging bits of economic data around the world that it didn't see two months ago, then there's little doubt it does.
What are these bits? "Signs of life" in the U.S. and European retail sectors, improving profits among European banks, recent rise in the Baltic dry shipping index, which acts as a proxy for global trade, and increasing house sales in the U.S. in February.
Beccalli quickly hedges, though, saying these aren't "the light at the end of the tunnel but rather some little sparkles." And if it was just Beccalli, it might have been easier to dismiss, but it's also others like Cisco's (CSCO) Stefano Pambianchi, who said technology companies were also seeing some rebound in orders.
Indeed, there's a need to believe the economy may soon recover, but one cannot ignore other signs, mostly the rising unemployment in so many parts of the world. It's difficult to see how things can improve as long as the jobs market is in such distress. Aberrations, such as sudden high retail or housing sales can happen and don't make a trend.
As for Soros, he thinks that "events are always exceeding people's understanding." Just like another well-known oracle, Warren Buffett, he believes the "complex financial instruments used by the banks were economic weapons of mass destruction," and he actually expected the tipping point to come much sooner.
Now, he says, the important thing to realize is that "the system that collapsed was flawed," and hence shouldn't be restored, but reformed, yet politicians and bankers alike hadn't realized this yet. He thinks the G-20 meeting in London this Thursday is the last chance to avert disaster, but even before the leaks that a coordinated stimulus plan is not in the cards, he thought it would fail. If the plan fails, he said, then "the global financial and trading system falls apart," and "could push the world into depression." Even if the depression will not happen -- although he thinks chances are quite high it will -- the recession will last a long time.
It's easier to listen Beccaili, and surely his comments are important, but it may be more important to listen to Soros and consider his words (even if he says he has psycho-somatic illnesses that tip him off to changes in the market). The signs are around us; has anyone seen any "sparkles"?