Ready for a rally?

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: a rerun of the 1930s Depression, having sold equities and commodities and pushed government bond yields down to very low levels. But what if all the measures taken by governments and central banks actually work? Interest rates have been slashed, taxes have been cut, money has been bumped into the banking system. The effect of these policies might come through in 2009, since both monetary and fiscal policy always take a while to have an effect.

Mr Bowers reckons that the fourth quarter of 2008 may have seen an “inventory shock”. Faced with credit constraints and forecasts of plunging consumer demand, companies slashed production. The result is that they are entering 2009 with very low inventories. If consumer demand turns out to be better than expected, then companies may find themselves desperate to get hold of components and raw materials. Pricing power will return and commodity prices will shoot back up.

That would definitely count as a big surprise. Morgan Stanley, for example, is forecasting a fall of 30% in capital expenditure between now and mid-2010. If Mr Bowers is right, low government-bond yields could lose their appeal and equities could rebound. Income-seeking investors seem unlikely to get much of a return from cash this year.

An equity rally could occur even if the global economy is in for a prolonged period of weakness. Two of the best years for Wall Street in the 20th century were 1933 and 1935, despite the severity of the Depression. The value of the London stockmarket more than doubled in 1975, in the midst of a stagflationary crisis and the year before Britain had to ask the IMF for an emergency loan.

For much of late 2007 and early 2008, many people in the “real economy” wondered what the financial sector was panicking about. It was only in the autumn that business conditions turned savagely down. By extension, it is quite possible that in the course of 2009 company executives will be bemoaning a slump in both demand and profits at a time when stockmarkets are rallying in anticipation of recovery in 2010.