Microsoft: 'No bounce'

There's a broad consensus that economic recovery is under way more-or-less everywhere.

Where there is considerably less agreement is whether that recovery will be strong and sustained, feeble and fragile or just the brief prelude to another contraction.

The message of stock markets - which have bounced between 40 and 50% in most countries from their lows of the spring - is that good times for business are just around the corner.

This is the biggest share-price boing since the 1930s - and is rational if company profits and dividends are set to surge very strongly in the coming two years, having fallen in the previous two.

Certainly many analysts and investors expect just such a rehabilitation. According to Bloomberg, they are anticipating a rise in corporate profits from 2010 to 2012 of more than 50% in aggregate.

Which would wipe out most of the recession losses.

But what about the business leaders who actually run the world's biggest companies?

Well, the ones I encounter are bemused by the optimism implied by the performance of share prices.

Take Steve Ballmer, the chief executive of Microsoft whom I interviewed this morning.

Microsoft ought to be more sensitive than most companies to economic conditions almost everywhere. And Ballmer does not believe boom times are near at hand.

Yes, we're over the worst, he says.

But he finds it difficult even to use the world "recovery" about where we are.

He says we're bumping along the bottom and will do so for a considerable time - which is presumably measured in years, because for him insipid growth is the new economic reality.

And then there's Michael Geoghegan, chief executive of HSBC, who - in an interview in this morning's FT - says he is anticipating the economy to shrink again.

So who's right - the investor bulls or the management bears?

Well neither have 20:20 crystal balls. And both have vested interests.

Any investor long of equities is hardly going to call the turn unless and until he or she has gone short.

And as for the Ballmers and Geoghagan, it's rational for them to dampen expectations of profits growth and then deliver more than promised.

Also in Ballmer's case, he has a double motive for being gloomy - since his sales pitch du jour, as per a lecture he gave this morning for the CBI, is that hard-pressed companies could do worse in their straitened circumstances than to improve productivity by upgrading (you guessed) their IT.

I suppose I could turn for adjudication to professional economists. But their forecasting record in the past few years on the stuff that matters has been so poor as to make weather forecasters seem imbued with godlike gifts of foresight.

So we're just going to have to accept that our vision is obscured by fog - although many, I'm sure, will have mentally said a big "yes" at the recent observation by the hedge fund pioneer, Crispin Odey, that there is a bubble element to the bounces in share prices, bond prices and commodity prices.

Or to put it another way, the massive exceptional monetary stimulus of central banks has lifted up financial markets rather faster than it has buoyed the real economy.

And the big unanswered question is whether economic reality will catch up with financial-market hopefulness, which would be the benign outcome, or whether the rising prices of bonds, commodities and shares contain an element of unattainable fantasy.

Update, 15:45: Here's why the stock market may be more rational about the prospects for big companies than Ballmer, as per a successful investor in global blue chips with whom I've been chatting.

First, the productivity of US companies has held up in spite of the sharp fall in economic activity - which implies that big companies are typically more efficient than they've ever been and will generate stupendous growth in profits on even modest growth in turnover.

Second, if China is true to its word and "rebalances" to stimulate domestic demand (albeit slowly and steadily), there'll be huge long-term opportunities for businesses with big brands such as Nike, Coke, pharma businesses and so on.

Third, the income-return on equities is so much higher than on deposits, lending to the government or property that the risks are priced in.

Which is all fine and dandy unless you think that there simply won't be any sustained economic growth and/or oil prices will rise so much as to persuade central banks that there's a risk of generalised inflation - which would lead to a rise in interest rates.

A rise in interest, if it came so soon, would be an agonizing blow to the bulls' vulnerable parts.