Whats in store for the stockmarket and will Main Street be forgiven for the excesses of Wall Street?
Like most things, once you recognised, or is willing to recognise, the problems, solutions abound. But, turning around a huge vessel takes time. Afterall, the excesses of the market was seeded long ago and its implosion left few unscathe.
Its a global problem aka globalisation!
It takes political will and the willingness to allow adoption of comprehensive, albeit invasive, solutions to repair the damage on Wall Street and thereby lessen the impact, and suffering, on Main Street. There are no painless measures - some doses of communistic measures are needed to reclaim and rehabilitate the irresponsible laissez-faire practices.
a) If Central Banks can't be a Lender of last resort, nationalizing financial institutions that failed is, at best, necessary to restore confidence. It is imperative that the Western nations allow Soverign Funds or Global non-resident investors to, not only increase their stakes in financial institutions but, also welcome Board representations and ideas.
During the 97/98 Asian financial crisis, Western powerhouses and investors bought and controlled many Asian companies, why not the reverse be allowed? You can't have the cake and eat it all; "leave your money and leave my room" is a bad start.
b) In my last article, I mentioned that if one equation in the vicious cycle of cost push and demand pull inflation evaporates, commodities prices will fall due to declining demand. This has materialize and factors of production are/is less dear. Hopefully, with a slowing economy, the cost of living also falls with lower costs of production.
c) When the demand for funds eases, so will interest rates. With renewed and restored confidence, businesses will borrow for expansion to keep up with demand and banks will resume lending as some level of credit creation is needed to grease growth.
d) The catch is if Government simply prints money to satisfy liquidity demand, inflation will rears its ugly head. The world will be a worse place if runaway inflation is twinned with declining or negative growth. If confidence in money as a means of exchange dissipates, all bets are off; recovery becomes more remote.
e) With less rosy attraction in the big, costlier cities, more will return to their rural homeland and 'plough the field'. A change in trend will increase primary production, in particular cereals, rice and other consumables and ease the pressure on prices.
China is leading the way in allowing farmers to own land for up to 30 years for arable purposes. The farmers are allow to buy, sell or merge their land; with better technology, higher yielding grains and machineries, farmers can enjoy economies of scales. With this, Thomas Malthus can rest better.
f) The madness of deleveraging US$ loans and decoupling of Yen-carry trades is being unwind and straightening up fast in this uncertain times as fewer are 'trigger-happy' and reality sets in with many riding on this opportunity to rid their books of overdue positions. When the dusts settle, a more robust regime will surface to rein in on reckless practices.
g) The toxic loans and inflated values of assets will be trimmed and canned and should reflect current values which is affordable albeit minimal and acceptable gearing. The days of living on 'tomorrow's income' today will be a thing of the past.
h) USA and Europe taught Asia some lessons in 1997/98 but imploded under fairly similar but exponential factors. At its peak, Japan was mortgaging their Third Generation's forward earnings to buy properties; Japan is still licking her wound long after the bubble bust in 1990,
If there is no political will to allow foreigners and foreign funds to have a stake and participation in management, the recovery route will be even less certain.
The collapse of stockmarkets worldwide is a reflection of lost confidence in the global financial system. To make matter worse, the fall was sharp and fast and until the stockmarkets stabilize, there is little that can be done to save Main Street from tomorrow's trauma. Failures and closures of financial institutions and businesses, credit contraction and lost confidence translate into lost jobs, depressive moods and declining demand. While policymakers explore, adopt and invent new ways to tackle the crisis, the worst is yet to be.
The 1st - 3rd Qtr 2009 will see mainstream man-in-the-street coming to reckoning and sufferring from this financial fallout. Prices of goods and services will be more earthly bound. Borrowed time and resources will be reduced. Resources will have to be redeployed.
Recovery In Sight & Opportunities Abound
It is not all doom and gloom. There are still opportunities for level headed investments with higher returns as prices ease.
Capitalism is here to stay and the next millionaires or successful tycoon might be you!
Lookout for sectors that are 'bombed out' (banks, financial institutions, manufacturing) and those that cater to necessities (hospitals, drugs, food, commodities) and consumables. Care to tell me more?
Companies NEVER fail; its the management. Be thrifty, turbulence ahead.
Political will to rid overindulgence and excessive, negative, selfish behavior will help turn the vessel around! Hope to see you there when the LUCKY vessel turn around. Now that the causes are identified and recognised, the treatment begins.
Good luck & God bless
THIS IS NOT AN INVESTMENT ADVISE NOR ANY ATTEMPTS TO SWAY DECISIONS. IT SHOULD NOT, AND CANNOT, BE RELIED ON FOR MAKING ANY INVESTMENT DECISIONS. IF IN DOUBT, CONSULT YOUR OWN PROFESSIONALS FOR ADVICES; ITS FOR READING PLEASURE ONLY