- December 24, 2008
- Posted by: admin
- Categories: Blog, Uncategorized
Is it just a standard economic recession cycle which is going to get over OR a never-ending reality shaping a new economic world order? Will there be a major reconfiguration of the core and the derivatives of the global financial markets? Will anyone play ‘future derivatives’ in the future?
Is it just a flood which the corporate dinosaurs are going to swim and see thru towards a more certain business landscape – or is it a beginning of the end for the large behemoths for ever?
It is part of the standard economic cycle but magnified due to the excessive debt spending. In the short term we will have an economic crisis. In the mid term we will have new regulartions and ways of doing things. In the long term it will be back to business as normal. We frequently don’t repeat the same mistakes but we do work hard to come up with new creative mistakes to make.
Their is nothing standard about the current economic mess that we are in. During the Bretton Woods period for example, currencies did not float and nations were on the gold standard. You also did not have derivatives and synthetic financial instruments. A case can be made that we were playing with tools that no one really understood. Much of the growth was based on paper profits with no underlying assets or overvalued assets.
In America for example, many of the regulations that were put in place after the Great Depression, have been systematically dismantled. It is equivalent to taking the circuit breaker panel out of your house and wiring it directly to the electrical main. Sure you can run alot more power into the house, but eventually it will melt everything down.
This has been a systemic purge of the system of excesses in different areas. The responses have been to try to avert a depression. Whatever area you seek to influence, there will be consequences. Interest rates affect currencies. Currencies affect commodities. Fiscal policy affects everything.
This will spell the end for many corporations, never to return to their former glory.
This is a crisis, but mostly a bigger example of recurring economic and social cycles. We are already seeing several major configurations, removal of some investment banks and similar, and concentrations of power in banking and other industries.
It is not the end of behemoths, as long as we are in a demographic boom, populations going up, concentrations of effort, at large scale will happen. Besides business, one needs to consider NGO’s, religions and governments as well.
Now if you want to consider future likely crisis…imagine a situation where 99% of all jobs can be done by computers and robots, economically. Add into that a medical system that allows almost everyone in the world to live to 100 years, and nearly zero infant and child mortality. Add in that those who can pay for rejuvenation and regeneration treatments might have healthy lifespans of 500 years. That is the flood that is coming later this century.
It’s only standard where there is a profligate fiat-based fractional-reserve banking scheme in place. On one hand, this recess is standard – or rather INEVITABLE when you have a cartel of private bankers in cahoots with government create money from debt in perpetuity. When a boom or a series of booms is induced by rampant credit creation, a bust is guaranteed.
On the other hand, this scheme could not, cannot, never could be sustained forever. As sure as a cartelized fiat money creates the business cycle (i.e., the business cycle is a result of our money system, not inherent to laissez faire capitalism), it will and must collapse on itself or be abandoned. This is the end of the dollar as the world reserve currency in the coming months. They’ve simply printed too many of them.
The actions of govts and central banks to “fix” the problem are precisely those things that will worsen and prolong the crisis. What must happen is a severe recession must be allowed to run it’s course – a liquidation of malinvestment. Then true value streams can be re-established and the rebuilding process can begin. Any insitution, large behomoth or small operation that cannot meet real market needs is going to be (or should be) liquidated. Then those resources can be re-applied in a more marketable fashion.
Either hyperinflation will occur or a new currency will be instituted against which the current dollar will be grossly devalued. Either way, those of us who hold dollars will see our current buying power soon gutted.
By a few oz of gold and silver. Not as an investment. As an insurance policy.
Its not just a standard economic recession cycle. It will change the world economy. Now the businesses have new set of challenges as well as new opportunities. So the companies that will understand this delimma will swim towards a more certain business landscape.
Don’t panic or be mislead by CNN and the pundits…….. There are 10 year cycles and this one seems a bigger one than many and kicked off by greater incompetence than usual (remember the 1987 crash – one hedge fund collapsed the entire market). Liberal economic systems adjust. Governments have to learn how to speed and ease the transition. Happy New Year
Hi Ali,
The previous two recession of 1990-91 and 2001 were short lived mostly linked to consumer spending, which was manageable. But the current asset bubble has spread all over the globe like a plague hitting banks, corporations, insurances companies. After auto sector next in line is the credit card sector which will burst in 1st quarter of 2009. The known losses have hit a Trillion Dollar mark and could easily stretch towards USD 3 Trillion mark. There is lot of talk of measures to stimulate the economy. New estimates for the calendar year 2009, suggest that the Global growth projection is pushed down to below 3 pct. If we do not add Asian growth number, then the overall global GDP number could worsen.
The bottom still looks far from where we are right now. Estimates are that in USA out of 8.500 Banks & Financial Institutions, half of them will be forced shut down. US Unemployment could easily push beyond 9%.The biggest problem is Cash availability to plug the holes. In my view, USD 3 to 4 Trillion Cash Injection is immediately required to calm the market, whuch is not there. Most of the injection is against borrowed money, so how can borrowed money solve the problem. The cost of fund is also gradually going to rise and printing of money would see sharp surge of inflation, which could lead towrds hyperinflation scenario. It is very tough for capital market, as assets is required to have healthy balance sheet. Banks & Financial institutions are concentrating on quality lending. Globally lending standard has been tightened and lenders are unsure about the health of the borrower balance sheet and therefore, may not be willing to offer liquidity which would continue to cause credit crunch.
I am not sure about the future of Derivatives, Investment Banks, Mutual Funds or Asset Management companies. But, I know that 6-major banks are at the risk of incurring another USD 300 to 400 Billion losses in Derivatives.
This is just the beginning of global financial crisis. Catastrophe cannot be prevented by taking actions just before it’s about to occur. Bailout could only help in delaying the catastrophe, it sends wrong message to the Wall Street and encourages in their wrongdoings. I do not think that the bailout would solve the market fundamentals. It only helps in injecting the liquidity into the financial sector.
The global economy has been intentionally inflated through borrowed money, which leads to Higher Global Growth, Higher Per Capita Income, Higher Consumer Demand, Higher Bank Deposit, Higher Lending, All was only possible due to Borrowed Money and when the Interest Rate moves either way or whenever the Limit of Two Counterparty are fully utilized. So nothing could have been done and the crisis is unavoidable. Therefore, the bubble needs to be pricked so that the air can be passed off.
Hence, in my view the recession is here to stay for a llonger period. Though is not easy to give an exact time frame, but more painful days are surely ahead of us.
Cheers
Asad
Hi M. Ali,
In the US it started in August of 2007 when – the Federal Reserve cut (inter-meeting, 8/17) the ‘discount rate’ to 5.75% from 6.25% citing tighter credit and shaken financial markets. Central banks in the U.S., Europe and Asia had injected more then $400 billion (Aug 9-16) into the banking system providing liquidity to global credit markets.
Global Oversight / new Laws / Regulation were discussed in Washington on Nov 15, see statement: http://www.jcbcapital.com/2008panic.htm
The problems have been identified and stopgap remedies are already being implemented. The current panic / crisis was a failure of US/global laws/regulations. Global Markets have fallen from $62.6 trillion [10/31/07] to $27.6 trillion [11/20/08] losing $35 trillion.
Our U.S. Laws which were written in 1933, 1934 & 1940…globally leading into Bretton Woods…The G-20, EU, IMF & World Bank met in Washington on Nov 15 – to discuss a post-Bretton Woods structure of laws / regulations.
– $47 trillion credit-default swaps – ‘largely unregulated’, the NY Fed has taken the lead in organizing this market defining them in recent weeks as an insurance product and trying to clear them. The Bank for International Settlements cites the total outstanding notional amount of OTC derivatives at $596 trillion (12/ 2007) – $400 trillion are interest rate derivatives.
– $12 trillion of U.S. mortgages – ‘failing non-prime’, this July the Federal Reserve’s issued new regulations for mortgage lenders.
– $3.6 trillion of money market funds – ‘uninsured’, Paulson’s Treasury using its authority protects US money market mutual funds in the past days with insurance (using a $50 billion fund) – as some of the $3.6 trillion of funds ‘broke the buck’.
– $2-3 trillion Hedge funds / naked-shorting – ‘largely unregulated’, now reporting of short-selling. Short selling by Hedge funds of $100 million must now report positions to the SEC.
Markets will rebound. The US Treasury will use the $700 billion EESA to buy equity positions in financial institutions: $125 billion going to the 9 largest US banks and $125 billion going to smaller banks, the FDIC supports interbank lending. Federal Reserve increases its balance sheet to $2.2 trillion from $924 billion (9/10) in 2 months. The Federal Reserve, CFTC and SEC announce that a central clearinghouse for the $33 trillion credit-default swap market will be running by December 31.
G7 agrees to recapitalizing banks with public and private funds, insure depositors and unfreezing credit markets. G20 commits to “using all the economic and financial tools to assure the stability and well functioning of financial markets” – they account for about 90% of global gross domestic product. IMF’s 185 member nations endorse a commitment to “use all available tools” to prevent systemic failure.
15 leading European nations commit $2.3 trillion and agree to a 14pt plan to aid troubled banks by adding capital through investment and by guaranteeing inter-bank lending.
China announced a $586 billion (4 trillion yuan) economic stimulus package (almost 20% of China’s 2008 gdp) – the plan bolsters low-rent housing, infrastructure in rural areas, roads, railways, airports, subsidies for farmers will be raised and tax deductions for purchases of fixed assets (machinery) to stimulate investment.
Japan’s package includes government guarantees for loans to businesses is $385 billion.
Chicken Littles’ are running amok screaming the sky is falling the sky is falling – the alarmist/alarmist media, dooms-dayers, naysayers, fear mongers are the enemies of the American spirit. We will have some weak quarters of gdp – however, Americans are a resilient lot and our economy and markets will recover shortly. Buy Low – Sell High, Build a highly diversified portfolio.
JC Brandon
Hi Ali,
I think we will see a future where small or “medium” is better. Technology improvements allow freedom of location, and fewer people the ability to do the work of many.
This year is going to be terrible – I think we can rename January as “Pink Slip January” as many employers wait until AFTER Christmas to lay people off. Economic activity is retracting and I have plenty of anecdotal evidence of people not buying Christmas gifts and putting off travel plans. Even Mark Texiera, the professional baseball player, has teams opting out of bidding up a high contract form him.
In times like these, average people learn the virtue of saving and frugality, which they do not learn in school (where are Aesop’s fables when you need them). The US government keeps telling people to spend spend spend, but I’m telling the people I serve to save save save.
What is really a shame is that Americans, of all people, have become much more dependent on the government for answers than in most times in their history (WWII excepted). Seeing so many people, like children, looking to Uncle George and now to Uncle Obama for a solution is very sad to this student of American history.
This fundamental problem could distort and IS distorting policy decisions (such as zero % rates and spending trillions to “get this economy going” – read: spend). Because people expect government to solve all problems now – bailouts etc – this will do interesting things to global markets. If we go down the road to protectionism (the pinnacle of stupidity) then the world just might leave us behind because we no longer produce many things, we BUY things.
So if the US tries to bully the world around like a union boss, then we will find out that we have MUCH LESS leverage than in the past – and we will be economically punished. And I won’t say anything about how we damaged our currency balance sheet with all the debt…wow that is going to be bad…
Chris
It’s a crisis. When the Fed’s main tool (interest rates) breaks (they no longer have control), and they say they’ll use “all available tools” to shape the economy, it’s panic setting in.
Derivatives are here to stay, but there will be some sort of global clearinghouse for them that monitors ‘systemic risk’ and curbs trading of derivatives when ‘systemic risk’ (whatever that is) is detected.
Big firms have done things to get big that are not sustainable. In an ideal world, they could be allowed to go splat and the smaller, well managed firms would step in. However, big firms also have lawyers and lobbyists who will tie up government to prevent that from happening, so in essence the dinosaurs have hired out rodent hunters to keep the mammals from overcoming them.