Monday, December 29, 2008

Defending The Prognosis


The prognosis was an unhedged opinion. After criticising economists and analysts for being wishy-washy, ... "on the one hand, however if the other thing happens..." , so i am glad some readers realised it was a straight out opinion. I do not expect many to agree, so thanks for the feedback. Its much easier to continue to be bearish, just regurgitate whats in the media - but of course I could be wrong. I will try to clarify some of the concerns, not to sway you, but to explain further my views.

Toxic assets too huge - It seems too big because its a one way traffic. It seems too big because of the unwinding and de-leveraging trends. It seems too big because everybody wants to be first out best dressed. What we have to be aware is that sometime soon these cash and liquidity will have to be placed out in some form or other. It seems too big because of risk aversion, rather than the inability to deal with the issues.

It will take a much longer time - Let's get the facts. Even during the Great Depression, we saw recessions lasting 22 months, and to me, its largely because we did not have the fiscal or monetary knowledge or tools to deal effectively and immediately with the issues then. In other views, some will argue that Japan too more than 10 years to work itself out of its 90s credit bubble. Well, thats because Japan did nothing for the first 10 years, seriously folks. If you compare to the immediacy of the many moves to tackle the issues during the current crisis, we would have a better appreciation of the comparison.

There are still time bombs - The greatest thing about this American financial markets, is their transparency. When the proverbial stuff hits the fan, everybody will be clamoring to rip open all wounds, especially the affected firms. The affected firms had to lay it all down as its pointless to try to hide. In fact, it would be a very shrewd move to let it all out so as to be part of the bailout. The transparency thing is very good because their firms are so large, i.e. no one main owner operated financial behemoth. Usually the largest shareholder holds less than 10%. The scrutiny is magnified with independent directors trying to save their behinds, not to mention the vulture bond holders trying to see if the firm is worth anything at all.

Is Roubini wrong then? - You all know I think the world of Nouriel Roubini. I have highlighted many of his opinions and he is by far the most astute and correct economist on the current financial turmoil bar none. By his accounts, he still sees some pockets of danger in the economy, but he is not as bearish now as he was a few months back. We also should note that a number of things are very fluid - Roubini worked with Timothy Geithner and Lawrence Summers many years in recent years. You can bet that the 3 of them will be discussing intimately on ways to address the issues. You cannot get better advice than from the man who predicted the carnage step by step, can you?

The new team - Well you have Geithner, Summers and de facto Roubini, throw in Paul Volcker as well - is that a more credible team than Paulson and Bernanke? The team has been planning the actual fiscal stimulus and various remedies for the issues at hand. What started out as a $350bn plan has morphed to $600bn and now is likely to top $1 trillion. They are not shy about it, and they want to stamp their mark the moment Obama takes office come mid January. On actual economics data, each $1bn spent on infrastructure will create 35,000 jobs. The team is also wary that the stimulus will not go overseas immediately to create jobs outside of the US, hence expect more on healthcare, education and infrastructure spending.

Too giddy on Obama - Some may be questioning that I have gone overboard on the optimism riding on the Obama factor. But I have been following articles and interviews on him and how he has been picking his team members. The more I read, the more convinced I am that we have the best person to lead, he is also an astute and well prepared manager. He is, in a single word, competent. If you look at how he organised his campaign for the elections, it was a focused and effective. Above the fray, above the meanness, focused on the issues and getting to the heart of the matter. Oratory skills aside, he exhibited high intelligence, a general amount of ego and deserved self-confidence. The so called goodwill riding on him when he takes office should not be discounted - anyways what better way to deal with esoteric problems such as risk aversion and irrational fear than to match it with unmitigated goodwill laced with competence.

What about demand destruction - Exports are down, shipping rates have plunged, oil price is nearing $30... surely there must be demand destruction! Or is there? There is a fundamental price for everything based on demand and supply. The irrational peaks in commodity prices has more to do with liquidity surplus, the rise of commodity centered funds, the rise of hedge funds playing trend and momentum investing, the unquestioning acceptance of analysts far fetched supply inadequacies years ahead of us... Read the EIA's weekly US oil import data. In the week ending Dec. 19, total US oil imports were 12.780M/day, versus 12.907M/day in the same week a year ago. That's only a 1.0% drop - where is hell is the demand destruction? The global credit crunch resulted in forced liquidation of global supply chains, as every one liquidated their inventory to raise cash in order to survive. The inventory sales flood the market to create a false over-supply situation while supply destruction is playing out at break-neck pace as unprofitable mines are shut down. That tells me that for many resources, we are forced to work down a lot of inventory rather than seeing a genuine demand destruction. Commodity prices were artificially high 6 months back, now its the other extreme. Very soon, we will see shipping rates on the upswing again as not only is inventory very low, but many have mistakenly shut down mines and harvesting as well.

p/s photo: Anna Tsuchiya

pps: Over the next few days I will blog on the recommended international stocks, local stocks and a high-risk portfolio selections, all based on my global market prognosis. Its been more than 6 months since I have made stocks recommendations.

4 comments:

rask3 said...

Hi,

I have never taken market forecasts seriously, although I would admit their subliminal effect on me. Rational long term investors will have to, from time to time, overcome the fear of the unknown. The future is never clear.

Rask

Au Yong said...

Hi SD
I have been following your articles quite closely.

I think you are absolutely correct in changing to a positive outlook for H1 2009. It's easier to take a hedged stance but I think the hidden signs of a recovery are there. I group these as:
1.The determination and concerted efforts of the major economies to address the crisis. These are real and substantial steps, perhaps over prescribed, but hey it's better than half hearted measures. I am sure it's easier to handle the inflation later than to extradite ourselves out of the current doldrums.
2.The Obama effect will be there for all the reasons that you mentioned. I hasten to add that in this hour of total darkness, the Obama effect will shine as we will all look for any sign to get out. There will be self fulfiling phrophecy. All we need is just the turning sign and we will build upon it.
3. The undercapacity utilisation as a result of over-reacting by producers. We are going into a 'shortage' situation very quickly as producers cut down. Demand will be there and will grow even bigger once recovery sets in.

Overall, I think what started as a financial crisis has now morphed into a Confidence Crisis. I still believe in Keynesian and confidence will return once the effects of government spending set in. I hope more stringent measures will be put in place to moderate growth and greed.

Au Yong

Ivan said...

Maybe I am wrong, I think I will come back again on end of 2Q 2009. Let the market tell us the answer. . .I might be miss the boat due late ride on? haha. .

Ivan said...

Maybe I am wrong, I think I will come back again on end of 2Q 2009. Let the market tell us the answer. . .I might be miss the boat due late ride on? haha. .