Will the stalactites hold?

The financial meltdown has been making a mess on stock exchange floors and business boardrooms globally but nothing that has been tried so far seems to be freezing the tide of red ink.

Since the financial crises that kicked off in August 2007 it has beset markets and financial institutions all over the world, stock markets have lurched upwards, downwards and sideways since and seemingly at the whim of the market regulators in the United States.

The next collapse of a Bear Stearns, Northern Rock, Lehman Brothers or another New Zealand finance company seems just around the corner-if Bear Sterns Fannie and Freddie and Lehman Brothers have gone the way of the dodo, you can bet other Wall Street firms who have been drinking at the easy credit trough and lending to others whose assets are of dubious value are going to head the same way.

Last week a massive bombshell, one that has been on the brink for the best part of seven years, Fannie Mae and Freddie Mac finally collapse and the US Federal Government will pile 100s of billions of taxpayer dollars into it hoping to stem the flow.

All this has had a chilling effect on the credit market, the lifeblood of business, between financial institutions and other business and between individuals.

Heads of powerful investment banks have still not come clean about their exposure to the sub-prime derivatives market to in what Warren Buffett has called "financial weapons of mass destruction" and we continue to see new revelations everyday about previous cavalier attitudes to lending, and borrowing, coming home to roost.

The value of these derivatives in the Fannie and Freddie collapse are relevant to the bleak outlook for world markets and the global economy and likewise the recent Lehman Brothers meltdown.

Optimism is well overrated in this market because the bubble of optimism keeps getting pricked.

Even Warren Buffett's assurances that the Federal Reserve did the right thing bailing out Fannie and Freddie had me worried.

It seems a tad self serving to me on his part considering he usually keeps his mouth shut and claims not to like the limelight-seems to me he has been popping up everywhere in extended interviews, ball games, TV shows and the like over the last year or so, most uncharacteristic of him and his style in the past.

My feeling is that investors are set for at least another year of this cloak and dagger stuff.

The market has so far been propped up by taxpayers around the globe-directly to help ailing banks and indirectly to allow cheaper credit to flow through financial markets and ease the pressure on doing normal business.

There is no sign yet that this approach has or will work in the future, having said that, the vast increases in new and different financial instruments in the 1990s and early 2000s and the resultant surge in speculation and bull runs in sharemarkets took time to reach their nadir.

Perhaps now that the bubble has burst it will take just as long to recover from the hangover than the credit binge party itself.


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c Share Investor 2008

The Global Economy looks bad now? But wait there's more

JPMorgan scoops up troubled Bear 4:56am: The deal values Bear Stearns at just $2 a share. Regulators hope purchase will stave off wider chaos in financial markets. more

The Bear Stearns fire sale reveals the iceberg underneath the tip of current disclosed sub-prime losses.

Everyone is talking about it and I have written about it frequently for more than a year. The contagion from the reckless lending of the last 10 years still has time to play out its course.

Emergency rate cuts on Sunday(US time) in the United States and talk of another one on Monday 17, of perhaps 100 basis points, will do little to restore the faith in credit markets, housing, business, the stockmarket and every other sort of financial instrument that is traded, with the possible exceptions of some commodities and minerals.

In New Zealand a story out today shows the high exposure our banks have to our ever decreasing housing market and along with higher government spending promised by the Labour government and a whole host of other price increases, interest rates are clearly going to skyrocket.

Things are looking grim here but in the United States, where it all began, they are suffering worse than anyone else. High house foreclosures, defaults on loans and increasing unemployment are front page stories. One doesn't have to be Warren Buffett to figure out that America is already in recession. The official confirmation of two consecutive quarters of GDP stagnation will only be a matter of course when it is announced.

The real question is, how bad is it going to get in the US and how much is it going to affect us in New Zealand and other parts of the world?

I'm not an expert in global economics but do have a keen economic grounding and I think things in the US are going to get alot worse. We still haven't seen the full extent of losses that banks and other financial institutions have been hit with, and those losses will have to be accounted for somewhere in the US economy.

The selling of Bear Sterns to JP Morgan Chase for $2 a share is a good indicator of more financial institutions sitting on bigger than disclosed losses. The balance sheet of BS, who incidentally survived the Great Depression, must be grim indeed.

The impact on other countries is going to be felt more than it is now because these things take time to filter down. Of course immediate impacts on currency values, world sharemarkets etc are felt quickly but longer term impacts, like even higher interest rates oil prices and goods and services.

Some economists talk of a "disconnect" of Asian economies from the still dominant US beast but that really isn't probable to me because countries like China, India and Japan still rely on a strong United States to survive. Economic self sufficiency in Asia is still a decade or so away.

A key sign of a loss of faith in the global economy will be seen when the US stockmarket opens in a few hours time.

If another interest rate cut is announced by the Fed and it is a big one, one should expect a rise in the DOW. Having said that, the fact that such a large cut is being proposed will probably mean the market will rightly look at this scenario as a good reason to dump their shares.

The uncertainty will have investors hitting the sell button.

The feeling I have in this part of the world is that investors have already started to panic. The New Zealand market was down by 2% and Australia followed with a 2.5% drop. Asian markets, as usual in times of turmoil, were hit harder. Over a broad range of markets in Asia they were down around 4% on average.

Whatever happens to the global economy in the coming days, weeks, and months, you can be sure it will be volatile, fraught with emotional writing from people like me and bad for the back pocket.

It will however, be very interesting.


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c Share Investor 2008 & 2009