Does history repeat itself?

Business Spectator - An old threat to new Europe

Interestingly, here is another article that underlines the current issues in the world and more particularly in Europe. The current situation is very similar to that of pre-world war ones. It is an end of an era, a crisis, and no vision of the future. A transition from one world into another. It could be that Mr.Obama's role will be greater than expected.

In Europe, the rise of nationalism is obvious in difficult time. There is simply no that feeling of common interests among the European nations. And the future development is wide open. Just like sixty years ago, same forces are in play. Hopefully something has changed during that period and the results will not be the same.

Predictions

The Brit Ministry of Defense looks at world’s future - it’s grim. « Fabius Maximus

For example, a decline of confidence in globalized markets is possible and might cause international rivalries to intensify, increasing the risk of inter-state warfare. Therefore, while planning on the basis that major strategic powers have a shared interest in maintaining global economic stability remains reasonable, the need to understand the potential for conflict between them will persist.

Why do predictions about future always include war? That is, probably, our greatest fear. Death, chaos, uncertainty, loss, change, unpredictability... War brings the ultimate challenge. Some accept it, some don't. But they all risk and take chances when involved. And, in the end, some profit other loose.
The above example, listed in the forecasts published between 2006 and 2007, is very close to truth today. And highlights one thing I want to emphasize - how market risks work with other risks and vice versa.

Trade Wars - Isolationism

This title sounds like it belongs to some modern video game rather than reality in which we live. From what I see in the news and comments, what I call the "trade wars", is starting. As John Mauldin writes in his latest newsletter:

Ecuador defaulted on its foreign debt. Since the G20 meeting in Washington in October, five of those countries - Russia, India, Indonesia, Brazil and Argentina - have announced their intentions to raise import tariffs or otherwise restrict trade. Russia has announced plans to raise tariffs on autos; India has already lifted duties on iron, steel and soy; Brazil and Argentina are putting together a case within Mercosur for boosting external tariffs. Vietnam just raised taxes on steel imports to 12% from 8%. The EU said it may reimpose duties of 79% on a paper-binder component in retaliation against China. French President Sarkozy has established a $7.5 bln fund to invest in domestic companies so as to avoid foreign takeovers. China has reinstated export rebates and now we see that US steel, textile and paper markets intend to file complaints against Chinese imports, and did anyone notice that this auto-bailout excludes foreign companies?

It's all about self-preservation.

 

This pretty much describes the beginning of the self-preservation fight among states. No more free trade for some time, obviously. Some brakes will now be artificially applied to economies, as if the slowdown itself was not enough. The scary part is what the political situation will develop into after these steps done in the economy. It is far from over so it will be interesting to watch how things develop in 2009. Fortunately, the consensus among analysts is that there is recovery coming for the US markets in 2009. I assume, seeing that all the markets are so intertwined now, this should push other markets up as well.

If this is the Great Depression II, it is way less scary than some things I've witnessed in Bosnia during civil war. So this pretty much looks like child's play, looking in comparison. Looking forward to recovery later in the year and, in the short term, I wish you happy forthcoming holiday season. I'm also very much looking forward to my Summer/Winter holidays at the end of January.

Trade Wars - Are we on the verge of something far more significant?

RGE - Germany is fighting with Europe. Can China be far behind?

The outlook described in the above article might serve as an introduction into something far more significant and affecting than the current crisis is. Any non-economical friction that exists in the world might be boosted by economical situation in the near future. Soon the priorities for many states might change. Who would care about poverty, pollution, global warming, international issues when there are immediate problems at home. And if those problems are caused or helped by some other countries, quite an isolationist policies might be adopted. Not to mention aggression in certain ways - trade wars or something much more significant.
Anyway... I don't want to be a pessimist. The situation in Australia is probably far better than elsewhere and I can enjoy the time I'm spending here, far away from those "other" problems and issues.

Predictions for 2009

8 really, really scary predictions - Meredith Whitney (7) - FORTUNE

If 2008 was characterized by the market impacting the economy, then 2009 will be about the economy impacting the market.

Some more predictions for 2009, as these are popular at the end of the year. What I see is best described by Ms.Whitney in the article above. Markets went down, real economy followed. Now, it's the other way around. The economy is going down. Markets will either be held low by the pressure or will start recovering slightly.
Obviously, this could be the phase 1. Flat market indices for some time, before the new upward movement. Nouriel Roubini, on the other hand, predicts another 20% fall in the markets. Some other experts agree that P/E ratios could go better, which coincides with the Roubini's view.

Forecast for 2009

Business Spectator - Global economy to contract slightly in 2009, says IIF

There is, generally, a consensus in the analysts’ forecasts for the 2009. Most of them see a recovery starting in the second half of 2009. The world economy will contract slightly. The forecast is that the contraction will wipe out this year’s gains. In the third quarter of 2009 the recovery should start in the US and a quarter later in the EU. These opinions are probably keeping the markets at the level.

The ASX S&P 200 has not made any significant changes since the latest bottom in November. It has been oscillating between 3500-3600 for the past month.

ASX S&P200 at 3660

The Australian indices are following the Wall Street lead from Friday session. The ASX S&P 200 opened higher – just a bit above 3500 - and is skyrocketing upwards today. At 11:45 it is nearing 3670 and has been on the upwards move since opening.

The market recovery acts just as Buffet said. The expectations are for the economy to start recovering in mid 2009 so it is reasonable to see the bottom in the stock market about now. Or, in the November 2008 lows.

Some expect further downward pressure in the next quarter. Considering there will be the new US president and a whole lot of changes and actions coming up, I don’t think that would move the markets downward. Especially considering that Democrats want to bail out the US auto industry. There are other stimuli packages being announced by other governments worldwide, including the EU. This should prop up the commodity prices a bit by pushing the demand. Hopefully it will not be beating the dead horse.

Oil and the Changing Political Climate

Falling price of oil will have an effect on the world political climate. Perhaps more than economical. Looking at the numbers below, that show what the price of oil should be if these countries want to balance their budgets, can lead to some staggering conclusions.

Russia is missing from the list. Their value for '09 is $70. It means that the price of oil should be at $70 per barrel, with the same production output, to balance their national balance sheet.

Since OPEC countries are not effectively reducing production, for they need any cash they can get, the oil price might go even lower - towards $30 per barrel. If that scenario goes on, the political unrest in the above, already fragile, countries, will develop in some interesting ways.

After all this (the financial and economic crisis) is done, there will be conspiracy theories stating that the Western countries' only way to bring the rising powers of Russian, China, India, Brasil, etc. was to cause an economic collapse. Which happens to make more damage do those fast-developing countries than to the already developed ones.

Oh, and yes, the auto industry is changing rapidly. It is about time, considering it is the end of the year 2008 and the era of the car as we know it is, obviously, over.

S&P Downgrades Russia to BBB with Negative Outlook

RGE analysts write:

S&P downgraded Russia's sovereign bonds to BBB, the second lowest investment grade ranking from BBB+ citing the rapid depletion of Russia's reserves which have fallen 25% since early August and high levels of fiscal spending. It suggested Russia's current account would be in deficit of 2.6% of gross domestic product in 2009, compared with a surplus of 5 percent in 2008 as its terms of trade deteriorate. Other ratings agencies will likely follow suit

Economists' forecast for Australia in 2009 and 2010

Business Spectator - Recession cloud forming

Committee of Australian Business Economists forecasts the economic environment in Australia in the coming period. The topics include GDP, growth, exports, Dollar, interest rates...
The recovery, in their view, is mid 2010 rather than 2009. The interest rates are to through at 3.5 percent. The Australian Dollar is to median at 0.60 US Dollars in 2009.

Buy low sell high

John Hussman: Buying Near the Bottom - Seeking Alpha

An article that reinstates some of what I wrote this morning. The majority of opinions are definitely bearish while the indexes are pretty low. While the markets are holding up at the support level, the investors aren't interested in buying. To me it sounds as the school-book definition of a market bottom.
US S&P 500 is already 20% up from the November lows. In a month or two we could look back and say: "Yes, that was the bottom and that was the come-back rally right there." By then it might be too late to restore some of the losses made throughout the year. :S

Russia's changed role

Business Spectator - Reassessing Russia

One more sign how the current economic situation changes the geo-political shape of the world. Falling prices of raw materials and energy caused diminishing of power of Russia on the world scene.
Bad economic, health, and demographic conditions will cause its population to decrease by one third by 2050, from 143 million to 100 million, forecasts OECD. All the power play of the last years might have come to an end?
Obviously, everything will change yet everything will stay the same.

CDS replace rating agencies?

Business Spectator - Rating agencies at risk

CDS or credit default swap rates are getting linked into the banks' interest rates on term loans instead of banks' credit rating issued by rating agencies. If this practice makes ground, the role of rating agencies would diminish and the rates would more closely match the market's perception of institution's credit worthiness.

Hopes of good news

What happens in the market these days seems like setting a stage for a major rally. First, on Friday, the very bad unemployment data failed to push the indexes lower. Instead, there was quite a rally which some analysts called bargain hunting. Then, yesterday, the news about the new US administration investment into infrastructure pushed resource companies higher. Whether this chain of positive development persists in the future, remains to be seen. But, the conditions are there. The majority of people are now bearish and the news hardly affect the mood anymore. That should be the typical attitude at market lows. Which sets the stage for moving upwards. This is, obviously, the reason many miss the initial rally. The US and Australian markets seem to be quite well up from the lows reached only a couple of weeks ago.

Today we will see whether the rally will extend from the US into Australian market. The S&P 200 is currently at 3650 and the ASX is about to open somewhere around that number. Although the index went up to 3750 over night, it is to open near to where it closed yesterday during trading hours.

Valued Opinions

I received my first rewards voucher from Valued Opinions. It is a web site that offers paid surveys. My points have accumulated to the amount of $20 and I was able to request a payout.

The rewards card came in after about a week. I selected a Safeway rewards card and used it to pay for groceries.

I’m happy to see that the system works.

Western Balkans Economic Situation - from Stratfor

Free Preview of Members-Only Content | Stratfor

Here is a brief analysis of the economic situation in the Western Balkans from Stratfor.
Generally, the lack of investment sentiment worldwide will have a long term effect on the region. The growth, dependent on the foreign capital, will be much slower.

Europe has been badly hit by banking crisis and the tight ties between banks and the industry.

Chinese Recovery in H2 2009?

RGE Monitor analysts state

In H1 2009, with the G7 in recession, manufacturing outlook could be even weaker but government measures including those to support the property market could lead to expansion mid-way through 2009. Industrial production is already growing at the slowest pace in 7 years and electricity demand contracted in October

It coincides with statements from other analysts about first positive signs in the economy worldwide.

US Housing Still Far from Bottom

... we learned that the housing market is nowhere close to bottoming out. New home sales dropped 5.3% in November to a 433k annualized rate – the worst since the 1982 recession. Even though sales are now down 69% from the July 2005 bubble peak of 1.39 million units, we believe builders have not been aggressive enough in curbing production because the most critical variable of all, the unsold inventory backlog, rose to 11.1 months' supply from 10.9 in September.

Need to see inventory backlog drop to 8 months' supply

The reality is that even though single-family starts have dropped to 26-year lows of 531,000, they are still running 23% above the prevailing level of new home sales. The worst the inventory-sales ratio ever got in the early 1990s real estate meltdown was 9.4 months' supply. We are currently 18% above that level and almost 40% higher than the 8 months' supply we would need to see before calling an end to the housing deflation phase.

Another 15-20% decline in home prices likely from here

As we saw last week, the Case-Shiller index fell 1.85% MoM or at a 20% annual rate. All 20 cities were down both sequentially and YoY. Home prices are now down a remarkable 22% from the 2007 peaks. With the unsold inventory sitting at the third highest level of the past three decades and mortgage approvals for new home purchases falling to their lowest level in nine years, we believe the laws of supply and demand point to a further 15-20% decline from here. So, of all the things that happened last week in the market, retailing stocks up 17%, the bank stocks up 26%, tech up 9%, the one development that probably has the greatest chance of being reversed is the 60% surge we saw in the homebuilding group.

David Rosenberg,
the North American economist of Merrill Lynch

Despite downturn, skill shortage very high

Business Spectator - Slowdown fails to knock skills shortage

The quarterly Clarius Skills Index, developed by the Clarius Group with KPMG-Econtech and released for the first time on Tuesday, shows skills shortages in 13 of 19 occupation categories analysed were at the highest levels since 2002.

Number of IPOs to increase in 2009

Business Spectator - More IPOs in 2009: PWC

PricewaterhouseCoopers predict the number of IPOs to increase next year. The expected increase is from 25-26 in 2008 to 30-40 in 2009.
The government stimulus is expected to stabilize and lift the sharemarket in the second half of 2009.

Profits higher than expected

Business Spectator - Company profits rise 5.2%

Company profits rose 5.2% on a year-to-year basis. That is more than expected 3.5%.

The Snowball

Alice Schroeder's 'The Snowball': Wisdom from Buffett's Biography - Seeking Alpha

I’ve had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.

Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States?’ It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, ‘I did it all myself,’ and think of themselves as Horatio Alger – believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery.

It feels a bit comforting to read the above lines. Relieves some of the pressure for not being born at a different place or at a different time.

Phase 1

Big Difference between Price and Value - Seeking Alpha

If we measure the reactions in the news instead of market price graph, the conclusion could be that we are in the Phase 1 of the economic cycle. Some see recovery sooner, some later. The good thing is that with every passing day we are closer to the end of the downturn, anyway.
Most opinions are that the through of the downturn will be sometime between this quarter and mid 2009. The effects of monetary policy, conducted over the past several months, will take time to have effect in the system.

Looking a bit further ahead, there are opinions that investing right now, besides buying a pretty good value, also bears low risk of loss in the next 3-5 years. With all the bad things happening and the reactions to counter the effects, it is hard to imagine things getting much worse in the next couple of years.