New World Order

At World Economic Forum in Davos, four possible scenarios about the global financial system in 2020 have been presented. The report can be read here, whereas below you can find the four scenarios.

Financial regionalism

This is a world in which post-crisis blame-shifting and the threat of further economic contagion have created three major blocs on trade and financial policy, forcing global companies to construct tripartite strategies to operate globally. As the crisis deepens in the US and Europe through 2010, the emerging markets walk away from a series of global talks, reject Western models and ideals, and form their own bloc of domestically focused economies. The US is isolated. With the exception of tourism and energy materials, most trade flows between the blocs decline sharply. Energy security becomes a key issue.

Re-engineered Western-centrism

This is a highly coordinated and financially homogenous world that may yet have to face up to the realities of power shifting to the East and the dangers of regulating for the last crisis rather than the next. With emerging economies severely affected by the global recession, the West maintains economic and moral primacy by playing a leading role in corporate restructuring, driving productivity increases and maintaining free trade globally. Its crowning achievement is the reform of existing international financial institutions-dubbed 'Bretton Woods II' – and the creation of a supranational regulatory authority. Unfortunately, Bretton Woods II falls short of the needs of emerging economies and the new regulatory regime fails to consider structural flaws in risk management, leading to renewed fears of an even bigger crisis.

Fragmented protectionism

This is a world characterised by division, conflict, currency controls and race-to-the bottom dynamics that only serve to deepen the long-term effects of the financial crisis. As the global recession bites, a range of other events, including inter-state conflict, domestic unrest and natural disasters, combine to make things worse. Countries try to look after their own economic interests, blaming each other and turning to populist, protectionist policies. Resource conflicts emerge, and security threats and terrorism keep nationalism and protectionism alive despite the high economic costs.

Rebalanced multilateralism

In this world, initial barriers to coordination and disagreement over effective risk management approaches are overcome in the context of rapid shifts in geo-economic power. The global community learns from its mistakes through sharing: as the US goes through successive crises and the emerging economies battle their own problems, the world eventually realises that meaningful collaboration is the only way forward. Major shifts in international institutions and a new recognition of the meaning of global governance imply that the financial system is better suited to the challenges of a complex, interdependent world in 2020, if not at all perfect.

Financial Literature

Financial literature is in abundance. But it is funny to see how number of titles follows the current trends. Until several months ago, titles offering riches were selling like crazy. Nowadays it's the titles about doom and gloom that are filling the shelves. Has the world really changed that much in such a short time? I don't think so.
I've seen several opinions about this and lots of the online advertising is only for the books about surviving the crisis. Vanguard has an article about it - here.
It is a fact that the earnings are falling across all the asset classes. Now it's a matter of preserving the capital. So, defensive assets - cash and bonds - are fixed-income assets and their value should be less volatile than stocks. But, realistically, even cash and bonds have their risks. Australian Dollar fell against Euro some 20-30% in the last 6 months. That almost matches the sharemarket rout. It is quite hard to talk about safe investments nowadays.

Defensive Assets - Rule of Thumb

In the latest Helm, Vanguard's periodical magazine for investors, there is a general rule of thumb regarding asset allocation into defensive assets:

However, one rule of thumb sometimes used is that your bond percentage could equal your age. This means that if you are 70, about 70% of your portfolio could be in defensive assets with only 30% exposed to more volatile shares.

Good to keep in mind. As always, this is only a general rule. What is the optimal choice depends on any specific circumstances you're in. Year 2008 was a reminder on how to properly build an investment portfolio and stick to it.

ASX Bounces

ASX indexes bounced off from about the same level they reached in November and have rallied strongly for the third day in a row. This is, by definition, a double bottom. The lows reached in November of around 3300 have been respected and the ASX 200 index is now back to 3500 range.

ASX slides close to 3400

Today the Australian All Ordinaries index closed just above 3400. It sled from yesterday's 3531 down 100 points.

Yesterday was President Obama's inauguration day and the US markets were closed.

Last 12 months do not look pretty at all...

Roubini - S&P 500 to bottom at 720, or 500-600

Nouriel Roubini, in his latest post “The Latest Bear Market Sucker’s Rally is Losing Its Steam as an Onslaught of Awful Macro and Earnings News Takes Its Toll” states that US S&P 500 could bottom out, sometimes in 2009, at 720 or, in worse scenario, between 500 and 600. P/E ratios to reach 10 to 12.
The recession is to be a 24-month, U-shaped with a 30% possibility of turning into a L-shaped stag-deflation.

She'll be alright, mate

The RGE Monitor, in its latest newsletter titled Global Economic Outlook for 2009 states

Australia's
recession will likely end in 2009 after starting in Q4 2008. Average annual GDP
growth in 2009 will be flat to sluggish (0-1%) after registering an estimated
1.6% in 2008.

Compared to other regions' outlook, this is excellent. US economy is supposed to contract throughout 2009. The same goes for Europe and UK.
Oil is expected to stay between $30 and $40 per barrel throughout 2009. This seems to be a perfect year for road trips, considering the price of fuel.

US Unemployment at 7.2%

Business Spectator - US Dec payrolls fall 524,000, jobless rate 7.2%

The latest drop in the share market was caused by very negative employment data in the United States. More than half a million jobs was lost in December 2008. In the year 2008 a total of 2.6 million jobs has disappeared. This is the largest decline after 1945 when 2.75 million jobs evaporated. Have in mind that 1945 saw the end of the second World War and the demand for high industrial production was gone.
The prospects in the near future are not expected to get better. Hiring is not expected to increase in the following three months.

Balkan Currencies in Freefall

Romania, Serbia Currencies In Freefall :: BalkanInsight.com

Balkan currencies are under pressure after the latest drama involving natural gas caused by the dispute between Russia and Ukraine.
The Bulgarian Lev fell 1.5%, Croatian
kuna 0.7%, and Serbian dinar 4.1%. Euro is now worth 93.35 dinars.
The natural gas crisis underlined the fragility of the region's economies and put a downward pressure on the currencies.

Something is Rotten...

... but, this time it is not Denmark. Bennet Sedacca, Atlantic Advisors, states about the current situation in the U.S.:

"Ever since 1995, the Federal Reserve and other authorities have been assisting in the birth of the largest debt bubble in our nation's history. Money supply has grown exponentially, weak businesses have been formed and failed, the consumer is leveraged up to their eyeballs, regulation is poor, and savings have dried up. Further, the brokerage/investment banking industry has been pummeled beyond recognition; lifelines have been given to everyone from poorly run banks to poorly run auto manufacturers. Esoteric securities have been relocated from the balance sheets of reckless banks and brokers to the U.S. Treasury, FDIC and Federal Reserve. Investors worldwide watched $30 trillion of stock market equity disappear in the past year while home prices have cratered by better than 25%."

The conclusion, when comparing the above fundamentals and the rise in the markets right now, is that this is an effect of an "adrenaline shot" by the US Government's intervention.
Of course, we will see a whole spectrum of ideas and actions out there. The real picture will only be painted by what happens here and now, every day.

Low Interest Rate Period to Follow

According to the current state of affairs, the interest rates in the developed countries are to fall close to zero and remain there for a prolonged period of time. For example, RGE states that US Treasuries TIPS market is anticipating less than 0.5% annual inflation for the next 10 years.
This means, if you happen to have some funds in the mentioned areas, the value of your assets will not fall (as a result of inflation) for some time. That is a period when saving makes sense.
The opposite situation, when inflation is high, is when it is better to get a loan. At the extreme, in extremely-high-inflation regions, it would be possible to buy a real asset - a car, a house, etc. - with a loan. The amount of that loan would be almost insignificant in a short amount of time.
But, to get back to the issue at hand. While saving for a goal now makes more sense, the interest rates on savings are quite low so that ceases to be a viable investment. People are, therefore, encouraged to start and invest into a business, a value-producing activity. Some might think that it is also a good time to buy a long-term asset, like a house, because the interest rates are low. But this is more questionable than it looks at the first glance. If one is to take a variable rate loan, then the variable rate will follow general trends and, if the loan extends over a 20- or 30-year period, there are going to be times with both high and low rates. Similarly, if one gets a fixed-rate loan then that fixed rate is already calculated by the financing institution to predict an average value over the loan time range. Hence, if the official interest rate is low the fixed rate on loans will be higher.
So, stick to real values - get and keep a good job, do it well, do what you love, and hold on to who you love.

ASX 200 at 3800

Wondering if this should be called a rally or not. It looks more like a nice and easy build-up. ASX 200 index is currently nearing 3800, which is 20% above November lows of 3200.
The downside of proclaimed 20-30% bounces after a through is that one has to get into the market at the very bottom, which is extremely difficult psychologically. And, besides, these percentages are much, much lower if the percentage is calculated from the top or other time periods. At the current levels, this is only a 10-15% retraction if you bought at 5000 and not at 3200.
Nonetheless, below is the current market chart. Some analysts say the economy is in a bad shape and there is no reason to be optimistic. Let's hope this is not the case and this upward movement is not purely speculation based on high hopes of the new US Government's spending plan.

UBS Sees Asian Growth in 2009

Business Spectator - UBS sees Asian asset growth rate rising in '09

According to UBS, in 2009 we will asset growth in Australasia region. Share prices are to rebound. The best growth is expected in China and Taiwan but there are also opportunities in Australia, Singapore, and Hong Kong.

Will markets recover in 2009?

RGE - Latest Project Syndicate column: “Will Banks and Financial Markets Recover in 2009?”

Nouriel Roubini's column at RGE Monitor site states a few interesting facts:

• There is a growing consensus that the market bottom may have been reached;
• The crisis now spills into the real world and bankruptcies now will affect the insolvent institutions;
• The recovery is expected in 2010 if everything goes well.

Well, these sound good enough if you consider they are coming from Dr.Doom. The year 2009 may be difficult but at least there is the light at the end of the tunnel.