Why This Isn't Financial Armageddon 16 comments
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It sure felt like we were nearing the end of the world while I watched the US market opening segments of Bloomberg last night from my home in Manila. Most charts were pointing down – US Housing Starts, stock indices, commodities, etc. The TV screen was red all over and it wasn’t the happy Christmassy kind.
I was pretty sure that I was going to have bad dreams. In my imagination, I saw the world in an unstoppable downward spiral. The job losses in the US finance, housing, and automotive sectors leads to more mortgage loan defaults. These defaults cause more job losses and another pronounced credit crunch. Anticipating Armageddon, firms in other parts of the world slashes jobs which causes even more devastation. By 2011, we would all probably be hunting, gathering, or farming for food. Rural will be the new urban. Brock Lesnar, the new heavy-weight champion of the UFC, will be king.
Right before finalizing my decision to liquidate all my soon-to-be worthless paper assets and to find a remote farm away from the biggest bullies in this part of the world, I came back to reality and asked – is this really the most likely scenario?
Many pundits compare our current predicament to the Great Depression for valid reasons. The condition that many of the US banks at present are in is reminiscent of the conditions of the banks in the late 1920s through mid 1930s. The confidence of households and businesses today are also at lows comparable to its level during the Depression.
But America survived the 1930s, didn’t it? This fact gives me great relief – I most likely will not have to learn how to operate the bow and arrow.
Still, one can’t help asking how bad this current crisis could get. Will it exceed the depth and length of the Great Depression? If yes, how much worse and longer will it be? If no, how much less?
I do not think that anyone can answer the second or the third question. We can, however, I believe, make an intelligent guess to address the first question.
Will our current crisis be worse than the Great Depression? My guess is no.
The first major difference between now and the worst economic period of the 20th century is the level of positive government interventions. Governments the world over are committing unprecedented sums to support the ailing global economy. At the same time, interest rates are being cut aggressively to encourage spending and investments. While many believe that these actions will prove to be insufficient, not many deny that these will help significantly.
The second major difference is the larger size of the US economy that is dependent on exports. In 1929, export was less than 5.7% of GDP (source). In 2007, export was 11.1% of GDP (source). This means that a slowdown in the US will affect a smaller part of its economy assuming that these exports hold up. But will exports hold up?
Say decoupling out loud around an economist these days and you can get a lecture on its supposed inexistence. Financial markets in Asia fell just as steeply as the US markets so, therefore, decoupling doesn’t exist they’d say. Emerging markets will suffer if America suffers.
But I argue that the simultaneous drop of financial markets in developed and developing economies does not prove that decoupling is dead. If anything, it proves that people are just as – how do I put it – “sentimental” in emerging markets as they are in developed markets. The real test of the decoupling theory is in the comparative performance of economies around the world. If growth holds up in emerging economies while developed economies recede, then there is your evidence that decoupling is a reality.
Japan, the second biggest economy in the world, has been in a slump for a decade or so. Did it hold back other economies?
The reality is that many economies are in much healthier conditions compared to the United States. These markets are going to help the US get out of its slump. China and India, two of the world’s most populous countries are still projecting growth. Yes, large economies like Australia and Germany are in bad shape but they aren’t in as bad shape as America is in. These economies will probably recover faster and help drive the global economy up slowly.
Some say that we are in uncharted territories right now. In this case, it is pointless to use historical data to support my guess. Instead of force feeding you with boring and possibly useless statistics, I’ll share parts of my diary and planner with you for you to see a bit of what is going on in brighter parts of the world.
A week ago, on a Tuesday night, I attended a party in this members-only club here in Manila where one, supposedly, has to spend a thousand greenbacks every quarter to become a member. Brazil and the UK will be happy to hear that much cachaca and Scotch were consumed that night.
The conversation of the three friends I spent most of the night with got me wondering if there is really a looming depression across the Pacific. One guy told us about the three paintings he recently bought for a total of $20,000. It must have inspired another friend because he asked the guy with the new paintings to accompany him to the gallery where he, guy with the painting, bought his paintings from. The conversation moved to watches – these guys are thinking of trading up their already expensive time pieces for even more expensive ones. I’m not talking $1,000 expensive. I’m talking $15,000 up expensive. The night ended after a discussion of imported windows which are about as expensive as mid-price-ranged cars.
The next day, I had dinner at this restaurant owned by this girl who looks like she doesn’t own a single thing made in the Philippines. Guess what? It was full as hell.
This coming Saturday, I will be attending two parties. Next Tuesday, I will be attending the would-be jam-packed opening of eight high-end watch boutiques – Patek Philippe, Audemars Piguet, IWC, Jaeger Le Coultre, Breitling, Panerai, Chopard and Omega’s. Next weekend, I will be shopping for Christmas gifts.
I suspect that in other brighter parts of the world, similar scenes will be found. Yes, we’re affected, but not significantly enough to change our habits - not yet, at least. The point is that we’ll be of help. The end of the world is not yet so near.
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This article has 16 comments:
ah, the sound of capitulation. everything will be better now - NOT.
Greetings to you, and all my friends in Manila and the Philippines.
You are onto something here. However, you are only revealing what reality looks like for some of the more privileged among us. On the other hand, you are not addressing the reasons why we are talking about an economic hangover when in fact, most of us behave no where near what we would behave like if we were truly close to the end of the materialistic world as we know it.
May I suggest that the blind have been preaching to the blind? Politicians have been pointing fingers. And though some blatant mistakes have gone unnoticed (and unpunished) for too long in our businesses, financial institutions, industry, and capitalistic markets at large, our representatives in Washington are flushing the baby away with the bath water.
The negative pictures they have been sketching for us over the past six months are actually beginning to take shape. Anyone being told repeatedly by the so-called "people in power" that things are going down the drain fast would be a fool not to take appropriate action in order to protect what little of his or her hard work is left to salvage, especially considering the dramatic shake-up in stock markets around the world. And for those for who, like you suggest, life is still on automatic -full speed ahead/no habits have changed- they are being told that things are about to get worse and that soon no one will be unaffected.
Well, no one is unaffected. If we are claiming we are in the midst of a crisis, there doesn't have to be an Armageddon in the works for a real crisis to take shape.
In my spare time I coach competitive tennis to kids. When I tell them how to serve and they tell me "I can't do that," in their whiny little voices, I reply: "you're damn right! If you say you can not do it, I won't disagree with you that you cannot do it. Before you can handle tennis, you have to be determined that you will do it."
My point is that in order to gain access to the highest office in our Western Civilization, politicians have been slinging so much mud around (and though much of it might be true -as it always has been), that the positive spirit that made the United States of America such a powerful economic force has been shaken to the point where people are left hopeless, waiting in fear for the next day to see their portfolios drop by another 5 to 10 percent. They feel powerless and BELIEVE they totally lost CONTROL over their business, their wealth, their lives, their destiny. Investors I speak with daily tell me that in the morning, when they turn on the news or their PC, they EXPECT to hear more bad news that inevitably is going to drag down the market from the get-go. Their will has capitulated and all they see is an inevitable slide for the worse.
You know what? That's exactly what is going to happen!
For those not convinced about how this works, read: "The Secret" by Rhonda Byrne. I wouldn't describe the universe the way she does. However, we are creating the world that we are living in (we -mankind- take credit or blame for building and/or destroying the world). And it all begins with what we THINK is right or wrong; what we THINK we need more of, or less of; what we THINK is our potential ahead of us, or the inevitable disaster and doom that awaits us.
Wake up, people (and I am looking especially at you: politicians and news casters). If you are unhappy about the abuses our system has permitted, summon a judge to take action. If you believe you need new laws and regulations, call upon your representatives to enact some. But stop blaming the whole damn world for all your lack of diligence of the past, because you ARE throwing the baby away with the bath water.
Remember one thing: your (OUR) pessimism is not what makes you (US) great leaders. Create a vision for a better future that people can believe in, and you will see that soon, THAT's where the focus will shift to.
Thanks, Chester, for inspiring me to express my thoughts on this.
X-Positive
Life sure sucks when your darn Bentley fetches less than $38k.
The author seems to be saying, with a straight face, that this is a GOOD THING!
It isn't. And I disagree with pretty much every other position. Isaiah was "negative". So was Jonah. So was Noah. It doesn't mean they were wrong and it doesn't mean one was wrong to ignore their advice.
Sometimes the sky really IS falling, and one would be wise to listen to the advice offered by the source of that information.
Aren't there any standards for SeekingAlpha contributors?
Still, sounds a lot like "Let Them Eat Cake" Syndrome.
Might want to dress down and go have a beer at the local pub for a more complete picture.
Lucky you to be at the top - hope it lasts. Unfortunately the desperate are rarely rational and are usually indiscriminate. Check the wind often and remember those who have less to keep your benevolence intact.
2009 is going to be a wild ride for many.
I admire your thoughts if I understood you correctly that outcomes can also be affected by people's outlook and perception.
Anyway, from the feedback I'm reading here, sounds like people really are in the negative mindset as can be seen by how some think this is armageddon, how they think gov't intervention is wrong, how bitter they are with Chester's rich party people's present experience. Ofcourse they are somewhat justified in their feelings by recent events.
Imagine if all the CEOs of the fortune 500 start thinking in the same manner, that business is hopeless and they should all close shop in anticipation of shrinking of economy. Then I guess you can expect unemployment to reach record highs and armageddon. Having a pesimistic mindset can really influence fundamental outcomes.
People's moods have a tendency to swing to opposite extremes. That's part of life.
Goodluck in your stop whining and take positive affirmative action. I think it's great that you have that mindset.
Chester,
Keep writing. That was a very entertaining, informative and good article. I"m sure it inspired a lot of readers.
On Nov 21 06:45 AM X-Positif wrote:
> Dear Chester,
>
> Greetings to you, and all my friends in Manila and the Philippines.
>
>
> You are onto something here. However, you are only revealing what
> reality looks like for some of the more privileged among us. On
> the other hand, you are not addressing the reasons why we are talking
> about an economic hangover when in fact, most of us behave no where
> near what we would behave like if we were truly close to the end
> of the materialistic world as we know it.
>
> May I suggest that the blind have been preaching to the blind? Politicians
> have been pointing fingers. And though some blatant mistakes have
> gone unnoticed (and unpunished) for too long in our businesses, financial
> institutions, industry, and capitalistic markets at large, our representatives
> in Washington are flushing the baby away with the bath water.
>
>
> The negative pictures they have been sketching for us over the past
> six months are actually beginning to take shape. Anyone being told
> repeatedly by the so-called "people in power" that things are going
> down the drain fast would be a fool not to take appropriate action
> in order to protect what little of his or her hard work is left to
> salvage, especially considering the dramatic shake-up in stock markets
> around the world. And for those for who, like you suggest, life
> is still on automatic -full speed ahead/no habits have changed- they
> are being told that things are about to get worse and that soon no
> one will be unaffected.
>
> Well, no one is unaffected. If we are claiming we are in the midst
> of a crisis, there doesn't have to be an Armageddon in the works
> for a real crisis to take shape.
>
> In my spare time I coach competitive tennis to kids. When I tell
> them how to serve and they tell me "I can't do that," in their whiny
> little voices, I reply: "you're damn right! If you say you can not
> do it, I won't disagree with you that you cannot do it. Before you
> can handle tennis, you have to be determined that you will do it."
>
>
> My point is that in order to gain access to the highest office in
> our Western Civilization, politicians have been slinging so much
> mud around (and though much of it might be true -as it always has
> been), that the positive spirit that made the United States of America
> such a powerful economic force has been shaken to the point where
> people are left hopeless, waiting in fear for the next day to see
> their portfolios drop by another 5 to 10 percent. They feel powerless
> and BELIEVE they totally lost CONTROL over their business, their
> wealth, their lives, their destiny. Investors I speak with daily
> tell me that in the morning, when they turn on the news or their
> PC, they EXPECT to hear more bad news that inevitably is going to
> drag down the market from the get-go. Their will has capitulated
> and all they see is an inevitable slide for the worse.
>
> You know what? That's exactly what is going to happen!
>
> For those not convinced about how this works, read: "The Secret"
> by Rhonda Byrne. I wouldn't describe the universe the way she does.
> However, we are creating the world that we are living in (we -mankind-
> take credit or blame for building and/or destroying the world).
> And it all begins with what we THINK is right or wrong; what we THINK
> we need more of, or less of; what we THINK is our potential ahead
> of us, or the inevitable disaster and doom that awaits us.
>
> Wake up, people (and I am looking especially at you: politicians
> and news casters). If you are unhappy about the abuses our system
> has permitted, summon a judge to take action. If you believe you
> need new laws and regulations, call upon your representatives to
> enact some. But stop blaming the whole damn world for all your lack
> of diligence of the past, because you ARE throwing the baby away
> with the bath water.
>
> Remember one thing: your (OUR) pessimism is not what makes you (US)
> great leaders. Create a vision for a better future that people can
> believe in, and you will see that soon, THAT's where the focus will
> shift to.
>
> Thanks, Chester, for inspiring me to express my thoughts on this.
>
>
> X-Positive
I feel decoupling is chained to at least two facts. First, Americans are not importing nearly as much. A good friend of mine in Manila can attest to that. He's an exporter. Chinese exports are way down and falling. The second is risk aversion. All our markets seem to rally then fall almost in unison. We're all feeling the affects of falling commodity prices. Decoupling is a myth, mostly.
There is another major difference between the great depression and now. The US is on a fiat currency system. That's probably good. But, the amount of money tied up in MBS and less risky derivatives is tremendous. That money is ceasing to flow through the economy. Essentially, our economy is falling off a higher cliff.
You are correct about another aspect, the US did and will survive. It will be painful for an undetermined period of time...a year, two, a decade. But we will emerge out the other side in good shape.
Now, will we survive a recession or a depression? Good question. My gut and readings tell me, unless radical action is taken (more radical then the $700bn bail out and stimulus package) a depression is a real possibility. I don't say that to spread fear, I just feel the depth of this thing is, by far, greater than any recession we've ever had.
Whether the EU is in better shape or not than the US is debatable. But, one thing is for certain, they are behind the power curve. Anyone with exposure to failed mortgages (and other derivatives) is in trouble.
China does still have positive growth. It takes a while to wind down from 12%. But, whether or not they will escape recession is to be seen. We, and the rest of the planet...he developed world...are just entering recession ourselves. I think this thing will not be resolved by Jun 09, as some have put forth.
I think the Fed knows it, too. They have been very creative out of necessity, but they are getting close to running out of tools. i suspect that's why the Fed now has it's hands on the secretive $2tn. It's gonna need it. We're gonna need it.
You can continue to buy those expensive artifacts in dollar terms, thanks to the current dollar strength. As in oil, two pressures are working to slash prices. First, lower demand and fears of more. Second, oil is priced in stronger dollars.
I, too, have had thoughts of talking our way into depression. There is some truth to the idea that what we say can come to pass. But, indicators don't lie. As the author points out, all sings point down. And my readings have shown me the extent of the trouble we (might be...LOL) are in.
Government intervention, I feel, is a necessity at this point. It was necessary a year ago when Bernanke asked congress to shore up the GSEs and save mortgages. They failed to act decisively. I bet they regret that, probably because they were trying to talk themselves into believing everything was gonna be okay. Or maybe because most of them were "let them fail" conservatives. Or, maybe the final push for oligarchy control over the masses is in motion...
Anyway, greetings from La Union.
Give me a break!
On Nov 23 12:51 AM Asbytec wrote:
> Another thought has hit me recently. There is an old saying that
> the right men rise to power during trying times, as in WWII. It's
> beginning to look as if Obama is that man (along with his all star
> cabinet.)
I must admit I am not surprised, though. No one should be. Once Biden was selected as his running mate, we all knew the change we were hoping for simply meant a change away from Bush's administration and back to core liberalism.
The change I was hoping for was profound. Reign in the influence of the lobby gang, end the war in Iraq, kick a little Wall Street tail, and get back to running the government in line with the constitution, and building our technology and science base,.etc. The last three are most important to rebuilding our economic might (as will be other issues some are sure to mention.)
In the end, he may have taken office two months too late to prevent a serious meltdown. So, let's not blame his right away if we slip into a prolonged recession or even a depression. Oh, and I am a conservative.
There was an all 'star panel' on CNN last night. It included a New York Times economist and two ivy league professors. All of which are published and widely read. One of them mentioned the one thing I've mentioned. That is, the storm is coming. It's not here yet. So, for those who believe we'll recover by June 09, it's not likely.
We might just be able to pull out of financial Armageddon (depression), but it will be close. Those panelists threw around the "D" word pretty loosely. They are no dummies, and they see the potential for it.