Are We at the Bottom Yet?

Anyone who has driven on a long road trip with children will be familiar with the cry of “are we there yet?”. After 13 months of the credit crisis we are also hearing the same cry from investors wondering if we have arrived in Bull Market territory once again.

The children usually start this refrain when they have become bored and tired, regardless of the distance still to be covered to reach the destination. Investors also become bored and tired by bear markets and are impatient to see their portfolio’s resume growth once again. Unfortunately for investors the answer will depend more on where you have put your money rather than the distance you have covered.

Many market commentators have talked about how world markets seem to be operating in tandem with no real decoupling evident. This is true if you are watching falls in the US markets rippling through Asia and Europe the next day. But if you step back and look at things over a larger time frame you can see that the markets are acting more like dominoes rather than operating in tandem.

The credit crisis has its roots in the falling values of US property. Due to financial engineering and credit derivatives, most of this risk had been sliced and diced and scattered in various toxic packages around the globe. As the mechanism that allowed this financial engineering seized up, so did other mortgage markets that had used the same models. The best example of this is the UK, which had also adopted most of the same irresponsible lending practices.

First, the US property market fell, and this quickly caused the market for CDO’s to dry up. Without this way of offloading risk, the UK banks had to curtail their imprudent lending practices. With no one able to lend to prop up the rotten edifice, the UK property market also began to fall. Banks around the globe stopped lending to each other because they all knew that their bookkeeping was suspect, with many being slow to mark to market the toxic CDO’s that where now, at least in the short term, worthless. This caused them to go running into the arms of sovereign wealth funds to shore up their capital.

All this financial turmoil has significantly impacted global growth to the extent that it was even able to slow the Emerging Market juggernauts of China and India and throw a spanner into the Commodities Supercycle.

Which brings us to where we are now with US government ostensibly nationalizing the two GSE’s that back the US housing market.

You can reasonably expect that since things fell like dominos, the recovery will be quite similar. The US property market has shown signs that its decline is slowing. Commodity prices and the inflation that they stoked have stalled, which will allow the central banks to change focus from inflation to pump priming.

Expect that the US markets will recover first, followed by Europe then Asia and the emerging markets. This will allow the Commodity Supercycle to gain traction again.

So in answer to the question, “Are we there yet “. The answer will very much depend on how you have positioned your portfolio. If you have over weighted the US market you should already be starting to see your portfolio recover. If you still have most of your assets in Europe it will be a long winter. If the bulk of your assets are invested in China, well, see you next year.

Comments

[pockyclips ...:]

Too simplistic. Your failure to consider short term geopolitical moves is glaring. Any misstep with Iran or Georgia/Central Asia will be painful.
You can bet our Russian and Muslim friends will make life difficult. We won't know where "bottom" is until spring '09 at the earliest.

2008 Sep 10 09:00 AM

[notsosmart:]

in this world today the only bottom you can be certain about is the one youre sitting on.we dont have many friends around the world & even less now that they own much of our worthless paper.

2008 Sep 10 09:43 AM

[Simit Patel:]

I have to agree with the aforementioned comments. Also, it is worth noting that fundamentally, nothing has changed. If anything, I'd argue the problem is just beginning; the US government cannot afford the bailouts, which means that it is going to fund these enormous bailouts by printing more money via the Federal Reserve. This will result in dollar devaluation, aka inflation, which is going to further fuel a decline in many financial markets as well as putting pressure on consumers who are already being overstretched.

The dollar devaluation is, in my opinion, the real story here, and is at the heart of the economic issues. That issue remains critical and is intensifying if anything. I would expect the issue to remain for at least a few more years, aside from momentary strengthening like what we are seeing now.

2008 Sep 10 11:41 AM

[doylegroup:]

To bad that finding a bottom isn't like driving to a destination. Rarely if ever do you know that a bottom has been reached until you have. Are we there yet? or just going up 2% one day and down 3% the next. Stay tuned

2008 Sep 10 12:30 PM

[ain't no fo...:]

We have a Dow that should be trading at 8500 today after everything this crisis has perpetrated on the world's economies and financial markets.

Instead, its trading at 11,000+.

Why?

An administration that has intervened, rigged, manipulated news and markets ever since the crisis began, and consistently rewarded the criminals who caused this unmitigated financial disaster. It wasn't by accident or to provide liquidity to the credit markets that Bernanke opened up the discount window to the big investment bankers who were the major cause of this crisis. It was simply a case of "you scratch my back, I'll scratch yours. You get a few HUNDRED BILLION $$ of "free" taxpayer monopoly money to day trade or buy hookers or do whatever you want with, but you better stick a bid up there if this market starts to break below 11,000... we've got an election to win in November, so play all you want, but be there when we need you because we can't have a meltdown in an election year now can we?"

And so the IB's and all the hedge funds they spawned have virtually limitless cash in their trading accounts, and if you have watched this market get whipsawed around with all the multi- hundred point up and down days (usually consecutively), you know the kids are having just a swell time gorging on that discount window candy.

And if you're not in their game, then whether you're long or short, it doesn't matter, because they took a big piece out of your hide.

That money doesn't go to any useful economic purpose, but then it wasn't supposed to... capitalism officially died the other day, after a long illness, and the dawn of American socialism has arrived.

2008 Sep 10 01:03 PM

[wallyjm:]

wnen blood is running in the streets good time to buy solid wealth in good solid equities. selling to put the money into printing press money is stupid. in germany after ww one those who had marks lost it all,but those in solid companies such as bayer; etc came out of it smelling like a rose! same recently in argentina.

2008 Sep 10 01:05 PM

[kurt walter:]

Near the bottom? No. In the next 3 years, lots of pay option ARM mortgage loans will be adjusting much higher.

2008 Sep 10 03:11 PM

[woodsey:]

The credit crisis has roots in usury.

2008 Sep 10 03:46 PM

[notsosmart:]

well,well.is america finally starting to wake up? it may be too late folks.the american jerk is now recognized by most of the world.of course their greed made them jerks also as they hold our valueless toilet paper.all under the conservative adm.losing our liberties,our dollar value & our way.

2008 Sep 10 07:58 PM

[dannyp52:]

What a hollow article.

2008 Sep 10 10:38 PM

[cynic69:]

I think Mr. Roxburgh is long this market and he is hoping this article will convince the rest of us to jump right in. I think we are still at the top of the market and with energy prices at this level equities are going to need a 40% haircut before they start to make any since.

2008 Sep 10 11:01 PM

[NOWHEREMAN:]

A 40% haircut from where? Oil will be down 40% from its peak in the $93-5 area.

However, I agree totally with the gist. Nickel has already been down 40% from its peak, ditto rice.

2008 Sep 11 02:45 AM