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Optimism will lose you money in todays markets.

Posted by Adrian on May 29, 2008

Personally I believe that general financial reporting is poor, occasionally an article, or a repost from another that has been doing the rounds from Reuters, through to Bloomberg and then across to the Financial Times – does hold some analytical merit. Times Online and New York Times has been good at reporting, Tom Keene from Bloomberg online; is an excellent interviewer, a sensible journalistic approach with middle ground view on market/economic estimates.

But generally, as I said, poor journalism and reporting.

Seven years ago or even going back a couple years prior to the tech crash for 2000, the world, not just America, began it’s global boom (liquidity from the US). Synchronized and the same time fueled after interest rates were cut so low in the US in the period of 2001 and 2003. Credit markets expanded and the securitization market (Wall street firms) sprung to life. China and India gobbled up commodities from Australian, Brazil and Argentina.

Global property booms began in every country in the world, from Bangladesh to New York. Property bubbles expanded – and as we know now, are deflating rapidly in developing countries, more notable US and UK.

Everyone is now aware of the seriousness of the dramatic fall in the US property market (subprime), the effects that had on the credit markets, the extreme poor timing of the Federal reserve for dropping interest rates so low at a time with booming commodity markets – only exasperating the high oil price and foods. It’s mess, no doubt there. Recession denial reverberates into a bizarre optimism in business reporting. The credit markets are not even half way through from unwinding. The credit crunch is still on. The stock market is volatile, the commodity markets are contributing to food inflation, oil inflation. If you are optimistic and investor in the markets, you’ll lose money. To believe that the US Fed has saved the day by cutting rates, buying massive amount of toxic waste from banks and bailing out investments banks. Is not only naive, but you’ll be on your own with that one.

The banks are freaking out, after a regulation bill ( now passed) to limit fees on cards and credit and extend the repayment period (on credit) – is going to shut down any profit left to make in the secrutization markets, debt and credit card markets. So the banks may pull credit lines or just shut off credit and write down their losses.

I read an article recently from CNNmoney, with was quite short sighted. If the world falls into a deep prolonged recession or depression, we may not get a deflationary aspect, nor a sharp decline. What we could get us a stagflation style recession, or a crumbling of the financial system that may take years to rebuild or regain normality. Credit lines will be cut and consumption will slow down, industry will be effected from stagnated expansion through the inability to preform with rising costs and oil costs. Also, economies could all fail at the same time, Europe, US some Asian countries such as Japan and Singapore, Malaysia, South Korea.

Deflation in the oil markets, would only occur if; 1. They find a massive oil field, which is unlikely. 2. China and India’s economy crash and oil demand slows dramatically.

Deflation in the food markets, will rely on improved climates for rice and wheat. In that sense you can throw in global warming into the equation. Which would indicate food shortages will continue, hence inflation of food based commodities will always rise.

High unemployment will be tied into higher oil prices and rising costs on highly leveraged companies.

It’s looking more like a stagflation global recession. Also It may not be a short recession in 2008 with moderate growth in the coming quarters of 2009 (US). But a crumbling of financial confidence, wealth and economic sustainability that may last longer that a year, or two A person I work with made an analogy, that the global economy maybe amidst a slow crumble, coming apart in pieces like a dried up cake.

We may not get a global sharp downturn in dramatic terms, but a prolonged collapsing (or crumbling financial system). But we may see some sharp dips, especially in stock markets and obviously property markets.

I would be willing to look at stocks again, when it becomes more bear market orientated. But companies that are oil reliant, like the automobile and aircraft industry are currently extremely volatile and dangerous to invest in.

To think my dad years ago had shares in an Airship company (yes they went bust 80’s style). Maybe airships will come back, once the airline industry finally has had it’s day and that could be close.


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