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Posts Tagged ‘bail out’

Brace for a global recession

Posted by Adrian on October 7, 2008

Don’t listen to politicians and some bank economist, who have been in denial that the world is heading towards a nasty slump, which could yet end up being a depression. The markets revealed bear markets in stocks early 2008 and commodities started to slow throughout 2008 to present (apart from gold). Shipping has also been slowing rapidly, refer to dry baltic index (morbius glass: The world is most likely in recession). So one should follow the markets closely rather than commentators that have essentially done very little analytical research into the huge unwinding of the credit markets and deleveraging.

Despite the ‘bank bail out’ bill becoming law in the US, the wider economic problems are reverberating around the world. More particularly Europe, which has overinflated housing markets in the UK, Spain and Ireland. So the credit crisis or liquidity squeeze that is causing turmoil amongst European banks, is also on the fear of local housing busts in the main European economies. One could argue that the US was technically in a recession since late 2007, now showing signs of a prolonged and harsh recession. Europe could be hit harder than the US, the markets are now factoring this in, look at the European dollar, a once high yield currency – which was theorised that the European dollar could replace the US dollar as a base currency. This of course won’t happen now, the European economies are all going to fall into recession in unison. The EUR has been sold off quite dramatically of late, weak currencies like the USD and the Japanese Yen are now being bought; since they were both so oversold for so long. The high yield EUR is losing favor. This is a clear signal that Europe is now in recession and the European central Bank (with other central banks) will cut rates aggressively.

The selling off of the EUR is in response to major bank troubles in European and European governments insuring bank deposits for the consumer. Essentially revealing to the US markets that the world is heading for a bad slump; lead by the banks. So in conclusion whatever the bailout bill does to the US, which is very little, the US market accepts that not only is the American economy suffering from so many economic woes, Europe is also.

Reiterating negative market sentiment was the Dow falling 770 points from 10,314 (6 Oct 2008 ) , then recovering to 9,955 points, this is in response to the European Union trying to instill calm, and also the fact that the EU is under strain as countries are independently acting on the banking crisis within Europe.

The next problem will be corporate failures and bankruptcy’s, with credit related derivatives and credit securities backed against company debt. When corporates failures kick in, we could see a huge collapse of hedge funds that invest in corporate bonds (and other complex debt investments). Either way the credit markets are near death. Businesses will find it almost impossible to raise capital. With business capital running completely off credit lines, even if Hedge funds go into survival mode and short sell companies into oblivion; the credit default swap (CDS’s) market will come into play. So the corporate bankruptcies will be an inevitable aspect to the global recession. We may see this occur very soon, as Hedge funds with massive leverage themselves, may fight to survive like a desperate animal. Like I mentioned, since the credit markets are now depressed. Liquidation of assets from companies and CDS payouts may be the only lifeline to Hedge Funds that have bought corporate debt.

In regards to the point I made about civil unrest in Europe, if the Italian PM Silvio Berlusconi is correct that the rest of the EU may bail out the whole European banking system (which is somewhat unlikley, since the US plan will be a flop) – if housing busts inevitably occur on a large scale across the EU and the European Central Bank decides to purchase junk mortgage related assets (from retail banks) – with EU taxes. History has shown that the Germans, French and English know how to riot.


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