03/22/2008 Financial Crisis – Where is the US and the world headed?
I agree on the financial market situation. However I'll be extremely happy if the turmoil lasts just 2 years. This, in my opinion, will come very close to the great depression and the financial systems will be overhauled. I could be too pessimistic but so far I've not been too off. I found about the subprime months after I purchased my house (I blame office work load for that) else I wouldn't have bought this house.
Consider this, Bush's deal has deferred the ARMs adjustment by 5 years and despite that the foreclosures have crossed 1M mark. By end of this year 75% of mortgage borrowers will have mortgage loans higher than the value of the asset. Many of these borrowers will simply walk on their commitments putting further stress on the property prices. I have discussed this with multiple people and they appear clueless. One suggestion from the Fed chairman (in the newspaper, of course) was for Banks to write off some of the principals. This will certainly be a bold step and might be one of the few possible solutions but extremely difficult to implement since issuing Banks do not own those mortgages. They have been packaged and sold to investors. Asking the investors to take the hit will kill the investment banking institutions for a good number of years. Even if some interim relief is brought this way, ARMs will start adjusting eventually and more stress will come on the housing.
Second possibility - Fed brings in more liquidity by reducing interest rates and printing more money (which it has been doing) to enable more confident and easy lending. But both steps will further weaken the USD and push the inflation up. With limited consumer confidence, this situation means severe stagflation.
What this means to the world economy - A disaster. And India will be one of the first countries to be hit. It's not 1998 - now over 25% of GDP is tied to foreign demand and exports. My prediction on the Sensex has so far been right on the money and I was lucky to clean house with all my Indian stocks last year. I think it will fall below 10K by early next year and stabilize at about 9K. Second, I believe that Rupee will decline to 45-46 level by end of this year. The slowdown in Indian economy from 10 down to 6% is a drastic indication of the tip of the iceberg. Two more quarters of slowdown and FIIs will pull their money out of the market and guess where Sensex will go (I think FIIs still have first option out). This means Indian investors will loose shirt and there will be blood bath on dalal street. Govt is already taking steps to get the money out of the market (Rupee is now convertible, right?) so that inflation and rupee devaluation can stay in check.
What's next - Indian housing will crash. Why? Last year when I was trying to buy an apartment in India, I approached ICICI bank for loan. The guy there went overboard to convince me that interest rate will stay low and that ARM was the best option. I was very troubled because what if the banks had sold similar loans to the million new home owners. There is already a lot of speculation built in home prices in India and those prices are sustainable only with rising income and further growth in services sector. With limited internal demand and slowing global economy, both the possibilities are questionable. With the way we Indians react to panic news, the country should brace for multiple black days for capital and real estate markets.
Anything positive - For long USD has provided the peg for other economies to march behind. This will erode in the coming years. The high inflation in Europe is providing safe haven for higher interest seekers to move their assets from USD to Euro. I don't think Euro can lead since the EC is useless in decision making and there is multiple stresses within already. It is good for pan-European trade but that's it. End of story. What I sincerely hope is that with tighter job situation, high inflation there may lead to an early trouble. Since Euro era is relatively new, it will fail to prove its credibility over USD and the trust will return to the greenback.
Harbingers - great depression (Keynesian demand push and World War II), the 50s (Korean War), 70s (Milton Friedman's monetary controls - an overhaul), 80s (Gulf War I), 90s (Internet), 2001 (Sub-prime market). The initial belief was that 2001 recession would be tackled by the "Nano" revolution, which never happened so hope was on the 2nd gulf war which didn't help much either. Instead the sub-prime market pushed the economy up into the mess it's in. By the time this mess is cleaned up, I feel that the "Go Green" revolution will be hot. The financial institutions will be made to drastically mend their ways - more oversight will come. As in the past, the US will take the lead on the new "Green revolution" and the world will follow suit.
Consider this, Bush's deal has deferred the ARMs adjustment by 5 years and despite that the foreclosures have crossed 1M mark. By end of this year 75% of mortgage borrowers will have mortgage loans higher than the value of the asset. Many of these borrowers will simply walk on their commitments putting further stress on the property prices. I have discussed this with multiple people and they appear clueless. One suggestion from the Fed chairman (in the newspaper, of course) was for Banks to write off some of the principals. This will certainly be a bold step and might be one of the few possible solutions but extremely difficult to implement since issuing Banks do not own those mortgages. They have been packaged and sold to investors. Asking the investors to take the hit will kill the investment banking institutions for a good number of years. Even if some interim relief is brought this way, ARMs will start adjusting eventually and more stress will come on the housing.
Second possibility - Fed brings in more liquidity by reducing interest rates and printing more money (which it has been doing) to enable more confident and easy lending. But both steps will further weaken the USD and push the inflation up. With limited consumer confidence, this situation means severe stagflation.
What this means to the world economy - A disaster. And India will be one of the first countries to be hit. It's not 1998 - now over 25% of GDP is tied to foreign demand and exports. My prediction on the Sensex has so far been right on the money and I was lucky to clean house with all my Indian stocks last year. I think it will fall below 10K by early next year and stabilize at about 9K. Second, I believe that Rupee will decline to 45-46 level by end of this year. The slowdown in Indian economy from 10 down to 6% is a drastic indication of the tip of the iceberg. Two more quarters of slowdown and FIIs will pull their money out of the market and guess where Sensex will go (I think FIIs still have first option out). This means Indian investors will loose shirt and there will be blood bath on dalal street. Govt is already taking steps to get the money out of the market (Rupee is now convertible, right?) so that inflation and rupee devaluation can stay in check.
What's next - Indian housing will crash. Why? Last year when I was trying to buy an apartment in India, I approached ICICI bank for loan. The guy there went overboard to convince me that interest rate will stay low and that ARM was the best option. I was very troubled because what if the banks had sold similar loans to the million new home owners. There is already a lot of speculation built in home prices in India and those prices are sustainable only with rising income and further growth in services sector. With limited internal demand and slowing global economy, both the possibilities are questionable. With the way we Indians react to panic news, the country should brace for multiple black days for capital and real estate markets.
Anything positive - For long USD has provided the peg for other economies to march behind. This will erode in the coming years. The high inflation in Europe is providing safe haven for higher interest seekers to move their assets from USD to Euro. I don't think Euro can lead since the EC is useless in decision making and there is multiple stresses within already. It is good for pan-European trade but that's it. End of story. What I sincerely hope is that with tighter job situation, high inflation there may lead to an early trouble. Since Euro era is relatively new, it will fail to prove its credibility over USD and the trust will return to the greenback.
Harbingers - great depression (Keynesian demand push and World War II), the 50s (Korean War), 70s (Milton Friedman's monetary controls - an overhaul), 80s (Gulf War I), 90s (Internet), 2001 (Sub-prime market). The initial belief was that 2001 recession would be tackled by the "Nano" revolution, which never happened so hope was on the 2nd gulf war which didn't help much either. Instead the sub-prime market pushed the economy up into the mess it's in. By the time this mess is cleaned up, I feel that the "Go Green" revolution will be hot. The financial institutions will be made to drastically mend their ways - more oversight will come. As in the past, the US will take the lead on the new "Green revolution" and the world will follow suit.
Labels: Finance
posted by TheFlipSide @ 4:00 AM
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