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Thursday, December 3, 2009

Will 2010 be a better economic year? PT2

With Particular regard to the causes of this current crisis turned economic recession in 07-08, the issues of a) credit flows and b) deflation due to conditions that can be described as an aggressive bear market, for not only stocks, but also for companies in distress, is also of importance.

The IMF asserts in their WEO that credit has started to flow and spreads have come down. That is somewhat good news, but expectations on lending conditions, as of July this year, are still down considerably.

There has been some movement in the Asian markets with regard to stock activity, but to the level where they were in 2006-07 is still yet to materialize. In fact, it may never rebound.

Deflationary pressure is still a major concern, as it appears as if, while manufacturing has "stablized", purchases are down with output productivity increasing with minor layoffs.

To highlight for a moment of how we got here overall; the chain reaction of bad events started when credit stopped flowing through the banking sector, simultaneously with the decline in private equity activity, due mostly because major investors lost confidence in the system that was corrupted by risky assets- mortgage backed securities and collateralized debt obligations- where the risks were severely under appreciated.

Particularly, the market for housing backed securities, became detrimentally unstable due to the deteriorating economic conditions in America which, among other things, causing homes to be "turned upside down" (the collateral that secured the home loan is worth less than the money owed on it) and equally, adjustable rates for low cost homes that were extreemly very low in order to attract middle to low income families, being raised at a time of considerably high real inflation cost which caused massive defaults- the price of gasoline and processed food, saw record prices in the years between 2004 to 2008, that had risen from $27.00 to $91.00 (USD) for oil and with the weighted average export shares of total food for 2002 to 2009 from 90.2 to 146.9 with the peak in 2008 to 190.9, as reported by the FAO's in their global food price index.

Currently, The Case-Shiller housing price index (HPI) state that home prices are at -13% of what they were last year this time and -50% from their peak in 2006-2007 in the USA. The Financial Times (FT) HPI in the Eurozone is down for past 7 quarters leading up to Q1, 2009, with negative digit decreases steepening from Q1, 2008 to Q1, 2009 to -4.5%.

In another vein, while the Asian housing market was red hot throughout most of the 2000's leading into 2009, the reports for 2009 are allot less stated- which is quite concerning when leading institutions, are touting the Asian led recovery for the global economy. Examining national statistics on the residential market is still red hot in China, with a 17% year over increase in overall household investment and 13% year over increase in residential property and for commercial property there was a 73% rate of sales increase.

Figures throughout Asia are pretty modest compared with China, but one must take into consideration the issue with respect to sovereign national investment in housing in the socialist state, coupled with increased domestic savings and a balance of payment surplus, to asisst with funding the Chinese market during the downturn, in addition to the stimulus plan they introduced in 2008.

Let's all hope Asia does not follow the western model of economic management to a tee. Even though Asian officials have chastised western officials for their management, the fact of the matter is that they learned the tools and templates for economic management from western schools of thought.

The key issue with all said previously, is that the regulatory regime and the way investment banks are allowed to do business, coupled with the issues as they relate to trading and collaterlalized trading, still has not changed.

Not only does this indicate that disaster can strike again, but also if growth is to be led through the virtue of these windows, with lower employment and manufacturing prospects, in conjunction with the still uncertain nature of the very system that collapsed- let alone the uncertainty about impending regulations- there is nothing to suggest that robust growth is to be expected.

Nevertheless, when we factor in the savings rates before the crisis started for Asia, it is not difficult to believe that spending, at least, in the region, will be higher than other continental markets with regard to home prices.

Overall, the major issue with regard to economic growth, globally, is the issue of who, exactly, will there be growth for?

So, the recession is ending for some people. Asia seems to have never had a recession, let alone still in one. But, the recession is certainly not ending for many of us out there.

Emerging and developing markets must take advantage of the permanent jobs losses and continue to develop nationally the traditional way, until they have "caught up" to developed markets- where ever that may end up.
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