Many Asian markets are closed this week for the Lunar New Year. Meanwhile the Dow is falling. It is fearful to think about what Asian markets will open with next week. Are we overacting?
My observations do suggest that there is enough money globally to be swished around…and adequate courage to make these moves. The huge investments by sovereign funds in troubled US financial institutions are evidence of this. Despite huge budget deficits, the US senate has voted without blinking an eye, to provide handouts and rebates to the American public… a macro-play we can expect to see more of around the world.
Fear is the only factor that really influences liquidity. With no fear of liquidity, banks can continue to do their business, make loans, support construction, collaterize debts and make lots of money. Life can go and improve and progress.
I am optimistic that we can spend out way out of the situation…avoid a major recession. There are concerns that the current spending spree and economic stimulation will have negative impacts in the longer term….but we cannot worry about that when we feel the impact. These days time just have too many things up its sleeve!
The picture for shareholders, especially those in financial service companies may be different. Asset losses have to be somehow accounted for even if there are sufficient funds to maintain liquidity… Some of these losses may show up as balance sheet items resulting profits taking a hit. Others may show up as off- the-balance sheet items…meaning the investors in funds managed directly or indirectly by the bank take the hit directly, rather than the bank shareholders. Both situations will result in severe loss of confidence as consumers for financial products marketed by banks or as investors in bank shares. Both situations should if one is concerned with fundamentals lead to a lower valuation of bank shares in the market place.
Hopefully this may not be, as governments and politicians all over the world have vested interest in promoting the strength of their financial sectors, and will spare no effort in restoring confidence in these businesses. Confidence counts more than fundamentals in today’s stock markets.
Conclusion? Perhaps we are making too much about a recession being eminent. We, the people and the governments can probably can fearlessly spend our way out of it
May the New Year of the rat prevail and be prosperous,
