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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (41566)	10/20/2008 6:05:26 AM
From: TobagoJack	Read Replies (1) \| Respond to of 220285

just in in-tray, greed & FEAR · The relief rally began this week, precipitated by the growing use of taxpayer funds to recapitalise Western bank balance sheets. GREED & fear's view is that a move up to the 1200-1250 level on the S&P500 is quite possible. · The basis for such a rally will be growing hopes that the government intervention can prevent the severe economic slowdown that stock markets have recently been discounting. These hopes will then be disappointed by the realisation that a severe downturn is underway. GREED & fear's guess is that such disappointment is likely to set in in the first few months of 2009. · Policies announced so far in the West are far from perfect. But by being so sweepingly large, they should save the financial system from imminent meltdown and should allow Western banks to roll over their maturing debt. But the cost will be a dramatically longer period of subpar growth and the potential erosion of the dynamic free-market model which has served the Anglo-Saxon countries well for so many years. · The stampede to inject taxpayer money into banks and guarantee all sorts of bank debt will have all kinds of unintended consequences. Perhaps the most important is to penalise the prudent banks in terms of their cost of funding, and indeed in terms of the general conduct of their businesses. · In GREED & fear's view the efforts to get Western banks to resume lending will not be successful. The issue is that healthy companies and consumers will be increasingly wary of borrowing. The likelihood remains for loan growth to fall well below trend in the Western economies in coming years. This will take place in the context of falling asset prices. · This is only the first recapitalisation of the banking system. A second round will surely follow, creating the likelihood that the worst-infected parts of the Western world end up following the Swedish model of the early 1990s, where the banks were fully nationalised with the interests of depositors put squarely above the interest of shareholders. In GREED & fear's view, full-scale nationalisation is a better option than the present half-baked approach. · If banks in the Western world are on course based on present policy drift to become fully regulated utilities, GREED & fear still hopes that such an outcome can be avoided in Asia. Asian banks have by far and large avoided the sins and excesses of their Western counterparts. · The risk for Asian markets is more capital outflows as risk aversion grows. This is clear from the recent dramatic weakening of emerging market currencies in current account-deficit countries. Still in GREED & fear's view the real macro risk in emerging markets is on the periphery of Europe where current account deficits are massive and where there has been considerable resort to foreign-currency borrowing. · It is technically correct that the size of the Lehman CDS settlement will be relatively small. But the fundamental point is that in a panic, market psychology is all that matters. And the alarming numbers represented by the gross CDS exposure are the stuff to drive a panic, most particularly if there are legitimate concerns that another key counterparty in the market is about to default. · Macro traders should have stopped trading CDS contracts when the credit crisis hit in August 2007 since the risk of market failure had become too great. They should use the present relief rally if it lasts to exit all positions and not trade CDS again until and if the market is put on an exchange with that exchange acting as an essential clearing house. · China's foreign-exchange reserves continued to grow last quarter. But the hot money inflows continue to reverse as people question the renminbi appreciation story. All this provides further reason for the PBOC to stop worrying about "overheating" if it has not already done so. · The main reason why GREED & fear is hopeful that Asia will not hit last Friday's levels again in any retest is how low valuations have become. GREED & fear also continues to hope that Asia and emerging markets will end up being the chief beneficiary of the current increasingly aggressive global monetary easing in terms of where the liquidity flows in the next liquidity cycle. · Obama has showed in recent weeks an impressive ability not to panic, unlike many of his party's activists. The election of Obama will satisfy American sentiment for a "new beginning" and "moving on" to borrow favoured stateside clichés. That should help drive the relief rally GREED & fear anticipates into year-end.