The global stock markets have corrected significantly since the beginning of the year. Is it time to jump in now?

Art, 16 Jan 2008

The answer is a big NO. US economy has just experienced the classic economic downturn with the falling house prices, which have hurt the banks badly. Economically speaking, this is just the beginning of the downturn. The next thing to come is the growing default of car loans (GM finance mentioned that the 3rd Quarter default was up slightly from 2.4% to 2.6%, but no mentioned of the 4th Quarter default rate). Credit card default will be the next to fall invariably as it is used to ‘support’ other outstanding loans until it cannot be done anymore. Credit card loans is estimated to be close to USD1 trillion currently outstanding. Capital One (US-based credit card company) is already reporting higher delinquency rate. With a 24% to 30% charge rate, it can come very fast. Even the prime housing loans default will not be spared subsequently, though at lesser degree but from a very sizable amounts base figures. Finally, the corporate loans default which is currently almost at all time low is likely to rise to the ‘normal default rate of 1.25% (or equivalent to about USD500 billions) as reported by FT, 12 Jan 08’ or likely to overshoot it, (it is beginning to hurt some Credit Default Swaps, CDS issuers).

I repeat, we are currently ONLY just after the first stage, the sub-prime housing loans. Who is going to save the US economy from recession? There will be some false dawning from FED rates’ cuts and fiscal stimulus. Don’t bet on it that it can be easily overcome the grip of US recession by the cutting of FED rate to even 0%, (despite the financial futures market having already priced in a 0.5% cut to 0.75% by end Jan 08 (to 3.75% or 3.5%), and yet last night Dow Jones Index was down by 280 points.) Though last night, PPI came in tame, but with the raising commodities’ prices, CPI will have a problem of staying low for too long. Some economists now are talking about stagflation though undoubtedly US recession is here. Like an auction party during this US presidential election year, the presidential candidates are all shouting higher and higher rescue fiscal stimulus package to the tune of USD75 billions coupled with more tax cuts. How much will the world stomach the borrowings to fund the world largest, which is US economy (or merry-making) this time round when US has already accumulated trillions of fiscal deficits (currently about twenty over percent of her GDP, of about USD12+ trillions?

Has the world economies decoupled? Just look at the stock markets around the world where last few nights of drops in the US stock market triggered dropped of almost all other markets which is very telling that it is not as decoupled as many have hoped for.

A last word of advice is, taken from the fund managers, ‘never try to catching a falling knife’.

Art, 16 Jan 08
Delta Fund Investing