Good Bye 2008, Welcome 2009, Part I

I finally got permission to spend some time blogging in the midst of vacations.

2008 worldwide stock markets suffer decline of 40% or more is not something new, the rate of decline is something new. How can we suffered that kind of steep losses in less than 1 year? The demised of Lehman Brother, in my opinion, was the straw that broke the camel's back. That was the trigger of unsystematic/chaotic deleveraging unwinding that lead to forced liquidation from stocks, bonds, commodities to almost everything under the sun. That scared hell a lot out of governments around the world, they immediately took a stance of over reacting rather than sit back and relax to let the market sort out themselves. They competing for zero interest rate and announced humongous fiscal stimulus.

To those who has been very hardworking reading all over the Internet plus your "secret counsel sources", you will not find anything new in this summary. The themes are the same.

1. It is going to be government led economic economic recovery and NOT consumer led recovery. Spending is going into infrastructure, education, energy efficiency projects and etc. Trillions of dollars are in the pipeline. Good bye iPOD, cheap toys, camcorder, plasma TV, etc.

2. Low interest rates to encourage people to take risk again rather than benefiting the mattress manufacturers. But I doubt carry trade will resume anytime soon.

3. Competitive devaluation of currencies against each other. It is going to be a reverse beauty contest - nobody wants to be the Miss Universe. I would think currency market is going to be volatiles. I will simply avoid this area in order not to be caught bare-footed.

4. The big word of "Quantitative Easing" simply means "turning on the printing press", flood the market with liquidity and flare up the inflation to fight deflation. The Fed says buy the damn long term treasury to bring down the long term yield. Most of the people willing to chase after low yield 20-30 years bond is telling us they believe in deflation will last longer than most of us think or to bet the FED will be the greater fool(buy at higher price still). To borrow PIMCO, the stock market is pricing in a recession, the bond market is pricing in a depression. I can tell you that they are wrong! Short Long Term Treasury and buy GOLD.

5. Quantitative easing is creating a long term bond bubble, when deflates - it will be good news to equities and high risk assets but bad news for mortgage market - rising yield = rising long term borrowing costs. The Japanese was doing the same thing, when BOJ signaled the rate was too low in 2003, Nikkei 225 jumped 47 % from 7600+ to 11,000+. So it's a catch 22.

6. According to Fortune magazine, the housing pricing is still going to fall in 2009 by 15-20% for areas like L.A., Miami but it will stabilize by 2010.

7. Economy and financial markets must be distinguished. Most of the people anticipate a big rebound despite of anticipating more bad economic news - easing VIX ( close to 40% off from 80++), attractive tailing valuation, record cash level, etc.

8. Credit stress and confusing demand destruction create distortions in long term commodities supply. Farmers can't get credit to buy fertilizers, miners are closing mining and shippers got grounded(tight credit is one of the reasons). When demand returns, it will be sellers market.

9. Malaysia E & E sector will be affected. The good news is foreign workers will go first, less social problem but we still going to be affected somewhat. For example Digi, eggs manufacturers and etc will find themselves losing some revenue. Those crossing Singapore daily surely already find themselves out of jobs.

10. Lower oil price, lower commodities prices, shrinking corporate profits(domestic and overseas derrived) mean lower government revenue(taxes). It will be a challenge for the government to stretch their fiscal position. We have been running deficits during the commodities boom and it will get worse while waiting for recovery.

My biggest fear is government is still very complacent underestimating how bad things going to get when developed countries consumers reduce more spending. They are betting on us to spend our EPF money, sorry, many people have signed up paper asking to keep their contribution status quo - higher disposal income??, out you go. Equities and properties markets are not helping either(I guess I don't have to elaborate more). If the government wants to spend, looks like they either have to borrow money and live with higher deficits. Read in between the lines, higher future borrowing costs. Denial to keep confidence high while you have a back up plan is all right with us but what if they don't? That is the story of another year - 2009.