the depression analogies

it is all too easy to draw parallels to the 1929 depression that almost none of us have experienced first hand. Slate magazine has so far been transcending in its holistic and balanced viewed and reporting of the whole economic affair and i am grateful to the washington post company for that. this kind of jounalistic quality has simply been missing in most mainland chinese news sources. anyhow, it is easy to conclude from a few sound bites of the news that the doom is coming, and indeed it has, for the millions unemployed souls this is truly the worst. the main thesis of this post is the paradigm introduced by a globalised commodity and capital market, and its impact on crisis spreading and containment.

Ok so the argument for a less severe depression this time around compare to the '29 event is that government worldwide especially the U.S. is ill-prepared for the task. banks fail because there is no insurance scheme and the administration is simply imbecile at the time. so there is nothing left to do but fail. plus the communist ruled europe and prehistoric japan isn't much help either. simply dwelling on this fact will not support the claim that the financial crisis of 08 will be benign. on closer inspection of what the market today has produced will provide complexity in analysing the severity of the financial crisis of '08. butterfly effects are amplified today due to the advanced state of communication we enjoy today. sometimes I reckon this might not be such a good thing that we are able to communication anywhere and anytime and read anything. anyway, fear in this case is amplified because the world consumers are bombarded subconsciously that the economy as we know it today is going to end.  Ok i must admit in my darkest corner of mind there is a (small) yet playful part that scorns at the prospect of millions become jobless. the pure value of this sinking economy makes excellent drama of human suffering,don't you agree? this beats formula 1 hands down no question... anyway, secretly happiness never hurt any stock price, but fear definitely would. moreover and perhaps more crucially than fear itself is the interconnected nature of this crisis where financial products are bundled, packaged, intertwined and injected into each other. Look around ourselves and we found our banks, our super, our mortgage company, our insurance company, our company and our family all have more or less holding of the sub prime mortgage and that is a bit worrying. this will cause a self-propelling sequence of waves of deleveraging that will never end in good shape. in other words, everybody is scarred in the end to some extent.

the twin top formation of the dow have been hailed by some (e.g., me) as the turning point of our modern economy, as legend has it, it's only gonna go down hill from here. but how much down? let us paint a picture here. the tip of current bull run is formed last year in august, where everything and every man is geared to 110% and maxed out on equity leveraging loan. this equity index figure at the time can not and should not be trusted. it will come down fast like a dough on yeast hit by a heavy hand. no surprise there. then the unfortunate thing happened. consumer and business confidence is shot because credit market seized up. on snap. nobody can afford to borrow anymore because money is so damned expensive despite repeated urging of the central governments and a flurry of interest rate lowering. no matter. financial institutions such as the notorious citi bank are having crisis of their own and can not afford to lend. they need equity to beef up their balance sheet in the face of plunging loan book face value. how exactly this sequence occus is unknown whether it is the sacking occur first or the cutting of spending. i would think they happen simultaneously. how much falling can consumer confidence hurt the economy is unknown but i would venture the following guess:

1. house hold borrowing will fall to a lower equilibrium such as 93 % from the current level of 99% or more. this decrease of borrowing will dent GDP by a significant market especially when US GDP is made up of 50% consumer spending, of which automobile spending is a large chunk in itself. (cya GM)
2. household spending will not increase until the new Obama administration injected some heavy words and billions of cash into the economy and a few key industry is propped up such as financial and automobile, and foreign investors started to snap up bargain based stocks in large blue chips. this will signify the bottom of the market fall as seem by USA's new owners, the middle easterners and the chinese
3. the recovery will be long and painful and cheap labour is running out and high gearing is never to be seen again. the true growth can only now be coming from equity growth and revenue improvement, never again financial engineering. which make me suspect the new administration and the new attorney will start to hammer out law to specifically enforce the banking sector and all the crazy investment practices of the past decade pioneered by none other than the the beloved former fed chair alan Greenspan. (i used to love the guy, sigh)
4. the world is kind of level off after this crisis. developing countries are hurt less because they are geared less. think about chinese's saving rate of 30% and its implications. the world countries kind of come back to the same starting line again, this time with fairer competition and more liquidity. somehow i feel this could be a good thing in the long run. the new commodity will be (yet again) the grab for brilliant minds and improvement of productivity. American consultants, sadly, will be yet again in demand as the new challenge dawns on the world (circa 2010). so the moral of the story is to get in to investment banks NOW before it's too late
5. i'm not too certain on the housing situation. the world will always need housing and people should not be scared into deferring their real estate purchasing decisions. in the long run the minority of owner occupier buyers will start to push house prices in key suburbs higher through positive churning, and this will be the key determinant of wealth creation for us layman souls. so it is not too late to invest start from now.
6. i can't see how china will start to beat the US and JAPAN straight after this crisis because our administration is still, for a lack of more adequate word, fucked. business can not function in a sealed, muddled, and overly corrupt world. human creativity are not fostered in a biased and unfair environment. a direct consequence is the net outflow of creative minds which will only benefit the existing establishment. eg. the US. just look at where top college graduates go and weep.
   
7. the auto industry. oh the tragedy even though oil will take ages to climb back the mid 100 price level reached earlier this year, the mental shock will remain in the mean time. hummers and escalades will be out of vogue for a long time to come. GM can not wait to push out its VOLT faster. ford is actually making cars ppl like. Fusion and its SUV siblings are quite attractive once people start to looking for cars to buy again. if they can stack up with quality and discount then ford will be alright. the chinese auto market will the a shining beacon of hope and cash flow for the next 2 years for all auto makers as the chinese continue to squeeze boxes on wheels onto their hectic and downright dangerous roads. double deck expressways anyone? how exactly can metropolitan areas get around the bottleneck situations is beyond me. the sheer volumne of cars in chinese cities today is a great project for urban planners.
8. the END