Green Shoots or Fresh Weeds ?

Andrew Michael Teo

If only market signals are so obvious...

In August 2007, the United States triggered what would be known as the Sub-Prime Credit Crisis then. Later, this evolved into the Global Financial & Economic Crisis. The crisis saw many renowned financial institutions in the United States and across Europe seeking bailouts from their respective governments using taxpayers’ monies.

Financial institutions which received bailout included Goldman Sachs, Citigroup, Bank of America, JP Morgan and AIG. AIG was the worst among the bailout recipients because it was already on the edge of bankruptcy. These financial institutions were rescued, while some were left to collapse, notably Lehman Brothers.

The crisis, the worst of its kind since the Great Depression of the 1930s, spread across Europe and Asia-Pacific. Billions of dollars in the form of rescue packages were dished out to boost the liquidity of the national and international banking systems in order to prevent the financial sector and businesses from collapsing. Their collapse potentially result in more job losses and other societal problems.

While these rescue packages may have slowed down the crisis from worsening further, they have, however, effectively created a set of similar problem which is no different to that of the sub-prime. I will call it “super-prime” in this instance. The financial markets, properties and real estates prices have been soaring even way before global economy starts to recover.

Think Again

The speculative rise in properties and real estates prices are due to available cheap loans. Both the financial markets and the financial institutions were lushed with liquidity. This effectively created the same bubble that triggered the global economic crisis.

Considering the currently still-cloudy economic condition, especially the unemployment rate, while taking in account of the prices of properties and real estates in Taiwan, Hong Kong and Singapore, there is no doubt that speculative activities are going on in the property and real estates markets.

Were there steps taken to curb these activities?  Are these indications of an economic recovery? Well, think again. Are we are in a recovery stage or are we still caught in the recession?

Not surprisingly, many economists are positive that global economy has recovered from the worst recession, while ignoring fresh signs of trouble in the PIGS economy and calling the world to focus their sight on the “improved” economic data.  However, regardless of how “improved” economic data have turned out to be, there are questions that still need to be answered:

  • With the private sector’s problems shifted to the public sector, and if the burden of which can no longer be passed on, how will the problem be unravelled?

  • At the end of the day, who foots the bill for the massive bailouts?

The crisis that began with concerns about sub-prime credits, and with its massive bailouts of financial institutions by governments, has evolved into the Sovereign Debt issue, which would appear as the latest phase of the crisis that started in 2007. As I had said before, in my opinion, this will not be a V-shaped recession.

It is certainly one that is going to be an inverted-square root, meaning we will have to go down deep before things start to really pick up. And even if the economy stays flat, the stock market will almost surely head back down when financial markets began to realize what a jobless recovery actually looks like.

So, while the statistics may point to an economic recovery this quarter or next, the real world will be feeling recession pains throughout 2010. Here are some reasons why the economy will stay flat or even decline in 2010:

  1. Loss of Wealth

    People will not only feel poorer, they are poorer in real terms. Personal wealth will continue to decline in 2010, as inflation soars even further, fueled by a wave jobless and unemployment among local citizens. Strategic defaults in home mortgages will occur for home buyers, who inflated housing and properties prices by rushing to buy houses and properties during the late 2009, which will result in higher foreclosure rates putting downward price pressure in the real estates market. Hence homeowners will experience a commensurate loss of wealth as the value of their homes decline.

  2. Jobless Recovery

    Unemployment will put pressure on wages, which will remain stagnant, and longer hours worked. This all adds up to falling national income, which means consumers are afraid to spend money.

  3. Cut in Consumer Spending and Change in Consumer Attitude

    A fear of a loss of income will continue to squelch consumer spending and to effect change in attitude among consumers. Most people I know are fearful about their futures, i.e. loosing their jobs or seeing a cut in commissions, profits, or wages. This means they will hang on to their pennies in 2010.

    Bottom line: Consumers drive 70% of GDP, and a meaningful recovery will not happen without their dollars. The change in spending habits will not be a passing fad. Frugality will be the norm in 2010 and beyond.

  4. Change in Business Spending

    Businesses do not see a turnaround in 2010. Even with public figures talking up the economy,  businesses are not listening. If consumers aren’t spending, why should businesses? As the consumer continues to struggle, we will see businesses reining in their spending further and push back hiring plans throughout next year.

  5. Government spending

    In the past years, the government had increased spending and cut taxes to spur spending during times of economic crisis. However, this is no longer a serious option. Simply put, the government lacks the tools necessary to significantly increase consumer or business spending in 2010.

What have Asian Leaders learned from the Crisis?

Donald Tsang, Chief Executive of Hong Kong, who had cautioned against the recent rapid rise in the property markets in Taiwan, Singapore and Hong Kong, had made known his fear for a double dip recession in the second-half of 2010. Japan had dished out an US$ 80billion stimulus package to prevent its economy from falling into a double-dip recession.

With bubbles again started to form even before full “recovery” sets in, especially in Asia, and with Europe facing the Sovereign Debt issue, will interest rates be used as a tool to prick these bubbles? Why would happen next if interest rates started to climb?  What monetary and fiscal tools are left available for central bankers and governments ?

Federal Reserve Chairman Mr. Ben Bernanke said, “never say never,” when asked whether the Fed should instead use higher interest rates to pre-emptively prick future bubbles, and he later said he wouldn’t rule it out.

Strategic defaults on mortgages will grow substantially over in the later half of this year and next among prime borrowers, and it will be identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and it will continue to grow amid low interest rates, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some mortgagors will take another look at their mortgage contracts, and note that nowhere did they swear under oath that they would repay.

If this happens, then global economy will once again be dragged into another recession which is certainly going to be even worse then the initial one since the tail of the inverted square-root shows no end. However, on the other hand, with commodities prices, especially oil, creeping up again and showing signs of inflation, central bankers will be caught in-between pricking the bubble, which would cause the double-dip recession, and containing inflation. However, with the Sovereign Debt issue at hand, will central bankers be using interest rates as a tool ?

Either way I look at it, the second-half of 2010 is certainly going to be the time when economists, regulators and governments alike will have to embrace a brand new economic model and a new way of thinking about how the modern global economy works.