2008 was the year that collatorised debt obligations wiped out the capital bases of the west's biggest banks, which played itself out during September 2008 following the china syndrome chain reaction that followed the Lehman's (LEHMQ.PK) bust that led to the unprecedented actions of capital injections and nationalisation of too big to fail banks that looks set to continue for the whole of 2009 and beyond. The crisis had been festering and growing since the August 2007 interbank market freeze due to flawed and some could say fraudulent mark to market valuation of worthless over leveraged mortgage backed CDOs.
The time bomb continued to tick under the bankrupt banks - how long could the banks hide the truth from the market that they were insolvent? The article of September 9th (BANKRUPT Banks Wiped Out by Tulip Backed Securities, Is China Cheap?) in response to email queries of "should I buy banks now?" , clearly pointed out that banks should be avoided as the banking crisis had yet to hit the financial markets let alone the economies which were also soon expected to fall off the edge of the cliff as the second phase of the credit crisis kicked into gear. Meanwhile the more asset prices fell, the more loss making illiquid positions forced more asset sales and therefore more deleveraging, which culminated in the crash of 2008. Deleveraging is not over and therefore suggests much lower asset prices during 2009.
Key Lesson from 2008
The key lesson from 2008 is that no matter how bad you thought things could get, they in fact got a lot worse in every respect, from the stock market panic of September / October 2008 to the financial system that came to the very edge of armageddon. This leads me to believe that being an optimist during 2009 could prove to be a fatal mistake, whilst the world is not going to end, well hopefully not, what it does mean is that the financial and economic crisis will get a lot worse and therefore which means much lower stock prices during the course of the year.
So no matter how bad 2008 was, 2009 could still be worse!
The Paradox of Deficit Spending Bailouts and Stimulus Packages
I may be wrong in my thinking here but there appears to be a huge paradox at the heart of the stimulus packages and banking system bailouts aimed at generating economic activity and this is that the record amounts of new government debt issued has the effect of soaking up liquidity from the financial system i.e. the US is expected to issue $2 trillion of treasury bonds during 2009, how much of that $2 trillion would have gone into main street ? Therefore this implies that whilst the public expects huge and highly inefficient stimulus packages to impact on the economy. However at the same time the deficit spending is quietly draining the financial system of liquidly, therefore main street by the end of 2009 will be wondering why the trillion dollar deficits have had no impact on the economy. This also implies bond prices will fall, despite deflation.
http://seekingalpha.com/article/116371-2009-economy-outlook-severe-recession-but-not-a-depressionUNLESS....There's a black swan event!
Then there are the Black Swan events of which there were many during 2008, events that cannot be allowed for by their nature that tend to rip forecasts apart. In 2008 one of the key events was the Russian invasion of Georgia that set the ball rolling for a collapse in the Russian stock market that had previously held up remarkably well. Therefore there will be many black swan events during 2009 that will severely impact on financial market trends, which makes forecasting of markets that are more susceptible to black swan events such as crude oil for example being impacted by an attack against Iran's nuclear infrastructure (highly improbable but not impossible). However should it occur, then that would immediately negate the existing forecast.
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