So what's next?

Please note the link above to Mr. Gottliebsen’s article in which he responds to a series of ”so what happens next” questions. I would like to throw some of my thoughts against some extracts of his (check the linked post for the full article):

Stock market purge.
“There is, therefore, a good chance we have seen the bottom of the overall share and commodity markets, but not for those specific stocks that are destined for future troubles.”

I doubt we have seen the bottom yet for equity markets and residential property hasn’t yet adjusted to the crash. I expect the situation in Australia to be significantly better than the US, although the impacts will still be severe.

A downturn is unavoidable.
“We are still going to experience a significant world downturn. When President Bush says the US is going to quickly return to the old days, he is talking nonsense. Our Prime Minister, in warning of much tougher times, was telling the truth. Over time, this massive injection of money into the system may create inflation, which will require higher interest rates at a time of low demand – so called 'stagflation'. I am not forecasting that, but it is a danger.”

Agreed, and I see no reason why the US president would start telling the truth…..that would undermine an unbroken record. As for stagflation, I see this as a real risk, the monetary spigots are being set to full open all around the world. My take on the likely medium term value of the US dollar also reinforces my view that inflation and interest rates may disconnect from monetary policy and rise significantly.

More capital is needed
“It will take a year or so before we know. However, a large number of Australian companies currently need to restore their balance sheets and this market rally provides the opportunity.”

I suspect there will be a rally at some point where people start to believe, for a brief moment, that things will return to the way they were. However, the reality is that this recession is a 5-10 year event. As for the American banking system it is formally in “dead parrot” territory. The credit worthiness issues in the U.S. banking system are now migrating to the US government proper. The eventual unloading of US dollar holdings will be the phase that puts the “Great” into the “Recession”.

The China factor.
“Australia depends on selling resources to China and Japan for a big chunk of government revenue and if China falls over we will run into deep trouble. I don’t think that will happen.”

Under a seriously recessionary environment I do not believe China is an inherently stable nation. A serious “X factor” hangs over the future of China in an economic and socio-political environment unsupported by US monetary expansion. An socially unstable China with the US in an economic depression is not the setting for a happy world order.

A shift to long-term thinking.
“The winners on the share market will be the so called value investors – those who look at long term strategies and the ability of companies to perform. The current crop of highly paid short-term forecasters will pass. Extensive retraining will be required.”

Yeah well frankly you would want to be a long term investor. If you bought stock in 1929 you would have waited until 1954 for the Dow to reach the levels of its ’29 peak; this time around that would be 2032 folks. Same expectations should apply today.

Contractors will suffer.
“The economic downturn will lift unemployment but, much more importantly, the enormous area of independent contractor income will be affected. A great many families will still be receiving income, but they will be seeing a lot less of it because the companies they are working for need less of their services.”

Ordinary people will start feeling the impact of this recession in about 6 months to a year. Right now the average Joe may be hearing noise but doesn’t yet feel the pain. As this recession unfolds there will be a progressive step down in confidence. At the end of this decade I wouldn’t be surprised to see a majority of people with superannuation is cash.

Credit will tighten.
“Globally, banks are going to be much more cautious animals. Tighter bank lending means that commercial and resident (sic) property markets decline. One of the property areas hardest hit will be commercial property, where capital is hard to find and where there is extensive property on the market for sale.”

The only good thing about having a mortgage in times of declining property prices is that at least you have a mortgage! Those letters you get from the bank about adding another $10,000 credit limit to your card are an endangered species. Defaults on credit cards will become a series issue over the next five years. I expect credit, especially for young people will be very difficult to come by.

Director remuneration will be reined in.
“Globally, company boards that sign up for big executive remuneration packages, only to find that their company does not perform, will be dismissed. Directors will therefore be putting their job on the line with every generous package they sign.”

It is undoubtedly clear that cultural issues have contributed to some sub-optimal behaviour in this area over the last decade to say the least. But ultimately central banks especially the US Federal Reserve should bare the brunt of the blame. The failure of the American elite to support and protect the American people is an unsettling theme from this crisis and may have a profound effect on the future of that great republic.

Infrastructure finance will be tight.
“In Australia, interest rates will come down sharply. But governments are going to be shocked at the cost of funding infrastructure. Institutions backing past Australian infrastructure projects have been taken to the cleaners by over-optimism and bad financial structures. Regulation of prices and returns will need to be much more realistic and badly researched demand figures in non take-or-pay areas will be laughed at. “

As I work in this sector I am inclined not to comment other than to say I would expect the Federal government to be using infrastructure spend in the near- to medium-term provide fiscal stimulus to the economy. Construction on the Hoover Dam commenced in 1931 ….

Ratings agencies will lose clout.
“During the boom, credit controllers have had a decade of drought. Much of their activity was outsourced to rating agencies who handled it extremely badly.”

Ratings agencies I suspect will be another causality of this crash; I suspect their role in the undoing of the Western financial system will be the stuff on many Ph.D’s