Saturday, May 24, 2008

The economy in the coming months....

"Every recession is different...just like each poor
Russian family is miserable in its own way" - Bernanke
I remember the last recession very well. Businesses were spending in like there was no tomorrow in 2000. In those days, a Java programmer was paid $10,000 a month and businesses couldn't wait to spend money. If you look back, it was obvious the craze was one big bubble but when you were in the midst of it the excitement was contagious and businesses wanted to outspend their competitors. Every thing came to a halt in mid-2000, the crash of Nasdaq and the collapse of several prominent dot.coms knocked some sense into everyone. Businesses became cautious, caution turn into parsimony and retrenchments came fast and furious. If you were a retrenched IT worker, you would feel like the world had no use for you. Things got from bad to worse and when you thought that things were about to get better a group of terrorists hijacked several planes and slammed them into skyscrapers. I had the great misfortune of investing all my spare cash on 10 Sept 2001 thinking everything was about to get better- incredible timing some would say. The economy headed nowhere and had a mild recovery in 2002 only to be hit by SARS in 2003. April 2003 was the bottom and the economy has been growing since...
The coming slowdown will be totally different from the 2001 recession. It will be caused by the housing slump in the US and a slowdown in consumer spending. Along with the slowdown we have an inflation problem to contend with. The strange thing about the current slowdown is the unemployment rate in the US is still very low 5% and job losses contained. I remember in the last recession at the same point in time, the US economy was losing jobs by the hundreds of thousands per month. We don't see this happening in the current slowdown. The explanation for this is the US has lost most of its manufacturing jobs in the past decade and replaced them with service sector jobs. Employers are reluctant to fire people from these jobs because they require a lot more training than manufacturing jobs. While the subprime crisis, credit crunch and housing slump probably caused more losses than the bubble, except for banks and businesses that depend on the housing sector, most US companies will go into this slowdown with best balance sheet in their history (post bubble many became conservative in their spending). If you take out the banks, S&P 500 companies showed an earnings growth of 10%. In the coming slowdown individuals (US consumers) are suffering while companies appear well-heeled.

During the last recession almost every company got hit. How well you do in this slowdown depends on which sector you're in. In Singapore, construction backlog stretches well into 2010 so we won't be seeing a slump in construction, companies involved in shipbuilding have full order books for the next 5 years. The IT sector which was relatively flat when other sectors were booming in 2006/2007 will remain about the same. Companies involved in infrastructure in China + India will keep growing because of the urbanization - something that shouldn't be underestimated as 15 million people move from villages to cities every month. Companies that will do poorly in the coming months are involved in property and banking. I think it is mostly psychological - 1 year ago, the condo market was so hot, people couldn't imagine prices coming down and now we have a small glut. Banks will see a slowdown in housing loan applications and will see slower but still decent earnings.
It looks like most of the pain will come from inflation rather than unemployment. The people in India and China are getting richer and would like to live like us. They want to eat the same high quality Thai fragrant rice, they want to drive around in their TATA or Geely cars and they too would like to fill their cities with skyscrapers and they need steel, copper, etc. you get the picture. Mother earth does not have enough for the world's population to live like Americans. We now have to share with a growing middle class in China, India, Russia & Brazil (collectively known as BRIC). Our lives will be worse because we now have to share. You will still have your job but there is less you can buy with your income.

We had some exciting times in the financial markets earlier this year. During the turmoil there was little time to differentiate, investors sold their stocks in banks infected subprime along with the shipping companies that are still having blockbuster earnings....I think the markets will face some headwinds in the coming months but we won't see the type of indiscriminate selling we saw in early part of the year. Exactly 1 year ago, the stock markets could do no wrong and everyone thought it was the best time to invest only to be hit by the financial typhoon a few months later. Many investors learn their lesson like this, they pick a time when everything looks rosy to invest which is usually the tail end of an economy boom, then when the stocks they bought falls, they swear to stay away from the stock market forever. I've always maintained that investors should invest at regular fixed intervals to overcome the volatility in the markets - better still but harder to do is to invest when economic problems abound and when there is general feeling of negativity about the economy. Warren Buffett often says he gets an "F" for economics but over time I came to realise that he probably knows as much about economics as anyone else. He also understands that it is useless to invest based on the state of the economy because it is the easiest piece of information to appreciate and discount. By the time you know that the economy is in bad shape, so does everyone else and prices have already adjusted for it. If you look back in time, when was the best time to invest? When everyone thinks the economy is entering recession or when the economy is firing on all cylinders?


My Online Notebook said...

My theory is:

1. To make a profit, buy low sell high (obvious). You get low when things starts to fall for a while and everyone (even the super WOLS) agree that the economy is in bad shape. You get high for the reverse.
2. People are neurotic, they always over-react to good and bad news. So, prices WILL deviate significantly from fundamentals. There is opportunity for profit.
3. Unfortunately, people somehow works on heuristics using current price trend. When it falls, we fear it fall further. When it rise, we are so sure it will rise further. Our fear is so much stronger than our sensibility.

Result 2 and 3 arise from behavioral economics. To beat the 3 there is no escape from doing some sort of valuation, otherwise we will always buy on herd behavior.

I definitely got an A for economics, but so far my Investment got at most a C. I suppose a rookie investor (like me) needs to pay some tuition fees in the market first.


Anonymous said...

@my online notebook

Not that anyone can't have their bragging rights, so... Your A in economics, is it in home economics?

But I guess if your so rate yourself, I bet your can predict the future! I can justly say you either

a)A witch
b)That fortuneteller at Bugis Guan Yin Temple
c)A person from the future (A Paradox?)
d) A braggart!

Anonymous said...

they say a monkey also can play the stock market and make money.

sure make monkeys out of economists. LOL.

Anonymous said...

"Mother earth does not have enough for the world's population to live like Americans."

How do I correct this? How do I cripple...growing power?

Anonymous said...

"Mother earth does not have enough for the world's population to live like Americans."


However, if the planet cannot sustain a reasonable standard of living for a given population, is the issue the standard of living or the population size?

Why hasn't anyone suggested birth control as a solution to world hunger & climate change?

perma said...

"However, if the planet cannot sustain a reasonable standard of living for a given population, is the issue the standard of living or the population size?"

This is the problem with growth based on the model of resource consumption and depletion - the growth that we know it for centuries. In Singapore, the govt is making the mistake in the most stupid way thinking increase in population will help to achieve growth.

Anonymous said...

nah. a global war has already started with handshakes and smiles. the thought crossed my mind sometime back but the confirmation came from a statement in indo today(news).

good luck!

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