Wednesday, October 22, 2008

Follow-up to Analysis of the Financial Crisis

Two weeks ago, I posted about Mr. Komal Sri-Kumar’s near calming treatise of the financial crisis provided on October 3rd. He is TCW Group’s Chief Global Strategist.

Mr. Sri-Kumar expects a 6 to 9 month Recession, with the stock market starting it's recovery in April 2009. He is rather bullish on equities, and does not believe we are heading into a Depression. Bearish on oil and bullish on the dollar: Oil $75, Euro $1.25, Gold $700.

However, last week I attended New York University’s financial crisis seminar. This Panel’s views and forecasts were decidedly bleaker than Mr. Sri-Kumar’s.

NYU Panelists:
• Dennis Berman, Deputy Bureau Chief, Wall Street Journal’s Money & Investing
• Mark Patterson, Chairman, MatlinPatterson Global Advisors LLC
• Nouriel Roubini, Professor of Economics, NYU Stern School of Business
• Lawrence White, Deputy Chairman & Professor of Economics, NYU Stern School of Business
• Moderator: Thomas Cooley, Dean, NYU Stern School of Business

The NYU Panel’s views:

1. Predicted that the worse is yet ahead.

2. The recession would last 18 to 24 months. The question is whether the recession will be V, U or L shaped. While the word “depression” was not used, the Panel described the economic recession as one of the worst since the Great Depression years.

3. Equities will decline further from current levels and will not have a meaningful recovery for perhaps two years.

4. Housing prices expected to decline further. Housing prices will not recover quickly and will reduce the net worth of consumers to such an extent that it will affect spending.

5. Expect consumer loan defaults and hedge fund failures to add to the financial crisis.

6. The bond default rate is currently at 3%. Its historical average is 4%. The Panel expects it to rise to 10% or higher with the possibility it could reach 25%. The covenant light and toggle loans will delay defaults and bankruptcies.

7. China’s funding the USA trade deficit will become problematic and may require higher interest rates and perhaps a political “quid pro quo” such as Taiwan.

Mr. Sri-Kumar and the NYU Panel are in agreement that:

1.The Financial Rescue Plan was not developed and implemented effectively. The solutions have come late to a problem that was obvious in 2007. The handling of the Crisis by officials world-wide undermined their credibility and the predictability of the Crisis which has exasperated it.

2. “Inter-bank lending” is a key variable.

Click here to access the NYU Panel’s webcast link. Seminar held October 15, 2008. Duration: 97 minutes.

Click on this link for a summary and to access Mr. Sri-Kumar’ October 3, 2008 teleconference call.

Thursday, October 9, 2008

Analysis of the Financial Crisis

Mr. Komal Sri-Kumar, TCW Group’s Chief Global Strategist, gives a thorough, almost calming, treatise of the financial crisis in his October 3rd teleconference call.

It is worthy of review.

A summary of Mr. Sri-Kumar's content and conclusions:

Believes the two major reasons crisis came about:
1. Low interest rates in force for a longer time than necessary which encouraged borrowing regardless of qualifications or the ability to repay the loan.
2. Ineffective regulation.

Not heading into a depression. Disinflation is major threat, not inflation.

His expectations include being bearish on oil and bullish on the dollar: oil $75, Euro $1.25, Gold $700. USA recession starts 4th quarter 2008, 1st quarter 2009 and ends March April 2009 with the stock market starting its recovery. Recession will be worldwide. Bullish on USA equities. The $700 billion rescue plan may result in a profit for the Federal government.

Europe will continue to decline and will decline much steeper than other areas. Particularly affected will be the United Kingdom since 20% of its economy relies on the financial sector versus the USA’s 5%.

China’s GDP growth will be reduced perhaps to 7%-8% in 2009 compared to 2008's expected 11% with the complication that China has stopped trying to curb inflation and is striving for growth.

His presentation explores: When will this crisis end? Are foreign investments safer than investing in the United States? What areas of the world offer attractive investment opportunities now? The origins of the ongoing financial crisis. An explanation of what the rescue plan is intended to achieve.

The recording of Mr. Sri- Kumar's Conference Call is available for free to the public domain.

For the Digital Playback call:
Primary Playback Number: (888) 843-8996
International Playback Number: (630) 652-3044
Passcode: 22866500
Call available: October 3, 2008 - November 3, 2008
Broadcast on October 3, 2008 – duration 45 minutes.

Click here to get a copy of the PDF of his presentation.
(* It is not necessary to register on the web site to listen to the conference call, just call the 888#).