FYI | Aug 31 2007
Market analysts at BCA Research issued an update on their thoughts about global share markets this week and the report could have easily been written in response to my thoughts on Wednesday (see Rudi on Thursday this week).
Just to avoid all miscommunication on this matter: I am not suggesting BCA released a report in response to my weekly editorial, I am simply concluding it fits in perfectly with my thoughts expressed on Wednesday. (Last time we checked we had no BCA email addresses in our database of registered readers).
On Thursday I suggested the present time of extreme market circumstances is likely to lead investors into something that will be equally extreme by its nature: either share markets are warming up for another fierce bull run or, the other side of the ledger, a bear phase is about to kick in.
BCA Research has come up with another option: extreme volatility. In other words, if you’re getting seasick because of all the 1% down and 1% up movements by the share market, you better start looking around for a swimming vest because this extreme volatility is here to stay.
BCA has a positive view on equities in general, but a more negative view than market consensus when it comes to the two major problems behind this month’s market struggles: the US housing market and the subprime originated global credit crunch.
As far as the analysts are concerned the US housing market has landed in a bear phase and it’s going to take a while – a long while – before that market sorts itself out. Up to two years, is BCA’s verdict, and one may expect all the negatives that could possibly arise from such a situation between now and then: falling house prices, increased mortgage failings, more consumer debt problems and, yes, ultimately less spending by US consumers.
The analysts draw a comparison with the “long post-bubble slump” that hit US commercial real estate in the late-1980s/early-1990s, and with the UK housing market in the first half of the 1990s.
The key difference is, however, this time around the US Federal Reserve has the ability to ease aggressively before the housing downturn risks crunching the overall economy, says BCA. The Bank of England did not have this option in the early 1990s.
In short, BCA says the bear market in US housing will persist until inventories are run down and overall affordability improves significantly. Both elements will take time, it’s that simple.
As a result US economic growth is going to slow, and the Federal Reserve will cut interest rates. This will further weaken the US dollar.
BCA is still confident the US can avoid a recession, but the country will experience “sub-par” growth nevertheless.
Turning to the world’s second major problem, the global credit crunch and its underlying cause – sub-prime US mortgages in all shapes, forms and derivatives – the analysts quote a fund manager who confessed to another service:
“Anyone who is bullish here either doesn’t understand what’s going on or is talking their book…This is a 25-year up-cycle in credit being popped. Once the air has started coming out, for the life of me, I don’t see how they can put it back in again…There are a lot of players out there who are insolvent, they just don’t know it yet”.
BCA confesses to have heard similar comments from clients who cannot remember when the overall credit market environment was as bad as it is now.
Sounds scary? It is. But BCA argues the authorities will use everything in their might to prevent this debt problem from crunching the real economy – even if it means creating more excesses further down the road.
Taking a positive view on matters, the analysts believe (hope?) the worst of the current financial crisis will be over by year end, and the world will be able to move on in a more normal fashion again at the start of the new calendar year.
Here comes the bad part: BCA believes the current episode has all the same characteristics of the recession fears in 1998, which prompted Fed easing. That was good news, at first, for investors in the share market, because a powerful rally followed. But it also led to increased volatility in the market.
The bad news is that this share market rally ended with a genuine crash two years later.
It would seem BCA’s middle-of-the-road version of future events has a bit of both my two suggestions.
Have a great weekend!
Your I think I am up for a great weekend myself editor,
Rudi Filapek-Vandyck
(as always supported by the Fabulous team of Greg, Terry, Chris, Joyce, Grahame, Pat and George)
