FYI | Mar 19 2008
My optimism got the better of me when I wrote this week’s editorial on Wednesday. I thought there was a genuine chance we would see a strong bounce in share markets this week, but it has quickly become clear this is not what is happening on Wall Street and therefore it is very unlikely to happen elsewhere.
I have therefore decided to remove the opening part of this week’s Rudi On Thursday. Here’s how the second part went:
Two things that caught my attention this week and both are symbolic in their own right. The first one was that TD Financial’s chief economist and rates strategist Eric Lascelles now expects US interest rates will be at 0.75% when this whole crisis of liquidity is over. After this week’s cut by 0.75% the Fed Funds are still at 2.25% so if Lascelle’s projection is correct, there’s a whole lot more Fed cutting to come in the months ahead. This in itself tells you this saga is far from over yet.
Admittedly, Lascelle’s 0.75% projection is the lowest I have seen so far, but his forecast comes within a declining trend. Last year, when “subprime” hit global headlines and the Federal Reserve started lowering interest rates, only a few experts, such as Dennis Gartman, would go as far as stating that ultimately US interest rates would fall as low as during the last crisis of 2000-2003; that was 2%. By now the number of economists that is pencilling in such 2% as being the bottom has grown exponentially. At the same time, however, there have been a growing number of economists who have gradualy been putting lower figures in their spread sheets. 1% is sometimes mentioned. Since this week, there’s at least one of them who has gone lower than that.
The second trend I spotted is even more ominous, it is about economists now all but giving up on a quick recovery for US financials, and thus the US economy. Remember the “it’ll be all better in the second half” line that prevailed at the end of last year and in the early weeks of 2008? Those forecasts were based on what economic text books describe as a V-shaped recovery – as opposed to a more protracted U-shaped or the worst: an L-shaped tragedy (think Japan).
V-shaped recovery in essence means the economy goes down, hits rock bottom and then spurts back into full gear. In no time, those bad quarters have been all but forgotten about. The main reason why economists had been expecting 2008 was likely to show such a V-shaped pattern for the US economy is because the Federal Reserve proved keen to slash interest rates aggressively and by doing so it would provide the economy with so much stimulus it would even make a dead horse dance on its feet after a while.
Except, of course, when the dead horse is like, uhm, really, really deeply injured. Then it might actually take a bit longer. Like when US banks have to do a lot of balance sheet repairing and US housing still has some way to fall. And that is exactly what is happening in the market today: an increasing number of experts is finally succumbing to the realisation that this won’t be a quick recovery, for the simple reason that it possibly could never be given the severity of what is actually happening in the US.
The latest one to come to this party is the team of economists at National Australia Bank. The team has revised most of its expectations, and most went down. And so it is that NAB concedes the US economy is likely to record a standard book recession (two subsequent quarters of negative growth) starting with the current quarter plus the next one. This has reduced its GDP growth forecasts to 1.5% this year and to 2.25% in 2009. Fed Funds will fall to 1.50%; twice as high as where TD Financial’s Lascelle sees them but NAB acknowledges “lingering risks of more aggressive action”.
However, the most devastating change has occurred where the team actually increased its previous forecast: the time when the US economy will register a recovery from its current crisis. NAB still has “second half” in its spread sheet, only the year that is attached to it has changed: 2009 instead of 2008.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always supported by Greg, Grahame, Pat, Joyce, George, Chris and Paula)
