Perspective Unlimited

Monday, September 17, 2007

Where Has the Exuberance Gone?

Even though it is only September, June seems like such a long time ago. Back then, markets were on record highs every where, Dow crossed 14000 and STI almost reached 3700. Three months later, not only has the exburance evaporated, confidence in the global financial system has taken a serious hit.

Locally, a lot of hot air has also escaped from the property sector. People who were busy talking prices up three months ago are now talking about a correction. With the uncertainty, illiquid assets like property would be the first to see their ask-bid margin widen. Some units in my neighbourhood have slashed their asking prices by 15 per cent since August but are still left on the market unsold. Many sellers continue to ask for optimistically high prices given the illusion of a bullish market when you flip the ads, but the reality is that the number of transactions have fallen.

The global credit crunch, triggered by the subprime crisis, has produced the first bank run on Northern Rock in the UK. The case is interesting, and grave, for several reasons. Northern Rock did not have any known losses to the US housing market, its credit simply dried up due to events elsewhere. Most analysts continue to reckon the bank to be a viable business but the nature of bank run is always about confidence, rather than solvency. Though Northern Rock is a relatively small bank, the wider implications are already beginning to be felt. The UK housing market boom is now on wobbly legs. Forecasters are already saying that the financial and housing market turmoil could hit the UK economy in 2008 and 2009 by as much as 1 percentage point (which is significant for a mature economy like the UK).

A US recession (some would say long overdue) is also an increasing possibility. Stock markets actually rallied in the past month or so since that Friday, hoping for Fed to "ride to the rescue". The markets again got ahead of itself, STI crossed 3500 again as if the subprime crisis never happened. But as events in the UK show, confidence is clearly fragile. Any interest rate cut by the US carries risks of stagflation, unwinding of the Yen carry trade, and a further fall in the US dollar that will hurt export-dependent Asian economies. Meanwhile, Greenspan goes around hawking his own book as if determined to talk the economy down (more consultancy fees Alan?) and as if none of this has anything to do with him.

Where is the silver lining in all these? For years now we have been hearing about the great Asian growth story of China and India. Many analysts continue to believe that Asia will be stong enough to weather any US downturn. The next 12 months would be interesting. There is a good chance that this hypothesis would be put to the test.


  • Northern Rock is a special case if you read it closely, they pursued a very aggressive lending strategy and collapsed because they needed to rollover billions during this period credit crunch. There is no solvency issue here.

    The hot air isn't gone if you're looking for a property in Singapore, you will know what I mean. Just today during lunch, I had to sit through non stop whining by my foreign colleagues on the "unbelievable rental" market. One ang moh had to face a tripling of his rent (read my blog). Singaporean colleagues complained about the people asking for price way above valuation for HDB flats.

    The housing bubble in UK and Ireland deflated earlier than the US bubble. I have a video documentary explaining the miserable caused by the Irish housing bubble saw it long before I heard of US subprime woes.

    I think the key now is whether the Fed cuts can ease the credit crunch. This is what market is looking at. The 3 month LIBOR hasn't really come down much hopefully with the cuts, it moderates.

    Singapore's M3 is growing at 23% vs 7% GDP basic economics understanidng tells me this is inflationary and can drive up prices of my favorite mooncakes. What is your take on this?...

    By Blogger LuckySingaporean, at 3:14 pm  

  • This comment has been removed by the author.

    By Blogger Bart JP, at 3:47 pm  

  • Hi Lucky,

    I have been reading property ads and calling agents. On the whole, many sellers are still asking for high prices, giving the illusion of high prices. But many sellers quietly telling agents to accept lower prices. A few phonecalls to agents this month and I found them to be far more accommodating, willing to follow up compared to back in June. I tracked a few listed properties and saw their asking fall by 10-15 per cent over 4-8 weeks. What was not unreasonable asking prices 2 months ago have become unattainable today.

    I am not a monetary economist. But given Singapore is a financial centre, is it mraningful to link M3 to local economy?

    By Blogger Bart JP, at 12:54 am  

  • Bart,

    Monetary economist? I didn't know there is so much specialisation in economics.

    As for our property & equity markets I think it will be a double headed snake, they will head even higher before they go lower. Bernanke cutting rates, it is boom town once again - round 2!

    By Blogger LuckySingaporean, at 11:01 pm  

  • Yes, most schools offer monetary economics as a specialisation.

    I am still digesting the news.

    "An instant poll of more than 1,000 readers of, showing that two thirds disagreed with the FOMC's decision."

    The US equity market is jumping with joy! Wonder what the local market reaction would be.

    This is crazy. I spoke too early, exuberance is clearly not gone . . . it is in fact stoked by none other than the Fed.

    Question: Can stock markets rise (or not sink at least) through a reccession in the real economy?

    I am beginning to ponder.

    By Blogger Bart JP, at 12:28 am  

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