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.