Opening Position
February 2008
Now that 2007 is behind us, what can we expect in 2008? The two words I hear most frequently are "stagflation" and "volatility." I don't expect 2008 to be a booming time for the US economy. In 2007 we saw serious problems in the credit markets, which led to a downfall in the financial sectors, with investment banks and brokerages getting hit hard. We also saw a notable weakening in the US dollar. And there's no doubt in my mind that we will see the impact of the credit crisis in at least the first half of 2008. In addition, we'll probably see a lowering of interest rates, which has to happen to prevent deflation in housing prices. If interest rates do not go low enough to create a floor for housing prices, we can expect to see stagnation or deflation in the economy.
The US relies heavily on assets, which is why we have booms and busts. We saw the dotcom bubble burst and after that we saw the economy get reinflated, which brought back the bullish rally in the financial markets.
In the same way we need something to reinflate the economy after the slump caused by the credit crisis. At this point there's no sign of what that is going to be. This is a Presidential election year, and that will introduce its own uncertainties until November, when a new President is elected. This, I'm sure, will bring about the volatility that is expected in 2008.
While we are on the topic of the Presidential elections, in this issue we have included an interesting article on how the Presidential cycle affects the financial markets. After you read it, maybe you'll take away a gem or two to help you trade until the elections. "Elections As The Most Powerful Short-Term Cycle," written by Matt Blackman, begins on page 46.
Elections aside, there are some serious problems in the US economy that must be fixed. We have a crisis in the credit markets brought about by the highly leveraged housing market. Although there have been significant liquidity injections to keep the credit markets from collapsing further, there are still a lot of liabilities that need to be addressed. This is not surprising, given the leverage of most markets in the US.
Let's think about this: If an entire economy is in trouble because of a highly leveraged market, what do you think will happen to your trading account if it's highly leveraged? All the more reason to keep your risk calculations a top priority. That's a good way to start off your year.
Jayanthi Gopalakrishnan,
Editor
Originally published in the February 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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