Opening Position
March 2009
The year 2009 is being billed as one of hard work that will pave the way for better times. With the new Presidential administration in the US, there is indeed a tremendous amount of optimism throughout the world. But it goes without saying that it will take a lot of work to fix not just the state of the economy but the state of the world. The bad news still keeps coming in, with some pundits even forecasting a second wave in the financial crisis.
I’m not sure when or if that second wave will be, or even whether that means we’ll see lows even lower than we saw in November 2008. But the one thing I do know is that the economy is in a deep recession. The government has already spent hundreds of billions of dollars in bailouts, and it is far from being fixed. Clearly, there is more work that must be done to overhaul the entire financial system. We can expect more fiscal stimulus programs, which could end up costing more than $800 billion. That’s a huge amount, but its purpose is not to directly fix the financial problem. This is because an economic contraction will cause more financial distress, which in turn will create more problems for the economy.
What the fiscal stimulus is designed to do is increase demand. The banks will still have to work their way out of the crisis they are mired in. And only when we see this type of action can we see a recovery.
The housing crisis was at the heart of the financial problems. There was such a huge supply of mortgages available, enabling just about everyone to secure a mortgage, whether they were financially capable of having one or not. We all know what happened there, but we need to see lower mortgage rates in the market. This will help fuel the demand that is currently lacking.
With things the way they are, what should traders do? It’s probably wise to hold on to our cash and wait. Usually, when markets have collapsed as much as they have, there is an upswing in the financial markets as well as the economy. Let’s see if that happens this time. Since the lows of November 2008, the markets have stayed within a trading range, and they are going nowhere right now. This type of action is expected after a sharp downturn.
It’s now a matter of how long the markets will stay in this range. When is that demand going to come back into the markets? The obvious answer is when the buying resumes and a new uptrend begins. When you see that happening in your charts, get ready to work hard and reap those profits.
Jayanthi Gopalakrishnan,
Editor