Market Insight: North America
Saturday 27th September 2008 - 9:00am - 10:00am
Market Insight: North America
Michael D. Antonovich•
David D. Hale
William A. Halter•
Joseph P. SchoendorfFacilitated by
Saturday 27 September
It is not all gloom and doom in America, and an economic recovery is still in sight from next year. But first, the US badly needs to get the financial crisis out of the way by passing the bailout plan proposed by Henry Paulson so the banking system can stabilize and work properly again. The US real economy is not just about the housing and sub-prime market; there are sectors that are still performing positively.
Current Crisis.The timing of the crisis could not have been worse. An emergency package is badly needed before the presidential election to save the economy, and the outgoing administration – with less than two months to serve – has to provide that solution. But the good news is that over 90% of US homeowners are still paying on time. For states where housing prices have been falling sharply, the bottom may soon be in sight. About half of the sub-prime losses have already been taken care of by the banks. The impact of the crisis on some of the states that are supported by other sectors, such as agriculture and energy, has been uneven. The US is therefore still not in a recession with exports up 18% this year on the cheaper dollar. A stronger recovery could be seen next year if the financial situation is stabilized.
Market Correction.Compared to the stock crashes of 1929 and 1987, the Dow Jones appears to have done most of its correction with limited market downside. While the financial stocks have collapsed, the market for the rest of the stocks has been mostly flat. The ban on short selling is an interim emergency measure to stabilize the market but, over the long term, short selling provides an important avenue for liquidity, participation and an additional trading strategy. The role of short selling and its impact on markets will have to be studied further. A return to a normal IPO market – where the pipeline of listing aspirants is still long and strong, but confidence is low – would help.
The Solutions.The US legal system incentivizes homeowners to take up cheap loans and walk away from them. As a result, defaults have been at an historic high. Hundreds of banks are expected to fail from massive housing defaults. Legal reforms are needed to promote proper mortgage ownership. Passing the package by Paulson could sharply reduce the number of bank failures as the Treasury could buy bad assets and address solvency problems head-on. With over US$ 500 billion of sub-prime losses already written down, the US$ 700 billion package would be sufficient to rescue the banks. As for the massive credit default swaps, a more transparent market mechanism is needed so that such trading is not restricted to a few large players in the opaque over-the-counter market.
nnovation. Historically, the US economy has been driven by great innovation and it is the unknown ahead that provides the impetus for long-term growth. In the late 1970s, major publications such as Time and Newsweek declared the death of Dow Jones and equities; the bourse responded with one of the most bullish runs ever during the next 20 years. Companies such as Microsoft, Google, Cisco, Intel and Oracle did not exist in the 1960s; today, they help lead the innovation revolution and promote economic growth. More importantly, there is more innovation in Silicon Valley today than at any other time. The creation of a new economic cycle in the US has never been solely due to traditional companies such as General Motors introducing new products, but in tandem with expansion driven by innovation and new industries.
President and Chief Executive Officer, The Atlantic Council, USA
Graduate, University of Utah; Master's degree, Columbia University. Member of the Board, American In...
Michael D. Antonovich
Supervisor, Los Angeles County, USA
BA and Master's, California State Univ., Los Angeles; Intercollegiate Studies Institute, Stanford Un...
Partner, Accel Partners, USA
Forty-five years' experience in high-technology industries. Formerly: 18 years in various positions ...