The Age of Despondency…

Looking ahead, what will happen? Global governments have made it clear they are willing to take significant action to stem the adverse effects of this current crisis. However, markets have been acting faster than these governments can react. Nonetheless, it is important to keep in mind that government and especially monetary policy tend to work on a lag. We still have not realized the effects of the recent rates cuts, and more importantly the Troubled Assets Relief Program (TARP). It is extremely likely we will see an additional set of global rate cuts sometime in the near future. This despite the fact the real effect of these cuts won’t be immediately realized, nonetheless, the psychological effect will be immediate. And of course, given the unbiased sell-off across all assets and qualities, investor psychology has definitely played a major role in this sell-off.

I believe that current and potential future government/monetary policies will eventually lead to stabilization in global markets over the next couple months. Prior to this however we face what could be a volatile earnings season, poor holiday sales in the US, and what will likely be worsening economic news from the US and Europe. Also, downgrades to either Morgan Stanley or Goldman Sachs could significantly extend the current market uncertainty, and this should be monitored closely. Nevertheless, unlike developed nations which are facing both the credit crisis and an economic slowdown, for the most part emerging markets are only facing the latter. What does this mean? I believe that once markets stabilize Russia, China, & Brazil will likely benefit the most over the mid-term. These markets are all significantly off their highs, yet domestically are still experiencing relatively strong GDP growth. What we want to monitor in these markets is the ability of domestic demand to make-up for slowing export markets. As for the developed nations, especially the US, there will be a critical shift from what were major consumers to major savers; given the importance of consumption in these economies we will likely see Real GDP growth remain below trend through the rest of this decade.

Here are some basic trading ideas, however, these are only suggestions; I in no way advocate undertaking them. I personally am hesitant to make any moves until I see some easing in the credit markets and proof that the TARP and other policies have begun to unlock credit markets… There is without question some great values out there on an individual equity basis, but the real question is whether or not you have the capital to stay in the market for as long as the market remains irrational…