Widespread selling creating financial violence people hope to avoid, analysts say
NEW YORK – THE fear is spreading.
For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.
But the broad international sell-off yesterday and Monday has raised fresh concerns that a looming recession and the fallout from sub-prime mortgages could have global repercussions.
Some analysts saw the sell-off, with leading stock market indexes off 4 per cent to 8 per cent worldwide, as being driven by fear more than by fact.
‘I don’t think it’s warranted by the fundamentals,’ said Mr Edward Yardeni, an independent strategist. ‘The global economy’s resilience in the face of a credit crunch has been impressive.’
Mr Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight US job market and strong growth and the extraordinary build-up of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession.
‘People are creating the financial violence that they hoped to avoid,’ he said.
Other analysts point out that the overseas uncertainty reflects the unpleasant, if not devastating, reality that the excesses of the long-running credit boom will not go away soon.
What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.
‘What you see is not a panic of the public. This is a panic of the sophisticated,’ said Mr James Sinclair, a wellknown gold trader who oversees a financial website and who has warned investors for years about the dangers of derivatives.
‘But this will have a tremendous impact on the public. It’s very serious, and drastic emergency economic action is needed.’
Most retail investors have not invested directly in the complex securities that have ruined the reputations of some of Wall Street’s most-respected minds.
Their exposure, however, to plummeting companies like Citigroup and Merrill Lynch, and now a broader basket of stocks affected by the market malaise, will add to the sense of wealth erosion that many are already feeling from the declining values of their houses.
On his blog, JSMineSet, Mr Sinclair has told his readers that as much as US$450 trillion (S$649 trillion) worth of derivatives could disintegrate, leading to a far greater and, in some ways, unpredictable calamity.
He argued that compared with the savings and loan crisis in the late 1980s, when the formation of a trust company for beaten-down institutions established a floor for sinking assets, the inability of the government to form a similar entity for suffering securities had heightened investors’ unease.
While the views of Mr Sinclair, who expects the price of gold to go to US$1,650, up from about US$870 now, might be taken with a grain of salt, other experts have also begun to warn of the dire consequences of the credit market collapse.
Mr Christopher Wood, a strategist based in Asia who publishes a widely read newsletter called Greed & Fear, pointed out in a note published this weekend that the potential insolvency of bond insurers like Ambac, MBIA and ACA Capital signals a larger market correction that has not yet been grasped by policymakers.
‘Greed & Fear’s view is that with the bond insurance business model fast unwinding, a full-scale crisis could be coming,’ he wrote.
The international selling has also stoked a long-held fear that flush Asian and Middle Eastern central banks and governmentbacked
investment funds will cut back on their US dollar-based investments – like Treasury bills and stakes in troubled investment banks – in the face of another round of interest rate cuts and continued weakness in the dollar.
These flows have been a crucial source of liquidity for an economy that produces little of its own domestic savings, and they have been lifelines for capital-starved banks. But no money manager, regardless of how long the timeframe, likes to invest in a falling market, and analysts fear that a spate of additional write-downs and market turmoil will signal to foreigners that the markets in Asia have not yet found their bottom.
One large investor, who asked not to be identified because he did not want to tip his hand, said the sell-off on Monday was a direct response to the stimulus package proposed by the Bush administration – not so much a judgment that the proposal was inadequate as a reflection of the weakness and drift of the world’s largest economy.
‘It is one thing to see the market go from 14,000 to 12,000,’ he said. ‘But when the president of the United States says we are sick, you can’t ignore that.’
Source: NEW YORK TIMES (The Straits Times 23 Jan 08)