DEAR READERS, THE AVALON INSTITUTE HAS SOME BRILLIANT THINKERS. I THOUGHT YOU WOULD APPRECIATE THIS PERSPECTIVE ON THE ECONOMY FROM MY GOOD FRIEND, RAJ NAIR. EVERY POLITICAL AND FINANCIAL LEADER MUST READ THIS! (10 years and 7 years ago, I presented papers in India, that predicted, and are confirmed by RAJ NAIR'S timely analysis. Read and note the depth of his comments.) BBBoothe
It was relatively easy to predict that USA, the UK, Europe and Japan would have a rough time in 2009 and end up with negative GDP growth, lower consumer spending and that US under Obama will focus more on its economy than on opening new war fronts despite provocations, etc. Saying with conviction that India’s lot will improve from mid 2009 was also not difficult despite there being many economists predicting as late as the end of Q1 of 2009 that India’s revival will start only by the year end when the US economy was expected to show signs of revival. But predicting what will happen in 2010 is more complex than predicting 2009, since there is more than one view on whether the global economic travails are over.
Is the economic crisis over?
The wound has been cleaned and first aid has been administered. Several measures have been taken by developed nations to prevent a global melt down. These are at best, Band Aid solutions and Band Aid does only what Band Aid can do - cover the wound and heal minor problems. In the present instance, a lot of Band Aid was used but the wound is deep and complex. The economic problem has neither been cured nor can it be wished away irrespective of whether the stock markets reflect those concerns any more. That the stock markets are in a state of stupor can be gauged from facts.
In Nov 2007 when I said that a crisis is at our door step, the nominal value of outstanding derivatives had already scaled the scary $ 500 Trillion mark ($485 Trillion on Aug 31, 2007 rising to $ 595 Trillion on Dec 31). The global GDP at that time was around $60 Trillion only! This reckless level of financial exposure requires many years to restore to safe levels. In the meanwhile, stock markets were rising.
It is instructive to read what Carol Lumis, a friend of Warren Buffett and who edits his annual letter to shareholders of Berkshire Hathaway, had to say about unwinding of derivatives, a few years before the current crisis.
“Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully. Gen Re was a relatively minor operator in the derivatives field. It has had the good fortune to unwind its supposedly liquid positions in a benign market, all the while free of financial or other pressures that might have forced it to conduct the liquidation in a less-than-efficient manner. Our accounting in the past was conventional and actually thought to be conservative. Additionally, we know of no bad behavior by anyone involved.
“It could be a different story for others in the future. Imagine, if you will, one or more firms (troubles often spread) with positions that are many multiples of ours attempting to liquidate in chaotic markets and under extreme, and well-publicized, pressures. This is a scenario to which much attention should be given now rather than after the fact. The time to have considered – and improved – the reliability of New Orleans’ levees was before Katrina.”
Has the prime cause of the crisis been licked if not its consequences?