Sunday, February 1, 2009

The coming week will be important for all of us.

This coming week sees the unveiling of the new administrations ideas on a 'bad bank' to buy up the delinquent loans and assets that are corroding the system. The issues at stake are huge. If the new bad bank buys bad assets at say 30 cents on the dollar then we could see another huge round of write downs ,bankruptcies and capital raising's in the banking sector. If on the other hand the government pays par for the toxic debts then the taxpayer ends up footing the bill - the old 'privatization of profit, socialization of failure' moral problem.

I've written before that the real threat to the global economy and financial order would be a 'W' shaped recession where the stimulus creates a minor recovery followed by a further major leg downwards when monetary and fiscal policy have to be tightened. It looks as if the emphasis on capital spending with the required long lead times and planning approvals will delay the impact of the stimulus for a year or two and might turn the 'W' into a 'V'.

What's becoming abundantly clear is that with the government setting the agenda any business model that relied on access to easy capital or substantial leverage is going to be reporting red ink for a while yet. The deleveraging that has been going on through the banking sector is likely to accelerate through the rest of this year before stabilising next year. At some stage the market is going to recognize this and make a clear distinction in company and sector valuations.

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