The Crisis Knowledge

My Lecturer was telling us in class the other day, "...sometimes people who knows nothing about finance, could predict the status of the economy better than those who claims they know it all."

Well, true. However, the only person you can believe in - is yourself.


I came across this interview extract from this man from wealth management. Here goes..

• The signs of the sub-prime crisis were evident a year ago. Yet, nobody did anything about it..

.... at that time, a lot of risk was being taken off the table. The question is whether it was quick enough. Nobody expected it to have dominoed so fast. The sub-prime debacle was the primary catalyst, due to the lack of risk management on credit exposure. ... The thing that people were not able to foresee happening so quickly was the nature of the risk it had put on the real financial system.

• How did that lead us to the current economic situation?

The financial system as we know it is on the brink of survival. The first entity that had lost its position in the market was Lehman Brothers. The first happens at the top of the mountain. People see it, but it has not come to base camp yet. Then it stops. People think it has ended. However, The Lehman failure has caused so much fear in the soundness of the financial system that interest rates shot through the roof. Banks stopped trusting one another. And the whole market has gone into a credit crunch, effectively paralysing the monetary system.

• And that filtered down...

....Banks don't trust banks, let alone corporations that need funding for investing or daily operations.

• Are bail-outs effective?

They are a necessity. Without it, the financial system would have collapsed a month ago. At least now there is still hope that this will not be an extended crisis....

• What went wrong with the financial markets?

.... But when banks are making bucket loads of money , there is no proper supervision. ....There's always greed that oversteps the concerns of the risk management. In the sub-prime crisis, instruments became more complex and their credit value less viable in order to get a better return. But professional investors were still buying this stuffs. There is a complete lack of awareness of the intrinsic risk that was involved.

• The US, a market-driven economy, is turning to direct interference. Does this spell the end, or at least demand a re-think, of laissez-faire capitalism?

In the Asian crisis, when Hong Kong intervened in the market, it was severely criticised by the US. Everybody in Asia knew that intervention was necessary because of the situation. Today, however, the US realises what was happening in Asia at that time was a very small scale situation of what is happening in the US right now. You can't tell a sovereign state to let your banks and companies go bankrupt. Asian markets have a certain social-democratic way of approaching capitalism. Now, the US has become primarily socialist, where all the banks and the companies is going to be owned by the government. It has become a full circle.

• What can worsen the situation?

I don't think the system can take another shock., like the failure of a large European financial entity. ... The automotive industry in the US is another big question mark. Is it archaic, should it be allowed to fail? Or is it critical to US jobs and US growth and should not be allowed to fail? It's not part of the financial system, but its such a giant in the US economy that losing several hundred thousand jobs overnight would be a big issue.

• How long do you think the recession will last?

Two scenarios. If what is being done now works reasonably well. it will last through to 2009. If not, it will be another two, three years. That's typically the cycle. Stocks and equity markets tend to forecast way before recovery, so you can potentially see this turning around in June.

• What kind of business will survive, or even flourish?

I'd look at low-leverage companies sitting on a lot of cash - there are tons of them around the world. At the current market valuations, lots of companies are cheap and dividend yields are strong. In the medium to long term, stick to companies with good business models, that are profitable. Go back to basics, things people cannot do without: utility companies, telcos and consumer durables will be affected, but their survivability will still be strong. On recovery, what will do well are the commodities.

• What should consumers and businesses do in the meantime?

A big mistake a lot of companies are making is firing staff. Retrenchment should be the last resort. What they should do is reduce salaries, freeze bonuses and pull incentives. People should be kept in their jobs, otherwise not only will consumer spending dramatically fall, psychology and confidence will be hugely impacted. The best thing for consumers to do is to carry on spending - if they can. Everybody is cutting back, but try to live life as normally as possible. Keep your ear to the ground. ........

• Is that something to be optimistic about? People emerging more knowledgeable....

Human beings learn from their lessons but also have very short memories. ...... growth over the years, was able to accumulate a lot of wealth. Everyone is financially stronger to manage this crisis.

For my knowledge..