Published April 20, 2009


Beware what the long-term holds


FIRST, let's get the easy stuff out of the way - the outlook for this week (which this column is supposed to discuss) is pretty much the same as the view given a fortnight ago. In a nutshell, there's enough liquidity and interest sloshing around in the local market to provide ample support. So there should be no major plunges to worry about and traders can probably go about their business as usual playing the second-line stocks in rotation or buying the blue chips on the dips - unless of course Wall Street suddenly takes the view that the US government's rescue package may not work.

This, of course, won't happen anytime soon, because you have enough politicians and central bankers claiming that their efforts in propping up failed assets are working and, as we've stated many times before in this and other columns, the earnings and economic reports to be released over the near term will probably show the necessary upticks needed for the bulls and US officialdom to show as evidence that the economy has turned and the worst of the crisis is over.

And, with fund managers desperate to try and justify their existence, you can rest assured that the financial industry will try to wring the very last drop of mileage from such upticks. The possibility, however, is that while current market behaviour suggests a V-shaped recovery, a 'W' is just as likely, with the second dip, if it occurs, probably going deeper than the first.

There are several reasons why investors and traders should be sceptical about claims that everything is fine and it will be clear skies ahead. For one, analysts such as Paul Krugman and Joseph Stiglitz (both Nobel prize-winning economists) have written extensively about why the present US bank bailout plan is doomed to fail, so we won't repeat those arguments here.

Suffice to say that Wall Street loves it, because it amounts to a one-way bet in which taxpayers are paying to benefit the financial sector. This point was also recently made by economics professor William Black, the former regulator in charge during the US Savings & Loan (S&L) crisis of the 1980s and former director of the Institute for Fraud Prevention in a TV interview earlier this month (

Prof Black alleged in the interview that the present US administration is covering up the extent of the bailout because the sums are much, much larger than reported and officials are scared stiff of the consequences if the truth is known.

He also pointed out that after the S&L crisis, a law called the Prompt Corrective Action Law that mandated automatic nationalisation when a banking crisis hits was passed, but this is now being ignored: 'I think, first, the policies are substantially bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law,' said Prof Black.

He also stated that hiding the extent of the mess in order to gain public confidence and propping up insolvent banks were what the Japanese did in the 1990s and so, quite logically, he predicted it could lead to the same outcome as Japan - a lost decade of growth.

Our take on all of this is similar, and one we've expressed many times before - the relentless pumping of money to inflate an economy built on poor fundamentals and such other tactics as changing the accounting rules to give banks greater leeway in how they value their toxic assets may fool people some of the time, but not all people all of the time, because the underlying economics have not changed.

Those bullish on the recovery should ask themselves this question: Since the present bounce originated from Wall Street and since US stocks are rising because of the government's bank rescue plan, how strong will the recovery be once there are signs that the scheme may fail?