Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bailout Plan Bullish for Stock Market? What Happens Next?

Stock-Markets / Credit Crisis Bailouts Oct 03, 2008 - 10:57 AM GMT

By: Prieur_du_Plessis

Stock-Markets

Best Financial Markets Analysis ArticleOne major international bank after the other is collapsing and is either being nationalized or sold off in sections. Although passed by the US Senate, the House of Representatives has yet to approve a bail-out plan for beleaguered banks.

Globally there is a sudden shortage of US dollars in money markets. Central banks of major powers are injecting enormous amounts of money into money-market systems worldwide.


Japan and the US are already in economic recession, while Europe is on the brink. The economy of China, which has been the major driving force behind global economic growth, is slowing down, resulting in commodity prices declining.

Understandably, equity markets world-wide are finding themselves in sharp bear markets.

The causes of the above are legion, but can be summarized as money-hungry financial institutions that lent too much money too readily to eager individuals and institutions for the purchase of overvalued assets. If the one who bought last cannot find a buyer, he, as well as the one that financed him, will be in trouble. This has a domino effect, as no one wants to buy or take over the debt.

The critical positions in which the banks find themselves have led to virtually frenzied activity in all financial markets as they tried to reduce their risks and neutralize market positions at all costs, and take out cover on other assets. This is similar to the 1920s in the US when banks allowed investors to use equities as collateral. When equity prices dropped, the investors could not repay their debt, resulting in the banks holding collateral that had no value. Many of the banks subsequently went bankrupt.

The question is: what now?

There is no doubt that everything possible will be done to resolve the crisis as quickly as possible to rescue the world from the financial chaos and thus avoid a global recession. The US Congress has no other option but to accept the bail-out plan in its current or amended form, as without it banks will be forced to call in companies' credit lines in order to survive, with the resultant downward spiral of unprecedented unemployment and poverty worldwide. Although the fiscal bail-out plan would contribute to ensuring greater stability in the banking sector and financial markets, all might not be over yet.

There are doubts about whether the bail-out plan, or New Deal as it was called in the 1930s, will be sufficient to stop the wave of deteriorating financial statements of banks and give them the courage to start lending money again. The main concern is whether it will result in a turnaround in consumer sentiment, especially in view of the fact that consumer spending is key to economic growth.

In order to ensure the New Deal lends enough impetus to the economy and largely prevents disinflation or deflation, the Fed and other central banks will have to relax their monetary policies considerably and reduce their bank rates aggressively. This will be necessary in especially the coming months, as inflation rates in First World economies in particular will decline sharply owing to lower oil and other commodity prices.

If a bail-out plan is not accepted, the Fed and other central banks will have no option but to lower their lending rates to banks and increase their current support of banks substantially. Although such monetary action would underpin the global financial system, banks would still be reluctant to pass the lower interest rates on to consumers and would rather improve their balance sheets.

Therefore, from an economic and investment perspective, there are three scenarios that should be considered. Firstly, a completely New Deal (”New Deal Plus”), which entails the bail-out and lower bank rates, secondly, a New Deal that entails only the bail-out, and thirdly, no bail-out and only lower interest rates.

Outlook for asset classes
Equities : At present it is extremely difficult to project profit, earnings and dividend growth and therefore to value equities and stock markets. However, what is clear is that in the current bear market prices worldwide have declined to such an extent that the Standard & Poor 500 Index is currently trading at a price-to-book value ratio of around 1.85 compared with an average ratio of 2.4 over the past 30 years. This is equal to the lows in 1987 and 1990.

Should the bail-out plan be approved, it would be positive for global equity markets, but it would have to be followed up with lower interest rates in order to pull the markets out of the current bear phase. Emerging markets such as China would once again come to the fore as favourites.

Long-term government bonds : The decline in long-term interest rates in recent months is largely the result of fears of a worst-case scenario, namely that the bail-out plan would be rejected. Should it be approved, long-term interest rates could start bottoming and rise slightly, whereas a bail-out followed by lower interest rates would cause long-term interest rates to rise more markedly as stronger economic growth is anticipated.

Commodities : Commodity prices (oil, industrial metals and platinum) could recover somewhat if the bail-out plan is approved, but would probably start falling again in the absence of monetary stimulus. On the other hand, commodity prices could strengthen if the accepted bail-out is followed by lower interest rates.

The following table summarizes my view on the likelihood of the three possible outcomes of the bail-out plan and its effect on the global economy, financial markets and currencies.

3-oct-t4.JPG

As is evident in this table, the New Deal Plus should be the most beneficial for the entire global community and gets my vote. Let's hope common sense prevails in the next few days.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

By Dr Prieur du Plessis

Dr Prieur du Plessis is an investment professional with 25 years' experience in investment research and portfolio management.

More than 1200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns (including his blog, Investment Postcards from Cape Town : www.investmentpostcards.com ). He has also published a book, Financial Basics: Investment.

Prieur is chairman and principal shareholder of South African-based Plexus Asset Management , which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries.

Plexus is the South African partner of John Mauldin , Dallas-based author of the popular Thoughts from the Frontline newsletter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

Prieur is 53 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town , South Africa . His leisure activities include long-distance running, traveling, reading and motor-cycling.

Copyright © 2008 by Prieur du Plessis - All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Prieur du Plessis Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

roberto
04 Oct 08, 08:40
RE: Bailout Plan Bullish for Stock Market? What Happens Next?

Will the bailout work?

Absolutely not. Amazing as this sounds, 800 billion dollars compared against the entire portfolio of worthless man made financial instruments is but a grain of sand on the beach. This 800 million dollars is being thrown into a blast furnace and will be totally consumed.

The only way to solve this problem is to start over. Debt forgiveness. As crazy as that sounds. long term, would actually save the people pain and money.

Here is the future - At least 7 years of incredible financial and social stress that will redefine the words Great Depression. The good news is fiscal conservatism will come back into vogue in our government and corporations. At least the next generation may have a more fulfilling future.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in