Economic Crisis???

Recently I am superbly busy with my works and my PhD thesis. Just finished couple of researches and a seminar as speaker. Finally have some time to rant about some of my thoughts and understanding especially on the subject of economic crisis.

3-4 years ago, we all know what happened. Burst of subprime market cause the economy to went south and we experienced then greatest economic crisis since Great Depression.

After that, everybody started talking about recovery and stimulus as well as quantitative easing. Everybody was optimistic about the future including all those central banks, investment bankers and investors / speculators. Asset prices started increasing and profit was running wild in derivative markets, commodity markets, stock markets and other tradable financial markets. Majority stock markets rallied more than 100% compared to their September 2008 low. Some even managed to rally more than 200% (Latin America SE).

Now, with just 10 - 20% retracement in the those tradable financial markets, we are all doom!!!!! There is no tomorrow!!!!! US will be recession!!!!! Economy is going south!!!!! Sell sell sell!!!!!

Look at the chart of Hang Seng Index from 2008-2011 available from Stockcharts.com. It drops more than 20% compared to early August. However compared to September 2008 low, it is still almost 70% higher. It's not even at the first level of fibonacci retracement (61.8%) which should be at around 17274.


Furthermore, did economy recover compared to 2008?

Unemployment is worst (in most developed economies) now compared than 2008, output did not increase much compared to 2008 due to high level of umployment (deflationary gap). monetary expansion does not yield any quantitative and/or qualitative improvement other than inflation. Productivity did not improve as well. The only change that we have is the liquidity in tradable financial markets due to the significant aggresive monetary expansion from central banks and fiscal expansion that cause governments around the world to have budget deficit problems. So I wont be surprise if stock markets visit their september 2008 low.

WAIT?

Most investors / specualtors / trades do not like to listen to economics stuff. What they want is that how to gain profit in such economy condition (at least that's what my asset management client ask all the time).

Well, if you listen to what I said in 2008 (invest in commodity market), I am sure you have gain at least 200%. Furthermore, investment is always long term. It's much better to buy a good firm at fair price than fair firm at good price. If you own shares of good and profitable firms, keep it. Warren Buffett will not be the (second) richest man in the world today had him sold Coca cola or Gillete during the US recession of 1993.

Another question that I often get from my client is that how do I earn profit during bearish market sentiment? Well, how bout put option, put warrant, Bear contact, short derivative etc. Investing in safe instrument such as money market and bond market can also maximise the return. Furthermore cash is king now. Lower loss = higher gain.

Unless economy improves (ie lower unemployment and more stable positive economic growth), do not rush into the market. This is probably the best time for us to find a good firm with fair price. (KO maybe lol.)