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Monday, 6 April 2009

Short-term positive, but disaster looms for the longer-term

By R SIVANITHY
Published March 29, 2009

SINGAPORE - Last week's column raised the likelihood of a play on the major indices because of probable quarter-ending window-dressing. To be honest, the play that did materialise has caught us and many others by surprise, virtually erasing all of the Straits Times Index's loss for the quarter.

Moreover, as a result of the heightened liquidity and momentum that have built up and because there are still two more trading days for index fixing before the quarter actually ends, our guess is that the STI should remain firm for the near-term but will come under some pressure afterward.

In this regard, traders may wish to note that the index started the year at 1,746, almost exactly at the 1,745.66 that it ended on Friday so if any propping up does occur it will likely ensure this level is not breached.

This much is relatively easy to figure out. It's beyond the next week that things get a bit more hazy. There seems to be a feeling in some circles that the bottom has been reached and it's probably sunny skies ahead - Fed officials on Friday for example, spoke of the economic data picking up possibly by mid-year while some analysts have been quoted as referring to 'inflection points' implying that markets have turned.

Our take on all this is the same as it's been for months now - if you print enough money and pump enough cash into zombie banks, car companies, insurance giants and a hugely leveraged consumer-driven economy, even the worst of blood-sucking undeads should twitch into some semblance of life. But it will not result in a lasting, durable recovery; in fact, it is very possible that the subsequent fallout will be worse than before.

This is what is happening now in the US - thanks to an estimated US$3 trillion that the Federal Reserve and Treasury are injecting into America's economy, people are starting to think that the worst is over and Wall Street, whose run over the past fortnight was also probably aided by window-dressing, has tried the get the bullish bandwagon running again.

The truth of the matter is that although the bandwagon might trundle along for a while yet - possibly even a few more months - it cannot sustain because of the flimsiness of the underlying economic recovery that is being engineered.

Rather than rely on Fed officialdom and investment bankers, both who have a vested interest in claiming a recovery is imminent, our preference is for independent observers who operate beyond the sphere of Wall St and politics.

One outpsoken critic of the latest US bank bailout plan is Princeton academic Paul Krugman, 2008's Nobel prize winner for economics, who has openly said the plan will not work and when it fails, Congress will probably not approve any more money for the Obama administration which would be calamitous.

In his March 26 New York Times commentary titled 'The Market Mystique', Prof Krugman correctly points out that the government is in effect bribing the private sector to buy toxic assets with its proposed public-private partnership and also correctly criticises the 'quick-fix' mentality behind the entire rescue effort that is trying to get banks back to where they were a few years ago.

'As you can guess, I don't share that vision. I don't think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good,' said Prof Krugman.

Interestingly, Citigroup's FX Technicals said basically the same thing in its March 26 market commentary: 'We honestly still think that people do not get the seriousness of this 'economic deleveraging' taking place.. this is not a deleverage of the past 5-6 years but of 25-30 years worth of excess'.

The unit goes on to say that the US and entire global economy has been operating like a massive hedge fund for the past three decades, supplementing stagnant real incomes with cheap credit and asset market appreciation to maintain a lifestyle and illusory wealth creation that would otherwise not have been possible.

The worry is this - that state of the world is clearly unsustainable going forward yet everyone (led by Wall St-backed US officialdom) is doing their best to engineer a quick return to that state as possible. It will result in a short-term uptick in the numbers and the market will respond, but when - not if - the next collapse comes, it's difficult to see how an even bigger rescue can be mounted.

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