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700-Billion-Dollar Question

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[Photo of sketched Dinasaur]My fearless forecasts, in a nutshell, on what to expect from the global financial meltdown.

The unfolding Wall Street crisis gave us a front row seat to human emotions. Greed in the earlier part of the decade morphed into fear this year. What makes recent events terrifying for most is that they are unprecedented, the breadth and depth having no equal in the last century, except maybe the Great Depression of the 1930s.

Greed has finally taken its toll, pushing us all into the middle of a major historical event, which may go down in history as the Wall Street Crisis of 2007 or the Global Financial Crisis of 2008.

Red Flag

The subprime-triggered credit crisis pummeled the biggest US home loan company Countrywide (A subsidiary of Bank of America—Ed) into submission followed by century-old Bear Stearns. But both were mere undercards to the main event. Those who disregarded the warning signs are now paying a steep price. The patient, prudent, and paranoid are now prowling. This shrewd bunch is ready to pounce as the impact from the avalanche of capitulations of big names, who once seemed invincible, pushes the market into a selling climax.

Questions

Home prices in the US may fall even further. This will cause more pain from write-downs and financial failure, culminating in a credit crunch.

As a credit crunch intensifies into never-before- seen levels, global financial markets will dive into a free-fall. The key questions are as follows:

Are investors unnerved by not knowing what lies ahead? Or do they already have an educated guess of a highly probable worst-case scenario.

Are they uselessly fearful of the ocean not knowing what lies underneath the calm surface? Or does their panic have basis?

Are investors driven by valid expectations that financial nerve centers—which orchestrate the movement of money and credit—are undergoing a systemic breakdown? Or are investors seized by irrational fear of the unknown (since events are unprecedented ergo they’re unpredictable)?

All of these uncertainties depend on whether the US$700-billion bailout will prove to be enough to stem the tide and put the financial sector back on track.

Forecasts

It’s going to be very scary times for the middle class already in survival mode. The heavily invested wealthy, meanwhile, despite skillful damage control, will see their wealth reduced by a significant portion.

Still, there are bright spots amid these bleak scenarios.

Valuations may seem compelling for bluest chip companies that will undeniably weather the crisis —especially those cash-rich and debt-free. Examples of these are some technology and holding companies (such as Berkshire Hathaway) that are geared to pick up undervalued companies among the rubble.

Coal as cheap energy will still power China and India, as their growing economies march on.

Fertilizers as crop boosters will help feed the world, as climate change and diet change put pressure on food supply.

Emerging economies such as China, India, Brazil, and Russia may trade more among themselves to keep their economies humming along. This will hasten the decoupling process from the slowing economies of the superpowers.

Unfortunately, recession is now a given and the question we now have to face is, how far, wide, and deep it will be. The answer will tell us how much pain and suffering we have yet to endure.

Print ed: 11/08

 

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