Wednesday, October 8, 2008

Worst Case Scenario - A Long Drawn Recession

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The dismal economic scenario in the U.S. is a boon to the Democrats' efforts to wrest control of the White House. In fact the focus of their political campaign centers on putting the blame for the crippling economic crisis the country is currently experiencing on the shoulders of the Republicans who have held the reigns for several successive terms now. The American electorate who are the first to feel and experience the brunt of the current administration's economic follies are clamoring for change. The Financial Bail-out package, the last gambit of the Republicans, is not helping their candidate a single bit.

In the just concluded second presidential debate, political pundits has called it a draw with neither of the two contenders gaining a clear advantage from the debate. But the most intriguing question of the night which practically sums up what is in every Americans' mind was the one put by one woman in one of the risers in the stage:

“How can we trust either of you with our money when both parties got us into this global economic crisis?”

While Obama kept on interjecting his presentations with jabs at the 8 years of Bush Administration blaming it for the current financial crisis but failing to come out with a clearcut strategy that will directly and immediately alleviate the the plight of the ordinary Americans, It was surprisingly McCain who came out with a bold pronouncement, the night's only new government program: a $300 billion plan to help beleaguered homeowners, which might have made Franklin Roosevelt proud.

With a month to go, it will be a close finish.

However, whatever the outcome will be this coming November, the fact is the U.S. will remain in recession. The extent and duration of this recession will depend on how the new administration will address the entailing economic issues.

As a trader, I have seen this scenario over and over again. And one of the most appalling observation I got from all these is the fact that the "markets" always know best. The financial markets may fall but they always rise up once again and settle on a level that bests reflects the current market conditions or a reflection of improved future market conditions. The current financial crisis triggered by the housing bubble will actually self-heal. In my observation, the markets have fully taken into account the whole sub prime problem and the housing bubble... even over done it! New regulations, bail out packages, stiff fiscal reforms, interest rate cuts are the market signals market players are looking for at this point in time to get markets moving in either direction. Will the economy get worse before it gets better? This all depends on who will be at the helm of the government after the November elections and how market players will view his future fiscal policies. This is why you see the financial markets going sideways despite the approval of the bail out players are watching the elections...taking hints on what directions the main political protagonists...mapping plans on how, when, and where to position in the various markets. If whoever wins the elections has the nod of approval and the seal of confidence of the market players, then you will see an immediate market turn-around. On the other hand, if the one who wins poses more questions than answers, then expect the market to go into doldrums looking elsewhere for market directions.

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