The markets started rising last week after the Global Central bank rate cuts and the various European rescue packages.Players are saying that the worst is over,the eye of the storm has passed. The comentators on CNN,CNBC are predicting a recession but no more really BAD news.
I think they are wrong.Here's why i think so:
1) Real economy slowing down The slowing economy in the west will affect the consumer portion of banks' balance sheets.I.e. people will begin to default on car loans,credit card loans etc.These loans were securitised ina similar manner to morgages.Banks have to write off all these loans.More write-offs reduce Capital.Banks are forced to slow down lending or raise more capital.Either measure affects the real economy.
2) Commodity Prices Oil,steel ,wheat just about any heavily traded commodity has declined by over 20% from year highs in the past 2 monhs.Oil is below US$ 90/barrel.At mid-year 2008 everyone and their grandmother was predicting US$ 150/barrel oil by the end of the year.Lots of hedge funds and other 'sophisticated investors' bet on commodities rising for the rest of the year. As these losing bets on commodities are unwound and some fail to make margin calls expect another implosion in the markets.