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.
I don't want to wade into the flood of news and reports about the hijacked ship and tanks.The papers are doing a good job.The world of arms trading is a simple business but with complex details.
Firstly, arms are usually sold to STATES and NEVER individuals or non-state groups i.e. Taliban,FARC,Lords Army.......etc
Secondly,Only states without an embargo such as a UN Arms Embargo can purchase.
Thirdly, to sell to a State it must produce an End User Certificate.This is a document that states that X amount of weapons and equipment bought from Z industries is being procured for the sole use of Government Y.Hence, we are within the first rule.
Tough situation for any arms dealer or manufacturer.You have clients but they aren't a sovereign state yet, they are going to work on how to legitimise themseleves using the arms you intend to supply.Then fortune smiles on you and you remember there several Third World states like DRC,Liberia(under Taylor) and a few others that don't have proper Government Procurement and Oversight. The correct incentive to the right official guarantees the supply of several blank End User Certificates.How you use the Certficates is up to you.
Now the arms factory(and its host country) can sell the weapons to you and pretend they didn't know it was for a guerilla outfit(or semabargo busting) because you had all the documentation.
September 2008 was a good month.At least on the legislative and regulatory front.Two interesting developments that serve to deepen our financial markets occurred. 1.Credit rating regulations Gazetted by the Government. Banks and other financial institutions can now share information on your payment(defaulting habits).Hopefully it will move to all businesses including your landlord.Any body with access to your credit information will be able to judge how honest you are on your promise to "send the check by Friday". If it works like other countries it should make it easier for persons with good credit histories to get loans at good terms from their banks.Businesses with good history will find it easier to get supplier credit. The flip side is that a bad credit rating will make it difficult to even rent a good house-(if ur prospective landlord sees that your score is bad, he may not want your tenancy).
2.Banks allowed to lend to each other using their securities as collateral This may confuse those who don't deal with banks, how can a bank keep cash but run out of liquidity?Banks are like any business enterprise sometimes they need more cash than they keep at hand.When this happens, they have two ways of raising cash:-
A. Borrow money from the Central Bank (CBK)through REPOs(Repurchase agreements).These transactions involve the Commercial bank using its Treasury bonds and bills as security to borrow from the Central Bank
B.Borrow money from each other via the Interbank market The new rules add a C option.
C.The new interbank master repurchase agreements.The transactions here are similar to REPOs the difference being that instead of having CBK and a bank transacting, we have a commercial bank to commercial bank transaction the borrowing bank gives securities to the lending bank as collateral for the lending.