Wednesday Oct 07, 2009

Technology spending? Economic growth? Have you heard of UAE?

Recent news of increased economic stability in the world is comforting.  However how much of it is based on sound fundamentals?  If you are an investor or run a business where in the world do you want to invest for growth and equityUnited Arab Emerates may be a place of interest.  The UAE growth rate in GDP is astounding.  While not all economic indicators are objectively sound, you have to speculate where can you find a better risk/reward ratio. 

Western based banks have recovered their share price as well as balance sheets, but new credit lending is still tight.  Loan losses are still surging in the West.  In my opinion there remains too many toxic, complex, leveraged, convoluted, imaginary assets out there that have not been exposed to date.  In order for the world economy to move forward the majority of bad credit instruments need to be exposed and liquidated.  Otherwise we will continue to regain the false sense of consumer comfort that eventually got us into trouble. 

Most world economies are driven by consumer spending, but consumer savings is the buffer from repeating what we are seeing today.  One issue is where (globally) to place your assets into safe saving instruments with a secure and viable return. 

I'm not sure anyone out there has all the answers...

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Monday Apr 27, 2009

Have you been watching the TED spread?

A picture is worth a 1000 words and it certainly resonates with the economic global meltdown this past year.  A red flag indicator on the economy is the TED spread.  This metric is an indicator of perrceived credit risk in the economy.  The TED spread tracks the difference between interest rates of interbank loans and short term T-Bills (government debt).  The difference is measured in basis points (bps). Unlike the economic recessions of the past, this spread skyrocketed universally across the globe rather than in specific countries.  Historical averages are usually below 50 bps so when the TED spread went over 450 bps in the Fall of 2008 there was no surprise what was happening in the world stock markets.  Click here to see a TED spread quote from Bloomberg.

While the TED spread has dropped in the first part of 2009, there certainly needs to be additional closure of the spread in order to get back to historical averages. This will only happen, in my opinion, when credit flows normally once again.  There has been too many mixed messages on banks lending again (but to whom???) and being able to assign value on toxic assets that the banks are holding.  Until these two items can be cleared out, the one common solution for both is attracting private investors.

Consumer and private investor confidence is at an all time lowGovernment loans and stimulus packages globally all factor into where and what to invest.  Where have all the risk takers gone?  I certainly don't have the stomach to hedge in the current securites environment.  Even governments have retreated to purchasing safe, secure debt for investments so who can blame the private investors to be in a you lead and then I'll follow strategy.

Events got pretty scary last October when the TED spread peaked.  A money market fund defaulted, consumers were running on banks and many financial institution capitalizations were evaporating.  You could literally hear value being sucked out of the market and retreating to liquid assets.  Where did it all go?  It's like we had full balloons in a closed room and suddenly the balloons are all empty... but there is still the same amount of air in the room.  We just cannot find the air to blow the balloons back up again.  Reports have indicated that world banks have written off ~$900B (U.S. dollars) in toxic assets but there remains ~$3.1B still working its way through the system.  The TED spread will be watching...

This is where consumer confidence plays a huge factor. 

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Tuesday Nov 25, 2008

The World Economy is a Turtle...

One would have to be pretty insulated to be oblivious to all the economic troubles throughout the world.   In the last 2 months I have visited Brazil, China and India and the economic impact in each country is amazing.  A year ago in India I was amazed at the Bombay stock index surge and the feverish pace in Beijing preparing for the Olympics.  Who would have thought back then that in one year things would be completely the opposite.  The credit crunch has hit consumer confidence throughout the world.  Banks are not lending.  Even private equity is hard to come by and the terms are not very attractive.  Consumer spending has decreased significantly.  Have you noticed the price of oil as of late?  Some countries that were surging on oil profits are now unable to sustain their economy which was built up over the past few years.  Selling out oil futures for the next 12-18 months is not something that is usually done.  There is plenty of energy data out there.  In India and China you can read about government actions to start infrastructure projects in hopes of jump starting their economy once again.  Stock market reaction seems to be driven less on fundamentals and more on the factor of fear.  Fear that nobody knows where is the bottom of the decline.  What is going to cause a turnaround of the confidence of people to start spending once again?  I read that approximately 70% of most economies are driven by consumers.  Another major factor is the credit market for access to cash for businesses.  It's also true that consumers in some countries are addicted to being highly leveraged so they need access to credit to spend again.  The formula for fixing this appears to be pretty simple:

Mend = Lend + Spend

However getting the lend and spend to occur has been one of the hardest problems throughout the world.  Confidence is easy when things are going well, but confidence in difficult times really is something that doesn't come easy.  Private equity and the venture capitalists naturally will get more inflexible during economic contractions.  New funding rounds for startups are probably going to require new lead investors.  Banks throughout the world are not willing to release capital just yet.  Businesses and consumers all feel the contraction.

The world needs to extend it's arms, legs, tail and neck and start slowly walking forward again.  Staying in its shell means no progress regardless of where you may reside.  It really is a world issue to be solved. 


The blog of Bob Porras - Vice President, Data, Availability, Scalability & HPC for Sun Microsystems, Inc.


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