Negative Feedback Loop in 2009!

Financial market conditions have remained tough because of inflation and diminished growth expectations globally. The access to capital markets is becoming costly with access limited, but the highest quality issuers. In turn, growth in private investment, business confidence will moderate to varying degrees across the region.

On average, the economic growth will be weaker in 2009 than in 2008! If this year, Malaysia is going to record above 5% GDP growth, then next year, I am not surprise to see a softer than 5% then. Exports, which didnʼt fall off as sharply thus far, in turn will hold off much of the adjustment from the recessionary impact from the US economy. The global economy, including those of the Japanese and the European economies, is weakening fast and that pretty much confirmed by leading indicators. That means the export slowdown seems to be spilled into 1H09. Even the intra-Asian trade will not be spared.

And in responding to the inflation problem, central banks, including Bank Negara, as many are expecting to see interest rate hikes, in turn, will severely affecting the discretionary spending. It could be far more severe if food and energy prices do not come down to match it.

In a nut shell, I expect the loss of economic momentum will be larger than the consensus expects. In his own words, Bill Gross of PIMCO points out that an asset deflation in turn becomes a debt deflation, and finally prime mortgages surrender to the seemingly inevitable tides. The ever worst thing that one can imagine in 2009 is that the world may fall into what I called as ʽnegative feedback loopʼ effects.

Make no mistakes, the current conundrum, if failed to be resolved, this will be a perfect recipe for dysfunction financial institutions.

Up to this point, efforts are limited to maintain the stability of major financial institutions, recapitalizing their balance sheets and lowering the cost of mortgage credit. As the discount rate is higher than the expectations for home prices, one could safely assume that Fed funds may have to be lowered to 2% to lower the discounted present value of an existing home to at least slow down the current descent, otherwise, this could prove to be the beginning of the long journey back to normalcy. One complicating factor has been the recent up-tick in mortgage rates, and is still about a percentage point higher than it was at the start of the year.