Have we seen it all?!

The year of recession

Rare crisis...

• There have been very few cases where you've had this kind of financial disruption without a significant effect on the economy

Fed Chairman, Ben Bernanke

• ENTIRE US ECONOMY “IS IN DANGER”, CRISIS DEVELOPED OVER TIME, IN AN EXTRAORDINARY ECONOMIC PERIODUS President, George Bush

• “What you need first is to restore confidence and the main worry right now is confidence”

Head of IMF; Dominique Strauss-Kahn

Housing market

• Health of economies measured by deceleration of housing market

• Housing has immense impact on macroeconomics for several years

• In theory this slow down should have happened a while ago….but it’s a cycle

• Recessions or slowdowns

– 1973-74 , 1980-82,1990-91, 2001 (Recessions)

– 1987 and 1995 (slowdowns)

Growth of Sub-prime lending

Source: Center for Responsible Lending/Inside Mortgage Finance

Recession

Crucial Events of the Credit Crunch

USA:

• FED takes control of Fannie Mae and Freddie Mac (market initially reacts well)

• 1 week later - Lehman files for bankruptcy - no assistance from the government

• Insurance giant A.I.G. in desperate need of loans, FED decides to help.

• Merrill Lynch sells itself to Bank of America - to avoid Lehman fate.

Europe:• Fortis forced into a break-up talks, partly bought by BNP Paribas and local govt’s

• Dexia, French-Belgian lender - receives major capital injection

Market events

• EURUSD 1.23+, falling from 1.60+ (July 08)

• Oil falls to $62+ region - July: $147

• Gold down to $700+ region – July: $985 region

• Indicies fall in double-digits

Source: SaxoTrader 2

Consequences; Extreme instability

Source: Bloomberg

• Volatility shoots to extreme levels

• Cost of borrowing spikes likewise- USD 3 month LIBOR rates

Action taken to fight the crisis...

• Fed passes the long awaited $700 billion plan .

• .... injects $250 bn in return for partial ownership

• Fed cuts rates to 1.50% -- in a co-ordinated action with other central banks...

• Goverments announce guarantee of all bank deposits, e.g. Ireland, Denmark, UAE, Denmark, Austria...

• UK allocates up to 50 bn GBP for recapitalisation/share-purchase of major UK banks

• Iceland takes over Kaupthing Bank hf, 3rd lender to be taken over

Two Interesting Things

Middle East Booming….at a cost!

Middle East

• Inflation fears:

– 10% Saudi Arabia

– 11% Kuwait

– 13% Oman

– 12% UAE

– 15% Qatar

• Dollar peg previously a major discussion point, but easing now with recent USD gains

• Recent Oil falls a concern to OPEC, big reductions put in place...

Economists: e.g. Iran needs oil to be $70+

Perfect storm

 

Commodity High (YoY) Low (YoY) Correction % Current (27 Oct)

EURUSD 1.6000 1.2480 22% 1.2480

USDJPY 115.40 92.79 20% 92.79

Gold 1004 703 28% 725

Crude Oil 145 62 56% 62

S & P 500 1554 830 46% 830

•I will reprint John Hardy's 50% retracement numbers for indications:

Main calls

• EURUSD: previous 1.2700 and 1.2300 targets met, now 1.2000 next level – Q1 2009

• USDJPY: Down to test 90.00

• Gold: below 700 by Q1 2009

• Crude: 50-60 by Q1 2009

• S&P: Down to test our long-term minimum target of < 765.00

• Fed funds: 0.50% by Q2 2009

• ECB: 1.50% by Q2 2009

Thank you UAE!