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Over the past few days there have been illuminating comments from several leaders either from government, business or the international finance community detailing the origins of the current economic mess, where we are now or the repercussions of the crisis. We thought you might find them helpful in determining how to invest your hard-earned money.
The first comment comes from the transcript of a press conference that included Jose Vinals, Counsellor and Director of the International Monetary Fund’s (IMF) Monetary and Capital Markets Department. Mr. Vinals noted that “based on the broadening credit deterioration, we have increased our estimated writedowns, actual and potential writedowns, on U.S. originated assets from $2.2 trillion in our interim update in January to about $2.7 trillion in the current report.” It was only last October that the losses projected by the IMF was less than one-half the current figure. According to Mr. Vinals, “of the writedowns that are pending for the banking system, about one-third has already been incurred in 2007 and 2008, and two-thirds are potential writedowns for the period 2009 and 2010.”
The IMF estimated that approximately two-thirds of the losses would be borne by banks with the balance by insurance companies, hedge funds and pension funds absorbing the balance. Of the total, the IMF estimated that U.S. banks have written down about one-half of what they will ultimately end up doing.
Despite the ominous and mind-numbing numbers referenced by Mr. Vinals, at least at this point and absent a revision upward, the equity markets seem to have priced in these writedowns.
In describing the depth of the current recession, the IMF said in its latest World Economic Outlook that “this downturn represents by far the deepest global recession since the Great Depression.” The report also projected that the global economic output will shrink during 2009, the first annual decline in more than six decades.
Calling the public and private infusions of capital into financial institutions thus far “piecemeal and reactive,” the IMF recommended that due to the “current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions.”
Should this above paragraph come to pass as the IMF, along with others have alluded to the possibility, at least at this time, it would mark the end of capitalism in the United States as we know it. Some investors might welcome this change. However, we think, long-term it would be detrimental to the financial well-being as well as to the standard of living in America.
As noted above in a narrower context, we do believe that the stock market has priced in the majority, if not all of the current economic slowdown. We therefore believe that after the more than twenty-five percent move off the bottom and a necessary consolidation of some of those gains, stocks should move higher.