Subprime Mortgage, Financial Crisis ? - Part 2

Today, 15th August 2007, marked another day of heavy downfalls for the KLCI and major stock market around the globe, except the Chinese Stock Market, which seem to have stood up quite well against the tide. This is something that have fascinated me. For the past few months, I have been imagining the next financial crisis could have been triggered from the burst of the Chinese Stock Market bubble. Ironically, my prediction had turned out to be all wrong whereby she has been one of the few survivors during the recent bloodbath, and in fact, she has turned out to be a winner!! while others have been whiner!!

So, winner or whinner, life moves on. There are people that have been stuck with handfull of investments and saw their "market" value vaporised within days and don't know what to do; there are also those that have been observing at the sideline all these while and wondering whether is it time to bargain hunt (I think these are the lucky few); and there are of course those that have decided to cut their loses and swear not to call their stock broker ever again and etc. Whichever category one is in, I think most people would like to know one thing, "How will it be going forward?", including those that have sworn and cursed. No?

There have been alots of write ups from professional analysts about how would it be going forward. You could have read lots of articles where people have been screaming that the sky is falling, and in fact, there are also a minor few that still think that this sell-off is over-reacted. I am a bit bias to the latter and would like to share some of my views (again, please be reminded that I haven't done well in economics):

Data from Moody's claimed that the subprime market is about USD600 billion (Yes, billion, I've spelled it correctly). It is a huge amount at first look. However, another source of data shows that the total U.S. household debt, including mortgage loan and consumer debt, was $11,400 billion in 2005 (roughly 5% being sub-prime). By comparison, total U.S. household assets, including real estate, equipment, and financial instruments such as mutual funds, was $62,500 billion in 2005. So, assuming ALL borrowers of Sub-prime (I mean, every single person who borrowed money from the subprime market) were to default at once, it can still be well-absorbed by the whole financial market. And secondly, as all these high risk subprime loans have already been securitised and partially sold out to other financial institutions, funds, monetary bodies around the globe like those European's and Asian's. Hence, the losses have already been well-contained and spread out. This is also the reason why we see so many European funds and banks suffered heavy losses from this.

Secondly, as one of the points being brought up times and again by Icapital, one of the leading market analysts that I like, the global economic growth we are currently experiencing is mainly contributed by China, India and the recovery of some of the European countries. The US is having a lesser influence on the global market nowadays. Of course the current jitters might stay for a while, but the effect should not be as heavy as we have gone through. Imagine, the stock market has easily wiped off Trillions worth of market capitalisation from around the globe. This is a few times heavier than the sub-prime loans, even assuming that ALL loans are defaulted at once. What I am arguing here is that the sell-offs have been over-reacted.

Thirdly, the world economy has gone through many expansions and contractions over the years. We have learnt way too many lessons than we have actually needed. The system is mature enough to handle the situation. Just look at the ways banks and government bodies pumping liquidity into the system immediately after the outbreak. Even financial institutions have taken measures to limit their loses and to cool down the selling pressures. Moreover, as mentioned before, the slow down of the housing market has already been observed since year 2005. I suspect that most of them have already preparing for these to happen.

So, back to the question "are we seeing a recession?" In my humble opinion, not at this stage. Of course, the market will need time to heal itself in a few weeks' time. Investors will also need time to lick their wounds. However, to those that have been on the sidelines, this is definitely a better (might not be the best yet, though) time to pick up some bargains compared to months ago. For myself, this is certainly an exciting opportunity.