Even With TARP, It’ll Be A Slow, Painful Recovery   

• As much as those in Asia hate to admit it, the Anglo-Saxon economies and financial markets are the center of the world. The U.S. and Euro economies rank the highest in world competitiveness, accounted for 60% of world stock market capitalization in 2007, and for 43% of global GDP growth over the past 10 years or so, despite the rapid growth of the BRICs/Emerging nations.
• Thus the most serious financial and housing market crisis since the Great Depression in the U.S. is not just a U.S. crisis, it is a global crisis. Frustratingly, politicians, regulators and investors outside the US can only stand by and watch the Congressional debate about the troubled asset recovery plan (TARP).
• As of September 27, the New York Times was reporting that a political consensus for a rescue plan was near. While stock market investors have tried to put a positive spin on the proposed rescue plan, credit markets are not buying it, at least yet. Credit markets are reacting as if there is a bank run on the system, as interbank lending has collapsed.
• Even proponents of the rescue plan admit that the troubles with mortgage loans will most likely take years, i.e., well beyond the tenure of the current Treasury Secretary and possibly his successor’s. Further, TARP is primarily aimed at stabilizing the financial system, not directly revitalizing economic activity. Depending on how fast the balance sheets of the world’s financial institutions are de-leveraged, tighter credit could make the economy worse, not better, in the short short-term.
• The crisis will negatively affect virtually every economy in the world, and the major problem with Japan’s economy is that growth has been almost entirely driven by external demand, while external demand is rapidly dissipating as the credit crunch crimps global economic growth.
• While there is probably less downside risk in Japan’s stock prices than there is in US stock prices, we expect to see more downside in Japan’s Nikkei 225 as the credit crunch really bites into US economic growth.

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