Are Global Governments Building the Foundations of a Bull Market ????

Global Markets Outlook – Nov 12 2008

Problem

The credit crunch has presented one of the most challenging financial situations of the past 100 years. It seems like investors have short memories as every 5-10 years the market hits a wall and a sell-off occurs. People panic, over sell and the market losses its stability. Once this happens you see scare mongering and when financial institutions and governments fail to show strength and provide positive figure and solutions, the market does not have facts and figures from which to find its feet. Investors run scared of the unknown as they fear the worst when they don´t know the reality and this is what we have seen in the past 18 months.

Last August banks in America started reporting right downs, this then spread into Europe and across the world. The depth of the sub-prime debt was unknown. Investors turned to the banks and governments for answers. How big was the sub-prime exposure? Were these right downs the sum of the problem, or would there be more to come?

Unfortunately the banks did not have the answers because they could not calculate the exact value of their exposure. The reason for this was that sub-prime mortgage loans were packaged up and sold on as derivatives time and time again, therefore the total market exposure far exceeded the value of the underlying assets (in this case mortgages). This uncertainty and the subsequent right downs that followed caused the credit-crunch. Globally recognised banking institutions like Lehman Brothers and Bear Sterns were wiped off Wall Street like they were small family businesses. Banking institutions stopped lending to each other, credit spreads widened and the financial system started grinding to a halt.

Solution

There was no immediate solution to this problem, some pundits likened the situation to the Great Depression, the Dot-Com bubble burst and the 9-11 terrorist attacks. There can be similarities drawn to all three but the response to this problem was unique. Ministers across the USA met to discuss possible cash injections into the banking system. In the UK the Nationalisation of Northern Rock and the capitalization of other companies, marked a government reaction rarely seen before. Also across Europe finance ministers from many different countries made a commitment to work together to solve the problem. It was recognized that this was a global problem and an `Im Alright Jack´ attitude was not going to benefit anyone.

The US Federal Reserve put together a proposal for a $750bln bailout of US banks and mortgage lenders. The UK government guaranteed all customer savings in retail banks. To date, global governments have pledged more than $4.5 Trillion to help underpin the global economy and financial infrastructure. This is nearly 15% of global GDP.

Given the fact that the markets have rallied out of every financial crisis in the past 100 years, and considering that never before has such a consolidated effort been made by global governments to underpin the global financial infrastructure. As the credit crunch dust settles and the Bulls can see clearly, we might just see the biggest market rally in history