M&B: My view was that the sentiment was so negative and central banks providing so much money at near no cost that markets could only improved. Since the bottom of equity markets in March (China and Brazil excluded: they bottomed end October 2008, the MSCI emerging markets index in November) to 27Th October, the DJ is 50% up, S&P +57%, NASDAQ +70%, FTSE +48%, DAX +53%, NIKKEI +43%, SENSEX + 95%, SHANGHAI +75%, BOVESPA +70% and the MSCI emerging markets +102%. In the meantime, the economy has not really improved, whilst no longer in a nosedive. The improvement noticed during Q2 and Q3, was mainly due to Government money (car industry and the financial sector in the
I have also been worried about the commercial real estate situation where prices dropped 40% between August 2009 (latest data available) and October 2007 (peak of the cycle) – I remember well what happened in the early 1990’s. The outstanding face value of US commercial real estate loans amounts to USD 2-3.5 trillion depending on sources, including USD 270-275 billion due next year and over USD 1 trillion by 2015. Banks own 45% of commercial real estate loans, compared to only 21% of single-family loans and U.S. Office Vacancies Reach Five-Year High of 16.5%. In September, the FED noticed that banks were slow to take losses on their commercial real-estate loans.
Undoubtedly, banks will have additional large losses coming from this sector and the rest of the economy will be impacted, whilst probably not to the same extent as the residential real estate that had a huge psychological effect in additional to the financial one: this may stall any recovery in 2010-2011. Banks will need either to further reduce their balance sheet to be in adequacy with prudential ratios and/or raise new capital. Just look at all the cash call that banks in Europe and the US have done over the past few months or are attempting to do, besides selling assets.
I will not come back to changes that occurred on rule FSA 115 regarding fair value accounting (and my opposition to it since it increased opacity): whilst giving some breathing space for banks, it did not solve the problem and may compound it in the future.
To summarize: too far too fast. Markets have been sustained by liquidity that has not been channeled to the real economy (i.e. most of it!). I am not however in the camp of the gloom and doom for the world economy, whilst I am rather negative on the Western world economy.
U.S. Office Vacancies Reach Five-Year High of 16.5%
Wall Street Journal
Local Banks Face Big Losses
Commercial Mortgage Outlook: Growing Pains in Mortgage Maturities
Congressional Oversight Panel
August oversight report: The continuing risk of troubled assets
MIT Center for Real Estate