The S&P 500 Index rose more than 6% this week as hope mounted that the worst might be over for the banking system and a turn of the broader global economy is on the way.
As US released more details of its Public Private Investment Plan (PPIP), the US stock market surged 7% overnight but fears on the viability of the plan and likelihood of participation from banks were the main concerns.
My take on the new release is that the US is taking on a "do-everything-it-takes" attitude to rescue the economy and that should set the right tone for investors and stabilise the markets but ultimately it is not the pricing of the legacy assets and loans that will turn around the lack of confidence, but the greater transparency that is attached to this move that will allow the big banks to raise sufficient capital from private markets (in the range of hundreds of billions more) that will call an end to the crisis.
A couple of issues need also to be addressed to stop the economy from spiralling down further:
a) Distressed home sales: Without a clear sign of the bottom of falling house prices, risk appetite will not return. Hence, finance for viable borrowers with sound leverage need to be earmarked to help establish a floor for home valuations
b) Deleveraging of consumer : UK household savings rate jumped from 1.7% in the third quarter of 08 to 4.8% in the fourth quarter. Although rebuilding and repairs of the household balance sheet will bring balance back to the debt-fueled decades of 90's and early 2000's, the governments also need to ensure consumer credit is freed up to improve liquidty for the people. This is not to fuel another debt spending spree, but to inject consumption back into the economy and pull it out of a longer than expected recession.
Final words, Stabilisation is still not equal to Recovery.
Eric Tan, London
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