I have been observing an interesting occurrence here in Malaysia. I have noticed that the number of luxury cars on the road, like Mercedes and BMW has increased significantly like mushrooms. People are getting richer.
I still remember (vividly of course) about the last 1997/1998 Asian Financial Crisis. Before the crisis was unleashed upon us, it was pretty similar as well. Loads of Mercedes’s and BMW’s on the road. After the crisis hit, not a single luxury car could be seen, though there were those odd few. I still remember that I came across only a few luxury car during my whole journey back to Kelantan for “balik kampung.”
Fast forward to now, where are we at the present moment economy-wise? Are we already at the top of the economic cycle? Is the mushroom-ing (if that’s even a word) of wealthy individuals a good indicator to predict that an inevitable recession is about to come? Or does the economy has a bit more steam to soldier on? Are we about to embark on a commodity super cycle as stated in the media and by research analysts? Or are we already on it?
It’s also interesting to see the stock market’s reaction a couple of nights ago to the Fed’s (US Federal Reserve) decision to cut interest rate by 25 basis points (from 4.5% to 4.25%). Soon after the decision was announced, the Dow tanked by nearly 300 points or 2.1 percent. It seems, the market was expecting more. Some were expecting a cut of 50 basis points and there were a few who were expecting 75 basis points.
Alright, let’s have a look at this issue. If the Fed did actually cut the rate by 50 or even 75 basis points, that is actually saying something about the current state of the economy don’t you think? It is saying that Fed is thinking that the economy is worsening and is in a high-risk of falling into recession. They’re saying that the risk of recession is higher than the inflationary risk. A cut of only 25 basis points could mean however that the Fed is of the view that the economy just need a little nudge on the shoulder to propel it further.
Another scenario could be, they did intend to cut the interest rate by a higher figure than 25 basis points. Just that they’d prefer waiting for the year-end figures (i.e. consumer spending and etc.) before taking further actions. Who knows, further interest rate cut can be seen next year?
One thing to note that last night, the Fed announced a new scheme to inject more liquidity into the market. The banks are now able to borrow money from the Fed at below-market rates. They think that this is a good idea but there are analysts out there who think that this will worsen the problem. It’ll be interesting to see how things unfold.
The Reserve Bank of Australia on the other hand, recently decided to keep its interest rate stable at 6.75% after raising it just before the elections. I am of the view that they’re more worried of the inflation getting out of control than the country falling into recession.
I’m currently reading a book entitled “Way of the Turtle” and I came across something really fascinating. Mind you, it’s a share trading book but the concepts presented are fascinating. According to the author, a particular system will lose its “edge” as many people starts using it because it has made truckloads of money for others. As the system loses its “edge”, it’ll eventually stop producing money. This is not to say that the system is not effective anymore but rather to say that there are too many people using the same approach, thus losing its uniqueness.
Take this for example. Mr. A opens up a road-side stall selling Nasi Lemak. Assume, on average, 50 people buys the Nasi Lemak from him a day. He makes a lot of money. Now, many people will start thinking that this is a lucrative business and decide to go into the business themselves. The next thing you know, another 9 Nasi Lemak stalls popped up along the same road. The average of 50 people buying Nasi Lemak is still the same, thus making the stalls having to share the profits. Now, on average, one stall only gets 5 customer. As you can observe, the Nasi Lemak business has lost its “edge”. By the way, this is a normal occurrence here in Malaysia. You open up a stall in Malaysia and there’ll be people following suit, opening up same stalls beside you.
Anyway, apply this concept to the economy and the stock market. Have these two lost their “edge”? Have they ran out of steam? Have the market gone to the point of un-sustainability? Will reality kick in and bring their participants back down to earth? Well, time will only tell.
However, we need to understand that trying to over-predict the future is futile. Today, you can come up with all sort of predictions of the future, and the next thing you know, your analysis is stomped by a news development released tomorrow.
Think about this. In the previous years in Australia, quite a number of times the tabloids came up with catchy titles that utilised the words like “Stock Market Crash” and “Recession”. The next thing you know, the market advanced into new territory and breaks new records for years to come.
So, are we going into a recession? I can’t say for sure and like I said, I don’t believe in over-predicting the market as well. No analysts have crystal balls also to give a definite answer .
We are in an interesting period right now. High volatility. High uncertainty. Interesting. Interesting indeed.
Investors and traders out there, good luck!
P.S. Please take note that this article is not a recommendation to do anything. This is just of my own personal view and I might be wrong. It also may differ from the opinions of REAL EXPERTS out there. I am just having fun doing a write-up about the market. Please refer to the DISCLAIMER page.
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