Intelligent Commentary

I have been corresponding with a fellow reader for sometime, and he has kindly consented for me to publish his essay below but not his name: (my comments in blue)

Dali-san,

You postulated credit implosion is started with excessive money growth driving assets beyond its fair value. Financial institutions will have to go through the balance sheet cleansing process, therefore monetary policy may not the best tool for this. It also very difficult to use fiscal policy to solve this problem. The root is lack of transparency to mark down what they have on their balance sheets. Like Buffet said, many of them are mark to myth, not even close to mark to model.

Since many of these assets are tie to value of the housing properties, the speed of cleansing will depend on the speed of housing prices fall. This will take sometime to sort out. Recent UBS announcement of massive write down did not send the stock price to hell, I wonder why?
(I think there were early sellers, and on news, the actual selling will be limited. I have been harping on the European banks' results in the coming days - I believe there will be surprises, bad ones, but the impact will not be in the banks' share prices, but rather the implications for the spread and reach of the credit bubble implosion).

Global liquidity is still a plenty, as long as there is source of capital replenishment, the financial institutions will be able to go on with business as usual? Some argue these institutions are too big to be allowed to fail. People on this side of the pond and middle Eastern are flush with cash to buy US assets. It is more of confidence issue than liquidity. Subprime loan is about US $ 1.5 trillion? Can the world support a few more hundred billions? I don't think it is an issue, except the creditors faith will be tested to the extreme.
( That is why I am also critical of Bernanke's rate cuts because its as if his prime motive is to save the stock market from collapsing. A central bank is to ensure low inflation, steady economic growth - stock prices and excesses should not bother the Fed. When the Fed cut aggressively, it pours more money on the problem when the problem can only be cured with proper correction. By easing too much, you go back to the root of the problem, thus not curing the illness but only suppressing it).

The rise of Chinese and Indian consumptions will continue to offset slower growth or mild recession in the States. The rest of the world economy has decoupled to certain degree but stock market has not decoupled yet. Chinese economy growth is depending around 20% export to the States in 2007. Many Malaysia still dare not drive up plantation stocks despite run up of soft commodities prices, still have colonial mentality?
(No colonial mentality in palm oil, its an open market, foreign funds are welcomed to buy as much as they like, Malaysians are just a small subset of investors, not supposed tp dictate prices).

My thesis is fundamental and price begin to diverge but not at screaming buy level yet. I will never argue with the market, if it decided to fall more, let it fall - regardless they get the why correctly. Sub-prime, credit implosion or recession, I think the market is having a confirmation bias. As soon as they find some confirmations, they will just sell, sell, sell. If you look at the volume, you won't find extreme volume on the way down or up. There is no extreme short selling yet, what does it tell us?
(It tells us that we are still unsure of what is bringing down the markets. Many still don't think its a credit bubble implosion, which is very much severe than a housing correction only).

Worldwide stock market is not extremely overvalued, dramatic valuation collapse is not happening soon. People constantly doing rotation play. What does it tell us? Single digit PE valuation is also unlikely to happen. I think one just need to sit tight and wait for pessimism to wane.