This is bottom . SP will hit 1300 mark in December

In the post published on this blog earlier I was predicted that in October the market will test July lows. It is always difficult to precise estimate the “critical“ point when the market will turn but I feel that it may happen within next few days or even today. Here are my arguments:



1) Blogosphere is full of doom and gloom stories. Number of posts in blogs with some including the word ”crises” jump to 350

2) IMF is turning to more gloomy tone. Just 3 Months ago IMF revised up the GDP forecast for US and EUROPE but now in the latest WEO they suggest that US economy will tank

3) Politicians around the globe are not only calling for actions but they already advanced in legislative process (US). Even in Europe politicians woke up and will meet on EU mini summit this weekend. (politicians are always well behind the curve)

4) All my colleagues are bearish, Now most of CNBC ‘s guests predict recession

My general point is being that I feel like only optimist isle surrounded by ocean of pessimism and gloom. It sounds like classic contrarian argument which may sounds odd in the eve of US earnings season. But financial markets are far beyond supply and demand curves. This is very misleading picture of the market. It implies that the investors base their decisions on the fundamentals, whereas the goal of the market participants is to make money. Only if the market prices reflected the fundamentals accurately would it make sense for them to be guided by those fundamentals and in that case nobody could make money than anybody else – this is an absurd conclusion!

Long time ago John Keynes formulate his beauty contest thought. He was arguing that the stock prices are not only determined by “fundamental” factors but mostly how the crowd of investors will behave in the future. In Keynes’view, the optimal strategy is not to pick those faces the player thinks the prettiest, but those the other players are likely to think the average opinion will be, or those the other players will think the others will think the average opinion will be, or even further along this iterative loop. Beyond a certain point this self-validating feedback loops become unsustainable and market crash (this is valid for both boom and bust cycles) (This type of cooperative behavior may be bay be model well by Ising model )
We were in the negative feedback loop since the beginning of September and we are approaching the “critical” turning point. It obviously doesn’t mean that reality will change. Still the deep recession is ahead of us and but that’s different story. The end year rally is just ahead of us.

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Wednesday links and random thoughts

• US stocks plunged yesterday, led by a 28% drop in shares of Countrywide Financial Corp amid bankruptcy speculation. Merrill Lynch suggest that US recession is not a forecast but more a present day reality.

• Pimco Managing Director Bill Gross suggest strong pullback of aggregate lending amid subprime loses as thinly capitalized modern banking is vulnerable to the withdrawal of the deposits. Amid credit contraction Gross sees FED to cut rates to 3% by mid 2008


IMF has released article IV consultations with Qatar. Authorities’’ and IMF views on currency:

The authorities are committed to maintaining the peg to the U.S. dollar in the period leading up to GCC monetary union. They also view a pegged regime as likely to be in the interest of the GCC in the post-monetary union period. As regards the level of the exchange rate, the authorities agreed with the staff’s analysis and conclusion that the exchange rate is in line with fundamentals…

…A peg is appropriate in the period leading up to the proposed monetary union, but staff recommends a careful study for the period after the establishment of the monetary union.

That’s what I think:
Targeting an exchange rate and maintaining an independent monetary policy, with an open capital account is commonly called the impossible trinity. Only two objectives can be achieved at the same time. The peg to USD dollar broadly worked so long as the business cycle in those countries was well synchronised with the US economy. In other words the business cycle in these countries was synchronized with FED rates policy. Now the situation seems to be changing GCC countries are increasingly “decoupling” from the USD cycle as Asia is becoming significant consumer of energy. In other words GCC business cycle become increasingly connected to China’s business cycle which makes the “impossible trinity” more significant problem especially if decoupling story will continue. The USD-pegged central banks in the GCC region may be stressed further if the FED will cut rates aggressively and energy prices will not fall strongly.

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Recouping after Decoupling

The US employment report released on Friday erodes further consumer confidence. The jobless rate rose in December to 5% form 4.7% a month earlier. In December only 18K jobs has been created which increases the odds for recession. NBER Feldstein sees now recession more than likely. Recession camp is growing and now now its not only Larry Summers, David Rosenberg, Jan Hatzius but as master of disaster - Nouriel Roubini reports recession view is becoming central scenario .

The old saying, “If the United States sneezes, the rest of the world catches a cold,” remains relevant. Last year IMF analysis showed that recessions in the United States can exert significant spillovers on both advanced and developing economies.


So if the global decoupling was a key theme for 2007, global recouping may be the dominant story for year 2008. That’s Morgan Stanley’s opinion which I fully share.

Although asynchronous character of Eastern Europe economies is likely to persist as the direct trade link to US is week but growth in the region is unlikely to remain resilient to weaker external conditions. Weaker growth in western Europe – the main trading partner of the Eastern Europe and tighter liquidity conditions are likely to reduce recent strong performance seen in past periods.
CEE4 countries are well positioned for the slowdown. In Hungary monetary policy has enough room to moderate the spillover effects of disturbances from lager economies. In Poland and Czech R. economies are well balanced and the domestic demand growth was not strongly addicted to the credit growth.

Southern East Europe (SEE) balance sheet looks far more worrisome. Amid rapid credit growth fuelled by booming domestic demand traditional vulnerability indicators in SEE reached levels that in other countries has not been sustainable. Although part of the real exchange appreciation in the recent years may be explained by rising productivity but growing external macro gaps in SEE are rising questions about real overvaluation of exchange. Also historical evidence suggests that countries with wider macro gaps ahead of US recessions suffers larger cumulative loses of GDP during the recession. Romania looks especially vulnerable as the set of macroeconomic variables is far from equilibrium. C/A gap is not only large but by large by large financed through bank to bank borrowing.

Domestic demand

C/A Gap

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Interesting articles: GCC inflation, Krugman on US recession,

• Paul Krugman in his most recent post put a nice chart showing that so far US economy avoided recession as the rising export has offset the impact of the housing burst.

• The GCC common market which has been launched on Tuesday will face number of challenges among which mounting inflation seems to be most serious. Here are two (1, 2)articles on rising inflation pressure in UAE

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