The Great Crash of 2008

4 12 2008

The signs are everywhere if you just care to seek them out. The Kuala Lumpur Composite Index or KLCI has lost more than 45% of it’s value. Just look at the graph below which represents the performance of the KLCI over the last year.

365maincomposite1gif

The Malaysian Stock exchange closed today with the index at 847, down from a high of ovr 1500 points just early this year. The New York Stock Exchange has taken a similiar beating losing some 47% of its value.

Just today I read this report on almost all the news portals. The following is an excerpt taken from Yahoo.

Private jobs and services slump show recession toll

NEW YORK (Reuters) – Private employers slashed an unexpectedly high 250,000 jobs in November, the most in seven years, while the service sector that powers most of the economy posted its worst slump on record.

The reports on Wednesday were the latest signs that the job market is nowhere near a bottom as the U.S. recession enters its second year and the entire economy was still in a state of trauma after the worst financial crisis in a generation.

“The severe damage to the service industry is another indication of the extraordinary force of this recession,” said Pierre Ellis, senior economist at Decision Economics in New York.

Just imagine that, 250,000 jobs were lost in the month of November alone. The only reason we in Malaysia don’t hear any of this happpening is because nobody is telling us. A colleague of mine told me that he heard a group of men discuss the separation scheme (read severance pay) their company will soon be offering.

All over the world production of goods is slowing down causing a spillover effect on services. With less or no goods to be transported, delivery services are taking a beating too. Look at the headlines early November.

DHL to cut 9,500 U.S. jobs

The firm will end deliveries within the U.S., but will continue shipments to other countries.

NEW YORK (CNNMoney.com) — Global delivery company DHL announced Monday that it was cutting 9,500 jobs as it discontinues air and ground operations within the United States.

DHL said its DHL Express unit will continue to operate between the United States and other nations. But the company said it was dropping “domestic-only” air and ground services within the United States by Jan. 30 “to minimize future uncertainties.”

With the little data before you, this should not come as a surprise. 250,000 more people jobless means 250,000 people demanding and consuming less goods, leading to even less goods to be delivered. I am no economist but I do not think it would take a genious to figure out that soon we in Malaysia would be severely affected by this global phenomenon, regardless of what our desperate leaders are trying to tell us.

There is much more depressing data out there but you’ll have to look for it and analyse it for yourself. Here is an article written by Robert Reich who is America’s 22nd Secretary of Labor and a professor at the University of California at Berkeley. His article is the inspiration for my posting today.

Monday, December 01, 2008

The Great Crash of 2008

If this isn’t a Great Crash I don’t know how to define one. Stocks were down another 7 percent today. Since the peak of last year, major stock indexes have dropped 47 percent. We’re in range of the Great Crash of 1929.

Why is the Great Crash of 2008 happening? First, because investors are beginning to understand the enormity of the bubble economy that began to form in the late 1990s when all contraints were lifted on borrowing in order to buy everything that was assumed to be increasing in value — starting with houses and including securities and shares of stock themselves. So-called “margin requirements,” first instituted in the wake of the Great Crash of 1929, were all but abandoned, as big banks and hedge funds found ways around them.

Even more important, investors are starting to fathom the emptiness of American consumers’ wallets. Retail sales last Friday and Saturday — the first days of the Christmas buying season — were disappointing. Had retailers not discounted to the point of taking losses, sales would have been abysmal. In other words, consumers have gone on strike.

Why have they gone on strike? Not because of the difficulty of getting credit. Most consumers can barely afford to pay the interest charges on the debt they’re already carrying. Consumers have gone on strike because their earnings haven’t kept up. The recovery that officially ended December, 2007 (the National Bureau of Economic Research now tells us) was the first on record in which median earnings declined, adjusted for inflation. Since then, many people have also lost their jobs or are working part time when they’d rather be working full time, or else know they’re in danger of losing their jobs.

The speculative bubble still has some air in it; asset values will continue to drop before they hit bottom. That will take at least a year, possibly two. But don’t expect asset values to bounce substantially back, even then. The only way to revive Wall Street is to revive Main Street, and the only way to accomplish this is to get America back on the course of rising median incomes.

I shall leave you with this. The current accepted remedy for dealing with a recession is to spur spending which creates jobs, which puts more money in the hands of the people, which in turn spurs more spending.It is this philosophy that is driving the cuts in interests rates or  rate cuts.. Rate cuts are actually the cutting of the basic lending rates which banks and Financial Institutions have to adhere to when giving out loans.  Read here how low the rates have come down in the the UK. But with  interest rates already  at historic lows, the government of Malaysia does not really have this mechanism at it’s disposal. Instead it has cleverly reduced the minimum limit for contributions to the Employees Provident Fund (EPF) from 11% to 8%, hoping this extra money will spur it’s working populace into a spending spree thus saving the economy from a recession. Think it will work?

I am not sure really, but the best advice I can give to those reading this article is to be wise with your earnings, get your EPF contributions back up to 11% ( you didn’t need the money before, so you sure as hell don’t need it now), be on the lookout for a good investments (pick up stocks of companies which have very strong fundementals or are the backbone of the economy i.e bluechip) and spur others to do the spending. hahaha!

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2 responses

5 12 2008
tzywen

For us, 8% and 11% is just 400 in the course of the 2 years haha

Time to save some money!

5 12 2008
virtualmystic

The way the government see’s it (and correctly I might add), another dollar more available in circulation (not saved and not deducted to EPF) is another dollar that will help spur the economy. True that you will only get some RM20 in hand extra but there are an estimated 10 million employed in Malaysia. That’s RM200 million/month more money in circulation! My advice still stands, especially the “invest” part.

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