The end of one year and the beginning of a new one gives us time to reflect on where we have come from and where we are going. Although the 2008 year is one we would rather forget,
it is important to ensure that we examine what went wrong so that we can apply these lessons for the future. In doing so, it becomes apparent that although the subprime crisis and economic woes were exacerbated by financial engineering, the underlying cause of the current predicament we find ourselves in was a traditional boom and bust in the U.S. housing market. This is discussed in more detail by Tara Jones who has written a number of articles on subprime over the past 12 months and provides a further update in this issue.

In looking to the future, the question of, “Is it really that bad?” seems to be one that we are being asked a lot. While the current environment is certainly not good, there is a school of thought now emerging that a rebound may be sooner and stronger than many experts are predicting.

Joseph Carson, chief economist at Alliance Bernstein noted recently that “We were producing two million tons of steel a week prior to the Lehman Brothers collapse. Now we’re producing 880,000
a week. The economy has slowed, but it has not fallen by half in the last three months. This kind of significant inventory liquidation is exactly why recoveries take place.”

This theory is supported by Lakshman Achuthan, managing director of the Economic Cycle Research Institute who stated that, “Generally, the sharper the recession, the sharper the recovery,” These statements point to the possibility of a ‘V’ or ‘U’ shaped recovery where a sharp downturn is followed by a corresponding sharp upturn. This sense of optimism, while still in the minority, was not seen before the New Year and is a sign that the focus is now starting to shift to the future. This focus, together with actions taken by governments, reserve and federal banks and the much anticipated fiscal stimulus from President Barak Obama in the U.S. are all signs of a light at the end of the tunnel.

Daniel Minihan
Director
dminihan@moorestephens.com.au