Morgan Stanley Outlook for 2008

[yieldmatters]

http://www.morganstanley.com/views/gef/index.html#anchor5943

All - see a link to the Morgan Stanley Global Economic Forum outlook for for Australia in 2008 (other countries are there too).

There comments about the highly leveraged household in Australia is not news - they seem to be stating the obvious somewhat but nevertheless it is a good summary.

 

[alexlee]

I share your bearishness, YM. That's why I'm planning to buy more property. Is there a disconnect? I don't think so. I have a gradual buying strategy. A downmarket, to me, is a better time to buy than a rising market. I find it very hard to pull the trigger in a fast-rising market.

There is plenty up ahead. One of many: if US consumers are no longer pulling equity from their homes to buy consumer goods, but consumption hasn't fallen off a cliff, what are they now using? Answer: credit cards. Now, the same banks who securitised residential mortgages so creatively (in part to access pension funds and money market funds) also securitised credit cards. Were they more conservative with those? Maybe, maybe not.
Alex

 

[yieldmatters]

A downmarket, to me, is a better time to buy than a rising market. I find it very hard to pull the trigger in a fast-rising market.

Me too!!!

People who are 'almost' on the same page but not quite are far more aggrevating than those that are on another planet.

There is plenty up ahead. One of many: if US consumers are no longer pulling equity from their homes to buy consumer goods, but consumption hasn't fallen off a cliff, what are they now using? Answer: credit cards. Now, the same banks who securitised residential mortgages so creatively (in part to access pension funds and money market funds) also securitised credit cards. Were they more conservative with those? Maybe, maybe not.
Alex

I've read about that - credit cards are apparantly the next big problem. No more equity withdrawals so people have moved onto credit cards which are likely to default and as you say have also been securitised.

 

[aaarghhh]

Interesting article YM

Do you have any archived forecasts from previous years. I tried searching on the Morgan Stanley site but nothing available.

It would be good to see how good Morgan Stanley's cyrstal ball gaze-ing was for FY2007 and FY2006.

2008 smells like a good year to buy property. Getting hungry...
Aaron

 

[Kennethkohsg]

Dear YM,

1. Thank you for sharing this interesting article with us.

2. I agree that RBA is mostly likely to slow down the Australian Economy in 2008, as part of its overall efforts to effectively curb its underlying core inflationary pressures within the Ayustralian Economy.

3. Consequently, it is quite likely that RBA may further increase its interest rate in early 2008 period.

4. Following the subsequent slow-down of the Australia Economy, there is a good chance that RBA may also have to consider cutting interest rate in 2009 so as to "jump-start" the slowing down Australian Economy where neccessary;- though this proposed interest rate cut can/may occur at as early as during last quarter in 2008 after the post-August 2008 Beijing Olympics Games Celebrations, should the global situation adversely impact the Australian Economy far more deeply than what the RBA has originally envisaged for itself.

5. The proposed interest rate cut will, in turn, likely to provide further stimulus for the recovering Sydney Property Market to enter into its booming stage in 2009.

6. More exciting times ahead for the Australian Economy and its various housing markets, come 2008 and 2009 period.

7. For your further comments and discussion, please

8. Thank you.


Cheers,
Kenneth KOH

 

[BayView]

3. Following the subsequent slow-down of the Australia Economy, there is a good chance that RBA may also have to consider cutting interest rate in 2009 so as to "jump-start" the slowing down Australian Economy where neccessary;- though this proposed interest rate cut can/may occur at as early as during last quarter in 2008 after the post-August 2008 Beijing Olympics Games Celebrations, should the global situation adversely impact the Australian Economy far more deeply than what the RBA has originally envisaged for itself.
Cheers,
Kenneth KOH

You've mentioned the Beijing Games a number of times now; is it just to identify a point in time with a specific event (such as December with xmas), or do you really think it can affect our economy?

I can't see how the Olympic games will have any effect on Aus at all. It's a big deal in one place for 2 weeks and will inject some cash into that Country's economy, not ours.

It'll be a good 2 or so weeks for our air service companies I guess, although I think a lot of the flights will have already been booked and paid for.

How are they going with their plans to get the sun to come out from behind the smog in time for the Games?

Apparently they were thinking of closing down the City to road traffic for a while before and during the games. Good luck.

 

[The Y-man]

I can't see how the Olympic games will have any effect on Aus at all. It's a big deal in one place for 2 weeks and will inject some cash into that Country's economy, not ours.
.

I believe there is a theory that some of the current China boom is fuelled by accelerated building and infrastructure projects to be completed in time for the Olympics. Once the Olympics are over, my understanding is also that many countries suffer a small downturn in local economy (counting the costs?).

Cheers,

The Y-man

 

[yieldmatters]

Do you have any archived forecasts from previous years. I tried searching on the Morgan Stanley site but nothing available.

It would be good to see how good Morgan Stanley's cyrstal ball gaze-ing was for FY2007 and FY2006.

I don't - I just stumbled across it this year. But that would be a good exercise.

 

[yieldmatters]

I believe there is a theory that some of the current China boom is fuelled by accelerated building and infrastructure projects to be completed in time for the Olympics. Once the Olympics are over, my understanding is also that many countries suffer a small downturn in local economy (counting the costs?).

And the other aspect is the Chinese government desperately wants to slow down an overheating economy - they have inflation problems, asset bubbles, overinvestment in certain industries etc. But they won't hit the brakes too hard before the olympics because it may cause a social disruption.

 

[alexlee]

I've read about that - credit cards are apparantly the next big problem. No more equity withdrawals so people have moved onto credit cards which are likely to default and as you say have also been securitised.

And there are others. Credit Default Swaps, for example. People got really complacent with CDS prices when defaults were thought to be negligible. The banks (those same banks who created CDOs) also sit as counterparties to those CDS's.
Alex

 

[bernly]

Credit Default Swaps
Alex

Pardon my ignorance, Alex, but how does a CDS work? And what happens when it doesn't work?

 

[alexlee]

Pardon my ignorance, Alex, but how does a CDS work? And what happens when it doesn't work?

A CDS is basically a bet on whether a company's bonds (debt) defaults of not. In simple terms it is insurance against defaults. Originally it was designed so that I can protect myself against the default of a loan I've made to a company. But these days you can make a bet on debt you don't own.

So if say I am short (selling) a General Motors CDS and you are long (buying). You pay me an amount for the swap (think of it as an insurance premium). If General Motors debt defaults, I pay you.

Like any other instrument, the price depends on market perception. So if people think the chance of default are very low, the price of the swap will be very low. i.e. it costs very little to 'insure' a default. But what happens when defaults rise (if we have a recession, for example) above what people thought? The people who are 'short' the CDS will have to pay up, big time. Who is short the CDS's? Who knows. They're generally OTC (over the counter) instruments, as opposed to being trackable through a central exchange.

It sounds complex but it boils down to this: people mispriced risk. They thought the mortgage backed CDOs were safer than they were, so they priced them too low, so when mortgages started defaulting they took losses. CDS will be a similar sort of thing for corporate debt. High yield (junk) debt default rates have been at historic lows. And junk debt issuance (some companies need to keep issuing new bonds to make interest payments) has been frozen for months. What happens when companies that have issued junk bonds start defaulting?

The other issue is what happens if, say, the party on the short end who has to pay up doesn't have the money? It might be a hedge fund. They would have to sell other stuff in their portfolio, and drag markets down.
Alex

 

[Noeyedear]

Me too!!!

People who are 'almost' on the same page but not quite are far more aggrevating than those that are on another planet.

Oh so true.