Signs of bottoming out

Successfully calling the bottom in any crisis will give any “expert” bragging rights, but I wince whenever I see someone trying to make a prediction. After all, if there is anything we have learned lately, it’s that nothing is what it seems, and the best game plan is just like what your mother used to tell you in grade school: better be prepared. (What is it with quotable experts and the inability to say, “I don’t have a clue?”) Still, just like on that lengthy vacation drive when the kids start asking “Are we there yet?”, there are road signs that can indicate when we are already in the last leg of the trip. Last week, during the CFA Society of the Philippines’ 3rd Prestige Night (I never saw a more well-dressed group of super brainy people in my life), Michael Lee of Bloomberg indicated several early signs of a bottoming out and why (the list is not meant to be an exhaustive one). Being from Bloomberg, this guys lives and breathes economic indicators, and eats graphs for breakfast, heh.

1. Stock market reversal – the stock market, Lee says, is a discounting mechanism. When the stock market recovers, normally the economy will follow in six to nine months, so watch out for that. 2. US Industrial Production – the graph he showed that historically, this tracks almost the same path as US gross domestic product growth rates and is therefore a very good indication of when the recession is coming to an end. 3. Baltic Dry Index – Wiki explains that this measures the demand for shipping capacity versus the supply of dry bulk carriers. Recently, Lee says the index has been showing a “most disconcerting” trend indicating that world trade is coming to a halt as banks get cold feet in issuing letters of credit, with China, Japan and Korea suffering the most. 4. Bloomberg’s Financial Condition Index – if you have access to a Bloomberg terminal, you might want to track this propriety chart, which has been proven in recent quarters to indicate financial easing or freezing among global banks.

I caught a whiff of another interesting thing Lee pointed out and that is the significance of these Asian currency swaps happening in the region lately, as a response to the US and global financial crisis. These swaps initially sound like a good, proactive response, but Lee says they could have the unintended effect of drying up the supply of domestic currency for borrowers in Asian countries. That doesn’t sound good for any economy. The depth and length of this crisis will definitely put a toll on many (some we have already seen in this blog in a previous post), especially in developing nations. This New York Times article points out a very interesting possibility:

This recession will probably have its own social profile. In particular, it’s likely to produce a new social group: the formerly middle class. These are people who achieved middle-class status at the tail end of the long boom, and then lost it. To them, the gap between where they are and where they used to be will seem wide and daunting. The phenomenon is noticeable in developing nations. Over the past decade, millions of people in these societies have climbed out of poverty. But the global recession is pushing them back down. Many seem furious with democracy and capitalism, which they believe led to their shattered dreams. It’s possible that the downturn will produce a profusion of Hugo Chávezes. It’s possible that the Obama administration will spend much of its time battling a global protest movement that doesn’t even exist yet. In this country, there are also millions of people facing the psychological and social pressures of downward mobility. In the months ahead, the members of the formerly middle class will suffer career reversals. Paco Underhill, the retailing expert, tells me that 20 percent of the mall storefronts could soon be empty. That fact alone means that thousands of service-economy workers will experience the self-doubt that goes with unemployment. They will suffer lifestyle reversals. Over the past decade, millions of Americans have had unprecedented access to affordable luxuries, thanks to brands like Coach, Whole Foods, Tiffany and Starbucks. These indulgences were signs of upward mobility. But these affordable luxuries will no longer be so affordable. Suddenly, the door to the land of the upscale will slam shut for millions of Americans.

Having said that, I still say watch out for the signs, and in the meantime, enjoy the ride, even if it’s a bit bumpy. Life is too short for something like a Great Depression-like event to make us all grumpy! PS. Congratulations to the new CFA Level 3 charterholders! They have mastered three rigorous, six-hour exams covering topics that included ethics, financial statement analysis, valuation, derivatives, economics, and alternative investments and have gained at least four years hands-on experience. Kudos to Rose Christine Badillo, Anna Marie Bernardo, Kelanie Cabiltes, Luz Pilar Glinoga, Francis Goseco, Biao Huang, Jocelyn Labas, Ana Christina Pastelero, and Carl Stanly Sy. I forgot which one of them gave birth between reviewing and taking the exam, but to you girl, a major salute!