Hong Kong stock market rebounded in the last 4 weeks or so, and similar for the US. The "reasons" were better-than-expected earnings, less-worse-than-expected payrolls etc. Is the US economy in such a good shape to warrant a shallow correction (18% drop from Oct-07 high of 14197 to Jan-08 low of 11647)?
Consider the facts: subprime mortgages have blown up, inflation pressure is building up, people are losing jobs, house prices have gone down, oil price is as high as the moon, the economy is clearly contracting - the core question is, as always, is the worst over?
I'm afraid not. My guess is that rising credit card delinquency rate will be The Next Big Thing (tm).
Let's say you're a person living in US. You worked in a big financial institution and received good bonus. You refinanced your apartment to take advantage of the housing boom, spent like crazy in the last few years. Gasoline price was less than $2 per gallon, food was cheap and you could not find a trace of inflation. Your investments performed very well. You have got tax rebates from the Government. Foreign goods were affordable.
Those were good old times. Suddenly you're in 2008.
The financial institution that you worked in no longer exists. You survived the first and second rounds of redundancies but could not make the third. The price of your apartment is falling every month and you can no longer afford to pay for the mortgage. Gasoline price is now higher than $3.5 per gallon, food price is soaring and inflation is everywhere due to commodity boom and declining US dollar. Stock market has fallen in the last 6 months. You still have got some money from the Government - just enough to pay some bills perhaps.
What would you do? I guess one normal reaction is to wait and see - dip into your savings first (reminder: the saving rate in US is close to zero). If it's not sufficient, sell your investments. In the worst case, pay for the bills using your credit card, the easiest form of personal loan available, and hope that the next president will save you and your family.
Will the new US president be able to do so? I don't know. But it doesn't sound very likely isn't it.
Credit card companies are not stupid either - they will find some ways to protect themselves. Raising rate, ask someone to share the risk, or sell more credit-card ABS. Rating agencies tell us that we're still safe - anyone wants to trust them anymore?
