The theme of the day: Caveat Emptor

The banks have been saved and further catastrophe avoided. Now where the market goes from here would be largely dependant on the next moves the governments of the world make. Monetary policy has been tried over the last several months and has had little impact as banks tighten credit and batten down. Even with this latest massive interventions by the various central banks, the interbank rates have remained relatively high. What this means is tighter credit for the real world - leading to foreclosures and a contraction in the economy. In a recessionary environment, both companies and consumers also focus on hoarding cash and cutting back on spending/reducing debt levels - thus leading to a vicious cycle where less investment in capital leads to lower employment leading to lower spending leading to even less capital investment and so on.

Is the world ready yet for some serious spending on the part of the various governments (ie fiscal policy)? Right after the massive bank bailouts, it would be politically difficult for most governments to justify huge public spending on infrastructure. Not until things get worse at any rate (just as several banks had to fail/be nationalised before the bailout could occur). But it is only when there is massive injections in the public sector can the private sector overcome its fear of investment. Australia has taken baby steps towards this direction during this week, but other have yet to follow.

Thus until this happens, my personal feel is that the world economy will continue sliding downwards possibly to Q3/Q4 09. Will there be opportunities? Most assuredly, but caveat emptor.