Gloomy news abounds, but things aren't all as bad as they may seem.
RESERVE Bank governor Glenn Stevens reckons businesses, the markets and commentators need to avoid gloomy talk and focus on long-term opportunities. In that spirit, here's some of the events of the past 24 hours, with silver linings attached.
¦Yesterday's share price descent means the Australian sharemarket has lost 20% in November, and is now leading a race to the bottom. After losing 5.1% on Wednesday night, Wall Street's Dow Jones index is down 14.2% this month and London's FTSE 100 index is down 9.8%.
The common theory is that this resources-centric market is being hurt particularly badly by the belated realisation that China's economy is slowing significantly, but other markets that are also exposed are faring better.
The Hong Kong market includes China's biggest listed companies and is widely considered to be a proxy for the Chinese economy, and is down a less-steep 15% this month. China's Shanghai sharemarket has actually risen by 16%, partially reversing heavy losses.
The silver lining? Every 1% this market loses is 1% closer to the bottom. That simply cannot be far away, with shares in the S&P/ASX 200 Index now priced at 9.2 times earnings and on pre-imputation tax credit yield of 7.3%. Valuations are roughly 50% below the norm.
Wall Street's Dow Jones Average is now priced at 9.65 times earnings, but has an inferior dividend yield of 3.8%. The FTSE looks more attractive, at 7.2 times earnings and a 6.8% yield.
¦ Fears of a Japanese-style deflationary downdraft have been fuelled by news that US consumer prices fell by 1% in October, the biggest one-month drop in history. Falling prices magnify the weight of debt on the economy, because they result in lower income, and lower debt-servicing capacity.
The silver lining? There are prices of things that are consumed, and prices of things that are produced, and it is only declines in the prices of things an economy produces that will cause genuine debt service-sapping deflation.
Declines in the prices of things that are consumed are actually beneficial, for household and business consumers, and Morgan Stanley economist Gerard Minack says that so far it appears that it is the prices of things consumed that are mainly driving the US CPI lower — imported things, including oil, in particular.
And whether we ultimately reach deflation or not, inflation is certainly being slowed by the economic downturn. Historically, low inflation translates to higher price-earnings multiples on shares, which everybody should welcome.
¦ Citigroup, once the world's biggest bank, is the latest finance house to go onto emergency crisis watch. Citi's shares fell 22% on Wednesday night after it followed up plans to axe 52,000 staff with news that it would buy up the remaining $US17.4 billion of assets sitting off-balance sheet in structured investment vehicles.
The group's shares are down 78% this year, and its market value has slumped from $US270 billion ($A430 billion) to $US35 billion — less than half the $US75 billion of capital it has raised since the crisis began.
Citi, JPMorgan and Bank of America are members of the 30-company Dow Average Index, and between them have shed $US500 billion of market value.
The silver lining? Citi is too big to fail. The US Government's bail-out fund has already swung $US25 billion into the group's balance sheet, and more will follow if and when Citi needs it.
Citi's shareholders could be wiped out in a state-funded reconstruction, were it needed. But there is agreement now that the decision to let the much smaller Lehman Brothers go to the wall in September worsened the crisis. That mistake will not be repeated.
¦ In the US Senate, Democrats have called off plans to force a vote on redirecting $US25 billion from the Bush Administration's $US700 billion Troubled Asset Relief Program (TARP) package into a rescue of America's car industry.
General Motors, Ford and private equity-owned Chrysler are on the brink as car sales plunge and their remaining cash reserves erode — by $US18 billion in the past three months alone — and there is no sign that the distressed debt and equity markets can pony up bridging money.
GM says that if emergency funding doesn't arrive, it could collapse within weeks. Ford could hit the wall in the first half of 2009. Chrysler is a private company, and its position is less clear, but it says it needs a merger to survive, and held unsuccessful talks about a merger with GM earlier this month. Between them, the three car maker are supporting a million US households, through direct employment and employment at companies that supply them.
The silver lining? It is a question of political will to save Detroit's car makers, not a question of finding the dough. Democrats, including Barack Obama, argue that Treasury Secretary Henry Paulson's $US700 billion TARP fund should be tapped to the tune of $US25 billion, but Paulson and congressional Republicans oppose expanding TARP beyond the financial sector.
But there is an alternative plan, to use a similar amount, set aside earlier by Congress to subsidise production of more fuel-efficient vehicles. It is being pushed by the Republican camp, and is the rescue of last resort — one that might help restore the industry's competitiveness by accelerating its shift towards hybrids and other fuel-efficient vehicles.
A rescue is controversial in any event, even in the depths of crisis. Some think the industry should be left to either stand or go into bankruptcy, opening the way for mergers and industry-wide reconstruction.
