Hock's Viewpoint - By Choong Khuat Hock

Source: http://biz.thestar.com.my/news/story.asp?file=/2010/2/1/business/5577245&sec=business


At home, a divided Malaysia on racial and religious grounds is like a divided America on ideological grounds. Inspirational leadership will be required to bring together the various factions under an inclusive and liberal 1Malaysia concept that is not threatened by just a single word.

WHO would have thought that the Jan 19 loss of the Massachusetts seat by the Democrats, which it had held since 1953, could roil the markets by so much?

The loss of the seat deprived the Democrats of the 60-seat majority that it held in the Senate which would have enabled it to pass Bills easily. The loss of the “safe” seat worried many Democratic senators, especially those contesting in the Nov 2 mid-term elections for 36 of the 100 Senate seats.

Predictably, the Democrats have turned more populist by pandering to voters’ unhappiness over bank bailouts and generous Wall Street bonuses, made possible partly through an implicit guarantee for banks which allowed them to borrow funds cheaply.

Voters were also unhappy about the high unemployment rate and the burgeoning budget deficit which may have to be financed with higher taxes. Politicians scrambled to be seen to help Main Street rather than Wall Street.

Coincidentally or purposely, Obama announced on Jan 21, two days after the Massachusetts electoral defeat, proposals that were aimed at preventing banks from using depositors’ money for proprietary trading, hedge funds and private equity.

Though these proposals could reduce the chances of a failed banking division dragging down a “too-big-to-fail” mega-banking conglomerate, the market plunged on fears that populist measures would hurt bank profits and perhaps corporate profits in general if other measures were introduced.

Markets were also worried about the imminent rise in China’s interest rates which could cool the overheated Chinese economy and affect demand for commodities. Even Federal Reserve chairman Ben S. Bernanke’s senate confirmation was in doubt at one time before his eventual confirmation on Thursday after securing 70 out of the 100 votes.

Paul Volcker, the former Fed chairman, who supports more stringent banking regulations, also faced a difficult reconfirmation hearing in 1983 after raising interest rates and plunging the economy into recession to tame inflation.

Nevertheless, in the current economic and political climate, humans are likely to revert to norm which is to favour pain avoidance as per the Prospect theory. That means boosting growth through low interest rates and fiscal stimulus even if it means burdening future generations with higher debts.

Following the correction in the world markets, the question on many investors’ mind is whether a double-dip is likely.

Chances of a double-dip are low for the following reasons: First, the US market as shown in the Chart is not expensive as it is trading on a forward price/earnings ratio (PER) of 14.1 times compared with an average forward PER of 15 times since April 2006.

Results of companies have generally been quite good in the current earnings season. The Malaysian market is now fairly valued at a forward PER of 14.1 times which is the average forward PER since April 2006.

 

Second, interest rates are likely to remain low as consumer spending remains weak, and with Bernanke at the helm, easy monetary policies are likely to be favoured. After all, in his speech entitled Monetary Policy and the Housing Bubble on Jan 3, he asserted that loose monetary policy was not the cause of the US housing bubble. Perhaps, loose monetary policy was not the only cause of the US housing bubble but it was certainly a main contributory factor.

Third, fiscal stimulus by major countries should ensure reasonable economic growth, especially when compared with the weak numbers in 2009.

Going back to US politics, the loss of the 60-seat majority by Democrats may not be a bad thing as it would force the Democrats to work with the Republicans.

Bill Clinton remained a popular and effective president even after the Democrats lost their majority in the Senate and Congress in 1994. Politics will not be easy as voters want the budget deficit reduced but at the same time want government spending to boost job prospects and help the needy. Though the problem was created during the Bush era, a quick solution is demanded; blame is now being heaped on President Barack Obama for the jobless recovery. Politics seem certain to play a bigger role in business and the economy.

At home, a divided Malaysia on racial and religious grounds is like a divided America on ideological grounds. Inspirational leadership will be required to bring together the various factions under an inclusive and liberal 1Malaysia concept that is not threatened by just a single word.

Only liberal and open societies seem to prosper from Tang China, Ottoman Empire and the United States (before Bush).

Let us be one of those enlightened societies so that ideas and innovation can flourish rather than a guarded and paranoid society that encourages more brain drain.

Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd.

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