The Pain is Shared (or will be)

http://www.youtube.com/watch?v=N-qQDG0ChAY

i can see the points he makes. BUT, its scary to see so much pain and this pain is being felt the worst by the working class.

and again, the only clarity i get is - ensure you have excess resources/liquidity to take you through 2009 and maybe even 2010.

Everything is connected.

A worker in a firm that supplies grills to General Motors loses his job along with another 1000 workers. He has tremendous amount of credit that he cannot pay without his job. He defaults on his loans. The banks take his house and car. The bank freezes all credit in that town.

The worker now stops spending and consuming along with another 1000 families. Assuming that each of these 1000 workers have 4 friends who feel their pain and immediately change their consumption habits. Thats 4000. If those 4000 have another 4 friends, thats 16000. At the next level 96000 stop spending. And this continues. Now imagine if 10000 people have lost jobs or even 100000....the change in spending habits will be huge.

As America stops consuming (the biggest consumers in the world) all the countries that are dependent on exports to US (or even Europe) will suffer major drops in trade income. Malaysia is no exception.

Again i am no economist but look at our reserves as our savings account. As we export more than we import, we make excess income which we place in savings. When foreigners buy more than they sell of our shares/bonds, we have money flowing into our savings (these are called Portfolio Funds). When foreigners invest in our country to build factories and call centers, money flows in (FDI - foreign direct investments). So what happens when US is now worried about jobs in their country.

Firstly, let me say i am a fan of Obama. BUT, Obama's priority will be to help Americans first and not the world. So say, he announces that any company that sets up factories in America will be granted a 5yr tax holiday (sound familiar...this is exactly what Malaysia and other Asian countries did to push FDI). So a company that runs a factory in Malaysia decides to close the factory in Malaysia and opens in America. FDI not only stagnates in Malaysia, it may actually flow out.

As this happens, portfolio funds who are opportunistic see this as economically negative for Malaysia, they will choose to exit the country. They will sell our shares and our bonds and sell our currency. This leads to massive wealth destruction in our country. On top of that, our currency now gets weaker (this may help initially as our exports become more attractive BUT if the world continues to slow), our weak currency will force imports up and this may lead to rising costs in our living expenses.

Our reserves (savings) will fall dramatically while US corrects itself.

The more i see and read, the more i am convinced we are entering a period of great rebalancing. Destruction before creation. The pain is yet to come for a lot of us but if you look around, you will see the pain being felt already among the lower income groups.

So get your reserves to carry you through 2009 on the assumption that you lose your job and you cannot find another. As you continue working, build on those reserves. If i am right, this could be the best advice you ever receive. If i am wrong (which i hope i am), you will have accumulated some fine reserves to buy a new property, or a car you like or even take your family for a grand holiday.

In my world, this is a limited downside trade with a greater upside. I would rate it a 10 to 1 trade and at those odds....why would you not do it?