The Next Wave of the Tsunami

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 13 August 2009, 7.50 am and 7.20 pm)

Most of us love to walk along the exposed beach at low tide, scurrying back on shore before the tide returns.

In the morning of December 26, 2004, Tilly Smith, the 10-year-old English schoolgirl was doing exactly that with her family. They were on a holiday in Phuket in Thailand.

But that morning, Tilly Smith noticed something very different about the ocean. It was foaming, kept coming in, and wasn’t behaving normally. It reminded her of a lesson on tsunamis she learnt at school recently.

She went hysterical as she desperately tried to convince everyone of the approaching tsunami. Fortunately for all at the hotel where she stayed, they listened and ran away from the beach.

The tsunami came, killing a quarter-million people around the world that day. But at the Smith’s hotel, no one died.

The Indonesian tsunami, like all tsunamis, was a series of waves. Depending on the landscape, the time interval between each wave could be between tens of minutes to more than an hour. Usually, the third or fourth wave is the most devastating.

I tell this story because when stock markets crash, they also crash in a series of waves. The Wall Street Crash of 1929 was like this. It began in October 1929 with the Dow falling some 50%.

Over the next three years, between October 1929 and July 1932, there were six bear rallies, with four of them registering gains of some 30%. But each rally came from a lower base. The market finally bottomed in July 1932. By then, the Dow was down some 90%.

Of course, this time round, it’s different, so we tell ourselves. The bulls claim the latest data suggest that the global economy is at a big turning point upwards. For instance, US job losses slowed in July. And the US economy fell slower in the spring quarter.

Actually, the figures are only telling us that “the ship is sinking more slowly”. But don’t be fooled. The ship is still sinking.

I say this because there are still many potholes dragging down the US economy. One of them is the US housing market. This was the epicenter of the global credit crunch. And it has not gone away.

For example, about US$750 billion worth of Option Adjustable Rate Mortgages were issued between late 2004 and 2008. These popular loans offered low payments before resetting at higher rates not more than five years later. This five year grace period is expiring from this autumn. Many won’t be able to pay up.

This could be one of the possible triggers for another major dip in global stocks. Another major cause for concern is the buying frenzy sprouting around us. The end of this bear rally must be near.

If I were to put on my pessimistic hat, my mathematical model shows that such a major dip should come in the last three months of this year.

Like the British schoolgirl Tilly Smith, my sense is that something is not right with the markets. Of course, my conviction is not as strong as hers. That’s because economics is not an exact science. I’ll probably be proved dead wrong. But if I am right, I will buy you coffee when we meet.