An outsiders observation in New York

Last week I had the chance to participate in meetings in New York with some investments banks and hedge funds. My key observations are (no priority):

• The crisis is the worst people have seen in their life time, but they still have a Trust/Hope in Obama's abilities to unite the country, the effect of fiscal policies and the different FED programs. Next year will be difficult, but 2010 will be better


• The only negative view on Obama was expressed by my taxi driver taking me into New York


• It's almost as if there is no downside from expansive fiscal policies and FED programs.


• FED are more negative and uncertain on their growth forecast, than the official forecast indicates, but more in line with actual actions that for the time being has broad agreement, but are driven by the inner circle


• Banks are getting capital to make them survive in a more classical banking structure. They are not getting capital to support activities in fixed income markets. VaR models and earlier lack of pricing of counterparty risk is putting pressure on bank's capital requirements.


• The current uncertainty in the financial sector is leading many still employed to act is if they could be unemployed within the next months. More certainty about who is employed going forward will make those still having a job off-setting the negative effect from those unemployed


• The non-financial corporate sectors were very healthy going into this crisis and so it will better manage through a difficult 2009 - The second de-coupling story after China/Emerging markets?


• If the homeownership ratio moves back to trend line if would suggest a much bigger housing market correction than currently priced into the markets


• Geo-political risks are not in focus, was mentioned by one as an outside risk for equity markets in 2009. The latest issues in India, Pakistan and Afghanistan are seen as local problems


• Broad agreement that Geithner will be the implementer, but the relative powers of Summers and Volcker are less certain.


• The hedge fund community is under heavy stress from poor performance and investor redemptions(not new, but confirmed). Management of risk from high water marks is an issue and the free-ride on counterpary risk exposure is over


• The money market is working again and most banks can now get the necessary funding to manage their activities


• Strong belief that Treasury interest rates will raise in 2009 as the balance between the current deflation scare and inflation scare from strong increase in monetary aggregates is close. This belief is strongly correlated with the economic turnaround in 2010


• No clear views on the exit strategy from all the FED programs


• Limited focus on a discussion of the risk that fiscal policies and the different programs is crowding out private capital and just increasing the future burden on tax payers

It's fair to say that, I came to the US with a fairly dark view of the world and I mostly got it confirmed. On the other hand - as the equity market rally since Friday and so far today clearly indicates- the idea that we in Q1 2009 could get a rally as in 1930 on a strong belief that the worst is over is a fairly high probability. This would give a good selling opportunity.

I think the consensus underestimate or are too positive on:

1. The non-financial corporate will not be able to decouple and was not as healthy as people want to think. Also lot's of uncertainty about covenants on expiring loans in 2009


2. The negative effect from unemployment increases will kick-in for real in 2009


3. There are a number of down-side effects from an expansive fiscal policy and the FED's different programs that is underestimated


4. It's not a matter of going back 4-5 year, but about changing the way the world economy has to work without the leverage and financial sector got used to

But of-course, I could be wrong and will have to constantly question my longer term beliefs.

Here in the short run, I will have to find a way to dig myself out of the small hole I have made since Friday afternoon. On a short term basis S&P 910 is resistance and the next level would be 940-950. I doubt we get through here before Christmas, but maybe here I have more hope than strong belief. It seems like Oil and Gold are following stocks today as expected. Fixed income have sold off, but are making at least a small come-back here.