Business

Saturday June 27, 2009

Spot-on predictions

Review by ANITA GABRIEL


Contagion: The Financial Epidemic That is Sweeping the Global Economy ... and How to Protect Yourself from It

Author: John R. Talbott

Publisher: John Wiley & Sons

PAST is always prologue for Talbott, according to a newspaper, referring to John Talbott’s economic punditry, which thus far appears to be impressively accurate.        

Two years before the collapse of the dotcom bubble, the best-selling author and former investment banker for Goldman Sachs had published a book predicting the bust.

In 2003, he wrote The Coming Crash of the Housing Market, in which he predicted a housing market collapse. And three years later, he foretold that housing prices had peaked in Sell Now! It’s no surprise then that he has earned the nickname “Johnny Nostradamus” among his friends.

This track record of spot-on predictions may draw many to read his latest book, Contagion, in which he does not merely examine the scope of the cash crisis in United States, but also attempts to unravel why the sharp decline in Americans’ total wellbeing has such a far-reaching impact on the world and how the global crisis will eventually play out.

“What began as a simple decline in housing prices is going to have repercussions and ramifications far from the world of real estate,” he says.

Those shocked and displaced by the “devastating magnitude” of the US financial crisis and its reach on global economies, and who are struggling to recoup their financial footing, may find this book useful as it provides some clarity on what’s in store for them, their assets (be it stocks, bonds, real estate or commodities) and companies.

For readers, there are suggestions on how, as investors, they can overcome the storm and make some informative investment decisions in Chapter 13, titled “Which investments and which countries will weather the storm the best?”

Talbott, who used to be a visiting scholar at UCLA’s Anderson School of Management, spends several chapters examining the direct and secondary links surrounding Wall Street’s wellbeing, the general economy and the wellbeing of average citizens on main street.

These include the value of property plunging (hence throwing you “underwater on your mortgage” – you owe more on your mortgage than your house is worth) and banks pulling back on all consumer spending (that is, credit cards and student loans), and car companies exploding due to the brakes being slammed on sales.

The picture he paints is spooky for the American reader.

“The story that I am describing is one in which the value of people’s homes decline at the same time that their stock market portfolio value declines, at the same time that reignited inflation causes a market value decline in their bond portfolios at the same time that their 401 (k) and pension benefits are threatened.”

He joins the wide pool of economists who expects this to be a long-lived and prolonged recession. With that as a premise, he has made a few predictions in this book.

Housing prices, he says, will continue its slide down the slope for another two to three years. The US stock market will chart new lows due to the credit crunch and erosion of confidence that will sap consumption. Much of these have, in fact, already taken place.

He also sees that China’s economy will not only stall but its GDP will contract as there is no market for its exported manufactured goods, and that country bankruptcies will be on the rise – including Russia and Venezuela – as oil falls to US$40 per barrel.

But do take note that Talbott’s contagion has a wider meaning, one that also involves governmental and societal matters. Much has happened since the book was published.

Critical of some of the remedial measures taken to date to solve the crisis, he describes them as “expensive band aids”.

Instead, he strongly advocates some automatic mechanism to keep bank’s leverage levels checked and also says that management must be made more accountable to shareholders.

The author, not unlike many others, strongly pushes for hedge funds and private equity firms (some lay the blame of this financial crisis squarely on them) to be regulated and to be more transparent.

Critics of the US bailout of corporations will find their voice in this book. Talbott says the bailouts are proof that US corporations, not American citizens, still have a stranglehold on their elected representatives.

His exploration of laissez fare and conclusion that even free markets need some form of rules and law to maintain the balance makes Contagion a worthy read.

Credit, he says, is the magic of capitalism and free markets, and any major distortions in its supply, can create an upheaval on livelihoods.

Lastly, he expands on the absolute necessity of ethics in the government specifically and the people, generally, although he openly admits that politicians and ethics seem to be a bad mix.

His message to the individual reverberates: “If Americans can look to help others, society benefits, and surprisingly ends up helping everyone.”

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