That is serious money to you and me and some people think the total is $500bn and will increase as the bonfire spreads to credit insurance. It is certainly a shock to the Western financial system, inviting numerous questions, including: Where will markets be in 12 months time?
A considerable portion of the immediate problem is the temporary paralysis of the Western banking system. This is slowly being resolved but recapitalisation takes time. Meanwhile, the losses are real and alarming, representing a shock to other sectors of the US and European economies, otherwise unaffected by the actual sub-prime related fiasco.
Psychological problems for corporations, consumers and investors are considerable because a year ago very few people had even an inkling of what was about to happen. The outlook seems grim, or has certainly been made to look so by an excited and emotional press. Therefore, for perspective, we should refer to the DB table:
The $400bn of losses forecast is insignificant compared to items in the table, not least DB's calculation of $149.1trn for total world financial markets. However, the ongoing and more serious problem that has yet to be checked concerns confidence. The setback in stock market valuations since the sub-prime related problems broke is vastly greater than $400bn.
Needless to say, governments and their central banks have a big vested interest in stopping the rot. This requires leadership, which has not exactly instilled confidence to date. However governments are crisis oriented and I assume that leadership in monetary, fiscal and psychological terms will improve over the next few months. This does not require a miracle - just common sense.
A year from now, and perhaps well before, I believe calm will have returned to stock markets which will be trading above today's levels, with my secular themes among the leaders. Western banks, at worst, should show clear technical evidence of base formation development. Meanwhile, most stock markets look as if they will move somewhat lower before they trend higher once again.
