CIBC World Markets recent weekly insight written by Senior Economist Benjamin Tal has some indications that although it is bad right now, we are closer to the end of the crisis then at the beginning…whew!Here are the reasons Mr. Tal gives for his theory: First, US house prices—the trigger of the current crises—are still falling, but the pace of the decline is
moderating. Earlier in the year house prices in the US were falling by more than 2% a month. Today they are
falling by 0.5% a month. And at this rate, US real estate prices will stop falling altogether by early next year.
That realization will provide the market with the necessary injection of confidence that the housing crisis is
indeed about to reach bottom.
Second, what distinguishes the current situation from previous crisis is the speed and determination at which
policy makers have been reacting to ease the credit crunch. The policy steps taken since early September were
designed to achieve three key goals: to shore up capital position of financial institutions; to provide liquidity to
money markets; and to support business and household confidence in the financial system. By far the most
significant step was that the US Treasury will use $250 billion of the $700 billion authorized in the Trouble
Asset Relief Program (TARP) legislation to take equity stakes in the nation’s banking sector. This should notably
improve banks’ ability to borrow from each other and extend credit to households and businesses.
To be sure, the next six months will be difficult. The economies in both the US and Canada are probably in
recession, and we probably will not see a sustainable recovery before mid-2009. However, current market
valuations and credit spreads price in even a more severe scenario. To the extent that policy steps to date will
work to stop the bleeding in the credit market, the recession might end up being milder than currently
discounted by the market. In such a case, look for some recovery in equity markets at one point in early to mid-
2009.
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