Project On Stock Markets

Introduction What Is Economic Recession When GDP growth is negative for two consecutive quarters or more. For all practical purposes though, a recession starts when there are several quarters of slowing but still positive growth. The first quarter of negative growth in a recession cycle is often followed by positive growth for several quarters, and then another quarter.of.negative.growth. This definition is somewhat unpopular with many economists as it does not take into consideration changes in other economic variables such as current unemployment rates.or.consumer.confidence.and.spending.levels. The official agency in charge of declaring that the economy is in a state of recession is the NATIONAL BUREAU OF ECONOMIC RESEARCH (NBER). NBER'S defines recession as a "significant decline in economic activity lasting more than a few months" For this reason, the official designation of recession may not come until.after.we.have.been.in.one.for.as.ubstantial.amount.of.time. It is actually quite natural for countries to experience mild economic recessions. This is a built-in factor of a society economic cycle as spending and consumption are going.to.increase.and.decrease.along.with.prices. Rarely, experiencing many of these factors simultaneously can evoke deep economic recession or depression

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Definition of Recession Recession is not to be confused with depression. Recession means a slow down or slump or temporary collapse of a business activity. In its early stage it can be controlled in a methodical manner. Experience helps to avert total collapse. Unchecked, it leads to severe depression. Depression is a dead end. It is time to close shop completely. It is a total state of irrevocable economic failure. When a country is doing well all round its Gross Domestic Product (GDP) is on the rise. Overall economy is bullish; it is not only the stock exchanges that tell riches to rags stories but even small businesses. It all adds to the national exchequer. An economist is likely to give a detailed, comprehensive definition of recession. But for the layman who has been affected knows it only one way-when he loses his job and has no money to pay his credit and loans. Recession is when the consumer faces foreclosure and the banker comes knocking for his pound (or dollar) of flesh. Many companies and whole countries go bankrupt for want of liquid funds and cash flow for.even.daily.requirements. If you look at it from the point of view of a businessman, recession is a transitory phase. The Business Cycle Dating Committee of the National Bureau of Economic Research has another definition. It profiles the businesses that have peaked with their activity in one season and it falls naturally in the next season. It regains its original position with new products or sales and continues to expand. This revival makes the recession a mild phase that large companies tolerate. As the fiscal position rises, there is no reason to worry. Recession can last up to a year. When it happens year.after.year.then.it.is.serious.

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Are we facing a recession or not? Yes, for the simple reason that not only our neighbors but our friends are unemployed. There is less of business talk and more billing worries. Transitory recessions are good for the economy, as it tends to stabilize the prices. It allows run away bullish companies to slow down and take stock. There is a saying, ‘when it’s tough the tough get going’. The weaker companies will not survive the brief recession also. Stronger companies will pull through its resources. So when is it time to worry? When you are facing a foreclosure, when the chips are down and out and creditors file cases for recovery.

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What Is Stock Markets A stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities. Current the Top 15 Stock Markets Exchanges in terms ok Domestic Market Capitalization are:

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The World's Top 15 Stock Exchanges by Domestic Market Capitalization (2007):

Domestic Market Rank

Exchange Name

Country

Capitalization (in $ bn)

1

New York Stock Exchange

United States

15,651

2

Tokyo Stock Exchange

Japan

4,331

3

Euro next

4

NASDAQ

Belgium, France, Holland, Portugal

4,223

United States

4,014

5

London Stock Exchange

United Kingdom

3,852

6

Shanghai Stock Exchange

China

3,694

7

Hong Kong Stock Exchange

China S.A.R.

2,654

8

Toronto Stock Exchange

Canada

2,187

9

Frankfurt Stock Exchange

Germany

2,105

10

Bombay Stock Exchange

India

1,819

11

BME Spanish Exchanges

Spain

1,800

India

1,660

12

National Stock Exchange of India

13

BM&FBovespa

Brazil

1,370

14

Australian Securities Exchange

Australia

1,298

15

SWX Swiss Exchange

Switzerland

1,271

Review of Literature History of Recession

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Since history seems to repeat itself, maybe we could learn something about the current possible recession by studying the world recession history. The market’s moves in approximately 15 year cycles. The market goes up for 15 years then seems to go sideways for the next 15 years. This growth & then consolidation pattern happens frequently through out history. Let's first consider the Dow Industrials index from 1930 through 1945. This period started with the great depression. We all know the effect the depression had on stock values. The Dow lost over 88% of its value between 1929 and 1933. It made a nice rebound following the depression. It increased 345% over the next 4 years. We will see there is a theme in the recession / expansion cycle. Recessions are relatively short and can be very violent to investors in the stock market. The expansion period following recessions are much longer and historically quite good. One thing you need to be extremely aware of. Numbers and percentages can be deceiving. We just mentioned that the index lost 88 percent, but then gained 345%. Sounds like you made up all your losses and then some. Not quite. The dirty little secret to investment losses is this: if anybody loses 50% of his portfolio, then it needs to make 100% just to break even. This is an ugly little fact, but let’s looks at it in real life. If someone had $100,000 and lost 50%, he would be left with only $50,000. How much do you have to earn on your $50,000 to get back to even? You need to earn another $50,000. This is 100% of what you currently have. You lost 50% and must gain 100% just to break even. Now that some of the back ground work is complete lets look at the next 15 years, from 1945 through 1960. In 1955 the Dow finally got back to where it was before

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the great depression. This was a very long 25 year wait. Imagine the poor retirees that retired before the depression and never again regained their original portfolio value! The last 15 years were mostly down then sideways (1930 through 1945). The next 15 year time period (1945 thru 1960) had very mild recessions with the worst only causing a 15% drop in the Dow. Overall, the Dow gained 267% over these 15 years. This is very good reward for a minimum amount of risk. This leads us to the next 15 years, 1960 to 1975. The 15 year cycle is definitely in effect. The last 15 years were very tame yet had a nice return. These 15 years were not for the feint of heart. Gain was very little over the period, but volatility was killer. The period started out with a wonderful 75% gain, but gave it all back by the end. The recessionary periods were very violent. The reward available in this market was much smaller than the risk. It would have been nearly impossible to be a buy and hold investor and have stayed with the market. Thus far, we had a 15 year period that was horrible (1930-1945), one that was very nice (1945-1960), then another horrible one (1960-1975). Without looking ahead, we might guess that the next 15 year time period would be another nice one. The market consolidated over the last 15 years and should be ready to move ahead again. This period began with a 6 years of continued consolidation (going sideways), but when it was done consolidating, it moved up very nicely. It moved from around 800 in 1982 to 2800 by 1990. This represents a 250% increase for the period. The volatility for the period was pretty tame, at least if you look at the volatility caused by recession. The largest pullback in value was the 1981 to 1982 recession which was about 18%. There was a large pullback in August of 1987 of about 30%, but

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wasn't caused by recession and didn't take that long to be regained; all in all a very fruitful 15 years. This would lead to believe that the next 15 years (1990 thru 2005) would be tumultuous again as the market needs to digest its gains. The roll the market had going continued for the first half of this period. It gained 300% in just 8 years. This was more in the first half than the others gained in their entire 15 year period. This didn't go un-noticed however, and the market promptly took back a healthy 35% through the next recessionary period. It took until mid way through 2006 to finally get back to even from the highs seen in 1999. Once this was achieved, however, the Dow just kept going. It extended its gains through the expansion period, hitting new highs once again. This brings us to today. There is much talk about the beginning of another recession. We're at the end of a period that should have shown consolidation, but instead had another large run up. This run up wasn't without sizeable volatility. We've just broken a long term support line. I've drawn support lines through the years following recessions and had you sold when the support line was broken, you would have been saved a lot of grief during the next recession. In summary, It would be said that the recession history points to our next recession causing havoc on the Dow and the global stock markets. When will the next recession be or are we already in it?

Objective & Scope of Study The primary objective would be:-

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To study Recession & it’s Impact on Global Stock Markets The other secondary objectives would be:• To study the impact of Recession on global stock markets

• To study the drawbacks of Recession in the Economies • To compare the global Stock Markets during 2008-09 Recession • To formulate the strategies for tackling the ongoing Recession

• To study the origin of recession in the global stock markets • To study the various initiatives taken by the governments • To study what should be done in order to reduce the impact

Methodology

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Marketing research is the process collecting and analyzing marketing information and ultimately arrived at certain conclusion Management in any organization need information about potential marketing plans and to change in the market place. Marketing research includes all the activities that enable an organization to obtain the information. This research is very important in strategy formation and feed back of any organizational plan. There are many type of research some are conceptual, empirical, descriptive, explorative etc. each research type is being used for various purposes. In this research I have used descriptive research; I try to describe what Recession is and how it affects Stock markets and other Economy related Issues. Research design is the plan, structure and strategy of investigation conceived so as to obtained to research problem and control variances. It is the specification of methods and procedures for acquiring the information needed. It is overall operational pattern or framework of the project that stipulated what information is to be collected and from which source and by what procedure. Types of Research Design: Different types of research design have emerged on account of the different perspectives from which a research study can be viewed. There are three fundamental categories that we used frequently are given below. 1. Exploratory Research: In the case of exploratory research, the focus is on the discovery of ideas. An exploratory study is generally based on the secondary data that are readily available. It does not have formal and rigid as the researcher may have to change his focus or direction, depending on new idea and relationships among variables. An exploratory research is in nature of a preliminary investigation.

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2. Descriptive Research: The objective of such a study is to answer the “who, what, when, where and how.” Of the subject under investigation, descriptive studies are well structured and tend to be rigid and its approach can not be changed every now and then. It is therefore, necessary that the researcher give sufficient thought to farming research question and deciding the types of data to be collected and procedure to be used for this purpose. 3. Causal Research: A causal research investigates is cause and effect relationship between two or more variables. The causal research design is based on reason along well-tested line. We use inductive logic for confirming hypothesis with the help of future evidence. Types of Data:• Primary data • Secondary data Primary Data:Primary data is that kind of data which is collected by the investigator himself for the purpose of the specific study. The data such collected is original in character. The advantage of third method of collection is the authenticity.

Secondary Data:When an investigator uses the data that has been already collected by others is called secondary data. The secondary data could be collected from Journals, Reports and 11

Various Publications. The advantages of secondary data can be economical, both in the term of money and time spent. The researcher of the reporter also did the same and collected secondary from various internet sites like Google.com.altavista.com and many more. The researchers of the reporter also visited various libraries for collection of the introduction part. Types of Research carried out: In my project work I used exploratory research, as it aim to answering question about Recession and its effects on Stock Markets and other Economic Issues. Data collection: To achieve the objectives, the secondary sources of data are used. Secondary sources of data includes the usage of Magazines and Journals and Newspapers related to Economic happenings and current

Limitations

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Secondary Data is an important component of research. It is related to collection and processing of data by people rather than the researcher. The common sources of Secondary data are Census, large surveys, organizational records etc. Secondary data is considered as the data you have gathered from Primary sources to create a new research in sociology. Whereas in historical research, it is considered as a summary of.a.book.or.set.of.records. The.Following.are.the.benefits.of.Secondary.Data.Used: -Time-saving -Does.not.involve.collection.data -Provides.a.larger.database.as.compared.to.primary.data.

Although all efforts were taken to make the accuracy of data as accurate as possible but it may had the following constraints: -Reliability.is.not.guaranteed. - It does not permit progression of formulating research question to designing methods.for.answering.that.question. - The Secondary researcher can not engage in making observations and developing concepts. - The source of the data is not guaranteed.

Analysis and Interpretation

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What is Bull and Bear in Stock Markets ? A market trend is the prevailing course or tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends (long term), primary trends (mid-term) and secondary trends (short-term). The concept of a market trend is used in technical analysis and contrasts the standard academic view of financial markets, the efficient market hypothesis. Technical analysis utilizes the concept that market trends or market cycles occur with a certain degree of regularity and predictability and consideration of market trends is common to many investors. The terms bull market and bear market describe upward and downward market trends respectively and can be used to describe either the market as a whole or specific sectors and securities (stocks). Also the terms bullish and bearish may be used synonymous with "optimistic" and "pessimistic" respectively, e.g., "bullish on gold" or "bearish on technology stocks" etc. Bull Market: A bullish market trend in the stock market often begins before the general economy shows clear signs of recovery. A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases capital gains. India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for almost five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding 14

animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements. International sculpture team Mark and Diane Weisbeck were chosen to re-design Wall Street's Bull Market. Their winning sculpture, the "Bull Market Rocket" was chosen as the modern, 21st century symbol of the up-trending Bull Market. Bear Market: A bear market is a general decline in the stock market over a period of time.[8] A bear market is a downward primary market trend. It is accompanied by widespread investor fear and pessimism. Investors anticipate further losses and are motivated to sell. Prices fluctuate constantly on the open market. To take the example of a bear stock market, it is not a simple decline, but a substantial drop in the prices of the majority of stocks over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." The most famous bear market in history followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of market capitalization by July 1932, marking the start of the Great Depression. After slowly regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s.

How Bearish the Global Stock Markets can be in Recession ?

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How sharply will the US stock market fall if recession call ends up being correct? Given the recent flow of macro news, the likelihood of a US hard landing has certainly increased; thus, it is important to assess the implication of such growth slowdown, hard landing or outright recession on the stock market. As predicted at the time of my recession call, the Federal Reserve decision to pause and then stop would lead to a suckers’ rally. This typical suckers' rally always occurs at the beginning of an economic slowdown that leads to recession. The first reaction of markets to such bad economic news is usually a stock market rally based on the belief that a Fed pause and then possibly easing will rescue the economy. This is always a suckers' rally as, over time, the perceived beneficial effects of a Fed ease meet the reality of the investors realizing that a recession is coming and that the effects of such a recession on profits and earnings are first order while the effects of the Fed easing on the economy and stock market are - in the short run of a recession - only second order. That is why you can expect another suckers' in early fall when the Fed will actually reduce the Fed Funds rate. But, as the continued flow of poor macro news increases the probability of a recession, the equity markets will - in due time – sharply fall when wave of news and macro developments hits hard a weakened and vulnerable economy; then you will see a serious bearish market in equities. Actually, the initial equity market response to the August 8th FOMC statement was tentative as the statement was interpreted by the markets as suggesting that maybe the Fed was not done yet and that further hikes in the fall could not be ruled out. I had then predicted – even before the August 8th statement - that the then almost sure Fed pause was actually a stop and that the next Fed move would be a cut – not a hike – in the fall or winter. Markets were behind the curve in realizing the downside risks to growth and were still debating whether the “temporary” Fed pause would be followed by a hike. It then took the mild PPI and CPI reports to radically shift the market consensus from the 16

view that the pause was temporary before another hike to the view that the pause was actually a full stop with some possibility – still in a minority view – of a Fed Funds cut in late 2006 or 2007. It was then – when the consensus moved from pause-to-hike to pause-to-stop – that the stock market has its true post-FOMC suckers’ rally as the market finally expressed relief to the news that a full stop was not more likely. You may indeed see another suckers’ rally when – following even more bad macro growth news – the consensus will move towards a higher probability of a Fed Funds cut – rather than just a protracted pause. It is well known – from basic macro theory – that the equity market reaction to poor growth news is ambiguous. Lower than expected growth lead to a higher stock market value via the “interest rate channel” and to a lower stock market value via the “profits/earnings channel”. The former effect derives from the fact that bad economic news increases the probability that the Fed will ease monetary policy and thus stimulate the economy, demand and profits. The latter channel derives from the fact that slower growth – or even worse an outright recession – will lead to lower demand, lower revenues and lower profits. Indeed, as stock prices are forwards looking and equal to the discounted value of dividends where the discount rate is related to an appropriate measure of interest rates, bad growth news affect the numerator and denominator of the ratio of dividends to the appropriate discount rate. Usually, the first effect dominates at the beginning of an economic slowdown – when the likelihood of a slowdown is high but the likelihood of a true hard landing or recession is still low and unclear: then the interest rate channel dominates the profits channel. But once the signal of a hard landing or recession become clearer and the likelihood of such hard landing much higher the profits channel dominates the interest rate channel. Stock prices plummeted worldwide, amid heightened fears of a US recession. While over the course of last week US financial markets suffered the worst fall since 2002, 17

with the Dow Jones Industrial Average dropping by 5 percent, many Asian and European indices dropped by a similar amount in just one day. It was the biggest oneday fall in world stock markets since September 11, 2001. Industrial stocks fell together with financial, suggesting that the US credit crisis, hitherto confined mainly to the banking and mortgage sectors, is spilling over into the real economy worldwide. India was the hardest-hit, as the Bombay Stock Exchange Sensitive Index fell by a record 7.4 percent, despite the Indian stock market having fared relatively well over the course of the past two weeks. Some analysts had begun to conclude that India would be resistant to problems in the US economy, but this view lost credibility as stocks plummeted on. Similarly, Brazil’s Bovespa index, another bellwether of the so-called emerging markets, tumbled by 6.6 percent, pushing it down by 20 percent since the beginning of the year. “The perception that the US will face a recession has spread,” Luiz Sedrani, head of equity at the Sao Paulo-based Banco Votorantim, the financial arm of Brazil’s largest diversified industrial group, told Bloomberg news. “Brazil will suffer because a slowdown in the US will reduce demand for commodities, which make up most of our exports.” Major stock indexes in Hong Kong and China also fell significantly. In Hong Kong, the benchmark Hang Seng Index plunged 5.5 percent, and the Chinese benchmark Shanghai Composite Index fell 5.14 percent, despite the fact that the Chinese stock exchange is relatively closed. The Bank of China, one of the country’s major finance houses, announced that it would take higher losses than expected from write-downs of US mortgage-backed securities.

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The Tokyo Nikkei 225 index lost almost 4 percent of its value on Monday, and some 13 percent since the start of the new year. Monday’s closing value represented a two-year low. Likewise, many southeast Asian markets have fared even worse than the US over the past few weeks. Since the start of the new year, the Dow Jones index fell by 8.9 percent. By comparison, benchmark indexes in Australia, Hong Kong, India, Japan, the Philippines, and South Korea have all fallen by over ten percent over the same period. Singapore’s benchmark index fell by six percent on Monday alone. Asian economies have their own problems outside of a prospective fall-off in exports caused by decreased US consumer spending. Some analysts have noted that Asian central banks, particularly those of China and Taiwan, are currently more concerned with inflation than with the dangers of negative growth. European indexes were also hard hit. The Frankfurt Xetra Dax fell by 7.2 percent, and the Paris CAC-40 by 6.8 percent. The London FTSE 100 took its biggest hit since its formation in 1983, losing some 5.5 percent of its value. The Spanish stock exchange fell by more than seven percent, in its worst day since 1991. There was a corresponding flight to safety as stock indexes tumbled and investors bought up government securities. Yields on German and UK federal bonds fell sharply. The rapid sell-off was partially driven by losses in the financial sector, as bank and bond insurance equities took significant losses amid fears that banks would write off more debt contaminated by US sub-prime mortgages. Shares in Germany’s Commerzbank fell by 6.7 percent, after its chief executive said the bank would announce more debt write-offs in the fourth quarter of 2007, and that more write-offs would likely follow.

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France’s Société Génerale was even more strongly affected by rumors of further writedowns; the bank’s stock fell by 8 percent and a further 7.3 percent. Switzerland’s UBS, which had already written off some $13.7 billion in debt, lost 4.7 percent of its value. The US stock market was closed on Monday, but is expected to react negatively when it reopens on Tuesday. Futures tied to US stock indexes fell sharply. European insurance agencies were among the biggest losers, amid investor concern that bond and other debt insurers could go into default owing to the sheer amount of debt that has been written off. Fitch Ratings downgraded its credit rating for Ambac, the second-largest bond insurer, on Friday, partially triggering Monday’s panic. European and Asian banks own significant quantities of securities based on US subprime debt, some of which has been already written off as worthless. Investors are concerned that banks will write off even more debt as the US housing market continues to deflate and more American homeowners are driven into foreclosure. The insurance companies covering sub-prime-based securities also took a beating, as investors became concerned that they would not have the funds to make good on their claims if more write-offs were announced by the banks. In the longer term, there is a significant risk that a recession in the United States will have a devastating impact on the export-led economies—in particular China—which are highly dependent on US consumer demand. Moreover, the prospects of recession are certain to lead the Federal Reserve Board to make further cuts in interest rates, leading to a depreciation of the US exchange rate and with it the value of Asian assets denominated in dollars. The huge fall in global equities markets indicate nothing if not the utter inadequacy of the fiscal stimulus package put forward by the Bush Administration last Friday. The

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package, valued at some $145 billion dollars, or one percent of gross domestic product, will come mostly in the form of one-time cash rebates for taxpayers along with new corporate tax cuts. To put the measure in perspective, US household debt is now more than 100 percent of GDP, up from approximately 80 percent in 2003. Given the current rate of debt accumulation among consumers, the stimulus package will put a tiny dent in overall debt accumulation by US households, and its effect on consumer spending and the foreclosure rate will be almost negligible. While the columnists make strong cases against the effectiveness of either the proposed fiscal stimulus or Federal Reserve Board rate cuts, they do not put forward any convincing alternatives. The overall sense is that the worldwide plunge of the stock markets is symptomatic of an insoluble crisis of the world capitalist system that has emerged with the bursting of the speculative sub-prime mortgage bubble in the US.

Effects of Recession

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An economic recession can usually be spotted before it happens. There is a tendency to see the economic landscape changing in quarters preceding the actual onset. While the growth in GDP will still be present, it will show signs of sputtering and you will see higher levels of unemployment, decline in housing prices, decline in the stock market, and business expansion plans being put on hold. When the economy sees extended periods of economic recession, the economy can be referred to as being.in.an.economic.depression. About the only good thing about a recession is that it will cure inflation. The balancing act the Federal Reserve must pursue is to slow economic growth enough to prevent inflation without triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits. The Major Effects of Recession are: •

Slump in the market – Goods and services are difficult to be sold as the

purchasing power of the people comes down. •

Stock prices come down – Investment suffers. The industrial production is

badly affected as investors avoid investing in companies that might suffer losses during recession. Bigger companies are able to withstand the setbacks but smaller companies have a tough time and some may end up closing down. •

Increase in unemployment – People are thrown out of jobs. They are left in

the lurch. They are unable to meet both ends. Many goods and services are not within their reach. •

Depression – Recession causes depression if it persists for a long time.

Negative trends are visible in the stock market and rapid unemployment is there. Companies need to be bailed out by the government. Public spending suffers a set back. 22

•

National debts on the rise – Increase in national debts means less money can

be spent by the government on development. Money gets diverted in bailing out companies. The recent recession in the U.S. indicates how banks have to depend upon federal aid for their survival. Taxpayer’s money is being spent in giving these banks a boost. •

Halted Imports and exports – As the developing economies exports depends

upon the functioning and purchases from the developed economies. In recession both the economies get affected badly as the developed economies don’t have much liquidity so as to purchase or depend on the Import as there is not enough money circulating in the markets to purchase the resources available thus it ultimately affects the exporting economies in terms of their export revenues.

US Recession can it affect India ? Indo-US bilateral trade has been upbeat, except for the nuclear deal that is facing a stormy period. According to the Indian Finance Minister, USA will not go through

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the impending recession. Even if it does, it is not likely to impact India. Having said that, in the last week of January 2008, the actually story seems to be different. But trade and commerce, is affected. Investors are aggrieved at the trading activity coming to a grinding halt frequently in the last three months. Indian exports to the US are less than earlier and dependence is less as it is also exporting to rich European nations, China and Japan. Asian markets have also felt the slump when Dow Jones hit the low notes. How much can India withstand the impact? In the first place, is the 2008 recession coming at all? If the rest of the world recession impacts other nations, how can India remain insulated? The crisis of US recession is looming on its policies in the Middle East and home turf. There is no immediate concern for Indians. The jobs are not being threatened as yet. BPOs are still working 24 X 7 and jobs are being generated in other sectors. Real estate has more or less stabilized in many cities and small towns. Infrastructure activity has not slowed down either. The software professionals are returning home and Indian students

prefer

to

study

in

Australia,

New

Zealand

and

Britain.

Since US is one of the major super powers, a recession–mild or deeper will have eventual global consequences? USA may cut their capital investments into the country if they have to control recession at their end. The year 2008 has not started on a good note for the US economy. Till the stocks don’t climb upwards chances are that investors will loose more money. Despite world recession and India’s optimistic outlook, the results will not show at least in the next two years. Is a recession coming to Indian shores? Highly unlikely. The rupee may have appreciated against the shrinking dollar. But Indians are enjoying the new found material wealth and flaunting it. The reigns have to be tighter at the US end till the economy becomes buoyant. 24

Impact of a possible US Recession on India •

Though no one likes or wants a recession, almost everyone appears (looking

at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the 25

United States and other economies as a buffering factor. But what is the reality for countries like India? •

It would be naïve to imagine that a recession in the United States would have

no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s. •

Even so, fears of a US recession led to panic in the Indian stock market.

January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Sang, Nikkei, and Kospi. •

History might hold a clue here. The last time the bubble burst (2001-2002),

the DJIA went down by 23%, while the Indian Index fell by 15%. •

Much has happened between then and now. The Indian economy has shown a

robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States. •

Many companies like ICICI and TATA AIG holding saw an large shredding

of their consumers shares as people panicked in fear of companies losing large sum of money in the nearby future as they were having partnerships with the off-shores Financial Institution,

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•

During the Recessional periods the Inflation rate was seen touching its life-

time high of 13.68% in Indian Economy. •

Recession created a situation of High Interest rated followed by Liquidity

crunching situations in the economy and this resulted in the less of credit for the capital formation of the various sectors and major sectors affected was the Automobiles, Metals and the Business Outsourcing sectors.

The effects of this Recession on India may be different from those of the past ?

•

A credit crisis in the United States might lead to a restructuring of asset

allocation at pension funds. It has been suggested that CalPERS is likely to shift an

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additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored. •

In terms of specific sectors, the IT Enabled Services sector may be hit since a

majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well. •

The manufacturing sector has to ramp up scale economies, and improve

productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea? •

The tourism sector could be affected. Now is the time to aggressively promote

health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism. •

The Indian Rupee has appreciated in relation to the US dollar. Exporters are

pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the 28

overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.

• Recession 1926 • Post World War I Recession • Panic of 1907 • 1870's Recession United States Recession History

• 1890's Recession

The United States has encountered 32 cycles of expansions and • Panic contractions, of 1857with an average of 17 months of contraction and 38 months of expansion. Below you will • Panic of 1837 find a detail history of economic recession in the United States • Depression of 1807 • Panic of 1819 29

• Panic of 1797

•

Late 2000's Recession

•

Early 2000's Recession

•

1990's Recession

•

1980's Recession

•

1970's Oil Crisis

•

Late 1960's Recession

•

Early 1960's Recession

•

Late 1950's Recession

•

Early 1950's Recession

•

Late 1940's Recession

•

Recession of 1945

•

Dollar per barrel 160 The Great Depression

Nymex Crude Oil Future prices in U.S dollars ($)

February 2001– January 6th 2009

30

T ho us a nd s 600 Net Changes in U.S Jobs

31

- 07

- 07

Sep

Oct

- 07

- 07

Jul

- 07

- 07

- 07

Aug

Jun

Apr

- 07

Feb

- 07

- 07

Jan

- 08

Feb

- 08

- 08

- 08

- 08

Sep

Oct

Nov

- 08

- 08

- 08

- 08

Aug

Jun

Jul

- 08

Jan

Apr

- 07

Dec

- 08

- 07

32

Nov

114

112

110

108 Industrial Production World-wide

106

1 0 4 January 2007-November 2008 (Worldwide) During Recession Tendencies:

102

100

Sub-prime Crisis •

Involves financial institutions providing credit to borrowers who do not meet

prime underwriting guidelines. Sub-prime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience.

33

•

In case of 2008 recession case the sub-prime mortgage resulted in huge losses

because the financial institutions where in the situation of excess creditor to defaulter’s already known as Ninja’s and are low on credit-worthiness. •

It started with the lending of the money to the various less credit worthy people

in order to face the intense competitions in the markets of lending. •

After the Housing bubble busted out it resulted in the low of these Mortgages

packaging and thus resulted into the filing of the Bankruptcies of the Biggest 5’s of New-York Wall-Street such as the BEAR-STERN,LEHMAN BROS. and other such as AIG and MORGAN STANLEY being acquired up by the various other competitors and helped by the Federal Reserve.

Comparison and Representation of World Major Stock Markets (2006-09) RUSSIA STOCK MARKET (MICEX)

34

Country Russia

Interest Rate 10.50%

Growth Rate -10.90%

Inflation Jobless Current Exchange Rate Rate Account Rate 11.60%

8.30% 9069

30.2350

Russia Stock Market (MICEX) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

Year Jan Feb Mar Apr May Jun 2009 554

623

647

787

957

917

Jul

Aug Sep

871

1034 1077

2008 1571 1569 1569 1631 1688 1754 1439 1293 854

Oct Nov Dec 514

517

562

2007 1570 1640 1539 1678 1516 1588 1683 1599 1636 1733 1777 1835 2006 1065 1164 1233 1308 1144 1082 1277 1370 1255 1335 1435 1550

JAPAN STOCK MARKET (NIKKEI 225)

35

Country Japan

Interest Rate 0.10%

Growth Rate -7.20%

Inflation Rate -2.20%

Jobless Rate 5.70%

Current Account 1266

Exchange Rate 91.2900

Japan Stock Market (NIKKEI 225) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

INDIA SFeb TOCK M ARKET Apr (BSE SENSEX 30) Jul Year Jan Mar May Jun 2009 7682 7269 7055 8352 8977 9550

9050

Aug

Sep

Oct

Nov

Dec

1020 1018 4 7

2008

1257 1301 1178 1265 1365 1348 1275 1266 1126 7163 7703 7864 3 7 8 6 5 1 5 6 0

2007

1683 1729 1664 1702 1727 1773 1724 1527 1576 1628 1483 1503 8 2 2 8 5 3 9 4 5 4 8 1

2006

1534 1543 1562 1690 1546 1421 1443 1515 1555 1608 1572 1626 1 8 7 6 7 9 7 4 7 3 6 6 36

Country India

Interest Rate 3.25%

Growth Rate 6.10%

Inflation Rate 11.89%

Jobless Rate 7.32%

Current Account 5

Exchange Rate 48.1425

India Stock Market (BSE SENSEX 30) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

37

Year Jan

Feb

Mar

Apr

2009 8674 8822 8160 9902

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1168 1426 1340 1478 1539 3 6 0 5 8

2008

1673 1660 1480 1534 1627 1346 1257 1404 1259 8510 8451 8739 0 8 9 3 6 2 6 8 6

2007

1336 1293 1241 1245 1376 1400 1466 1398 1542 1732 1852 1908 2 8 5 5 5 3 4 9 2 9 6 0

2006 9238 9743

1050 1123 1039 1000 1075 1155 1220 1303 1299 8929 9 7 9 7 2 1 4 3 5

UNITED STATES OF AMERICA STOCK MARKET (DOW JONES) Country USA

Interest Rate 0.25%

Growth Rate -3.90%

Inflation Rate -1.50%

Jobless Rate 9.70%

Current Account -99

Exchange Rate 76.4250

United States Stock Market (DOW JONES INDUS. AVG) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

38

Year Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 7949 7063 6547 7762 8212 8300 8147 9135 9281 2008

1197 1218 1174 1230 1248 1134 1096 1128 1036 8176 7552 8149 1 2 0 2 0 7 3 4 5

2007

1239 1221 1205 1238 1313 1326 1321 1284 1311 1352 1274 1316 8 6 0 2 6 7 2 6 3 2 3 7

2006

1066 1075 1095 1107 1109 1070 1073 1107 1133 1167 1198 1219 7 0 9 4 4 6 9 6 1 0 6 4 UNITED KINGDOM STOCK MARKET (FTSE 100) Country UK

Interest Rate 0.50%

Growth Rate -5.50%

Inflation Rate 1.60%

Jobless Rate 7.90%

Current Account -9

Exchange Rate 1.6271

United Kingdom Stock Market (FTSE 100) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

39

Year Jan Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

2009 4052 3816 3512 3926 4243 4230 4127 4645 4797 2008 5578 5708 5414 5832 6054 5518 5151 5320 4819 3853 3781 4049 2007 6161 6172 6001 6316 6420 6505 6206 5859 6134 6459 6071 6278 2006 5634 5725 5813 6001 5533 5507 5682 5818 5798 5937 6026 6022 FRANCE STOCK MARKET (CAC 40) Country

Interest Rate

FRANCE 1.00%

Growth Rate 0.30%

Inflation Rate -0.20%

Jobless Rate 9.80%

Current Account -1

Exchange Rate 1.4712

France Stock Market (CAC 40) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities. 40

Year Jan Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

2009 2849 2697 2519 2840 3153 3117 2983 3420 3554 2008 4637 4683 4431 4766 4907 4397 4061 4281 3953 3067 2881 2988 2007 5502 5516 5296 5646 5990 5883 5644 5265 5386 5661 5381 5497 2006 4748 4895 4970 5085 4814 4615 4735 4948 5058 5220 5306 5254 CHINA STOCK MARKET (SHANGHAI SE COMPOSITE IX) Country

Interest Rate

CHINA 5.31%

Growth Rate 7.90%

Inflation Rate -1.20%

Jobless Rate 4.30%

Current Account 129986

Exchange Rate 6.8278

China Stock Market (SHANGHAI SE COMPOSITE IX) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

41

Year Jan Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

2009 1863 2012 2071 2347 2560 2721 3008 2668 2684 2008 4383 4193 3411 3095 3365 2736 2652 2320 1896 1720 1707 1821 2007 2641 2613 2785 3253 3899 3670 3616 4301 5114 5562 4803 4836 2006 1181 1267 1245 1319 1497 1531 1613 1547 1637 1759 1851 2094 HONG KONG STOCK MARKET (HANG SENG) Country HONG KONG

Interest Rate 0.50%

Growth Rate -3.80%

Inflation Rate -1.50%

Jobless Rate 5.40%

Current Account 41

Exchange Rate 7.7506

Hong Kong Stock Market (HANG SENG) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock

42

Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

Yea r

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009

1257 1269 1134 1352 1638 1753 1725 1972 1952 9 9 5 0 1 8 5 4 2

2008

2175 2261 2108 2313 2412 2204 2117 2039 1763 1101 1229 1340 8 6 5 7 7 2 5 2 2 6 9 6

2007

1938 1965 1866 1981 2029 2050 2215 2038 2388 2697 2600 2659 5 2 5 0 4 9 1 7 6 4 5 7

2006

1494 1531 1544 1606 1569 1523 1604 1688 1694 1760 1845 1869 5 2 5 4 7 4 4 3 9 7 4 1 SOUTH KOREA STOCK MARKET (KOSPI) Country SOUTH KOREA

Interest Rate 2.00%

Growth Rate -2.20%

Inflation Rate 2.16%

43

Jobless Rate 3.80%

Current Account 4400

Exchange Rate 1207.8000

South Korea Stock Market (KOSPI) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

Year Jan Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

2009 1093 1055 1019 1233 1362 1361 1378 1546 1608 2008 1589 1632 1574 1702 1801 1675 1507 1474 1388 939

949

1007

2007 1356 1383 1376 1460 1553 1716 1771 1638 1814 1904 1773 1840 2006 1297 1304 1310 1380 1296 1204 1233 1287 1328 1319 1374 1377 BRAZIL STOCK MARKET (BRAZIL BOVESPA STOCK IDX) Country Brazil

Interest Rate 8.75%

Growth Rate -1.16%

Inflation Rate 4.36%

Jobless Rate 8.00%

44

Current Account -1665

Exchange Rate 1.8082

Brazil Stock Market (BRAZIL BOVESPA STOCK IDX) historical data, forecast and news. The combined size of stock markets around the world was estimated at about $36.6 trillion USD at the beginning of October 2008. The New York Stock Exchange (NYSE) is the largest stock exchange in the world by dollar volume and has 2,764 listed securities.

Year Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009

3727 3818 3623 4197 4867 4949 4887 5521 5538 2 0 5 6 9 5 3 8 6

2008

5370 5896 5882 6215 6901 6394 5686 5332 4590 2943 3125 3474 9 5 7 3 8 7 9 7 9 5 1 1

2007

4200 4314 4117 4559 4947 5179 5292 4801 5265 6009 5906 5982 7 5 9 7 2 7 2 6 3 9 9 8

2006

3350 3611 3631 3790 3579 3284 3486 3551 3479 3643 3993 4132 7 4 2 1 2 8 6 2 9 8 0 7

Top Performing Stock Markets in the World: 2009

45

The global equity markets were in Bull Run until end of December 2007. The year 2008 was see as a black year for the stock markets around the world as it gave a negative returns of almost 40% (on the negative side).At its peak in October 2007, global equity, or the market capitalization of all companies in world stock markets, stood at $62.5 trillion, close to that year’s world GDP figure of $65 trillion. Then all thanks to US Sub prime crisis all market caps went down. A jaw-dropping $37 trillion of wealth in the form of market cap was wiped out in 18 months up to the multi-year lows that were reached on March 9, 2009. That was 59 per cent of public company values, or $25.5 trillion. Since then, however, equity values have risen 37 per cent – a wealth-growth of $9.5 trillion – to just over $37 trillion. Almost all markets fell in 2008. According to a report by Economy Watch, 62 markets out of the 83 studied are now up. Here is the list of some of the best performing stock markets in the world: Rank 1 2 3 4 5 6 7 8 9 10

Country Peru Russia India China Taiwan Ukraine Argentina Indonesia Israel Brazil

2009 Growth 72.92% 53.33% 48.25% 47.01% 44.96% 44.30% 43.24% 39.15% 39.04% 37.32%

Decline -31.94% -61.22% -18.26% -26.30% -28.51% -55.38% -31.47% -25.05% -24.96 -30.18%

* Here Decline indicates Decline from 52-week high. All the BRIC Nations have found a place in the list of top performing global stock markets. US officially enters Recession 46

•

The US recession, which observers worldwide have predicted for

months, has officially begun. •

The National Bureau of Economic Research, an official panel of

senior economists, has declared that the US entered recession in March this year. •

Since then, the decline in the US economy has been further

undermined by the 11 September terrorist attacks on Washington and New York. •

The US economy has suffered 10 recessions since the end of

World War II, the last of which was in March 1991. •

The past 10 years of economic growth have been the longest

period of expansion in US history, the NBER said. •

And the government is due to revise its estimate of Gross

Domestic Product (GDP) between July and September on Friday, with some expecting a downward revision to -1% from -0.4%. •

US shares fell into the red from their early gains after the NBER

announcement. •

But the falls were cushioned by rising expectations of a stimulus

package and the positive news from the retail sector. •

And the Dow Jones Industrial Average of leading US shares pulled

itself back into positive territory to close 23 points higher at 9,983.

47

Major Bankruptcies filed • Dec 26, 2007 - Maxjet Airways files • March 31, 2008 - Aloha Airlines files and discontinues passenger transporting operations • April 03, 2008 - ATA Airlines files and discontinues operations • April 05, 2008 - Sky bus Airlines files and discontinues operations • April 10, 2008 - Frontier Airlines files • April 26, 2008 - Eos Airlines files and discontinues operations • September 20, 2008-Lehman Brother’s Filed for Bankruptcy for Chapter (11)

48

What on the other side’s? o

2009 - Recession Bottoms with Housing and Unemployment • Housing bottoms late this year • Bank loan losses abate late this year • Unemployment peaks in the second half of this year • Lower Energy Prices alleviate pressure on consumer spending – but virtually no economic growth or recovery o New Obama Administration • Increased economic “bailout” and middle class spending programs. Increased federal budget deficits. 2009 – Business • Cost of goods declines from current levels as interest rates, labor costs and commodity prices decline but business is facing zero consumer and business demand. • Corporate profits in decline for most of this year despite easy year/year comparisons. • Weak consumer spending but pent-up demand building

o

2010 – Economy Makes Gradual Cyclical Recovery • Increased employment = increased consumer spending • Increased Corporate Sales = increased corporate profits = increased capital spending • Increased interest rates and rising prices from higher demand and continuing federal budget deficits 49

Recovery in US Stick Markets (DOW JONES) The U.S. recession will end someday, maybe even within six months, but the recovery probably is not going to look all that great. That is the view emerging from leading economists, who see the United States limping out of 18 months of deep recession by this summer burdened with high unemployment, a huge federal budget deficit and no obvious engine to generate strong growth. "A return to growth in the second half of the year is not equal to a return to health," said Bruce Kasman, chief economist at JPMorgan in New York. It means - Instead, what it may mean is that the economy trudges along at lackluster levels for a while, not deteriorating but at the same time not getting healthy enough to generate a normal growth rate or create jobs. The 4th Quarters result concluded: 1. ON average thought the Untied States would see annualized GDP growth of 1.2 percent in the first three months of this year, but the survey published said they see a 4.6 percent decline. 2. Forecasts for the April-through-June period have seen a similar shift, from a 1.9 percent growth forecast to now a 1.5 percent decline, based on the 52 economists who participated in the paper's February survey. 3. The average forecast is for growth in the third quarter at 0.7 percent, less than half the rate expected last fall. 4. The fourth-quarter picture has also darkened, but just slightly, to growth of 1.9 percent from 2.1 percent seen in November.

50

For Financial FirmsA slow, jobless recovery would mean credit losses piling up well after the recession officially ended. For consumersIt would mean household wealth might continue to decline. For U.S. trading partnersIt might be some time before once-voracious American consumers provided much lift. But even sluggish economic growth would be a welcome change. Purely from the financial point of view, see who vital players are affected in the current crisis: The financiers: Banks who lend money in a big way have got huge holes in their lockers and there are also bankers like Lehman Brothers who have been sucked in to a black hole already! Economists have already warned that the damage this time has been so heavy that Governmental intervention could at the best help only a little. Without adequate funds in circulation, where is the road to recovery? Speculators: Huge players in stock markets who were gleefully riding on the back of the bulls have been thrown to the ground and trampled upon by the bears! Without money to catch the bulls that have fled out of the arena, where is the road to recovery? The Shock-absorbers: The insurance firms. By backing their might hugely behind securities of dubious merit, the insurance firms have failed miserably to insure their own future! Now that

51

risk-takers in business are left with no back-up support in the form of insurance, where is the road to recovery? Thus all the main pillars of the money market are now lying, battered and bruised, in varying degrees of comatose; no body can accurately predict when and how early they will recover. Consumer Fears: Fear is probably the widest reaching aspect in protracting the current economic downturn. If consumers are afraid to spend or in many cases nowadays unable to spend, all facets of economic growth are stunted. In short, if people aren't spending, the economy slows, if the economy slows, jobs are lost, if jobs are lost people can't spend, and the cycle continues. Slowing Sector Growth: While this mess initially started in the financial sector, the growing restrictions on the credit market has begun to impede almost all other sectors, including, what only months ago seemed to be an impenetrable energy sector. Segments across the board have been hit, from utilities to technology, services to industrial goods. About the only area that has held its own are consumer goods, due in large part to the fact that society still needs to eat. This broad slowdown is now taking its toll on the job market, as illustrated by a rise in jobless claims. Job Losses: Unemployment, currently at 6.5%, a fourteen-year high, and almost a full two percent higher than a year ago, will play the most unfortunate factor in a prolonged recovery. Consumers will be wary to go out and spend without assurance of a steady paycheck and job security. Continued job loss will stymie consumer spending and

52

hamper consumer confidence, which would normally act as the catalyst in jump starting the economy. Global Economies: Foreign markets, which in past recessions or times of economic sluggishness have provided shelter for investors, now have problems of their own. Crippled markets in Europe and Asia have left many US investors shaking their heads and searching helplessly for new markets in which to invest. A global downturn also adds momentum to the rolling snowball effect on markets at home, as foreign nations stop investing in the US to focus on their own economic and financial difficulties. America will pull through this current downturn and learn some valuable lessons in the process. While global stock markets thrash wildly, convulsing in huge four, five, and even six-hundred point intraday swings, many people will pause to reflect on what brought the nation here in the first place. It is unfortunate that so many must suffer to learn ideals as simple as saving for a rainy day, not overextending oneself financially, and other basic monetary fundamentals, but in the long run this will make our nation stronger as a whole, more stable, and more economically independent.

53

Various Reports and Data Data likely to show that Japanese exports fell a record 30.1 percent in December from the previous year, in part because of poor U.S. demand for autos and electronics Reports on the euro zone manufacturing and services sectors are expected to indicate no reprieve from recession-level readings House prices may have further to fall - perhaps another 20 to 25 percent in major cities, according to Goldman Sachs research There are already some tentative signs that the U.S. manufacturing sector is stabilizing. Two regional manufacturing reports issued last week showed a slight improvement. And in the U.S. housing market, figures coming this week are expected to confirm that home prices continued to slide in November and that home builders had cut back on new construction in December

54

Will the Recession in Stock Markets and other sectors will end in 2009? No, as far as the US, the UK, Spain and Ireland are concerned; possibly yes for other European economies and Japan in-terms of Stock Markets and Capital markets. Whatever happens, 2009 will not be pleasant. For all the cuts in interest rates and taxes, higher unemployment will be the dominant issue of the first half of the year, outweighing gains to real incomes from these policies and lower commodity prices. Uncertainty will be the watchword for the year, making any prediction precarious, but there is still a good chance that rising incomes will become powerful forces in the continental European and Japanese economies later in the year. For those economies that need much bigger rises in household savings rates to adjust for the recession, recoveries will be delayed. There is also a good chance the world will enter a debt-deflation trap, although I hope the authorities will do everything to avoid this. But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget.

55

Recession ? Recovery ? And the year ahead U.S. Economy -- Year-old recession will continue for another six months, making it one of the longest and most severe in post-war history. -- Key underpinnings of the recovery in the second half of 2009 will be federal economic stimulus and resolution of the financial crisis. -- Major risks to the economy include uncertainty about the extent of bad investments in mortgage and other securities. Labor Markets -- Payroll losses will average 218,200 jobs per month in the first six months of the year, slowing to 41,700 jobs per month in the second half of 2009. -- Unemployment rate will rise to 8.2 percent in the second half of the year. -- Turnaround in the labor market will be later than that of the overall economy, as employers wait for evidence of growth. Monetary Policy -- Fed will maintain historic low target for key interest rate before raising it toward the end of 2009. -- Inflation will be relatively low over the year, and core inflation will slow. -- Central bank is widely expected to pursue financial lending and monetary stimulus initiatives.

56

World Economy -- Financial crisis is considered the most serious since the 1930s, while the global economic downturn compares to that of 1982. -- Averting a worse downturn will depend critically on stimulative policies, with more fiscal stimulus needed in industrial and developing countries. -- Emerging markets will continue to grow but at a much slower pace, contradicting the idea that they are independent from the industrial countries. The start of the year is always a time to look at the year that was and the one that will be. December 2007 has been marked as the official start of the current U.S. recession. The official dating only occurred a few weeks ago by the official body NBER (National Bureau of Economic Research). The dating of the start of a recession is always well after it has begun and the dating of the end of the recession will always be well after it has ended. I bring this up first as there is good news here. Now that we are 12 months into this current recession, we can find comfort in knowing that we are 12 months closer to the end of it. When it ends we will find out many months after. By the time the recessions end, the stock markets often have already created strong returns. Prior to December 2007 we started to hear rumblings of sub-prime mortgage issues in the housing market. I think we can all agree that the sub-prime issues were the springboard to the malaise in the current economy. During the height of sub-prime

57

madness "NINJA" mortgages were created. NINJA stands for "No Income, No Job, No Assets”‘. From these alone we can see why the housing, credit, and sub-prime issues came to be - how foolish are those who allowed this to happen! Since World War II, the economy has seen 13 "pull backs." Each and every time, the contraction was temporary. And from recessions, bull markets have always been born. Such is the nature of the markets.

58

Jobs Recovery could be slow and weak In the midst of a recession, huge job losses are expected to continue for at least several more months. But what really worries economists is that the job market could be slow to recover even when the economy begins to improve. In the recession that began in December 2007, the economy has shed more than 1.1 million jobs. Economists expect the Labor Department's monthly employment report to show another 325,000 job losses for November when it is released Friday. November's job losses would represent the largest monthly drop in non-farm employment in seven years, if the report meets estimates. A larger decline could represent the biggest monthly drop in more than 26 years. The unemployment rate is expected to reach 6.8%, which would be the highest since February 1993. All indications suggest there's little stopping jobs from continuing to plummet. ADP's monthly employment report showed private sector payrolls fell in November by 250,000 jobs from the previous month. And according to a report by outsourcing agency Challenger, Gray & Christmas, planned job cut announcements by U.S. employers soared to 181,671 last month, the second-highest total on record. A slew of large-scale job-cut announcements came Thursday, with AT&T (T, Fortune 500), DuPont (DD, Fortune 500), Viacom (VIA) and Credit Suisse announcing they would cut a total of nearly 21,000 jobs. All cited the weak economic conditions for the cuts. November's report will be the first glimpse at how the job market reacted after the peak of the credit crisis, reached in mid-October. 59

"This report will show the full impact of the credit situation, and it will be very disappointing," said John Silvia, chief economist at Wachovia. "We continue to have problems in the construction and durable goods sectors, because there's no credit to finance those big-ticket purchases." The anticipated weak government report will also bring the current recession closer to the level of 1.6 million jobs lost in the 2001 recession. The job gains leading up to the current recession were much more modest, leaving less excess for employers to cut. As a result, job losses earlier in the year were steady but lower than levels typically seen in past recessions. Only in the last several months has the economy shed in excess of 100,000 jobs per month.

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Economies cannot afford slow recovery

Hefty job losses, though worrisome, are expected in a recession. But the job market typically recovers fairly quickly, helping to grow the economy. However, that didn't happen coming out of the last recession, and economists fear a speedy recovery is unlikely this time around as well. "The key thing is we have a sharp recovery, with job gains that put the kibosh on foreclosures," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "What we can't afford is to have a jobless recovery like we had the last two times. My fear is not a depression; my fear is we end up with a weak recovery we really can't afford." According to the Economic Policy Institute, the economy took four years to return to the previous peak jobs level after the 2001 recession - an unprecedented amount of time. The recovery took more than twice as long as the 21-month average of all other recoveries after 1945. Jobs weren't helped by weak economic growth toward the end of the recovery cycle. But history will likely repeat itself coming out of this recession as well, as the economy is expected to face a number of headwinds going forward. Lyle Gramley, a former Federal Reserve governor and current Stanford Group economist, said the job market will take a long time to bounce back. He said the credit crunch will thaw very gradually and the past two years' deep housing market declines will yield a drawn-out recovery. An employment recovery may be most affected by lower consumer spending, which accounts for more than two-thirds of the nation's gross domestic product. "Consumers are going through a major change in their spending and savings habits," said Gramley. "Throughout the housing bubble, consumers had a savings rate of zero,

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relying on the rising price of their homes. Now they're saving money for the future instead of spending it." Furthermore, a speedy rebound in employer confidence seems unlikely after the government spent trillions of dollars in an attempt to rescue the economy from one of history's deepest credit crises. Employers will likely be hesitant to hire even if the economy begins to rebound. "If Obama gets his stimulus plan through, we may come out of this a bit quicker in the housing, construction, energy and infrastructure industries," said Silvia. "But those other sectors are going to face a very slow recovery."

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IMF sees US Recovery The International Monetary Fund forecast on Wednesday Japan's economy would slip into recession this year, Europe's would grow by well below two per cent, and the United States' should recover in first half 2002. IMF managing director Horst Koehler told reporters in Helsinki the IMF would revise growth estimates for an already shaky world economy as more data comes out showing how it was hit further by the September 11 attacks on the United States. "At the moment it's premature to go out with new numbers," he added. The IMF's last forecast for the world economy was made last month, when it said it expected global economic growth of 2.6 per cent in 2001 and 3.5 per cent in 2002.On the outlook for the United States, Koehler said the IMF expected a recovery "at the latest in the second quarter of next year," and welcomed moves there to revitalize the economy. "We are quite confident that the action taken by the US, a combination of interest rate cuts and tax cuts and the (economic) stimulus package the United State Congress is discussing will have a positive effect," he said. The US economy grew at a slightly stronger pace in the second quarter than previously thought, at 0.3 per cent, but plunging consumer confidence fanned fears that a recession might follow the air attacks. Koehler warned against quick fixes to get the global economy back on its feet. "It would be a mistake to take actions which may help out in the next three or six months but at the end build up new problems for the medium and long term," he said.

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Government Stimulus Package So with all that gloomy news, what makes economists think the United States can return to growth in six months? Much of the optimism is connected with government measures to pour huge amounts of money into the economy. Barack Obama takes office as president Tuesday and has already won Senate approval for a two-year, $825 billion economic stimulus package. A vote in the House of Representatives is expected later this month. "We're still deep inside the belly of the recession beast, even as Washington is furiously trying to crawl its way out," said Bernard Baumohl, chief global economist with the Economic Outlook Group in Princeton, New Jersey. "Though the evidence is still scant, we believe the Obama economic program, combined with ongoing restructuring in the financial sector, will set the stage for the economy to return to positive growth by next fall," he said. The stimulus package, loaded with about $275 billion in temporary tax benefits, should help revive consumer spending, which accounts for two-thirds of U.S. economic activity. A boost to the economy from the government stimulus package has been a key feature of most forecasts for a rosy finish to 2009, Housing, spending and manufacturing do not need to rebound fully for gross domestic product to turn positive. They just need to stop falling so sharply. Still, simply placing a plus sign in front of the GDP figure will not cure all the economic ills. Peter Hooper, chief economist at Deutsche Bank in New York, said household wealth looked likely to fall further, thanks to dropping home and stock values A Goldman Sachs economist, Jan Hatzius, recently raised his credit loss estimate to a little more than $2 trillion from his March 2008 forecast of about $1.2 trillion Financial firms had recognized less than half of the losses, which means more big write-downs are still to come and banks will need to raise new capital. 64

How Do I Get It Through? •

Manage business on cash flow basis

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Increase efficiency of asset turnover; increase liquidity

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Intensify customer service initiatives

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Become innovative in controlling costs;

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Outsource where appropriate

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Join Co-ops to spread costs over larger group

Look for new ways to leverage existing employees and infrastructure by investigating new sources of revenue from new products and markets.BE.A SOLUTIONS PROVIDER.

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Secure access to bank credit; firm up bank lines

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Focus should be given on the Small Medium Enterprises (SME’s) so as to make the Industrial structure of the Economies be more stable towards Recessions in future.

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The focus should now be on the appropriate new financial structures such of that of the countries e.g. : Indian Economy Stock Markets which are showing growth opportunities even in the period of Recession and learn something from their structure.

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Conclusions o

Severe reductions in State and Local Government spending

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Weak exports as overseas economies fall into recession o

Continued credit pressures in residential housing and consumer lending spreading to commercial real estate markets and corporate lending

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We are in a deep and protracted recession that began in the fourth quarter of 2007. It began in housing and has spread through the entire U.S. and overseas economies. Economic weakness has intensified through 2008 and will worsen through the first half of 2009.

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Increased near term economic and market pressures include:

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stubbornly high inflation in food and basic services

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lower corporate profits

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increased unemployment

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continued weak levels of corporate capital and consumer spending

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However, a bottoming of the housing cycle and abatements in bank credit losses in the second half of this year could set the stage for cyclical capital markets and economic improvements in 2009 and 2010.

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After an expected cyclical recovery in 2010-2012, we believe the longer term socio-economic issues facing this country will result in slower future economic growth for the United States.

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•

The availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future.

The authority of the Federal Reserve Board to oversee financial market stability should be expanded to cover all sources of systemic risk in the financial services industry, should be structured to coordinate effectively with other supervisory agencies, and should be designed to allow for consistent, appropriate forms of intervention in response to systemic risks. Even after the authority of the Federal Reserve Board has been expanded, the consolidation of other federal financial regulatory functions should proceed; the experience of other leading jurisdictions indicates that consolidated supervision offer numerous benefits in terms of the quality and completeness of financial regulation and that the principal objections to consolidated supervision can be met through statutory safeguards and institutional design. Experience in other leading jurisdictions also demonstrates that many of the benefits of consolidated oversight can be achieved without the immediate merger of front-line supervisory units and the world’s premiere consolidated agency, the British FSA, was established first as an oversight body and only later assumed full supervisory functions This four-phase approach to regulatory consolidation improves the likelihood of successful transition by delaying controversial decisions, avoiding unnecessary steps, and providing an organizational structure that can lead reform while safeguarding continuity of supervision. The creation of a United States Financial Services Authority is also consistent with expansion of the Federal Reserve Board’s role in overseeing market stability and would actually improve the capacity of the Board to perform that function effectively.

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