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

1

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.

2

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.

3

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:

4

The World's Top 15 Stock Exchanges by Domestic Market Capitalization

(2007):

Rank Exchange Name Country

Domestic Market

Capitalization

(in $ bn)

1 New York Stock Exchange United States 15,651

2 Tokyo Stock Exchange Japan 4,331

3 Euro next Belgium, France,

Holland, Portugal4,223

4 NASDAQ 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

12 National Stock Exchange of

IndiaIndia 1,660

13 BM&FBovespa Brazil 1,370

14 Australian Securities Exchange Australia 1,298

5

15 SWX Swiss Exchange Switzerland 1,271

Review of Literature

History of Recession

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

6

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

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

7

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

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?

8

Objective & Scope of Study

The primary objective would be:-

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

9

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.

10

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:-

11

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

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

12

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

13

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

14

a herd. This is especially relevant to participants in bull markets since bulls are herding

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.

15

How Bearish the Global Stock Markets can be in Recession ?

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

16

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

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.

17

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,

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 one-

day 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

18

houses, announced that it would take higher losses than expected from write-downs of

US mortgage-backed securities.

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

19

announce more debt write-offs in the fourth quarter of 2007, and that more write-offs

would likely follow.

France’s Société Génerale was even more strongly affected by rumors of further write-

downs; 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 sub-

prime 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.

20

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

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.

21

Effects of Recession

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.

22

Companies need to be bailed out by the government. Public spending suffers a set

back.

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 ?

23

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

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

24

flaunting it. The reigns have to be tighter at the US end till the economy becomes

buoyant.

Impact of a possible US Recession on India

25

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

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

26

of money in the nearby future as they were having partnerships with the off-shores

Financial Institution,

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 ?

27

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

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.

28

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

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.

United States Recession History

29

The United States has encountered 32 cycles of expansions and contractions, with an

average of 17 months of contraction and 38 months of expansion. Below you will

find a detail history of economic recession in the United States

• 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

• The Great Depression

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

30

• Recession 1926

• Post World War I

Recession

• Panic of 1907

• 1870's Recession

• 1890's Recession

• Panic of 1857

• Panic of 1837

• Depression of 1807

• Panic of 1819

• Panic of 1797

February 2001– January 6th 2009

Net Changes in U.S Jobs

31

J an. 6th

48.56

0

20

40

60

80

100

120

140

160

Feb-01

Jul-0

1Dec

-01

May

-02

Oct-02

Mar-03

Aug-03

Jan-04

Jun-04

Nov

-04

Apr-0

5Se

p-05

Feb-06

Jul-0

6Dec

-06

May

-07

Oct-07

Mar-08

Aug-08

Dec

-08

D ollar per barrel

Industrial Production World-wide

32

Thousands

-800

-600

-400

-200

0

200

400

600

Jun-0

5

Sep-0

5

Dec-0

5

Mar-0

6

Jun-0

6

Sep-0

6

Dec-0

6

Mar-0

7

Jun-0

7

Sep-0

7

Dec-0

7

Mar-0

8

Jun-0

8

Sep-0

8

Dec-0

8

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

Sub-prime Crisis

33

100

102

104

106

108

110

112

114

Jan-07

Feb-07

Mar

-07Ap

r-07

May

-07Jun

-07Jul

-07Au

g-07

Sep-07

Oct

-07No

v-07

Dec

-07Jan

-08Feb

-08Ma

r-08

Apr

-08Ma

y-08

Jun-08

Jul-08

Aug

-08Sep

-08Oc

t-08

Nov

-08

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.

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)

34

RUSSIA STOCK MARKET (MICEX)

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 Jul Aug Sep Oct Nov Dec

2009 554 623 647 787 957 917 871 1034 1077      

2008 1571 1569 1569 1631 1688 1754 1439 1293 854 514 517 562

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

CountryInterest

RateGrowth

RateInflation

RateJobless Rate

Current Account

Exchange Rate

Russia 10.50% -10.90% 11.60% 8.30% 9069 30.2350

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

Japan 0.10% -7.20% -2.20% 5.70% 1266 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.

Year

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 7682 7269 7055 8352 8977 9550 9050 10204 10187      

2008 12573 13017 11788 12656 13655 13481 12755 12666 11260 7163 7703 7864

2007 16838 17292 16642 17028 17275 17733 17249 15274 15765 16284 14838 15031

2006 15341 15438 15627 16906 15467 14219 14437 15154 15557 16083 15726 16266INDIA STOCK MARKET (BSE SENSEX 30)

36

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

India 3.25% 6.10% 11.89% 7.32% 5 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.

Year

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 8674 8822 8160 9902 11683 14266 13400 14785 15398      

2008 16730 16608 14809 15343 16276 13462 12576 14048 12596 8510 8451 8739

2007 13362 12938 12415 12455 13765 14003 14664 13989 15422 17329 18526 19080

2006 9238 9743 10509 11237 10399 8929 10007 10752 11551 12204 13033 12995

37

UNITED STATES OF AMERICA STOCK MARKET (DOW JONES)

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

USA 0.25% -3.90% -1.50% 9.70% -99 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.

Year

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 7949 7063 6547 7762 8212 8300 8147 9135 9281      

2008 11971 12182 11740 12302 12480 11347 10963 11284 10365 8176 7552 8149

2007 12398 12216 12050 12382 13136 13267 13212 12846 13113 13522 12743 13167

2006 10667 10750 10959 11074 11094 10706 10739 11076 11331 11670 11986 12194

38

UNITED KINGDOM STOCK MARKET (FTSE 100)

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

UK 0.50% -5.50% 1.60% 7.90% -9 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.

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 6022FRANCE STOCK MARKET (CAC 40)

39

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

FRANCE 1.00% 0.30% -0.20% 9.80% -1 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.

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 5254CHINA STOCK MARKET (SHANGHAI SE COMPOSITE IX)

40

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

CHINA 5.31% 7.90% -1.20% 4.30% 129986 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.

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)

41

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

HONG KONG

0.50% -3.80% -1.50% 5.40% 41 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

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 12579 12699 11345 13520 16381 17538 17255 19724 19522      

2008 21758 22616 21085 23137 24127 22042 21175 20392 17632 11016 12299 13406

2007 19385 19652 18665 19810 20294 20509 22151 20387 23886 26974 26005 26597

2006 14945 15312 15445 16064 15697 15234 16044 16883 16949 17607 18454 18691SOUTH KOREA STOCK MARKET (KOSPI)

42

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

SOUTH KOREA

2.00% -2.20% 2.16% 3.80% 4400 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)

43

CountryInterest

RateGrowth

RateInflation

RateJobless

RateCurrent Account

Exchange Rate

Brazil 8.75% -1.16% 4.36% 8.00% -1665 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 37272 38180 36235 41976 48679 49495 48873 55218 55386      

2008 53709 58965 58827 62153 69018 63947 56869 53327 45909 29435 31251 34741

2007 42007 43145 41179 45597 49472 51797 52922 48016 52653 60099 59069 59828

2006 33507 36114 36312 37901 35792 32848 34866 35512 34799 36438 39930 41327

Top Performing Stock Markets in the World: 2009

44

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 Country 2009 Growth Decline1 Peru 72.92% -31.94%2 Russia 53.33% -61.22%3 India 48.25% -18.26%4 China 47.01% -26.30%5 Taiwan 44.96% -28.51%6 Ukraine 44.30% -55.38%7 Argentina 43.24% -31.47%8 Indonesia 39.15% -25.05%9 Israel 39.04% -24.9610 Brazil 37.32% -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

45

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.

Major Bankruptcies filed

46

• 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)

What on the other side’s?

47

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.

o 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

Recovery in US Stick Markets (DOW JONES)

48

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.

For Financial Firms-

A slow, jobless recovery would mean credit losses piling up well after the recession

officially ended.

49

For consumers-

It would mean household wealth might continue to decline.

For U.S. trading partners-

It 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

risk-takers in business are left with no back-up support in the form of insurance,

where is the road to recovery?

50

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

hamper consumer confidence, which would normally act as the catalyst in jump

starting the economy.

51

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.

Various Reports and Data

52

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

Will the Recession in Stock Markets and other sectors will end in 2009?

53

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.

Recession ? Recovery ? And the year ahead

54

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.

World Economy

-- Financial crisis is considered the most serious since the

55

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

madness "NINJA" mortgages were created. NINJA stands for "No Income, No Job,

56

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.

Jobs Recovery could be slow and weak

57

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.

58

"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.

59

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,

60

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."

61

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.

62

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.

63

How Do I Get It Through?

Manage business on cash flow basis

Increase efficiency of asset turnover; increase liquidity

Intensify customer service initiatives

Become innovative in controlling costs;

o Outsource where appropriate

o 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.

Secure access to bank credit; firm up bank lines

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.

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.

64

Conclusions

o Severe reductions in State and Local Government spending

o 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

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.

Increased near term economic and market pressures include:

o stubbornly high inflation in food and basic services

o lower corporate profits

o increased unemployment

o continued weak levels of corporate capital and consumer spending

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.

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.

65

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.

66