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Saturday, October 06, 2007
Financial Markets

Financial Markets and Contraction Economics


Currently the financial markets are very difficult to predict both in the US, Europe and Asia. The sub-prime mortgage crisis has hit all financial products because the mortgages were packaged, and sometimes incorrectly rated from a credit perspective, and then swapped and traded against other financial instruments across the world. The markets will take a while to digest this damage and only if the governments step in and bring reality to the structure of financing will the recovery be quick. If the insider trading isn’t curtailed, and the hacking of companies’ financial structures for quick one time gain isn’t reduced, then the economy will continue to have downward pressure as individuals de-leverage the growth prospects of previously viable functioning companies (with strong balance sheet cash positions) for their own personal gain. This negative growth process, of removing the core financial strength of companies, could be termed Contraction Economics versus the Expansion Economics of the past.

The real financial problem is the reduction of the growth prospects for large market capitalisation companies that have been restructured to virtual elimination. When real money multiple effects that viable operating companies have on providing jobs disappear, the secondary and tertiary markets (i.e. their suppliers and their suppliers’ suppliers) are also affected. When money leaves a company and flows to an individual through restructurings and liquidations, the immediate loss in real GDP to a nation can be 2 to 3 times as much as the primary loss of the company that was sold off or consolidated. The loss can be much greater than this if it is a core anchor industry company to a nation’s economy. Often, real equity from the liquidated company terminates in the purchase of a non-producing singular luxury asset.

Those wishing to gain when the world economy starts to recover should keep their eyes on the companies that have solid asset foundations, strong management teams, with long term annualised cash flow projections and absolute growth perspectives. If we look at one example of this, the bulk gas market looks like an attractive opportunity as does all forms of bulk gas transport. Once it is clear that the overall stock market is soundly turning north, an investment in these companies, purely for their ability to manufacture and distribute hydrogen would probably bring good returns. Fuel Cell vehicles are here to stay and refuelling them either by home generation of hydrogen or bulk manufacture of hydrogen is a huge market that is bound to develop very soon. The five to ten year window on a return on your initial investment should be very good.

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