James Owers, Professor of Finance at Georgia State University, said: “The market expects that regulations will be tightened more quickly and aggressively by Obama than by McCain, which is generally bad for company profits. But then it was lax regulation that got us into this mess and Obama has some very astute economic advisers. It is a question of who can get the best balance between regulation and economic stimulation.” Hugh Johnson, founder and head of Johnson Illington, a US fund manager, thinks that a McCain victory would be better for the stock markets in the short term, but that US shares would fare better under Obama long term. He said: “Although both candidates wanted to keep taxes low, Obama wanted to increase capital gains and dividend tax and to roll back the Bush tax cuts for the highest two income brackets. So McCain’s proposals will provide a greater stimulus to the economy than Obama’s, putting upward pressure on US shares. But in the longer term, the US deficit will go up and the economy will suffer.”

Analysts say that an Obama victory had been priced into the markets in recent weeks. However, the recent share rally is down to the likelihood of a further economic stimulus package rather than the prospect of an Obama presidency, they say.

Pete Najarian, an options trader in New York, said: “Whoever has been named president-elect, the fact that the decision has finally been made will bring a huge degree of relief. The market has been in such a volatile state in the past few months and we just wanted an answer on who the new president would be. In the past week and two days, share price volatility has dropped by about half and it should fall further now.” Jeremy Siegel, of the Wharton Business School in Pennsylvania, said that shares usually perform better on the day after a Republican president is elected, as investors, who are generally conservative, celebrate but in the long run, Democrats have had better returns. Professor Siegel studied stock returns in the days surrounding US presidential elections between 1888 and 2004.

From Monday morning to Wednesday night, US stocks rose by an average of 0.7 per cent in the event of a Republican victory. They dropped by 0.5 per cent, on average, over the equivalent periods of Democrat victories.

In 1967, Yale Hirsch released data based on the previous 134 years, which determined that, on average, shares performed better in the final two years of a presidential term, a trend he attributed to manoeuvring by the party in power to increase its chances of reelection.

“As presidents and their parties get anxious about holding on to power, they begin to prime the pump in the third year, fostering bull markets, prosperity and peace,” according to a recent edition of the Stock Trader’s Almanac, the monthly newsletter set up by Mr Hirsch, which covers the financial markets.

However, with stock markets down by 30 per cent this year, it would be unwise to put too much store in the long-held theories on the stock market’s relationship with the president.

Source: http://business.timesonline.co.uk/tol/business/economics/article5084111.ece

It took a while before it became clear (or at least, accepted) that the problem was system-wide. Initially, it was smaller, local banks that got into difficulty.

The first Japanese bank failed in August 1995 (the first since the war). This was dismissed as a local difficulty because it was Hyogo Bank, a regional bank affected by the Kobe City earthquake in that year.

The blanket deposit guarantee was introduced in June 1996, but it did not prevent runs on the banks for two reasons. One was credibility. Saying the money was safe was one thing; proving it was another. Second was practicality. Imagine your bank does go bust. Even if there is no question about whether you will get your cash back, you are faced with complete uncertainty. Far better to get it out straightaway.

The specifics of every banking crisis vary by country and by cycle, but the general forces are the same. When expanding gearing gives way to contracting debt, the stage is set for a liquidity crisis.

For Japan, this occurred in 1997-98. Two large brokers and one big money-centre bank failed, followed a few months later by the nationalisation of two long-term credit banks. A similar liquidity crisis has struck the West.

It is not obvious that the process in the US and the UK has been shorter. If you define the stock-market peak as 1999-2000 and the rally since early 2003 as no more than a relief rally (analogous to Japan’s recovery from 1992 to early 1996), then the timetable is actually similar.

A liquidity crisis has a sharp impact on lending to other parts of the economy. As a result, the economy slows and the debt built up by households and businesses becomes harder to support. This gives rise to the third and final phase: a solvency crisis. Japan’s big banks reached that point about five years after the liquidity crisis.

Three kinds of adjustment are needed before stability can return. First, asset values must discount the credit- constrained world. That is already happening with a vengeance, but take care not to assume too quickly that the process is complete.

A sucker rally (or three) should be expected, to make sure that hope is extinguished before share and house prices can return to any sustainable rising trend.

The Nikkei plunged about 40% in 1990-92, rallied by about one third, then traded between 15,000 and 20,000 from 1992 to early 2000. This range included three rallies of more than 30%.

Second, the banking sector needs to write off bad debts, consolidate (a polite way of saying shrink), and rebuild its capital base. In banking terms, completing the MUFG merger in October 2005 marked the end of the crisis.

Third, the real economy must also adjust to the new credit constraints. In Japan’s case, car sales, land prices, bank lending and the household spending index have, like share prices, returned to the levels of the early 1980s.

Corporate gearing ratios are at levels not seen for 40 years. Its economy has been through a wrenching adjustment over a long time.

Could it take this long in the West? Experience has taught that we should not rule out such a possibility. You could argue that the imbalances in the West are greater and have been allowed to build for longer than in Japan. It is that build-up of imbalances which will determine the scale and duration of this adjustment period rather than the actions of politicians and regulators (who have a tendency first to deny, then to fight the last battle rather than this one).

The author heads the Société Générale Asset Management Japan Core Alpha team

Source : http://www.timesonline.co.uk/tol/money/investment/article5061770.ece