Scenario3: The deleveraging process continues unabated resulting in fresh new lows for global markets: There is still something incomplete about the current downturn; overall leverage ratios are way above trend and after the overshoot on the upside valuations need to fall to bargain-basement levels to form a true bottom for equities. The current consensus among opinion makers is for governments to end the downturn through intervention and aggressive spending.
...The base case here still is that the US and the global economies avoid an Armageddon-type scenario in the wake of all the concerted policy action. But it would still not be possible to engineer a new growth cycle until excessive debt in the system is purged. As a result, equity markets will continue to trade in the range established since the lows were hit in November 2008.
However, the odds of the third scenario materialising have increased in recent weeks as treasury yields in the US have risen sharply and the price of gold has broken out on the upside. It’s key that these disturbing trends reverse quickly and the US market holds the November lows for Scenario 1 or 2 to have a chance to play out in 2009.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com