David French | 24/03/2009 11:07:03 AM

This article was published in the Capricorn Investment Partners First Quarter 2009 Newsletter

Across the globe interest rates are falling and Governments are spending like there is no tomorrow. That is almost certain to sow the seeds of the economic recovery. In the same way that the share market foretold of the impending economic downturn, it is very likely to begin recovering before jobs and GDP recover. That us why we are busy restructuring client portfolios.

The thing that is lacking is confidence, both in the economy and in markets. But there are some encouraging signs even there. On Monday 8 March, 2009 a new market opened in the US, for trading Credit Default Swaps. These instruments are insurance policies, taken out by lenders, against the risk that the borrower will go broke.

To date most of these instruments have been private contracts, and as such their terms, conditions and size have not been readily quantifiable. Public trading of these assets, is a huge step forward in financial transparency, and consequently in restoring confidence in the banking system.

Within a few weeks, we expect an announcement regarding the establishment of a ‘bad-bank’ – a public/private trust that will purchase rubbish assets from financial institutions. This has happened before, successfully, in the USA, Switzerland and Sweden. Again, clarity will win the day.

Reinvoking the up-tick rule in financial markets will prevent short sellers from driving prices down, and some tighter regulation will also assist in cleaning out rogue elements in the market.

Many of these initiatives have been discussed over the past 6 months, but it is only now that they are being implemented.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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