Risk appetite has returned back at the global level after the recession? Comment?

INTRODUCTION: In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

DEFINATION: In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was "two down quarters of GDP".^[3] In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.

Causes of the late-2000s financial crisis

Many factors directly and indirectly caused the ongoing Financial crisis of 2007-2010 (which started with the US subprime mortgage crisis), with experts placing different weights upon particular causes. The complexity and interdependence of many of the causes, as well as competing political, economic and organizational interests, have resulted in a variety of narratives describing the crisis. One category of causes created a vulnerable or fragile financial system, including complex financial securities, a dependence on short-term funding markets, and international trade imbalances. Other causes increased the stress on this fragile system, such as high corporate and consumer debt levels. Still others represent shocks to that system, such as the ongoing foreclosure crisis and the failures of key financial institutions. Regulatory and market-based controls did not effectively protect this system or measure the buildup of risk. Some causes relate to particular markets, such as the stock market or housing market, while others relate to the global economy more broadly. In July 2009, the U.S. announced the members of the Financial Crisis Inquiry Commission to investigate the causes of the crisis. Its report is expected at the end of 2010. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.

Korea and fiscal worries hurt risk appetite

Korea and fiscal worries hurt risk appetite

The FTSE All-World equity index is down 1.1 per cent and commodities are mostly under pressure. Worry is pushing money into perceived havens like the dollar and core bonds.

The S&P 500 on Wall Street is down 0.8 per cent in its holiday-shortened session – though it is getting some support from optimism regarding the start of the festive shopping season.

Better data out of the States – supported by well-received corporate earnings and the Federal Reserve’s $600bn backstop – have provided flurries of positivity over recent days. The S&P 500 in New York rose 1.5 per cent, for example, on Wednesday following upbeat news on jobs and consumer sentiment.

But the benchmark had fallen 1.4 per cent the previous session as fiscal and political factors weighed.

The former relates to the fear the eurozone budget crisis will spread to Spain, delivering more uncertainty, austerity and financial system woes to a region struggling to emerge from recession. Stock traders are today avidly watching the euro, noting its extremely tight correlation to risk appetite. The cost of insuring the bloc’s debt is at record levels.

The latter is the tension on the Korean peninsula following the North’s shelling of civilians in the South.

Both those issues still fester – indeed Pyongyang has now accused Washington and Seoul of pushing the region close to war by planning military exercises in the Yellow Sea. And the euro is being sold off again as eurozone “peripheral” bonds signal contagion.

They have been joined on Friday by the now seemingly traditional end-of-week worry about

Risk appetite has return back at the global level after the recession.

1. Buy and Hold

By 2009, the global economic malaise had erased a decade's worth of gains. Buying and holding turned out to be a one-way ticket to massive losses. From 2007 to 2008, many investors who followed this strategy saw their investments lose at least 50%.

2. Know Your Risk Appetite

The aftermath of a recession is a good time to reevaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work.

3. DiversifyDiversification failed in 2008 as stock markets around the world swooned. Hedge funds and commodities tumbled too. Fixed annuities, on the other hand, had their day in the sun in 2009 - after all, a 3% guarantee sure beat holding a portfolio that fell by half. Holding a bit of cash, a few certificates of deposit or a fixed annuity can help take the traditional strategic asset allocation diversification models a step further.

4. Know When to Sell

Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game.

5. Use Caution When Using Leverage

The events that occurred following the subprime mortgage meltdown in 2007 had many investors running from the use of leverage. As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas.

REFERENCE:

www.wikipedia.com