The world is changing

GM, Citigroup getting dropped from Global Dow gauge

By MarketWatch

Last update: 1:49 p.m. EDT March 29, 2009

Comments: 18

3 articles in the Financial Times on 25 March 09: Ominous signes

Public finance fears hit gilts auction

By David Oakley, Capital Markets Correspondent

Published: March 25 2009 12:32 | Last updated: March 25 2009 15:43

A UK government bond auction failed for the first time in seven years on Wednesday as investors refused to buy the securities because of worries over the country’s deteriorating public finances.

US willing to look at China currency proposal

By Krishna Guha and Tom Braithwaite in Washington and Peter Garnham in London

Published: March 25 2009 14:19 | Last updated: March 25 2009 20:27

The dollar fell briefly on Wednesday after US Treasury secretary Tim Geithner said he was open to exploring a Chinese proposal to reduce reliance on the US dollar as the world’s reserve currency.

Sir Fred Goodwin’s house attacked

By Andrew Bolger, Scotland Correspondent

Published: March 25 2009 10:00 | Last updated: March 25 2009 17:40

Police were guarding the Edinburgh home of Sir Fred Goodwin, former chief executive of Royal Bank of Scotland, on Wednesday after it was attacked overnight.

Jon Stewart Talk show shows Wall Street to be built on empty promises

Source: the Daily Show

A must see.

Stewart articulated the anger and bewilderment of millions of Americans who now feel ripped off and afraid. He framed the question that everyone wanted asked: how were the financial masters of the universe allowed to pursue their ruinous behaviour unchallenged for so long?

http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220533

Leading investors

World safest banks mid year 2009

Source: Global Finance Magazine

What a difference half a year makes.

http://www.gfmag.com/admin/mods/abmRepository/root/Docs/2009/safest_mid_year.pdf

Safest banks 2008

Source: global finance magazine

Warren Buffett's shareholders letter for 2008

A must read

http://www.berkshirehathaway.com/letters/2008ltr.pdf

Sobering read - from 28 March 2006 by Roubini

Source: Nouriel Roubini

The recent speculative attack against the Icelandic currency and the incipient run on its banks is no news (actually a deja-vu as my co-author Brad Setser says) to students of financial crises in emerging market economies; Brad and I wrote an entire book about it. A combination of a large and growing current account deficit, driven in part by a credit boom and an asset bubble (with housing bubbles leading to an excessive growth in real estate investment and an excessive increase in private consumption and fall in private savings) can be deadly if it goes bust and it triggers a domestic and/or international run on a banking system with large foreign currency liabilities and little liquid reserves. The combination of weakening fundamentals and illiquid banks can lead to a panicky currency and liquidity run: we saw it in Mexico in 1994, in East Asia in 1997-98, in Brazil in 1999 and in 2001-2002, in Turkey in 2001. Add to these problems, a fiscal imbalance and high public debt and you may even get a sovereign debt crisis, as in Ecuador, Russia, Argentina, Uruguay.

So, today it is Iceland to be in trouble. But which other economies - emerging or advanced - look in part like Iceland today? The list is clear: Turkey, Hungary, Australia, New Zealand, Spain, United States. What all these countries have had in common in recent years?

First, a large (relative to GDP) current account deficit, a large (relative to exports) external debt and a significantly overvalued exchange rate.

Second, an asset bubble in the housing sector.

Third, a fall in the private savings rate and an increase in the consumption to GDP rate, as well as a boom in real estate investment that are all driven by the housing bubble; these, in turn, lead to a worsening of the current account.

Fourth, a credit boom that has fed this asset bubble and that can make their banking system vulnerable to a housing bust.

Fifth, a partial cross border financing of the current account deficit via the short-term cross border flows to the banking system that currently is mostly in domestic currency (but that in some cases used to be in foreign currency).

Sixth, a relatively low stock of liquid foreign exchange reserves relative to the cross border foreign currency liabilities of the country (the U.S. and advanced economies being an exception as they have little forex reserves but also little foreign currency debt).

On top of all these vulnerabilities, some but not all of these countries -  the U.S. in particular - have also a large fiscal deficit.

Thus, is it pure financial "panic" that explains the recent contagion from the Icelandic currency to the currency and debt markets of Turkey, Hungary, Australia, New Zealand? Suddenly, in all these countries investors are realizing that the force of gravity of a large current account deficit eventually dominates the carrry trade of interest rate differentials. It is true that the large current account deficits of these countries and their housing bubbles have been known for a while. But markets and investors have a strange way of sometimes waking up - as they did in Thailand in 1997 - and realize that the problems in one country - Iceland today (Thailand in 1997) - are very similar to those in other countries (East Asia in 1997 and the "usual suspects" above today). 

Does this mean that the eventual trigger for the adjustment of the U.S. dollar has arrived? Not yet for the U.S. dollar; but certaintly you see now the beginning of the stress on the currencies of Hungary, Turkey, Australia, New Zealand. The U.S. is only partiallly different: still the dominant reserve currency; still being supported by massive intervention by China, other Asian countries, oil exporters and other emerging economies with current account surpluses; still with limited reserves but also with limited foreign currency debt.

But you can play your luck only for so long, especially when - unlike all these other economies - you also have a large and growing fiscal deficit and you are increasingly financing it with new short term debt that is 100% purchased - on net - by non-residents that are now subject to a serious currency risk. It used to be argued that short term foreign currency debt is dangerous when you have little foreign currency reserves as liquidity runs can occur; while domestic currency debt is less risky as you do not have the same rollover/liqudity risk; it was also argued that, as the currency risk is held by the non-residents holding your local currency debt, no nasty balance sheet effects of a devaluation can occur.

But these argument are probably flawed: if most of your domestic debt is in local currency and is held by non-residents, these investors face a large currency risk. Thus, once they start to expect a large depreciation of your currency, their incentive to hedge their currency risk and dump your assets and your currency becomes very large. Then, both a currency crisis and a run on your assets - be it liquid bank deposits or short term government debt -may occur - with nasty effects on your financial system and the ability of your government to finance itself. So, the fact that U.S., Spain, Australia, New Zealand and now even emerging markets such as Turkey and Hungary are financing themselves in local currency may be of little comfort. Runs on currency and liquid local assets may still occur with severe and disruptive effects on currency values, bond markets, equity markets and the housing market.

I have been warning for a while - as Morris Goldstein did - that the new crises in emerging market economies may take a different form from the traditional ones where large stocks of short-term foreign currency debt and low levels of forex reserves could cause a run and an external debt crisis. Instead, runs on the short-term domestic localcurrency debts of governments and banks could still occur - even in the absence of those traditional external vulnerabilities - and lead to a new type of financial crises. The developing events in Iceland and, possibly, in other emerging market economies, suggest that it was wishful thinking to believe that currency crisies, contagion, financial crises and runs were a thing of the past.

In the meanwhile U.S. policymakers - both at Treasury and even some, but not all, at the Fed - live in this LaLa Land dream that the U.S. current account deficits and fiscal deficits do not matter and that the U.S. external deficit is all caused by a global savings glut or is actually a "capital account surplus" as it allegedly represents the foreigners' desire to hold U.S. assets.  They - and financial markets and investors - may soon wake up from this unreal dream and face a nightmare where the U.S. looks like Iceland more than they have ever fathomed.

 

Must see

relevelling of wealth

Source: The mad hedge fund trader, seekingalpha

I attended a luncheon today for old college economics professor, former Labor Secretary Robert Reich. The bad news is that we will lose another three million jobs this year, taking unemployment easily into double digits. The good news is that we are not entering another Great Depression, or even a Japanese style lost decade. We are in the midst of a cyclical recession, albeit a very deep one, from which we will emerge in 2010. Part of the problem is that the share of earnings of the top 1% of American income earners has soared from 8% in 1980 to 23% in 2006. These people don’t spend their money, they invest it, effectively removing it from the retail economy.

UAE throws Dubai financial lifeline

Source: The associated press

Who would have phatomed that!

DUBAI, United Arab Emirates -- Dubai's finance department said Sunday it sold $10 billion in bonds to the United Arab Emirates' Central Bank, alleviating some concern about the Gulf city-state's finances, hit hard in the global financial crisis.

With the sale, the department said it will have "the necessary liquidity" to compensate for global funding sources that have dried up over the past year.

The funding agreement is part of a $20 billion long-term bond program launched Sunday.

Up to 10m foreclosures in the US?

Source: The Herald NZ

More than 2.3 million homeowners coast-to-coast faced foreclosure proceedings last year, an 81 per cent increase from 2007. Analysts say that number could soar as high as 10 million in the coming years, depending on the severity of the recession.

Crisis worse than Japan?

Source: The Economist

HERE is one consolation for the depressing instability of finance. History offers a rich array of banking crises from which policymakers can draw lessons—and against which today’s rescue plans can be judged. According to an IMF database, there have been 124 “systemic” banking crises since 1970—episodes in which bad debts soared across the economy and much of the banking sector was insolvent.

Most of those were in the developing world. But the list also includes half a dozen rich-country crashes, from Japan’s slump after its property bubble burst in the late 1980s, to the Nordic bank crises in the early 1990s. All involved deep recessions, required massive government intervention to clean up bust banks, and led to big increases in public debt as economies shrank while government spending soared. But the speed of recovery differed dramatically; Japan endured a decade of economic stagnation, whereas South Korea returned to growth within two years of its 1997 banking disaster.

Received wisdom holds that policy choices determined the pace of recovery. Sweden rebounded quickly because it acted fast: removing dud assets from banks’ balance-sheets, recapitalising weak banks and nationalising where necessary. Japan stalled for a decade because it took years to recognise the scale of its mess. In his first presidential news conference on February 9th, Barack Obama pointed to Japan as an example of what not to do. Its “lost decade”, he argued, was the consequence of “not act[ing] boldly or swiftly enough”.

There is truth to that analysis. Japan’s central bank took too long to fight deflation; its fiscal stimulus was cut off too quickly with an ill-judged tax increase in 1997; and it did not begin to clean up and recapitalise its banks until 1998, almost a decade after the bubble had burst. But the history of bank failures suggests that Japan’s slump was not only the result of policy errors. Its problems were deeper-rooted than those in countries that recovered more quickly. Today’s mess in America is as big as Japan’s—and in some ways harder to fix.

Double bubble

This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). So did commercial-property prices. In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion in 2000 (or the equivalent of 222% of GDP) to $41 trillion (294% of GDP) in 2007 (see second chart).

Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.

We're all Swedes now

Matthew Richardson and Nouriel Roubini write the WaPo: Nationalize the Banks! We're all Swedes Now

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong. 

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off. 

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer. 

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even. 

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers. 

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

Nice graph!

China growth rate 2009: call it 2%

Reading the text below from The Economist, the EIU predicts 6% growth, the Chinese Government growth target is 8%, Aka's prediction is 2% why- last quarter it only grew 2% - and things are going to get worse before they get better.

The outlook for China's economy continues to darken with the publication of each new statistical indicator. According to the latest data, economic growth slowed to 6.8% in the year to the fourth quarter of 2008, down from 9% in the third quarter and half its 13% pace in 2007. Although real GDP growth of 6.8% may still sound pretty robust, it was China's lowest rate of growth since the fourth quarter of 2001 and implied that growth on an annualised quarter-on-quarter basis was around just 2%. Other indicators also point to a significant downturn in economic activity. Industrial production grew by only 5.7% in the 12 months to December, compared with an 18% pace in late 2007. And the OECD’s leading indicator of economic activity in China has fallen to its lowest level in its 26-year history, lower even than during the slump in 1989—the year of the Tiananmen Square massacre.

Despite the increasingly gloomy data from China, the Economist Intelligence Unit has maintained a forecast of 6% growth in 2009. This, however, would be the slowest rate of growth since 1990, and would represent a hard landing for the Chinese economy. It would also be significantly below the government's own growth target of 8%, which according to an often-cited theory is what the economy needs to grow by to prevent rising unemployment and, in turn, social unrest

As long as inventories are too high - no recovery

Source: The Economist

Unfortunately, so far it seems that inventories are still high in the developed economies, at least in relative terms. The ratio of inventories to monthly sales for all types of business (manufacturing, wholesale and retail) in the US was 1.41 in November 2008, the highest number since September 2001, according to data from the US Census Bureau. This suggests that there remains a substantial need to deplete stocks further. (True, the inventory ratio is inflated by falling sales, and in absolute terms inventories are falling. But inventories have not fallen as much as sales, so there is further catching up to do. This will hit import demand.)

The best indicator for inventory levels in the euro area, meanwhile, is the European Commission's monthly survey of inventory levels for manufacturing and retailing. The indicator for stocks of finished goods in the manufacturing sector declined slightly in January, but it remained very high. In the previous month's survey, the percentage of respondent companies judging their inventory levels to be excessive was the highest since August 1993. The equivalent figure for European retailers in January surged to the highest level since 1996 (moreover, the 1996 peak was mainly due to unusual volatility at the time).

In Japan, too, excess inventories remain a worry. While high inventories in the US and Europe are compounding the problems facing Japanese exporters, the same situation in Japan is undermining the country's demand for imports from the rest of the world, including from Asia. The Bank of Japan's Tankan survey of business sentiment for the fourth quarter of 2008 showed that the share of companies seeing their level of inventories as excessive was at its highest since the start of the series in the fourth quarter of 2003. This means that de-stocking is likely to continue for some time, and that the pace of de-stocking may yet increase.

Wanna buy some banks

By: Aka

Based on today's market cap you could take 100% of Westpac's shareholding ($31.1B) and go on an european buying spree, buying 100% of the Royal Bank of Scotland ($11.8B), 100% of the Bank of Ireland ($0.7B), trow in Barclays Plc ($11.5B) and still have some change left over. Or you could go the US way and buy the Citigroup Inc ($18.9B) (this was the largest global company in '07) and half of Morgan Stanley ($11.3B), your choice.

4 Australian bank in the top 20 global banks

Source: The Australian

THE crisis in the financial system catapulted all four majors into the ranks of the top 20 global banks for the first time.

No 9: Westpac, with $43.2 billion in market capitalisation, is now the ninth-largest bank in the world. Picture: AP
As a result Australia's big banks are expect to grab new business opportunities and draw the attention of more international investors.
Although shares in the Big Four banks have collapsed more than 50 per cent in the past year, with new multi-year lows struck on Friday, they have stood up far better than their UK and US counterparts.
Despite pressure on their funding and bad-loan books, they remain highly profitable while banks overseas seek government handouts, are nationalised or allowed to collapse. In the US alone, the global shake-up means Australia's four largest banks, which have retained their AA rating, are now considered some of the biggest in the world.
The banks believe their newfound status will increase their participation in markets such as foreign exchange trading, where opportunities in the past have been limited because of the presence of bigger global players.
The elevation in world rankings has brought extra attention from fund managers, particularly in the US, and the banks expect more share buying from overseas institutions.
Westpac has already experienced an increase in foreign exchange deals, with a sharp surge in the number of $1billion-plus transactions being carried out by the bank's trading desk.
On stock market capitalisation, Westpac is now considered the world's ninth-largest bank, with a worth of $US28.2 billion ($43.2 billion), ahead of Commonwealth Bank at No15, National Australia Bank at No17 and ANZ at No19. Remarkably, all four Australian banks now rank ahead of past giants such as Citigroup and Morgan Stanley in the US, Barclays in Britain and Deutsche Bank in Germany.
There are now only 13 AA-rated banks in the world, compared with 20 when the global financial crisis emerged.
The world's largest bank is now HSBC, the British institution, which is worth four times the average value of an Australian bank, while US banks JPMorgan Chase and Wells Fargo are next according to market capitalisation.
The renewed bout of fear about financial system stability, particularly in Britain, has decimated the value of a number of global institutions. The headline British banks of Lloyds, Halifax Bank of Scotland, Royal Bank of Scotland and Barclays are now worth about half of the Australian banks.
One of the largest casualties among the banks but still afloat is Citigroup, which was once the world's biggest bank but is now worth just $US15 billion and ranks No22.

20M jobs lost

From the NY Times

Joblessness Jumps Sharply Among China’s Migrants

About 20 million of the total estimated 130 million migrant workers, whose cheap labor underpins China’s manufacturing sector, have been forced to return to rural areas because of lack of work, according to a survey conducted by the Agriculture Ministry that was cited at a briefing. In late December, employment officials estimated that at least 10 million migrant workers had lost their jobs in the third quarter of 2008 as waves of factories and businesses shut their doors.

US Banking system effectively insolvent

Source: CNBC interview Roubini

Roubini estimates the peak losses later this year at $3.6T of this is $1.8T losses of banks and related brokers / dealers. The total combined equity of banks is $1.4T leaving them effectively insolvent

Bank bonuses out-size market cap

Source : Economist

“ISN’T it funny/How they never make any money/When everyone in the racket/Cleans up such a packet.” That Basil Boothroyd poem was originally written about the movies, but it could just as well apply to banking.

In its last three years, Bear Stearns paid $11.3 billion in employee compensation and benefits. According to its 2007 annual report, Lehman Brothers shelled out $21.6 billion in the three years before, while Merrill Lynch paid staff over $45 billion during the three years to 2007.

And what have shareholders got from all this? Lehman’s got nothing (the company went bust). Investors in Bear Stearns received around $1.4 billion of JPMorgan Chase stock, now worth just half that after the fall in the acquirer’s share price. Merrill Lynch’s shareholders got shares in Bank of America (BofA) which are now worth just $9.6 billion, less than a fifth of the original offer value. Meanwhile, Citigroup paid $34.4 billion to its employees in 2007 and is now valued by the stockmarket at just $18.1 billion.

All this has reinforced the idea that banking is simply a gravy train for employees. The row over the early payment of bonuses at Merrill Lynch shows yet again that insiders’ interests come first (those to BofA staff, however, are likely to shrivel).

The case against banks goes something like this. Over the past 25 years, the cost of finance has been low and asset prices have generally been rising. That has encouraged banks to use more leverage in order to earn high returns on equity. The process of lending money against the security of assets, or trading assets with the banks’ capital, helped to push asset prices even higher. A sizeable proportion of the profits that resulted from all this activity was then handed out to employees in the form of wages and bonuses.

But when asset prices started to fall, the whole system unravelled. Banks were forced to cut the amounts that they had borrowed, putting further downward pressure on prices. The “shadow banking system”, which relied on bank finance, started to default. The result was losses that outweighed the profits built up in the good years; Merrill Lynch lost $15.3 billion in the fourth quarter of 2008 alone, compared with the $12.6 billion of post-tax profits it earned in 2005 and 2006 combined.

IMF set to slash global growth rate

Source: FT

The International Monetary Fund will slash its forecasts for global economic growth this week, saying the downturn is worsening in both rich and poor economies.

Dominique Strauss-Kahn, IMF managing director, said last week that the fund would “significantly adjust” its projections downwards in the light of bad news about growth and continued problems in financial markets.

Reuters on Sunday quoted Axel Bertuch-Samuels, deputy director of the IMF’s capital markets department, as saying that the global growth forecast for 2009 would be cut to 1-1.5 per cent from its current projection of 2.2 per cent, but the fund declined to confirm that number.

Mr Strauss-Kahn said last week he expected more countries to come to the IMF for help, including some in Latin America that were “just on the edge”. The IMF has so far committed about $50bn as a result of the crisis, around a quarter of the resources it has immediately available for rescue lending.

In November, the IMF cut projections sharply for world growth in 2009 to 2.2 per cent, down 0.8 percentage points from an October forecast, noting that industrialised economies were headed for the first full-year contraction since the Second World War.

Jim Rogers: ‘UK has nothing to sell’

Source: FT By Peter Garnham

The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

He says his view reflects the UK’s dire economic situation: “It’s simple, the UK has nothing to sell.”

Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,” he says.

“The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west? You don’t need London,” says Mr Rogers.

Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. “If the UK discovers more North Sea oil, I might change this view,” he says. “But I don’t see that happening.”

Roubini: U.S loss may reach $3.6T

From Bloomberg: Roubini Predicts U.S. Losses May Reach $3.6 Trillion

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Professor Roubini has been steadily increasing his estimate of total U.S. credit losses, but I think this estimate might be too high. 

I think the U.S. residential credit losses will be in the $1 to $1.5 trillion range and additional credit losses from corporate loans and bonds, commercial real estate, credit cards, and other consumer loans will probably add close to another $1 trillion in losses. That is still well short of Roubini's $3.6 trillion estimate - although give Roubini credit - he has definitely been right so far!

Gathering Gloom

Source: Economist

The Economist Intelligence Unit has made further downgrades to its forecast for global GDP growth. This primarily reflects significant downward revisions to our forecasts for Germany, Japan and China, all three of which have seen their exports hit hard by the collapse in global demand. At market exchange rates we now expect the global economy to contract by 0.9% in 2009, by far the worst performance since the end of the second world war.

Our new forecast is half a percentage point lower than our previous (already gloomy) forecast, published in December. Just a month ago, we expected world GDP to contract by 0.4% in real terms in 2009. But economic data continue to get worse, and we have adjusted our projections accordingly. About the only "good" news is that our US forecast is essentially unchanged, as the continued deterioration in economic data is offset by the prospect of scaled-up fiscal stimulus

Capita selecta

WSJ: Circuit City to Liquidate, Meaning 30,000 Job Losses
Bloomberg: GE Capital May Cut as Many as 11,000 Jobs This Year
WSJ: Pfizer to Cut Up to 2,400 Jobs
WSJ: Google Plans 100 Layoffs of Recruiters
AP: AMD to cut 1,100 workers, 9 pct of staff
Reuters: Hertz to cut more than 4,000 jobs
Bloomberg: WellPoint Cuts 1,500 Jobs, Blames ‘State of Economy’
AP: Blue Cross Blue Shield to cut up to 1,000 jobs
Tampa Bay Business Journal: Report: Layoffs looming at Clear Channel

Marks & Spencer CEO - 'sharpest downturn in shortest time

From the Guardian: M&S chief pleads for government help after sales slump
Marks & Spencer chief Sir Stuart Rose today called on the government to do all it could to restore consumer confidence as the high street giant unveiled dire Christmas trading, the closure of 27 stores and confirmed more than 1,200 staff were to be axed in a bid to cut costs....The 125-year-old retailer, which has 600 outlets, said like-for-like sales were down 7.1% in the 13 weeks to 27 December, despite holding two one-day pre-Christmas sales, when 20% was slashed off the price of all goods. Like-for-like sales of general merchandise – clothing and homewares – were down nearly 9% and food sales declined 5.2% from 2007 levels....Rose said the looming recession was "the sharpest downturn in the shortest time" he had witnessed in 38 years in the retail business, and the outlook remained challenging.I suspect December retail sales will be very ugly (worse than October and November).

Deflation and hyper inflation - A possible scenario

By Aka

In and amidst the developing credit crunch the fear of deflation and hyper inflation are both present and increasing. Like a ship taking on water and rolling from side to side the global economies are more and more swinging between deflation risk and hyper inflation risk. Volatility on commodity and financial and stock markets has never been so high (oil from $140 to $40 a barrel, global stock markets down 50%, 0% yield on treasury stock etc).

Where fed's around the globe have been very successful in keeping inflation under control and within the acceptable bandwidths, the increasing volatility is likely to cause havoc in the coming years. The only problem is nobody know if it will be deflation, high inflation or both.

One scenario is that the US will accept the dangerous route of high inflation and deflate itself out of its current position. Europe is likely to do the opposite and is more likely to face deflation.

For the US which has already increased its money supply dramatically this is a more logical approach. Being supported by the fact that the US$ is the reserve currency the US has this option to play with. By increasing the money supply and stimulating the economy though infrastructure spent etc it also will cause inflation, deflate its currency (the US$ may fall by half) therefor reduce its overseas and internal government debt, which is north of $10T and allow its export sector to lead the economy toward recovery. This before Europe has worked its way out of the credit crisis.

For Europe that due to the 30-ies in Germany is far more afraid of hyper inflation is not likely to increase the money supply extensively. Also given that this can only be done by the European bank and not by any of the EU counties on its own initiative.

As we are only at the end of the credit crunch and the beginning of the recession for Europe the negative flow into the real economy has still pass through a large number of stages and reinforcing negative cycles. Europe is therefor likely to see a structural drop in demand, leading to price decreases, leading to increased unemployment, leading to further demand reduction, etc.
An extended period of deflation is therefor more likely for Europe leading to an high an overvalued Euro stalling Europe's export leading to further deflationary pressure.

All in all it looks like the US and Europe are on different paths in search of resolving this crisis. Their different path are likely to lead to more problems down the road.

UK interest rate lowest in 315 years

Source: BBC
The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.

1/3 of Banks Will Disappear Next Year

Many banks don't have enough money to survive in 2009, but mergers will keep their brands alive, said Ralph Silva of TowerGroup

Setting the Scene

By Aka 

During the 1930's the GDP of the US reduced by 30%. During the Asia crisis in the GDP of various Asia countries reduced by 15%. Leading economist are currently still talking of reductions of one or two percent for our current recession. Is that realistic?

Americans' debt shrinks - 1st time ever

Household debt falls by 0.8% as Americans' net worth falls by largest amount on record on declining home and stock prices

Source:cnnmoney.com

From one bubble to the next

By: Aka

After ten years of debt fueled consumption, where the US borrowed from China in order to consume products from China the great unwind and deleveraging process has started in earnest. Given the structural nature of this bubble monetary and fiscal stimulus is needed to substitute for the fast falling away consumption and investment wave that has swept us to false hights over the last ten years.

Stimulus is good but only to the extent that is stops structural damage, i.e normally leveraged, well run companies from being washed away with the culpable (US banks and hedgefunds who created and fueled this bubble using leverage, cheap debt and dis-aligned systems - derivatives). Because if we allow the foam of the bubble to continue to exsist by funding a false economy, we will only be replacing one bubble by the next. It is a fine act to find the right balance between clearing out the dead wood and not distroying an entire forest.

MSCI world stock market drop 50+%

Source: Economist

Roubini - worst crisis in US in 50 years

http://econvideo.blogspot.com/2008/11/roubini-worst-says-us-recession-in-50.html

South Korea

South Korea's debt (public and private) is the only one in Asia that tops the US (251% of GDP). The average in Asia is 143% of GDP according to the Economist.

Credit crunch will last years and years

As Schiller set out in his talk on 28 November 2008.

23 Trillion

* The US Government has pledged US$7.76 trillion to rescue the financial system, according to Bloomberg data.

* This equals US$24,000 every US citizen and nine times what the US has spent so far on wars in Iraq and Afghanistan

* The crisis has erased US$23 trillion the value of the world's companies

Source: NZHerald

Home prices in record decline

A Case-Shiller survey shows a 16.6% annual decline in the summer months as the housing picture continues to deteriorate.

By Les Christie, CNNMoney.com staff writer

Last Updated: November 25, 2008: 3:23 PM ET

The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.

Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.

In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops - 2.7% in Dallas and 3.5% in Charlotte.

IN THE RED

Bertram said the US banks' problem was on the assets side of their balance sheet (the quality of their loan books). New Zealand banks' problem, by contrast, is on the liabilities side - their reliance on imported credit for more than a third of their funding.

* New Zealand's large current account deficits have been funded by banks importing credit, which is now in short supply.

* This has helped keep the dollar high, hobbling exports and making it harder now to trade our way out of trouble.

* And now the banks have sought, and been given, a Government guarantee to help them roll over those offshore debts.

Ireland

Nov 20th 2008
From the Economist Intelligence Unit ViewsWire

Ireland's economy faces three years of declining output

The Irish economy is already in a deep recession and it now appears almost certain that activity will continue to contract over the next two years. 

Global Stock markets to fall 75%

Prediction AB: global stock market to fall 75% of its high (Oct 07). Currently the S&P is 50% off - meaning another 50% before we reach bottom

This is less than during the depression of the 30'-ies where the stock market dropped 89%. The main reason for the further drop is that the spill over effects to the real economy has only just started, plus the spill over in all other emerging markets.

The next stage will be the debt driven deflation cycle (Fisher) where monetary policy is rendered useless, once interest rates near 0% and consumers cut spending to reduce debt that increases due to deflation. There will be limited appetite for capital expenditure and consumption will be limited to necessities.

WASHINGTON, NOVEMBER 12, 2008--With stock and house prices falling and Congress considering a new fiscal stimulus package and exploring additional bailouts, is an end to the financial turmoil in sight? At an AEI event on October 30, a panel of experts offered their opinions on the current state of the housing crisis and speculated about when the housing market.will finally bottom out. The consensus? It will be a while yet.

Falling economic indicators and the continued slowdown in the housing and credit markets, both in the United States and abroad, have given the panelists reason to believe that the nadir of the housing crisis is still to come. Predictions of when markets would reach their bottom varied from third quarter 2009 to sometime in 2010. New York University economist Nouriel Roubini said that "for the last few months, people have always been calling the bottom. . . . They said it after Bear Stearns, after Fannie and Freddie, after AIG, after TARP [the Troubled Assets Relief Program] . . . and each time markets have rallied for a little bit and then gone further south. . . . Unfortunately, I don't think we're at the bottom."

18 November 2008

• Global Recession - this will be the first time since recorded time
• The Goldman forecast is for a 3.5% annualized decline in GDP for Q4.
  
• Forecast: 2009 Hotel Occupancy Rate to be Lowest Since 1971
  
• Citigroup: About 50,000 job cuts in "near-term"
  

Global recession

Global recession is it possible? US / Europe now UK.
Japan not far behind

We are in total new territory as recessions have always been limited to certain countries or a combination of countries.

Global GDP is around $45T. Global growth has been around $2T p/a and this would slow to $1T or zero.