Tallest Buildings As Leading Indicator

Some five years ago, I recall reading an article on how the construction and completion of each of the world’s tallest building usually coincides with a major equity market collapse. Sadly, I also remember that the article was written in a matter of fact way with no attempt to explain the co-relation.

Works on the Empire State Building began during the euphoric 1920s and finished during the Great Depression. If we are concerned about an upcoming global decline, perhaps we should find out if there are any super-tall buildings under construction?

Guess what? There is. The Burj Dubai, touted as the world’s biggest and tallest is currently under construction in the Persian Gulf city-state. What has happened since construction started? Well, since December last year the Dubai Stock Exchange has lost 54%.

Three landmark buildings in New York City – the Chrysler Building, the Empire State Building, and the Manhattan Company Building (40 Wall Street) – remain as tangible reminders of the enormous ambition and exuberance that characterised the era.

All three buildings were conceived in the bull market and built through the peak, only to open for business amid the worst office-space market in decades.

As each of these buildings were completed, they opened during down-trodden markets.

The signal to sell appears when the tallest building is conceived or begins construction.

Typically, the buildings open for occupation in the “worst of time”, usually in the midst of a major correction. This was proven true again for the Petronas Twin Towers in Kuala Lumpur; the twins were started in 1994 and completed in (you guessed it...) 1997. Need I say more about the co-relation?

The next tallest building was erected in Taiwan; Taipei 101 was scheduled to be completed in 2004. A similar end befell Taiwan in 2004.

Next, it may be Dubai’s turn. The UAE Stock Index collapsed the moment construction started on Burj Dubai, and the magnificent tower is not even completed.

With that, there now appears to be more believers that “tallest buildings” may be a leading indicator; but even as the coincidences appear to be overwhelming, no one has quite attempted to explain the linkages. My explanation is simple. It usually starts from two key traits – excess liquidity and big egos. You will never find countries like the Philippines, Thailand or even Holland planning to erect the world’s tallest buildings.

Certain prerequisites need to be present such as a thriving economy, a period of massive wealth creation (either through real estate/currency/equity markets) and insatiable big egos (you want people to know how well your country/city has done).

In a nutshell, too much money, throw in some big egos and you have a potent mix of problems stirred up pretty nicely.

That spells for an economy/markets/assets that have overshot.

Under construction

Burj Dubai is expected to be an 818m (2,684ft) tall skyscraper. It is currently under construction, and as of May 12 2008, it is 636m (2,086.6 ft) tall, with 160 completed floors. Once completed (projected for 2009) it will be the tallest man-made structure of any kind in history. Currently, there is no man-made structure under construction that could be taller than the Burj Dubai, although there are some proposals.
The 610m (2,001 ft), 150 floor Chicago Spire (formerly Fordham Spire) is currently under construction in Chicago. If completed, it would surpass the CN Tower as the tallest freestanding building in North America, and would be the tallest all-residential building in the world. Construction began in June 2007, and is expected to be completed in late 2010.
The Guangzhou TV & Sightseeing Tower, being built in Guangzhou, is expected to be 610m (2,001 ft) tall. If completed (projected for 2009) it will be tallest concrete tower.
The Jakarta Tower (Menara Jakarta) is a tower that is currently on-hold in Jakarta, Indonesia. Upon completion (projected for 2011), it will stand 558m (1,831 ft.) tall up to the antenna, thus making it the tallest concrete tower.
Russia Tower, in Moscow, stands to be 612m (2,009 ft) high and is expected to be completed in 2012.
The key appears to be when all these towers are completed. When they open, could their respective stock markets have been badly damaged by then?

We need to closely watch the Chicago Mercantile Exchange when the Chicago Spire opens in 2010.

Will a calamity hit down south China when the Guangzhou Tower opens for business in 2009?

Going by the theory on the link between wealth destruction and skyscrapers, thankfully, works on the Jakarta Tower is currently on-hold. The timing of the completion of the Russia Tower in 2012 looks just about right for a correction judging from the current capitalism surge.

Noteworthy is that the Shanghai World Financial Centre has just been completed and in time for the Olympics. But note this – it is greeted by Chinese equity markets that have shed 50% of its value from its high!

Bank guarantees causing stock market crash

INTERNATIONAL. Speaking on CNBC, Marc Faber the Swiss fund manager and Gloom Boom & Doom editor and publisher said the stock selloffs in world markets may be partially caused by the fact that many governments increased guarantees for bank deposits, making them a much safer investment.

"Now that deposits are guaranteed, basically I as an investor have no incentive to hold equities so I sell them and put my money in bank deposits," Faber told "Squawk Box Europe", on Monday.

The other measures taken by various governments to try and prop up ailing markets have had the opposite effect, he added.

"The interventions, they actually have increased volatility. It’s impossible to forecast market movements when you have interventions," Faber said.

"If the global economy slows down by as much as I think it will… then a lot of book values will have to be adjusted downward quite substantially," he said.

Chris Whalen from Institutional Risk Analytics makes a similar point in his latest newsletter saying that stock prices no longer represent value and the price confusion is making things worse.

"Price no longer represents value and there’s no reason to trust prices on the stock markets until the 80/20 rule is back in force, where 80% of stocks represent 20% of market volatility", says Whalen.

“The disruption caused by the ground rules shift is visible in all aspects of business and finance,” Whalen writes.

Faber's conclusion? "I think first we’ll have a bout of deflation that will actually be quite substantial… but then the budget deficits will go through the roof and the Fed will print even more money … and then later on we'll have very high inflation."

Roubini: S&P500 May Decline Another 30%

Citigroup (C) Won't Make It

Citigroup (C) Won't Make It
By 24/7 Wall St.
Last update: 4:38 a.m. EDT Oct. 27, 2008

http://www.marketwatch.com/news/story/story.aspx?guid={58fa552e-05b7-4f2e-b0f5-7dd531f414cb}&link=www.247wallst.com/2008/10/citigroup-c-won.html&print=true&dist=printMidSection

Citigroup (C) is not going to make it, at least not an an independent company. The FT has reported that the head of Goldman Sachs (GS) called Citigroup CEO Vikram Pandit to discuss a merger. Goldman had converted itself into a commercial bank. Maybe it was worried it would go the way of Morgan Stanley (MS). But, the Treasury has come up with capital for all the big financial firms, so the urge to do something has probably passed for the world's premier investment bank.
It is different for Citigroup. There things have gone from bad to worse.
Citigroup is not likely to make it as an independent company. It will not be a buyer. It will be sold.
If the bank's stock price and analysts covering the company are right, Citi's fate could be determined by the end of the year. Over the last month, shares in the bank are down by 40%. Rival JPMorgan (JPM) is off 2%. Wells Fargo (WFC) is up 10%. Citi's market cap is down to $66 billion. Bank of America's is nearly $100 billion.
In the last quarter Citi lost $2.8 billion, or $.60 per share, compared with a profit of $2.2 billion, or $.44, in the period a year ago. Revenue fell 23% to $16.7 billion
Bank analyst Meredith Whitney, who has been right more often than not on bank stocks, says that troubles in Citi's consumer group will drive up its losses more than expected. She cut her earnings estimates on the bank to a 2008 loss of $2.87 per share and a loss of $2.65 in 2009. Citi may not have the capital to cover those losses even with the government's cash injection.
What Whitney did not factor in just a week ago is that the credit crisis and signals of a recession have become much worse in a matter of days. Mortgage defaults are likely to rise more sharply then they have been as people lose jobs. The consumer's ability to pay his credit cards debt will deteriorate sharply. Citi's investment banking business is dead as a doornail. Most LBO loans are dropping in value as each week passes.
Citi will not report Q4 earnings for almost three months. It may run into awful trouble before that. The Fed and Treasury are going to have to find a merger candidate. Most likely that will be JP Morgan (JPM) because Bank of America (BAC) and Wells Fargo (WFC) are already digesting big acquisitions. Or, the government may turn around and take a majority stake in the money center bank the way it did with AIG (AIG) where it has already provided $90 billion in loans.
Vikram Pandit will have failed. It may take a little while for that to become absolutely clear, but Wall St. can take it to the bank. Or, maybe not.
Douglas A. McIntyre

Reasons behind runs on countries

As for this most recent phase of the withdrawal of credit, which has caused financial crises for a series of emerging economies in eastern Europe, Asia and South America (see "Now there are runs on countries") and also global falls in share prices, it was in a way wholly foreseeable.

It was caused, to a large extent, by an exceptional and unprecedented shrinkage in the prime brokerage industry, which in turn led to a serious reduction in the volume of credit extended to hedge funds, which in turn forced hedge funds to sell assets, especially those perceived as higher risk.

This contraction in loans provide through prime brokers was the inevitable consequence of the collapse of Lehman, but also - far more importantly - of the recent conversion into banks of Morgan Stanley and Goldman Sachs.

Morgan Stanley and Goldman are - by far - the biggest prime brokers, with Morgan Stanley the number one.
But as banks, they're prevented by regulators from lending as much relative to their capital resources as they had been as securities firms.

So the US authorities should have known - and presumably did know - that by allowing Morgan Stanley and Goldman to become banks they were in effect forcing a serious contraction in the hedge-fund industry, which in turn would lead to sales of all manner of assets held by hedge funds and precipitate turmoil throughout the financial economy.

Which, as if you needed telling, only goes to show that regulatory intervention carried out with the best of intentions can have consequences that - in the short term at least - can be very painful.

Roubini: `Severe Global Depression'

Jim Rogers

NEW YORK (Reuters) - Investor and author Jim Rogers, one of the earliest to predict the boom in commodities of the last few years, said Friday that he recently bought agricultural commodities despite the sharp fall in prices.

"I've been buying agricultural commodities. I bought some a couple of days ago. It's down today. It did not matter, I bought them. I covered shorts yesterday," Rogers said on CNBC.

Rogers told CNBC's Maria Bartiromo that the financial markets are in a liquidation phase. "Commodities are only thing that I can see that will not be impaired."

IMF Warns of Systemic Meltdown

First from the BBC, "IMF in global 'meltdown' warning":

The world financial system is teetering on the "brink of systemic meltdown", the head of the International Monetary Fund (IMF) has warned in Washington.

Dominique Strauss-Kahn said rich nations had so far failed to restore confidence, but he endorsed a new action plan by the G7 group.

He also said the IMF was ready to lend to countries in dire need of capital.

Mr Strauss-Kahn spoke after talks with US President George W Bush, G7 finance ministers and the World Bank.
On Friday in the US capital, the G7 group of most industralised nations released a five-point plan to free up the flow of credit, back efforts by banks to raise money and revive the mortgage market.

Speaking in Washington on Saturday, Mr Strauss-Kahn said: "Intensifying solvency concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown."

BBC made it sound as if he later retreated from his assessment:

He later told a news conference: "The first co-ordination between advanced countries and the rest of the world is now on track."

Further comments from Reuters:

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades.

At a joint news conference, French President Nicolas Sarkozy and German Chancellor Angela Merkel said they had "prepared a certain number of decisions" to present at a Sunday meeting of European leaders as they work feverishly to restore blocked credit markets to working order.

The United States appealed for patience, but the International Monetary Fund stressed that time was running short after leading industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.

Hypo will not lasted to wednesday.

HRE spokesman Obermeier did not want to comment Spiegel Online as to reports that the liquidity Gap of the bank could reach 70 to 100 billion euros by the end of 2009. He could only confirm that the consortium's original aid pledge had been withdrawn. "Why, we do not know," Obermeier said. He said there were clear signals from the shareholders and Government, that they wanted to cooperate to find a solution to the problem....

Sources close to [Finance] Minister Steinbrueck said that the Finance Ministry had not been informed of the changed situation in advance by either Hypo Real Estate or the consortium of banks. The government was informed only through ad hoc communication with HRE that the rescue package had collapsed. "We will now try to pick up the pieces on Sunday," the Ministry of Finance said. The aid plan, agreed to one week ago, foresaw a short-term loan of 15 billion euros and a long-term refinancing of up to 35 billion euros in the second half of 2009.

"Die Welt am Sonntag" had previously reported that Deutsche Bank had found in a study that HRE already clearly needed more money in the short-term. According to the Deutsche Bank report, the company would lack up to 50 billion euros by the end of the year and even as high as 70 to 100 billion euros by the end of 2009....

"If there is no solution when stock markets open on Monday morning, the company won't make it two more days," said a banker.

This week, the Bundesbank and the BaFin had labeled the rescue operation which is now collapsing as vital to avoid "severe disruptions to the financial markets". In a letter from the Bundesbank and BaFin to Finance Minister Peer Steinbrueck it was said that otherwise the German financial and economic system would be threatened by "similar unforeseeable consequences" as after the collapse of the U.S. financial group Lehman Brothers.

Do you really understand structured products?

Written in 2007. A hint of what coming.

IT is almost funny. We have invested billions of dollars in structured products, but no one seems to understand how they work.


Here's how: Equity-linked notes (ELN) promise high returns and are one of the most popular structured products. The most advertised has been Pinnacle Notes. It is now selling series 8 which will close its offer tomorrow.

It is similar to other ELNs. Your earnings are linked to eight well-known local stocks like DBS, UOB, OCBC and Singapore Press Holdings.

If the price of all eight counters declines by no more than five per cent, you earn an annual return of 8.8 per cent. It's good.

If all eight stocks decline no more than ten per cent, you get 4.8 per cent. It's still good.

For the worst case, if even one stock declines more than 10 per cent, your return drops to zero.

Structured products limit both losses and gains. For Pinnacle Notes, these range from 0 to 8.8 per cent per year for four years. It looks fair.

Dig a little deeper, however, and you'll find problems:

1) First, if the market is strong and all eight stocks remain above their launch price (LP), you will be 'knocked out' after three months. Then, you get only your principal plus 2.2 per cent interest.

2)Second, to get the full 8.8 per cent per year for four years isn't easy. ALL eight stocks must remain above 95per cent of the LP and at least one must drop to the 95 to 100 per cent range.

3) Third, if just one of the shares drops into the 90 to 95 per cent range, you get 4.8 per cent.

4) Fourth, if just one of the eight stocks falls below 90 per cent of the LP, your return falls to zero.

5) Fifth, ELNs and Pinnacle Notes do not disclose costs. Sales people may tell you there are none.

Don't believe it. The costs are significant and higher costs increase the likelihood of your receiving the lower end of returns (0 per cent).

6) Sixth, Pinnacle Notes are 'principal protected'. It sounds reassuring, but the protection can be withdrawn when you need it the most, as I will explain.

PRINCIPAL PROTECTED?

Pinnacle Notes invest about 90 per cent of your money in high-rated corporate bonds and 10 per cent in options.

The options do well when the Notes' 4.8 and 8.8 per cent payout conditions are met. Otherwise, they expire worthless. That is okay since the bonds earn enough to pay expenses and repay your investment.

It gives you principal protection.

If even one bond defaults, however, the issuer can cancel your protection. It is all explained in the 242 pages of prospectus and pricing statement. It is heavy reading. Here are two key excerpts:

(i) The principal protection can be withdrawn if a bond's interest payment is late. The word 'late' is defined rather strictly in the prospectus.

It says: 'reference to any grace period will not be applicable'. (page A-26)

(ii) The pricing statement says: 'the amount the Issuer will pay back... could be significantly less than the principal amount of the Notes. Accordingly, it is possible that investors could lose all of their investment.' (page 13)

Lose your investment? What about the principal protection?

Well, it is there for you in good times. In bad times, when you need it the most, the protection can be withdrawn by the issuer.

A Pinnacle Notes salesperson explained it to me this way: 'It's not as safe as government bonds, but it is still safe.'

That brings us to the billion dollar question: If the risk of the bonds defaulting is really so small and hardly worth mentioning, why pass it on to investors?

Why doesn't the issuer avoid this matter by simply taking the risk itself?

The only answer I've received so far is: 'It's the industry practice.'


--------------------------------------------------------------------------------

The more, the merrier? Not for these equity-linked notes

THE previous series of Pinnacle Notes, series 6 and 7, required six bonds to stay within a prescribed price range. Now, to earn a return you need eight stocks.

Normally, adding more shares to your portfolio is good. It provides diversification.

With structured products, however, the investment rules get turned on their head. Now, owning more stocks is bad.

Why? It's because the chance of six stocks staying within a given price range is somewhat of a long shot.

The chance of eight stocks doing it is even more remote.

The sales people I talked to never mentioned this.

Their focus was entirely on earning the top return of 8.8 per cent. No one said a word about the probability of achieving it.

Apocalypse soon

The leverage pyramid supporting world property prices is unravelling, but it's not too late to sell
--------------------------------------------------------------------

The troubles at Fannie Mae and Freddie Mac, the US semi-government lenders that hold or guarantee US$5.4 trillion of mortgages, have exposed the innermost sanctum of the credit-cum-property world of the past decade. They have lent their semi-government credit ratings to dubious financial products that purport to decrease financial risks by reshuffling the deck. While government money will bail them out, they will cease to be the sugar daddies for Wall Street. The leverage bubble has nowhere to hide; it will explode.



Rising leverage was the tide that carried all asset prices upwards. In Hong Kong, London, Mumbai or New York, rising property prices became the reason for prosperity, and this prosperity was the rationale for the rising prices. As one Hong Kong tycoon told me, wealth begets wealth; people who make money in the stock market buy property, people who make money in the property market buy stocks, and the happy story goes on and on. Yet, the free lunch was an illusion. Its engine was the debt pyramid game.



The bricks for the pyramid were new financial products that purported to decrease risk for owning assets and, hence, required less capital for their purchase. The rising price trend validated the power of the financial innovations for several years. In fact, the rising trend was due to the belief in the new products that created a demand boom for risk assets with debt financing. Like any bubble before, this one fell under its own weight. As a bubble grows, it needs proportionally more money to stay afloat. At some point, there isn't enough to keep it rising. The ensuing rush for the exit reverses the momentum. The way down is usually much steeper than the way up.



Rising oil prices are an accelerator for the downturn. Money is reallocated from most bubble cities to oil exporters. The money reduction sucks the air out of the bubble. To fight the receding tide, central banks are printing money to slow the descent. But more money leads to higher oil prices, sterilising the central banks' efforts. Further, high oil prices depress economies and decrease investor confidence. The central banks are fighting a losing battle against falling asset prices and are fuelling stagflation. The inflation will take years to cure. The central banks are digging their own graves.



Investors should sell any asset that has benefited from rising leverage. Property is entering a bear market everywhere except among oil-exporting countries. All else being equal, while inflation is good for property, the current price is already too inflated to be supported by inflation. While the consumer price index rises, property prices fall. At some point, the ratio of the two returns to the historical norm and the bubble is fully deflated. On that basis, property prices may fall by one-third globally, and by half in many "hot" cities.



Hong Kong's property market is triply vulnerable. First, the city's economy depends on its stock market. That is falling. Local speculators made billions from mainland IPOs and they splashed out on luxury properties. The wealth spillover from the stock market boom was the driving force for the property market.



Expanding financial sector employment was another spillover. As investment banks expanded their payrolls on the dream of endless hot Chinese IPOs, many bankers got their big bonuses. But the hot IPOs of yesteryear are now underwater. Loss-bitten investors are not re-entering the market. Those bankers lucky enough to keep their jobs have no expectations of a bonus. This is definitely not the time to splash millions on a luxury property that is actually a modest-sized concrete box.



Second, the US Federal Reserve is likely to raise interest rates after the November election. US inflation is becoming entrenched. The Fed is caught between financial and price stability. Every time it tries to sound tough on inflation, another financial explosion forces it to loosen the money supply again, sparking more commodity speculation.



Next year, the explosions may cease and the Fed may be able to switch to fighting inflation: it may raise interest rates to 5 per cent in the second half of the year. As adjustable-rate mortgages dominate Hong Kong's property financing, the massive rise could hit investors or speculators hard. The default rate could spike.



Third, China's economic cycle is turning down but inflation is staying up. In particular, Guangdong faces a serious downturn. Its export economy is being hit hard on rising costs and falling demand. What is happening to Macau's casino business shows how a lack of money in Guangdong could affect its neighbours. At the same time, inflation means that Guangdong will charge Hong Kong more for its goods and services. Hong Kong will get less money from, but pay more to, its neighbour.



The triple squeeze may imply one of the worst years, next year, for Hong Kong property. During the current bubble, the mass market hasn't inflated dramatically. The pain from the massive price decline between 1997 and 2003, plus sluggish income, has prevented mass hysteria in the property market this time. Those with money to spare ramped up the "luxury" market. Citing negative real interest rates, too many people - mostly financial professionals who may lose their jobs soon - have maximised leverage for property purchases in the past two years. The prices at many well-known developments have tripled since 2003.



Hong Kong's luxury property price may fall by 50 per cent from its peak. It is not too late to sell. An offer may be significantly lower than you expect. But you should take it. The big fall is yet to come.



Andy Xie is an independent economist

Tianjin 2008 - The Global Economic Outlook

Mystery Insurer On the Brink

US politicians sure like to keep us guessing.
Following on from last week’s installment (Mystery bank on the brink, which did indeed turn out to be Wachovia), senate majority leader Harry Reid, had this to say yesterday, regarding the bailout bill:We don’t have a lot of leeway on time. One of the individuals in the caucus today talked about a major insurance company.

A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt. That’s what this is all about.
His remark sent insurers spiralling, with shares in MetLife, the biggest US life assurer, falling nearly 14 per cent, and Prudential Financial, the second- biggest insurer, down more than 7 per cent. Life insurer CDS widened (see Bank of America chart below), before a spokeswoman for Reid denied his earlier comments:

Senator Reid is not personally aware of any particular company being on the verge of bankruptcy. He has no special knowledge about [a bankruptcy] nor has he talked to any insurance company officials … Rather, his comments were meant to refer to the conditions in the financial sector generally. He regrets any confusion his comments may have caused.Oops.

Credit Market Winter

This is the major economic events this week:

From RGE Blog:

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:
Situation Report: So far as I can tell by working the telephones this morning:
LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is ceasing up.
This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.
I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.
Another senior professional in a major global financial institution wrote to me:
Today, in our trading room, I could see the manifestations of a lending freeze, and the funding hiatus for banks and companies, with libor bid only, the commercial paper market closed in effect, and a scramble for cash - really really scary.
Do you think this is treatable without a) a massive coordinated liquidity boost and easing of monetary policy and b) widespread nationalisation of some banks, gtess to others AND a good bank/bad bank policy where some get wiped along with their investors? The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.
And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffet declared yesterday, as reported by Bloomberg:
the U.S. economy is ``flat on the floor'' after a cardiac arrest as companies struggle to secure funding and unemployment increases.
``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,'' Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. ``The economy is going to be getting worse for a while.' …The credit freeze is ``sucking blood'' from the U.S. economy, Buffett said.

Fed balance sheet balloons 55% in 4 weeks

It really looks like Helicopter dropping money from the Sky. Heli Ben not bluffing he will drop money to wall street in his speech during 2002

US in deep recession

The U.S. recession will be "significantly deeper" than they previously thought, Goldman Sachs economists predicted Friday in a research note. ... The unemployment rate will likely rise to 8% by the end of next year from 6.1% currently.
Goldman is now forecasting Q3 2008 real GDP growth at 0.0%, with PCE at minus 2.5% (annualized as reported by BEA). This is similar to my two month estimate for PCE, see Estimating PCE Growth for Q3 2008. Both PCE and investment will be negative in Q3, but net exports, private inventories and government spending will probably all show positive growth in Q3. So GDP may be close to zero.

A major change in the Goldman outlook is the increase in the unemployment rate to 8% in 2009 (their previous forecast was for unemployment reaching 7% in 2009).

One of the features of recent recessions is that the unemployment rate kept rising for 18 months to two years after the recession officially ended. This suggests that the peak unemployment rate (for this cycle) might not happen until 2011, even if the recession ends in late 2009

After the Bailout, it get any better?

People may say sell into rally. I think no one believe in a recession holding stocks are a better option. These 5 years the stock price rally so much. It will be very very abnormal it never drops 50% according to history. This time cannot be different.
While i has much respect for Warren Buffett but the ways he calls congress and the way he backstabs his wife for leaving him for another man makes me thinks he is not
so smart after all. He no need to publish book to tell everyone his dead wife betray him. Everyone with some brain power already figure out that a very long time ago. I can only say he forget about the Solomon Brother mess he get into again.


From Paul Krugman:
Has the bailout already failed?
OK, I know that’s premature. And I place no weight at all on the fact that the Dow plunged after the vote.
But it is interesting that short-term Treasury yields are down — only 0.13% on one-month — suggesting that the flight to safety continues unabated. Against this, John Jansen reports some signs that money markets are unfreezing, slightly.
We’ll learn more next week. But I have a prediction: well before January 20, Congress will be asked to vote on bailout 2.0.

Jim Rogers: America is in a recession

Rogers pronounced that "America is in a recession and the world is in a recession." He also placed much of the blame for the current U.S. crisis on former Federal Reserve Chairman Alan Greenspan, and said Greenspan's successor Ben Bernanke "doesn't know anything about markets...he doesn't know anything about anything except printing money."


Rogers said he's putting his money into airline stocks, Swiss francs, Japanese yen and agriculture stocks as long-term plays while shorting U.S. government long bonds.

He favours airline stocks because he believes demand for air travel as a global essential service industry will make a comeback once the airline sector emerges leaner and stronger from the current downturn.

Japanese Style Economy

USA may be facing a japanese Style economy soon. It may not be a lost decade but a losr period of around 5 years. As long it refuses to let bad banks collapse there are no ways to solve it problem. Look at 1997 asia crisis and Japanese 1990 Bubble. Then lot of econmies with the same problem in the past. It all show you must let rotten banks failed. This is part of the way to solve this crisis. The Bailout plan alway fail based on past experiences.


From Martin Hutchinson at BreakingViews (free subscription available):

Treasury secretary Hank Paulson’s plan uses money borrowed by the US government to buy value-impaired debt left over from the credit bubble. In a period of freely available credit, that might not matter. Good investments would get funded and, since additional money is available, some bad investments would, too. Diverting some money into unproductive uses should affect mainly those bad investments, with only modestly negative economic effects.

When money is tight, however, as it is likely to be for some time, withdrawing $700bn from the funding pool to support failed, past investments has a more serious effect on the economy, because capital flows are restricted by market illiquidity and investor trepidation. If that reduces asset prices, it exposes more loans to losses. If it prevents good investments by crowding them out of any chance of getting funding, it reduces economic activity. Either way, it makes the economy less efficient.

Herbert Hoover’s Reconstruction Finance Corporation of 1931-32, which made loans to politically connected companies, didn’t do much to alleviate the Great Depression. An equivalent amount of welfare handed out through the “Veterans’ Bonus”, which Hoover opposed, might have boosted consumption and stabilised the economy more quickly.

Japan’s 1990s infrastructure spending spree also diverted capital from more productive uses, helping to cause consumption to stagnate and the downturn to extend for 13 years. Paulson’s plan differs from both these examples in some ways, but is similar in that it may divert capital from its most productive uses. The danger is that the rescue plan could have similar consequences.

The Europe Time Bomb.

From other part of the world, Europe is in a bigger trouble than USA. This us what everyone have not seem. The Global recession may even start from there. Some of the banks in Europe are in worser conditions than Lehman Brother. It is just a matter of time this time bomb explodes.

From certain Newspaper:

It took a weekend to shatter the complacency of German finance minister Peer Steinbrück. Last Thursday he told us that the financial crisis was an "American problem", the fruit of Anglo-Saxon greed and inept regulation that would cost the United States its "superpower status". Pleas from US Treasury Secretary Hank Paulson for a joint US-European rescue plan to halt the downward spiral were rebuffed as unnecessary.

By Monday, Mr Steinbrück was having to orchestrate Germany's biggest bank bail-out, putting together a €35 billion loan package to save Hypo Real Estate. By then Europe was "staring into the abyss," he admitted. Belgium faced worse. It had to nationalise Fortis (with Dutch help), a 300-year-old bastion of Flemish finance, followed a day later by a bail-out for Dexia (with French help).

Within hours they were all trumped by Dublin. The Irish government issued a blanket guarantee of the deposits and debts of its six largest lenders in the most radical bank bail-out since the Scandinavian rescues in the early 1990s. Then France upped the ante with a €300 billion pan-European lifeboat for the banks. The drama has exposed Europe's dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against ''le capitalisme sauvage'' of the Anglo-Saxons.

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of "off-books" chicanery than the Americans. Mr Paulson may have saved Europe.

Most eyes are still on Washington, but the core danger is shifting across the Atlantic. Germany and Italy have been contracting since the spring, with France close behind. They are sliding into a deeper downturn than the US.

The interest spreads on Italian 10-year bonds have jumped to 92 points above German Bunds, a post-EMU high. These spreads are the most closely watched stress barometer for Europe's monetary union. Traders are starting to "price in" an appreciable risk that EMU will break apart.

The European Commission's top economists warned the politicians in the 1990s that the euro might not survive a crisis, at least in its current form. There is no EU treasury or debt union to back it up. The one-size-fits-all regime of interest rates caters badly to the different needs of Club Med and the German bloc.

The euro fathers did not dispute this. But they saw EMU as an instrument to force the pace of political union. They welcomed the idea of a "beneficial crisis". As ex-Commission chief Romano Prodi remarked, it would allow Brussels to break taboos and accelerate the move to a full-fledged EU economic government.

As events now unfold with vertiginous speed, we may find that it destroys the European Union instead. Spain is on the cusp of depression (I use the word to mean a systemic rupture). Unemployment has risen from 8.3 to 11.3 per cent in a year as the property market implodes. Yet the cost of borrowing (Euribor) is going up. You can imagine how the Spanish felt when German-led hawks pushed the European Central Bank into raising interest rates in July.

This may go down as the greatest monetary error of the post-war era. The ECB responded to the external shock of an oil and food spike with anti-inflation overkill, compounding the onset of an accelerating debt deflation that poses a greater danger. Has it committed the classic mistake of central banks, fighting the last war (1970s) instead of the last war but one (1930s)?
After years of acquiescence, the markets have started to ask whether the euro zone has the machinery to launch a Paulson-style rescue in a fast-moving crisis. Who has the authority to take charge? The ECB is not allowed to bail out countries under EU treaty law. The Stability Pact bans the sort of fiscal blitz that has kept America afloat. Yes, treaties can be ignored. But as we are learning, a banking system can implode in less time than it would take for EU ministers to congregate from the far corners of euroland.

France's Christine Lagarde called yesterday for an EU emergency fund. "What happens if a smaller EU country faces the threat of a bank going bankrupt? Perhaps the country doesn't have the means to save the institution. The question of a European safety net arises," she said.

The storyline is evolving much as eurosceptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter.

The next domino to fall.

Hedge fund have had not-so-hot returns so far this year, on average delivering losses despite promises to be able to deliver positive returns in markets good and bad.But SEC short banned has changed everything. Hedge Funds are closing down every week. This will definely cause troubles in the coming months.


From the Times Online, "'We are approached by hedge funds considering fund liquidations on a weekly basis'" (recall the UK is an even bigger hedge fund center than the New York metro area):

Every week at least one British hedge fund is considering winding up its funds as catastrophic investment performance puts the sector under unprecedented pressure, an industry expert said yesterday.

Andrew Shrimpton, the former head of hedge fund regulation at the Financial Services Authority who now runs Kinetic, a consultancy, said: “The credit crisis is definitely kicking in for the hedge fund industry now. We are being approached by hedge funds considering voluntary fund liquidations on a weekly basis.”

His remarks came as CQS, one of London's best-known hedge funds, wrote to its investors to say that its flagship $4.25billion CQS Fund had fallen 9.42 per cent for the year to date.... The fund, which specialises in convertible arbitrage - or small price differentials between bonds and underlying equities - is down more than 11 per cent for the year.

Mr Shrimpton said that turbulent investment markets and worries that investors are rushing to redeem funds were taking their toll on a sector that had experienced unrivalled growth since the turn of the millennium.

He added that the FSA's ban on short-selling shares in the financial sector was hitting individual investment strategies, including long-short equity funds and event-driven funds. “There is a shake-out going on. Everyone is being affected,” he said. He also called on the FSA to drop its temporary shorting ban as soon as stability begins to return to the markets: “Short-sellers add liquidity to the markets; there is a clear case for dropping the ban in more stable times.”....

There was no suggestion that the fund [CQS] would be forced to wind up.

It also emerged yesterday that Toscafund, the $6billion London-based hedge fund run by Martin Hughes, was sitting on substantial paper losses on its investments in Washington Mutual and Sovereign Bancorp..

Hedge funds were bracing themselves yesterday for a rush of redemption calls as investors, particularly the super wealthy, try to withdraw their capital by the end of the year.

One manager at a London hedge fund said: “Investors are scared - they want cash. We are not going to be immune from that.”

He said that it was likely that companies that run funds of hedge funds would be hit particularly hard. Hedge funds have recorded their worst investment performance for the year to date.

Worldwide, hedge funds have lost more than 10 per cent, according to Hedge Fund Research (HFR), the Chicago-based research firm.

Almost every hedge fund investment strategy has recorded losses for the year so far, according to HFR data. Only macro investments and merger arbitrage strategies have posted gains.

Will U.S. Treasury bonds default one Day?

From NEW YORK (Fortune):

What odds would you lay that Uncle Sam is going to be a deadbeat?

Until a few weeks ago, that sounded like a ludicrous question. And even amidst bailout insanity, the market has shown that the vast majority of investors still hold the view that U.S. Treasury bonds are the safest of safe havens, the kind of investment you'd bring into your bunker in the event of a nuclear attack.

But a few skeptics are willing to put their money where their doubts are.

One day after the failure to pass a Wall Street bailout plan sent the bond market into convulsions, skittishness about Uncle Sam's prospects was felt in the market for credit default swaps, insurance-like contracts in which buyers pay a premium and sellers agree to compensate them in the event of a specified event - most often the default of a bond.

In New York trading Tuesday, prices rose to a record 31.3 basis points (each basis point is 1/100 of a percentage point) to "insure" Treasury debt, compared to as little as 7.5 basis points in January, according to information provided by CMA DataVision.

In other words, it would've cost you $7,500 per year to protect $10 million in Treasury bonds in January - but $31,300 today. Of course, even the latter figure remains negligible compared to, say, the $2 million up front - plus $500,000 per year - that you would have needed to pay for the same amount of default swap protection on Morgan Stanley (MS, Fortune 500) bonds when the firm was under fire two weeks ago. But the increase is telling nonetheless.

A wild market
Credit default swaps are a wild, unregulated market - see "The $55 Trillion Question" - in which participants make bets on the failure of corporate bonds, municipal bonds and, yes, U.S. government bonds.

Default swaps on U.S. bonds have been bought and sold for at least four years, says Simon Mott of CMA DataVision. But the market is still little known. One prominent trader in U.S. debt, when asked about swaps on Treasurys, expressed surprise and started asking co-workers, "Did you guys know that there are credit default swaps on U.S. bonds"? (The other traders seemed to know, though one could be heard saying "it's the biggest joke" in the background.) U.S. government issues are not the only sovereign debt covered by swaps. Large banks such as JPMorgan Chase (JPM, Fortune 500) will match swap buyers and sellers for, say, U.K. debt or Icelandic government bonds.

Prices on U.S. government swaps may have peaked - at least for a day or two. The underlying market for U.S. bonds seemed to be stabilizing Tuesday, according to Tom di Galoma, the head of U.S. Treasurys trading at Jefferies & Co., as investors began anticipating that the government will provide some form of relief for the holders of toxic mortgage debt would pass. "We've seen the low in yields," di Galoma says. "Who else can go out of business at this point?"

Of course, if the past month has taught investors anything, it's how unsettling the answer to that question can be. But the U.S. failing to make its payments? Now that would be a shocker (yes, a Moody's spokesman confirms that it re-affirmed the U.S. government's AAA rating last week). And if it did, the swap player who bet the right way may not feel much like celebrating

The American Nightmares

I think Singapore businessmen can figure out to export those stuff to Africa countries. It is a big busines

The SEC needs to be closed Down

From the SEC: Statement of Securities and Exchange Commission Concerning Short Selling

Temporary prohibition of short selling in financial companies.
This order will be extended beyond its currently scheduled expiration, to allow time for completion of work on the anticipated passage of legislation. It will expire at 11:59 p.m. ET on the third business day after enactment of the legislation, but in any case no later than 11:59 p.m. ET on Oct. 17, 2008.

Oh well ... SEC allows all this troubles for the past few years, you cannot
expect it to do any better this time round.

The discussion of other

I am hopeless until now i thought Yves Smith is a guy? This is her discussion with Megan McArdle.

Mother Of All Bank Runs

The Professor is Bloody Smart, this is what i expected to happen around middle of DEC 2008 which will resulted into a very messy problem. I never expected him to figure this out.
However this is what i think. I do not gain any profit from it.

From:Nouriel Roubini

I will elaborate later today on the rising risk of the "mother of all bank runs", i.e. the risk of a run on the uninsured deposits in the US banking system. In Q2 of 2008 the FDIC reports $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits are not insured.


Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits.

Particularly at risk are the cross border short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $1 trillion. I will also discuss later today the appropriate emergency policy responses necessary to prevent this "mother of all bank runs" (i.e. the need for a temporary blanket guarantee on all US deposits combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued).

The Bailout will be a failure

The US Gov still do not understand that this crisis is too big to be rescue. It is at least 40% of the US economy. They need to change the very fundamental of the economy in order for it to sucess. This recession cannot be avoided. In Fact, it is just a normal bubble except it is abit bigger this time.

Any proposal to rescue the US financial system will fail to avert a recession said Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor and publisher, now based in Thailand.

A stock rally in the event that a package is approved will be temporary and should be used as 'an opportunity' to sell, said Faber.

"The rejection of the package is good because it shows that some people in the US are still sane," Faber said... "A bailout will not buy the US a way out. The government is less powerful than markets in fixing this mess."

"Most of the investment community are focusing on the financial crisis," Faber told TV newswire last night.

"But what they should be focusing on is that earnings will continue to disappoint for a long time, and that global growth is going to go down substantially. Most economies already today are in recession."

Noting that the US Dollar should continue to find support as investors rush to try and re-pay their debts "I think gold will be a relatively good investment under any kind of scenario until the US government bans the ownership of Gold in the United States.

"They are very good at changing the rules of the game – now banning short sales [of financial and other US equities].

"So yes – physical gold, you should own. Not derivatives with Citigroup, J.P.Morgan, UBS and investment banks, but physical and outside the US,

European banks May be in trouble

After the US banks, the european banks are very likely to be next as the ECB cannot launch a bigger rescue mission than the FED. The leverage ratio of those banks are over 50. It may be too easy to get into trouble for them.


According to Daniel Gross, director of the Centre for European Policy Studies in Brussels,

the crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to about €2,000bn (more than Fannie Mae) or more than 80 per cent of the gross domestic product of Germany. This is simply too much for the Bundesbank or even the German state, given that the German budget is bound by the rules of the European Union’s stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. Similarly, the total liabilities of Barclays of around £1,300bn (leverage ratio 60!) are roughly equivalent to the GDP of the UK.....