Prozac for Wall Street

Well we are only three weeks into the year and we are rapidly approaching my target levels on te downside. I must admit that I thought that we would have the usual January run up to my topside levels but this did not occur. Last nights 75 basis point cut in the Fed Fund rate will not help the markets at all and here is why: 1) The Fed does not set interest rates the banks do and they aint going to start lending to the already overstretched consumer again - What Sir, would you like another sub prime loan ton pay off your old one? 2) There is already too much liquidity in the system, look at the T-Bill rate at 2.5% 3) The opinion that the East will keep the global markets expanding is incorrect - last year the spend for consumers was as follows: US $9 trillion, China $1 trillion and India $600bn. The consumer is paramount and he cant draw on any more credit facilities unless his house price rockets again. This ain't going to happen. 4) What happens if you are one of the few who has been saving - you are being screwed to keep the market propped up. Who is the Fed working for: Wall Street Banks?? The market will continue to fall - don't try to catch the falling knife

Predictions for 2008

After a number of years being away from the coal face of the markets and just watching and observing them from a distance I have decided to include in my blog a yearly review and monthly updates. I guess this is mostly for my own benefit but also for those of you who may be interested; perhaps we could start some sort of forum to discuss my ideas as I am sure that a number of people will disagree. As I am now living in London I feel that I may perhaps have a different view to those of you in South Africa who have a different agenda in terms of a micro and macro outlook for the world’s economies. I have been known a perennial bear for most of my life but some of you will remember that I can be bullish, having called the bottom of the industrial market in 1995 and the bottom of the Rand in 2001. I sincerely believe that the credit crunch that started in the 4th quarter of 2007 has been entirely misunderstood and misinterpreted by mainstream media and as a result equity markets are not pricing in the reality of the situation. Financial shows like CNBC are totally wrapped up in underplaying the effect of this and in fact are only interested in one thing and that is talking the markets up – this is bordering on massive fraud and they will, I believe at some time in the future be called to account to justify their position given the facts that they know are reality but refuse to divulge. One interesting snippet regarding the wonderful Jim Cramer (CNBC pundit) is that on 29th January 2000he listed 10 stocks that you had to own no that the internet was changing everyone’s lives and that is “was different this time”. If you had heeded his advice 6 of his recommendations went bankrupt and your portfolio as of today is down 90% and he STILL has a job at the network and is still calling a bull market for 2008. 2007 will always be known as “Credit Crunch Year” and I believe that the full impact of this burst bubble will only play out during the duration of 2008, the common media is still on the theme that it will have an impact for the first half of 2008 and then all will be fine during the second half and equities and the housing market will continue on their unabated upward movement. Don’t be fooled, it cannot happen, the world is on the brink of a major collapse in the banking system, the problem is one of solvency and not liquidity as the Central Banks are declaring war on at present. The major problem facing the banks is the write off of their bad loans which many still are marking to market against an enormous amount of Insurance Policies and derivative hedges taken out to protect their exposure to sub-prime loans, CDO’s etc. The problem is that the Insurance Companies and some of the counterparties to these contracts are themselves insolvent and will never be able to settle their obligations to these contracts. To date the banks have admitted to write-offs of $100bn but I expect this figure to reach $1 Trillion, this will effectively wipe out the worlds banking capital. Not many people understand the fractional creation of money in the banking system but the loss of $1 Trillion effectively wipes out $14 Trillion in lending capacity of the banks so the lowering of interest rates by the Central Banks will have no effect on the ability of consumers to start another round of borrowing and therefore the start of the so called resumption of growth in global economies. Inflation vs Deflation A number of prominent economists are predicting higher inflation for 2008 and some even talking about stagflation; I am definitely in the camp of a global deflation scenario leading to a recession in the US and perhaps even a 1930’s type depression. As the banks embark on saving themselves and recapitalising from the Chinese and Middle Eastern Sovereign funds they will become very risk averse and lending to both the corporate and the consumer will effectively dry up. Unemployment will start to creep up as layoffs in the housing and financial sectors start to take effect. This will exacerbate the housing crisis and have a serious impact on company profits and balance sheets further limiting their borrowing capabilities. This will have the fundamental effect of little money chasing too many goods and effectively causing price erosion – Beware the gold bugs as the price of precious metals will be severely impacted in Q2. Shift of Power to the East The US as the global leader is now in question and as the financial implications of a severely bankrupt economy emerge the vast wealth and trade surpluses accumulated by the East over the last decade of uncontrolled US spending will allow control of a number of Industries including the financial sector to move to the East – This will effectively limit the US ability to be a worldwide aggressor (They have attacked 20 countries since the end of WW2). The long term impact of this is a subtle shift to a Muslim dominated world in the next decade. Country Views South Africa As South Africa’s higher interest rates against the falling rates in the US and European Zone remain the Rand will remain extremely strong as global cash, although diminished will continue to look for yield enhancement. I therefore see an extremely strong Rand through to the middle of 2008 and then it will start to deteriorate as the commodity prices fall and the geopolitical risk of the African Continent start to weigh. For the reasons above I see a surge in the Alsi for the first half of the year and then a substantial re-rating lower in the second half, this will only occur if the major markets see a slow and orderly down trend and not a panic induced crash in the first six months. Don’t bet that the rugby world cup will save the equity market as this is already priced into the index. Asia The Asian economy is probably the swing factor in the global economy that might mitigate the collapse of world trade, they will continue to grow but at a much lower rate than 2007 as demand for their exports start to diminish as the western economies slow. The bubble of the Chinese market may continue to expand for the first six months of this year but look for a serious re-rating at the end of 2008 Japan

The japans equity market will continue to struggle as they grapple with a sluggish economy and extremely low interest rates, they are suffering from an internal deflationary spiral and will continue to do so during 2008. This is the scenario that I believe will play out in America this year, one must remember that the Japanese market is still less than 50% of its peak at the end of their real estate bubble in the latter stages of the 1980’s. UK

The outlook for the UK market looks grim, the housing bubble is starting to unwind albeit 18 months later than the US and consumer spending is starting to slow with weaker than expected retail sales reported for the Christmas period. The City is highly dependant on the US banks and as their business contracts we will see a number of high profile lay-offs. Interest rates will continue to fall but may be limited by the inflationary fears of $100 oil and inflating food prices. The credit crunch scenario will continue to haunt UK banks and Insurance Companies through the whole of 2008. Housing prices will slide by at least 15%. USA

The US is already in recession and the only debate is how long it will last and whether it becomes a deflationary depression, the big factors that will dictate this are: - The continued housing slump - Consumer spending patterns - Collapse of the commercial real estate market - The collapse of the CDO ($2 Trillion) market due to the insolvency of the bond insurance companies. - Presidential race for the White House America and unfortunately the rest of the world will now have to pay the price for a decade of more of excessive spending, lack of saving and total greed and the fraudulent scam of CDO’s, SIV’s and other derivative structures. Conclusion: 2008 will be a year to conserve capital and cash and bonds will probably offer the best return in a deflationary global economy, a number of banks will go to the wall and don’t think that the South African banks will be immune. It will therefore be prudent to spread your cash between the banks and only have the guaranteed minimum with each one. I will endeavor to do a monthly update on these predictions and track them into the year end. May you all have a capital conserving 2008