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

The Looming US Depression

BE CAREFUL what you wish for. The entire US Treasury market is betting the Fed will cut rates in September. Goldman Sachs expects rates to finish the year at 4.5%, fully 75-points lower from here. The head of Ford just demanded a cut in interest rates too, and now Bill Gross of Pimco, head of the world's biggest bond fund, says Washington should step in to save US home-buyers – "write some checks, bail 'em out" – before their teaser mortgage deals run out, pushing up to two million families into foreclosure. But what's the hurry? The US Dollar is already more worthless than at any time in its history according to the international currency market. The trade-weighted US Dollar closed July 2007 at its lowest monthly value ever against the world's other major currencies. It took a 12% drop in world stock markets to force enough short-covering to cause a bounce in the greenback. Flooding Wall Street and Main with freshly printed bills – whether through sharply lower interest rates...or through direct intervention by the "Reconstruction Mortgage Corporation" that Bill Gross is calling for – will only remind the world why it was so bearish on the Dollar before the start of this month. Come Sept. 2007, the only difference will be that we can add the chasm of negative US real-estate equity to the yawning Twin Deficits. And with America's troublesome triplets choking its throat, the only hope for the Dollar would be a swift death. Long-term support on the Dollar's Trade-Weighted Index had sat around 80 since the mid-90s low. But not any more. "Someone would certainly be blamed for the ultimate collapse when it came," as J.K.Galbraith wrote in The Great Crash, 1929. "There was no question whatever as to who would be blamed should the boom be deliberately deflated. For nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-1." It took re-arming for World War II to finally kill the Depression, but Milton Friedman still blamed the Fed for causing the slump nearly thirty years later. Ben Bernanke has gone on to build his entire career on saying "sorry" for the interest-rate hikes that apparently caused the modern world's worst-ever recession. Indeed, the long shadow of the Great Depression today blocks out most recollections of just how bad things became during the inflationary bust of the 1970s. Investors fleeing into the safe, welcoming arms of US Treasury debt would do well to remember what happened when gains in the Consumer Price Index overtook bond yields between 1973 and 1980. (They might want to recall what happened to Spot Gold Prices when the same thing happened between 2003 and 2005, too.) But the current Fed chairman has played no small part in ensuring that flared pants and double-digit inflation have been replaced by the 1930s deflation as the big ghoul from history most feared by policymakers, central bank wonks and investors worldwide. "During the major contraction phase of the Depression, between 1929 and 1933," as Bernanke said in a speech of 2004, "real output in the United States fell nearly 30%. During the same period, according to retrospective studies, the unemployment rate rose from about 3% to nearly 25%, and many of those lucky enough to have a job were able to work only part-time." By comparison, the 1973-75 recession – "perhaps the most severe US recession of the World War II era," according to Dr.Ben – real output fell 3.4% and the unemployment rate merely doubled from 4% to 9%. "Other features of the 1929-33 decline included a sharp deflation," he went on. "Prices fell at a rate of nearly 10% per year during the early 1930s – as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households." Fast forward to late summer 2007, and Bill Gross has bought into the Bernanke Fed's worst-case scenario, adding the full weight of his $692 billion in bonds under management for good measure. "Market forecasters currently project over two million [housing] defaults before this current cycle is complete," says Gross in his latest comments. "The resultant impact on housing prices is likely to be close to minus 10%, an asset deflation in the US never seen since the Great Depression. "The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions..." In short, the very crisis for which Ben Bernanke has been waiting to prevent all these years is beyond his meager talents. Bill Gross reckons that even a 200-300 basis-point cut in the Fed Funds rate would still leave the vast bulk of re-setting homebuyers facing monthly mortgage repayments they simply can't bear. "Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do," he advises George W.Bush, claiming that Depression-era fiscal meddling will somehow avoid weakening the Dollar. That will only happen, however, for as long as the rest of the world keeps debasing its money at the same rate as Washington. And that, in turn, will only protect US investors for as long as fixed-income fund managers can pretend that bond-interest coupons aren't being eaten alive by inflation. The Bank of England summoned up £314 million from nowhere on Monday, making a short-term loan to cover a gap in Barclay's cashflow. Four of Wall Street's finest borrowed $500 million each from the Federal Reserve on Wednesday. The European Central Bank injected €40 billion in three-month loans on Thursday (around $54.2 billion). The offer was snapped up by German and Italian banks unable to get short-term funds in the market. On the other side of the trade, meantime, the cost of natural resources continues to push higher, even as Treasury bonds surge. Wheat futures just hit a new record high, after India – the world's second-biggest consumer of the grain – invited bids to help it buy an "unspecified" quantity of wheat to help expand government stockpiles. Global inventories, says the US Dept. of Agriculture, will fall to a quarter-century low by next June. Soybean prices are also rising, as China's domestic output is likely to fall after a prolonged drought – potentially losing 17% from last year and causing imports of 31.4 million tons in the 12 months beginning Oct. Copper imports into China, meanwhile, doubled in the year to July, said the Beijing customs office last Wednesday. The only US data report that showed a double that day was the number of foreclosure notices sent out in July to late-paying US homeowners. Investors fearing a sharp cut in US interest rates, even as the cost of living continues to rise sharply, may want to consider an allocation to Physical Gold Bullion. During the negative real interest rates of the late 1970s, Investment Gold more than quadrupled to its all-time high of $850 per ounce. Its greatest gains during the current bull market so far came when US interest rates again dipped below the rate of inflation between 2003 and 2005. To Buy Gold Online Today – as near to live "spot" market prices as private investors can get – be sure to visit BullionVault now... Adrian Ash, 28 Aug '07

Who will pay the price for the Credit Crunch

Curb the greedy global financiers Will Hutton One of the most inequitable and amoral acts in modern times is happening in front of our eyes and there is hardly a murmur of protest. The multibillion-dollar bail-out of global finance after one of the most reckless periods of lending and deal-making since the late 1920s is extraordinarily one-sided. Little people's taxes are underwriting the mistakes of big people, who in the process have made riches beyond the dreams of avarice. Globalisation, it is now clear, is run in the interests of a global financial class that has Western governments in its thrall. This class does not give a fig for the interests of savers, clients or wider workforces. The rules of the game are set up solely to benefit the financiers, whether in London, New York or Hong Kong. The nonsense at the heart of the crisis -- lending 100% mortgages to borrowers with no income, employment or assets, packaging up the resulting debt and selling it to banks around the globe while taking a handsome fee on every transaction -- can be launched with impunity. Financial regulation, we are told, hinders the efficiency of financial markets. But now that it has become obvious that the mainly American borrowers have neither the capacity nor intent to repay any of the mortgages in an era of higher interest rates and stagnating house prices, there is justified panic at the wider consequence of the global system holding trillions of dollars of valueless debt. The past few days have seen some recovery in the financial markets and some hopes for a return to normality, but what does normal mean? The system that has delivered hundreds of billions of dollars of written-off loans with a global impact can hardly carry on as if nothing has happened. The banks at the epicentre of the crisis should go bust and heads should roll. The hedge funds that bought the debt, traded it and sold it on to banks globally should also be allowed to go bust and be subjected to much closer surveillance and regulation. Interpol should make arrests in New York, London, Tokyo, Beijing, Frankfurt and Paris, starting with all the executives in the credit-rating agencies who blithely ranked the debt as creditworthy in exchange for fat fees and freebies from the very banks who were making the absurd loans. Governments should bring suits against the executives involved, the repositories of vast personal wealth, to help repair the hole in private and public balance sheets. Instead, most central banks and governments across the West are straining every muscle to limit the fall-out, assure banks and hedge funds that there is limitless public money on tap and that governments' first aim is to get back to "normal". The explanation is obvious. The Western financial system is too important to be allowed to implode; credit is any economic system's life-blood and if the supply lines get gummed up because of a collapse of confidence and severely punctured balance sheets, everybody suffers. Quite right, but at least we can be careful in future about the terms on which supportive cash and potential bail-outs are made, as well as drawing larger conclusions about the nature of the implicit contract between finance and society. Unbelievably, the European Central Bank has made hundreds of billions of euros available to all comers within the European financial system at no penalty for the privilege, while the Federal Reserve Bank in the United States has lowered the interest rate at which it supports distressed banks. It is as though Europe and the US had announced an amnesty to the world's criminal gangs after they had gone on a killing spree because they feared the killing would get worse. The Bank of England alone has held the line, insisting that anybody turning to it for cash as a last resort will have to pay at a rate of interest that will hurt the borrower. Good for the bank, except its stance is undermined because outside the eurozone it cannot insist the European Central Bank follows its stance. It is also undermined by a British government that on these matters is the most craven in the West. For as the German and French governments along with senior American Democrats argue, the whole affair raises fundamental questions. It cannot be right that finance insists on freedoms and lack of regulation to indulge in anti-social recklessness in order to make personal mega-fortunes, but when things go wrong to ask for government bail-outs with no questions asked. Thus German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for more transparency and regulation of hedge funds; thus in Brussels and Washington, there are to be investigations into what the executives at the credit-rating agencies have been up to. But from the British government there has not been a peep, not a hint that the contract between finance and society needs to be reassessed both at home and abroad. That would be -- heaven forfend -- "anti-business". But the West's economies and societies cannot be constructed as if their sole raison d'être is to ensure that there is a steady flow of deals for investment banks, private equity houses and hedge funds, along with an abundant flow of credit, and the moment there is any interruption governments bail them out. Finance is hardly poor. In Richistan, his revelatory book about today's mega-rich, Robert Frank shows how closely enmeshed instantaneous wealth and the financial markets have become. British leader Gordon Brown runs a government that is essentially conservative over business opposed by an opposition yet more conservative, with the Lib Dems terrified to rock the conservative consensus. Over the past few years, there has been a fire sale of British assets to foreigners, together with ever-closer entanglement with the American debt markets to sustain the bonuses of the financial community. It would not surprise me if, before the story is over, at least a couple of household British financial names have to be offered a lifeline. Somebody, somewhere must start blowing the whistle. The Americans at least take capitalism so seriously they challenge, monitor and regulate it. No such culture exists in degenerate Britain. We need a party which will speak for an interest other than self-interested, amoral plutocrats. None exists. -- Guardian Unlimited © Guardian Newspapers Limited 2007

Emissions Impossible

ENVIRONMENT EU carbon-trading slammed Wed, 13 Jun 2007 Businesses in the European Union will not be forced to reduce their carbon emissions by as much as previously thought because of "short-sighted" plans for the EU's carbon trading system, environmental group WWF said on Wednesday. The group criticised the second phase of the EU's Emissions Trading Scheme (ETS), designed to reduce the EU's greenhouse gas emissions, for allowing companies to "buy massive amounts of credits from projects outside the EU," under a system set up by the Kyoto Protocol. In its report titled "Emission Impossible", the WWF argues that "this reliance on cheap imported credits means that European industry may not have to reduce its own emissions at all" during the second phase of the carbon-trading mechanism, which is set to run from 2008 to 2012. Under the ETS, companies are issued carbon credits which effectively set a cap on how much they are allowed to pollute. Companies may then either reduce their own emissions and sell any extra credits to other, bigger polluters, or purchase extra credits, thereby raising their cap. The first phase, which has been running since 2005, was widely criticised because it has been argued that governments handed out too many carbon credits, allowing industry to pollute more freely than it should have been allowed to. The WWF report studied nine EU member states — Britain, Germany, Poland, Ireland, France, Spain, the Netherlands, Portugal and Italy — and estimated that during the second phase of the ETS, between 88 and 100 percent of those countries' carbon emissions could be effectively offset by purchasing additional credits from outside the EU. "The European Commission's decision to allow companies to buy huge volumes of project credits means that heavy industry — including the power sector — could potentially buy its way out of cutting its own emissions," said Dr. Keith Allot, the head of WWF-UK's Climate Change Programme. "There is a real danger that this will lock the EU in to high carbon investments and soaring emissions for many years to come — wrecking the EU's emission reduction targets for 2020 and 2030 and making a mockery of Europe's standing as a world leader in tackling climate change." "If the ETS is to fulfil its potential, we must ensure it leads to real carbon emission reductions within Europe."

The Myths and Pitfalls of Emissions Trading

This is a new blog that will attempt to unravel and demystify the world of emissions trading. The environment has become a seriously hot topic and there is no doubt that the next election will be fought using "carbon footprints" as a weapon. The market for emission trading is at present completely deregulated haphazard and fraught with disinformation. A number of brokers are making enormous profits from this situation and the world will need to bring these to a central clearing house to enable worldwide monitoring and rating to ensure that all this trading is in fact reducing emissions. I fear that this is not the case at present and more and more "credits" are created to augment income rather than reduce output. This step requires the political will of all countries, but some need to take the lead so I hope this will be usefull in bringing together articles and statistics that will help highlight the ongoing activities that are taking place and will need to happen to achieve this desired outcome. Please consider the environment before printing this Blog