A Malaysian Turtle Investing Diary...By Amateur for Amateur: Hussman Commentary

A Malaysian Turtle Investing Diary...By Amateur for Amateur: Hussman Commentary

Commodities - Hints for 2009

Rise and fall of commodities gives hints for 2009
Tue Dec 23, 2008 3:38pm EST

By Christine Stebbins - Analysis

CHICAGO (Reuters) - Just a year ago the debate about grain prices was simple: how high was high?

Huge global demand for grains, governments hoarding food, climate fears amid droughts, storms and floods -- basically every bullish factor one could imagine hit the markets.

The psychology of short supplies carried over to other commodities as well, especially industrial metals as China and India drew in a rapidly rising share of materials as their economies raced to modernize and transform.

The final element for the "perfect storm" sending commodities to stratospheric heights was the tsunami of Wall Street and other speculative money that, frustrated by stagnant stocks and bonds, finally bought into the commodities story.

The benchmark Reuters-Jefferies-CRB index .CRB of 19 commodity futures was at 358.71 on December 31, 2007, up 17 percent for the year. It jumped another 32 percent to hit record high of 473.97 on July 3, 2008.

Then, as investors blinked, it was over. The index started sliding and by early December fell to a 6-1/2-year low of 208.58 -- down 56 percent from the midsummer highs.

The global economic crisis tied to dried-up bank credit -- the lifeblood of all markets -- rocked Wall Street but also rolled over commodities, bursting bubbles right and left.

"A great start and an unexpected finish," said Rich Feltes, director of MF Global Research in Chicago.

Gold had soared past $1,000 an ounce. U.S. wheat prices had gone past $25 a bushel -- the previous record was $7.50 -- amid a 60-year low in U.S. wheat stocks. Midwest floods and a biofuels boom pushed corn above $7 a bushel, triple the average price for decades. In July, crude oil neared $150 a barrel.

"The main negative for all of these commodities is the demand side of the equation with the economic malaise," said Bill O'Neill, managing partner of Logic Advisors LLC and former head of commodities research at Merrill Lynch.

The question for the coming year? How low is low?

"As we head into 2009 I think an important question to ask is will that fund money come back?" MF Global's Feltes said.

"Commodities are not going to be a lead indicator," he said, pointing to gross domestic product instead. "The economy has to turn around first. There has to be fundamental justification for higher GDPs for improving commodity demand before investors feel comfortable coming back to commodities."

LIMPING ALONG - BUT KEEP AN EYE ON GRAINS?

In U.S. commodity markets, weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.

Open interest in the CBOT's largest ag contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.

The credit contagion shows no signs of being solved any time soon, with the hopes of most investors pinned to the new policies and measures a Barack Obama administration says it will aggressively put in place starting in January.

How quickly that might spur economic growth and investor confidence is an open question. But among commodities, one place to keep an eye on may be grains. Several factors might make food and biofuels a trigger for a commodities recovery.

For one thing, the single biggest demand force in the recent commodities craze -- China -- is not going away. Neither is food or biofuels demand, although the latter may cool down.

"The theme we've had in the last half of this year was all about demand destruction," said Dan Basse, president of Chicago-based consultancy AgResources. "We're concerned about supply destruction starting mid to late winter and having a bull market in agriculture the last half of 2009."

Basse said supply destruction -- referring to lower global grain plantings -- was a key to watch. But so are biofuels.

Obama, from a top corn and soybean state, has promoted biofuels. But using food crops to produce them has been increasingly attacked by food inflation watchers and even environmentalists, saying it does little for global warming.

"Ethanol has been one of the big drivers of the bull market," Basse said.

Another factor that will have a huge influence over whether commodity prices recover is the value of the dollar. A weak dollar makes U.S. grain exports cheaper, for example.

"The U.S. dollar will continue at least early in the year to drive all commodity markets," said Bill Lapp, president of consultancy Advanced Economic Solutions.

Identify market bottom

This piece of advice is probably worth millions to the right person. Giving this away free on my blog is almost altruistic
; ) Sometimes when we have certain "information" or " smart ideas", we tend to sock them away to make it work for our benefit.

There's not much wrong with that, its how rich people think and act.

Well, another way rich and wealthy people act is to ask "questions", questions seeking views and ideas, its free anyway. You'd be surprised how prevalent that is, and nobody would be thinking of "paying back" a fee to the ideas/views generator. I could do the same and not share, anyway a blog does not make me money. So, here's my Christmas gift to all.

How to look for markets' bottom this time around. You look around, there are so many stocks trading at 3 or 4 times PER, there are so many trading at just 0.2-03 book value, how to pick, when to buy? You switch on CNBC, everyday is a time to buy and sell, depending on who you are listening to.

We all know that 5 years out anyone who bought well would do very well. However, you also want to know you are buying into a genuine recovery. Seriously real bottoms are unattainable, but we can keep a lookout for catalysts that signify a genuine recovery.

Cheap valuations are a reflection of risk aversion, the rush to US Treasuries is a sure sign of risk aversion, the rush to USD and yen are a sign of definite risk aversion.

Gem #1: Markets will only start a genuine recovery when risk aversion subsides

Gem#2: Risk aversion reduction will be immediately reflected in weaker USD and yen

The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.

The best guide for locating current markets' bottom: WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. When these two currencies fall, it show a willingness to move exposure into other currencies or assets, be it stock or bonds. Before they are reflected in the prices, the signal will be most apparent in the currencies.

However, even then we cannot really ascertain a buying trigger. So, my advice would be to break up you investing funds into 3 portions, get ready your list of stocks to buy.

Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds

Catalyst #2: When the rate moves to 97, move the second portion

Catalyst #3: When the rate breaks 100, move the rest in

A point not missed here is that if yen weakens against the USD, the latter would be gaining in strength. However, I am using the yen/usd rate as a guide, as I believe when the yen starts to weaken, the USD would also weaken, but not by as much - i.e. the USD would gain ground against yen but at the same time lose ground against the euros and other major currencies. I use the yen/usd rate because that is most widely followed. The yen is used as the determinant because it was the most popular currency for carry trades, the unbelievable strength now is due to risk aversion as the Japanese exporters are basically losing money and cannot compete below 90.



Merry Christmas & Happy Holidays!

Opportunity knocks as bottom looms

Glenda Korporaal | November 24, 2008

IF history repeats itself, now is the moment when a lot of investors will amass great fortunes, UBS wealth management head Liz Cacciottolo says.

By last week, "the general feeling from clients was that it has got to such extreme levels that value is there, and we saw a bit of cautious buying", she says.

"History shows that bear markets and times of extreme dislocation provide the greatest opportunities," says Cacciottolo, who has headed UBS's wealth management division in Australia for the past three years, providing advice to some of the country's wealthiest individuals.

"Some of the major fortunes have been made in these periods in the past.

"If you look back at the cycle, some of the people who are wealthy today have become so because of actions they took in the 1990s or even the 1970s," when they were cashed up.

"Having some ability to seize those opportunities -- having cash and not being fully invested -- is important."

But she says private investors will not begin seriously buying until the markets settle. "People have been a bit surprised at the relentlessness of the downward move, some are shell-shocked.

"The markets are really discounting extreme scenarios at the moment. When you get to this stage in the cycle, the price behaviour is clearly driven by sentiment rather than valuation, because liquidity has moved out.

"Some investors are buying at these levels but investors are looking for a greater period of stability to build confidence."

A UBS veteran and mother of three boys, Cacciottolo spent 17 years working with the bank in London, including the last five years building up its British wealth management division at a time when it was aggressively seeking to expand.

In one three-month period she interviewed more than 400 people in London because of the rapid expansion.

When she left to come back to Australia in 2004, the division had more than 900 staff and $50 billion in assets.

She says many fortunes have been made in highly volatile markets and in market downturns and the current volatility may provide opportunities for some of Australia's most wealthy individuals who are not geared up.

"Deleveraging is taking place. Our typical client tends to be a longer-term investor" without too much leverage. The problems arise when people have borrowed against individual stocks, "particularly if they are an executive, and their wealth has been tied up an individual stock and that stock has dropped dramatically".

"But in these times of extreme distress and dislocation our wealthy clients have made a lot of money. They were able to spot an opportunity when it came along." In the 10 years until 2007 private wealth per person in Australia grew at an annual rate of 11.4 per cent to $362,000, with 10 per cent of 8 million households having assets of more than $1 million, according to information compiled by UBS. Of these, 215,000 household had net worth of more than $2 million.

The growth in wealth in Australia, she says, has come from a combination of increasing investment in superannuation, entrepreneurs who have built up businesses and sold them or listed them on the ASX, and investors who have been investing in the stock market for many years and taken profits along the way.

"A lot of the pain and the issues coming up are for those who have entered the market in the last year or two," she says.

"A lot of the clients we deal with have been investing in the market for 10, 15 or 20 years."

The wealth figures have yet to be revised for the impact of the stock market crash, but the downturn will have very different effects on individuals' wealth, depending on debt and exposure to equities.

Cacciottolo says wealthy Australian investors have tended to be more focused on share market investments than their British counterparts, and were prepared to gear up more.

"I find investors here more focused on equity markets and more leverage tends to be used by private clients in Australia because some of the tax benefits are there," Cacciottolo says.

"In Britain they tended to use hedge funds a lot more than we have.

"People tended to use alternative asset classes, including property and commodities, whereas in Australia a lot is wrapped up in the equities markets.

"There are a lot more financial incentives to invest in equities in Australia, such as franking credits, compared with Britain."

Cacciottolo says some clients have been "cautiously looking at adding certain things" to their investment portfolio.

"But it needs the market to settle a bit for people to start making real decisions.

"This extremely volatile market whipsawing around tends to be unsettling for everyone."

Cacciottolo, whose mobile phone rang several times during our lunchtime interview, says her wealthy private clients are keen to keep in touch with their advisers, and talk about what the market is doing, even if they are not buying.

"Things have been moving so fast it is hard for people to digest the volume of information," she says.

"A lot of the time it is just about being able to talk through what is happening in these uncertain times."

Cacciottolo says the sharp fall in the Australian dollar might help the economy by making Australian exports cheaper.

This could help the economy get through the crisis in better shape than some other economies, as during the Asian crisis in 1998.

History shows that some of the sharpest rises in share prices come after a very sharp fall, she says.

"When you have these down years, you have quite significant rises afterwards," she says.

"If you didn't get out of the market some time ago, it's probably not a good thing to capitulate now at these levels, because you can't afford to miss out on the kind of recovery which could happen shortly after."

The end of the affair

Nov 20th 2008 | WASHINGTON,

America’s return to thrift presages a long and deep recession



DEBBIE JEFFRIES could see it coming. When she manned the cash register at Linens ’n Things, the household-goods chain where she has worked for 14 years, a customer would sometimes open her wallet and display 15 credit cards. “That people can pull out that many credit cards—that’s insane. You say, whoa, maybe that’s why we’re here. We have so much debt.”

Ms Jeffries cut up her own credit card several years ago when the balance became unmanageable, but still became an indirect victim of the credit crunch that is now dragging America into recession. Linens ’n Things filed for bankruptcy protection in May; in October, unable to find a buyer for its stores, it began to liquidate itself. A sign in the window of Ms Jeffries’ store in suburban Maryland invites anyone interested in buying the fixtures to see the manager. Ms Jeffries expects to be out of a job by the end of December.

An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990.


Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans.

As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says.

Even before this crisis hit, saving was bound to rise. Baby-boomer Americans have saved far less than their parents, according to McKinsey Global Institute, the consultancy’s affiliated think-tank, and are unprepared for retirement. Drawn out over many years, a rise in saving would be a good thing. But compressed into a matter of months, it would be downright dangerous. But the possibility cannot be dismissed. Bruce Kasman and Joseph Lupton of JPMorgan predict that the saving rate will jump to around 4.5% by the end of next year, the sharpest jump in so short a time in the post-war period.

Patricia Baker, a part-time hostess at a Maryland country club, is spending $1,000 on Christmas this year compared with $3,000 last year. She worries about the economy. People at the club still play golf, but instead of ordering lunch and a beer, many just buy crackers and a soda. She also has less to spend. Illness kept her husband off work for a bit, and they fell behind on payments on their two credit cards. The credit-card company docked his wages to pay off the first, and she is still battling over the second. She expects her monthly mortgage payment to reset next year from $1,700 to $2,000 or more, and doubts she can find anything better: “Banks aren’t going to touch anyone that doesn’t have perfect credit.” She now pays cash—as she did for two pillows in the Linens ’n Things closing sale.

This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. On November 19th Federal Reserve policymakers disclosed they expect the recession to last until mid-2009. Their inflation worries have evaporated; indeed, consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small”.

The risk is that the recession will be longer and the recovery weaker than expected as consumers retrench. Until 1982 recessions were often induced by the Fed to weaken demand and reduce inflation. Declines in GDP were dominated by business inventories and interest-sensitive spending such as cars and houses. Once the Fed eased money, spending sprang back.

Since then inventories have become less important to the business cycle and deregulation and financial innovation mean higher interest rates take longer to affect spending. Expansions are marked by sizeable growth in assets and debt. When the cycle turns, falling asset values and debt reduction weaken the kick of lower rates, producing anaemic recoveries with rising unemployment. The Fed has already lowered its interest-rate target to 1%, but it is fighting gale-force headwinds as lenders reduce their loan portfolios. Citigroup recently told many of its credit-card holders that it was raising their interest rates by up to three percentage points.

Lenders once routinely pooled credit-card, student and car loans into securities and sold them to capital-markets investors. Joseph Astorina of Barclays Capital says no one wants to buy such securities now for fear that some overextended investor will dump its own holdings a week later, driving their values down sharply. The issuance of credit-card-backed securities, which averaged $8 billion a month in 2007, was zero in October, he says.

Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio—perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained.

This makes a strong case for more government stimulus. Lawrence Summers, the former treasury secretary and a candidate for the same post under Barack Obama, said on November 17th that it should be “speedy, substantial and sustained over a several-year interval”. Fiscal stimulus at this stage would replace some of the demand which has been wiped out by the credit crunch. It won’t prevent a recession; but without it, the recession is guaranteed to be far worse.

Boom turns to gloom as crisis hits Dubai

Fri Nov 21, 2008 9:12am EST Dubai shopping spree stalls, retailers tighten belts
21 Nov 2008
Dubai distressed property sales rise as crisis bites
21 Nov 2008By Thomas Atkins - Analysis

DUBAI (Reuters) - The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.

DUBAI INC.

Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

(Editing by Chris Wickham)

Trade for 2008 year end window dress

Sime----------5.45 Div 44 sen (x-24 Nov)
Tenaga-------5.95
Maybank----4.74
Commerz----5.65
IOI------------2.08

Valuecap holdings

http://bursa-chat.blogspot.com/2008/10/valuecaps-holdings.html

Buy American. I Am.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Farmers in Sumatra let oil-palm fruit rot as prices fall | The Jakarta Post

Farmers in Sumatra let oil-palm fruit rot as prices fall | The Jakarta Post

Despite rebound, stocks end worst week ever

By Charley Blaine and Elizabeth Strott

The stock market finished its worst week ever with a dramatic rebound from even worse lows.

The Dow Jones industrials moved more than 1,000 points during the session -- from a low of nearly 700 points to a gain of more than 300 -- before falling back again. It was the first 1,000-point swing for the blue-chip index.

The blue chips closed down 128 points, or 1.5%, to 8,451. Twice during the day, the index fell under 8,000 for the first time since April 2003. Twice it bounced back.

The Standard & Poor's 500 fell 11 points, or 1.2%, to 899. But the Nasdaq Composite Index gained 4 points, or 0.3%, to 1,650. A big engine in the Nasdaq's gain: a 9.1% gain to $96.80 in Apple (AAPL, news, msgs). The iPod maker had fallen as low as $85 at the open.

For the week, the Dow and S&P 500 were off 18.2%. It was the worst week for the Dow in its 112-year history and the worst week for the S&P 500 since the week of May 21, 1933. The Nasdaq's 15.3% loss was its worst since the week of April 10, 2000, as the dot-com bust broke.

The market turmoil was so great that crude oil tumbled in response, finishing Friday at $77.70, down 10.3% on the day and 17% on the week. The close was crude's lowest since September 2007. Energy stocks were slammed as well, with declines exacerbated by margin calls forcing many investors to sell shares.

"A psychiatrist is what is needed to help investors today," Tony Crescenzi, chief bond market strategist at Miller Tabak, told MarketWatch.com.

Did the rebound signal a bottom?

It's too early to say if Friday's rebound from its lows means stocks have seen a bottom. The Dow, S&P 500 and Nasdaq are all off more than 40% since peaks reached in October 2007 and have lost 27%, 30% and 30%, respectively, since Aug. 31.

But watch the Dow and S&P 500 on Monday. The Dow hit a low of 7,882.81 at 9:37 a.m. on Friday and nearly hit it a second time at 1:50 p.m. ET, bottoming in that round of selling at 7,978. The S&P 500 bottomed at 839.80 at 9:37 a.m. and tested that level again without falling below. The second bottom was 842.43.

If anything like a bottom was achieved, it came then. And it is possible that the market will rally sharply soon and then muddle along for a while waiting for a catalyst to send it higher. Two more market measures suggest the U.S. market is grossly oversold and could bounce higher:

The fear indicator. A widely watched measure of market fear, the CBOE Volatility Index ($VIX.X), hit a record 75.92 Friday before dropping back to 69.95. The higher the VIX, the more fear there is in the market. But often, when the VIX starts to drops, a sharp rally erupts.

The 200-day moving average. The S&P 500 closed Friday about 31% under its simple and exponential moving averages. Typically, the index level falling 12% to 15% under the 200-day moving average is a buy signal.

But a rally is no sure thing -- especially right now when raw fear rules the stock and credit markets.

A very negative catalyst -- such as weak market response to Friday's G7 announcement and the Treasury Department's plan announced Friday to buy stakes in banks -- could come as early as Monday.

And that's just the first headwind. The second wind gust will start big-time on Tuesday when the third-quarter earnings season kicks into high gear next week, and investors are bracing for lower profits and reduced profit estimates from companies. Among companies set to report: Intel (INTC, news, msgs), Johnson & Johnson (JNJ, news, msgs), JPMorgan Chase (JPM, news, msgs), Wells Fargo (WFC, news, msgs), Citigroup (C, news, msgs) and Google (GOOG, news, msgs).

If the reports are worse than expected, stocks could fall back.

But by far the largest problem remains the global credit crisis that has made banks in the United States and elsewhere unwilling to lend to each other. The crunch has threatened many businesses because they can't get short-term financing to fund daily operations. The crunch has also resulted in fewer customers getting approved for mortgages, car loans and credit cards.

In addition, many investors have lost confidence in markets, government solutions to fix the problems and corporate management skill.

"Things are still very stressed, and we don't know what's going to fix it, " Barry Moran, a currency trader with the Bank of Ireland in Dublin, told Bloomberg News.

The three-month London interbank offered rate, or Libor, rose to 4.82% Friday from 4.75% Thursday. It was the highest level all year and was up from 2.82% one month ago.

Higher Libor rates indicate aversion to lending and to risk generally. The Libor typically follows central banks' interest rates.

The stock market plunge -- the Dow has fallen 22% so far in October -- has forced many hedge funds to liquidate stocks to meet margin calls. Another casualty: Chesapeake Energy (CHK, news, msgs) CEO Aubrey McClendon was forced to sell "substantially all" of his company stock over the past three days to meet margin loan calls.

Unless the cash gets freed up, experts say, the U.S. could face a very serious recession. Other countries may face bigger problems.

Finance officials from the major industrial nations, the so-called G-7, were meeting this weekend in Washington, D.C., to discuss the situation. Late Friday, they agreed on common guidelines to address the world financial crisis, a move that opens the way for a series of government actions. But The Wall Street Journal said the agreement falls short of the joint plan that many investors had sought.

Among the guidelines, countries agreed to "use all available tools" to prevent systemically important financial institutions from failing, and to ensure that bank deposit insurance programs are solid; to ensure that banks can raise capital from government as well as private sources.

Many investors and traders were disappointed in the deal; they'd hoped for a dramatic G-7 accord, such as a concrete agreement to guarantee bank debt.

U.S. to buy stakes in banks

While the G7 ministers were working on a comprehensive plan, Treasury Secretary Hank Paulson said late Friday that the government will move ahead with plans to buy equity stakes in financial institutions. The administration received authority to make direct purchases of stock in the $700 billion rescue bill Congress recently passed.

Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

The new plan seems to supplant the $700-billion plan to buy distressed mortgage-backed securities that the administration convinced Congress to approve only a week ago. That plan seems to have been put on a back burner in favor of this new approach which would, in effect, partially nationalize the industry.

While the Treasury department says it still plans to buy up distressed assets, the scope of that plan is unclear, The New York Times said. And, The Time said, the federal government meanwhile has directed Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), the government-controlled mortgage giants, to ramp up their purchases of troubled mortgage bonds, in what could be a speedier and less formal process than the reverse auctions proposed by the Treasury.

The markets for the week Close for week Wk. ago close % chg. YTD. chg.
Dow Jones industrials
8,451.19 10,325.38 -18.15% -36.29%

S&P 500 899.22 1,099.23 -18.20% -38.76%

Nasdaq Composite 1,649.5 1,947.39 -15.30% -37.81%

Crude oil per barrel $77.70 $93.8 -17.23% -19.05%

Gold per troy ounce $859.00 $833.2 3.10% 2.51%

A wild last hour of trading

The last hour of trading Friday had been billed as potentially crazy, and it delivered. There were reports that hedge funds are being forced to sell stocks to meet margin calls from brokers. The market is also being hit by redemptions by mutual funds.

Then, the rally took off, in part because many investors began to sense that a credit plan would emerge this weekend.

The biggest losses came from energy stocks, which were falling because of a sharp decline in crude oil. Crude in New York fell 10.3% to $77.70. That's the lowest close for crude since September 2007.

Losses for Dow components Chevron (CVX, news, msgs), down 9.6% to $57.83, and ExxonMobil (XOM, news, msgs), down 8.3% to $62.36, were worth about 93 points of the Dow's loss by themselves.

Twenty of the 30 Dow stocks were lower on the day along with 321 S&P 500 stocks and 61 Nasdaq-100 ($NDX.X) stocks. The Nasdaq-100, which tracks the largest Nasdaq stocks, was down 5 points, or 0.4% to 1,270. Apple's gain was worth 11 points for the index.

Energy prices -- New York close Fri. Thur. Chg. Month chg. YTD chg.
Crude oil (NYMEX) (per barrel)
$77.70
$86.59
-$8.89
-22.79%
-19.05%

Heating oil (per gallon)
$2.2131
$2.4186
-$0.2055
-22.69%
-16.47%

Natural gas (per million BTU)
$6.5380
$6.8250
-$0.2870
-12.10%
-12.63%

Unleaded gasoline (per gallon)
$1.8070
$2.0273
-$0.2203
-27.27%
-27.45%

Sellers of insurance on bonds issued by bankrupt investment house Lehman Bros. may face demands that they pay out more than 91 cents on the dollar to buyers of those insurance contracts.

That’s the upshot of an unusual auction process Friday that established the price for defaulted Lehman debt and, in turn, potential claims payouts on insurance protecting that debt, known as credit default swaps.

Certainly, some firms will take a hit because of the pricing, potentially amounting to billions of dollars in combined losses. In the Lehman auction, participants included most major financial firms from around the world. But it’s too early to tell which companies will be on the hook or for how much. Some of the sellers bought protection for themselves, for example.

In a best-case scenario, said Barry Silbert, chief executive of SecondMarket, a marketplace for trading illiquid assets, financial companies that sold default swap contracts would make their payouts in the coming weeks, have enough capital to cover all the positions, and take their losses and move on.

In a worst-case scenario, sellers of the swaps would not have the cash to make the payments and would have to liquidate their assets to cover their positions.

"The next two weeks will be very telling," Silbert added.

The auction had been watched closely as a gauge for valuing the problems faced by financial companies from the mortgage and housing collapse. And it was one reason why Goldman Sachs (GS, news, msgs) fell 12.4% to $88.80. For the week, Goldman Sachs was down 30.6%.

Moody’s also raised concerns about Goldman’s long-term credit rating on Thursday, lowering its outlook to negative.

Europe and Asia have an ugly day
The American market took its cue at the open from Europe and Asia.

London's FTSE 100 Index ($GB:UKX) fell 8.9%, Germany's Xetra DAX Index ($DE:DAX) was down 7%, and Europe's broader Dow Jones Stoxx600 Index lost 7.5%. Japan's Nikkei 225 Index ($N225) plunged 9.6% and Hong Kong's Hang Seng Index ($HSIX) closed down 7.2%.

Equity trading was halted in Austria, Russia, Indonesia, Ukraine and Iceland.

Is it the end of the financial world?

Investors are selling everything during the current financial panic, but when they realize the end of the world hasn't arrived, we might be in for a big rally. MSN Money's Jim Jubak thinks we'll have a clearer picture of the financial landscape by Oct. 23.

GM talked merger with Ford and Chrysler

General Motors (GM, news, msgs) approached Ford Motor (F, news, msgs) in recent months about a possible merger, but Ford called off the talks after the auto maker concluded it should continue to go it alone, The Wall Street Journal and The New York Times reported.

News of the merger talks came one day after reports surfaced that GM has recently been in discussions about acquiring privately held Chrysler.Stock Charts (Year)
General Motors

General Electric
Ford was down 4.3% to $1.99.

GM shares rose 2.7% to $4.89 after getting walloped Thursday, when the Dow component lost 31% of its value and fell to $4.76. The last time GM traded at that level was in spring 1950. GM shares had been up in pre-open trading Friday.

Analysis: Can GM and Ford survive?

GM stock tanked after ratings company Standard & Poor's put the auto maker's credit ratings under review Thursday. S&P said GM has enough cash to make it through 2008, but a worsening picture for the auto industry could cause more trouble next year.

GM said Friday morning that it is facing "unprecedented challenges," but "bankruptcy protection is not an option."

GE earnings are inline
Another Dow component, General Electric (GE, news, msgs), reported third-quarter results that were in line with recently lowered forecasts.

GE earned $4.31 billion, or 43 cents per share, a 22% drop from last year's results. On an operating basis, GE earned 45 cents per share, in line with its lowered guidance of 41 to 45 cents made at the end of September. Analysts were looking for 46 cents per share.

GE has a big financial business, and like the rest of the sector, it has been struggling amid the turmoil.

GE shares closed up 13% to $21.50.

Worries about Morgan Stanley weigh on stock
Morgan Stanley (MS, news, msgs) shares fell 22.3% to $9.68.

That was something of a victory; the shares had been down as much as 40% early in the day after plunging Thursday on worries that its deal with Japan's Mitsubishi UFJ wouldn't go through.

Adding to the worry were comments from Moody's Investors Service that it may cut Morgan Stanley's credit rating.

Mitsubishi UFJ two weeks ago offered $9 billion for a 21% stake in Morgan Stanley. At the time, Morgan was trading at $25 per share.

The Wall Street Journal has said the deal with Mitsubishi UFJ is set to close on Tuesday.

"The company must have the ability to roll over its debt and operate with counterparties in the market on a daily basis," Ladenburg Thalmann analyst Dick Bove said in a note on Saturday. "If it can do this, it will survive and ultimately thrive. If it cannot it faces a difficult future."

An injection of $9 billion in cash won't solve Morgan Stanley's problem, he added. The company’s debt must be guaranteed.

The problem with Warren Buffett

By Michael Brush
Has Warren Buffett lost his touch?

With more than a hundred investments carefully handpicked by the Oracle of Omaha and his disciples -- plus a huge cash hoard of $28 billion -- Buffett's Berkshire Hathaway (BRK.A, news, msgs) was supposed to be a bastion of safety in this turbulent market.

But Buffett, or at least Berkshire, hasn't been immune to the market's volatility. When the market rallied late last week on news of a financial-sector bailout, Berkshire shot up nearly 20%. On Monday, it gave up more than half of that advance.

Before this recent run, it was down 20% since early December, only slightly better than the 22% decline of the S&P 500 Index ($INX) over the same time frame.

Understandably, many Berkshire Hathaway investors feel shaken. They're wondering whether Buffett has finally turned into an investing has-been.

Oh, he's still wealthy enough to rank second in the latest edition of the Forbes 400. But he's down from No. 1, and his $50 billion net worth represents a $12 billion decline in the past six months, Forbes reported.

On Tuesday, Berkshire announced plans to plunk down $5 billion to take a stake in Goldman Sachs Group (GS, news, msgs), at a time when many investors are running scared from the financial sector. In market downturns past, Buffett has made smart buys at the bottom, but it remains to be seen whether this is one of those or will go the way of less fortunate investments in companies such as USAir, now US Airways Group (LCC, news, msgs).

Several theories floating around purportedly make the has-been case. But just one explanation makes sense. We'll get to it in a moment.

First, here are the three bogus theories you need to ignore if you want to play Berkshire Hathaway right -- or if you're one of the many who follow Buffett's every word of advice.

No. 1: No more 'skin in the game'
More than two years ago, Buffett generously decided to give his stake in Berkshire to charitable foundations. This means he won't personally profit from Berkshire's performance.

But it's a mistake to think this makes Buffett less motivated, analysts say, because a guy like Buffett hasn't been in it for the money for quite some time. (Read "Buy the stock Buffett's giving away.")

As for the actual stock sales to raise funds for charity, "he said a while ago that there would only be a small portion liquidated annually," says Justin Fuller, an analyst who follows Berkshire Hathaway for Morningstar (MORN, news, msgs). So his selling won't drive down the stocks.

No. 2: The 'succession issue'
Another explanation for Berkshire Hathaway's weakness is that investors are worried that Buffett, 78, could soon step aside or pass away. But Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX), which holds shares of Berkshire Hathaway, says you shouldn't worry about this.

"There is no evidence that he is mentally or physically slowing down," says Tilson. Plus, according to insurance company estimates, a healthy 78-year-old lives on average for an additional 15 years, Tilson says. He expects Buffett will be running Berkshire for the next decade.

No. 3: Buffett has lost his Midas touch
Like any good investor, Buffett readily admits he makes mistakes. But the recent numbers are shocking.

The value of unrealized gains on his stock holdings fell $7 billion by the end of the second quarter compared with the end of 2007, and unrealized losses grew to $3.9 billion from about $1 billion.

Two of his biggest turkeys are newspaper companies: Gannett (GCI, news, msgs) is down 61% in the past year, and The Washington Post (WPO, news, msgs) has shed 20%.

Do these big losses mean that Buffett's brain has actually gone into retirement without giving notice?

I doubt it. First off, Buffett's holdings are bought "for life," as he likes to say. So it's unfair to judge them over the short term. Even if you do this, you can make the case that Buffett's performance is telling us his brain is working better than ever. Because so far this quarter, Buffett has turned in an enviable performance.

As of Sept. 23, his holdings were up 9% during the third quarter, compared with a 5.9% decline for the S&P 500, according to an analysis of his portfolio by Bespoke Investment Group, an investment research shop. His best performers were Wells Fargo (WFC, news, msgs), SunTrust Banks (STI, news, msgs), Bank of America (BAC, news, msgs), Kraft Foods (KFT, news, msgs) and Lowe's (LOW, news, msgs), up anywhere from 15% to 47% so far during the quarter.

Buffett's real problem
The real reason Berkshire Hathaway stock is weak is that despite Buffett's investment prowess, his company is still mainly a property and casualty insurance business.

And that's been a terrible business of late because pricing is so weak in property and casualty insurance, as well as most other segments of the sector, says Stephen Shueh, a managing partner at Roundview Capital. Shueh is a value investor who holds Berkshire Hathaway shares.

The problem is that -- Hurricane Ike notwithstanding -- there haven't been big disasters in the recent past to force insurers to make big payouts. Insurance companies have been growing fat on excess capital from all those premiums coming in. As they gain capital strength, they can offer more insurance -- but to win business, they have to lower prices.

Over the past year, commercial insurance pricing is off 5% to 6%, says John Iten, a senior analyst in Standard & Poor's insurance group. And pricing in reinsurance is down 10%, Iten says. Reinsurance is one of Buffett's fortes. It involves offering insurance to other insurance companies who write policies against major catastrophes.

All of this helps explain why Berkshire Hathaway's insurance earnings -- before taxes -- fell 20% in the second quarter and net income fell 7.6% to $2.88 billion. Both fell sharply in the first quarter as well.


To anyone who pays attention to Buffett, none of this is a surprise. In his most recent letter to shareholders, in February, Buffett warned investors that the "party is over." He told them straight out it was "a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008."

The other problem, of course, is that Buffett has collected a lot of companies with direct exposure to the housing sector. These include Shaw Industries, the world's largest carpet manufacturer, and Star Furniture, as well as Clayton Homes, Acme Building Brands, Benjamin Moore and Johns Manville, which sell manufactured homes, bricks, paint and insulation, respectively.

Buffett also has a lot of exposure to consumer-facing businesses like apparel, through companies such as Fruit of the Loom and H.H. Brown Shoe Group.

These businesses have been hit hard by weakness in the economy.

Buy or sell Buffett?
Because of the grim outlook for insurance pricing and the weak economy, analysts such as Gary Ransom of Fox-Pitt Kelton are not enthusiastic about Berkshire Hathaway's stock.

But for long-term investors, the stock looks like a good buy-and-hold and sleep-at-night investment.

"We still believe the conglomerate will do well by its shareholders for decades to come," says Morningstar's Fuller, who has a five-star rating on Berkshire Hathaway, Morningstar's highest rating.

Here are three reasons:

Berkshire Hathaway looks cheap. "It is trading below intrinsic value, and it always returns to intrinsic value sooner or later," says Tilson, of the Tilson Focus Fund. By tallying the value of cash per share and investments, and putting a reasonable valuation on Berkshire operating businesses, Tilson calculates intrinsic value to be as much as $160,000 per share. That suggests a potential gain of 19% just for getting back to a fair valuation for Buffett's stock.

Buffett has the best managers in the business. Buffett doesn't put much value on résumés. Instead, he looks for a good track record and passion. Most of the chiefs running his operating businesses no longer have any financial need to work. They sold their businesses to Buffett but continue working for him because they love it. "They have exactly the job they want for the rest of their working years. I think our rare and hard-to-replicate managerial structure gives Berkshire a real advantage," Buffett told shareholders in his most recent letter to them.

Buffett has the cash to take advantage of the train wreck in the market. "As the markets get more and more chaotic, that works to Buffett's benefit," Tilson says. While others panic, Buffett will pick up bargains. Last week, for example, Buffett stepped up and bought Constellation Energy Group (CEG, news, msgs) after its shares swooned because of concerns about its financial strength. "It would be hard to find a better example of why this market is so perfect for Buffett," Tilson says.

Undervalued or not, a share of BRK.A at more than $130,000 may be beyond the average investor's means. The other option is BRK.B, now trading around $4,400.

6 Buffett stock picks
If you want to try your hand instead at individual holdings in the Berkshire Hathaway portfolio, consider these stocks. Three are positions that Berkshire added to during last quarter. Three others are holdings favored by value investors and Buffettologists around current levels.

Berkshire Hathaway took on one new position last quarter when it bought 3.24 million shares of NRG Energy (NRG, news, msgs), a utility. At $30 a share, NRG trades about 30% below where Berkshire probably bought last quarter.

Berkshire also added to Sanofi-Aventis (SNY, news, msgs), a pharmaceutical company with most of its sales in the U.S. and Europe, and Ingersoll-Rand (IR, news, msgs), which sells industrial equipment such as climate control and security systems. Morningstar analysts have five-star ratings on both companies. Each stock trades at or near lows for the second quarter. So if you buy now, you'll get about the same price that Berkshire Hathaway got, or even better.


Wells Fargo looks like a buy because as a financially sound survivor, it will likely benefit from the banking mess by making acquisitions or expanding, says Todd Lowenstein, a co-portfolio manager of the HighMark Value Momentum Fund (HMVMX). Wells Fargo is one of Buffett's top five holdings.

Tilson thinks American Express (AXP, news, msgs) looks "very attractive" at current levels. Fears about weak consumer spending and losses on credit card debt could hold the stock down for a while. "But they will emerge from this with a brilliant franchise intact and incredible earnings power," Tilson says. "This is one of the world's great businesses."

Just be patient, and don't expect gains right way, as there is no known near-term catalyst for the stock. American Express is also one of Buffett's top five holdings.

Another Buffett holding in the financial sector, M&T Bank (MTB, news, msgs) also looks attractive around current levels, says Ed Walczak, a portfolio manager at Vontobel Asset Management's Phoenix Focused Value Fund. The stock is weak this year with the rest of the group. But this doesn't make sense because it has "a lot less exposure to the bad stuff that is out there, like residential mortgages," Walczak says.

The faint of heart may find comfort in the fact that half of the float of M&T Bank stock is held by Buffett and other serious long-term investors, Walczak says, which means there may be "less craziness" in terms of stock price.

Musings from a Crazy Day

1. The American baby boom generation has seen their buy and hold retirement accounts shredded in the last year. Shredded. An entire generation, perhaps the most influential American generation, was sold the story that buy and hold would take them to retirement shangri-la. Anyone got plan B for these folks?

2. I just caught a Russian market official speaking about Russian market distress. He said that the Russians were responsible for their troubles 10 years ago, but now the Americans are responsible for the latest crisis. Nice try. The current global meltdown is a result of first greed then fear. Those emotions don’t care about nationalities or borders. So if you, or if anyone, regardless of country, don’t like your portfolio’s direction…look in the mirror.

3. How far can the Dow drop? I don’t know. No one knows. If someone tells you they know, and you believe them, please go see a medical doctor to ask for a full frontal lobotomy.

http://www.michaelcovel.com/

When fortune frowned

Oct 9th 2008
From The Economist print edition

The worst financial crisis since the Depression is redrawing the boundaries between government and markets, says Zanny Minton Beddoes (interviewed here). Will they end up in the right place?

AFTER the stockmarket crash of October 1929 it took over three years for America’s government to launch a series of dramatic efforts to end the Depression, starting with Roosevelt’s declaration of a four-day bank holiday in March 1933. In-between, America saw the worst economic collapse in its history. Thousands of banks failed, a devastating deflation set in, output plunged by a third and unemployment rose to 25%. The Depression wreaked enormous damage across the globe, but most of all on America’s economic psyche. In its aftermath the boundaries between government and markets were redrawn.

During the past month, little more than a year after the financial storm first struck in August 2007, America’s government made its most dramatic interventions in financial markets since the 1930s. At the time it was not even certain that the economy was in recession and unemployment stood at 6.1%. In two tumultuous weeks the Federal Reserve and the Treasury between them nationalised the country’s two mortgage giants, Fannie Mae and Freddie Mac; took over AIG, the world’s largest insurance company; in effect extended government deposit insurance to $3.4 trillion in money-market funds; temporarily banned short-selling in over 900 mostly financial stocks; and, most dramatic of all, pledged to take up to $700 billion of toxic mortgage-related assets on to its books. The Fed and the Treasury were determined to prevent the kind of banking catastrophe that precipitated the Depression. Shell-shocked lawmakers cavilled, but Congress and the administration eventually agreed.

The landscape of American finance has been radically changed. The independent investment bank—a quintessential Wall Street animal that relied on high leverage and wholesale funding—is now all but extinct. Lehman Brothers has gone bust; Bear Stearns and Merrill Lynch have been swallowed by commercial banks; and Goldman Sachs and Morgan Stanley have become commercial banks themselves. The “shadow banking system”—the money-market funds, securities dealers, hedge funds and the other non-bank financial institutions that defined deregulated American finance—is metamorphosing at lightning speed. And in little more than three weeks America’s government, all told, expanded its gross liabilities by more than $1 trillion—almost twice as much as the cost so far of the Iraq war.

Beyond that, few things are certain. In late September the turmoil spread and intensified. Money markets seized up across the globe as banks refused to lend to each other. Five European banks failed and European governments fell over themselves to prop up their banking systems with rescues and guarantees. As this special report went to press, it was too soon to declare the crisis contained.

Anatomy of a collapse
That crisis has its roots in the biggest housing and credit bubble in history. America’s house prices, on average, are down by almost a fifth. Many analysts expect another 10% drop across the country, which would bring the cumulative decline in nominal house prices close to that during the Depression. Other countries may fare even worse. In Britain, for instance, households are even more indebted than in America, house prices rose faster and have so far fallen by less. On a quarterly basis prices are now falling in at least half the 20 countries in The Economist’s house-price index.

The credit losses on the mortgages that financed these houses and on the pyramids of complicated debt products built on top of them are still mounting. In its latest calculations the IMF reckons that worldwide losses on debt originated in America (primarily related to mortgages) will reach $1.4 trillion, up by almost half from its previous estimate of $945 billion in April. So far some $760 billion has been written down by the banks, insurance companies, hedge funds and others that own the debt.

Globally, banks alone have reported just under $600 billion of credit-related losses and have raised some $430 billion in new capital. It is already clear that many more write-downs lie ahead. The demise of the investment banks, with their far higher gearing, as well as deleveraging among hedge funds and others in the shadow-banking system will add to a global credit contraction of many trillions of dollars. The IMF’s “base case” is that American and European banks will shed some $10 trillion of assets, equivalent to 14.5% of their stock of bank credit in 2009. In America overall credit growth will slow to below 1%, down from a post-war annual average of 9%. That alone could drag Western economies’ growth rates down by 1.5 percentage points. Without government action along the lines of America’s $700 billion plan, the IMF reckons credit could shrink by 7.3% in America, 6.3% in Britain and 4.5% in the rest of Europe.

Much of the rich world is already in recession, partly because of tighter credit and partly because of the surge in oil prices earlier this year. Output is falling in Britain, France, Germany and Japan. Judging by the pace of job losses and the weakness of consumer spending, America’s economy is also shrinking.

The average downturn after recent banking crises in rich countries lasted four years as banks retrenched and debt-laden households and firms were forced to save more. This time firms are in relatively good shape, but households, particularly in Britain and America, have piled up unprecedented debts. And because the asset and credit bubbles formed in many countries simultaneously, the hangover this time may well be worse.

But history teaches an important lesson: that big banking crises are ultimately solved by throwing in large dollops of public money, and that early and decisive government action, whether to recapitalise banks or take on troubled debts, can minimise the cost to the taxpayer and the damage to the economy. For example, Sweden quickly took over its failed banks after a property bust in the early 1990s and recovered relatively fast. By contrast, Japan took a decade to recover from a financial bust that ultimately cost its taxpayers a sum equivalent to 24% of GDP.

All in all, America’s government has put some 7% of GDP on the line, a vast amount of money but well below the 16% of GDP that the average systemic banking crisis (if there is such a thing) ultimately costs the public purse. Just how America’s proposed Troubled Asset Relief Programme (TARP) will work is still unclear. The Treasury plans to buy huge amounts of distressed debt using a reverse auction process, where banks offer to sell at a price and the government buys from the lowest price upwards. The complexities of thousands of different mortgage-backed assets will make this hard. If direct bank recapitalisation is still needed, the Treasury can do that too. The main point is that America is prepared to act, and act decisively.

For the time being, that offers a reason for optimism. So, too, does the relative strength of the biggest emerging markets, particularly China. These economies are not as “decoupled” from the rich world’s travails as they once seemed. Their stockmarkets have plunged and many currencies have fallen sharply. Domestic demand in much of the emerging world is slowing but not collapsing. The IMF expects emerging economies, led by China, to grow by 6.9% in 2008 and 6.1% in 2009. That will cushion the world economy but may not save it from recession.

Another short-term fillip comes from the recent plunge in commodity prices, particularly oil. During the first year of the financial crisis the boom in commodities that had been building up for five years became a headlong surge. In the year to July the price of oil almost doubled. The Economist’s food-price index jumped by nearly 55% (see chart 1). These enormous increases pushed up consumer prices across the globe. In July average headline inflation was over 4% in rich countries and almost 9% in emerging economies, far higher than central bankers’ targets (see chart 2).



High and rising inflation coupled with financial weakness left central bankers with perplexing and poisonous trade-offs. They could tighten monetary policy to prevent higher inflation becoming entrenched (as the European Central Bank did), or they could cut interest rates to cushion financial weakness (as the Fed did). That dilemma is now disappearing. Thanks to the sharp fall in commodity prices, headline consumer prices seem to have peaked and the immediate inflation risk has abated, particularly in weak and financially stressed rich economies. If oil prices stay at today’s levels, headline consumer-price inflation in America may fall below 1% by the middle of next year. Rather than fretting about inflation, policymakers may soon be worrying about deflation.


The trouble is that because of its large current-account deficit America is heavily reliant on foreign funding. It has the advantage that the dollar is the world’s reserve currency, and as the financial turmoil has spread the dollar has strengthened. But today’s crisis is also testing many of the foundations on which foreigners’ faith in the dollar is based, such as limited government and stable capital markets. If foreigners ever flee the dollar, America will face the twin nightmares that haunt emerging countries in a financial collapse: simultaneous banking and currency crises. America’s debts, unlike those in many emerging economies, are denominated in its own currency, but a collapse of the dollar would still be a catastrophe.

Tipping point
What will be the long-term effect of this mess on the global economy? Predicting the consequences of an unfinished crisis is perilous. But it is already clear that, even in the absence of a calamity, the direction of globalisation will change. For the past two decades the growing integration of the world economy has coincided with the intellectual ascent of the Anglo-Saxon brand of free-market capitalism, with America as its cheerleader. The freeing of trade and capital flows and the deregulation of domestic industry and finance have both spurred globalisation and come to symbolise it. Global integration, in large part, has been about the triumph of markets over governments. That process is now being reversed in three important ways.

First, Western finance will be re-regulated. At a minimum, the most freewheeling areas of modern finance, such as the $55 trillion market for credit derivatives, will be brought into the regulatory orbit. Rules on capital will be overhauled to reduce leverage and enhance the system’s resilience. America’s labyrinth of overlapping regulators will be reordered. How much control will be imposed will depend less on ideology (both of America’s presidential candidates have promised reform) than on the severity of the economic downturn. The 1980s savings-and-loan crisis amounted to a sizeable banking bust, but because it did not result in an economic catastrophe, the regulatory consequences were modest. The Depression, in contrast, not only refashioned the structure of American finance but brought regulation to whole swathes of the economy.

That leads to the second point: the balance between state and market is changing in areas other than finance. For many countries a more momentous shock over the past couple of years has been the soaring price of commodities, which politicians have also blamed on financial speculation. The food-price spike in late 2007 and early 2008 caused riots in some 30 countries. In response, governments across the emerging world extended their reach, increasing subsidies, fixing prices, banning exports of key commodities and, in India’s case, restricting futures trading. Concern about food security, particularly in India and China, was one of the main reasons why the Doha round of trade negotiations collapsed this summer.

Third, America is losing economic clout and intellectual authority. Just as emerging economies are shaping the direction of global trade, so they will increasingly shape the future of finance. That is particularly true of capital-rich creditor countries such as China. Deleveraging in Western economies will be less painful if savings-rich Asian countries and oil-exporters inject more capital. Influence will increase along with economic heft. China’s vice-premier, Wang Qishan, reportedly told his American counterparts at a recent Sino-American summit that “the teachers now have some problems.”

The enduring attraction of markets
The big question is what lessons the emerging students—and the disgraced teacher—should learn from recent events. How far should the balance between governments and markets shift? This special report will argue that although some rebalancing is needed, particularly in financial regulation, where innovation outpaced a sclerotic supervisory regime, it would be a mistake to blame today’s mess only, or even mainly, on modern finance and “free-market fundamentalism”. Speculative excesses existed centuries before securitisation was invented, and governments bear direct responsibility for some of today’s troubles. Misguided subsidies, on everything from biofuels to mortgage interest, have distorted markets. Loose monetary policy helped to inflate a global credit bubble. Provocative as it may sound in today’s febrile and dangerous climate, freer and more flexible markets will still do more for the world economy than the heavy hand of government.

Bad, or worse - A global recession is almost certainly on the way

DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. As the financial crisis has broadened and intensified, the global economy has begun to suffocate. That is why the world’s central banks have been administering emergency measures, including a round of co-ordinated interest-rate cuts on Wednesday October 8th. With luck they will prevent catastrophe. They are unlikely to avert a global recession.

According to the IMF’s most recent World Economic Outlook, published on Wednesday, the world economy is “entering a major downturn” in the face of “the most dangerous shock” to rich-country financial markets since the 1930s. The fund expects global growth, measured on the basis of purchasing-power parity (PPP), to come down to 3% in 2009, the slowest pace since 2002 and on the verge of what it considers to be a global recession. (The fund’s definition of global recession takes many factors into account, including the rate of population growth.) Given the scale of the financial freeze, the fund’s forecast looks optimistic. Other forecasters are convinced that a global recession is inevitable. Economists at UBS, for instance, expect global growth of only 2.2% in 2009.

The rich world’s economies were either shrinking, or close to it, long before September. Recent weeks have made a rich-world recession all but inevitable. America’s economy lost steam throughout the summer. Temporarily buoyed by fiscal stimulus and strong exports, output grew at a solid 2.8% annualised rate between April and June. But as the stimulus wore off, the job market worsened, credit tightened and consumer spending slid.

That slide became a rout in September. The economy lost 159,000 jobs, the most in a month since 2003. Car sales fell to a 16-year low as would-be buyers were unable to get credit. The economy may already have shrunk in the third quarter. The rest of the year is likely to be worse. Some economists expect consumer spending to fall at its fastest pace since the 1980 recession. Add in other gloomy evidence, such as a survey of purchasing managers that suggests manufacturing is extremely weak, and it is clear that output is now falling. America’s recession may not yet be official, but it is well under way.

In Europe the outlook is equally grim. The British economy, which stalled in the second quarter, is now unmistakably falling into recession. The IMF’s forecasts suggest that Britain will see the worst performance of any big economy in the year to the fourth quarter of 2008. The economies of the euro area, too, are struggling badly. Figures released on Wednesday showed that output in the euro area fell at an annualised rate of 0.8% in the second quarter. GDP shrank in the currency zone’s three largest countries—Germany, France and Italy. The fourth largest, Spain, barely grew.

As elsewhere, the most recent figures have grown grimmer still. Business confidence has turned down and a closely watched survey of purchasing managers points to a further contraction in activity over the summer months. Even the European economies that are less directly affected by housing busts, such as Germany, have been hard hit. The big hope for the euro area was that German shoppers, relatively free of debt and with scope to save a little less, would make up for weakness in debt-laden economies such as Spain. But household spending in Germany has been falling since the end of last year.

Japan, too, is looking weak. Its economy shrank at an annualised rate of 3% in the second quarter as exports fell, investment slowed and high food and fuel prices dented consumer confidence. Japanese banks are less embroiled in the financial crisis than those in Europe and America, but with other economies falling into recession and the yen soaring, the prospects for Japan’s exports and economy are dark.

This gloomy backdrop explains why the co-ordinated rate cuts were so essential. Even without the financial seizure, the case for cheaper money was becoming abundantly clear. With commodity prices falling sharply (the price of a barrel of crude was down to $88 on October 8th) and economies suffering, inflation risks are evaporating in the rich world. If oil prices remain at around today’s levels, headline inflation will be below 1% in America by next summer. Deflation is an increasing risk. That suggests more rate cuts will be needed, particularly in Europe.

All told, the IMF expects the rich-world economies to grow by only 0.5% in 2009. Its forecast of 3% global growth depends on reasonably robust expansion in emerging economies. The fund expects developing countries, as a group, to grow by 6.1% in 2009, more slowly than their blistering 8% pace of recent years, but far from recession. That would imply an unprecedented growth gap between the rich and emerging world (see chart).

Some emerging economies, notably China, have shown remarkable resilience to the financial storm. Many other markets, however, are being hit hard as investors flee risk. Analysts at Morgan Stanley estimate that capital flows to emerging economies could fall to $550 billion in 2009 from around $750 billion in 2007 and 2008. Such a sharp drop would hit economies that rely heavily on foreign finance: more than 80 developing countries are likely to run current-account deficits of more than 5% of GDP this year.

The links in the real economy could also be stronger than many imagine. Exports will be hit as recession grips the rich world. Falling commodity prices bode ill for the countries that produce them, notably in Latin America. The Brazilian real has fallen by more than a quarter against the dollar in the past month. Thanks to more disciplined macroeconomic policies and large cushions of reserves, many emerging economies have strong defences against a rich-world downturn. But they will not escape unscathed. A mild global recession is the best that can be hoped for.

An unprecedented crisis

Malcolm Maiden
October 10, 2008 - 1:49PM
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The continuing sharemarket crisis is like nothing I have reported on, and I have witnessed some doozies: the long, painful market slump in the seventies that followed the 1973 OPEC oil price shock, the October 1987 market crash, the Long Term Capital Management crisis in 1998, the 2001 dot.com meltdown and the World-com-Enron crisis that followed, and 9-11, to name some of the highlights, or lowlights.

This is one is different because it is more than a year old, and there is still no clear picture about how it is going to be fixed.

The slump induced by the OPEC oil shock was also a slow burn, but Fed boss Paul Volcker eventually sterilised inflation by controlling money supply. The market slumps in 1987 and 1998 were much shorter in duration, and were solved essentially by liquidity injections.

The dot.com crisis was self-inflicted, and allowed to run its course, and the World-Com-Enron crises were also allowed to work their way through the markets ahead of accounting reform.

Already in this crisis we have seen liquidity injection of unprecedented magnitude, a raft of bank rescues, unprecedented co-ordinated central bank rate cuts this week, and the nationalisation of failed operators in the US, Britain and Europe, including Fannie Mae and Freddie Mac, the groups which between them finance half of America's $US12 trillion mortgage market. None of it has so far unblocked what are, in essence, crucial global financing arteries.

The increasingly obvious fact that the crisis is seriously contaminating economic growth worldwide was behind Wall Street's overnight fall, which spilled over today into more carnage for markets around the world, including Australia.

But the more primal concern driving the markets down is the lack of clarity about the nature of this implosion, and what is needed to cure it.

It seems likely now that major co-ordinated international action is coming.

The US is now considering using part of its $700 billion bailout fund to buy shares in beleaguered banks, the British Government has this week announced plans to spend up to 50 billion pounds on shares in its banks, and European bailouts of groups including Fortis and Dexia have also involved governments taking equity.

Government buy-ins have occurred before: Hong Kong's Monetary Authority bought a major stake in HSBC during the 1997 Asian markets crisis, and later sold out at a sizeable profit, for example.



But the scale of the government buy-ins this time is larger, and are set to become larger still.

Other extreme steps are possible, including even a global trading halt, to give the markets time to catch their breath, and regulators time to frame their next moves.

But it is far from clear what those moves would usefully be. Enough cash has been injected world-wide now to get the debt markets moving again, in theory, and some of the weakest links in the system have been removed - by collapses, buyouts, forced mergers and nationalisations. But the banks are still not lending to each other.

They simply don't trust their counterparties to repay the dough, and that is the heart of the problem. The depressing truth is that there are still vast sections of the market that may contain huge pools of losses that have been fully disclosed.

Hedge funds accounted for about 40% of market activity at the peak of the boom. They were big players in commodities and currencies too, and some think the Australian dollar's sudden slide and the slump in commodity prices is partly due to them retreating. But we really just don't know: the hedge funds are private companies, and disclosure is minimal.

Other potential black holes are theoretically open for inspection, but aren't really. Banks are, for example, marking their exposures at market value - losses that the IMF says could reach $US1.4 trillion are a result of that process - but the bog, chunky end of the global property market is frozen. There are no landmark property sales occurring. Until sales do happen, the extent of the losses in that sector is a matter of guesswork.

But the scale of the government buy-ins this time is larger, and are set to become larger still.

Other extreme steps are possible, including even a global trading halt, to give the markets time to catch their breath, and regulators time to frame their next moves.

But it is far from clear what those moves would usefully be. Enough cash has been injected world-wide now to get the debt markets moving again, in theory, and some of the weakest links in the system have been removed - by collapses, buyouts, forced mergers and nationalisations. But the banks are still not lending to each other.

They simply don't trust their counterparties to repay the dough, and that is the heart of the problem. The depressing truth is that there are still vast sections of the market that may contain huge pools of losses that have been fully disclosed.

Hedge funds accounted for about 40% of market activity at the peak of the boom. They were big players in commodities and currencies too, and some think the Australian dollar's sudden slide and the slump in commodity prices is partly due to them retreating. But we really just don't know: the hedge funds are private companies, and disclosure is minimal.

Other potential black holes are theoretically open for inspection, but aren't really. Banks are, for example, marking their exposures at market value - losses that the IMF says could reach $US1.4 trillion are a result of that process - but the bog, chunky end of the global property market is frozen. There are no landmark property sales occurring. Until sales do happen, the extent of the losses in that sector is a matter of guesswork.

Oei Hong Leong | singapore stock market

singapore stock | singapore stock market

Buffett's Goldman, GE Warrants Worthless After Rout

Oct. 8 (Bloomberg) -- Billionaire investor Warren Buffett's instant paper profits on Goldman Sachs Group Inc. and General Electric Co. have been wiped out amid the stock market's worst yearly slump since 1937.

Goldman, the most profitable Wall Street firm, fell 1.7 percent today in New York trading to $113. That leaves Goldman, for the first time, below the price at which Buffett can buy $5 billion of shares (i.e $115). When the deal was announced last month, Goldman closed at $125.05, meaning Buffett was up $437 million.

Goldman and GE also sold Buffett a combined $8 billion in preferred shares that pay a 10 percent dividend, allowing his Berkshire Hathaway Inc. to earn $800 million a year without the warrants unless the companies collapse. In exchange, the firms got Berkshire's cash and endorsement by the ``Oracle of Omaha'' at a time when stock prices are falling on concern that a tightening credit market may hobble even the largest companies.

Buffett ``doesn't have a two-week time horizon,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire and GE shares. ``Just because these prices drop below the strike price, it doesn't suggest that either of them are not exceptionally good investments.''

GE, the world's biggest maker of jet engines, agreed Oct. 1 to give Berkshire warrants to purchase $3 billion in shares at $22.25 apiece. As with the Goldman deal, Buffett's warrants for GE stock are good for five years. The shares, which closed at $24.50 the day of the agreement, have for five days ended trading below Buffett's strike price. The rose 1.7 percent to $20.65 today in New York Stock Exchange composite trading.

Pick and Hold

``You've got to pick them and hold them,'' said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington. ``He admits that he can't time markets, and he takes a very long time horizon.''

Buffett, heralded as the world's best stock picker, agreed to the investments while some rivals find themselves short of cash. The worst housing slump since the Great Depression has resulted in record mortgage defaults in the U.S. and a yearlong contraction in global credit markets, driving down stock prices and sending firms like Goldman and GE in search of funds.

For Buffett, whose Berkshire Hathaway had $44.3 billion in cash at the start of the year, it's also been a call to action. He's committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire. Buffett is Berkshire's chairman.

``We want to use cash,'' Buffett told PBS's Charlie Rose in an interview last week. ``There are times when cash buys more than other times, and this is one of those times where it buys more.''

`Beginning to Scream'

Goldman has fallen 47 percent this year in New York Stock Exchange composite trading; GE has declined 44 percent. The Standard & Poor's 500 Index slid 1.1 percent to 984.94 today, extending its 2008 tumble to 33 percent in the market's worst yearly slump in 71 years.

``Top-quality, well-managed firms like Goldman and GE are getting to the point where the values are beginning to scream,'' Betz said. ``Those are the sorts of companies that will continue to earn money and continue to function well.''

Buffett, ranked the second-richest man in the U.S. by Forbes magazine, transformed Berkshire from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to corporate jet leasing and insurance.

Economics 101

Steve Keen
October 6, 2008

IN MAY 2007, the Organisation for Economic Co-operation and Development (OECD) commented that "the current economic situation is in many ways better than what we have experienced in years. Our central forecast remains indeed quite benign".

Three months later, the financial crisis began: the US stockmarket started its long decline and house prices fell. Financial institutions began to resemble tenpins rather than the pillars of society they had once been.


G4 leaders stop short of bailout
European leaders vow to help banks out at the end of an emergency summit in France to try to shore up confidence in the banking system.


A year later, the crisis has become even more extreme, with five more large international banks failing the weekend the US
Government devised a $US700 billion ($897 billion) bailout plan, only to have it rejected by Congress.

WHAT CAUSED THE CRISIS?

The immediate cause was the collapse in American house prices, which had doubled between January 2000 and August 2006, and have since fallen by 20%. More than 1% of American households have defaulted on their mortgages.

Up to a quarter of mortgages were "subprime", and fi nanced by the issuing of "residential mortgage-backed securities" rather than by traditional bank loans. The bonds were then sold to investors, pension funds and councils all over the world. Those buyers have since lost not just their anticipated interest but also much of their principal.

The bonds were also used by lenders to raise money through repo agreements - a contract in which one finance company sells another a bond in return for cash, and is then obligated to buy the same bond. By August 2007, so many households
had defaulted that the bond prices began to plunge, and suddenly lenders refused to accept them as collateral for loans.

The wholesale money market collapsed, and the credit crunch began. The long-term cause of the crisis was the dramatic growth in private debt in America - from a low of 37% of GDP in 1945 to 290% now - and across the OECD. The subprime fiasco was the final stage in a process that has seen lending extended to progressively riskier and less viable borrowers.

This final lending spree drove both stock and house prices to historically unprecedented levels, from which they are now falling, bankrupting both borrowers and lenders.

WHY DOES IT MATTER THAT THESE SUBPRIME BONDS ARE WORTHLESS?

The long-term problem is that buyers of these bonds are getting far lower returns than they expected from their investments. The money they used to buy the bonds has essentially been lost. They will have far less income - and far less capital - than they had anticipated and may face bankruptcy.

The more immediate problem is that, when the financial bubble was at its biggest, these bonds were the mainstay of the repo trade. Now no one wants to buy a bond in case the seller is unable to buy it back as promised. The repo market has
therefore dried up, and the bonds are effectively worthless.

However, many financial institutions still record the value of these bonds at the original sale price - their nominal or "book value" - rather than their market value.

If they were instead valued at what they could be sold for now, next to nothing, the recorded value of those companies' assets would fall, making them effectively insolvent and unable to lend. Their managers live in dread of some event forcing
them to do that - such as a distress sale by a company trying to avoid bankruptcy.

This is why the US rescue plan was devised: to buy these toxic bonds, euphemistically called "troubled assets", before the
fi nancial institutions were forced to value them.

If a global recession results from this crisis, it would be diffi cult for us to avoid a recession here as well.

WHAT IS THE US RESCUE PLAN?

The plan involves the US treasury buying up to $US700 billion worth of "troubled assets" from financial institutions, then covering that cost by selling $US700 billion in new government bonds to the public.

SO WOULD THE PLAN WORK?

That's very hard to say, but the details are not promising. This is a rescue plan devised by people who didn't see the crisis coming in the first place - otherwise they would never have allowed subprime loans to be created. If they didn't understand
the problem with subprimes, then it's possible they don't understand the system they're now trying to rescue.

Even the amount nominated, almost US$150 billion more than the US has spent on the war in Iraq, was not chosen in any scientific way. A US treasury spokeswoman told Forbes magazine: "It's not based on any particular data point. We just wanted to choose a really large number."

There's also the problem of how much the plan would pay for these toxic bonds. The initial proposal was to set the price through a "reverse auction": start by offering a low purchase price, and progressively increase it until individual financial
corporations decide to sell.

However, this could result in sales by more solvent firms at prices that would bankrupt less solvent ones, so it is likely that this, and many other, aspects of the plan will change in time - if it is passed into law by Congress.

If the US financial system is to continue, then the assets of financial institutions must be increased - and this bailout would enable them to replace some of their impaired assets with $US700 billion in cash. But this could still cause a significant fall in their assets, depending on the sale price. And the book value of outstanding mortgage debt is $US14 trillion. With mortgage defaults at unprecedented levels and still on the rise, there's no guarantee the plan is big enough to succeed.

SO HOW DOES ALL THIS AFFECT AUSTRALIA?

In our globalised fi nancial system, crises anywhere can cause ructions elsewhere. Banks and investors throughout the world hold CDOs linked to the American crisis, so that bankruptcies in the US can damage the financial security of a municipal council in Australia.

ARE COMPARISONS WITH THE GREAT DEPRESSION JUSTIFIED?

The real comparison now is with the financial crisis that preceded the Great Depression, centred on the stockmarket collapse of 1929. Then, despite a 36% fall in the share index that year, all the Wall Street merchant banks made it through
the Great Depression.

This time, all fi ve Wall Street behemoths have either failed (Lehman Brothers), been taken over at bargain-basement prices
(Bear Stearns, Merrill Lynch), or have sought to change their status to that of commercial banks before they failed (Morgan Stanley and Goldman Sachs). And the expected economic downturn has only begun. So the financial crisis is much worse than in 1929.

So is the level of private debt. When the 1929 crisis began, America's private debt was equivalent to 1.5 years of the nation's GDP.

It is now equivalent to 2.9 years of GDP - and that doesn't include the net debt involved in the $US500 trillion derivatives market. So the debt situation is almost twice as bad.

One attenuating factor is that the US is not as economically dominant as in the 1920s, and the emerging economies of China and India may counteract America's downturn.

But the US is still the world's largest economy, and many other OECD nations are as indebted as the US. How the now widely expected economic downturn compares to the Great Depression remains to be seen.

Associate Professor Steve Keen is from the school of economics and finance at the University of Western Sydney.