The Four Big Threats to Your Wealth in 2011 (Toxic Investments)

Uploaded by moneycontent on Apr 7, 2011

The Four Big Threats to Your Wealth in 2011 (MoneyWeek Magazine)

UK Housing threat
UK Stock market threat
Drop the Euro before it collapses
The "bond bubble" is about to burst


The fact is we're in unchartered territory ... and it's a very dangerous and unstable situation.

Does a 40% rise in the FTSE and a 9% rebound in property prices over the last 18 months seem right to you?

The way we see it, these aren't healthy markets at all ... they're not even recovering markets ...
...these are grossly inflated markets, pumped up by desperate government intervention.

Will the UK economyh sink into deflation if the Government follows through its pledge to rein in our national debt? ...

... Or, with the Bank of England's furious attempts to keep the ball rolling, is it inflation we have to fear?


So ... what should you do?
Survival Action #1 Buy defensives and "bear market protectors"

Defensive stocks: These kinds of companies don't need economic growth to make money, because people have to spend on their products out of necessity. In short, they're specifically suited to keep your portfolio ticking over in times of upheaval ... and GROW when the market truly recovers.


Survival Action #2 Get the right dividend players into your portfolio now

But since the bust up of 2008, investors have rediscovered the appeal of dividend cheques. This is for three reasons ...

1. Dividends outperform bond yields. According to Bloomberg, by the third quarter of 2010 more U.S. stocks were paying dividends that exceed bond yields than any time in the last 15 years.
2. Dividends can't be fudged - they have to be paid with real money.
3. Dividend-payers are excellent stocks to own in times of unprecedented uncertainty.
Dividends contribute to share price stability. If the share price of a dividend-paying firm falls, it is likely to fall less sharply than a pure growth stock. That's because as the price falls, the yield tends to pick up, encouraging investors to buy back in.


Survival Action #3 Ride gold all the way to $2,230 .. or even more!
... you're talking an eye-popping gold spike to $23,450 per ounce. And during times of confusion, gold often performs better than most other assets. Consider this ... adjusted for inflation, the 1980 gold peak of $850 gives you a price of $2,230 still on the horizon today.

Leadership needed over continental toxins

April 7, 2009

Leadership needed over continental toxins

David Wighton: Business Editor's commentary

Everyone at last week's G20 meeting was pretty much agreed — detoxing the banks of their poisonous assets was a necessary condition for global economic recovery. Curious then that so little was said about the issue in the official communiqué.

The world leaders pointed to what had already been done in terms of recapitalising banks and dealing with their impaired assets. And they underlined their commitment to do whatever was required in the future to restore the normal flow of credit. But that was it.

Experience of previous banking crises suggests that what is required is a comprehensive and systematic approach to bank balance sheets. Yet the approach we have at the moment remains ad hoc and piecemeal.

In Britain great strides have been made both in recapitalising the banks and ring-fencing their toxic assets. The taxpayer has put £37 billion directly into RBS and Lloyds; Barclays has raised £7.3 billion from investors and is expected to bring in another £3 billion from the sale of iShares; and HSBC has just wrapped up a very successful £12.5 billion rights issue. In terms of toxic debt, RBS and Lloyds have taken out insurance with the Government covering potential losses on almost £600 billion of assets.

Even so, some analysts believe more will be needed. Yet Britain is much further down the road than many other countries. And meanwhile, the scale of the problem just keeps mounting.

Only in January the International Monetary Fund doubled its forecast of total losses on US credit assets to $2,200 billion (£1,490 billion). As a result, it estimated that US and European banks would need to raise $500 billion to prevent their balance sheets from deteriorating further.

Now I hear that the IMF's economists are preparing to increase that figure to $3,100 billion, with a further $900 billion for assets originated in Europe and Asia.

This escalation reflects the spreading of the downturn from US property-related securities to the real economy around the world. Banks exposed to the crisis in central and eastern Europe look particularly vulnerable.

In a joint report by Morgan Stanley and the consultants Oliver Wyman, the authors argue that continental European governments need to come up with a more comprehensive approach to bolstering their banks, many of which have perilously thin capital cushions.

Meanwhile in the US, Mike Mayo, a veteran banking analyst now at Calyon Securities, warns that the worst is yet to come. He says that government action on impaired assets could trigger the need for further large capital increases for US banks.

The problem is that ploughing more taxpayers' money into their undeserving banks is politically toxic. What politicians need is the cover provided by concerted global action. And they need it before the next G20 summit. Now that Mr Sarkozy and Ms Merkel have their crackdown on tax havens, perhaps they can show some leadership on more urgent problems.

http://business.timesonline.co.uk/tol/business/columnists/article6047880.ece

Toxic debts could reach $4 trillion, IMF to warn

April 7, 2009

Toxic debts could reach $4 trillion, IMF to warn

Gráinne Gilmore, Economics Correspondent

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

Paul Ashworth, senior US economist at Capital Economics, said: “The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla' losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.”

In its January report, the IMF said: “Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount.” At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

The IMF's jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 billion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6047929.ece

Without a cure for toxic assets, credit crisis will persist

Without a cure for toxic assets, credit crisis will persist
By Steve Lohr

Friday, February 13, 2009
NEW YORK: Many of the large U.S. banks, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today's marketplace, would overwhelm the value of the banks' assets, they explain. The banks, in their view, are insolvent.

None of the experts' research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are federally insured. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.

But without a cure for the bad-asset problem, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, the economists and experts say, is a larger, more direct government role than in the Treasury Department's plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the toxic, mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years. Such forceful action was belatedly adopted by the Japanese government from 2001 to 2003, by the Swedish government in 1992 and by Washington in 1987 to 1989 to overcome the savings and loan meltdown.

"The historical record shows that you have to do it eventually," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Putting it off only brings more troubles and higher costs in the long run."

Of course, the stimulus plan put forward by the administration of President Barack Obama could help to spur economic recovery in a timely manner and the value of the banks' assets could begin to rise.

Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.

Meanwhile, the loss estimates keep mounting.

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Roubini estimates that total losses on loans by American financial companies and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2trillion. Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.

"The United States banking system is effectively insolvent," Roubini said.

For its part, the banking industry bridles at such broad-brush analysis. The industry defines solvency bank by bank and uses the value of a bank's assets as they are carried on its books, rather than the market prices calculated by economists. "Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Roubini's numbers may be the highest, but many others share his rising sense of alarm. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the U.S. banks have a capital shortage of $500 billion. "In a more severe recession, it will take $1 trillion or so to properly capitalize the banks," said Johnson, an economist at the Massachusetts Institute of Technology.

At the end of January, the IMF raised its estimate of the potential losses from loans and other credit securities originated in the United States to $2.2 trillion, up from $1.4 trillion in October. Over the next two years, the IMF estimated, U.S. and European banks would need at least $500 billion in new capital, an estimate more conservative than those of many economists.

Still, those numbers are all based on estimates of the value of complex mortgage-backed securities in a very uncertain economy. "At this moment, the liabilities they have far exceed their assets," said Posen of the Peterson Institute. "They are insolvent."

Yet, as Posen and other economists note, there are crucial issues of timing and market psychology that surround the discussion of bank solvency. If one assumes that current conditions reflect a temporary panic, then the value of the banks' distressed assets could well recover over time. If not, many banks may be permanently impaired.

"We won't know what the losses are on these mortgage-backed securities, and we won't until the housing market stabilizes," said Richard Portes, an economist at the London Business School.

Raghuram Rajan, a professor of finance and an economist at the University of Chicago graduate business school, draws the distinction between "liquidation values" and those of calmer times, or "going concern values." In a troubled time for banks, Rajan noted, analysts are constantly scrutinizing current and potential losses at the banks, but that is not the norm.

"If they had to sell these securities today, the losses would be far beyond their capital at this point," he said. "But if the prices of these assets will recover over the next year or so, if they don't have to sell at distress prices, the banks could have a new lease on life by giving them some time."

That sort of breathing room is known as regulatory forbearance, essentially a bet by regulators that time will help heal banking troubles. It has worked before. In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a meltdown of the banking system.

In the current crisis, experts warn, banks need to get rid of bad assets quickly. The Treasury's public-private investment fund is an effort to do that.

But many economists and other finance experts say that the government may soon have to move in and take on troubled assets itself to resolve the credit crisis. Then, they say, the government could have the patience to wait for the economy to improve.

Initially, that would put more taxpayer money on the line, but it might reduce overall losses if the government-controlled entity were a shrewd seller. That is what happened during the savings and loan crisis, when the troubled assets, mostly real estate, were seized by the Resolution Trust Corp., a government-owned asset manager, and sold over a few years.

The eventual losses, an estimated $130 billion, were far less than if the hotels, office buildings and residential developments had been sold immediately.

"At the end of the day, the taxpayer money would be used to acquire assets, and behind most of those securities are mortgages, houses, and we know they are not worthless," said Portes, the London Business School economist, who is president of the Center for Economic Policy Research.

"So the taxpayers would not be out anything like the back-of-the-envelope, headline numbers people toss around."


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http://www.iht.com/articles/2009/02/13/business/insolvent.php