Printing money: an easy guide to quantitative easing

Printing money: an easy guide to quantitative easing
The 'unconventional tools' that the Bank of England will use to fight the financial crisis.

Last Updated: 9:29AM GMT 06 Mar 2009

Interest rates are now as close as they can get to zero without causing malfunctions in the financial system.

In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.

Some have been tried before with differing degrees of success. But whatever the tool, the objective is clear: to keep Britain from dipping any deeper into recession and becoming trapped in a debt-driven deflation and depression, as the US was in the 1930s.

With no room to cut rates, the Bank must instead turn to direct means of influencing the money supply. This is important. The nominal growth rate of an economy can be no greater than the speed at which money is growing, and flowing around the economy. This famous economic equation – the quantity theory of money – lies behind the Bank's decision to create £150bn of money.

Whether it will succeed is another question, but Thursday's announcement means it has thrown its weight behind this new policy of quantitative easing with more weight and vigour than any other central bank in history.

THE BANK OF ENGLAND'S EMERGENCY WEAPONS

Liquidity support

How does it work? The Bank lends out money in return for collateral – usually government or company debt – to instill confidence in the market and provide cash with which to trade. It has been doing this for over a year through its Special Liquidity Scheme and its successor.

Pros The system does not meddle directly with monetary policy – so does not interfere with interest rate decisions – and it directly ensures that banks' balance sheets are kept above water.

Cons Although it addresses liquidity problems –
ie. when financial institutions don't have enough cash to hand – it does not solve the credit crunch, in which banks are unwilling to lend cash at all.

Does it work? To an extent. It has ensured strains on the financial markets have eased in comparison with the early days of the crisis, but the amount banks are willing to lend remains extremely low.

Buying company debt

How does it work? The Bank buys, rather than lends against, the assets of private investors, be they pension funds, insurance groups or banks. The assets are most likely commercial paper (short-term company debt) and corporate bonds. It pays for the money from a pot of cash raised by the Government through issuing gilts – in other words without increasing the amount of cash in the system. This is what the Bank has attempted to do through the Asset Purchase Facility, and is what the Federal Reserve is doing in the US.

Pros If successful, it gets to the heart of the matter, reducing the cost of credit for companies and lubricating the capital markets for companies. Because the purchases are funded by the Government it is not particularly inflationary.

Cons It has proved very difficult for the Bank to get hold of the right type of commercial debt (in other words at a good price, and a type that won't default). Pay too little and you will leave the taxpayer facing a big bill in the coming years.

Does it work? To an extent. The Fed has bought billions of dollars worth of corporate debt, but with little impact on commercial bond spreads.

Buying gilts (Government debt)

How does it work? The Bank buys government debt off investors and banks rather than corporate debt. This is something the Bank had authorised by the Treasury yesterday. The aim is to bring longer-term interest rates down, ensuring that companies and lenders cut their own rates.

Pros: Gilts are gilt-edged, and so have very little chance of defaulting (and if the UK Government has defaulted that is a whole other kettle of fish to worry about) and there are plenty of them around, so are easy to buy.

Cons: It does not make any direct difference to companies' cost of borrowing, instead pushing down government interest rates: nice, but not the heart of the matter.

Does it work? Yes, if by that you mean getting long-term interest rates down. The Japanese did it in the past, but it has not yet been tried by the Fed.

Creating money to buy assets

How does it work? The Bank buys assets off private investors but funds those purchases by creating money (literally, with the push of a button; metaphorically, with printing presses). This is what the Government has now approved. The aim is to increase the amount of money in the economy, which will in turn increase either economic growth, inflation, or a combination of the two.

Pros: The UK faces a possible spate of debt deflation, and there are few more powerful weapons for a central bank to use than its printing presses. It can also aim to kill two birds with one stone and cut the cost of borrowing for companies by making cash more plentiful. With interest rates at zero, there are few other more powerful tools the Bank can employ.

Cons: In normal times, such a policy is potentially highly inflationary. There is every chance the Bank is unconsciously laying the ground for an uncontrollable wave of inflation in the future. Deflation is the big enemy at present but the threat may be overblown, and printing money – quantitative easing – will create a mess of unparalleled proportions to clear up afterwards.

Does it work? Yes and no. The only other time it has been used is by the Bank of Japan. As Japan is still trapped in stagnation, many say it failed. However, there is evidence the Japanese experience would have been worse had it not taken these measures. Some also argue that the BoJ was too slow to start quantitative easing.

The helicopter drop

How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows. This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.

Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.

Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging. It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.

Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.


http://www.telegraph.co.uk/finance/financetopics/recession/4944762/Printing-money-an-easy-guide-to-quantitative-easing.html

Report: 1 in 5 Mortgages Are Underwater

Report: 1 in 5 Mortgages Are Underwater
By Mara Der Hovanesian
Thu Mar 5, 8:08 am

It's bad enough when the value of your house is sinking like a lead balloon. But for a growing number of Americans, their woes are compounded by owing more on the mortgage than what that house is now worth. It's called having negative equity -- the opposite of what happens when a home appreciates and a homeowner builds positive equity above and beyond his initial investment.

In a new report released Mar. 4, more than 8.3 million U.S. mortgages, or 20% of all mortgaged properties, were saddled with negative equity at the end of 2008, according to LoanPerformance, a company that tracks mortgage data. That's up two percentage points, from 7.6 million borrowers, from the end of September 2008. California led the nation with a monthly average of 43,000 new negative-equity borrowers over the three-month period, followed by Texas (16,000), Nevada (15,000), Florida (14,000), and Virginia (14,000).

"Given that we've never seen house price declines of this magnitude, this is probably one of the highest negative-equity levels we've ever seen," said Mark Fleming, chief economist for First American CoreLogic, LoanPerformance's parent. "House price declines have taken hold everywhere."

Temptation to Walk Away

The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all U.S. mortgages. The data was filtered to include only properties valued between $70,000 and $1.25 million.

The most severe "underwater mortgages" -- mortgage loans that are 125% or higher than the value of the property -- are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000). Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater.

A veteran real estate broker in Las Vegas who declined to be named said that in 2004 there were only 2,000 homes on the market; now there are some 20,000 and growing. "Everybody became crazy," she said. "In certain areas (home prices are) off 60% from the peak. It's really sad because there's no equity and people can't refinance."

Nevada Leads Negative Equity

The negative-equity conundrum appears poised to get worse. LoanPerformance calculates that there are another 2 million houses that are approaching the danger zone, that is, within 5% of being in a negative-equity position. Negative-equity and near-negative-equity mortgages combined account for a quarter of all homes with mortgages nationwide.

The distribution of negative equity is heavily skewed to a small number of states, according to Fleming. Nevada has the highest percentage of negative equity: More than half of all mortgage borrowers in that state are now upside down. The average loan-to-value ratio for properties with a mortgage in Nevada was 97%, or less than $8,000 in equity. That leaves the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values.

In states where unemployment is high and rising, such as Michigan, the problem of upside-down mortgages is acute. "It's the combination of underwater and losing a job that is of most concern at this point," says Fleming. "If you're underwater but can still pay your mortgage, you're O.K. And if there's equity in the home and you lose a job, you can always refinance" to tap into that to make ends meet, providing a bank will approve a new loan.

Worst Is Yet to Come

Ranking the states by total number of borrowers underwater, California came in first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million), Texas (497,000), Michigan (459,000), and Ohio (435,000). These five states account for more than half of these problem mortgages.

For states that haven't seen a widespread problem in declining prices and therefore upside-down mortgages, the worst may be in store. Fleming forecasts that the largest increases in the share of negative-equity mortgages will likely occur in states that have not yet experienced deep declines. "The worrisome issue is not just the severity of negative equity in the 'sand' states," Fleming said, "but the geographic broadening of negative equity that is expected to occur throughout the year."

http://news.yahoo.com/s/bw/20090305/bs_bw/mar2009db2009033306801;_ylt=AkxNe7n.EtjHM3M3rhZhkROyBhIF

It's Time to Sell and Walk Away

It's Time to Sell and Walk Away
By John Rosevear (TMF Marlowe)
March 5, 2009 Comments (14)

There's no escaping this truth: The market has lost more than half of its value since it peaked in October 2007.

It could go even lower -- and it probably will.

Things are getting worse. If you have any home equity left, it's still shrinking. General Motors inches closer to Chapter 11 every day -- and General Electric (NYSE: GE) is confronting some mighty problems of its own.

Our entire banking system seems on the ragged edge of collapse, as nervous investors wonder who AIG's counterparties are and fret about the true financial condition of institutions such as Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). Layoffs continue at a torrid pace, as companies such as General Dynamics (NYSE: GD) and Tyco Electronics (NYSE: TEL) join the very long list of companies adjusting to new economic expectations.

It's going to get worse before it gets better -- if it gets better. Some folks are saying there's no way out -- a huge collapse might be in the cards. At best, they say, we're looking at a decade or more of high unemployment and stock market misery.

This is the time when you look at your decimated portfolio and wonder how much more you can take. This is the time when many pundits remind you that the "buy and hold myth" has been "debunked," and that the "smart money" is already in cash, waiting for the bottom. This is the time when the temptation to join them is overwhelming.
This is the time when you sell it all and walk away,
There's just one catch But if you act while you still have something left to get rid of, answer this: What do you do after that?
I mean, great, you sold. Congratulations. Now what?

• You can leave what's left in a money market fund that earns a whopping 1%.
• You can buy gold, though that seems more and more to me like buying tech stocks in 1999.
• You could buy bonds issued by a blue-chip company such as Johnson & Johnson (NYSE: JNJ) or Procter & Gamble (NYSE: PG) -- yet that still leaves you exposed to an economic cataclysm.
• You could … geez, I don't know what else. There isn't much available that looks like a great long-term investment strategy once you're out of the market. Picassos? Vintage Ferraris? Rental condos in Scottsdale? The Ferrari would be fun, but it's not really a retirement plan.

Of course, when people talk about selling, they're not thinking about an alternative long-term strategy. They're thinking they'll wait for the bottom and then buy back in.

Is that what you're thinking?

You sure that's a good idea? Waiting for the bottom and jumping back in would be market timing. That's the practice of using something -- technical analysis, macroeconomic factors, seasonal indicators, astrology -- to buy when markets are about to rise and sell when they're about to fall.

Market timing, the academics say, doesn't work. But there were academic theories that said our current mess couldn't happen. Are they wrong about this, too?

As Foolish retirement guru Robert Brokamp notes in the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, some timing indicators seem to work more often than not. For example, when dividend yields go up and price-to-earnings ratios go down, prospects for stocks in general have usually been good. No-brainer, eh? But some notions are more nuanced -- for instance, statistically speaking, the stock market does best between November and April.

Ouch. Given how the market's done since last November, let's hope that last one doesn't hold this year. But that makes for a good point -- tendencies and trends and "more often than not" isn't reliable enough to bet your retirement fund on. Consider: Will the next sharp upward spike in the markets be yet another bear-market rally -- or the birth of a new bull? One thing history tells us about bull markets: They start sooner than most folks think they will. We'll only know for sure in retrospect.

Likewise, we'll all know what the bottom was -- a year or two later. But how will you know it when it's here? Can you say for sure that we haven't already seen it? The bottom happens, we all know, at "the point of maximum pessimism." I don’t see very many optimists around today.

Wall Street chest-thumping aside, there's only one good answer to that: I don't know.
So what should you do? The short answer is to "invest well and hang on." Successfully timing the markets involves an extraordinary combination of luck, skill, knowledge, and more luck -- and even the best market timers regularly miss the mark.
A better answer? Well, we can't predict the future -- but as Robert notes in his article, there are reasons to believe that the remainder of this bear market will unfold along certain lines. And there are strategies you can use to mitigate downside risk in the meantime -- strategies that don't involve selling everything and sitting in cash.

These aren't esoteric strategies, either -- they're approaches you can use in any portfolio, even a 401(k).

Fool contributor John Rosevear has no position in the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Tyco Electronics is a Motley Fool Inside Value pick. The Fool owns shares of Procter & Gamble.
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http://www.fool.com/retirement/general/2009/03/05/its-time-to-sell-and-walk-away.aspx

Rule No. 1: It's OK to Lose Money

Rule No. 1: It's OK to Lose Money
By Rich Greifner
March 5, 2009 Comments (2)

For such a brilliant investor, Warren Buffett sure lives by a stupid set of rules.

I'm referring, of course, to Buffett's famous first (and second) rule of investing: Never Lose Money. That's certainly an admirable goal, and it's one that we analysts at The Motley Fool strive for -- to be right about every stock, every time. However, there's a small problem with Buffett's rule. It's impossible.

Mission impossible

It seems like everything the man touches turns to gold, but even Buffett has been wrong on occasion. His investment in Pier One didn't pan out, nor did his purchases of H.H. Brown Shoe Co. or Dexter Shoes (perhaps Rule No. 3 should be "Never Invest in Shoe Companies").
His recent purchases haven't all been moneymakers, either. In his latest letter to Berkshire Hathaway shareholders, Buffett lamented that purchasing ConocoPhillips too soon had cost Berkshire "several billion dollars," and he referred to his investments in two Irish banks as "unforced errors."

Given his stated M.O., how could Buffett be so cavalier about these losses? It's simple. For starters, the man has more money than God. And secondly, his famous advice may not mean what you think it does.

Do as he does, not as he says

When Buffett says "never lose money," he doesn't actually mean that investors should never lose money. Instead, he means that investors should strive to limit their downside risk by purchasing shares in businesses with significant competitive advantages when those businesses trade at a large discount to their intrinsic value.

If you concentrate on buying such companies, it's less likely you will lose money on each of your investments and highly unlikely that you will lose money over the long run. That's the real meaning of Buffett's famous rule -- and it's the secret to his sustained success.

Rule No. 3: Buy great businesses at good prices

A great business is often easy to spot. In fact, Buffett has even given us a handy framework. In Berkshire's just-released 2008 annual report, Buffett outlined six key traits that he looks for in any acquisition candidate:

• At least $75 million in pre-tax earnings.
  
• Demonstrated consistent earnings power.
  
• Good return on equity with little or no debt.
  
• Strong, committed management.
  
• A simple business model.
  
• A fair price.
  

Scores of companies meet these criteria. As you'll see in the table below, I've identified six popular companies that appear to fit Buffett's bill. The trick, however, is buying these businesses at a significant margin of safety.

To calculate a company's intrinsic value, Buffett usually forecasts future cash flows, and discounts those amounts to a present value as one would when pricing a bond. For the purposes of this article, I'll substitute the price-to-earnings ratio, which is admittedly a crude approximation of a company's value:

Company
5-Year Average P/E Ratio
Current P/E Ratio

AutoZone (NYSE: AZO)
13.9
13.9
Boeing (NYSE: BA)
28.6
8.6
Colgate-Palmolive (NYSE: CL)
23.6
16.1
Honeywell (NYSE: HON)
19.4
9.4
Microsoft (Nasdaq: MSFT)
24.2
10.0
Yum! Brands (NYSE: YUM)
23.1
15.5

Data from Capital IQ, a division of Standard & Poor's.

Would Buffett buy these stocks?

Doubtful. Although he is chummy with Bill Gates, Buffett's deep aversion to technology will likely keep Microsoft out of Berkshire's portfolio. Boeing is too cyclical, AutoZone too pricey, Yum! Brands' interest coverage too low, and Honeywell he's already bought -- and sold. And while Colgate-Palmolive looks attractive at today's prices, Buffett already owns a large stake in competitor Procter & Gamble (NYSE: PG).
And that brings us to rule No. 4:

Rule No. 4: Pick your stocks wisely

Buffett doesn't purchase stocks because he saw them mentioned on CNBC or he received a hot tip from a friend in the know. He takes his time, studies the company and its industry, and buys only when he is confident that he understands the company and it meets his aforementioned criteria. His famous thought experiment below nicely sums up his feelings about stock selection:

If you thought of yourself as having a card with only twenty punches in a lifetime, and every financial decision used up one punch, you'd resist the temptation to dabble. You'd make more good decisions and you'd make more big decisions. ... You'd get very rich.

Buffett's point is not that investors should limit themselves to a predetermined number of trades. Rather, you should carefully study a company and make sure you fully understand it before you buy shares. With greater understanding comes greater confidence -- and greater returns as well.

At Motley Fool Inside Value, advisors Philip Durell and Ron Gross don't recommend stocks based on short-term trends or market movements. Like Buffett, they study superior businesses -- and they wait patiently for these businesses to fall to attractive price levels.

Rich Greifner wishes he had held a few of his punches last year. He does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway and Procter & Gamble. Berkshire is an Inside Value and Stock Advisor recommendation. Microsoft is an Inside Value selection. The Fool has a disclosure policy.
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http://www.fool.com/investing/value/2009/03/05/rule-no-1-its-ok-to-lose-money.aspx

Should You Give Up on Stocks Forever?

Should You Give Up on Stocks Forever?
By Dan Caplinger
March 5, 2009 Comments (1)


If you've sat out the bear market on the sidelines, you must feel like a genius by now.
As someone who still owns a fair number of stocks in my portfolio, I can only imagine what it must be like to watch all the bad news about the economy and the stock market without having to worry about what impact it's having on your own personal portfolio. It must be nice.

Still, despite the huge amount of cash that those who sat through bad times have preserved over the past year and a half, most of them want to know when stocks will stop falling just as much as any of us.

You still need stocks It's obvious why those who still own stocks want to see the recovery begin -- they want their money back. But if you don't own shares right now, why does it matter what the stock market does? Your money's safe, so why worry about stocks at all? Why not just give up on them forever?

Here's why: No matter where you have your money invested right now, your primary concern is how to reach your financial goals. And unfortunately, even if you've dodged a bullet by staying out of stocks during 2008 and 2009, you're still probably not on track to cross the finish line simply by keeping your cash in a money market account or investing in low-yielding Treasury bonds.

Consider a simple example. In late 2007, two families had $200,000 saved for their retirement 20 years from now. They're each shooting to reach $1 million in 2029. One of them kept their money mostly in stocks, which lost half their value in the bear market. The other foresaw the crash and moved everything to cash.

Now, the first family's portfolio is only worth $100,000, meaning that they'll have to earn about a 12.2% average annual return on their investment. It's pretty clear that they're counting on a recovery in stocks, as safer investments won't get them close to the return they need.

On the other hand, the second family still has $200,000. They won't have to earn as high a return, but at 8.4%, they'll still have trouble getting there without getting back into stocks at some point.

Take your profits

So once you've decided that you can't give up on stocks forever, you have to decide when to get back in. That's the toughest thing about market timing. You have two decisions to make: one when you sell, and the other when you buy back in again. If you've been in cash for a while, you got the first one right -- and by getting back in now, you can lock in your savings and assure yourself of achieving the buy low-sell high event of a lifetime. Wait, and you risk missing out if the market rebounds.

But that doesn't mean you should just throw all your money into whatever stocks happen to catch your eye. The lucky decision you've made could have a big impact on your investing decisions going forward. Specifically:

Stay out of high-risk stocks. Using the previous example, someone who only needs to average an 8% return doesn't need to take the same risks as someone who's trying to earn 12%. If you'd prefer to keep your results a bit less bumpy, you don't have to deal with the higher volatility of small growth plays like FLIR Systems (Nasdaq: FLIR) or Cameron International (NYSE: CAM). Or alternatively, you can make volatile investments but keep a cash cushion to soften the blow of any future declines.

Look for great values. In contrast, now's a great time to take some shots at some relatively safe companies that have been unfairly beaten down recently. Here are just some of the many stocks that sport attractive valuations and healthy corporate investment returns, and could be poised for a rebound:

Stock
1-Year Return
Forward P/E
Return on Equity (ttm)

Halliburton (NYSE: HAL)
(56.6%)
8.7
26.9%
Hewlett-Packard (NYSE: HPQ)
(40.4%)
7.5
20.8%
Nokia (NYSE: NOK)
(71.8%)
10.6
27.5%
Precision Castparts (NYSE: PCP)
(51.7%)
6.5
25.3%
Tidewater (NYSE: TDW)
(38%)
4.7
19.1%

Source: Yahoo! Finance and Capital IQ, a division of Standard & Poor's. ttm = trailing 12-month.

So if you've survived the bear market unscathed, give yourself a pat on the back -- and then start thinking about the future. You have an unparalleled opportunity that few have right now.

Take advantage of it.

For more on making the right investment moves now:
Stocks to get you through the next Great Depression.
Maximize your profits from the stimulus bill.
This is why Warren Buffett is buying stocks.


Fool contributor Dan Caplinger didn't miss the crash, but he's still putting new money into stocks. He doesn't own shares of the companies mentioned in this article. Nokia is an Inside Value recommendation. Precision Castparts is a Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy offers great value.

http://www.fool.com/investing/value/2009/03/05/should-you-give-up-on-stocks-forever.aspx

**Don't 'Buy and Hope:' How to Survive Until the Next Bull Market

Don't 'Buy and Hope:' How to Survive Until the Next Bull Market
Posted Feb 27, 2009 12:09pm EST
by Aaron Task in Investing

With the market heading lower again and the Dow hitting yet another new 11-year low intraday Friday, it's hard to believe stocks will ever be a good investment.
But "there's a bull market in our future," says John Mauldin, president of Millennium Wave Advisors.
That's the good news.
The bad news is Mauldin, who selects active fund managers for his high net worth clients, says any 1990's-style bull market that rewards passive index funds and "buy and hold" investors is unlikely to arrive before for another five-to-six years.
In the interim, the investor and author of the Thoughts from the Frontline e-letter says investors should focus on:
Staying conservative and preserve capital for the "great opportunities" that will emerge when the dust settles.
Be active with your portfolio and only buy stocks if you're both a good stock picker and an astute trader.
Avoid index funds: "Buy and hold was always a bad idea," he says.
Own some gold as a hedge: But he is not a gold bug or major dollar bear, as detailed here.
Seek income in quality munis, corporate bonds and dividend paying stocks but (again) you have to be smart with your selection, or find a manager who is.
As the name of his firm implies, Mauldin's market-timing work focuses on the market's "big" cycles - like 15-25 years - from bull (i.e. 1982-1999) to secular bear (2000-present). Price-to-earnings ratios are key to determining when the cycles switch, and Mauldin believes stocks are not "cheap" today based either on trailing 1- or 10-year P/Es, or by market-weighted P/Es as "Stocks for the Long Run" author Jeremy Siegel curiously argued in The WSJ this week.
Mauldin's baseline prediction is for "another leg down" this summer that takes major averages to new lows but sets the stage for a "1974-type bottom"; the key here is to recall the Dow bottomed in price in 1974 but then spent the next 8 years flip-flopping in a wide range around 1000, before beginning its historic rise to 10,000 (and beyond) in 1982.

http://finance.yahoo.com/tech-ticker/article/195681/Don (Click here to watch the video).

Notes:

• Buy and hold. (Index fund. 20 years is the long run. Buy and hope on the market returns.)
• Relative return type strategy during a bull cycle. (Buy on dips and hold.)
• Absolute return type strategy during a bear cycle, e.g. 8%. (Do not buy and hold in a bear cycle. Time by valuation e.g. PE based on 1 year or 10 year trailing earnings. Pick and choose stocks, muni fund, etc.)

Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.

Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.
Posted Feb 27, 2009 08:00am EST
by Henry Blodget

John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.
Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.

From The Business Insider:
If you think things are bad here, take a quick peek at what's going on across the pond:
The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

A note from Strategic Energy, as quoted by John Mauldin:
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.
Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.

John Mauldin summarizes:
Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.
(Subscribe to John Mauldin's newsletter here >)

http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs%20%20,cs,db,hbc

Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted

Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted

Posted Mar 02, 2009 01:35pm EST
by Aaron Task in Newsmakers, Recession

Fed Chairman Bernanke raised eyebrows (and, briefly, the market) last week when said there's a "reasonable prospect" the economy will bottom this year and be in recovery in 2010.
But Berkshire Hathaway's Warren Buffett disagrees: The economy "will be in shambles throughout 2009 and...probably well beyond," the Oracle of Omaha declared this weekend.
In sum, Buffett and much of the rest of humanity are just now coming around to Nouriel Robuini's way of thinking, the economist known as "Dr. Doom" is upping the ante on his longstanding bearish views.

A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.

"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."

Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.

http://finance.yahoo.com/tech-ticker/article/197164/Even-'Dr.-Doom'-Is-Scared-Economy-Much-Worse-Than-Roubini-Predicted?tickers=%5Edji,%5Egspc,QQQQ,DIA,SPY

What Fuels The National Debt?

What Fuels The National Debt?
by Reem Heakal (Contact Author Biography)


First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.


Responsibilities of the Treasury



The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)



The primary tasks of the Treasury include:

• The collection of taxes and custom duties
  


• The payment of all bills owed by the federal government
  


• The printing and minting of U.S. notes and U.S. coinage and stamps
  


• The supervision of state banks
  


• The enforcement of government laws including taxation policies
  


• Advising the government on both national and international economic, financial, monetary, trade and tax legislation
  


• The investigation and federal prosecution of tax evaders, counterfeiters and/or forgers
  


• The management of federal accounts and the national public debt

The National Debt



A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)



The Role of Congress



Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.



Who Owns the Debt?



The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.



Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.



The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).



War Time



In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.



The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.



Conclusion



The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.



For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)



http://www.investopedia.com/articles/04/011404.asp?partner=NTU3

Q&A: Should I buy into HSBC's rights issue?

From Times OnlineMarch 2, 2009

Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper

BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.

Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.

However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.

The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.

Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.

Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.

We answer your questions.

Q: I’m a shareholder. Should I take up the rights?

A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.

Expert opinion is divided on what they should do.

Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.

“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”

However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.

“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”

Q: What are my options?

A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).

The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.

According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.

Q: Are rights issues a good thing?

A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.

On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.

Q: I’m a borrower. Is this good news for me?

A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.

One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.

Q: I’m remortgaging. Is HSBC a good bet?

A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.

It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis

http://www.timesonline.co.uk/tol/money/article5832350.ece

US banks may need more bail-outs, says Ben Bernanke

US banks may need more bail-outs, says Ben Bernanke
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.

By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009


Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.

The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.

Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."

The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.

"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.

The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.

The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.

A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4934220/US-banks-may-need-more-bail-outs-says-Ben-Bernanke.html

Dow Jones valuations are just getting tougher

Dow Jones valuations are just getting tougher
With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.

By Martin Hutchinson, breakingviews.com
Last Updated: 1:23PM GMT 03 Mar 2009

That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.

Fast back to December 5, 1996.

The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.

It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.

As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.

So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.

That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.

In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/breakingviewscom/4931436/Dow-Jones-valuations-are-just-getting-tougher.html

Gold: Warning for investors chasing short-term gains

Gold: Warning for investors chasing short-term gains
The scale of the recent moves in the gold price and the resulting publicity are reasons for caution.

Daniel Sacks of Investec Asset Management
Last Updated: 3:56PM GMT 03 Mar 2009

There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is "long" – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.

However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.

The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.

Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.

Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.

The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.

Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.

It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.

Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.

Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4931336/Gold-Warning-for-investors-chasing-short-term-gains.html


Comment: A highly speculative asset for the uninitiated.

HSBC's cash call provides reality check despite Asian promise

HSBC's cash call provides reality check despite Asian promise
HSBC'S awful results are an important reality check for everyone caught up in the global financial crisis.

By Damian Reece
Last Updated: 5:57AM GMT 03 Mar 2009

While our attention here has been focused on domestic trouble and strife to do with which bankers got paid what and when, the world economy continues to go to pot.

The bank's results are truly awful, even before the £17.5bn of write downs including its disastrous US business, but then so is the global financial system in case you'd forgotten.

A £12.5bn rights issue reveals a bank extremely worried about the future, but then so it ought to be.

Its senior executives are foregoing bonuses for 2008 but then so they should, having overseen a company that on the best measure saw an 18pc fall in profits and the worst a 62pc drop.
Stephen Green, HSBC's chairman, sought to explain the causes of the current crisis on Monday with reference to the triangle of Western consumer economies gorging themselves on debt supported by the surpluses of the Far Eastern producer nations and the oil and mineral rich resource nations.

Last year that once golden triangle fast became a Bermuda triangle with the likes of HSBC a piece of the wreckage bobbing around in the ocean – afloat at least and not completely sunk.

These results are no cause to sing out in celebration but neither are they a death knell.

This is a UK-based bank still going without government aid and able to raise a record £12.5bn from investors. It has at least a veneer of credibility left, enough for it to talk of opportunities to pick off acquisitions as competitors seek safe harbour.

The 19pc fall in its shares yesterday reflects the fact that, understandably, pessimists win every argument at the moment.

The outlook is bad enough that no one can be sure that HSBC won't need the financial help of at least one government in future. Markets have got used to expecting the worst only to see those expectations all too often surpassed so they are in no mood to give anyone the benefit of the doubt.

What is in no doubt, however, will be the shift in economic power from West to East as a result of this crisis, an axis that HSBC straddles.

Even now Asia, except Japan, is expected to grow 4.6pc in 2009, a terrible result for the region but at least it's in positive territory in these worst of times.

The region still has the surpluses to stimulate domestic and regional demand while retaining the firepower to buy up the West's distressed assets at knock down prices.

All this at a time when the likes of the UK and the US will have to pay off debt and right the wrongs of their credit binge, further limiting economic recovery here.

http://www.telegraph.co.uk/finance/comment/damianreece/4929190/HSBCs-cash-call-provides-reality-check-despite-Asian-promise.html

The Case for Dumping Everything Now

The Case for Dumping Everything Now
By Dan Caplinger March 3, 2009 Comments (14)

By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?

You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:

All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.

Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.

Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.

Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:

1. The cyclical nature of the economy has ended, and there's no hope that businesses can grow or even come close to their past glory.
   
2. Everything that everyone has done to try to support the economy will ultimately fail.
   
3. Once everyone figures out that the only thing holding up this house of cards is unsustainable government spending, people will abandon the current economic system, and all the financial assets that previously held so much value will become worthless.

Sounds reasonable. Sign me up.

Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.

But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.

Change does happen

That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.

Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.

But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:

Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.

These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.

As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.

For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.

Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
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http://www.fool.com/investing/value/2009/03/03/the-case-for-dumping-everything-now.aspx

What's Next? Dow 5,000?

What's Next? Dow 5,000?
By Morgan Housel March 2, 2009 Comments (16)
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If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.

And as recently as, I don't know, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.

Well, Fools, meet insanity. It's quickly becoming the new reality.

What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow's short-term fluctuations are of little importance.

What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last fall. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.

Falling hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.

Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux will be enough.

That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.

The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.

Can they handle the truth? General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.

Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.

Until there's a coherent plan, (which I think means nationalization of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, stock indices won't be far behind. And around and around we go.

Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?

http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx


Related article: Mon, 2/9/09,
Stocks to fall AT LEAST another 40%! Here's why ...

Dow slides below 7,000 for first time in twelve years

Dow slides below 7,000 for first time in twelve years
The Dow Jones below 7,000 for the first time in twelve years on Monday after American International Group posted the largest quarterly loss in US corporate history.

By Telegraph Staff
Last Updated: 3:59PM GMT 02 Mar 2009

Dow Jones Industrial Average slides below 7,000 for first time in twelve years.

The blue chip index fell 144.8 - or 2pc - to 6918 points within minutes of opening after AIG reported a $61.7bn (£44bn) fourth-quarter loss and the US government said it would give the insurer another $30bn in loans. This is in addition to the $150bn it has already given the ailing insurer.

Wall Street's concerns about how governments around the world will fix the financial system and global economy have sent stocks to their lowest levels in 12 years.

The Dow Jones industrial average has dropped for six consecutive months, and is worth less than half of its October 2007 record high of 14,164.53.

Investors were also worried about European financial companies. HSBC, Europe's largest bank by market value, on Monday reported a 70pc drop in 2008 net profit and said it needs to raise £12.5bn and cut 6,100 jobs in the US.

HSBC and general gloom about banks and the global economy dragged down European stocks. Markets in London, Frankfurt and Paris was down between 2pc and 3.5pc just after trading started in New York.

Billionaire Warren Buffett wrote in his annual letter to investors on Saturday that he is sure "the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall".

"As bad as things are, they can still get worse, and get a lot worse," Bill Strazzullo, chief market strategist for Bell Curve Trading, told AP.

Mr Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.

http://www.telegraph.co.uk/finance/markets/4927959/Dow-slides-below-7000-for-first-time-in-twelve-years.html