Bank of England to buy bonds and loans in first step towards quantitative easing

The iconic columns of the Bank of England in London. Photo: EPA

Bank of England to buy bonds and loans in first step towards quantitative easing
The Government has taken the first step towards quantitative easing by authorising the Bank of England to buy up to £50bn of private sector assets as part of a wider drive to get banks lending again.

By Angela Monaghan Last Updated: 2:52PM GMT 19 Jan 2009

Under the scheme the Bank will be able to buy corporate bonds and consumer loans under the Government's new credit guarantee scheme.
Mervyn King, the Bank's Governor, said the new facility would "provide an important additional tool to improve financing conditions in the economy."
The move is not quantitative easing as it does not involve an increase in the money supply, but some said it could mark the beginning of a shift in that direction.
"This framework could readily evolve into full-blown quantitative easing - we would expect it to do so given the proximity of Bank Rate a de facto zero bound and deteriorating economic conditions, perhaps as soon as March/April," said Ross Walker, economist at Royal Bank of Scotland.
Quantitative easing, also known as printing money, is a more unconventional tool available to the Bank beyond interest rates as it attempts to halt the pace of economic decline in the UK.
The programme announced by the Treasury today comes into effect on February 2, before the next vote on interest rates by the Bank's Monetary Policy Committee on February 5.
"In effect one can argue that this makes the Bank of England the UK's 'bad bank', even if there are some limits to the risk that is being transferred," said Marc Ostwald, strategist at Monument Securities. "Cynics could also argue that Brown and Darling are merely passing the buck to the MPC in terms of exit strategy."
It is part of a broader programme announced by the Treasury this morning allow banks to exchange cash or shares for a Government guarantee on their "toxic" debts. As part of the rescue package, the taxpayer has taken an even bigger stake in Royal Bank of Scotland
The package comes before the first official confirmation on Friday that the UK is in recession. The Office for National Statistics is expected to reveal a sharp decline in gross domestic product in the final quarter of 2008, following a 0.6pc contraction in the third quarter. A technical recession occurs when the economy shrinks for two successive quarters.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4288754/Bank-of-England-to-buy-bonds-and-loans-in-first-step-towards-quantitative-easing.html

What we do when interest rates fail

What we do when interest rates fail
Mervyn King sets out the future for monetary policy, writes Edmund Conway

Last Updated: 8:13PM GMT 20 Jan 2009
You know things have come to a pretty pass when the Bank of England Governor admits that his main tool for influencing the economy – the UK benchmark interest rate – is no longer working.
But that is precisely what Mervyn King did last night. In a remarkable speech, he told Britons for the first time to brace themselves for quantitative easing. His acknowledgement that the UK central bank will have to resort to this drastic new method – used rarely in the history of finance – is likely to go down as one of the landmark moments in the financial crisis.
Equally striking as his confirmation that the Bank may soon embark on a policy of directly pumping cash into the economy was his stark description of the scale of the current malaise. Activity and confidence throughout the global economy had "fallen off a cliff", he said, with shares in London falling at one of the fastest rates in history and exports and output from here to the Far East dropping dramatically.
It is only against such a backdrop that such drastic action is necessary, he said. The plan the Bank intends to follow bears some resemblance to the scheme already in place in the US. The Bank has been granted permission by the Treasury to spend up to £50bn on assets, which it will then keep on its books with a view to selling them off later. The assets, which include commercial bonds and asset-backed securities, will be bought off private investors in the secondary markets – but this time the Bank will give them cash in return for the investments. The result will be an expansion of the Bank's balance sheet. For those who really follow such things, this is not quantitative easing, but what Ben Bernanke recently described as "credit easing".
In Mr King's words, which are worth quoting at length: "The disruption to the banking system has impaired the effectiveness of our conventional interest rate instrument. And with Bank Rate already at its lowest level in the Bank's history, it is sensible for the [Monetary Policy Committee] to prepare for the possibility – and I stress that we are not there yet – that it may need to move beyond the conventional instrument of Bank Rate and consider a range of unconventional measures.
"They would take the form of purchases by the Bank of England of a range of financial assets in order to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies. That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital markets."
The new asset purchase scheme will in fact give the Bank two powers beyond the ability to expand its own balance sheet. The first is to influence the pricing of a particular species of investment. If it believes the markets for certain corporate bonds are frozen, for instance, it may concentrate on buying them to help improve liquidity.
Second, and perhaps most importantly of all, it can, with the permission of the Treasury, opt to under-fund the Government's budget deficit. This means selling off fewer gilts than is necessary to pay for the assets, and is similar to what Japan did in the late 1990s, and what the Federal Reserve has now moved onto now. This is real quantitative easing. Interestingly, however, Mr King was reticent on how and when such a move would take place. It is hardly surprising. This kind of central bank activity has the potential to be highly inflationary. That should not be an immediate concern, given that the UK is now facing deflation.

http://www.telegraph.co.uk/finance/comment/edmundconway/4299635/What-we-do-when-interest-rates-fail.html

Sterling slumps to eight-year low after second bank bail-out

Sterling slumps to eight-year low after second bank bail-out

Sterling tumbled below the $1.40 mark against the dollar for the first time in almost a decade and fell against the rest of the world's major currencies as the UK Government's second bail-out of the country's banks underlined the dangers facing the economy.

By Angela MonaghanLast Updated: 6:37PM GMT 20 Jan 2009


The pound, which was trading above the $2 mark less than 12 months ago, slumped to below the $1.40 mark for the first time since June 2001 in morning trading in London after registering a fall of more than three cents yesterday.
Currency traders have been aggressively selling the pound as the depth of the recession facing the UK becomes clearer. Interest rates are now at 1.5pc and most analysts expect the Bank of England to continue cutting close to zero in an effort to get money moving around the economy again.
"Sterling has struggled due to the announcement of the new policy measures, in addition to reports of big losses in the UK banking sector," analysts at UBS said this morning.
Analysts are concerned that the second bail-out will substantially increase Britain's debt beyond the 8pc of gross domestic product projected by the Chancellor Alistair Darling at the Pre-Budget Report in November.
Prime Minister Gordon Brown admitted yesterday that he does not know how much the second bail-out of the banks will cost.
Steve Barrow, currency strategist at Standard Bank, predicts that the pound will slide to around $1.35 against the dollar over the next month or two.
He argues that although the US banking system has been hit by similar difficulties to the UK, sterling is particularly vulnerable to a weak performance from the financial sector and banking shares.
"One clear reason for the closer relationship in the UK is that the dollar can act as a safe-haven in times of global stress," he said.
Sterling is now down 28pc against the dollar in the past year and in December sterling teetered on the brink of parity with the euro for the first time.
This morning it tumbled more than 2p to 92.75 and fell to a record low of 124.77 versus the yen.
Jim Rogers, the co-founder of Quantum fund with George Soros, today told Bloomberg News that “I would urge you to sell any sterling you might have.”

http://www.telegraph.co.uk/finance/financetopics/recession/4295391/Sterling-slumps-to-eight-year-low-after-second-bank-bail-out.html

How to Profit From the Credit Crunch

JANUARY 17, 2009, 11:11 P.M. ET
How to Profit From the Credit Crunch

By MARK GONGLOFF
Investors shell-shocked by two nasty bear markets in stocks in less than a decade are starting to look elsewhere for good returns. In the wake of the worst credit crunch since the Great Depression, some analysts suggest they might take a look at, believe it or not, credit.

Their reasoning: Bonds and other credit instruments have arguably suffered much more than stocks during this downturn, meaning they could have further to climb when the economy starts to recover. What's more, as credit led the economy and stocks into the valley, it might have to lead them back out, meaning it could recover before stocks do.
Stocks "are historically first out of the block" in a recovery, says Binky Chadha, chief U.S. equity strategist at Deutsche Bank, "but given the credit crisis this time, credit has to recover before we can get equity returns."
Stocks took several steps back from a recovery last week, when the Dow Jones Industrial Average fell 3.7%. The blue-chip index is down 5.6% so far this year and 42% from its record high in October 2007. Last November, at the depths of the current bear market, the Dow was off 47% from its record, the worst decline since the 1930s.
But the suffering in the credit market has been unprecedented, as investors have come to avoid credit risk like poison. They have demanded record-high interest rates on debt, at levels that suggest a record wave of corporate defaults.
On the bright side, this offers investors a hefty yield -- even after a slight recovery in credit markets in recent weeks, which has pushed interest rates lower.
Many analysts say bonds still offer "equity-like" returns, but that may be underselling them: There is a chance some bonds can offer better returns than stocks.

'Astounding' Yields

For example, the yields on corporate bonds that ratings agencies consider below-investment-grade -- so-called junk bonds -- are 16 percentage points higher, on average, than yields on U.S. government debt of similar duration, according to Merrill Lynch data. A 10-year junk bond might yield 18%, compared with roughly 2% for the 10-year Treasury note.

That is an astounding gap; two years ago, junk bonds yielded just two percentage points more than Treasurys. This "spread" is not much lower than its record high of about 22 percentage points, set in November. Many analysts say this represents a much direr outlook for the economy and corporate bankruptcies than even the stock market does.
"Yield levels and the expected default rates they imply are way out of line with everything but a nuclear bomb," says Vinny Catalano, chief investment strategist at Blue Marble Research.
Safer debts have lower yields, just as more-creditworthy individual borrowers get lower rates when they apply for a loan. Bonds for companies with an "A" credit rating -- roughly middle of the pack for investment-grade bonds -- yield five percentage points more, on average, than Treasurys. Historically the spread is about one point.
Municipal bonds, which state and local governments use to pay for building bridges and libraries, yield nearly one percentage point more than Treasurys. Typically, given the rarity of municipal defaults and the tax-exempt status of their bonds, they yield slightly less than Treasurys.
These safer credit risks don't offer enormous returns, but if the stock market is flat, or worse, in 2009, then they could look much more appetizing. And despite a recent swoon, stocks could still be in store for a big disappointment if the economy fails to rebound sharply in the second half of the year, as many in the stock market still hope. Bonds, on the other hand, may already be priced for big disappointment.

No Certainty for Stocks

"We're really not even close to a point yet where we could state with confidence that equities will significantly outperform corporate bonds over the next six months," says John Lonski, managing director and economist at credit-rating agency Moody's.
But there are risks to wading into debt. If the economy roars back much more quickly than economists expect, bonds would still rally, but stocks might surge even more.
On the other hand, an economy that stays sluggish for a long time could spawn a growing wave of corporate bankruptcies that burn debt holders. What keeps policy makers awake at night is a worry that stimulus measures won't break the vicious cycle gripping the economy right now, in which tight credit hurts the economy, which hurts borrowers' ability to repay their debt and leads to still-tighter credit.
Even assuming some benefit from stimulus, Moody's expects high-yield-debt default rates to surge to 15% by the end of 2009, from just 4% at the end of 2008. That would be a record high for defaults in the modern era of junk bonds, which began in the 1980s.
Investment-grade default rates have been much lower, but will likely rise, as well. An economy that fails to respond to stimulus could push defaults still higher.
Meanwhile, some $758 billion in corporate debt is coming due in 2009, according to Standard & Poor's, meaning companies will have to either pay what they owe or refinance. Most of these debts were incurred five or 10 years ago, when rates were much lower, so refinancing will mean significantly higher borrowing costs for most companies. Less-creditworthy companies may not be able to get new financing at all. This increases the risk that companies won't be able to pay their debts.
In other words, very high yields on corporate bonds may be perfectly appropriate, given the risk that they could turn to dust in your hands. "It is still a very treacherous economic climate, and one has to proceed with caution" when buying debt, says Mr. Lonski.
Write to Mark Gongloff at mark.gongloff@wsj.com

http://online.wsj.com/article/SB123224182986193619.html

Success is 'something we attract'

Tue, Jan 20, 2009

AsiaOne

Success is 'something we attract'
By Lorna Tan

Founder of personal development firm Mind Edge and performance coach Alan Yip, 45, loves to trade in shares and invest in properties. But that is how he lost his hard-earned savings during the Asian financial crisis, so he is more careful now.
A Hong Kong citizen who is a Singapore permanent resident, Mr Yip became interested in property investing when he was working in Indianapolis in the United States as a computer programmer in a utilities firm.
'I was able to buy properties without any down payment so I became a property investor. At one time, I had eight landed investment properties in Indianapolis, Greenwood and Bloomington. I only had to make sure that the rental income from these properties covered the mortgage payments and maintenance,' he recalled.
In the US, it is possible to buy resale properties without a down payment as certain financial bodies allow mortgages to be transferred from seller to buyer without the need for bank approval.
The eight properties yielded a combined monthly rental income of US$2,000 to US$2,500. When he sold them a year after he was posted to Singapore by a chemical technology firm to set up its Asia-Pacific operations in 1996, he pocketed a profit of US$80,000.
This buoyed his confidence in properties, and fuelled other purchases when his siblings in Hong Kong roped him in when they bought three retail shops and a condominium in 1996.
'I was reckless in managing my money then. I didn't even ask for the details of these property investments and simply wired them the money, which amounted to about $150,000,' he said.
When the Hong Kong property market headed south during the Asian financial crisis a year later, they were forced to sell the properties at a loss and Mr Yip never got his money back.
In the same period, he lost another $100,000 from his Singapore, Malaysian and Hong Kong stocks.
In 2003, Mr Yip started Mind Edge with borrowed funds of $50,000. The company, which reaches out to students, parents and corporate entities, now generates an annual revenue of more than $1 million. This year, the firm with 17 staff plans to expand to Malaysia, Indonesia and Thailand.
Mr Yip is married to housewife Karen Leong, 31, and they have a daughter, Tiffany, four. His first book FUNtastic Parenting, on parenting, will be launched next month.
Q: What are your money habits?
I'm definitely a saver. I have separate bank accounts for different purposes. Every month, I put 10 per cent each in savings and stock investing. Another 10 per cent goes into an account meant for vacation and fun and 5 per cent is for my personal development such as the purchase of books and videotapes and attending seminars. I'm totally obsessed with improving myself. The rest of my income is for household expenditure, allowances for parents and wife, and insurance.
Q: What financial planning have you done for yourself?
I have primarily invested in Singapore stocks, properties and my business. I've been trading stocks since I arrived here in 1996.
I used to be crazy over share trading, doing my own analysis with information from books, newspapers, annual reports and journals.
Now I don't follow the market every day. I accumulate and hold. Currently, 70 per cent of my stock portfolio is in blue chips like Singapore Exchange, Keppel Corp, Wilmar, ST Engineering and Dairy Farm, and 30 per cent in small caps like Man Wah and Cacola.
On average, I achieved respectable returns of more than 20 per cent per annum.
Q: What about insurance planning?
I have a whole life policy with HK$1.8 million (S$345,000) in coverage and two term life plans, one of which includes critical illness cover. The total coverage for the term life plans amounts to nearly $850,000. I pay about $13,000 in annual premiums.
Q: What's your investment philosophy?
Value investing, which is the investing style of gurus such as Mr Benjamin Graham and Mr Warren Buffett. That means buying at good value and holding for the long term for appreciation and dividend yields.
Q: Any other investments?
I invest in properties as I want to build up a portfolio for passive income. In 1992, I bought a 0.4ha piece of land in Bloomington, the United States, for US$75,000 and built a 2,200 sq ft home where I lived when I was in the US.
It is now generating a rental yield of 10 per cent a year and the house is worth about US$100,000 (S$149,000).
I have three investment properties in Singapore. In June 2006, I bought a 614 sq ft condo in Kallang for $447,000 and in January 2007, I bought a 969 sq ft, two-bedroom condo in Siglap for $739,000. I also own a 1,350 sq ft home office condo in Buona Vista which I bought in March 2007 for $1.08 million. The first two properties will be ready for occupancy by this year while the third will be completed by next year.
I still own an ice-cream parlour business in Bloomington which I set up with my savings of US$70,000.
I also have a collection of 15 oil paintings by Vietnamese, Thai, Australian and Chinese painters.
Q: Moneywise, what were your growing-up years like?
We were a family of seven living in a small 200 sq ft government flat in Hong Kong. I was the fourth child. My father owned a small furniture business. But he was not a good businessman - he was Mr Nice Guy to his employees, who took advantage of his leniency. I spent a lot of time observing how he dealt with his customers and employees and that is why I decided to be an entrepreneur.
My mum was my first mentor. A worker at a toy factory, she instilled in me the values of dignity and perseverance. She never complained that we were poor and we never borrowed any money although we didn't have enough food at times.
To earn extra money, my siblings and I would paint plastic toys like dinosaurs and skeletons at home, earning 50 Hong Kong cents for a pack of toys. We learnt the value of working hard and saving the money.
Q: Your best investment to date?
There are two. First, my investment in Mind Edge. I set it up in 2003 with borrowed funds from balance transfers. I had to make cold calls for the first four months and when I had no business then, it was really worrisome especially as Karen was pregnant with Tiffany then.
But I persevered, and Mind Edge has since grown to be a viable player in the field of memory training, optimal learning and peak performance technologies, with annual revenues exceeding $1 million.
Second, it's investing in myself. With continual personal development and enrichment, I have become one of the few trainers here who can charge more than $1,000 per hour. My market rate is $1,500 to $2,000 per hour.
Q: What personal development tips do you have?
I'm where I am today because I made the choice and the commitment to be the best I can be. I urge all to do the same, especially now during the downturn.
Be relentless in upgrading your own skills. Success is not something we pursue...It's something we attract by becoming an attractive person and by being positive. Be mentally tough, optimistic and hungry for knowledge.
Q: And your home now is...?
A 2,200 sq ft, four-bedroom penthouse in Kembangan which I bought in October 2007 for $1.02 million.
Q: And your car is...?
A silver Subaru Forrester Turbo.

This article was first published in The Straits Times on January 18, 2009.

http://business.asiaone.com/Business/My%2BMoney/Building%2BYour%2BNest%2BEgg/Investments%2BAnd%2BSavings/Story/A1Story20090119-115748.html

ASIAONE / BUSINESS / MY MONEY / BUILDING YOUR NEST EGG / INVESTMENTS AND SAVINGS /

Decoupling dies as half the globe hits crunch

Decoupling dies as half the globe hits crunch

By Ambrose Evans-Pritchard, International Business EditorLast Updated: 12:33AM GMT 12 Dec 2007

Economists are sceptical that cities such as Shanghai will be enough to offset a US slowdown
The rising economies of Asia are too small and deformed to rescue world growth as America, Britain, Australia, and Club Med face their day of debt reckoning. China may make matters worse, not better.

Read more of Ambrose Evans-Pritchard on the global economy

The seven pillars of global demand over the last year - measured by current account deficits - have been the United States ($793bn) (£388bn), Spain ($126bn), Britain ($87bn), Australian ($50bn) Italy ($48bn), Greece ($42bn), and Turkey ($34bn). Most are facing a housing bust. All are in trouble.

China cannot possibly step into the breach. Jahangir Aziz and Xiangming Li argue in a new IMF paper that China's economy is now so geared to the US and EU markets that a 1pc fall in external demand will lead to a 4.5pc slide in exports and 0.75pc fall in GDP.

Assumptions that it will weather a global shock are "likely to be wrong, perhaps dramatically."
China is indeed gobbling up iron ore, soybeans, and crude oil, but it still makes up less than 4pc of global consumption and is no longer adding to total demand. Imports have been more or less flat since April.

China is boosting GDP at the world's expense, by snatching markets with a cheap yuan. It is beggar-thy-neighbour growth.

Note that Goldman Sachs, Morgan Stanley, and Lehman Brothers, have all begun to tear up the "decoupling" manual. - the pre-crunch script assuring us that the world could get along fine as the US buckled.

"What began as a U.S.-specific shock is morphing into a global shock," said Peter Berezin, a Goldman Sachs strategist.

"There is a clear risk that some of the hot housing markets in Europe and some emerging markets will cool dramatically," he said. The bank has begun "shorting" the Chilean peso. Is the metals boom over?

In Europe, not a single junk bond has been issued since August. Spreads on Euribor - the rate used to price mortgages in Spain, France, Italy, and Ireland - reached 93 basis points last week, a new record. This is tantamount to four rate rises for homeowners.

Thomas Mayer, Europe economist for Deutsche Bank, said the European Central Bank must cut rates immediately, regardless of the lingering inflation threat.

"This could go beyond just a normal recession. It could turn into a real economy-wide crunch that we cannot stop," he said

Four months after the global credit system suffered its August heart attack, nothing has been resolved.

The US market for Asset Backed Commercial Paper (ABCP) shed another $23bn last week. The outstanding volume has fallen for 17 weeks in a row as lenders refuse to roll over loans, cutting off $393bn in funding since August.

For now, consensus has settled on the view that subprime losses will total $500bn, and crimp lending by $2 trillion as bank multiples kick into reverse.

This assumes there are no more shoes to drop. Yet shoes are dangling precariously across the global credit system. We may soon have to add the terms HELOCs and 'monoline insurers' to our crunch lexicon.

HELOCs are home equity loans, the money extracted from houses to pay bills and keep shopping. Many borrowers pushed their debt to 110pc of house values at the top of the bubble.
Moody's says 16.5pc of these loans are in arrears beyond 60 days. The HELOC market is roughly $600bn, so add another $100bn to the funeral pyre. These niches add up.

Monoliners are specialist insurers who earn fees by lending their AAA ratings to US states, counties, and cities for bond issues - the safest corner of the credit industry.

The nasty twist is that most have ventured into mortgage debt to spice returns. They now face enough losses to threaten their AAA standing.

A downgrade means that every bond bearing their guarantee must be downgraded pari passu. Pension funds and institutions will be forced to liquidate sub-AAA holdings. A fresh cascade of distress sales will ravage the $2,400bn 'muni' market.

The unthinkable now looms. Moody's said it was "somewhat likely" that top insurer MBIA would fall below the AAA capital requirement: Fitch warns of a "high probability" that CIFG Guaranty and Financial Guaranty will be placed on negative watch.

Both agencies are poised to issue verdicts. The insurers will then have a month to raise capital, no easy task after a 70pc crash in share prices.

US Treasury Secretary Hank Paulson confronts the very real danger of a credit implosion spiralling into a full-blown depression. Given the risks, he can be forgiven for pushing through a rescue plan last week that amounts to a flagrant abuse of contract law and capitalist principles.
His subprime rate freeze is undoubtedly a stinker. The reckless are bailed-out. Those who scrimped to amass a little equity get stiffed. Moral hazard runs amok. But bankruptcy settlements are always ugly. This differs only in scale.

Mr Paulson's New Deal may at least reduce systemic risk. Frozen rates concentrate losses in the lower tiers of mortgage debt, but rescue the upper tiers, which is where the threat lies for the financial system. Would free marketeers rather see the whole edifice of capitalism burned to the ground to make their point?

The root cause of this staggering debacle lies in errors made long ago by the Federal Reserve and fellow sinners. It was they who inflated the credit bubble by holding interest rates too low for too long. It was they who lulled their nations into suicidal levels of debt.

The strategic failure of a whole generation of economists, bankers, and policy-makers has been so enormous that it may now take a strong draught of socialism to save the Western democracies. We start - but may not end - with the nationalization of Northern Rock.



http://www.telegraph.co.uk/finance/markets/2820887/Decoupling-dies-as-half-the-globe-hits-crunch.html

Asia needs to fully wake up to the scale of the West's economic crisis

Asia needs to fully wake up to the scale of the West's economic crisis
Asia is not going to rescue the world economy.

By Ambrose Evans-Pritchard Last Updated: 10:06AM GMT 04 Jan 2009
Comments 28 Comment on this article

The news from Japan, China, and the Pacific tigers has moved from awful to calamitous since the global industrial system snapped in October.
A raw reality is being laid bare. The mercantilist export model of the East is proving dangerously geared to the debt-driven excesses of the West. As we go down, they go down too. Some are going down even harder.
Japan's industrial output contracted by 16.2pc in November, year-on-year. "For an economy which lives from the prowess of its industrial exports, this is simply earthquake," said Edward Hugh from Japan Economy Watch.
Japanese exports fell 26.7pc. Real wages fell by 3.1pc, the seventh monthly fall. Taken together, the figures are worse than anything during Japan's "Lost Decade". They have a ring of 1931.
The fall-out in Japan has already shattered the authority of premier Taro Aso. His approval rating has dropped to 21pc. The cabinet is in revolt. The world's second biggest economy no longer has a functioning government.
Credit Suisse warns that Japan could slide into deflation of minus 2pc by the autumn. Since interest rates are already near zero, which means that real rates will rise as the slump deepens – the surest path to a liquidity trap.
Kyohei Morita from Barclays Capital estimates that Japan's GDP shrank at an annual rate of 12.2pc in the fourth quarter. "It's shocking," he says. Singapore has already reported. Fourth-quarter GDP contracted at an 12.5pc annual rate.
Taiwan's exports fell 28pc in November. Shipments to China dropped 45pc. Korea's exports dropped 18pc in November and 17pc in December.
"We are looking right in the face of an unprecedented regional depression," said Frank Veneroso, the investment guru.
"If there is one part of the global disaster that is not reflected in today's massacred markets it is this Asian debacle. The source of the collapse appears to be above all a contraction in China."
One has to careful with Chinese figures. When I covered Latin America in the 1980s, veteran analysts watched electricity use to gauge economic growth since they could not trust official data. It is striking that China's power output fell 7pc in November.
Asia has clearly failed to use the fat years to break its dependency on the West. It has stuck doggedly to its export strategy – by holding down currencies, or by subtle policy bias against consumption.
In China's case it has let the wage share of GDP drop from 52pc to 40pc since 1999, according to the World Bank.
The defenders of this dead-end strategy are now coming up with astonishing proposals to put off the day of reckoning. Akio Mikuni, head of Japan's credit agency Mikuni, has called for a "Marshall Plan" to bail out America by cancelling $980bn of US Treasury bonds held by the Japanese state.
This debt jubilee does have the merit of creative thinking, but it is entirely designed to keep the old game going. "US households won't have access to credit they have enjoyed in the past. Their demand for all products, including imports, will suffer unless something is done," he said.
Let me be clear. I make no moral judgment on the "neo-Confucian" model, nor – heaven forbid – do I defend the debt depravity of the West.
A stale debate simmers over whether the Great Bubble was caused by Anglo-Saxon and Club Med hedonism, or by an Asian "Savings Glut" spilling into global bond markets and fuelling asset booms, as Washington claims. It was obviously a mix.
Two cultural systems interacted through globalisation, locking each other into a funeral dance.
The point is that this experiment has now blown up. Whether or not we slam straight into a global depression depends on how we – East, West, all of us – handle this.
The top sources of net global demand as measured by current account deficits over the last 12 months have been the US ($697bn), Spain ($166bn), Italy ($71bn), France ($57bn) Australia ($57bn), Greece (53bn), Turkey ($47bn), and Britain ($46bn).
Most are tightening their belts drastically, and in the case of Britain the shift has been so swift that the arch-sinner may soon be in surplus. If they are draining world demand, then world demand is going to collapse unless others step into the breach.
The surplus states – China ($378bn), Germany ($266bn) Japan ($176bn) – have not yet done so, which is why the global economy went off a cliff in October, November, and December. Beijing is planning a $600bn fiscal blitz.
But how much of it is an unfunded wish-list sent to local party bosses? It will not kick in until the middle of the year, an eternity away.
For now, China is dabbling with protectionism to gain time – a risky move for the top surplus country. It has let the yuan fall to the bottom of its band. Vietnam has devalued. Thailand and Taiwan are buying dollars.
Watching uneasily, the Asian Development Bank has warned against moves to "depreciate domestic currencies".
Anger is mounting in the West. Alstom chief Philippe Mellier has called for a boycott of Chinese trains.
"The Chinese market is gradually shutting down to let the Chinese companies prosper. There's no reciprocity any more," he told the Financial Times. Optimists say the collapse in oil prices will give Asia a shot in the arm. Governments are still flush, with ample scope for fiscal rescues. Asia's central banks are sitting on $4.1 trillion of reserves.
They have the means, perhaps, but do they have the will to act in time? Or do Beijing, Tokyo, Taipei, Kuala Lumpur, – and indeed Berlin – still cling to their assumption that others will spend for them?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4093676/Asia-needs-to-fully-wake-up-to-the-scale-of-the-Wests-economic-crisis.html


Also read:
Decoupling dies as half the globe hits crunch
http://www.telegraph.co.uk/finance/markets/2820887/Decoupling-dies-as-half-the-globe-hits-crunch.html

S&P threatens to strip Spain of top AAA rating

S&P threatens to strip Spain of top AAA rating
Standard & Poor's has threatened to strip Spain of its coveted AAA rating as country's budget deficit explodes, offering the clearest warning to date that even wealthy states are running out of room to borrow.

By Ambrose Evans-PritchardLast Updated: 7:31AM GMT 13 Jan 2009

Standard & Poor's has threatened to strip Spain of its coveted AAA rating as country's budget deficit explodes
The move caused fury in Madrid and revived fears in the currency and bond markets about the underlying health of Europe's monetary union.
Spanish officials are irked that S&P has placed Spain's debt on "CreditWatch Negative", a notch lower than the "outlook" alert issued on Irish bonds last week. It is the first time that a AAA country has suffered such a harsh verdict since the start of the global financial crisis.
Such a move typically precedes a downgrade within weeks but the finance ministry insisted last night this would not be allowed to happen. "There's not going to be a rating downgrade because we are taking measures to overcome the crisis," it said.
Trevor Cullinan and Myriam Fernández, the agency's analysts, said the housing crash had set off a downward spiral in Spain that would drive the budget deficit above 6pc by 2006, double the EU's Maastricht limit.
"We expect a substantial worsening in the Kingdom's public finances," it said, predicting 2pc contraction in 2009 and a long slump as years of credit excess are slowly purged.
Spain is discovering the limits of action within the eurozone. It can no longer let its currency take the strain, or follow the US, Switzerland, Sweden, Britain, in slashing rates. Indeed, Frankfurt raised eurozone rates last July at a time when Spain's housing crash was already under way. Unemployment has surged to 13.4pc, breaking the 3m barrier.
Michael Klawitter, from Dresdner Kleinwort, said Spain was now crumbling on every front. "Tax revenue is collapsing. There is a banking crisis and a massive deterioration linked to housing. It is arguable that Spain has already let matters go past the point of no return," he said.
"We are going to see fresh talk about the sustainability of monetary union and it is going to get messy. Spain is the most pro-EMU of the big states so there has not been any backlash against EMU, but who knows what will happen," he said.
Ian Stannard, a currency strategist at BNP Paribas, said Spain needs to raise €70bn (£63bn) this year on the bond markets, both to roll over old debts and to pay for a fiscal rescue package worth 1pc of GDP.
Europe's bond supply will reach €765bn this year, up 15pc from 2008. It is far from clear whether the markets can absorb so much debt. Although Spain's public debt is modest at under 40pc of GDP, this may not prevent a downgrade.
"The economy is less resilient than any other AAA state. It is more dependent on real estate and tourism, and there is very high corporate debt. Household debt is close to levels in Britain and the US," said Mr Fernandez.


http://www.telegraph.co.uk/finance/4224453/SandP-threatens-to-strip-Spain-of-top-AAA-rating.html

Monetary union has left half of Europe trapped in depression

Monetary union has left half of Europe trapped in depression

By Ambrose Evans-PritchardLast Updated: 9:36AM GMT 18 Jan 2009
Comments 172 Comment on this article

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.
Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.
A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.
Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.
As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker – a "prison of nations", to borrow from the Austro-Hungarian Empire.
This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.
"Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers, who called for the dissolution of parliament.
In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.
These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts.
The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26pc of GDP. Riga property prices surpassed Berlin.
The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months.
Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.
This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project.
Latvians have company. Dublin expects Ireland's economy to contract 4pc this year. The deficit will reach 12pc of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach.
The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment. To cap it all, Dell is decamping to Poland with 4pc of GDP. Irish wages crept too high during the heady years when Euroland interest rates of 2pc so beguiled the nation.
Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end.
Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.
Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste".
Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.
They mean that capital flight from Club Med could set off an unstoppable process.
Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.
Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.
Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.
Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.
Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions.
In other words, the ECB is already providing a stealth bail-out for Europe's governments – though secrecy veils all.
An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4278642/Monetary-union-has-left-half-of-Europe-trapped-in-depression.html

UK Banks bailout

Banks bailout: Bonds tumble as Government admits no cap on taxpayer risk
Bank shares plunged and Government bonds tumbled after Gordon Brown announced plans to insure lenders for losses on bad loans which could amount to billions of pounds.

By James Kirkup Last Updated: 2:07PM GMT 19 Jan 2009

Billions of pounds of our money is to be poured into Britain's ailing banks. Gordon Brown says desperate measures are needed.

The Prime Minister announced a scheme to allow banks to exchange cash or shares for a Government guarantee on their "toxic" debts, transferring any losses they suffer from the banks to the taxpayer.
But the Government has conceded that it can't estimate how much taxpayers' money will be on the line in the latest bank assistance package.
UK bond prices fell sharply as the financial markets digested the prospect of further Government borrowing. Bank stocks also tumbled with shares of Royal Bank of Scotland losing more than half their value. Lloyds, Barclays and HSBC also fell.
Ministers say the new package, which comes only three months after another £500 billion bailout, is vital to restore bank lending and help companies get credit and stay in business.
At a press conference in Downing Street to announce the package Mr Brown said that "people are right to be angry" about what he called irresponsible lending by banks.
Mr Brown also reacted angrily to suggestions that he was handing a "blank cheque" to the banks by offering to protect them against the consequences of that lending.
He said: "You are completely misunderstanding this to suggest this is a blank cheque. Quite the opposite. It is for the Treasury to decide, after an analysis, what the insurance will be."
But he admitted that ministers have not yet set any upper limit on the value of loans they support or the level of risk taxpayers will bear.
As part of the rescue package, the taxpayer has taken an even bigger stake in Royal Bank of Scotland, which has today announced losses of over £20 billion – the biggest loss in British corporate history.
The Government is also offering to increase its stake in Lloyds Banking Group. The state could even take shares in Barclays and HSBC in exchange for insuring their loans in its new Asset Protection Scheme.
HSBC said that it had not sought capital support from the UK Government "and cannot envisage circumstances where such action would be necessary".
It is the second rescue package in three months, which is aimed at getting the banks to lend to businesses and homeowners.
If it fails, banking experts say the only option left for Mr Brown will be full nationalisation of the banking system.
In a statement to the City, the Treasury said the Asset Protection Scheme scheme is expected to operate for "not less than 5 years."
"To increase confidence and capacity to lend, and in turn to support the recovery of the economy the Government is today announcing its intention to offer protection on those assets most affected by the current economic conditions," the Treasury statement said.
In the first instance it will be open to the major British banks, but the Treasury said it was possible that insurance will ultimately be extended to the British subsidiaries of foreign banks.
The Government also announced:
A plan to make government bonds available to banks to support £100  million of loans for some home owners and small businesses, as recommended by Sir James Crosby, former HBOS chief executive;
An extension until the end of this year of the Government's £250  billion Credit Guarantee Scheme to support lending between banks;
An expansion of the Bank of England's £200 billion Special Liquidity Scheme. The Bank will now accept consumers' car loans in exchange for Government bonds, a move intended to support the failing motor industry;
Northern Rock, the state-owned bank, will be told to offer more home loans, reversing previous instructions for it to get rid of mortgage customers by charging punitive rates of interest.
Despite £500 billion having been pledged for a rescue package in October, the banks are not lending at the levels ministers and business groups say are needed for the economy to function normally. As a result, the country is mired in a recession which experts are forecasting could be the worst for generations.
The Chancellor, Alistair Darling, also suggested that the bailout would be accompanied by new measures to control the banks' behaviour
He said: "It's quite clear in the world we're living in just now we do need to look again at the way we supervise and regulate these banks."
George Osborne, the Tory shadow chancellor, said the Government had no choice but to help the banks again because the October package had "failed."
He said: "I don't like the idea but it's a question of what options there are."
Mr Osborne added that strict scrutiny must be applied to bank assets to protect taxpayers' interests. "We need to know exactly what the Government is proposing to insure. We need a full audit, an independent audit," he said.
The centrepiece of today's package is to provide Government guarantees against losses that the banks might incur on loans that have now turned sour amid collapsing house prices and a shrinking global economy.
The banks will pay a "significant" fee to the Government for each loan they insure.
They will be able to pay that fee in either cash or shares. That could open the way to the state holding stakes in all of Britain's four biggest banks for the first time.
Shares in Barclays fell by more than 20 per cent on Friday amid City speculation that the bank is exposed to huge losses. It tried to calm that speculation by pre-announcing significant profits, but its shares are likely to come under fresh pressure.
In the October package, ministers offered Barclays billions of pounds in new capital, but – unlike RBS and Lloyds – Barclays rejected the offer and chose to raise new funds from Gulf investors.
Treasury sources said the proposal to insure Barclays's loans in exchange for shares would effectively repeat that offer. Some believe that the bank will find it almost impossible to reject state help this time.
Despite raising the prospect of increased government holdings in the banks, ministers insist that outright nationalisation remains a last resort.
The loan insurance scheme is being proposed as an alternative to the creation of a state-controlled "bad bank" to house the toxic assets.
Officials say the insurance plan avoids some of the complexity and delay involved in valuing and buying the assets from the banks.
But it means the Government cannot know exactly what losses it would incur if the loans it insures go bad.
As well as paying substantial fees in cash and shares for the loan insurance, banks will also have to sign "contractual agreements" with the Treasury about their future lending, committing them to increase lending and focus new credit on British customers ahead of foreign borrowers.
Separately, the Government could increase its stake in RBS and the Lloyds Banking Group, potentially making the taxpayer the majority shareholder in Lloyds.
In October, some of the state's holding in RBS and Lloyds was taken in the form of preference shares, holdings that committed them to paying hundreds of millions of pounds to the taxpayer before they did anything else.
The banks say those obligations have shackled them and forced them to divert money that could otherwise have been used to lend.
In exchange for reducing what it takes from the preference shares, the Government wants more normal shares, effectively diluting the value of private investors' holdings and increasing state influence over RBS and Lloyds.
RBS has accepted the deal, taking the state's ownership to 70 per cent.
Lloyds is more reluctant to accept the offer, which could see the Government share exceed 50 per cent.

Understanding Risk and Return

Understanding Risk and Return

To get profit without risk, experience without danger, and reward without work, is as impossible as it is to live without being born. – A.P. Gouthev

Two key concepts provide the foundation for the field of finance.
1. A dollar today is worth more than a dollar tomorrow – this is the time value of money.
2. A safe dollar is worth more than a risk dollar.
The trade-off between risk and return is the principal theme in the investment decision.

RISK AVERSE: Most people are risk averse. This does not mean, however, they will not take a risk. It means they take a risk only when they expect to be rewarded for taking it. People have different degrees of risk aversion; some are more willing to take a chance than are others.

RISK NEUTRAL: Someone who is indifferent to risk is risk neutral.

RISK SEEKER: Someone who actively seeks out risky situations (a gambler) is a risk seeker.

• For small amounts of money, most people enjoy the thrill of a long-shot wager.
• For more significant sums, though, the tendency to risk aversion is nearly universal.

RETURN: People invest because they hope to get a return from their investment. Return is the good stuff that makes people feel better or improves their standard of living.

RISK: Risk is the bad stuff a risk averse person seeks to avoid. It is a fact of investment life and is unavoidable for anyone who seeks more than a trivial rate of return. Note that risk is a “four letter word.”

Financial crisis: Everything you need to know

Financial crisis: Everything you need to know about the meltdown but were afraid to ask.
Who got us into this mess, what did they think they were doing, and how do we get out of it?

By Emma SimonLast Updated: 4:04PM BST 13 Oct 2008

A trader in Frankfurt reacts to the latest turmoil in the markets Photo: REUTERS
Q: How have the banks got into this situation?
A: The problems started with the now notorious sub-prime mortgages in America. Banks granted home loans to people who had little chance of repaying them, but then sold these debts on to other banks, often packaged up with other less risky debts. Invariably these debts, and other high-risk securities, were sold on again. But then it became apparent that some of these loans would not be repaid, and banks were left holding "toxic'' debts.
More worryingly, banks were now unsure which institutions were most exposed to these bad investments, and drew back from lending to each other, amid concerns that the money would not be repaid if a bank failed.
The collapse of Lehman Brothers, the US investment bank, last month intensified this fear and effectively paralysed global money markets. Since then, central banks and governments have been hatching plans to restore liquidity and confidence in the banking system, so oiling the wheels of capitalism again.
Q: Why do banks need to lend to and borrow from each other?
A: Most people assume that banks work on that old-fashioned notion of only lending out the money taken in on deposit. But this rarely happens today. The money taken in as savings is invested in the money markets - in other words, lent to other banks for the best possible rate. Banks then borrow from these same markets and sell on this money, at a premium, to customers in the form of mortgages and personal loans.
If banks are unable to borrow from each other, and from these money markets, then they are unlikely to be able to offer competitive borrowing deals for consumers, and we may have to go back to the days when mortgages were "rationed'' and depended solely on deposits.
This also explains why banks would be unable to repay savers if these decided en masse to empty their accounts. Such a run on a bank can drive a profitable institution to the brink, potentially taking savers' money with it.
Q: So is my money safe in the bank?
A: Before Northern Rock collapsed a year ago, few people would have worried about the safety of their money in a British bank or building society. But with Northern Rock, Bradford & Bingley, HBOS and now Icesave running into difficulties, the security of our savings has become more important than the interest rates they earn.
Despite these problems, savers have yet to lose a penny. The closest savers have come to losing out has been with Icesave, a subsidiary of the Icelandic Landsbanki Bank. British savers saw their money frozen, and there were fears that the Icelandic compensation scheme would not pay out. But Alistair Darling, the Chancellor, confirmed that the Government will reimburse savers in full through the Financial Services Compensation Scheme (FSCS).
Q: Are all savings guaranteed?
A: No. The Government has been careful not to offer a blank cheque underwriting the nation's savings in full. It was only able to make this pledge to Icesave's UK savers because of the "exceptional'' economic circumstances.
Given the market volatility, savers should ensure that they have no more than £ 50,000 with any one bank, as this is the maximum that is guaranteed to be protected under the FSCS. This limit often applies to all brands offered by one banking group.
Take care with foreign-owned institutions, as very often you will have to reclaim the first euro20,877 (£ 16,500) from an overseas compensation scheme. If you are nervous, then stick with the UK, where at least as a vote-wielding citizen your money should be the top priority for the authorities.
Q: Why are share prices still falling? Has the Government bail-out failed?
A: Last week the Government unveiled a £ 500 billion rescue package for British banks. This trumped the US rescue plan in both size and scope, pumping liquidity and capital into our struggling banking system.
Although the plan is complex, at its core are three main policies:

• to offer extended borrowing facilities so that banks can access funds from the Bank of England;


• to recapitalise banks by injecting money directly into them in exchange for a stake in the bank; and


• to guarantee all new debt issued by banks, effectively making their corporate bonds as safe as Government-backed gilts.

But these radical measures failed to stem the stock-market rout, and bank share prices continued to head south.
This does not necessarily mean the bail-out has failed. The Government will argue that this is a long-term plan to put the banks on a firmer financial footing. Yesterday's pledge by G7 finance ministers to pump public money into banks to prevent their collapse could also translate into a recovery in share prices.
Q: So what is spooking investors? Is there much worse news to come?
A: It isn't just a lack of confidence in the banks that is driving share prices downwards. Fears of a recession are causing shares to be sold off in many companies. In a recession, consumer spending, already down, will dip further. This will affect companies' profits.
There are also fears that recession and unemployment could lead to more toxic debt. It is not just sub-prime mortgages: credit card debt and car finance deals may also have to be written off if consumers can no longer meet repayments.
Q: The credit crunch has been around for a year - why did it get so much worse this week?
A: Panic is breeding panic. The fact that the much-lauded rescue plans, coupled with a global interest-rate cut, have done little to staunch the rout may have raised the fear factor, as it is clear that Government and banks have little else to throw at the problem.
Q: The Government pumped money into the system before. Why didn't this work, and why do they think more money now will do the trick?
A: The Government already had a £ 100 billion Special Liquidity Scheme in place which allowed banks to borrow from the Bank of England. This has been doubled in the hope that, by giving banks access to more money, they will start lending to consumers again.
Q: This is an extraordinary amount of money. Are we going to have to pay more tax as a result?
A: This plan puts taxpayers' money at risk, but will not necessarily mean they lose out. If the plan revives banking fortunes then the Government could make money for taxpayers by having bought into the banks at such a low ebb. The money lent to them through the liquidity scheme will also have to be paid back. But if it doesn't work, we could be paying for generations, through higher taxes or cuts in public spending.
Q: Why should we pay more tax to save the banks? They got themselves into this mess.
A: It is not hard to see why this rescue package has been so controversial. Many people wince at public money being used to bail out an industry that has shown little restraint in pay and bonuses. But without this help, more banks would fail, causing misery for all. Bank collapses could put savers' money at risk; reimbursing that could cost the taxpayer far more.
Q: How far can share prices fall?
A: This is the billion-dollar question. Following the bubble in technology stocks in the late 1990s, the FTSE 100 share price index peaked at 6,950 in December 1999, before falling to a low of 3,287 in March 2003. We are still marginally above this point. However, the factors driving this crash are different and prices could head still lower.
Q: Is it too late to get out now?
A: If you have left it this late to get out of the market, it is probably too late and you are just crystallising large losses. Experts' advice is to wait for recovery, which will - eventually - come.
Q: Will shares just bounce back?
A: We have no way of knowing what the recovery will be like. In the 2003 crash, share prices recovered swiftly. But many experts are drawing parallels with the 1930s or 1970s, when recession stalled a recovery for years. There is also the salutary lesson of Japan. In December 1989, the Nikkei index peaked at 39,000 before suffering a catastrophic loss, sparked by a banking crisis. Today, almost 20 years later, it stands at just about 8,000.
Q: I don't own shares. Why should I care about the stock market?
A: You probably have investments that are exposed to equities, be it a pension, unit-linked savings, an endowment, trust fund or savings bond. Their value will have fallen by roughly a third over the past year, depending on what shares your plan is invested in. A stock-market collapse will also deepen a recession, resulting in job cuts.
Q: Why is my mortgage rate still high when base rates have been cut?
A: Many British banks have passed on this interest-rate cut, but there have been exceptions, including Abbey, Nationwide and HSBC. Most banks are not re-pricing new mortgage deals, because these are largely based on Libor - the inter-bank lending rate - and this has remained stubbornly high.



http://www.telegraph.co.uk/finance/personalfinance/3187716/Financial-crisis-Everything-you-need-to-know-about-the-meltdown-but-were-afraid-to-ask..html

The rescue has failed: it's time to fess up, reboot and start again

The rescue has failed: it's time to fess up, reboot and start again

Last Updated: 9:40AM GMT 18 Jan 2009
Comments 9 | Comment on this article

It's official. Government policy isn't working. As bank shares collapse amid renewed carnage on global markets, we now know the worst isn't over.
This crisis just entered a whole new phase. Gordon Brown's "rescue plan" lies in tatters. Perhaps now the Prime Minister – and his counterparts across the Western world – will do what needs to be done.
Regular readers know what's coming next. I've been writing the same thing for months. But I make no apologies – for this ghastly episode will only end once senior bank executives are forced, under threat of custodial sentence, to FULLY DISCLOSE to one another and the authorities, on the basis of all available evidence, the extent of their sub-prime liabilities.
I accept that's not easy. The toxic debts have been sliced, diced and securitised – then sold on many times. Millions of trades must be unravelled, often across international borders.
But this onerous task must be done. Then the losses must be written-off. Only after such purging will the banks begin to rebuild mutual trust – allowing the interbank market to reboot, so restoring the credit lines that are so vital to the broader economy. And all this needs to happen BEFORE more public money is spent recapitalising our banking sector.
I know what I'm saying is drastic. But this is a drastic situation. In the UK and US, in particular, the banks aren't playing ball. They think they're more powerful than our elected officials, and for the last six months they have been getting away with hiding losses and burying mistakes while screwing many billions of pounds out of taxpayers.
Look at the cause of this latest spasm. Opposition politicians point to the Government's decision to lift the ban on short-selling – allowing traders to pile pressure on bank stock. That misses the bigger picture.
Bank shares collapsed on Friday because of renewed fears that said banks have simply enormous liabilities on their books that they're still trying to hide.
In the US, Citigroup, Bank of America and Merrill Lynch unveiled a $25bn combined loss for the final quarter of 2008. But what was really shocking was that $15bn was sustained at Merrill Lynch – and the Bank of America, which bought the brokerage last year, didn't even know.
In a bid to save his job, Ken Lewis, Bank of America's boss, admitted he hadn't foreseen such a "significant deterioration" in Merrill's finances. But his words lifted the lid on the extent to which financial institutions are disguising the true state of their balance sheets – even to their own parent companies.
No wonder rumours then swirled of vast buried losses at Barclays and Royal Bank of Scotland. No wonder their prices collapsed. And such fears will fester and keep bursting to the surface until our banks "fess it all up" – and a credible number is put on potential losses at each of our major banks.
Yes, those numbers will be horrific. Yes, bank shares will be hit once more. But until we do the maths and swallow the write-offs, the rumours will continue and trust will remain elusive – to say nothing of long-term financial stability.
There is much talk of Franklin D Roosevelt. Trying to justify big pork-barrel spending, and yet more government borrowing, politicians on both sides of the Atlantic are employing the rhetoric of the depression-era President's New Deal.
One important lesson we can learn from FDR is to restore the Glass-Steagall firewall he erected between commercial and investment banking – so foolishly removed by the "bankers-turned-public servants" who dominated Bill Clinton's administration in the 1990s and who are now back, in the Obama fold.
But we may now even need to revisit America's 1933 Emergency Banking Act – closing our banks for a period, flooding them with government inspectors, killing off the technically insolvent and reorganising those strong enough to survive.
As if all this renewed banking angst wasn't enough, yet another fear is now stalking international capital markets. Last week, any remaining hope the eurozone had escaped the worst of this crisis was blown out of the water. Economic sentiment is now at a post-war low. Even the European Central Bank, admirably restrained until now, could resist the political pressure no longer and cut its interest rate to 2pc.
This column has long questioned the eurozone's long-term survival. Now global markets are doing the same. At the start of last year, the average 10-year government bond yield among the weaker member states (Portugal, Greece, Spain, Ireland and Italy) was just 25 basis points above the comparable number in Germany. That spread is now six times bigger.
Credit default swaps (the cost of insuring against a government default) among the most feckless eurozone members have reached Latin American levels. Would French and German taxpayers bail out another eurozone member? The longer this crisis goes on, the larger that incendiary question looms.

http://www.telegraph.co.uk/finance/comment/liamhalligan/4278506/The-rescue-has-failed-its-time-to-fess-up-reboot-and-start-again.html

Oil prices: The complete Q&A

Oil prices: The complete Q&A

Last Updated: 12:39AM BST 29 May 2008
This article was released at the time when oil price was US $130 a barrel.

http://www.telegraph.co.uk/finance/newsbysector/energy/2790667/Oil-prices-The-complete-QandampA.html

Paul Mortimer Lee, global head of market economics at BNP, and strategist Dominic Bryant explains why the oil price matters to us all.

Oil price Q&A:
Who are the winners and losers?
Who consumes all the oil?
Why is the oil price spiking now?
Where is the oil price going?
Is there really a shortage of supply?
What are oil futures and how are they traded?

Oil price comment:
Alan Duncan: Asking Opec to solve the oil crisis misses the burning point
Liam Halligan: $100-plus oil will be here for years as China motors ahead
Louise Armitstead: Slick investors strike riches as they cash in on peak oil
Mark Kleinman: Credit crisis was crude compared with this oil price surge
Dan Roberts: Cheap oil is history. But why?

Going for gold? (Jan 2008 article)

Record breakers: gold and oil prices reached record highs as alarms sounded on inflation

Going for gold?

Last Updated: 1:27AM GMT 23 Jan 2008
The price of crude oil and gold smashed through key milestones this week, prompting investors to consider whether now is the time to take profits, writes Myra Butterworth
Crude oil gushes to historic $100 mark
Sterling slumps to four-year low against euro
Gold soared as analysts warned that inflation and high energy prices would remain a key threat on the economic agenda throughout 2008 - gold soared to $861.20 an ounce in New York on Wednesday, surpassing the levels last seen at the height of the inflation crisis in 1980.
Meanwhile, crude oil touched the $100 milestone for the first time in its history earlier this week, fuelled by jitters about geopolitical stability after the assassination of Benazir Bhutto and the unrest in Kenya.
But on being asked whether gold investors should now take profits, Ian Henderson, the highly regarded fund manager of JPM Natural Resources, was emphatic in his answer. "Absolutely not. It would have to get to $2,000 an ounce in real terms to reach an all time high and we are miles away from that," he said.
"People are bored with property – they don’t like to lose money and they don’t know whether Alistair Darling will bail them out from any banks that may fall into trouble. They get something different with gold which is a useful hedge against inflation and they can get a real feel for the value of their wealth."
Henderson has around 33 per cent of his Natural Resources fund in gold and precious metals and he reckons this could increase to around 40 per cent. He is also bullish on oil and energy related stocks in general. He is also finding opportunities in the less well known commodities such as cobalt, titanium and mineral sand but added that he was reducing his exposure to base metals such as copper and nickel. Here is what other leading experts had to say on whether now was the time to sell oil and gold. (Comment: Looks like Mr. Henderson was wrong in retrospect.)
Graham Birch, head of BlackRock's Natural Resources Team and manager of the Gold and General fund said: "Gold has started off in 2008 at an all time high in excess of $850 an ounce. This represents a continuation of the upward trend which has been in place since 1998. The last time that gold was at $850 an ounce was back in January 1980.
"The main positive factors which have been affecting gold recently include:

• the weakness of the US dollar,


• financial market turmoil and


• more than a whiff of inflation.

Tragically, political instability has also been a factor in the aftermath of Bhutto's assassination.
"On the supply side, production from the worlds' gold mines continued to decline and we believe it would take a significant further rise in the gold price to reverse this particular trend. Although in the short term jewellery demand may suffer some price related weakness, the long term outlook remains bright with emerging market wealth trends especially favourable.
"So, for 2008 we anticipate that the market patterns inherited from 2007 will remain in place. While gold rarely goes up in a straight line the general tenor of the market seems likely to remain favourable."
Mark Harris, head of funds of funds at New Star, said: "I believe the price of oil will remain higher than lower and should not fall below $80 a barrel even if we were to see a slight correction from the current $100 mark. The long-term trend for oil will be upward and on this basis oil majors and oil services companies now represent good value. (Comment: Another prediction that turned out to be wrong on hindsight.)
"The outlook for oil is positive for investors for several reasons. Demand is on the increase, primarily from expansionary markets such as China. At the same time, OPEC is showing a reluctance to increase supply, which suggests supply may be running near capacity. This will continue to put pressure on the price of oil. "I still hold gold within my New Star portfolios - CF Australian Natural Resources and Merrill Lynch Gold & General. However, I have recently trimmed my weightings in expectation of a dollar counter trend rally that may put pressure on gold in the short-term. I believe the long-term outlook for gold is still good and any short-term correction may represent a good buying opportunity, possibly around the $800 an ounce mark. (Comment: In retrospect, he predicted the dollar counter trend rally putting pressure on gold in the short-term correctly.)
"The long-term outlook for gold is positive because demand is on the increase, supply remains marginal and the cost of mining is increasing. These influences combined should ensure that prices remain high."
Alan Steel, of Alan Steel Asset Management, said: "The oil price has been on a tear since summer 2003. Economic factors suggest it is near it’s peak and it is likely to fall 50 per cent over the rest of this year and beyond. Private investors sentiment is showing excessively high optimistic levels, a strong sell signal. Gold is probably on a long term bull market which started in 2001. But it is overdue a breather and a fall - but not as big a fall as oil. Here too investors sentiment is showing excessive optimism, a sell signal. (Comment: In retrospect, this chap got his predictions correct.)
"I would buy large cap equity growth, such as Henderson Global Technology, Neptune US Opportunities, or back Emerging Markets such as Allianz, RCM Stars, BRIC. Currently I think it is too late for oil and gold. Perhaps look at gold again next year."
Mark Dampier, of asset managers Hargreaves Lansdown, said: "Forecasting the direction of any commodity is almost impossible. Indeed I would suggest you might as well consult Mystic Meg so investors should not get carried away. Remember too that existing portfolios are likely to have exposure to oil and possibly gold too so make sure you are not doubling up.
"The outlook for oil depends much on the outlook for the world economy. If the US, Europe and UK hit a hard recession, I would have thought the demand for oil would reduce and therefore so would the price. The difficulty this time round however is that emerging markets such as China and India are huge consumers of oil which has not happened in previous cycles. Indeed China and India account for something like 35 per cent of world oil imports.
"There is much talk about a decoupling of the Asian type economies and the developed world. However it is far too early to say whether this is really true and I suspect for the time being Asia depends as much on the US as the US depends on it.
"There is also much speculation in the oil price especially given political tensions which of course can suddenly reduce too. I believe oil prices may well come down but if they come down to say $80 a barrel, does it stop the investment case? I think not. The majority of analysts have been using something around $60-70 a barrel for their forecasts so oil needs to come down a long way to affect company profitability.
"How would I play the oil price? You can buy a general commodity fund such as JPMF Natural Resources. However, I would suggest you look at C F Junior Oils a specialised fund that invests in smaller oil producing companies. These are just the types of companies that are being taken over by the large multinationals such as Shell, BP and Exxon who are low on reserves but are cash rich. The fund is run by Angelos Damaskos, the son in law of legendary investor Jim Slater, and I hold it in my own portfolio too.
"I have been a bull of gold for about 18 months. The gold price has only just gone through its old high in 1980. The obvious signal when we look back for the purchase of gold was when the chancellor sold half the gold reserves at about $250 an ounce. While gold doesn’t have a big industrial use, its use in jewellery has grown when demand from places such as India and China have grown with it as these have become more prosperous. In addition gold is looked at as a final store of value, it can’t be defaulted on like a currency or a bond.
"Given both the geopolitical and economic tensions in the world today it is not surprising the gold price has been moving up. I think it has every chance to go over $1,000 an ounce and I hold the BlackRock Merrill Lynch Gold and General fund.
"It is noticeable however that smaller and mid size companies in this arena have not done so well so it may be worth investors looking at Ruffer Baker Steel Gold fund and an offshore fund known as Craton Capital who tend to invest in the smaller and mid size gold companies".

http://www.telegraph.co.uk/finance/personalfinance/investing/2781948/Going-for-gold.html

Gold often serves as a proxy for inflation fears

Bullion outshines record from 1980

By Ambrose Evans-Pritchard

Last Updated: 1:02AM GMT 04 Jan 2008


Gold has soared through resistance to touch an all-time high of $861.20 an ounce in New York, surpassing the record last seen at the height of the inflation crisis in 1980.
Crude oil gushes to historic $100 mark
Sterling slumps to four-year low against euro
Bulls seized the initiative as oil spiked briefly to $100 a barrel and the dollar buckled on bad manufacturing data in the US. The New Year surge - setting the tone for the year - may be viewed with some alarm by central banks, aware that gold often serves as a proxy for inflation fears.
Ross Norman, director of TheBullionDesk.com, said the world faces a new era of "peak gold" in which discoveries become rarer, leaving the market starved of the metal just as demand in China and emerging Asia begins to gather pace.
"Supply is declining despite a seven-year bull run," he said. "Production in South Africa is the lowest since the 1930s, and it is falling in Canada. As for the central banks, they are no longer quite so keen to part with their gold.
"New conduits such as ETFs have opened up, giving investors access to a market that used to be off radar. It has led to a slow, glacial flow of big money into gold that is immune to profit taking. On January 9, China will start trading gold futures in Shanghai," he said.
Mr Norman, the top forecaster for the London Bullion Market Association over the past four years, said gold would reach $1,200 an ounce this year.
Veteran gold traders say the metal is enjoying a perfect storm of inflation fears, geo-strategic jitters over Pakistan and mounting concerns that the dollar could lose its role as anchor of the international currency system as Mid-East and Asian states break their dollar pegs.
While there is no likelihood of a return to the gold standard, the metal could find a new role as a hard currency to buttress the dollar and the euro if the Bretton Woods II systems disintegrates any further.
Russia has already said it aims to raise the gold share of its huge foreign reserves to 10pc. There is widespread speculation that a number of central banks could soon start to accumulate gold, rather than rely too heavily on euro and sterling bonds as an alternative to the dollar.



http://www.telegraph.co.uk/finance/newsbysector/energy/2781954/Bullion-outshines-record-from-1980.html