When the Economy Really Did ‘Fall Off a Cliff’

Op-Ed Contributor
When the Economy Really Did ‘Fall Off a Cliff’

By JEAN STROUSE
Published: March 22, 2009
IN what may come to be the definitive line about our current economic crisis, Warren Buffett said on the CNBC program “Squawk Box” this month that the United States economy has “fallen off a cliff.”

The most trusted investor in history went on the air to talk, with characteristic candor and humor, about the horrendous truth we pretty much know, possibly in an effort to calm things down and point toward some answers we don’t yet know. He proceeded to give his views on what went wrong (“everybody thought house prices could go nothing but up ... so you had $11 trillion of residential mortgage debt built on this theory ”), on people’s paralyzing fear and confusion (“We are in a very, very vicious negative feedback cycle .... I don’t want this to be the last line of the movie”), and on the absolute necessity of fixing the banks and taking clear, decisive action.

A look back at the handling of another financial crisis a full century ago underlines the point about decisive action. You just don’t want to take the wrong decisive action. Markets today are immeasurably more complex, global, fast-moving and regulated (a lot of good that did) than they were a hundred years ago, but the need for strong leadership has not changed.

In early 1906, the banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff — that the country would “have such a panic ... as will make all previous panics look like child’s play.”

Yet the country failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.

In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.

J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.

In the absence of a central bank, Morgan had for decades been acting as the country’s unofficial lender of last resort, gathering reserves and supplying capital to the markets in periods of crisis. For two harrowing weeks in 1907, with the whole world watching, he operated like a general, deploying three young lieutenants to do leg work and supply him with information, and bringing two other leading bankers, James Stillman of National City Bank and George Baker of the First National Bank, into a senior “trio” to make executive decisions. (First National and National City eventually combined to form what is now Citigroup — are the shades of Baker and Stillman writhing over what has become of their descendant institution?)

The Morgan teams ran “stress tests” on the unregulated trust companies, figuring out which were impossibly overleveraged and should be allowed to fail, and which were basically sound but crippled by the panic. Once they had determined that a trust was essentially healthy, the bankers supplied it with cash, matching their loans dollar-for-dollar with the trust’s collateral assets.

When the New York Stock Exchange nearly closed early one day in October 1907 because financial institutions calling in loans were choking off the market’s money supply, Morgan summoned the presidents of New York’s major commercial banks to his office and came up with $24 million to lend to the exchange. Next, New York City ran out of cash to meet its payroll and interest obligations; Morgan and company conjured up a $30 million loan and prevented default.

At the end of Week 1, President Roosevelt sent a letter to the press congratulating the “substantial businessmen who in this crisis have acted with such wisdom and public spirit.” Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

At the end of Week 2, Morgan called 50 presidents of trust companies to his private library on East 36th Street, locked the doors, and did not let them out until they had signed on to a final $25 million loan. The scholar of Renaissance art Bernard Berenson told his patron Isabella Stewart Gardner that “Morgan should be represented as buttressing up the tottering fabric of finance the way Giotto painted St. Francis holding up the falling church with his shoulder.”

Though Morgan had a large sense of public duty, he had not shouldered the falling church out of pure altruism. His self-interest operated on a national scale. His clients — many of them Europeans who had invested for decades in the emerging American economy through the House of Morgan — had billions of dollars committed in the United States. In watching over their long-term interests, trying to control the excesses of the business cycle and maintain the value of the dollar, Morgan had come to serve as guardian of American credit in international markets.

His power in 1907 derived not from the size of his own fortune but from the trust placed in him by investors, other bankers and international statesman. After Morgan died in 1913, the newspapers reported his net worth as about $80 million — roughly $1.7 billion in today’s dollars. John D. Rockefeller, already worth a billion in 1913 dollars, is said to have read the figure, shaken his head, and remarked, “And to think he wasn’t even a rich man.”

Trust in Morgan was by no means universal. In 1907, some of his critics charged that he had started the panic in order to scoop up assets at fire-sale prices and line his own pockets. In fact, the Morgan banks lost $21 million that year.

The difficulty today of assigning dollar values to “toxic” assets makes Morgan’s job look easy. Yet though the amount of money required for the 1907 bailouts is pocket change compared to the current trillions, at the time, the troubles and the numbers seemed enormous.

No single figure, much less a private banker, could wield the kind of power in today’s gargantuan collapsing markets that Morgan had a hundred years ago. And so far, not even the combined official powers of the Fed and Treasury have been able to stop the cascading disasters. Paul Volcker, the former Federal Reserve chairman, said recently that he couldn’t remember a time “maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

Perhaps new economic leadership will emerge during this crisis, under our gifted, charismatic president. It seems likely to consist of people who have the kind of experience, judgment and authority Morgan had — possibly a new “trio” made up of the current Fed chairman, Ben Bernanke; Paul Volcker; and Warren Buffett.

Only Mr. Bernanke is formally in a position to exercise that high authority now, which he is doing — he announced last week that the Fed would inject an extra $1 trillion into the financial system. Mr. Volcker, chairman of the White House Economic Recovery Advisory Board, could easily be promoted to a more dominant role. Mr. Buffett has already stepped up in public, praising the steps the Fed took last fall to insure money markets and commercial paper as “vital in keeping the place going” (if the Fed hadn’t acted, Mr. Buffett told his CNBC interviewer, “we’d be meeting at McDonald’s this morning”).

Moreover, Mr. Buffett said he could “guarantee” that in five years or so “our great economic machine” will be running a lot faster than it is now, with the government playing an enormous role in how quickly it recovers. Last fall he declared that we had just been through an “economic Pearl Harbor.” Last week he said that in order to fight this economic war the country has to unite behind President Obama, the government has to deliver “very, very” clear messages and we all have to focus on three jobs:

Job 1: win the economic war.

Job 2: win the economic war.

Job 3: win the economic war.

Just what Morgan would have said.


Jean Strouse is the author of “Morgan: American Financier” and the director of the Cullman Center for Scholars and Writers at The New York Public Library.



http://www.nytimes.com/2009/03/23/opinion/23strouse.html?em

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

Todd Heisler/The New York Times
President Obama met with his economic team, including the Treasury secretary, Timothy F. Geithner, at the White House on Monday.

By BRIAN KNOWLTON and EDMUND L. ANDREWS
Published: March 23, 2009

WASHINGTON — The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets.

Multimedia
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Tracking the $700 Billion Bailout
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Geithner Pushes Bank Rescue Plan, Part 1
Geithner Pushes Bank Rescue Plan, Part 2

Related
The Lede: A Boom in the Financial Metaphor Market (March 23, 2009)
Transcript: Treasury Timothy Geithner’s Press Briefing (March 23, 2009)

The Dow Jones industrial average was up sharply in afternoon trading on Monday, gaining more than 270 points. When the Treasury secretary, Timothy F. Geithner, spoke on Feb. 10 of a bank rescue plan without offering much detail, investors took that as a worrying sign and the Dow fell sharply, losing 380 points.

The Treasury secretary did not deny the uncertainties inherent in the new program on Monday but defended it as a practical approach. “There is no doubt the government is taking a risk,” Mr. Geithner said, “the only question is how best to do it.”

President Obama said later that he and his economic advisers were “very confident” that the program outlined by Mr. Geithner would start to unclog the credit markets.

“It’s not going to happen overnight,” the president said after meeting with his economic team. “There’s still great fragility in the financial systems. But we think that we are moving in the right direction.”

The president also reiterated his pledge “to design the regulatory authorities that are necessary to prevent this kind of systemic crisis from happening again.”
The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican lawmakers have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.”

Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.

The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds, insurance companies and other long-term investors.

The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match, one for one, every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”

On top of that, the F.D.I.C. — tapping its own credit lines with the Treasury — will lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors will be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, using funds from the $700 billion bailout program; the private investor contributes the remaining $6.

An attractive feature of the program is that it will allow the marketplace to establish values for the assets — based, of course, on the auction mechanism that will signal what someone is willing to pay for them — and thus might ease the virtual paralysis that has surrounded those assets up to now.
For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices.

One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday.
The true magnitude of the toxic-asset purchase program could amount to well over $1 trillion. Buried in Mr. Geithner’s announcement was the detail that the Treasury would sharply revise and expand its joint venture with the Federal Reserve, known as the Term Asset-backed Secure Lending Facility, which was originally created to finance consumer lending and some forms of business lending.

Starting soon, that program will be expanded to finance investors who want to buy existing mortgages and mortgage-backed securities, including commercial real estate mortgages. By allowing the so-called TALF program to buy up older assets, as well as new loans, the Treasury and Fed will be putting nearly an additional $1 trillion on the line — on top of all the money being provided through the F.D.I.C. program and the Treasury partnership programs announced on Monday.

The department defined three basic principles underlying the overall program.

• First, by combining government financing, involving the F.D.I.C. and the Federal Reserve, with private sector investment, “substantial purchasing power will be created, making the most of taxpayer resources,” the fact sheet said.
  
• Second, private investors will share both in the risk and in the potential profits, the Treasury Department said, “with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.”
  
• The third principle is the use of competitive auctions to help set appropriate prices for the assets. “To reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased,” the department said.

By emphasizing that private investors will share in the risk, the Treasury Department seemed to be seeking to reassure ordinary taxpayers that they will not bear the entire downside burden of yet another $1 trillion program.

At the same time, administration officials strove over the weekend to reassure potential investors that they would not be subjected to the sort of pressures, criticism and public outrage that followed reports of multimillion-dollar bonuses to executives of the American International Group.

The Treasury Department defended its approach as a compromise that would avoid the dangers both of being too gradual an approach and of burdening taxpayers with the entire risk.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience,” the department said. “But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases — along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

The plan relies on private investors to team with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.

Mr. Geithner made it clear on Monday that no limits on executive compensation would be imposed on companies that invest — unless the companies are already subject to such limitations as recipients of TARP money — because the government does not want to discourage investor participation.

Eric Dash and Rachel L. Swarns contributed reporting from Washington, and Andrew Ross Sorkin from New York.

http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?_r=1&hp

The Economics of Stimulus

The Economics of Stimulus
Fiscal mismanagement during the boom years constrains the UK's ability now to spend its way out of recession. Fixing the banking sector must be the priority

With the financial crisis intensifying last autumn, Gordon Brown wrote to EU leaders to urge a “new global financial architecture”. As the host of the G20 summit of advanced and emerging economies next month, Mr Brown has apparently tempered his ambitions for reform of the international order. European leaders - notably Angela Merkel, the German Chancellor, and President Sarkozy of France - have shown a marked lack of enthusasiam to be lectured to.

There is indeed much in Mr Brown's schemes that merits scepticism. But reforms to a dysfunctional international financial system are a direct route to remedying the crisis. The recession was born in the banking sector, through imprudemt lending and a credit bubble. The most immediate way of supporting economic activity is to fix the weaknesses in the financial system by recapitalising the banks and ensuring they have sufficient reserves to resume lending.

On an international scale, it will be important to reconsider the role of the International Monetary Fund, which traditionally acts to provide financial assistance to countries that face a liquidity crisis. The IMF cannot strictly act as a lender of last resort, because unlike a central bank, it cannot create money. The G20 should consider how best the IMF can help countries facing a capital crisis, and also consider the vexed question of reforming the voting weights to reflect the shift of power to the emerging economies.

The case for co-ordinated fiscal stimulus, as advanced by President Obama's Administration and by Mr Brown, has a respectable theoretical pedigree. The aim is for governments to fill the gap left by the collapse of private spending. But there are severe practical difficulties. To be effective, stimulus needs to be co-ordinated. The realities of national politics in the G20 economies make that unlikely. The sheer scale of the Obama fiscal package in the US is an open invitation for sectional interests to appropriate public funds for purposes that may have no lasting economic benefit. The wastefulness of huge public works projects in the 1990s during Japan's long recession is not a model to be copied.

The problem is acute in the UK, because public finances are in a mess. Fiscal management was too loose during the boom years. The use of fiscal policy to boost demand is popularly thought of as a Keynesian approach. But Keynes stressed the use of monetary and fiscal policy to stabilise the economy rather than to stimulate it. That means that budget surpluses should be built up during an expansion, so that there is scope to stimulate the economy during a downturn. Since 2002, Mr Brown as Chancellor and now Prime Minister has abandoned that fiscal discipline.

The result is that public borrowing is now expanding alarmingly. The UK budget deficit for February amounted to £9 billion - eight times the level of a year earlier. This brought public-sector net borrowing to a record £75 billion for the first eleven months of the fiscal year. As the recession continues, tax receipts will fall and public borrowing will expand further. It is crucial to the UK that other countries do follow expansionary policies. There will be pressure on the exchange rate if international investors worry about the sustainability of the public finances.

The CBI believes that scope for fiscal easing is limited. The chief executive of the Audit Commission has publicly worried about an Armageddon scenario in which there will be insufficient lenders to match the scale of public borrowing. Even if the economy recovers in 2010, the scale of the UK's public debt will then require a sharp fiscal contraction. It will have to be paid for in large tax increases and cuts in public spending. It is, to adapt an unfortunate phrase of Mr Brown's, beyond any conventional notion of boom and bust.


http://www.timesonline.co.uk/tol/comment/leading_article/article5956066.ece

The crew of a women’s surfboat paddle through large surf while competing at the Australian Surf Life saving Championships at Perth’s Scarborough Beach. Surf clubs from around Australia are in Perth for the annual inter-club championships

Is It Time To Abandon Buy And Hold Investing?

ETFguide.com



Is It Time To Abandon Buy And Hold Investing?



Wednesday March 18, 12:15 pm ET

By Simon Maierhofer


Just because you have access to water, sugar and food coloring doesn't mean you know how to make Coca Cola. The right mix is priceless. The right mix of asset classes, also called diversification, used to be considered priceless as well.
Diversification was a popular subject of discussion leading up to the 2007 stock market peak and started to lose its luster early 2008 when commodities began their freefall. Many are led to believe that holding tight will be the only option to make back their money while some die-hard diversification junkies and asset allocation aficionados are still trying to figure out the 'perfect mix.'
How did the 'perfectly allocated buy-and hold portfolio' fair from the October 2007 peak to the March 2009 bottom?
To see how a diversified portfolio stacks up against the broad U.S. equity market, we've put together a hypothetical portfolio with exposure to all main asset classes. Of course, we realize that this cookie cutter portfolio pales in comparison to some tailor-made diversification models. Nevertheless, there are only so many asset classes, all of which (with the exception of certain bonds and gold) were down.
An equal weighted mix of the Vanguard Total Stock Market ETF (NYSEArca: VTI - News), iShares Barclays Aggregate Bond ETF (NYSEArca: AGG - News), iShares Dow Jones US Real Estate ETF (NYSEArca: IYR - News), iShares MSCI EAFE (NYSEArca: EFA - News), iShares MSCI Emerging Markets ETF (NYSEArca: EEM - News) and the iShares S&P GSCI Commodity ETF (NYSEArca: GSG - News) would have lost 48.12% from the market peak (October 9th, 2007) to the March 9th, 2009 lows.
As a point of reference, the S&P 500 (AMEX: SPY - News) lost 55.19% in the same period while the Dow Jones (AMEX: DIA - News) was down 52.32%. Even though a 7% advantage helps, neither result should be acceptable to investors.
Unless a diversified portfolio was disproportionally weighted in either bonds or gold, the results were quite similar. The SPDR Gold Shares (NYSEArca: GLD - News) gained 23.91%, yet the broad iShares S&P GSCI Commodity ETF (NYSEArca: GSG - News), which sports a 10% allocation to gold, lost 47.20%.
The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT - News) saw a gain of 21.90% while the iShares iBoxx High Yield Corporate Bond ETF (NYSEArca: HYG - News) melted by 32.87%.
In the aftermath of the dot.com bubble burst induced bear market, many sectors boomed while others laid dormant. The Financial Select SPDRs (NYSEArca: XLF - News) for example gained 25% in 2000 while the Technology Select Sector SPDRs (NYSEArca: XLK - News) lost 42%. Yes, diversification worked back then.
The ETF Profit Strategy Newsletter was a step ahead already in 2008. Very early on, it identified the bear market as a deflationary depression. The 'red across the board' performance of nearly all asset classes is indicative of a deflationary environment. Whether we find ourselves technically in a depression right now or not is irrelevant. Fact is that we'll end up there.
Of course, the government doesn't set the trend, it follows it. The official statement: 'we are in a recession' wasn't released until after the stock market lost some 40% in December 2008.
Quite to the contrary, the ETF Profit Strategy Newsletter recommended short ETFs until November 2008 and once again in January 2009.
In fact, on December 14th, 2008 we forecasted the following: 'Range-bound trading, as we've seen over the past several weeks, grinds and tests the patience of investors. More importantly, it gives the stock market a chance to calm extreme levels of investors' pessimism. Conversely, optimistic sentiment, which should be more visible above Dow 9,000, gives way to further declines. These should draw the indexes close to or below their November 21st lows of 7,445 for the Dow and 740 for the S&P.'
This was followed up with this statement on February 13th, 2009: 'The best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600'. On March 9th, the Dow reached an intraday low of 6,440.
Rather than diversification, the newsletter promoted using short ETFs either to hedge long positions or simply as profit centers. Such Short ETFs included the UltraShort Financial ProShares (NYSEArca: SKF - News), UltraShort Real Estate ProShares (NYSEArca: SRS - News) and UltraShort S&P 500 ProShares (NYSEArca: SDS - News). From the January 6th 2009 highs to the March lows, those ETFs gained between 80% - 150%.
This bear market has humbled many investment gurus, stock pickers and asset allocation wizards. Yesterday a peacock, today a feather duster. If you don't want to get your nest egg scrambled, it might be time to take action and review your portfolio. The brand new issue of the ETF Profit Strategy Newsletter includes reliable short, mid and long-term forecasts for the U.S. equity markets along with winning ETF profit strategies. If you keep doing what you're doing, you'll get what you've got. Are you ready for more?



http://biz.yahoo.com/etfguide/090318/209_id.html?&.pf=retirement

How to pay off your debts

Afghan horsemen play Buzkashi on the outskirts of Kabul. Buzkashi is the national sport of Afghanistan, which literally translated means "goat grabbing". A headless carcass is placed in the centre of a circle and surrounded by players of two opposing teams. The object of the game is to get control of the carcass and bring it to the scoring area
(Rafiq Maqbool/AP)

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From Times Online
January 31, 2008

How to pay off your debts
James Charles

We would all like to bury our heads in the sand when it comes to debt, but the stark reality is that the longer you leave it, the worse your situation will become, so act now. There are a number of simple steps that you can take to tackle the problem head on and get back in the black.

Prioritise
Work out which debts you need to address first. Some will be more urgent, while others, such as a student loan, can be cleared over a longer period of time. You could divide them into two groups: priority and non-priority. Mortgage repayments, for example, would be considered priority debts because failing to make your repayments could result in you losing your home.
Whether you want to tackle the smallest, largest, most expensive or cheapest debt first, it is vital that you keep up the minimum repayments on all debts. Not doing so can damage your credit score and reduce the chance of obtaining credit in the future.

Background
How to improve your credit rating
How to choose a credit card
How to pay off your debts
IVAs explained
Student loans explained
Related Links
Store card interest 'extortionate'
1.7m households request debt help
Fight back against rising interest rates

Budget
To help to work out how much spare cash you can devote to repaying debts, it is crucial that you draw up a budget.
You can use a budget calculator online or simply sit down with an old-fashioned pen and paper and list all your income and outgoings. Then try to cut back where you can and keep a lid on costs wherever possible.

Boost
A simple and obvious way to speed the process of clearing your debts is to raise your monthly payments, and there are lots of ways to get the extra money you will need to do it.
The possibilities are almost endless, from renting your driveway to selling your old mobile phone. You could try selling unwanted presents or gadgets on eBay or other auction sites.
It is also worth making sure that you are not due any tax credits or government benefits.
Check that you are on the best deals for your insurance, loans, mortgages and credit cards by using price comparison websites such as Moneyfacts.co.uk or moneysupermarket.com, Also check whether you are paying for loan insurance on your mortgage or other credit and decide whether you really need this cover.

Savings
If you have a pot of savings locked away for emergencies, consider using the money to clear debt. It is likely that the cost of your debts is more than the return on your savings.

Snowballing
Once you have organised your debts, you may want to look at clearing them through a process of snowballing.
This involves making the minimum payments on your debts but using any extra cash to pay off one of them. Once you have finished clearing this first debt, you should then focus on the second debt, using the same extra cash, plus the money that you were using to make the minimum payment on the first debt. Then simply continue this process until all your debts are cleared.

Consolidate
If you are overwhelmed by the number of different debts you have, it may be worth consolidating your debts into one large loan.
The most common way of doing this is to move all your credit card balances to a new card with a 0 per cent rate for balance transfers.
But be careful if you decide to take out a consolidation loan. They can be expensive in the long term and may be secured on your home.

Communicate
Having relatively small amounts of debt is now extremely common. The average UK adult owes £29,500, including mortgages, so you are certainly not alone. However, if you are struggling to make repayments, or you are feeling overwhelmed by your situation, seek help from a debt charity.
Also try speaking to your lender. It may be willing to make an agreement over a new repayment timetable. You could also speak to a debt management company. And if you are really stuck, you could consider an individual voluntary agreement or even, as a very last resort, bankruptcy.

http://www.timesonline.co.uk/tol/money/reader_guides/article3247171.ece

2009 threatens to be "a dangerous year"

World Bank wants Britain and US to track how well stimulus works

The head of the World Bank has called on Britain, the US and other major economies to establish ways of tracking the effectiveness of their growing fiscal stimulus packages.

By Richard Blackden
Last Updated: 9:37PM GMT 21 Mar 2009

World Bank President Robert Zoellick says that 2009 threatens to be "a dangerous year"

"There is a legitimate debate about how the stimulus will be used," World Bank President Robert Zoellick said yesterday. "If you are going to have very big expansionary programmes, you need to show some fiscal discipline." The comments come less than two weeks before a critical G20 Summit in London at which leaders of the world's major economies will be seeking a consensus on a new set of measures to help drag the world out of recession.
Mr Zoellick says that 2009 threatens to be "a dangerous year" in which the economic crisis has the potential to spill over into political and social unrest in a number of countries.

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World Bank warns China can't make up for collapse in Western demand

The World Bank last week forecast the global economy will contract by as much as 2pc this year.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5029116/World-Bank-wants-Britain-and-US-to-track-how-well-stimulus-works.html

UK to remain in deflation trap until 2012, economists warn

UK to remain in deflation trap until 2012, economists warn
Britain will be mired in a deflation trap for years despite the radical efforts of the Bank of England to pump extra cash into the economy, economists have warned.

By Edmund Conway
Last Updated: 10:26PM GMT 21 Mar 2009

The forecast, by a team at BNP Paribas, states that prices in Britain will keep falling for at least another two-and-a-half years, as Britain suffers an apparently intractable bout of debt deflation.

The warning comes only days before official figures confirm this Tuesday that the Retail Price Index has dipped into negative territory for the first time in almost half a century.
It also follows a warning from the Bank itself that the UK is now exhibiting early signs of becoming stuck in debt deflation − the combination of falling prices and rising debt burdens that afflicted the US during the Great Depression.

But while many assume the combination of near-zero interest rates and a heavily-devalued pound will help prevent falling prices from becoming entrenched, and may stoke inflation, the BNP Paribas economists said they expected deflation to persist all the way until 2012. Furthermore, the fall in prices would be broad-based across the economy, pushing into the red not only the RPI but also the Consumer Price Index, which the Bank's Monetary Policy Committee targets

Alan Clarke, UK economist at BNP Paribas, said: "Our revised economic forecasts for the UK are the most pessimistic in the market. We expect GDP to contract by more than 4pc this year and by a further 1pc in 2010. We expect deflation to set in during 2011, even earlier were it not for the VAT hike [which will follow the temporary cut in the tax this year]."

"Over the medium term, we expect the unemployment rate to surge to above 10pc − well above neutral. This will exert significant downward pressure on inflation, turning negative in 2011."

The forecast is based largely on the bank's prediction that the unemployment rate will soar to 10.4pc of the workforce by 2011, depressing the wider economy and underlines the disparity between economists' expectations for the coming years.

The Office for National Statistics will on Tuesday announce that the annual rate of change in the RPI has dropped beneath zero for the first time since February 1960, most likely falling to -0.6pc. It is also likely to say that CPI inflation has fallen to around 2.5pc. The CPI does not include the effects of either house prices or mortgage interest payments, and so has been less affected by the falls in property values over the past year.

http://www.telegraph.co.uk/finance/financetopics/recession/5028673/UK-to-remain-in-deflation-trap-until-2012-economists-warn.html

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US calls on Sweden's "Mr Fix It" Bo Lundgren

US calls on Sweden's "Mr Fix It" Bo Lundgren
The Swedish financial chief known as "Mr Fix It" has been summoned to Washington to advise on how Sweden's model might avert a global banking meltdown.

By Henry Samuel in Stockholm
Last Updated: 11:11AM GMT 20 Mar 2009

US turns to "Mr Fix It" Bo Lundgren, the steely-eyed head of Sweden's National Debt office, played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990s.

Sitting in his office in downtown Stockholm before his trip to Washington, Mr Lundgren chuckled at the Wall Street joke that "Swedish models used to only attract attention if they were blonde and leggy".

Now, US President Barack Obama cites Sweden as a possible model of how best to tackle failing banks. Mr Lundgren, who was fiscal and financial affairs minister at the time of the last crisis, yesterday outlined the Swedish solution to the Congressional Oversight Panel, which supervises the US administration's troubled asset relief programme.

"I am a market liberal. I was even called the nearest Sweden had every come to having a party one could call libertarian," said Mr Lundgren, the former head of the Moderate Party with links to the Conservatives.

This did not stop him nationalising two failing major banks in 1992: the already majority state-owned Nordbanken, and the privately owned Gota bank.

"In the case of a crisis, the state needs to be strong," he said. "If it decides to act, it should become an owner."

After initial hesitation, when the Swedes chose to act they soon reached a broad political consensus.

The first, and in his eyes crucial step Mr Lundgren took was to restore liquidity by issuing a so-called "blanket guarantee" for all non-equity claims on Swedish banks.

This was vital to restore confidence, he said, and is something that has not been done in the US and UK.

It was also crucial not to put a figure on the guarantee, according to Stefan Ingves, the governor of the Riksbank, Sweden's central bank. Mr Ingves was a finance ministry official in the early 1990s and led the Bank Support Authority, created to resolve the crisis.

"If you pick a very low figure, people will say: 'That's not credible, we think the problem's bigger than that.' If you pick a very high figure, then people say: 'Oh gosh, is it that big a problem?'," he said.

The government did not extend its credit guarantee to shareholders of the nationalised banks, who were wiped out.

In the UK, the Royal Bank of Scotland has refused to go this far, but the Swedes insist this acts as a wake-up call to shareholders of troubled but still solvent banks to shape up or ship out. This decision spurred two private banks to raise private capital.

A "stress test" was worked out to determine how bad the problems were in each bank for the coming three years.

Banks were then ranked as healthy or as candidates for nationalisation, and those in between were told to clean up their act or face being taken over by the state.

Next, the toxic assets of the nationalised banks were ring-fenced into two separate bad banks and run by independent asset-management companies. The good assets were placed in a single, merged bank.

As central banks and supervisors "don't do corporate restructuring", the Swedish authorities decided to bring in investment bankers from the private sector to run the corporate finance side of the bad banks' assets. "Huge numbers" of bankers and auditors were flown in from London to do the "daily running of these businesses," said Mr Ingves.

Private banks were also urged to place their non-performing loans in separate bad banks. However, unlike what has been mooted in the US, there was never any question of the authorities buying bad assets from banks that remained in any way privatised. "We refused to do that because we could never agree on the price. If you pay too much it's a giveaway to the shareholders. If you pay very little then the transaction simply won't happen," said Mr Ingves.

Despite calling it a "political value judgment", it is clear he disapproves of countries such as Britain and the US who have committed huge sums to insure bad assets of private or part-private banks.

Once split, the two Swedish bad banks managed to liquidate their assets by 1997 and the state recouped at least half the funds it had made available.

While the process worked back then, the two Swedes recognised that the 1990s crisis, essentially home-grown and involving half a dozen national banks, was very different from the current global meltdown, involving far more banks and complex "packaged and repackaged" assets. Still, the solution remains the same, said Mr Ingves, even if far more co-ordination is today required.

"Clearly, one of the lessons that comes out of all this is that in Europe, the financial integration between countries ran way ahead of the EU's willingness to have a regulatory framework following at the same pace," said Mr Ingves.

The Swedes also expressed concern that other countries' handling of this crisis was still too piecemeal.

"In the US, certainly early on, there was no consistent policy over capital injection and bad assets. Now it's better but there are still too many loose ends," he said.

"To restore confidence you have to show exactly how big the problems are and how you are going to take care of that."

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5019186/US-calls-on-Mr-Fix-It.html

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UK house price falls among steepest in the world

UK house price falls among steepest in the world

Thursday, 5 March 2009

The credit crunch has triggered property price falls in nearly every housing market across the world, with the UK seeing some of the steepest drops, research showed today.


Around 81% of countries recorded falls in the value of property in the final quarter of last year, compared with just 27% in 2007, according to estate agents Knight Frank.

The group said it was now clear no market would escape unscathed from the global financial crisis, although the impact would vary according to the housing markets and underlying economies of individual countries.

The UK recorded the second steepest annual price declines out of the 42 countries Knight Frank looked at.

House prices fell by 14.7% in the UK during 2008, with 5.1% of the slide coming during the final quarter of the year.

The group said not all markets were at the same point in the cycle, with 19% of the countries it looked at still seeing price rises in the final three months of 2008.

But it added that although house prices rose by more than 10% last year in seven countries, values had now started to fall in six of them.

Dubai was the strongest performer during 2008, with house prices soaring by nearly 60% during the year, but much of this gain is expected to be wiped out in 2009.

At the other end of the scale, Latvia saw the steepest price slides on both an annual and quarterly basis, with homes dropping by 16% in the final three months of the year and plummeting by 33.5% during the whole of 2008.

Iceland also suffered badly, with prices falling by 14% during the year, with 11.3% of the slide coming in the final quarter following the collapse of its banking sector.

The United States and Ireland were both also near the top of the fallers' table with annual price drops of 12.1% and 9.1% respectively.

Nicholas Barnes, head of international residential research at Knight Frank, said: "The current downturn is unlike any other we have ever witnessed in both scale and causes.

"This year is likely to be more difficult than 2008, however, there is a 'consensus of hope' that the trough of the current cycle will be reached in 2009, although a bounce-back is not anticipated and the current fragility of markets could be exposed by further bad news from the financial sector or indeed the underlying economies.

"At some point, however, buyers will decide that price falls in many markets represent once-in-a-generation opportunities that are too good to pass up."

The Royal Institution of Chartered Surveyors also released research today showing the impact of the global economic problems on European housing markets.

It said the Baltic States had seen the sharpest falls during 2008, with Estonia recording a 23% slide, closely followed by the UK with drops of 16% and Ireland with falls of 9%.

It said even countries which did not experience a house price boom, such as Germany and Austria, had been hit by the credit crunch.

RICS said official house price indices in Spain surprisingly recorded only moderate price falls, but the current credit squeeze and the end of the consumer boom are expected to lead to a more material readjustment in 2009, particularly in the second homes sector.

Simon Rubinsohn, chief economist at RICS, said: "Ensuring a ready flow of mortgage finance needs to be an important priority for European governments but the key to providing support for property markets across the region is effective measures to underpin the economy."

GE reassures over profits of finance arm

From Times Online
March 19, 2009

GE reassures over profits of finance arm
Christine Seib, New York

Shares in General Electric (GE) rose almost 7 per cent in morning trading after the conglomerate reassured investors about the profitability of its troubled finance business.

GE, which saw its shares plummet to an 18-year low of $5.87 this month on capital raising and ratings downgrade fears, said that GE Capital was likely to be profitable this year even in a worst-case economic scenario.

The company’s stock was up by 6.9 per cent at $11.03 each by 10.50am as shareholders welcomed the news.

Michael Neal, chief executive of GE Capital, said: "Even in the adverse case we’re probably break-even to slightly profitable".

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Keith Sherin, GE’s chief financial officer, added that the company had run stress tests of GE Capital’s portfolio of business and found nothing that would force GE to raise additional capital.

GE Capital, which sells commercial and personal loans as well as making proprietary investments in real estate, has been hit by the souring property market.

GE has put aside $10 billion against expected losses at the unit, which once accounted for about half of GE’s earnings but has shrunk to less than one-third.

Shares in GE started to rise last week after Standard & Poor’s stripped the company of its AAA credit rating, taking it to AA-plus.

Investors had expected the downgrade to be worse, so took the one-notch demotion as a sign that there was no further bad news to come from the finance business.

http://business.timesonline.co.uk/tol/business/article5939737.ece

Opportunities still abound in tougher financial times

Opportunities still abound in tougher financial times

Last Updated: 4:01PM GMT 19 Mar 2009

Managing client money in a downturn is proving to be the ultimate stress test. In an economic downturn, capital preservation becomes a greater consideration as investment risk increases.

Stockmarkets can experience sharp declines, volatility rises and traditional sources of income can be eroded. Such periods of economic difficulty also provide attractive opportunities. Being positioned with flexibility means it is possible to take advantage of these as they emerge.

To manage client money successfully in a downturn we have to try to identify the environment in which we are operating. This has been made more difficult by the rapid change in the economic and financial landscape in recent months. But certain factors are apparent:

A number of leading banks have wiped out their capital. Governments have, however, made it clear that they will do everything possible to protect savers and keep the banking system functioning. This is good news, but investors need to be wary of any loss of nerve by the authorities as they face up to multiple bank recapitalisations.

We have entered a recession that will be deep and last for several years. There will be a sharp fall in the rate of inflation and we may even see a negative number this year. Interest rates will continue to fall.

Given the level of uncertainty, the value of capital and the extensive range of attractive opportunities available it makes no sense to lock up capital even if apparent returns are attractive. For example, investors in five-year structured notes backed by a bank whose credit rating is deteriorating, will attest to how uncomfortable they feel at present and how much poorer they are in the short term.

Equally, borrowing to invest even though interest rates are falling is unnecessary and potentially dangerous.

Backward-looking asset-allocation models have also failed to protect investors. Decade-long average returns and past correlations have been of little use over the past year and they will continue to provide poor guidance for a number of years to come.

Governments are fully occupied in an exercise that may best be described as battlefield triage of the financial system, while at the same time trying to work out how to sustain the rest of the economy and the confidence of consumers. They have now moved on to search for explanations as to what went wrong and who to blame.

On the other hand, investors should have a different agenda.

Liquidity in all asset classes is critical so that when the forced selling stops and the markets stabilise, investors will be able to use valuable capital to maximum effect. There are attractive opportunities in all asset classes.

Interest rates are low and probably heading lower. Returns on cash are correspondingly low, but having a good cushion of liquidity provides the flexibility to redeploy this quickly as opportunities open up. Gilt yields have tumbled, reflecting the decline in interest rates and the expectation that inflation will remain low for some time.

However, while this may hold true for now, the combination of substantial fiscal and monetary stimulus packages is likely to rekindle inflation in two years. This makes inflation-linked gilts look more attractive at present.

Corporate bonds have delivered a poor return over the past year as the default risk priced into them rises in step with the deterioration in the economic environment. However, there are a number of high-quality investment-grade bonds offering attractive yields well in excess of government stock.

Equity markets have slumped, but there are many good-quality businesses with strong balance sheets that are generating sufficient cash flow to support progressive dividend policies. Equities are an unloved asset class at present, but many quality companies in sectors such as oil and pharmaceuticals are sitting at attractive valuations. Commodities also have a role to play within a diversified portfolio.

Our focus at present is on gold and silver, rather than economically sensitive industrial metals. We regard the former as a hedge against the longer term inflationary implications of the action being taken to stimulate the economy, specifically low interest rates and the expansion of the monetary base.

We believe that successful investment is about managing risk, sensible diversification and taking advantage of opportunities as they occur.

Michael Kerr-Dineen is chief executive of Cheviot Asset Management

http://www.telegraph.co.uk/finance/personalfinance/investing/5016903/Opportunities-still-abound-in-tougher-financial-times.html

South-east Asian nations band together to safeguard exports

South-east Asian nations band together to safeguard exports
South-east Asian leaders called for greater co-ordinated regional action to help restore their damaged export-driven economies.

By Ben Harrington
Last Updated: 10:38PM GMT 01 Mar 2009

At the annual Association of south-east Asian Nations (Asean) summit held at the Thai seaside resort of Hua Hin, the 10 members of the organisation endorsed measures to stimulate economic activity, ease access to credit, and stand firm against trade protectionism.
Asean members include Indonesia, Singapore, Malaysia, Philippines, Thailand, Brunei, Cambodia and Laos.

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Export-dependent Asian economic growth is slowing rapidly as consumers and companies cut back spending amid the worsening global downturn.
In south-east Asia, Singapore is in recession and economists believe Malaysia and Thailand are on the brink, while Indonesian growth has slowed to its weakest pace in more than two years.
Many Asian countries have announced stimulus plans to stem the economic damage, but exports will not stage a major recovery until consumers in the West start spending again.
However, The 10 leaders of Asean failed to spell out any specific policies the group would take in a chairman's statement. Leaders also called for reform of the international financial system to take more account of developing countries. Meanwhile, the Asean members also said they still plan to become an economic community similar to the European Union by 2015 to boost competitiveness.
However, the group stressed that the EU was an inspiration and not a model.
One of the less high-profile agreements to come out of the summit is that dentists are now allowed to practice throughout the region.

http://www.telegraph.co.uk/finance/economics/4903911/South-east-Asian-nations-band-together-to-safeguard-exports.html

World now in grip of 'Great Recession' warns IMF

World now in grip of 'Great Recession' warns IMF
The world is mired in what future generations may dub the "Great Recession", the head of the International Monetary Fund has declared, in the face of a flurry of negative economic news.

By Edmund Conway
Last Updated: 10:40AM GMT 11 Mar 2009

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January.
The global economy faces a contraction in overall gross domestic product for the first time since the Second World War, said Dominique Strauss-Kahn. His warning came as:

• Britain's leading economic forecaster, the National Institute for Economic and Social Research, said the UK economy has given up more than two years' worth of expansion, sliding back to the same size it was in summer 2006. It added that the recession had deepened in the first quarter of the year.

Global economy to shrink for first time since the Second World War

• China slid into deflation for the first time in the crisis, underlining the fact that Western nations' reliance on Chinese growth in the recession may be futile.

• Evidence emerged of an industrial production collapse across Europe, while the Irish central bank chief predicted his economy would shrink by a staggering 6pc this year.

• Eastern Europe's problems intensified, with the European Union pledging its readiness to give money to Romania and experts warning that Serbia's economy will shrink by 3pc unless it is bailed out by the IMF.

Mr Strauss-Kahn said that the Fund was poised to cut its forecast for 2009 global economic growth from the paltry 0.5pc expansion it predicted in January, saying a negative figure was now more likely.

"Since then the news hasn't been good," he said. "I think that we can now say that we've entered a Great Recession. This recession may last a long time unless the policies we're expecting are put in place, in which case 2010 can be a year of return to growth."

The world economy has not shrunk since 1945 because usually the contraction in recession countries has been balanced out by economic growth from elsewhere. However, the IMF chief said this recession was unusual for its breadth and ferocity. "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," he said. "Continued deleveraging by world financial institutions, combined with a collapse in consumer and business confidence is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled."

The warning comes only days ahead of the G20 leading economies finance summit, which takes place this weekend. Ministers, including Chancellor Alistair Darling and US Treasury Secretary Tim Geithner, are due to meet to discuss a concerted response to the latest stages of the economic crisis.

NIESR said it had calculated that in the three months to the end of February Britain's economy shrank by 1.8pc. This is steeper than the official contraction of 1.5pc recorded by the ONS in the final quarter of 2009 and means the economy is now back to the same level it was in August 2006 .

http://www.telegraph.co.uk/finance/financetopics/recession/4969652/World-now-in-grip-of-Great-Recession-warns-IMF.html

Federal Reserve is now playing a high-risk game with inflation

Federal Reserve is now playing a high-risk game with inflation

The US Federal Reserve is increasing its balance sheet by another $1 trillion, including $300bn of Treasury bonds, the Federal Open Market Committee said on Wednesday.

By Martin Hutchinson, breakingviews.com
Last Updated: 8:55AM GMT
19 Mar 2009



Yet the pace of US economic decline seems to be slowing, while deflation is nowhere visible. Fed policy is now high-risk, and resurgent inflation may strike sooner than expected.

The FOMC said it expects inflation to remain subdued with some risk it could "persist for a time below rates that best foster economic growth”. Notably, the Fed is not now forecasting actual deflation.

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That’s not surprising, since February’s top-line consumer price index rose 0.4pc, equivalent to 4.8pc annually, while core consumer prices also rose, by 0.2pc. The Cleveland Fed’s median CPI was 2.8pc above the previous year. February’s producer price inflation was marginally lower, with the headline index rising at 1.2pc annually and the core measure at 2.4pc.

Meanwhile, last week’s unexpectedly strong February retail sales and Institute for Supply Management index readings suggest that economic decline is slowing.

The experience of the 1970s in both the United States and Britain demonstrates that the Fed’s theory that inflation won't co-exist with economic slack is wrong. Thus an over-inflationary monetary or fiscal policy could quickly produce accelerating inflation even while recession persists.

The Fed’s proposed purchase of $300bn of long-term Treasury bonds, when combined with the Obama administration’s record budget deficits, is particularly risky. Running large budget deficits and monetising them through central bank purchases of debt is a highly inflationary policy that has got plenty of emerging markets into trouble.

Broad money growth, whether by the M2 metric or by the St. Louis Fed’s MZM figure, has been running at over 15pc annually since last September. The $1trillion further expansion of the Fed’s balance sheet is very likely to accelerate this. The effect may not be obvious in the short term. But at some point, it is almost inevitable inflation will return, probably with force.

The Fed will then need to reverse policy with the speed and verve of a racing driver. Unfortunately, the odds are against it doing so before inflation has taken hold.

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

http://www.telegraph.co.uk/finance/breakingviewscom/5014284/Federal-Reserve-is-now-playing-a-high-risk-game-with-inflation.html

'The market is as cheap as in 1953'

'The market is as cheap as in 1953'
When the market turns it will be one of the most stunning bull markets any of us has experienced.

By James Bartholomew
Last Updated: 8:17AM GMT 20 Mar 2009

These are truly extraordinary times. Share prices of many smaller companies are almost unbelievably low. I was once told by an editor never to use the word "cheap" and he had good reason. You can say something looks "cheap" today and look pretty silly when it is even cheaper tomorrow. But really these times make it very difficult not to employ the "c" word.

There is no pleasing the market. On Monday, two of the companies in which I have serious stakes – worth more than 7pc of my portfolio – announced results. Aero Inventory, which manages aircraft parts for airlines, produced excellent profits – up by nearly half. How did the shares respond? They fell 17pc.

Yes, there were one or two reasons for the fall. Above the rest, the company said it had not been able to agree terms for a new contract with a major airline. That was a disappointment. But the irony is in the past six months or so, I have been told that the share price has been weak because of fear of overexpansion leading to a need for capital-raising. So, one minute the company is distrusted because it is expanding too fast, the next it is spurned for not expanding quickly enough. Damned if you do, damned if you don't.

The other company that reported on Monday is safe and exciting. Healthcare Locums, an agency for health and social workers, still slumped 6pc on Tuesday morning.

Sometimes the market seems moody. Shares can rise or fall 20pc with no apparent cause. I wonder if it can be occasionally a single, relatively modest buyer or seller who moves the market a great deal because the turnover in shares has fallen so low. Some of my shares, REA Holdings for example, can easily go through a day without a share being bought or sold. I would also guess that sometimes the buying and selling is just because some people – or funds – need cash.

In theory, this should provide an ideal hunting ground for those seeking good long-term investments. Aero Inventory is forecast by Numis Securities to make earnings per share this year of 83p. The share price earlier this week was 168p. So the share price was only a fraction over two times forecast earnings. Normally my rule of thumb is to say that anything with an earnings multiple of less than 10 is lowly rated. A good company on a multiple of five I would normally regard as extremely good value. But a multiple of two? That is astonishing.

No, gritting my teeth, I won't use the "c" word. But what can you say? It is hard to do justice to how astonishing this kind of valuation is. And it is not as though the company is in any discernible danger. Yes, it is geared but it is profitable and has banking facilities right the way through to 2013. Aero Inventory is an extreme example of the market as a whole.

On the bad side, the chart of the FTSE 100, like the chart of Aero, offers no encouragement. There has been no break in the downward trend. On the other, by any traditional measure, shares are excellent value. The redemption yield on 15-year government stock is currently 3.6pc, whereas the dividend yield on shares is 5.3pc.

Normally, it is the other way around: the dividend yield is lower than the return on government stock for the simple reason that, over time, dividends have historically risen whereas the yield on a government stock does not. True, some companies are reducing or cutting their dividends but this is at the margin. On this method of valuation, as far as I can discover, shares have not been such good value compared to government stock since about 1953.

My view is simple: shares are extremely good value, but it is impossible to know when the turn will come. When it does arrive, from this low valuation, it will be one of the most stunning bull markets any of us has experienced.

http://www.telegraph.co.uk/finance/personalfinance/investing/5017022/The-market-is-as-cheap-as-in-1953.html

Q&A All about 'toxic' debt

Q&A All about 'toxic' debt

Last Updated: 7:42PM BST 16 Sep 2008

What are "toxic" debts?

"Toxic" debt has become shorthand for the various asset classes hard hit by the financial crisis, such as sub-prime mortgages – the original "toxic" asset.

The word "toxic" caught on because these assets have proved financially ruinous. They have seen their valuations cut and buyer demand dry up.

The holders of the debt have in many cases fallen into a loss and been forced to raise emergency capital. The worst hit UK lender so far has been Royal Bank of Scotland, which has taken £5.9bn of writedowns and has had to raise £12bn from shareholders.

How much "toxic waste" is there?

Nobody really knows. Sandy Chen, banks analyst at Panmure Gordon, has estimated there are about $2,000bn (£1,127bn) of US sub-prime mortgages and another $1,000bn of "Alt-A or near-prime".

Those have been packaged into collateralised debt obligations (CDOs), pools of assets that are then spliced into several classes – from AAA secure through to BBB junk status.

More complex still are the "synthetic CDOs", which are not backed by assets but track asset performance. Panmure has estimated that there are $1,700bn of synthetic CDOs.

Asset backed securities have also been packaged into CDOs and have suffered writedowns. US commercial mortgages and leveraged loans, the debt provided by banks to finance private equity takeovers, are similarly now worth less than headline prices.

Even insurance taken out to guarantee bonds sold by the banks has turned "toxic". As the so-called monoline insurers have had their ratings downgraded, the banks have been exposed to more potential losses.

So, the potential exposure is hundreds of billions of dollars more than Panmure's estimate for the size of the sub-prime and near-prime market. As the economy weakens, the "toxic" portfolio is likely to widen to include credit card and car finance debt

What's the cost?

How long is a piece of string? The International Monetary Fund in April estimated that the US sub-prime meltdown will cost banks and other institutions $945bn.

For UK banks alone, it estimated the damage will be £20bn. Monoline exposures, commercial property and leveraged loans increase that estimate significantly.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2971683/QandA--All-about-toxic-debt.html

Banking on money creation to heal UK financial system

Banking on money creation to heal UK financial system
Sunday, 08 March 2009 17:52


IT JUST DOESN’T pay to be a saver in the UK right now. With the Bank of England (BOE)’s historically low rate cut to 0.5% last Thursday, the sixth cut in a span of five months, yet another blow has been dealt to those relying on savings interest for income. Savings rates have more than halved since the central bank rate’s progressive decline from 5% before the first cut last October. The average UK easy access bank account rate of 0.9% may seem attractive to Singaporean savers, but it is a far cry from the highs of 3.5% seen last May. Cash ISA (individual savings account) rates have also fallen from a high of more than 6% during the heady pre-Icelandic bank collapse days; the prevailing best-buy rate is now 3%.

The latest interest rate cut has also paved the way for the implementation of quantitative easing (QE), which after months of speculation finally received the official green light from Chancellor Alistair Darling last Thursday. The Observer calls it the “nuclear” option in monetary policy terms, while The Times sees it as “the most forceful action yet” to tackle the economic recession. However one chooses to view it, there is no denying that QE — a yet unproven policy tool in the UK — will take the country into uncharted territory.

QE is popularly known as the printing of money but actually involves the creation of money supply through the purchase of assets. The Bank of Japan implemented it in the early 2000s to fight deflation, although its effectiveness remains questionable. The worsening state of the UK economy has called for such drastic measures, however, and with interest rates falling towards zero, the government has to seek alternative avenues to cut borrowing costs to stimulate the economy. As The Independent’s economic editor Sean O’ Grady puts it, it is all about getting money — spending power — into a demoralised economy.

The initial £75 billion ($165.3 billion) that the BOE will pump into the system is smaller than expected, but the Chancellor has given the bank permission to extend the amount up to £150 billion if necessary. The £75 billion will be used to purchase medium- and long-maturity conventional gilts in the secondary markets, and to part finance the previously announced £50 billion Asset Purchase Facility aimed at getting credit moving again through the purchase of corporate bonds. This demand for government and corporate bonds is expected to push up bond prices, which will in turn reduce yields and make corporate and public borrowing cheaper.

Speaking to The Daily Telegraph, Citigroup chief UK economist Michael Saunders believes that if done on a large-enough scale, QE is a powerful form of stimulus for the economy and is likely to ultimately stabilise the economy and buy time for the financial system to heal.

Still, managing QE can be a monumental task, given the complex decisions on how much money to create and what assets to buy. Vicky Redwood, consumer and debt specialist at research consultancy Capital Economics, was reported in The Independent as saying that the main practical difficulty with QE is knowing what to do and how much. Much depends on how vigorously the BOE embraces it; the main danger is doing too little, she adds.

QE also comes with other risks. The central bank could lose taxpayers’ money if corporate bonds default. Also, by entering the debt market, the government faces the longer-term threat of creating a bubble in the bond market, which could burst when the economy starts to improve again. This in turn will drive up interest rates, thus raising the cost of servicing the government’s staggering public debt, which, according to the latest official statistics, has hit £2 trillion with the banking bailout of the Royal Bank of Scotland and Lloyds.

By “creating” money, there is also the risk of a further weakening of the pound sterling and inflation; the policy needs to be monitored closely as increased money supply, coupled with falling production, could lead to demand outstripping supply and hyperinflation, ETX Capital senior trader Manoj Ladwa was reported as saying in the Financial Times. There is also the danger that, instead of achieving the objective of getting them to lend, banks may decide to hoard the additional money in their reserves, which is apparently what happened in Japan.

For QE to work, timing is crucial. Commentators feel that the biggest challenge for the Monetary Policy Committee is ascertaining when to scale back when the economy eventually begins to improve. Stopping too early could run the risk of sending the economy into a “double dip” recession, while stopping too late could result in the recession being replaced with inflation, warns The Times business and city editor David Wighton.

These are among the long-term risks that policymakers need to weigh against the shortterm threat of the current recession being pushed into a full-blown depression. With the UK economy expected to contract further — the BOE had last month forecast a y-o-y fall in output of almost 4% — many feel there is little choice but to move forward with what shadow chancellor George Osborne has called “a leap in the dark” and “a last resort”.

It seems rather ironic that just as a heavyspending, debt-laden population is wising up to its excessive ways and wants to preserve whatever it has left, it now has to contend with paltry savings rates and the possibility of having the value of its assets further eroded by inflation and a sinking currency.

Lim Yin Foong was editor of Personal Money, a Malaysian personal finance magazine published by The Edge Communications, from 2001 to 2006. She is currently based in the UK.

http://www.theedgesingapore.com/blogsheads/999-lim-yin-foong-2009/2808-banking-on-money-creation-to-heal-uk-financial-system.html

Pessimism too high, time to buy: Mark Mobius

Pessimism too high, time to buy: Mark Mobius

Tags: Mark Mobius Templeton

Thursday, 12 March 2009 18:08

Veteran fund manager Mark Mobius sees a potential 20% rise in emerging market stocks in 2009 and views extreme investor pessimism as a signal to gradually start buying equities. "The danger we face now is being too pessimistic," Mobius, the executive chairman of Templeton Asset Management, a division of San Mateo, California-based Franklin Templeton Investments, said in a telephone interview with Reuters.

“We are seeing that slight bottoming out, that we have to be cautious of because if we are caught with too much cash, specifically when we are looking at very good bargains, then we are going to be in trouble with our investors,” he said.

Latin America and Asia are the two favoured regions with China and Brazil among the top country picks. Select countries such as Egypt and Turkey stand out among harder hit regions. “Eastern Europe is pretty much a disaster”. He believes China’s stimulus plan will help it achieve its 8% GDP growth target this year, helping pull up Asia which increasingly sells more of its goods to the world’s third largest economy. Brazil’s diversified economy and growing consumerism also make it attractive, he said.

Mobius manages roughly US$20 billion in emerging market assets out of the firm’s US$377 billion assets under management. Asked how high emerging market stocks might go by year-end: “If you really press me I would say 20% would not be unlikely, and the reason I would say that with some degree of confidence is that we have already come up.”

MSCI’s emerging markets stock index fell 54.48% in 2008. While the index is down 9.46% year-to-date, it has risen more than 15% from its four-year low in October. The Templeton Developing Markets Trust, the main US registered fund Mobius manages, is down 11.44% so far this year after dropping over 57.77% in 2008, according to Reuters data. Cash levels for his portfolio fluctuate between the preferred level of zero and 7% he said. He characterises them as “normal, or certainly not higher than normal”. During the 1997–98 Asian financial crisis, cash levels in his funds reached 20%.

While market volatility may not be over, a market bottom could be in place, Mobius said when asked at what point in the next 12 months investors might claim they’ve cleared a hurdle. “I’m saying that now. I'm feeling that now because of the incredible pessimism that you see everywhere. That usually is a pretty good sign that we are over the hump,” he said.

“Almost universal pessimism is usually a very good time to be buying equities because equities lead the economy,” by six months to a year he said. Famous for his globe-trotting and “on the ground” research, Mobius said of a recent trip to Latin America that while companies were preparing for the worst, customer orders were still coming in and “a lot of them” are maintaining steady investment programmes.

“On the ground things look OK but with a slower pace. That is on the investment side. The valuations now are very very attractive, even if we do a big markdown on earnings,” he said.


Thursday, 12 March 2009 © 2009 - The Edge Singapore


Last Updated on Tuesday, 17 March 2009 11:52
http://www.theedgesingapore.com/blogsheads/1017-the-edge-2009/2954-pessimism-too-high-time-to-buy-mark-mobius.html