Category Archives: Global Macro

Where to invest in 2015?

Standard

Dear Investor

SUMMARY

Globally, Deflation ( declining demand and prices)has emerged as imminent threat. Developed economies (Govt and Central banks) have been attempting every possible option like –ve interest rates & debt to GDP raising in excess of 100%, to stimulate demand. But, it seems efforts are not paying targeted results and economies are sleeping into deflation.

If Deflation spiral will continue in 2015, developed economies would be in huge trouble as Govt and Central Banks have already used all available options( Rate cut to Zero, Quantitative Easing and Govt expanding Fiscal muscle in excess of 100% Debt to GDP). In Deflationary Spiral Asset Prices, Commodity Prices and Gross Demand of Economy precipitate to the trough. Persistent low Demand and low Prices squeezes the margins of the company and thus lay off starts. Which further aggravates the economic situation. In extreme Deflationary conditions, Banks starts defaulting and may go bankrupt as happened during 1929 Great Depression. Even Some nations with Debt to GDP more than 100% and foreign Debt forming much of the debt part can default on sovereign obligations, like Greece and Argentina recently.

Global Geopolitical situation, where one eye should be fixed of investors in 2015 as it has reached to very critical stage. Israel could be dragged into fight against ISIS and Russia can exert more pressure on bordering nations.

Indian Economy has been struggling hard to recover from last 2 years slow down. Though Stock market has been scaling all time highs, hoping fundamentals will reciprocate with the help of aggressive reforms done by the Govt at the Centre, situation on ground has not improved much. Credit demand has come down to 9.6% from as high as 21%, 3-4 years back. Partly also due to RBI’s tight monetary policy. But, lack of investment is proving to be tough bottleneck to get over. Govt is still running high fiscal deficit, private companies are leveraged( latest report shows, may take 15 months to deleverage) and Banks are running large NPAs from Infra and Capital goods sectors hence not willing to lend them.

Therefore, Investors need to fix eyes on one parameter in 2015 and that is Investments. It will require either Govt flexing Fiscal expansion again till the time Private economy readies itself or bringing Foreign Investments, which has been aggressively tried by both PM and FM. To start the Growth Engine of Indian Economy, it needs 1 to 2 lakh crore of investments initially.

Therefore,

Investor Portfolio should Have some Gold, Have reasonable Cash, Reduce Equity and Real Estate, Have some long term Govt Bonds( GILT) to align your portfolio with prevailing dynamics.

In Detail…

Global Situation

“ It is inevitable for investors, in 2015 ,to remain closely updated with Global Situation. 2015 can be another 2008, wherein India had collapsed though crisis did not origin in India. Global factors will remain main driver of year 2015, with greater focus attached to Deflation in developed economies, geopolitical tension in Gulf with Israel jumping in at some time and Russia exerting more pressure. “

It seems, Globally, 2015 is going to be very chaotic, confusing, surprising, shocking and noisy year with significant developments on Economic and Geopolitical front. Asset classes will also collide with each other then ally with each other and then depart from each other. It is so confusing and complex to predict what will happen in Global markets and economy in 2015, that Very smart investors and big hedge fund managers are adopting simple diversification strategy to preserve the Capital. And their strategy is, invest evenly(25%) in each asset class, which goes up when 1. Inflation is more than expected 2. Inflation is less than expected 3. Growth is more than expected and 4. When Growth is less than expected.

Therefore, if there is one important advise, I can suggest to investors is

“ You should not be overly invested in any one asset class, except Cash”

The main threat to Global economy in 2015 is Deflation. Let me explain the dangers attached to Deflation. We will have to go back some years to understand it.

Till 2008, almost all nations on the earth were going high. Economies were expanding, Demand was on continuous rise, Commodities were zooming to the sky, New investments were initiated in many large projects with the expectation of future price rise, all most all companies were expanding their current capacity expecting higher demand in time to come. Ever increasing Global demand was driving this expansion and borrowing.

But, in 2008, Suddenly crisis enveloped this burgeoning Global economies. People, Institutions and Companies, who had borrowed massively in past years, expecting perpetual demand rise, were unable to pay off the interest, even. Because , Demand collapsed. And, in all these boom years, they had spent whatever they earned, not leaving anything for rainy days. Saving rate of US was -7% before crisis. It means, People were deep in debt by 2008, they had borrowed much more they can afford to. They were leaving on borrowed money. Similar was the condition of Companies and Institutions, they had undertaken massive expansion, overestimating future demand.

In brief, Developed Economies had gone far ahead of realities.

Therefore, When crisis( Reality) struck in 2008, Many companies and Banks went bankrupt. Companies expansions were underutilised or unutilised and people were unable to pay off the debt. Lakhs of employees were laid off in US, Europe and other advanced economies. This collapsed Demand substantially. But, yes , People learned not to overspend and to save.

Now, Advanced Economies depend on Consumption by Citizens to the extent of 60 to 80% for economic growth. But, this demand has come down. Due to low Demand and higher Capacity to produce, it has forced companies to lower the prices. With lower prices and margins, Companies can not afford to keep large work force and thus Company reduces workforce to remain lean and competitive. This is start of Deflationary spiral, wherein low demand caused low price and it further feeds to low demand.

But, now the situation turns grim because Commodity prices fall 40 to 65%. This feeds further price fall of assets and goods. Continuous low price environment also induces Consumers to postpone the buying decision.

With continuous price fall and demand fall, it becomes difficult to sustain business and pay down the debts as Income level keeps going down in low price and low demand situation.

Commodity price fall also indicates low current and future demand.

Now, question arises, How low price and demand can fall?

Govt Bonds are the best measure of that. Govt Bond always discounts and reflects expected Inflation or Deflation in the economy. Like India’s bond yield was close to 9% in 2014 showing elevated inflation expectation, which dropped to near 8% now, indicating Inflation expectation has softened to some extent. Which is visible also in Inflation numbers.

Now, It is shocking and surprising to learn that most of the European nations bonds for 1 to 4 years are quoting negative yields! It means for next 1 to 4 years, Investors and Institutions are seeing low price-low demand scenario ( negative inflation i.e. deflation) in these nations!

Height is Switzerland, where even 10 year Govt Bond is trading at -0.008, It had gone down to -0.80!

Let me explain the effect of –ve Bond yield. Say Rs. 100 bond yield is 1% that means you will get Rs. 101 after a year. If same bond yield is -1% means you will get Rs. 99 after a year.

Now you understand, Investor are lending trillions of dollars to European nations and to Switzerland at –ve interest rates. Why? Do they love to loose money? Heck no.

They are lending at –ve yield because they know that price and demand(inflation ) is going to fall much more. It means, if bond yield is -1% then price and demand are expected to fall more than 1% in bond tenure. It means, inflation will fall to such an extent that even lending money at -1% will make them money.

In last 1 month, Inflation has fallen in almost all developed economies with almost no exception. It means, Deflationary spiral is not limited to Europe but is quickly spreading to US and other parts of the World including major Emerging nations. For example, Thailand’s latest CPI (Inflation Index) fell to -0.41% against expected 0.25%.

To stimulate Demand and to see rising inflation, Central Banks of the world have printed trillions of Dollar. Govts have also expanded fiscal limits to the extreme. But, Inflation(Demand) is still not on the horizon. Instead it(Demand or Inflation) is sinking and sinking fast. The matter of concern is, If inflation continuous to sink fast and deflationary spiral aggravates, there is limited room for counter attack.

Having printed trillions of Dollars, Euros, Yens and Yuans and Sterling, capacity to accommodate further monetary expansion is very limited. Fiscal constraints will force Govts to walk tight on Fiscal discipline else rating downgrade is feared like France downgraded recently by Fitch.

Let us see in below table the Fiscal position, Debt to GDP ratios, Unemployment rate and Current Bond yield (as on 30/01/2015) to understand the larger picture.

Country Govt Bond Yield % (10 yr) Debt to GDP Ratio % GDP Growth rate ( YoY) % Unemployment rate %
Japan 0.290 227 -1.20 3.40
Germany 0.304 76 1.20 4.80
France 0.547 92 0.40 10.40
UK 1.33 90 2.70 5.80
Spain 1.43 92 2 23.70
US 1.63 101 2.5 5.6
Italy 1.66 132 -0.5 12.90

Hence, It is easy to understand that When smart investors and big institutions of the world are lending trillions of Dollars to Japan, Germany and France at less than 0.50% for next 10 years, they are expecting negative inflation in these economies for next some years. Bond yield in the vicinity of 1 to 1.50% in rest of the developed economies also clearly suggest that Inflation will remain near 0% to –ve for a period.

And, as I have said earlier, in Deflationary spiral, highly leveraged( deep in debt) Institutions, Corporations and individuals go bankrupt as real debt becomes much difficult to pay in.

Therefore, I recommend investors to remain evenly allocated to major asset classes.

Some exposure to GOLD is must. And, some higher allocation to Cash (Treasuries – 90 days Govt Bond) is compulsory.

If you are overly allocated to Equity and Real Estate, reduce it as soon as possible.

Deflationary spiral will lead to more currency war as it is visible, started by Japan and then by Europe and now by Switzerland and China. Hence, if you are overly allocated to international assets, reduce it within your risk limits.

India

India is on better footing, now. Rupee is stable and has shown great resilience against dollar’s recent strength. Current account deficit ( Exports-Imports) is contained now at 1.7%, Commodity prices have come down significantly helping to ease inflation pressure, rapid pace of reforms by Central govt are aiding India’s prospects. Most significant positive for India is stable and majority government to expedite decision making process. Decisions taken by Modi Govt since May, 2014 have very long lasting positive effects on Indian economy, its real effect and results will be seen 3-5 years later when implementation would have completed.

But, yes we have our share of problems too. Problem is Investments. As a nation, we need huge investments in Infrastructure to jump start the economic engine. It has been said time and again that poor infrastructure is one of the major reason behind stubborn and periodical rise of Inflation. The total need to spend on Infrastructure is close to $500 bn (Rs. 30 lakh crore).Due to ill governance and opaque policy environment, close to Rs. 18 lakh crore projects are pending for approval for lat many years. This is legacy of last Govt, Which will be cleared as laws are amended and reforms take place. But, many projects, even if approved, will fail to start as Banks are not ready to finance Infra projects as they are running very high NPA from these sectors.

Therefore, we need major sources of finance. In economy, you have two major sources of investments one is Govt and Other is Private companies.

Now, Govt is running very high Fiscal deficit. With cost cutting, cutting planned expenditure and selling off some PSU stake, Govt would be barely able to reach 4.1% fiscal deficit target. And even this would have not been possible, if Crude would have stayed around $100. The Point is, Govt is in tight situation and has very limited fiscal space to expand and spend in the economy.

Private Corporation and Conglomerates of our economy are still buried under large debt. And according to recent FICCI and CII estimate, it will take 15 months to deleverage.

From Business- Standard (23-12-2014)

“ Assocham (Associated Chambers of Commerce and Industry of India) President Rana Kapoor said: “It will take another 15 months before a significant deleveraging of the private sector can happen. By March 2016, they will be back in action.”

Barring a few large conglomerates, there was high leverage in the private sector, especially in the infrastructure and core segments, he said.”

Third option is, we bring foreign investments in our key infrastructure projects like Metros, Delhi Mumbai Industrial Corridor and Smart Cities and others. Mr. PM and Mr. FM are trying hard to bring foreign investments in these projects and they have been successful also. But, it too has limits.

We are getting some indication that Govt is trying fusion option. In bold step, we may see Jaitly expanding Fiscal boundary to accommodate Infra spend and all Govt machinery try hard to bring foreign investments. This was visible at Davos,too. Make in India was marketed very aggressively there.

Interest Rate Scenario

After keeping interest rates very high for long-long period, we could contain inflation. Yes, Commodity price decline has also played its role into it. And finally, Mr. Tough/ Wall – Mr. Raghuram Rajan( RBI Governor) has cut the interest rate by 25 basis points.

Change in the stance seems to have come from slide in Crude prices. The straight landing of Crude flight from $105 to $45 should have convinced Mr. Rajan that this is structural shift in Global demand and deflation will be greater threat and that should have prompted him to cut the rates. Domestically, too, He could see the Govt taking all necessary actions to increase the productivity and to boost the supply and at the same time reining in inflationary expectations by deregulation Diesel subsidy, small or no hike in MSP, approval of projects crucial to expand the supply side and promise to achieve fiscal deficit target of 4.1%.

I firmly believe that rate cut will become aggressive and it could be 100 to 150 basis points cut in this calendar year. The assumption and that has been highlighted by RBI, too , in its Financial Stability Report that Credit Demand in India has come down significantly from 21% to 9.6%. This shows that in last few years, People of India have either postponed buying or consumption decision or their income have come down and hence Credit limits. In both situations, it is very likely that demand will go down further and that will prompt asset price correction. We are already hearing of large inventory in Real estate sector in Metros and even price correction at some places.

I firmly believe, Real Estate will see major price decline in 2015.

Therefore, I expect Demand to slow down in India, too, in 2015. To stem the economic fall, Govt’s major thrust would be on Infrastructure spending, to generate large employment opportunities and to start the growth engine.

With above assumptions,

I believe one should keep investing in Equities through Mutual Fund route(so that portfolio remains adequately diversified). I recommend to invest SIP(Systematic Investment Plan-Monthly fixed investments)way in Mutual Fund not lumpsum.

One should also have exposure to Precious metals(Gold & Silver).

One must have reasonable proportion in liquid assets( Cash Management fund, liquid fund).

One must have some investments in log term Govt Bonds(GILT), which goes up as Interest rates are cut.

I wish Wealthy and Prosperous 2015.

Thanks

Regards

Dhaval Shah

Blog: https://investmentacademy.wordpress.com/ Cell: 98255 288 a15

Office – Khushi Investments, GF-1, Shivalay Complex, Near Bank of India, Manjalpur Gam Road, Manjalpur, Vadodara.

Disclaimer: This is a free daily investment newsletter published by Investment Academy. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. Author might have open positions in the stocks and Indices recommended above.

What is leading to the Global Markets Sell Off?

Standard

What is leading to Global Sell Off?

Markets behaviour in past few days have been quite chaotic and strangling, leaving investors completely clueless.

Everything under the sun(except Dollar & Gold) have been falling off the cliff. Take any currency, it is falling ferociously against dollar and loosing value against Gold.

Take any market(Capital markets) across the world, are losing ground rapidly and falling below 200 DMAs breaching all crucial supports.

Take any commodity, except precious metals, have been falling brutally since quite some time.

This scenario raises many questions. But, before answering them let us go through one by one market to better understand its present situation and its implications on broader markets and economy.

Let me take one by one

Currency

Have a look at the graphs of all major currencies of the world.

In past 3 months, every currency has plummeted 10% to 15% against Dollar. I am not talking about Euro only. Take any currency, developed nations currencies like Euro, Sterling, Swiss Franc, Swedish Krona or say Australian Dollar, New Zealand Dollar, currencies of natural resources rich nations or say India, South Korea, Brazil, Russia, emerging nations, —-virtually every currency except Japanese Yen, have fallen off the cliff in last 3 months.

American Dollars to 1 AUD (invert,data)

120 days latest (May 21)
0.825702
lowest (May 21)
0.825702
highest (Apr 14)
0.93362
American Dollars to 1 GBP (invert,data)

120 days latest (May 21)
1.43586
lowest (May 20)
1.42689
highest (Dec 2)
1.66869
American Dollars to 1 CAD (invert,data)

120 days latest (May 21)
0.932123
lowest (Feb 5)
0.931489
highest (Apr 14)
1.00324
American Dollars to 1 EUR (invert,data)

120 days latest (May 21)
1.2497
lowest (May 19)
1.227
highest (Dec 3)
1.512
American Dollars to 1 INR (invert,data)

120 days latest (May 21)
0.0213016
lowest (May 21)
0.0213016
highest (Apr 14)
0.0226091
American Dollars to 1 NZD (invert,data)

120 days latest (May 21)
0.6699
lowest (May 20)
0.669891
highest (Jan 13)
0.741801
American Dollars to 1 JPY (invert,data)

120 days latest (May 21)
0.0111501
lowest (May 5)
0.0105364
highest (Dec 9)
0.0113679
American Dollars to 1 CHF (invert,data)

120 days latest (May 21)
0.867363
lowest (May 21)
0.867363
highest (Dec 3)
1.00245

Virtually, all currencies have been in free fall since quite some time.

And, here under is the chart of the Dollar Index.

It has moved up with healthy consolidation in between.

But, What does this indicate?

IS capital moving to safety?

Would this lead to repeat of 2008 crisis? When capital moved to safety, dollar went up, markets crashed and rest currencies imploded OR

IS it short to medium term reversal before downtrend in dollar resume?

I will answer it in short while.

Let us check other markets, which are affecting broader markets right now.

Stock Markets

Since end of April and start of May 2010, markets across the world have been in correction. Developed markets have corrected more than 12% and some are accelerating the pace of correction off late.

Emerging markets are also into severe correction, China corrected by 20% and India more than 10% in past 1 month.

Commodities

Situation is no different in commodity market either.

Oil lost more than 22% after hitting high of $87 in start of March. Now, trading around $67.

Copper fell 21% after hitting high of $368 in mid of May.

Aluminium lost more than 35% in 3 short months. It has been a free fall from the high of $140 in Jan, 2010 to $85 recently.

Agriculture commodities have not been pared either.

Reuters/Jefferies CRB Index is down 18% from high, it formed in Jan, 2010.

That’s the present scenario. Except Dollar and Gold, rest all, currencies, stocks and commodities, falling ferociously.

What are the primary concerns in broad market responsible for such a huge sell off across the markets?

Remember, end of the day what matters to market is free flow of money i.e. LIQUIDITY.

We have seen markets going up in weak economies if growth in money supply was not interrupted and velocity of money was less affected.

But, since quite some time growth in money supply has slowed and velocity standstill.

Since, Greece debacle, we have been constantly hearing about Austerity measures, reduction in Fiscal Deficits and wage cuts and freezing pension payouts for 2-3 years across the European nations.

Let’s go through some major headlines

European countries vow to investors, we will cut deficits to rein in debt. Do not smash our beloved Euro.

““Italy Adopts $30 Billion of Cuts in EU Deficit Push””

Bloomberg, May 26

““The new Conservative-Liberal Democrat government in the U.K., which isn’t part of the euro, pledged this week to cut spending by the equivalent of $8.6 billion this year as it seeks to rein in a deficit of 11.1 percent of GDP. ””

Bloomberg, May 26

But, situation is squarely against these measures as unemployment hitting new highs

““Euro unemployment rate hits record 10.1 per cent: EU –ET Jun 1

BRUSSELS: The unemployment rate across the 16 countries that share the euro hit a record 10.1 per cent in April, with almost 16 million people out of work, the European Union said on Tuesday. ””

It also raises concerns of major slowdown, more severe than 2008, if Govts stops spending when private spending is still mired in to recession

““Luxury air travel: Out of the blue, into the red – ET Jun 4

NEW YORK: The economic downturn has clipped the wings of luxury air travel. Hi-end boutique airlines have fallen from the sky, business travelers

are bargain hunting online and most folks seated in the front of the plane have
"Luxury air travel has essentially been grounded," said Peter Yesawich, CEO of the travel marketing company Ypartnership, "One of the first prerequisites to go in a tough economy." Yesawich, whose company tracks travel trends, said that with the exception of long hauls, these days even most folks in first class are flying on upgrades. "It’s said that real profit in any flight is front of plane. The rest covers the overhead," he explained.
””

And, finally, hyped austerity measures are not politically acceptable as it costs election to party

””Sarkozy Grapples With ‘Politically Unacceptable’ Cuts

Bloomberg, May 20

Sarkozy has said he will cut France’s deficit to 3 percent of economic output in 2013 from 8 percent now. His reliance on a spending freeze, economic growth and a pension overhaul will get him only partway there, according to Samuel-Frederic Serviere, a researcher at Ifrap, a Paris-based group that monitors government spending””

Towards Conclusion

That means, after dolling out stimulus in 2008-09 and after taking private debt(mostly bank’s debt) on Govt Balance sheet, Debt of major developed nations have grown to 100% to 200% in past 1 year.

And, mind well, this 200% does not include unfunded liabilities(like Medicare, Medicaid, social security and Pension liabilities), if that is included Debt stretches past to 400-500% for all major developed nations to their GDPs.

Such an enormous debt to GDP raised concerns among Investors on Govts repaying ability. And, rightly, it is patently unpayable debt by any measure.

Had it been good time for the economy, Investor would have taken a chance. As economy improves, tax revenue increases, Govt will pay out the debt.

But, this is recessionary period. Govts revenue falling off the cliff. Govts have spent gargantuan sums on bailing out too big to fail and again spent huge sums to uplift the economy.

And, now Govts are curtailing expenditures, reducing or withdrawing stimulus partial in some cases and full in other to calm investors and that results in lower income for consumers, less incentive for corporate, less credit to institutions and it results in to less growth or negative growth of the Economy.

These concerns are driving all markets, currency, stock and Commodity, down.

But, then, where these huge sums of bailout, stimulus and tax cut benefits(stimulus money) are lying?

In giant coffers of the banks!!!!!

Yes, you read it right. The huge sums, central banks doled out to banks with anticipation that in turn banks would lend to consumers and economy would return to normalcy, did not make to 1st step even.

Recent news in Bloomberg confirms

““Banks’ Overnight Deposits With ECB Increase to Record,

Bloomberg, June 3

Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days. ””

But, why banks are not lending to each other too?

“The banking crisis is back,” said Norbert Aul, an interest-rate strategist at Commerzbank AG in London. “The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it’s deemed safer to park cash with the ECB rather than lend it on.”

Even after 2 years of crisis, there is hardly any clarity on derivatives bets, banks and institutions bet on interest rates and details of Credit default Swaps, which spooked market and froze the credit markets completely in 2008.

Banks do not know, how vulnerable other banks and institutions are if 2008 episode is to repeat. And do not forget the cause of crisis of 2008, it was housing crisis due to sub prime loans doled out by banks at teaser rates.

Banks know well that neither unemployment nor growth is to return in short term. This would surely result in more foreclosures and default. To prevent the capital erosion banks need to make more provisions against probable losses to save its balance sheet and more to save its stock from the agony of hedge funds and money managers.

Apart from that, Crisis has devastated free capitalism structure wherein banks could innovate, structure and sell products as they wished. Now, they will require more capital to put aside before lending to safeguard health of the bank and less leverage to reduce speculation under higher regulatory supervisions as envisaged by Central Bankers and G20 Finance Ministers.

And, you know well, US, UK and European Union nations run on credit. Their institutions, Banks, Govt and consumers—all are deeply addicted to debt.

It(Credit) is like main artery of Economic body of these nations. And, now flow of blood has reduced causing many parts to disfunctionality.

If banks are not lending then stress must be visible in credit markets!!! Borrowing must get costlier and bond sales must fall!!!!

Is strain visible in money market?

Yes, it is visible on front screen.

Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show.

May remained the worst month in a decade for corporate bond sales.

Let me take you through recent credit market news first

““Libor Shows Strain, Sales Dwindle, Spreads Soar: Credit Markets

Bloomberg, May 24, 2010

Corporate bond sales are poised for their worst month in a decade, while relative yields are rising the most since Lehman Brothers Holdings Inc.’s collapse, as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.

Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly increase since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.””

““Bond Sales Fall to Least in Decade, Yields Soar: Credit Markets

Bloomberg, May 27, 2010

Companies sold the least amount of bonds in a decade this month as concern Europe’s sovereign debt crisis will slow the global economy drove up relative borrowing costs by the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse.

Borrowers issued $61.1 billion of debt in currencies from dollars to yen, a third of April’s tally and the least since December 2000, according to data compiled by Bloomberg. At least 13 companies withdrew offerings, including New York-based retailer Jones Apparel Group Inc. and theater chain operator Regal Entertainment Group.””

So, Liquidity situation is though comfortable with banks but banks are unwilling to pass on liquidity.

And, without liquidity markets do not function on upside.

Hence, Markets are looking for some actions from authorities to ease liquidity condition. But, it is not a cake walk for them now as it used to be before crisis.

More debt issuance will lead to higher borrowing cost for today and higher roll over cost of debt in coming future.

That leads to confusion and uncertainty in the market.

Will Govts across the world roll back stimulus packages, curtail fiscal deficits and hike interest rates?

If yes, markets will continue to slide. This recent slide has started on the back of such news only, from European nations first and later followed by fiscal cut news from England.

Will Govts resort to printing more?

If yes than Markets will welcome it with rally as it welcomed in 2009 March.

But, it would not be as easy as it was in 2009 to participate and profit from it.

Increased volatility suggests rough weather to prevail in market for extended period with periodical tornadoes on up and down sides.

Regards,
Dhaval Shah
Investment Academy
Blog: https://investmentacademy.wordpress.com/
E-mail: investmentacademy, academyofinvestment

Alert!! Imminent decline in Market with rally in Dollar

Standard

Dear Investor

I have been watching dollar’s watrfall since last 6 months and i expect Dollar to loose further 50% value against precious metals and some strong emerging economies.

But, last friday, dollar closed full 100 basis points up with major decline in Gold. I suspect, this is a time i had ben expecting since last 1-1.5 month wherein Dolllar will go up by 10-15% and against that Equity markets, bullions, commodities and Metals would correct mostly by similar percentages.

ON Friday, Dollar index closed 100 basis points up, Yen registered biggest weeekly decline of decade after rising to 14 years high against dollar, Gold corrected sharply and almost all equity markets made some weak chart patterns during last week, you can call them topping patterns. This seems perfect situation for Dollar’s down rally to halt and reverse for some time and same for Gold and Equity markets in opposite direction.

Do not get confused here, what i am expecting here is a short term pause or rally in dollar. My outlook that dollar will loose as much as 50% value in next few years has not changed by 1 iota. But, there is no market where you have only one sided movement hence consider this as an opportunity to add Gold and probably Equity,too, on decline..

I expect Gold to correct upto $1100 at least. Under severe pressure may correct upto 1080. Largely Gold should not breach support of $1035 in this mid term correction.

Sensex may also correct 10% at least and 22 % max. Sensex has many supports downside but surely market at this level is not cheap for long term buying.

India’s fiscal situaiton has also deteriorated further. From targeted Fiscal deficit of 6% in budget, it has slipped to 7.9% and revenue collection is expected to be 6% lower.
Adding Fiscal and revenue deficits togather, India’s deficit is around 13.9%, which puts Govt under pressure to withdraw some % of stimulus.

Hence, if you are holding Banking, Auto and Pharma stocks, exit from short term perspective since they are on year high level. Markets will correct from here.
Markets will take a fresh look at currency, Govt and Companies debt situation and leverage before breaking on upside.

Regards
Dhaval

The G20′s secret debt solution

Standard

November 25, 2008 12:08 PM

Dear Investor

Those earn or profit from the events, who are ahead of the curve. In continuation of those best efforts, brining an opinion on New Monetary System.

This is precisely what G20 might have decided behind the scenes.

Look, if the said system gets nod of the G20, will ruin the depositors and will prove beneficial to debtors especially mortgagors.

This is an opinion and world has started debating. But as author of letter suggest, there are fewer options left with policy makers and unless any historical and unprecedented changes are brought in to rein in the crisis, it will have very severe and destructive effects on world economy.

With Courtesy from Money and Markets

The G-20’s Secret Debt Solution

11-13-08

If you think this weekend’s G-20 meetings in Washington are only about designing short-term fixes to the financial system and regulatory reforms for banks, hedge funds, brokers, mortgage companies and investment banks … think again.

Behind the scenes, a far more fundamental fix is being discussed — the possible revaluation of gold and the birth of an entirely new monetary system.

I’ve been studying this issue in great depth, all my life. And given the speed at which the financial crisis is unfolding, I would be very surprised if what I’m about to tell you now is not on the G-20 table this weekend.

Furthermore, I believe the end result will make my $2,270 price target for gold look conservative, to say the least. You’ll see why in a minute.

First, the G-20’s motive for a new monetary system: It’s driven by and based upon this very simple proposition …

“If we can’t print money fast enough to fend off another deflationary Great Depression, then let’s change the value of the money.”

I call it …

The G-20 may propose devaluing all currencies, including the U.S. dollar and the euro.

“The G-20’s Secret Debt Solution”

It would be a strategy designed to ease the burden of ALL debts — by simultaneously devaluing ALL currencies … and re-inflating ALL asset prices.

That’s what central banks and governments around the world are going to start talking about this weekend — a new financial order that includes new monetary units that helps to wipe clean the world’s debt ledgers.

It won’t be an easy deal to broker, since the U.S. is the world’s largest debtor. But remember: Debts are now going bad all over the world. So everyone would benefit.

Fed Chairman Ben Bernanke … Treasury Secretary Paulson … President Bush … President-elect Obama … former Fed Chairman Paul Volcker … Warren Buffett … and central bankers and politicians all over the world agree a new monetary system is needed.

So they’ll start hashing out the details to get the new financial architecture deployed as quickly as possible.

If you think I’m crazy or propagating some kind of conspiracy theory, then consider the historical precedent …

To end the Great Depression in 1933 Franklin Roosevelt devalued the dollar via Executive Order #6102, confiscating gold and raising its price 69.3%, effectively kick starting asset reflation.

Only this time, it won’t be just the U.S. that devalues its currency. The world is too interconnected. Instead, the world’s leading countries will propose a simultaneous and universal currency devaluation.

More On the New Monetary System …

11-20-08

Not surprisingly, my column last week about a new monetary system based on an upward revaluation of the price of gold set off quite a buzz all over the world. It was picked up by CBS MarketWatch, The Financial Times, dozens of blogs, and more.

Some Think I’m Crazy,
That I’ve Lost My Mind.
No Problem.

They can think and say whatever they want. I have thick skin.

Moreover, I have history on my side — Franklin Roosevelt’s 1933 confiscation and revaluation of gold and subsequent devaluation of the dollar.

I also have company in my camp: Take a look at Fed Chairman Ben Bernanke’s comments on the subject …

By an Executive Order on April 5, 1933, President Franklin Roosevelt confiscated all gold, which led to a devaluation of the U.S. dollar.

” … it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly … the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

Also consider George Soros’ recent proposal for a new monetary system involving the Special Drawing Rights, or SDRs, at the IMF: Currencies would be devalued … then repegged to each other and to SDRs … and then SDRs would be circulated as an international currency.

For Soros’ proposal to work, though, it’s my opinion that gold would have to play some sort of role.

Given the importance of all this and the high probability that some tinkering by the G-20 is already in the works, I’d like to elaborate a bit more on the subject, and then answer some questions I’ve received.

But first, let me cover the main points of my previous column …

Point #1: It’s simple: If current efforts to prevent a debt-deflationary spiral and depression won’t be effective, central banks and governments around the world have the ability to change the rules of the game.

Or as I put it in last week’s column, “if they can’t print money fast enough, they can resort to changing the value of the money (devaluing).”

History is squarely on my side here. I’ve already explained to you how Roosevelt did it. But now take a look at other historical precedents in the table I have for you today.

It proves, unequivocally, that devaluations work, and that devaluations can occur simultaneously across countries.

How the Gold Standard and Currency Devaluations Affected Different Countries During the Great Depression
Country Left Gold Standard (MM/YY) Devalued Currency (MM/YY) Industrial Production Bottomed
Australia 12/29 3/30 1930
New Zealand 9/31 4/30 1930
Austria 4/33 9/31 1931
Finland 10/31 10/31 1931
Japan 12/31 12/31 1931
Norway 9/31 9/31 1931
UK 9/31 9/31 1931
Sweden 9/31 9/31 1932
Canada 10/31 9/31 1932
Denmark 9/31 9/31 1932
Greece 4/32 4/32 1932
U.S. 3/33 4/33 1932
France 10/36 1935
Netherlands 10/36 1935
Czech 2/34 1935
Poland 10/36 1935
Belgium 3/35 1936
Italy 10/36 1936

Note the 12 countries that either came completely off the gold standard or devalued their currencies by 1933 (via raising the price of gold): All of them came out of the Depression almost immediately.

Australia and New Zealand came out of the slump first, barely one year after the Depression started.

The U.S. came out of the Depression much later, largely because it stubbornly defended the gold standard by keeping and even raising interest rates during the Depression (to prevent loss of gold reserves).

Meanwhile, of the five countries that unbendingly clung to the gold standard, refusing to devalue their currencies until much later, as late as 1936 — they all stayed in the Great Depression much longer, an average of 2.33 years longer.

Point #2: For multiple currencies to be simultaneously devalued to help reflate assets, a benchmark must become part of the system.

As you can also see from my table, several countries revalued or left the gold standard simultaneously, devaluing their currencies. That was only possible because there was a benchmark at the heart of the system back then gold.

To do the same today, some stable benchmark would have to be reintroduced into the system, even if only temporarily to help make the transition.

There are several choices and proposals out there, including the SDRs at the IMF, and the World Currency Unit (WCU) proposed by Lok-sang Ho, Professor of Economics and Director of the Centre for Public Policy Studies, Lingnan University .

Both proposals have their advantages. But they also have inherent disadvantages: The value of the SDRs already in existence fluctuates daily. So they would have to repeg SDRs to a third party benchmark (likely gold).

The WCU uses a nation’s GDP to value and allocate money supply. But that gives international businesses and investors an advantage over domestic investors due to Purchasing Power Parity (PPP) quirks.

My view: Ironically, after years of panning it, leasing it, loaning it out, and even selling it — gold will have to play some sort of role in the new monetary system (although as I noted last week, it need not be confiscated).

Right now, gold is extremely undervalued, and something you want to own. Period.

Point #3: Gold, whether it’s directly or indirectly part of a new monetary system or not — is extremely undervalued.

At its current price of about $735, in today’s dollars gold is 67% cheaper than it was in 1980. For gold to reach its 1980 high in today’s dollars, it would have to trade at $2,270 an ounce..

And as I pointed out last week, if there’s even the slightest role for gold in a new monetary system, it can trade even higher — I figure as high as $5,100 an ounce, which would be the equivalent of monetizing about 10% of the massive $53 trillion of debts in the U.S.

But don’t focus on the ultimate price of gold. Instead all you need to know is that no matter how you look at it, gold is extremely undervalued and something you want to own. Period.

Now, on to some of the questions
I’ve received, and my answers …

Q: What role do you think silver will play in a new monetary system?

A: None. Silver is not a monetary metal and, contrary to wide belief, it is not in short supply.

Q: You noted that the current official central bank price of gold is $42.22 an ounce. What is the difference between that price and the market price?

A: He quoted you the current price of gold. Central banks value the gold on their balance sheets at $42.22 an ounce, at cost. In my view, they will be revaluing their gold, much higher.

Q: I think your analysis is very well reasoned, but I have a question. What happens to things like wages if there is a currency devaluation like you describe?

A: The theory is that the inflation a currency devaluation would spark would eventually cause wage inflation as well, which is precisely what happened post the 1934 dollar devaluation.

Q: So that I understand properly, what actually happens when currency is devalued?

A: Since each unit of new currency is worth less, it takes more units to buy an asset. It causes an asset reflation to occur and also eases debt burdens.

Q: How do you see gold stocks responding?

A: To the moon!

Q: Would gold and gold miner based ETFs move in concert with the rise in gold?

A: Yes, though there may not be a 100% correlation. I would also expect gold and gold mining shares to move up sharply ahead of the news, in anticipation of a revaluation.

Q: Larry, I believe you were the first and only one who years ago predicted correctly that central bankers and governments worldwide will be racing to devalue their currencies against each other.

My query is, what is the best time to get aggressive with gold and gold shares? In the Great Depression, it was after the crash into the 1932 low.

A: Simple. Don’t try to time it exactly. Gold now!

Q: I come from Israel where the money was devalued endlessly since more than 50 years ago. Savers lost their shirts — the value of their savings was reduced.

Those who owed money (mostly on mortgages) made a fortune because they owed the same number of devalued currency units. Are you suggesting that something similar is about to happen?

A: Exactly. Only this time, a huge portion of the world will participate and, instead of doing it over and over again, a very large devaluation will occur in one fell swoop.

Q: Could this end up causing hyperinflation?

A: Yes, it could. But if done properly, hyperinflation could be avoided — largely by going back to a fixed rate currency regime or via the introduction of an international payments currency, such as the IMF’s SDRs, as George Soros is proposing.

Q: When and how long do you think it will take to implement? It apparently did not come up at last weekend’s G-20 meeting.

A: I am sure it’s already been discussed. If the global economy and deflation worsen by the next G-20 meeting in April, I suspect the discussions on a new monetary system will be accelerated.

I estimate it would take a year to transition to it.

Q: But Larry, gold is looking weak right now. What gives?

A: Don’t focus on short-term moves, in any market. Keep the long term in view. I suggest holding all of your gold, even if it falls back to $636, which is a major long-term support level.

If that were to give way, it would mean deflation is dragging on a bit longer, and we could even see $500 gold. But even then, I would be a buyer with both hands.

For core gold holdings, keep in mind that the upside potential of the precious yellow metal is at least $2,270 … and probably higher, to over $5,000 an ounce.

Hence, even if gold were to fall back to $500 first, your risk based on gold’s current price is about $235 — compared to upside potential that ranges from $2,235 to over $4,200 per ounce.

That’s a favorable risk-to-reward ratio — of as much as $17 for every $1 you risk.

Q: What is your take on the huge disconnect between the exchange-traded or paper price for gold and the drastically higher price (if you can even find any) for physical gold?

A: There is always a premium for physical gold over the spot futures price of gold. It includes the cost of fabrication into ingots, bars, or bullion coins.

In a bull market, the premium rises as dealers try to lift the markups and their profit margins.

Nevertheless, it is important to note that the physical gold market is getting very tight, with supplies dwindling and even the U.S.. Treasury suspending sales of American Eagles.

In my view, that’s consistent with how I see events unfolding. As I noted previously, central banks and treasury departments will stop lending and leasing out gold, then stop selling it … and in the next stage, start buying.

Best Luck

Larry

Regards,

Dhaval Shah

Investment Academy | Baroda | 09825528815

What Next? — The Worst is not behind us.

Standard

November 18, 2008 5:09 PM

Dear Investor,

What Next? We are trying to answer this question everyday. But let me tell you, the structure of financial markets including all debt financing and equity markets, was so complex that it is still difficult for people to understand and estimate the losses.

It has so many inter and intra connected channels, it appears like a maze. Nevertheless, we have to understand it for our safety and better future.

What Next? Could stimulus packages uplift the financial system? Could lowered interest rates ignite the lending and borrowing? Could various stimulus packages declared around the world show any material difference in the financial health of the banks and institutions?

If not than where are we heading towards from now? What is stored in future?

Let us understand it from Mr. Roubini, who was one of the few economist, who could rightly predict the crisis in mid 2007, also could brief the US congress on How this crisis will escalate and its effects in Feb and March ‘08? He has been proved right all the time in last 1 year on all of his forecasts and logical explanations.

The picture, he has portrayed of world economics is really frightening.

The Worst Is Not Behind Us

Nouriel Roubini, 11.13.08, 12:01 AM EST

Beware of those who say we’ve hit the bottom.

It is useful, at this juncture, to stand back and survey the economic landscape–both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:

–The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

–The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.

–Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.

–The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada , Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth–at market prices–to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

–The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies’ inflation rates to become below 1% by 2009.

–Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.

Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies even if the European Central Bank cuts too little too late. But monetary policy easing will be scarcely effective, as it will be pushing on a string, given the glut of global aggregate supply relative to demand–and given a very severe credit crunch.

·

–For 2009, the consensus estimates for earnings are delusional: Current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009, up 15% from 2008. Such estimates are outright silly. If EPS falls–as is most likely–to a level of $60, then with a price-to-earnings (P/E) ratio of 12, the S&P 500 index could fall to 720 (i.e. about 20% below current levels).

If the P/E falls to 10–as is possible in a severe recession–the S&P could be down to 600, or 35% below current levels.

And in a very severe recession, one cannot exclude that EPS could fall as low as $50 in 2009, dragging the S&P 500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%).

Similar arguments can be made for global equities: A severe global recession implies further downside risks to global equities in the order of 20% to 30%.Thus, the recent rally in U.S. and global equities was only a bear-market sucker’s rally that is already fizzling out–buried under a mountain of worse-than-expected macro, earnings and financial news.

–Credit losses will be well above $1 trillion and closer to $2 trillion, as such losses will spread from subprime to near-prime and prime mortgages and home equity loans (and the related securitized products); to commercial real estate, to credit cards, auto loans and student loans; to leveraged loans and LBOs, to muni bonds, corporate bonds, industrial and commercial loans and credit default swaps. These credit losses will lead to a severe credit crunch, absent a rapid and aggressive recapitalization of financial institutions.

–Almost all of the $700 billion in the TARP program will be used to recapitalize U.S. financial institutions (banks, broker dealers, insurance companies, finance companies) as rising credit losses (close to $2 trillion) will imply that the initial $250 billion allocated to recap these institutions will not be enough. Sooner rather than later, a TARP-2 will become necessary, as the recapitalization needs of U.S. financial institutions will likely be well above $1 trillion.

–Current spreads on speculative-grade bonds may widen further as a tsunami of defaults will hit the corporate sector; investment-grade bond spreads have widened excessively relative to financial fundamentals, but further spread-widening is possible, driven by market dynamics, deleveraging and the fact that many AAA-rated firms (say, GE) are not really AAA, and should be downgraded by the rating agencies.

–Expect a U.S. fiscal deficit of almost $1 trillion in 2009 and 2010. The outlook for the U.S. current account deficit is mixed: The recession, a rise in private savings and a fall in investment, and a further fall in commodity prices will tend to shrink it, but a stronger dollar, global demand weakness and a larger U.S. fiscal deficit will tend to worsen it. On net, we will observe still-large U.S. twin fiscal and current account deficits–and less willingness and ability in the rest of the world to finance it unless the interest rate on such debt rises.

–In this economic and financial environment, it is wise to stay away from most risky assets for the next 12 months: There are downside risks to U.S. and global equities; credit spreads–especially for the speculative grade–may widen further; commodity prices will fall another 20% from current levels; gold will also fall as deflation sets in; the U.S. dollar may weaken further in the next six to 12 months as the factors behind the recent rally weather off, while medium-term bearish fundamentals for the dollar set in again; government bond yields in the U.S. and advanced economies may fall further as recession and deflation emerge but, over time, the surge in fiscal deficits in the U.S. and globally will reduce the supply of global savings and lead to higher long-term interest rates unless the fall in global real investment outpaces the fall in global savings.

Expect further downside risks to emerging-markets assets (in particular, equities and local and foreign currency debt), especially in economies with significant macro, policy and financial vulnerabilities. Cash and cash-like instruments (short-term dated government bonds and inflation-indexed bonds that do well both in inflation and deflation times) will dominate most risky assets.

So, serious risks and vulnerabilities remain, and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will, over the next few months, overshadow the positive news (G-7 policies to avoid a systemic meltdown, and other policies that–in due time–may reduce interbank spreads and credit spreads).

Beware, therefore, of those who tell you that we have reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March; after the announcement of the possible bailout of Fannie and Freddie in July; after the actual bailout of Fannie and Freddie in September; after the bailout of AIG (nyse: AIGnews people ) in mid-September; after the TARP legislation was presented; and after the latest G-7 and E.U. action.

In each case, the optimists argued that the latest crisis and rescue policy response was the cathartic event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis–as I have consistently predicted over the last year–became worse and worse. So enough of the excessive optimism that has been proved wrong at least six times in the last eight months alone.

A reality check is needed to assess risks–and to take appropriate action. And reality tells us that we barely avoided, only a week ago, a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic, and more appropriate; that it will take a long while for interbank and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks, instead of being the lenders of last resort, will be, for now, the lenders of first and only resort; that even if we avoid a meltdown, we will experience a severe U.S., advanced economy and, most likely, global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets.

I’ll stop now.

Roubini,

Regards,

Dhaval Shah

Investment Academy| Baroda | 09825528815

Why US can not prevent depression???

Standard

November 12, 2008 2:32 PM

Dear Smart Investor

I have been sending updates to you since fall out started.

I have explained even factors contributing this collapse and also about unique, peculiar crisis of this time.

I restate that we are far far from crisis getting over.

Some expert’s opinions conclude that world markets may fall 20 -25 % more from this level. I am waiting for the confirmation of the move.

But at the same time, we need to understand that “Stock market bottoms out before real economy”.

For now, to understand why depression is inevitable and why will it lead to more failures?

Let us learn few factors, major contributors of the crisis.

With Courtesy from Money and Markets

Why Washington Cannot Prevent Depression

11-10-08

Fear of depression is sweeping the nation.

Millions of Americans are consumed with anxiety, abandoning their old shop-till-they-drop habits, slashing their spending, trying desperately to pinch pennies for the coming hard times.

Thousands of bankers are snapping shut their coffers, tightening their lending standards, hunkering down in anticipation of a massive economic downturn.

Sophisticated investors also see the handwriting on the wall. They’re pulling out of hedge funds, selling their mutual funds, rushing their money to the safety of Treasury bills.

Even the established media, often late to see the dangers, is beginning to speak out more loudly …

CNN Money: “The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5% or so for that period. Since that makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4% rate in the fourth quarter.”

New York Times: “As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan ’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s.”

The Wall Street Journal, USA Today, and hundreds of other newspapers around the world are all asking essentially the same question: Are we sinking into a depression? How bad will it be?

The answer, they say with unanimity, lies with Washington . That’s why General Motors has suddenly switched PR tactics, now admitting it will run out of the cash it needs to stay in business. It wants a Washington handout.

That’s why dozens of major cities and states are saying the same thing. They want their share of the federal money too.

In this Washington-worship environment, you may even see Wall Street brokers drop their traditional embellishment of the news and begin stressing the negative — all for the sake of pressing the case for “bigger and better” federal bailouts.

The dire reality: Washington is not God. It cannot save the world. It cannot prevent the next depression.

Hard to believe? Here’s the proof:

Proof #1
The Debt Crisis, the Primary Catalyst
of the Economy’s Decline, Is Far Too Big
for the U.S. Government to Control

The facts:

1.. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.

2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.

3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion!

In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion — a huge, unwieldy amount, but still minuscule in comparison to the massive debt build-up.

Debts: Too Big For Government to Control!

The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).

Still, most people insist,

“If only Washington can avoid the mistakes it made in the 1930s … if only Washington can preemptively nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”

What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how …

Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.

Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.

Clearly the government bailouts are too little, too late to end this crisis. At the same time …

Proof #2
The Cost of the Bailouts Is Too Much,
Too Soon for Those Who Must Finance It

With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do it by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money.

And now it has started: Just last week, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.

Also last week, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That’s four times the size of the entire deficit.

This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.

Proof #3
You Can Bring a Horse to Water
But You Cannot Make It Drink.

My father told me this story about President Herbert Hoover shortly after the Crash of ‘29 …

Hoover was worried about the sinking U.S. economy. So he called the leaders of major U.S. corporations down to Washington — auto executives from Detroit , steel executives from Pittsburgh , banking executives from New York .

And he said:

“Gentlemen, when you go back home to your factories and your offices, here’s what I want you to do. I want you to keep all your workers. Don’t lay any off! I want you to keep your factories going. Don’t shut any down! I want you to invest more, spend more, even borrow more if you have to. Just don’t do any cutting. So we can keep this economy going.”

Instead, the executives went back to their factories and offices and said to their associates:

“If the president himself had to call us down to Washington to lecture us on how to run our business, then this economy must be in even worse shape than we thought it was.”

They promptly proceeded to do precisely the opposite of what Hoover had asked: They laid off workers by the thousands. They shut down factories. They slashed spending to the bone.

And today, we’re beginning to see precisely the same phenomenon:

Washington is prodding consumers to borrow more, spend more, and save less. But consumers are doing precisely the opposite, as we just saw from the October collapse in retail sales.

Washington is prodding bankers to dish out more mortgage money, give people continuing access to credit cards, even lend money to sinking businesses. But the bankers are also doing precisely the opposite, as we just saw in a recent Fed’s survey of bank loan officers.

Why the reluctance to borrow and lend? Because most borrowers and lenders are finally beginning to recognize what really went wrong in the United States : Too much debt, not enough savings. They also recognize what they have to do about it: Try to cut back.

In response, Washington bureaucrats are rushing out, waving their arms frantically in the air, and shouting: “No! Don’t do that! We want you to lend and borrow more — so we can keep this economy going.”

But their pleas fall on deaf ears: No matter what the government says, it is the natural survival instinct of billions of people and businesses around the world that will determine the outcome: Depression and deflation.

Proof #4
Powerful Vicious Cycles
of Debts and Deflation

You ask: We’ve had these debts for many years, haven’t we? So why are they suddenly such a huge disaster now?

The answer: Yes, debt alone is usually tolerable. It can persist and pile up for years. And as long as borrowers have the income — or as long as they can borrow from Peter to pay Paul — they can continue making payments, and life goes on.

Deflation alone is also not so bad. It can help make homes more affordable, a college education more achievable, a tank of gas easier to fill.

It’s when debts and deflation come together that a depression is inevitable. That’s what happened in the 1930s; and, in a somewhat different way, that’s what’s happening today.

We are witnessing powerful vicious cycles in which deflation brings down debts and debts help accelerate the deflation.

For example …

  • In the U.S. housing market, widespread mortgage delinquencies and foreclosures precipitate massive selling of real estate; massive real estate selling causes severe price declines; and the price declines, in turn, cause more delinquencies and foreclosures.
  • On Wall Street, corporate bankruptcies — and the fear of more to come — precipitate the liquidation of common stocks, corporate bonds and virtually every kind of asset; the selling drives markets lower; and falling markets, in turn, cause more corporate bankruptcies.
  • Consumers, small and medium-sized businesses, city and state governments, hospitals and schools, even entire countries are caught up in a similar downward spiral; slashing their spending, laying off workers, dumping assets, losing revenues, and slashing their spending still more.

In every sector of the economy and every corner of the globe, debt defaults are causing deflation; and deflation is causing debt defaults. No government can stop this powerful vicious cycle. It has to play itself out.

Next, you ask: Why can’t the U.S. government simply create more inflation? Why can’t it do what the government of Germany did after World War I? Or what the government of Zimbabwe is doing right now? In other words, why can’t it just print all the money it needs to buy up all the debts?

That takes me to the fifth and final reason the government cannot end the debt crisis, cannot stop the vicious cycle of debt default and deflation, cannot prevent a depression.

Proof #5
The Ultimate Power of Markets

Let’s say I am Uncle Sam; I represent the U.S. government. And let’s say you represent the investors of the world, especially investors in U.S. government bonds.

I issue the bonds to borrow money. You buy the bonds to loan me money, to finance the U.S. government.

Now let me ask one fundamental question: Who is really in control of this situation? You or me?

The answer is obvious: I do not control you. I cannot tell you what to buy or how much. You are the one in control of that decision.

You have great power — power that the creditors of Germany did not have after World War I and the creditors of Zimbabwe do not have today. You have the power of the market — a market for the government securities you own.

In fact, in order to run my government, I cannot even dream of raising the money I need without you or without that market.

I need you. I need you to hold the U.S. bonds you’ve already bought. Plus, I need you to buy more new bonds to finance all my new spending and deficits. You are my lender, my creditor, my benefactor. I must keep you happy. I cannot afford to do anything that will make you angry.

In fact, by allowing the evolution of this vast market for government securities, I have effectively transferred the ultimate power to make final, critical decisions from me — the government — to you, the investors in government securities. And …

The power of the market is stronger than any politician or government bureaucrat. It is more powerful than any law. It is even more powerful than the gold standard.

In order to raise money for the government, I must retain your confidence, your trust. To do that, I cannot run the printing presses or destroy your money. Instead, I have to let the deflation and depression run its course.

Bottom line: It’s preposterous to believe that Washington can save every failing individual, company, country and government on this planet.

It’s naive to believe that government gimmicks or trick — manipulating the currency, writing new laws, changing the banking structure — will be a match for billions of consumers in revolt, millions of investors desperate to sell and thousands of banks pulling in their horns.

The government cannot repeal the law of gravity or stop investors from dumping their assets.

It cannot turn back the clock or reverse decades of financial sins.

It cannot win the battle against depression.

It cannot stop the Dow or S&P from losing half their value from current levels, if not more.

It cannot stop the collapse in real estate, commodities, and corporate bonds.

So act promptly now to liquidate or hedge your holdings, build cash and make sure the cash is safe.

Good luck and God bless!

Martin

Regards,

Dhaval Shah

Investment Academy | Baroda | 09825528815

The Coming Insurance Meltdown

Standard

November 04, 2008 4:26 PM

Dear Investor

Market is rising amidst all bad news proving it a tad bear market rally.

Be prepared, for next wave of meltdown..

Read on:

The Coming Insurance Meltdown

You’ve seen hundreds of subprime lenders bite the dust, with New Century Financial and Countrywide leading the way …

You’ve seen giant banks like Washington Mutual and Wachovia suffer a similar fate.

You’ve watched in horror as major investment banks like Bear Stearns, Lehman Brothers and even the giant Merrill Lynch were bailed out, bought out or simply wiped out.

Perhaps most shocking of all, you’ve seen the abject failure of the two biggest, supposedly “safest and soundest” mortgage companies on Earth — Fannie Mae and Freddie Mac.

Each time news broke on these shocking failures, stock markets crashed — not just here in the U.S. , but around the world. Investors lost trillions of dollars.. Entire countries took another step closer to the edge of the abyss.

Strangely, however, the crisis that’s in one of the most critical financial industries of all has been barely noticed at all.

Insurance!

Yes, there was a temporary news explosion after the AIG fiasco and it burst into headlines for a few days. But AIG was so promptly bailed out by the government that most investors put it out of their minds. Washington immediately declared the AIG crisis “over.” Wall Street said it was just an “anomaly.” And both insisted that “the rest of the insurance industry is doing just fine.” Not true!

How do we know? We have identified 46 insurers with $500 million or more in assets that are at an elevated risk of failure, and, earlier this month. And if the pattern of financial failures we’ve seen so far persists, size will be no obstacle.

Until now, we were virtually the only ones talking about this. But this week, we have noticed a fundamental shift in Wall Street sentiment, and yesterday, the shift began to hit the fan …

  • ING gasping for air: Shares of this global insurance giant ING have plunged nearly 80% this year. The most recent blood-letting struck after the company announced it lost a staggering 1.6 billion euros ($2 billion) on stocks, bonds, structured credit and real estate. Result: It’s grabbing 10 billion euros as part of a large Dutch government bailout package. Its CFO has resigned in disgrace. And these events raise serious questions as to how long it can survive.
  • Aegon shares smashed! With its stock also down nearly 80% in twelve months, the Dutch owner of Transamerica Corp. just announced it will post a huge third-quarter loss due to investments in Lehman Brothers, Washington Mutual and other assets. It has canceled its dividend. It, too, had to reach for a lifeline $3.8 billion from the Dutch government. And it may soon ask for more here in the U.S. if Washington lets insurers take their turn in the soup line.
  • Harford shares killed! Hartford Financial Services has lost almost 90% of its value this year — and more than half its market value yesterday alone! Why? Because it just posted a third-quarter net loss of $2.6 billion on writedowns of investments in guess who: Fannie Mae, Freddie Mac, Lehman Brothers and AIG.
  • The biggest U.S. and Bermuda-based insurers have piled up a total of $98 billion in losses — much in still unrealized losses — since the beginning of last year!

This could get a lot worse. So beware!

Here’s my view of the big picture:

First and foremost, we’re in an absolutely, crystal clear, bear market. That’s the big trend, and nothing that happened this week — or is likely to happen in the foreseeable future — is going to change that. Quite to the contrary, if anything, the insurance industry disaster that’s now in the making could help ACCELERATE that bear market decline.

Second, this week we’ve had a classic bear market rally. Some short sellers (especially in Germany ) got squeezed temporarily. The Fed tried to prop things up with a rate cut. And Wall Street cheered — a bit.

Third, the bear market rally now appears to be on its last legs. This provides an ideal entry point to stake out positions in inverse ETFs — exchange traded funds that are designed to profit in down markets. Why? Because thanks to the latest rally, they’re trading right now at bargain prices.

Fourth, as you’ve seen from the collapses all over the world, the bear market has now gone GLOBAL! And as you’ve seen from the global insurance companies I just cited, so has the insurance crisis. Result: In the next phase, some of the worst declines of all are bound to be in FOREIGN stock markets.

Until next time,

Mike

Regards,

Dhaval Shah

Investment Academy | Baroda | 09825528815

Black October — It has started. Some facts inside.

Standard

October 11, 2008 11:25 AM

Dear Investors

It seems Black October is evident all across the world. I informed all of you way before it collapsed. Hope, you have taken proper actions to save your portfolio.

I am not pessimist. Do not get me wrong. My role is to guide clients through both, bull and bear markets. My job is to read the facts and to inform the consequences thereof.

Let us read facts.

Bloomberg reports as under: (Click on link to read full news)

U.K. Treasury to Inject at Least $44 Billion to Prevent Collapse of Banks

Asian Stocks Plummet; Nikkei Drops Most Since 1987, Indonesia Halts Trade

Japan Corporate Bankrupties Jump 34%, Fastest Pace Since 2000, on Turmoil

Indonesia Exchange Halts Stock Trading After Benchmark Index Plunges 10%

Reuter reports

· Fed to Lend Directly to Corporations

Subscriber Content Read Preview

The Fed said it will bypass ailing banks and lend directly to U.S. corporations for the first time since the Great Depression, while hinting strongly at further rate cuts.

MSCI world index dips to 4 years low. Click on below link to read the details.

World stocks hit four-year low at European open

We do not hear this kind of news in normal days. These are special days with special events and special situation unfolding every day.

I am here under providing you a very critical view of expert on the markets. Read on:

With Courtesy from Money and Markets

Sinking Rapidly Into Depression

This is the crisis that will change the course of history.

Even before ivory-tower theorists have gotten around to officially calling it a “recession,” the U.S. economy is already sinking rapidly into depression.

And even as the government has vowed to embark on a $700 billion spending spree to avert financial panic, over $1 trillion in wealth has been wiped out in just five days of stock and bond market declines..

Cheap credit, the lifeblood of the U.S. economy, has nearly vanished from the scene.

Borrowing from Peter to pay Paul — the norm for decades in the consumer and corporate world — is becoming next to impossible.

Greed has been replaced by fear; euphoria, by panic; trust, by suspicion.

Everywhere, we see vicious cycles of mutual financial destruction:

  • Falling prices driving homeowners to abandon their homes … and fire sales on foreclosed homes driving prices into a steeper tailspin.
  • Strangled consumers falling behind on their credit cards … and credit card losses compelling banks to choke the available credit for consumers.
  • Wall Street panic smashing Main Street business … and Main Street business sowing the seeds for more Wall Street panic.

The probable consequences: Astronomical unemployment rates and intense hardship for millions of Americans; devastating losses for investors in almost every asset class; and, ultimately, deep depression and deflation (falling prices).

I wish that, somehow, this crisis could have been averted. But now that the bombs have been dropped, there’s not much chance we can avoid the explosions that typically follow.

The U.S. government’s giant bailout may buy some time and buffer some pain. But no matter how hard it may try, it cannot force banks to make risky loans or compel investors to buy sinking bonds. No government can repeal the law of gravity. No force can turn back the clock.

But you and I will get through this — together.

My team and I have everything we need to continue our operations in any foreseeable disaster. We will be here to guide you through thick and thin. And when it’s all over, we will be ready to start anew, hopefully on a steadier, more wholesome path.

This Is Not the End of the World;
It’s Just the End of a Crazy Era.

Our country has a cornucopia of resources and a wealth of knowledge. Even after a great fall, we will still have the elements for a great recovery.

Inevitably, this decline will deliver severe financial losses to most of those who endure it. But it can also deliver long-lasting benefits to all those who survive it.

If I’m right about the ultimate outcome, burdensome debts will be liquidated. Wild spending will be replaced with prudent saving. Unaffordable luxuries could give way to affordable bargains. And after the worst is over, thousands of new, innovative companies will burst onto the scene with clean balance sheets and a new vision.

Therefore, throughout our journey together — regardless of how dark the tunnel may appear — always remember the benefits. Relax your reactive impulses. Breathe what we trust will be a new atmosphere of collective sacrifice. Let time work its wonders.

But Don’t Expect a Recovery To Come Easily or Quickly.
The Deepest Declines of All Are Still Dead Ahead.

A recovery certainly won’t come from Washington ‘s $700 billion bailout boondoggle. It’s too little, too late to avert a debt collapse. At the same time, it’s too much, too soon for all those who will be asked to pay for it.

For the evidence, see our white paper submitted to Congress on September 25. The highlights:

  1. The FDIC’s list of problem banks includes only 117 U.S. institutions with assets of $78 billion. But the list has a fatal deficiency:
  • It did not include any of the large banks that have failed or been forced to merge this year.
  • Our list did. And that list shows there are 1,479 U.S. banks and 258 thrifts at risk of failure with total assets of $3.2 trillion, 41 times more than estimated by the FDIC. This number alone illustrates the shock and awe ahead for anyone expecting the new bailout law to bring about a real recovery.

The government seems to assume that our debt problems can be resolved by focusing on banks with financial assets gone bad. But the reality is that bad debts are everywhere:

  • At Fannie Mae, Freddie Mac, Ginnie Mae and other government agencies, $5.4 trillion in residential mortgages continue to rot.
  • Beyond residential mortgages, there are $2.6 trillion in commercial mortgages.
  • And beyond all mortgages, there are another $20.4 trillion in consumer and corporate debts — all subject to the same kind of surging delinquency rates we saw in subprime mortgages.

The government’s bailout plan is designed to help clean up debts that have gone bad so far. But what about debts that turn sour from this point forward? Do our leaders assume the economic decline is going to stop on a dime? Don’t they see that the decline is actually gaining momentum?

The bailout plan does nothing to address the $182 trillion maze of bets called derivatives. Nor does it take into consideration the fact that our nation’s three largest banks — Citibank, JPMorgan Chase and Bank of America — are exposed to far more credit risk on their derivatives than they have in capital.

In sum, even after committing $200 billion for Fannie-Freddie, $85 billion for AIG, $25 billion for the auto industry, $700 billion for the Wall Street bailout, another $150 billion tacked on to the plan for pork and tax cuts, plus hundreds of billions in emergency loans from the Fed … the government’s rescue is still too small to cope with the tens of trillions of souring debts and bets in a sinking economy.

At the same time, the government’s bailout commitments made so far — now exceeding $1.5 trillion — are already too much for those who will be asked to foot the bill or lend the money:

  • Even before these bailouts, the Office of Management and Budget (OMB) projected the 2009 federal deficit would rise to $482 billion.
  • Now, in just three weeks, the government has effectively chartered a course to triple that deficit.

In practice, the only way the government can try to raise that much money is by borrowing it. And to the degree that it does so, the only possible outcome is huge upward pressure on the interest rates that consumers, corporations and local governments have to pay for mortgages and loans. That can’t make the debt crisis go away. It can only make it many times worse.

The Day of Reckoning Is Today —
Monday, October 6, 2008

Today is the day we’ll learn whether the global financial markets will welcome the giant bailout plan with open arms … or reject it with grim disdain.

If the latest events are any indication, it will be the latter, and the markets will crash like never before. Look at what’s happened in just the past 72 hours:

First, immediately after the great bailout plan was signed by the president on Friday, the Dow plunged 474 points from peak to close. Not exactly a welcome reception!

Second, on Saturday, the previously agreed-to bailout of Germany ‘s second biggest property lender, Hypo, fell apart at the seams, sending government officials scurrying to come up with an alternative deal. But the amounts needed are huge: 20 billion euros by the end of next week, 50 billion euros by the end of the year, and as much as 100 billion euros by the end of 2009.

Third, UniCredit — the biggest bank in Italy , whose shares have been plunging lately — is trying to raise $9 billion in capital to stay afloat.

Over the weekend, even the country of Iceland has been shopping for a bailout.

Yes, stock markets can sometimes behave in perverse ways — plunging on good news, rallying on bad news and confusing the pundits on virtually any news.

But the world’s vast credit markets rarely lie. These are the markets where corporations and governments sell their bonds, notes and short-term paper to investors in exchange for cash.

These markets are far larger than the stock markets. And they are driven by traders who typically are among the first to see through the hype and fluff that pours daily out of Washington or Wall Street.

Join me for a sprint on my time machine — this time, going back just three weeks. Then follow along through each major turning point, and you’ll see what I mean …

New York City, September 15. Officials from the Federal Reserve and the Treasury Department have called together the heads of the biggest financial companies over the weekend. Their mission: To avert the inevitable meltdown that would ensue if two of Wall Street’s largest firms — Lehman Brothers and Merrill Lynch — went down.

Merrill has a buyer; Lehman doesn’t. So a Lehman bailout is on the table, following the pattern of the Bear Stearns bailout six months earlier.

But after back-to-back handouts week after week, some officials are fed up; they’re losing their appetite for more of the same. Instead of a Bear Stearns-type rescue, a vocal minority is arguing forcefully to make an example of Lehman, to let the firm fail.

“Let’s teach ’em a lesson,” they say. “Let’s send the message to complacent investors that risk in the marketplace is not dead after all..”

They assume the financial system is strong enough to withstand the shock. But they assume wrong …

September 16. It’s Monday morning. In one fell swoop, 158 years of Lehman Brothers’ history has been extinguished. Employees are saying their farewells. On 7th Avenue , dozens are carting off boxes of personal belongings.

As these images are transmitted via the Internet and the wire services to the far corners of the financial world, there’s a vague sense that something different is happening: For decades, an invisible glass shield called “trust” has protected global financial markets. But on this day, that shield has been shattered.

Suddenly, we have crossed into a new world of mistrust. Instantly, lenders have lost respect for borrowers, banks have lost confidence in fellow banks, and buyers are suspicious of nearly all sellers.

Several pivotal debt markets — already weakened by the on-again, off-again credit crunch that began over a year ago — are now plunging into a new, more acute phase of panic.

The market for commercial paper, the primary source of quick cash for thousands of corporations, is going into convulsions. A giant money market fund is “breaking the buck” — falling below $1 per share, due to huge losses in its Lehman Brothers’ commercial paper.

Libor, the international standard for interest rates that banks pay each other for short-term loans, is surging. The cost of credit default swaps, a type of insurance against big company failures, is skyrocketing.

While world credit markets are in turmoil, U.S. government officials are in shock. Their “let’s-teach-’em-a-lesson” theory is dead at birth … and in its place, and a new “Mother of All Bailouts” is in gestation.

White House Rose Garden, September 19. In 1930, even on the brink of the Great Depression, America ‘s highest officials dared not warn the public of a financial panic.

But today, appearing before the press in the Rose Garden, the nation’s three most powerful economic decision-makers — President Bush, Treasury Secretary Paulson and Fed Chairman Bernanke — are doing just that: They’re warning of a financial meltdown.

They’re deliberately taking a monumental risk with the public psyche, and they’re doing so for a single-minded reason — to help justify the greatest government rescue of all time: $700 billion, or nearly five times more than the entire economic stimulus package that came — and went — earlier this year.

Why are they doing it today of all days? Why are they in such a great hurry? Because they can see, with their own eyes, the seizures in the credit markets. By announcing a mega-bailout, with all the fanfare and theatre they can muster, they hope they can restore confidence in the credit markets and stem the flood of panicky selling.

But despite the high drama, and despite knee-jerk euphoria in the stock market, the credit markets barely blink. The credit convulsions continue unabated. Trust is not restored. Confidence continues to sink.

Capitol Hill, Sunday, September 28. After a long weekend burning the midnight oil, Congressional leaders of both parties are announcing a “done deal” with “solid bipartisan support.”

New York, September 29, 11 AM. Despite the “near certainty” of a deal in Congress, credit market investors are still not impressed. The Libor rate is still rising. The cost of credit default swaps is still surging. Commercial paper buyers are still in hiding.

Same day, 1:15 PM. Just a few minutes ago, in stunning defiance of President Bush, the House of Representatives has rejected the bailout package by a vote of 228 to 205. The news is exploding on the floor of the New York Stock Exchange like a neutron bomb, sending the Dow into a 778-point tailspin for the day and throwing credit markets into virtual cardiac arrest.

Thursday, October 2. While Congress scrambles to recover, Fed Chairman Bernanke — along with his counterparts at foreign central banks across the globe — have jumped in to try to fill the gaping hole left by the U.S. Congress’ failure to pass the bailout legislation. In just a few short days, they’ve injected an astounding $1 trillion into the global financial system, doubling, tripling and quadrupling their already-extraordinary prior infusions during previous bouts of the 13-month-old credit crisis.

But even these huge amounts aren’t enough. Several foreign banks are falling by the wayside. Trust continues to erode. Credit continues to vanish from the marketplace. More seizures sweep through the global credit markets.

Washington, Friday, October 3. Congress has stuffed the rescue bill with pork … Republicans and Democrats who opposed the legislation on Monday have caved in … the House has voted “aye” … and the President has rushed to sign it into law.

“Now, finally,” they say with a great sigh of relief, “the markets will give us their blessing. Now, finally, we can put this debt crisis behind us.”

Ironically, however, even after all the political arm-twisting and even after all the added billions, the package still doesn’t seem to be enough to calm credit markets. Quite the contrary, the Libor rate has risen even further. The cost of credit default swaps continues to make new highs. Commercial paper buyers continue to recoil in horror.

Surprising as it may seem, despite the greatest central bank money infusions ever … despite the largest government bailout package of all time … the credit crisis is not ending.

Back To the Present

You read these words on your screen or in a printout. And you say: “All this is unbelievable. Give me proof.” OK. Here it is …

Proof #1. Bloomberg, October 3: “The market for commercial paper plummeted the most on record as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Commercial paper outstanding tumbled $94.9 billion.”

Proof #2. Bloomberg, also October 3: “Leveraged loan prices plunged to all-time lows … and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.”

Proof #3. Citigroup is in danger:

  • TheStreet.com Ratings has just downgraded the Financial Strength Rating of Citi’s main banking unit from C- (fair) to D+ (weak).
  • Separately, We find that Citigroup’s global credit card portfolio — 185 million accounts with $201 billion — is in jeopardy with credit losses mounting. And nearly every single category of consumer loans is suffering dramatic increases in delinquency rates (Citigroup’s June 30 Quarterly Financial Data Supplement, pages 10 and 15).

Proof #4. Silent bank runs — mass withdrawals by institutional investors — are hitting some major banks, accelerating the credit crisis even more:

  • At Washington Mutual, the biggest bank failure in history, the Office of Thrift Supervision (OTS) reports $16.7 billion in cash withdrawals in just nine business days (MarketWatch).
  • At Wachovia, when the bank opened on Monday, it’s reported that it would have had no other source of liquidity if the FDIC had not stepped in to arrange a shotgun marriage with another major bank (Charlotte Observer). But which is the groom — Citigroup or Wells Fargo? Based on a judge’s decision this weekend, the answer is now up in the air, another source of uncertainty for investors and depositors.

Proof #5. In a thinly veiled attempt to stem the bank runs, the FDIC is changing its rules: The new bailout law now includes a jump from $100,000 to $250,000 in FDIC coverage limits for depositors.

But it’s unlikely this will be enough to significantly slow the outflows from banks. Reason: Too many banks may be relying too heavily on large, uninsured deposits that are not affected by the change. All this evidence leads you to a single obvious conclusion: The crisis is gaining momentum and worsening at an even more rapid pace.

Perhaps not so obvious is whether the long-term outcome might be …

Inflation or Deflation?

Clearly, ours is a debt-addicted society.

Without debt, U.S. consumers, corporations, local governments and, ultimately, even the federal government must cut spending drastically, driving down demand.

And without demand, most prices for goods and services are bound to plummet.

That’s deflation … unless, of course, the government can somehow end the debt crisis … unless the Fed can print money in unlimited amounts … and unless that money turns the threat of deflation into the specter of hyperinflation.

Which will it be? Watch the credit markets. As long as they continue to contract, they’re telling you that …

This collapse is bigger than any government: Despite the inflationary spending and bailouts, ultimately, DEFLATIONis the more likely outcome.

If so, that implies the real possibility of further declines in some of the markets that previously were among the biggest winners, including foreign currencies, foreign stock markets and industrial commodities.

Regardless of inflation or deflation, however, there’s always money to be made in a great crisis like this one — on the way up since the early part of the century …. on the way down in a period of deflation … and on the way up again once the deflationary period has passed.

And no matter happens in the months ahead, your number one priority right now must be safety and liquidity.

Move most of your money into the safest, most liquid investment on the planet — 3-month T-bills bought directly from the Treasury or a Treasury-only money market fund.

Good luck and God bless.

Regards,

Dhaval Shah

Investment Academy | Baroda | 09825528815

Black October — Europe too sinking. Banks are in deep debt upto the eyeballs!!!!!

Standard

October 06, 2008 3:24 PM

Dear Investors

Black October has started playing havoc. Did you notice?

Let me sum up the last 2 days events. It will make situation more clear for you.

BNP Paribas to Pay $19.8 Billion for Fortis’s Units in Belgium, Luxembourg

Hypo Real Estate Gets $68 Billion Bailout From German Government, Lenders

Credit Crisis Deepens in Europe; Officials Pledge to Rescue Troubled Banks

Above news can be sum up like Europe and UK are in deep crisis. You had been getting this news much before it started striking.

Let us have a look at some official statements to read the mindsets of top officials.

U.K. Chancellor of the Exchequer Alistair Darling said Britain is “ready to do whatever it takes” to help its banks.

“Until now the solutions have appeared to be uncoordinated, so perhaps it’s time for a more coordinated approach globally,” said Torsten Slok, an economist at Deutsche Bank AG in New York . “It’s not just the U.S. and Europe , it’s banks in every part of the world.”

` New World ‘

French President Nicolas Sarkozy, who convened the Oct. 4 meeting, called for a global summit “as soon as possible” to implement “a real and complete reform of the international financial system.” He said “all actors” must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.

“We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”

I believe picture is clear. This is just phase I of crisis. Central Bank’s secretary and chairman are ready with plenty cheque books to write in the name of WHOMSOEVER in trouble.

Presidents and prime ministers are fed up of this crisis, b’caz they hardly understand financial world. Sarkozy urged of altogether new financial system. Just read their statements twice, thrice to get the real meaning and try to access the thought process must be running in leaders heads while making such a categorical statement.

With $700 bn, US crisis has come to an end?!! Read on, there are many more sectors in queue.

Believe me, by the end of this crisis, people across the world will have lost the faith in currency.

Fed May See Lending to Companies, States as Next Crisis Fronts

By Scott Lanman and John Brinsley

Oct. 6 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month’s downfall of Wall Street titans: its spread to corporate America and state and local governments.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up.

A cash crunch on Main Street would endanger companies’ basic functions — paying suppliers, making payrolls and rolling over debt. The widening of the crisis suggests that Bernanke and Treasury Secretary Henry Paulson may have further fires to put out even as the Treasury sets up the $700 billion financial- industry rescue plan approved last week.

“The rest of the economy is clearly being affected right now by the tightness of credit,” said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York . “It’s just gathering momentum in the wrong direction.”

The market for commercial paper, which typically matures in 270 days or less and is used to help pay for expenses such as payroll and rent, shrank to a three-year low of $1.6 trillion in the week to Oct. 1, Fed data show.

Gannett, the largest U.S. newspaper publisher, said Oct. 1 it drew on a revolving credit line to ensure it had funds to repay its commercial paper.

Duke, Caterpillar

Duke Energy, the owner of utilities in five U.S. states, last week tapped about $1 billion from a $3.2 billion credit agreement after concluding it may not be able to meet its plan for new financing. Caterpillar, the biggest maker of earthmoving equipment, had to pay the biggest premiums over Treasuries in at least three decades at a sale of five-year and 10-year notes.

“Credit is the lubricant that oils the engine of the economy” and if it dries up “then the engine seizes up,” said Republican Representative Michael Conaway of Texas , who switched his vote last week to support the financial rescue. The inability of a major corporation to renew its short-term loans would have “a devastating impact on the economy.”

Even as confidence grew that Congress would pass the bailout, banks hoarded cash, indicating the proposed purchases of devalued mortgage assets may not be able to stop the credit crunch from widening.

No `Quick Turnaround’

“It’s not going to solve all the problems, and don’t expect a quick turnaround,” said Mickey Levy, chief economist at Bank of America Corp. in New York . “This is the typical time of the credit cycle where banks are tightening lending standards.”

Corporate bond sales shrank to $1.25 billion last week, capping the worst four-week slump since 1999.

Lending between banks is also seizing up. The gap between the three-month London interbank offered rate and the overnight indexed swap rate, a gauge of cash scarcity among banks, climbed to a record 2.80 percentage points three days ago.

Republican Representative Jerry Moran of Kansas , in an interview with Bloomberg Television, encouraged the Fed to consider guaranteeing loans between banks.

“We will continue to use all of the powers at our disposal to mitigate credit-market disruptions,” Bernanke said in a statement Oct. 3. He delivers a speech on the economy tomorrow.

Fed Powers

The central bank has power to extend credit to any company under “unusual and exigent circumstances.” It already used that authority this year to avert the failure of Bear Stearns Cos., take over American International Group Inc. and lend to banks to shore up money-market funds. The Treasury last month set up a program selling debt to help the Fed expand its balance sheet.

Investors anticipate the Fed will cut rates in an attempt to lower borrowing costs and encourage banks to lend. Futures prices show 100 percent odds of a half-point reduction in the 2 percent benchmark rate at or before the Oct. 28-29 policy meeting.

State and local governments having trouble meeting cash needs may push for help. Schwarzenegger told Paulson in an Oct. 2 letter that California and other states “may be forced to turn to the federal Treasury for short-term financing” if the crisis doesn’t ease.

“If states can’t access the credit markets because of market conditions, then the Treasury should consider providing it,” said Ben Watkins, a member of the debt committee of the Government Finance Officers Association, a group of public finance officials.

Services Endangered

Without funding, states “can’t operate the health-care system, schools, roads and other services they provide,” said Watkins, who also serves as head of Florida ‘s bond sales.

Market disruptions forced Oregon to cancel a $21 million sale of bonds for the state university system and several other planned issues are in jeopardy, State Treasurer Randall Edwards said. “There’s really no market, there’s no buyers out there,” Edwards said.

State and local government funding “has to be a concern for Bernanke and Paulson,” said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington . “There are two issues now: stop the immediate panic and restructure the financial system.”

Those aren’t the only areas Fed and Treasury officials may be concerned about.

Since 2005, New York Fed President Timothy Geithner has been pushing to reduce risks in the $54.6 trillion credit- default swaps market. Concerns rose after the Fed had to rescue AIG with an $85 billion loan to cover obligations at a unit that sold protection against debt default.

“We’re not at the end of the line yet,” said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington .

To contact the reporter on this story: Scott Lanman in Washington at slanman; John Brinsley in Washington at jbrinsley.

Regards,

Dhaval Shah

Investment Academy| Baroda | 09825528815

Black October

Standard

October 01, 2008 7:00 PM

Dear Investors

You have heard of black day in stock market history, even might have heard of black week.

But, did you hear of Black Month? It’s knocking your door. Get prepared for Black October.

If you believe, you have missed a bus. Heck, no. You should still act fast to redeem your Equity & Equity linked portfolios before it gets a lot worst.

Because, DOW is heading towards 7200. Unbelievable??!!!! No one could believe that Lehman can fail, AIG can fail, Merrill could fail!!!!!!!!

President can be forced to warn senate to be prepared for consequences if bail out package not passed. Not limited to this extend, even Australian and UK presidents pleading congress to pass the bailout package!!!!

Will get you more details on this soon.

Only 2 assets look safer, treasury/ G-sec funds and lot talked about, Gold.

Regards,

Dhaval Shah

Investment Academy | Baroda | 09825528815