Sunday, February 22, 2009

Obama's Visit to Canada

By Susan Bourette, Correspondent of The Christian Science Monitor, from the February 21, 2009 edition

For his first foreign visit as president, Barack Obama chose a country where no major banks have failed, home foreclosures pale by comparison with those in the United States, corporate and consumer debt is low, and citizens enjoy universal health care.

Canada often gets short shrift from its southern neighbor, despite its stature as the largest trading partner of the US and a staunch ally. But now, amid global economic turmoil, the financial moderation practiced by this nation of some 33 million people is being celebrated.

"These days, boring is beautiful. Prudency is a big hit," says Stephen Foerster, finance professor at the Ivy School of Business at the University of Western Ontario in London. "You might say Canada has suddenly become sexy, even if it's in an unsexy way."

President Obama acknowledged his affection for Canada during a six-hour visit Thursday to meet with Prime Minister Stephen Harper. The trip offered balm to a relationship rocked in recent years by differences over the Iraq war and, more recently, worries over protectionism. "I love this country," he said during a press conference after euphoric Canadians greeted his arrival in the capital, Ottawa, by singing Bob Marley's reggae classic "One Love" and chanting "Yes We Can."

Two days earlier, Mr. Obama hinted at the reason for his admiration. "One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis.... [It's] shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States."

Among industrialized countries, Canada is the only one not to have seen a major bank fail. The World Economic Forum ranked Canada's banking system as the healthiest in the world in 2008, while the US took the 40th spot. And while Canada's largest five banks reaped profits of $8.2 billion, the top five US banks lost a combined total of $8.3 billion last year.

Stronger federal regulations and lower leverage ratios borne by Canadian banks have allowed them to weather the global banking storm. Canadian financial institutions didn't engage in the subprime mortgage lending that sideswiped the US banking industry and forced millions of American homeowners into foreclosure.

"The difference with Canadian banks is that they never succumbed to the temptation of huge profits. It also allowed them to avoid the downside of more aggressive behavior," says David Haglund, a professor of international politics at Queen's University in Kingston. "It speaks to the more conservative nature of Canadian society in general. Canadians are simply more risk averse."

Canada has not escaped the global economic crisis. Its economy tipped into recession in the last quarter of 2008. In January alone, 129,000 jobs disappeared – the biggest one-month increase in years – pushing the unemployment rate to 7.2 percent. And this week brought more bad news: Alberta, Canada's cash cow, which has led the national economy over the past several years, is also in recession, hit by a slowdown in oil prices and sales. To combat the downturn, Prime Minister Harper's Conservative government introduced a $39 billion (about $31 billion US) stimulus package, to be rolled out over two years.

But analysts believe Canada's strong balance sheet will position it better than other embattled countries to weather this recessionary storm. For 12 consecutive years, Canada has posted budgetary surpluses, compared with the $1 trillion US federal deficit – a figure that doesn't include the $787 billion stimulus package signed into law this week.

To hear the analysts tell the story, Canada appears to have been getting a number of other things right. For example, even the most ardent proponents of big business are fans of the universal healthcare system. As Professor Haglund points out, the Big Three automakers have been able to produce cars more cheaply in their Canadian plants because the government absorbs the cost of healthcare.

And healthcare costs are lower in Canada, accounting for 9.7 percent of the GDP, compared with 15.2 percent in the US.

Higher taxes or regulation and a vibrant economy aren't necessarily mutually exclusive, Haglund says. "If Barack Obama can take away any lesson from the Canadian experience, it's that things can be changed while preserving what's best in North American life."

Wednesday, February 18, 2009

The Man Who Made Too Much

by Gary Weiss in February 2009 Issue

Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he’s paying the price.

Two young men, traders on John ­Paulson’s staff, come into his hedge fund’s office seeking advice on whether to buy a certain debt security. Sitting just a few feet away, I have no idea what Paulson tells them. His slightly high-pitched voice is so soft that on the rare occasions he is forced to speak in public, he’s easily drowned out by the rustling of papers or the clearing of throats. When he appeared before a U.S. House committee in November to try to explain how he had lavishly profited while countless others had suffered, Paulson spoke so gently, even when inches from the microphone, that representatives repeatedly, and with growing irritation, had to ask him to speak up.

Paulson is smart enough to know that at this particular moment in history, the less he’s heard from, the better. The simple reason: He is not suffering. In an era in which losers are universal and making a profit seems somehow shady, Paulson is the most conspicuous of Wall Street’s winners. Paulson & Co.’s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn’t climb nearly as much but were still successful enough to put him at the very top of his profession. By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.

Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under. (View a graphic showing how much John Paulson has outperformed other indices.)

Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?

The question has long dogged that most hated species of Wall Street trader, the short-seller who profits by trading borrowed stock. Because of his recent success, Paulson is now their designated king. So it’s no surprise that he is finding himself the object of finger-pointing about who caused the mess we’re in.

On November 13, Paulson and four other titans of the hedge fund world—Soros, Philip Falcone of Harbinger Capital Partners, Ken Griffin of Citadel Investment Group, and James Simons of Renaissance Technologies—were forced to answer questions in the glare of TV lights before the House Oversight Committee, chaired by Henry Waxman, a Democrat from California, the same man who dog-and-ponied tobacco executives into claiming under oath that cigarettes aren’t addictive. The five were selected because they were the highest-paid fund managers in 2007, as ranked by Alpha magazine, an industry trade publication.

There has never really been a time when short-sellers have been feted. They had a brief moment in the sun following the corporate scandals of the early 2000s, when hedge fund manager Jim Chanos, among others, was credited with uncovering Enron’s fraud. Even though short-sellers red-flagged the dangers of subprime lending years before the crisis—Gradient Analytics, a research firm, issued private warnings as far back as 2002—they have received few brownie points since the housing bust began. “Everybody’s too busy looking out for themselves to come to the defense of people who are perceived as profiting from the misery of others,” Chanos says.

In the view of many C.E.O.’s, short-sellers do more than just profit from corporate misfortune; they inflame it. C.E.O. Dick Fuld of Lehman Brothers and Alan Schwartz, former C.E.O. of Bear Stearns, in their own recent appearances before congressional panels, blamed rumormongers and short-­sellers for the demise of their firms.

“The shorts and rumormongers succeeded in bringing down Bear Stearns,” Fuld ­asserted. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.” Schwartz gave similar testimony when he appeared before the Senate Banking Committee in April, saying that there was a run on the bank despite a “capital cushion well above what was required to meet regulatory standards.” He testified that “market forces continued to drive and accelerate our precipitous liquidity decline.” Banking Committee chairman Christopher Dodd chimed in that “this goes beyond rumors. This is about collusion.”

But was it? Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.

The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.

“Jim, hi, it’s Alan Schwartz.”

“Hi, Alan.”

“Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”

“Alan, how do I know everything’s fine? Is everything fine?”

“Jim, we’re going to report record earnings on Monday morning.” 

“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”

“Well, yes, to some extent, but we should be fine.”

“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’  So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.”

Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That fucker was going to throw me under the bus no matter what.”

“So here it is,” Chanos says. “Alan Schwartz takes the position ‘Short-sellers were our problem,’ and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who’s telling the truth on these things? It’s unbelievable.”

Schwartz, not surprisingly, has a different version of events. “I did not make the statements attributed to me by Mr. Chanos,” he says through a spokesperson. According to someone who has spoken to Schwartz, the ex-C.E.O.’s side of the story is that the conversation took place on Wednesday, not Thursday, and that it was entirely different from what was related by Chanos. His contentions are that the call was an effort to obtain a public statement from Chanos that “a group of short-sellers out there are trying to take Bear Stearns down” and that no information on Bear’s financial strength was conveyed to Chanos.

Paulson is in his mid-fifties, hair thinning at the top just a bit, with a slight paunch that he fights by jogging in Central Park, a half-block from the 28,000-square-foot Upper East Side townhouse that he bought a few years ago. He is of medium height, medium build, medium disposition. He favors old-fashioned tortoiseshell bifocals and dark-gray suits—none of the forced informality that you find in some hedge fund offices. He speaks fluidly and candidly and is unmoved by critics of his chosen profession. This, after all, is a man whose mind has been set on making vast, historic amounts of money since he was a kid, when he bought candy in bulk and sold individual pieces to his buddies at a profit.

At the beginning of 2008, he says, the general thinking was, No, we’re not going to have a recession; we’re going to have a slowdown. “Then there would be a pickup in the second half of the year. When the second half started looking as bad as the first, the general feeling became, We’re not going to have a pickup; we’ll have a slowdown.”

Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says.

Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says.

Paulson has become a lightning rod not simply because he made money in an awful market, but because of the way he made it. He wagered against subprime securities while everyone else was piling in. He bet that in addition to Lehman Brothers, other banks like Washington Mutual and ­Wachovia were due for a fall.

Long before the financial crisis hit, Paulson, according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested.

John Paulson was born in 1955 in Queens, New York, in a pleasant and somewhat obscure middle-class neighborhood called Beechhurst. His father, Alfred, an accountant who came from a Norwegian family that had settled in Ecuador, rose to become C.F.O. of Ruder & Finn, a public relations agency. But John’s investment-­banking genes seemed to have come from his mother’s father, Arthur Boklan, who, during the crash of 1929, was a banker at a long-since-vanished Wall Street firm. In an interesting parallel with his grandson, he apparently prospered even as the Great Depression dragged the country into misery. In 1930, according to census records, he was able to afford a $220-a-month apartment in the Turin, a stately building that still stands at 93rd Street and Central Park West in Manhattan.

Boklan saw to it that his grandson had an early appreciation for the principles of capitalism. When John was a small child, Boklan was the one who encouraged him to buy Charms candy in bulk at the supermarket and then sell the individual candies to kids in the schoolyard at a substantial markup. His profits grew, as did his appreciation for economies of scale and the tendency of certain commodities to become mispriced through ignorance or carelessness. It was also the point at which he would become transfixed by the process of turning pennies into dollars. Paulson would spend much of the rest of his career under the tutelage of older Wall Street role models, seeking to replicate those days with his grandfather.

Following high school in Brooklyn, Paulson moved on to New York University, which in the 1970s offered a popular seminar taught by John Whitehead, then a senior partner at Goldman Sachs. Paulson listened, fascinated, as Robert Rubin, later secretary of the Treasury under Bill Clinton and now an unofficial adviser to Barack Obama—talked about the mysterious and new (to Paulson, anyway) world of risk arbitrage. At the time, the scholarly, soft-spoken Rubin was viewed, at least by Paulson’s professor, as the smartest partner at Goldman Sachs; he was certainly the richest. Paulson graduated first in the class of 1978, with visions of arbitrage in his future.

Harvard Business School followed. There, Paulson came under the spell of another established star in finance, the leveraged-buyout titan Jerry Kohlberg. “I had never heard of Jerry Kohlberg,” Paulson recalls, “but one of my friends told me, ‘Forget about investment banking. You’ve got to hear Jerry Kohlberg. These guys make more money than anybody on Wall Street.’ ” According to Paulson, Kohlberg described how he engineered the L.B.O. of a company by putting up just $500,000 in equity and then obtaining a $20 million bank loan secured by the company’s assets. The company was turned around and sold at a profit of $17 million in two years’ time.

Paulson received his M.B.A. and then spent his time in pursuit of as much money as he could earn. In 1980, the hottest jobs were not in investment banking but in management consulting. So when Paulson finished at Harvard that year, he joined one of the leading lights in the field, the Boston Consulting Group. Though the starting salaries were far higher than those in investment banking, he realized that even the partners didn’t manage to pull in the kind of money he was hoping for. Thus, following a chance social encounter with Kohlberg, Paulson moved to Wall Street, where he was introduced to Leon Levy of Oppenheimer & Co. Paulson was soon hired by Levy’s new venture, Odyssey Partners.

After a couple of years at Odyssey, Paulson realized he was not getting the training he needed to climb the ­investment-banking money tree. So in 1984, just as the bull market was beginning, the 28-year-old joined Bear Stearns as an investment-banking associate. Four years later, he was promoted to managing director but soon opted to strike out on his own. After dabbling in real estate and beer—Paulson was an early investor in what would become the Boston Beer Co.—he joined the great, long march of former investment bankers and traders into the hedge fund business in 1994, going where he thought the money was.

Paulson began with about $2 million of his own money, just a blip in the hedge fund world, even then. The firm consisted of just Paulson and an assistant. He shared office space in a Park Avenue building with other small hedge funds.

At first, growth was slow. Paulson, who lived in an apartment in Lower Manhattan above what is now a discount shoe outlet, shepherded his money carefully and began to establish a track record. In keeping with the norms of the time, he charged a fee of 20 percent of profits and 1 percent of assets—a comfortable sum when the size of his fund was $20 million but nothing like what he has made recently.

Then, in the late 1990s, came the tech bubble, and more important for Paulson, who was shorting stocks and betting big on corporate mergers, its bursting in 2001. When the market crashed after stocks lost steam that year, Paulson’s funds climbed 5 percent and rose the same amount in 2002, demonstrating his uncanny ability to avoid losing his investors’ cash as the rest of the market cratered. (Indeed, Paulson has had only one down year out of the past 15: His funds recorded a 4.9 percent decline in 1998, the year of the debacle in the Asian markets.) Money continued to pour in. By 2003, his funds had $600 million under management; two years later, their value was upwards of $4 billion.

Paulson began branching out, moving away from betting on mergers and into the financial instruments of firms in bankruptcy. He was still as obscure as he could be, keeping his name and that of his wife, Jenny, out of the papers, though they did begin to accumulate the usual symbols of hedge fund wealth. He left his apartment on Broadway for the palatial quarters of a mansion on East 86th Street and bought an opulent, though not extravagant, house in the Hamptons, outside of New York City.

Paulson got wind of the coming storm in the credit markets through the infallible barometer of prices. By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side—wagering that prices of risky securities would fall.

“We felt that housing was in a bubble; housing prices had appreciated too much and were likely to come down,” he says. “We couldn’t short a house, so we focused on mortgages.” He began taking short positions in securities that he believed would collapse along with the housing market.

The best opportunities were in the junkiest portion of the housing market: subprime. Pricing of subprime securities “was absurd,” Paulson says. “It didn’t make sense.” Subprime securities graded triple-B—in other words, those that the credit-rating agencies thought were just a tad better than junk—were trading for only one percentage point over risk-free Treasury bills. This absurdity appealed to Paulson as easy money.

While Paulson was hardly the only fund manager to bet against subprime, he seems to have made the most money, most consistently, from the banking industry’s troubles. One reason for this is that Paulson was able to recognize and act on the unimaginable—that the banks, which took on most of the subprime risk, had no clue what they were holding or how much it was worth. Big banks like Merrill Lynch, UBS, and Citigroup held triple-A-rated securities, but these were backed by collateral that was subprime at best, making the rating of the securities almost irrelevant. “They felt,” Paulson explains, “that by having 100 different tranches of triple-B bonds, they had diversification to minimize the risk of any particular bond. But all these bonds were homogeneous.” It was like having 100 different pieces of the same poisoned apple pie. “They all moved down together.”

What separated Paulson from the rest of the hedge fund crowd was his realization that nobody was able to value these complex securities. His advantage came when he was willing to admit that. Other traders refused to short the big banks because they couldn’t believe that such huge institutions would be so unaware of their own risks. Once that fact dawned on Paulson, he bet, fast and big, that the banks would fail. “We thought that many banks and brokerages were massively overleveraged, with very risky assets, and that a small decline in the assets would wipe out the equity and impair the debt,” Paulson says. He and his analysts knew that the banks were deep into subprime, and yet the prices of their debt securities hadn’t fallen, indicating that the rest of the market hadn’t caught on.

By the end of 2007, he started to beef up his short positions, focusing on overleveraged financial institutions—Wachovia and Washington Mutual among them.

And then there were derivatives. Since all that toxic waste on the balance sheet imperiled the survival of the banks, Paulson wanted to be sure he was prepared. So he bought credit default swaps, like the $22 million he bet against Lehman—essentially an insurance policy that paid off when Lehman’s bonds defaulted.

Even though Paulson didn’t actually own any Lehman bonds, he made more than $1 billion on that bet. It’s as though he’d bought insurance policies on houses he didn’t own along the Indian Ocean just moments before the tsunami hit.

Though the financial crisis has rewarded Paulson handsomely, he continues to search for investment opportunities. On October 2, he walked into a breakfast meeting at the J.P. Morgan Chase Tower, right across the street from his hedge fund’s old office on Park Avenue, to make a presentation to potential investors about a new fund he had started to trade distressed debt. Its name: the Paulson Recovery Fund. As usual, Paulson was calm and quiet. His associates described how Paulson & Co.’s funds had thrived during even the very worst declines in the market, with an annual growth rate of 17 percent since inception.

Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?”

Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out.

Paulson has also taken steps that may help him avoid being tagged as a robber baron, donating $15 million to the Center for Responsible Lending to support a program designed to help homeowners avoid foreclosure. His congressional testimony on November 13 included his thoughts on how the government could help the banks get back on their feet—something that will of course benefit everyone, not just the holders of those distressed securities that Paulson is eager to buy.

But it’s hard to see how any financier who made a fortune from market turbulence can improve his public image when the economy is in such serious trouble. George Soros, even with his massive philanthropic efforts to promote democracy in Eastern Europe, will probably go down in history as the man who broke the Bank of England. Traders like Paulson will probably never be popular. They might as well get used to it.

Paulson himself remains unrepentant. At a recent lunch for investors at the Metropolitan Club in Manhattan, his clients dined on Colorado rack of lamb and sipped champagne, the recession be damned.

Paulson, his wife, and their children still live in their home on East 86th Street, in a mansion that at one time was a men’s club.

They also have a seven-bedroom, seven-and-a-half-bath estate with an indoor pool on Ox Pasture Road in Southampton, New York; he bought the house in 2006 for $12.75 million. This past April, Paulson apparently wanted a place that was larger than a mere bungalow for his growing family, so he listed the property for $19.5 million.

At last look, it was still for sale; its asking price, which had been lowered at least twice, was down to $13.9 million. Evidently, John Paulson had bought at the top of the market.

George Soros 2008 Investment Year

In an article in FT on January 28, 2009, George Soros outlined how his 2008 investment year went.

***Problems facing Obama are even greater than FDR. Total credit outstanding was 160% of GDP in 1929 going to 260% in 1932. We entered the crash in 2008 at 365%, which he thinks will go to 500%

***Although he was positioned reasonably well going in 2008, his thesis of decoupling between developed and developing markets cost him dearly

***Indian and Chinese stocks were hit even harder than U.S. and Europe. He lost more in India than he made the year before. His Chinese manager did relatively better through good stock selection, but he was also helped by the renminbi appreciation

***He had to push himself very hard to make up for the India and China losses from external managers in his macro-account. This had the draw-back that he over-traded as his positions were too large for the increasingly volatile markets

***He could not go against the market in a big way due to his size, so he had to try to catch minor moves

***It also made it difficult for him maintain his short positions. Although he has a lot of experience, he got caught several times and largely missed the crashes in October and November

***On the long side he stuck to his guns and lost an enormous amount of money. Example is Petrobras

***He was able to get out of CVRD, a Brazilian iron ore producer, in time for the end of commodity bubble, but he didn’t short the commodities directly because of his previous difficult experience trading them

***He was slow to recognize the reversal of the dollar and gave back a big chunk of his profits

***His new CIO did well in the UK where he bet against the sterling vs. euro and that short-term interest rates would decline. He also made money going long credit after the collapse

***Eventually he understood the dollar’s rise was a flight to quality during the financial system disruption, not a fundamental move. This insight enabled him to bet against the dollar at the end of 2008 and make money

***He ended the year almost making his 10% minimal return goal after spending most of the year in negative territory

Tuesday, February 17, 2009

Sir. R. Allen Stanford Charged with $8B Financial Fraud

Federal regulators are charging R. Allen Stanford and three of his companies with a "massive" fraud that centered around high-interest-rate CDs.

The Securities and Exchange Commission's complaint, filed in federal court in Dallas, alleges that Stanford International Bank sold about $8 billion of so-called certificates of deposit to investors by promising "improbable and unsubstantiated high interest rates."

The rates allegedly allowed the bank to achieve double-digit returns on its investments for the past 15 years. U.S. District Judge Reed O'Connor entered a temporary restraining order and froze Stanford's assets.

The SEC's outgoing enforcement chief Linda Chatman Thomsen says Stanford and his family and friends "perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors."

Earlier, on February 13, Herald Tribune wrote:

R. Allen Stanford's company oversees a bank that has paid more than twice the national average on certificates of deposit.

For years, R. Allen Stanford, a flamboyant Texas billionaire, richly rewarded the wealthy clients of his private investment empire.

But now the U.S. federal authorities are investigating whether those rewards were simply too good to be true.

Several federal agencies, including the U.S. Securities and Exchange Commission, the FBI and the Internal Revenue Service, have spent "many months" looking into the business activities of the Stanford Financial Group, which is based in Houston, and Stanford's Antigua-based bank, which issues high-yielding certificates of deposit, according to two individuals briefed on the investigations who were not authorized to speak publicly.

The focus of the investigations appears to be how the bank could issue certificates of deposit that pay interest rates that are more than twice the national average.

A spokesman for Stanford Financial said it had been told by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, a securities industry oversight group, that "their visits to our offices were part of a routine examination."

The spokesman said those visits had occurred in January.

Embarrassed by their delayed response to multiple opportunities to uncover the $50 billion fraud that Bernard Madoff is suspected of having orchestrated, regulators are turning up the heat on money-management companies that appear to be performing significantly better than their peers.

This is not the first time Stanford's business operations have provoked attention.

Stanford Financial, a diversified financial company that offers a broad array of services, including investment banking and research, holds about $8 billion in deposits at its bank and has about $50 billion in assets in its wealth management affiliate, its spokesman said.

But a wrongful-termination lawsuit filed in a state court in Texas last summer suggests that the asset sizes may have been inflated. The two former brokers for Stanford Financial who filed the lawsuit said they had left the company as a result of fears that they could be implicated in various "unethical and illegal business practices" they claim to have witnessed.

In their lawsuit, they assert that Stanford Financial overstated individuals' asset value to mislead potential investors, failed to file mandatory forms disclosing its clients' offshore accounts and purged electronic data from its computers in response to an investigation by the Securities and Exchange Commission. A lawyer representing the two men did not return a call.

Stanford Financial, which has filed a countersuit against the two men seeking repayment of certain loans, denied the accusations.

"These allegations were made by disgruntled employees and are totally without merit," the company said. "Our company follows industry standards in generating marketing and sales plans, we are rigorously managed and fully compliant with all U.S. regulations."

A colorful and controversial figure, R. Allen Stanford has claimed ties to Leland Stanford, the former governor of California who started Stanford University. The university, however, has said there is no genealogical relationship between the two.

Stanford and his company have also emerged in recent years as major contributors to various lawmakers, appearing to have focused particularly on legislators considering bills that would tighten offshore banking rules.

And a decade ago, Stanford told The Associated Press that he had flown a Roman Catholic priest displaying signs of "stigmata," or bleeding wounds on his wrists and ankles, from the Caribbean island of Antigua to New York on his jet.

Stanford, who was said by his company to be unavailable for comment, ranked 205th last year on Forbes magazine's annual list of the richest people in the United States, with an estimated net worth of $2.2 billion.

On Antigua and Barbuda, he is akin to royalty, having been knighted by a prime minister and referring to himself as "Sir Allen Stanford" on the company's Web site.

Sir. Allen Stanford 's Videos From The Past

Allen Stanford twenty 20 Cricket and the WAGS

Cricket 20 million dollars for 20 overs

In a historic announcement Sir Allan Stanford announces a 20 million prize for the winner of one game of cricket. Each winning player becomes an instant millionaire. The losers get nothing. Cricket finally enters the big money league.

Sunday, February 15, 2009

International Property Show - Dubai 2009 opens with over 150 exhibitors from 20 countries

H.H. Sheikh Mohammed bin Khalifa Al Maktoum, Chairman, Dubai Land Department inaugurated today (February 15, 2009), the 'International Property Show - Dubai 2009', property exhibition.

The show is set to showcase exceptional development projects from over 150 exhibitors from across the globe that are seeking to leverage the high attendance of international and regional investors at the annual industry event.

Strategic Marketing and Exhibitions (SME), the event organiser, has revealed that the show, which will run until February 17, 2009 at the Dubai International Convention and Exhibition Centre (DIEC), is set to capitalise on the shift in property prices in Dubai, as well as the projected rise in the number of expatriates in the emirate in 2009.

Amidst the projections that Dubai's economy will expand by 2.5% in 2009, in addition to the expected arrival of many foreign residents, exhibitors and investors are upbeat about this year's event. The exhibition's association with the Real Estate Regulatory Agency (RERA) and the Dubai Land Department (DLD) has also contributed to the high level of confidence of investors at the show.

As the event's Strategic Partner, RERA has set up a special pavilion within the venue - the 'RERA Consultancy Zone', where representatives from the agency are answering the inquiries of commercial and residential investors and specialised visitors from the property industry. A dedicated pavilion has also been assigned to banks and financial institutions to aid investors seeking financial assistance.

Speaking at the inauguration, H.H. Sheikh Mohammed bin Khalifa Al Maktoum expressed optimism over Dubai's property market growth. 'Dubai will be the fastest city to recover from the impact of the ongoing credit crunch, and the emirate's real estate sector will once again witness a period of long term boom. However, developers need to remain focused on their goal of continuing with the projects that they have already started and ensure that these projects are delivered on time.

Developers who are registered with Rera can be assured of total support from Dubai Land Department. The impressive participation of players at the 'International Property Show - Dubai 2009' underlines the high confidence in the UAE's property sector.'

Currently in its fifth edition, the 'International Property Show - Dubai 2009' has gathered the support of UAE-based master developer Falconcity of Wonders as the Gold Sponsor, and Al Arabiya TV as the exclusive broadcast partner. Leading real estate companies showcasing their UAE-based developments at the show include - Khoie Properties, who are showcasing the Dhs3.5bn 'La Hoya Bay' project and Bonyan International Investment Group highlighting its 'Eye of Ajman' project. In addition, other local developers include Tiger Properties, Roots Land Real Estate, RAK Properties, Corner Stone Real Estate, Dubai World Central, Chapal World LLC, Savannah Properties, Threesixty, and KM Properties, Time Properties, Asia Star Properties International, and Sherwoods Independent Property Consultant.

'We extend our sincerest appreciation to H.H. Sheikh Mohammed bin Khalifa Al Maktoum for gracing us today with his presence at the 'International Property Show - Dubai 2009', and to all the local and international real estate companies who have supported this exhibition. We are also pleased by the good turnout witnessed at the event from developers, in addition to professionals from the property and finance sector, despite all the challenges imposed by the current global economic crisis. Finally, I would like to wish all the participants significant success, and we look forward to attain the goals of this exhibition, and consequently support the local and regional real estate sector,' said Dawood Al Shewazi, Managing Director, SME.

'This year's edition of 'International Property Show' features the participation of local companies licensed by the Real Estate Regulatory Agency (RERA) as we aim to showcase only licensed real estate projects. This has been the result of full coordination and cooperation with RERA, which entailed the submission of all the registration documents for each and every project at the show,' concluded Al Shezawi.

The 'International Property Show - Dubai 2009' was first organized in 2004, and has since grown to become the definitive event for companies seeking to establish strong personal relationships with worldwide players in property and investment industries. The global delegation at this year's event include high profile companies from the UK, US, Malaysia, Spain, Thailand, South Africa, Bulgaria, Korea and Cyprus. Among these are high profile names such as Florida Choice Realty Services, Crown Acquisitions Worldwide PLC, Estateman Limited, Capital Land Acquisitions Ltd. and Harlequin Hotels and Resorts from the UK, and KW Luxury Homes, Stonehenge Builders Inc. and Rapid USA Visas from the US.

James Chanos on Washington Actions and Long-Short

From Jim Chanos' interview with Chrystia Freeland of on January 23 2009. Watch the full interview with Jim Chanos, of Kynikos Associates, at VIDEO ON FT.COM

James Chanos, president of Kynikos Associates, is the world's biggest short-seller. While short-sellers are rarely popular among politicians and CEOs, the current economic crisis is a salubrious business environment for professional bears like Mr Chanos. A second-generation Greek-American whose father owned a chain of dry cleaners in Milwaukee, Mr Chanos studied economics at Yale before beginning his career in finance, working first in Chicago then moving to New York.

Now 50, he is best known for his prescient shorting of Enron and the work he did to expose that company's fraudulent accounting. In a video interview earlier this week with, Mr Chanos said he is bearish on healthcare, defence and for-profit education companies. He warned that the hedge fund industry needs to get used to the idea that there will be "lean years" as well as fat ones: his own fund, he said, has shrunk from $7bn to $6bn because cash-strapped investors are treating it "like an ATM".

An ardent Democrat, Mr Chanos spoke to the Financial Times in Washington this week, where he had travelled for Barack Obama's inauguration. Edited highlights from his interview appear below.

How much worse are things going to get?

No one knows for sure.

The last few weeks has seen fear re-enter the banking system, both here and in the UK. The [Bernard] Madoff affair also did a lot of damage to confidence.

Are people right to talk about nationalising the banks?

I don't know. We almost have it de facto for our largest institutions. The real crux of the problem [is] people still don't believe the numbers.

What will it take for people to believe the numbers? There is still a bit of Pollyanna in the air. We don't really know where these banks have marked these assets, because the news is still surprising us on the downside . . . The magnitude of these writedowns is still somewhat staggering.

What do you think of [head of the Federal Deposit Insurance Corporation] Sheila Bair's idea of creating some sort of aggregator bank?

We continue to violate all of Walter Bagehot's principles on lenders of last resort . . . As long as we continue to do that we are empowering the worst decisions, we are rewarding the people that got us here.

Are we running out of people able to run these big banks?

I don't know that we could do a whole lot worse than the people who have been running them lately.

Should the banks be lending more?

Prior to this the banks would lend to anybody with a pulse, and now even JP Morgan himself probably couldn't get a loan. It is a chicken and egg problem; you have people who are completely creditworthy, who probably don't want to borrow money now, and the people who do are your lower creditworthy borrowers and the banks are terrified to expand their balance sheets.

Isn't it prudent for banks to hoard capital now?

They should be coming clean with investors and with the government on their methodology for marking these assets and their loan loss reserves, and giving the Street as much transparency as possible.

Why isn't it happening?

Because so far the surprises seem to have been on the downside. I think there is still a lot of damage on these balance sheets that has not come out. My guess is the number is going to be over the trillion [dollar] mark when all is said and done.

What effect has [the alleged Madoff fraud] had?

It was a blow to confidence exactly at the wrong moment, when things seemed to be getting better, and injected that nasty concept of fraud into the equation.

Will we see changes in taxation for hedge funds?

We already saw it very quietly. One of the most attractive aspects of hedge fund management was taken away in the Tarp legislation, which was the tax referral for offshore managers. That very quietly went away, and that was a big deal.

Are you worried about a climate of criticism over pay in financial services? [People] should be upset.

Bankers still took home, and my hypothesis is that in fact they never really made the billion dollars.

That's the problem: we are going to find out when we go through the accounting that in fact these things were never that profitable.

Is America's financial capital moving from New York to Washington?

Power is beginning to shift, clearly, because of the government investment in these firms.

And anyone who doesn't see that is kidding themselves.

Have you identified any surprising areas of weakness in the economy? The three areas we are focusing on would be healthcare, defence and the for-profit education business. All those areas are going to be under a lot of pressure under the new administration.

What is the big thing everyone is missing?

The next battleground is private equity. It is going to be very tough for the industry to look at Washington with a straight face and say "Gee, you've got to be hands-off with us", while they are laying people off who are voting. That is going to be a PR nightmare, and I wish my friends in private equity good luck with that.

This is the week Barack Obama became president. What significance does that have?

I think the world is looking to America for a new beginning; I think a lot of Americans are too, no matter what your politics. The president-elect is hosting a dinner for John McCain, his defeated opponent, which is a very class act.

Long or short?

Oil? Long
US dollar? Short
GE? I'm going to hedge
Citigroup? Long
Ford? Short
Blackstone stock? Short
John Thain? A tough one. Long
HSBC? Long
John McCain? Long.

Saturday, February 14, 2009

Dubai Faces Further Liquidity Challenges, Says Moody's

13 February 2009
DUBAI - Gulf Arab companies especially in Dubai are facing further liquidity challenges as well as declining credit quality amid the steep global downturn, ratings agency Moody's Investor Service said on Thursday.

"Dubai is particularly vulnerable due to its closer integration with key sectors of the global economy, particularly real estate, tourism, trade and financial services," said Moody's in its 2009 outlook on Arabian Gulf corporates.

While corporate issuers in the region largely remained in a financially strong position in 2008, "overall credit quality in the region has declined, and is likely to continue to do so moving forward."

Moody's estimated that companies in the region require some $35 ?billion to $40 billion in debt refinancing this year.

The Gulf region has seen an unprecedented economic growth in recent years but the worldwide recession took a turn for the worse in the fourth quarter, hitting even the most resilient economies in the region as oil prices which fuelled local real estate markets, also collapsed on weak demand.

"Fundamental credit quality is likely to be tested in the downturn," said Moody's, adding that the Gulf has never before been financially tested on such a large scale.

"Rated gulf corporations are not immune from the global financial and economic crisis, particularly where they rely on external demand for their goods and services, or on fresh liquidity to support their operations", said Moody's.

The ratings agency said Dubai in particular, is facing an unprecedented level of contingent government liabilities, that call into question "less so its willingness, but its ability to support flagship corporates in the event of such a requirement." Dubai's mostly government-run corporates will need to refinance about $15 billion of $70 billion in debts in 2009. The total corporate debt in the Gulf region reached some $20.4 billion last year, heavily concentrated among government-related issuers. UAE issuers made up 90 per cent of total outstanding rated debt, with Dubai alone representing 51 per cent and Abu Dhabi, 39 per cent.

The total rated and unrated ?corporate financing requirements among members of the Gulf Cooperation Council in 2009 is about $35 to $40 billion.

"Addressing these maturities will be a significant challenge, although we expect liquidity to return to the markets as 2009 progresses, and bond spreads to recede from some of the panic-stricken levels seen in the second half of 2008," said Moody's.

It said that as markets re-open, issuers with sound credit fundamentals and government-backing should be able to close financing transactions, but these come at a price."The end of cheap money money has also reached the Middle east, and we expect companies will have to accept far more expensive funding going forward in return for better long term liquidity."

The tougher credit landscape will force companies to reassess their business plans as they respond to the new environment, Moody's said.

Moody's also expressed concern about the recent move of Abu Dhabi to inject Dh16-billion in fresh liquidity to five banks and said this may have a bearing on future credit ratings.

It said the move has been ?interpreted "as a sign that Abu Dhabi is becoming more reticent about supporting banks and other systemically important entities in other emirates."

"Moody's will continue to monitor developments closely. If a trend of selective treatment within the federation becomes discernible, Moody's stands ready to reduce its high support assumptions for government-owned companies in other emirates outside Abu Dhabi."

© Khaleej Times 2009

Marc Fiber on Obama's Stimulus Package

It is not a failure of a free market. It is continuous US government intervention. Market based solution: throw bad assets to the risk takers. The best solution is the massive tax cuts.

Interview to Bloomberg on February 6, 2009

China Interest Rates - There Is Still Room To Cut Them

China's central bank still has some room to lower interest rates to fight the threat of deflation, vice-governor Yi Gang said on Saturday, February 14, 2009.

The People's Bank of China last cut interest rates on Dec. 22, lowering the benchmark one-year lending rate to 5.31 percent -- a still high cost of borrowing in inflation-adjusted terms considering the sharp downturn in the economy.

"When I say interest rates are at an appropriate level, people interpret it as meaning no more rate cuts. That is not correct," Yi told a forum at Peking University.

The PBOC has cut rates five times since September and reduced bank reserve requirements four times. It has also abolished credit quotas, triggering a surge in bank lending in support of the government's 4 trillion yuan stimulus package.

"Interest rates currently are at a level that can be moved up or down, and I think there is still room to cut them," Yi said.

Consumer price inflation was just 1.0 percent in the year to January, and many economists expect an outright decline in the price level as early as February.

"After figures for February and March come out, our short-term concern will be to fight deflation," Yi said.

China is already experiencing deflation at the factory-gate level: producer prices fell 3.3 percent in the 12 months to January.

But Yi said there was no need to panic over the recent sharp deceleration in consumer inflation, which reflected a high base in 2008. Mechanically, the base effect alone would result in a 1.2 percent drop in the consumer price index this year, Yi said.

He said lower interest rates were a natural part of the "moderately easy" monetary policy that the PBOC adopted last year.

But because the central bank has other monetary tools at its disposal, including open market operations, the policy of zero interest rates being adopted by some other countries was not the best option for China, Yi said.

He said the central bank was determined not only to fight deflation but also to preserve the purchasing power of the yuan and to keep the currency's exchange rate stable.

Gold or Industrial Commodities?

Gold is one of the hedges against the falling currency value. Majority of currencies around the world are expected to fall further and that's why speculators buy gold. Now, because the gold is only one of the hedges and has a competition from other commodities, like industrial commodities, it's hard to time the appropriate entry and exit points. It's too volatile. And all the more so, because gold ETF GLD is so easy to trade.

At his interview to Bloomberg in Davos, Barrick Gold Corp. Chairman Peter Munk predicted the gold to top $1000/ounce in the near future. But what would be the good reason for that to happen? Is that undervalued now? Is dollar going to loose 10-20% of its value? Will it be the speculative hype?

In my view, industrial commodities have more solid reasons to grow: rise of emerging economies and fall of currencies.

In his interview to Bloomberg on January 6, 2009, Marc Faber said he favored industrial commodities over gold.

Monday, February 9, 2009

Senate Bill Would Regulate OTC Derivatives and Credit Default Swaps

Financial Crisis News Center reports: A bill introduced by Senator Tom Harkin would bring all OTC financial transactions and credit default swaps currently traded without federal oversight onto regulated exchanges. The Derivatives Trading Integrity Act, S. 272, would establish stronger standards of transparency and integrity in the trading of swaps and other over-the-counter financial derivatives as a critical step toward restoring confidence in the financial system. Senator Harkin is Chair of the Agriculture Committee.

The broad goal of the legislation is to establish the standard that all futures contracts trade on regulated exchanges. According to the chair, it will bring these transactions out into the sunlight where they can be monitored and appropriately regulated. Senator Harkin envisions that the regulated exchanges will work with the CFTC to ensure that trading on the exchange is fair and equitable and not subject to abuses. In calling for thee regulation of credit default swaps, SEC Chair Christopher Cox recently told the Senate Banking Committee that the credit derivatives market is a regulatory hole that must be closed by Congress.

Senator Harkin has noted that, while swaps contracts function much like futures contracts, they are not regulated as futures contracts because of a statutory exclusion from CFTC authority. Since they do not have to be traded on open, transparent exchanges, it is impossible to know whether credit default and other swaps are being traded at fair value or whether institutions trading them are becoming overly leveraged or dangerously overextended. Financial derivatives like credit-default swaps must be traded on a regulated exchange, said the senator, so that regulators can know the value of the contracts, who is trading them, and if they have enough assets to back the contract.

The SEC’s current authority with respect to these instruments, which are generally security-based swap agreements under the Commodity Futures Modernization Act, is limited to enforcing antifraud prohibitions under the federal securities laws. The SEC is prohibited under current law from promulgating any rules regarding credit default swaps in the over-the-counter market. Thus, the tools necessary to oversee this market effectively do not exist.Over the years, the CFTC and laws enacted by Congress have allowed instruments that are essentially futures contracts to be privately negotiated without the safeguards provided through exchange trading. In this economic downturn, said Senator Harkin, Congress does not have the luxury to sit back and let the markets work.

The Derivatives Trading Integrity Act will bring more transparency and accountability into the marketplace. Specifically, the bill amends the Commodity Exchange Act to eliminate the distinction between “excluded” and “exempt” commodities and transactions versus commodities and transactions traded or conducted on regulated exchanges. All commodities and transactions of the same nature would be treated the same.

In addition, the bill eliminates the statutory exclusion of swap transactions, and ends the CFTC’s authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts

The bill seeks to eliminate the negative consequences from the lack of price transparency and the failure to properly measure and collateralize the risk in trading over-the-counter derivatives. Similar problems have not been seen in the trading of financial futures on regulated futures markets, subject to CFTC oversight.

OTC credit derivatives emerged in the mid-1990s as a means for financial institutions to buy insurance against defaults on corporate obligations. Credit default swaps are executed bilaterally with derivatives dealers in the OTC market, which means that they are privately negotiated between two sophisticated, institutional parties.

They are not traded on an exchange and there is no required recordkeeping of who traded, how much and when. Although credit default swaps are frequently described as buying protection against the risk of default on, for example, corporate bonds, they are also used by investors for purposes other than hedging. Institutions can and do buy and sell credit default swap protection without any ownership in the entity or obligations underlying the swap. In this way, credit default swaps can be used to create synthetic long or short positions in the referenced entity.

Sunday, February 8, 2009

Before and After. Madoff on Markets and Markopolos on Madoff

Before: October 20, 2007, Bernard Madoff at a roundtable discussion with Justin Fox, Ailsa Roell, Robert A. Schwartz, Muriel Seibert, and Josh Stampfli.

After: February 04, 2009, Harry Markopolos, independent financial fraud investigator, testifies at the House Financial Services Subcommittee hearing on $50 billion investment fraud engineered by Madoff.

IGS Group CEO John Godden on Hedge Funds in 2009

Hedge funds reportedly lost 18.3% in 2008. Bloomberg TV interviewed IGS Group CEO John Godden on the hedge fund trends in 2009.

Bio: John Godden runs alternative investments advisory consultancy, IGS Group, which works with many of the leading hedge fund asset managers, investors and global banking groups to engineer opportunities and connections in the alternative asset management space. IGS advises on asset allocation, product design, investor sources, distribution, market assessment and regulatory impact for Hedge Funds, Fund of Funds and Service Providers. Until January 2006, John was Managing Director of HFR Asset Management, a subsidiary of Chicago-based HFR Inc. where he build the assets under management from $500,000 to more than $4B over a four year period.

John was previously with Barclays Capital where he was responsible for developing Structured Derivative Products for European Financial Institutions and helped develop their Mutual and Hedge Fund Structured Product capability. He also spent four years at BNP Paribas where he developed Derivative Instruments for both Retail products and Asset/Liability Management, latterly focusing on Options on Discretionary Funds/Portfolios for use as Retail Products and for more accurate hedging of liabilities.

Friday, February 6, 2009


On February 11, 2009, MSCI Barra (NYSE:MXB) a leading provider of investment decision support tools worldwide, including indices and portfolio risk and performance analytics, will announce the results of the February 2009 Quarterly Index Review for the MSCI Equity Indices – including the MSCI Global Standard and MSCI Global Small Cap Indices as well as the MSCI Global Value and Growth Indices, the MSCI Frontier Markets Indices, the MSCI Global Islamic Indices, the MSCI High Dividend Yield Indices, the MSCI Pan-Euro and MSCI Euro Indices, the MSCI US Equity Indices, the MSCI US REIT Index, the MSCI Asia APEX 50 Index, the MSCI KOKUNAI Japan Equity Indices, as well as the MSCI China A Indices. All changes will be implemented as of the close of February 27, 2009.

MSCI Barra will post the list of additions to and deletions from the indices for the February 2009 Quarterly Index Review on its web site,, shortly after 11:00 p.m. Central European Time (CET) on February 11, 2009. A summary of the announcement will be made available shortly thereafter on Bloomberg page MSCN, and Reuters public pages MSCIA. MSCI Barra will make detailed information available to clients beginning immediately after the summary announcement appears on Bloomberg and/or Reuters.

For the MSCI US Equity Indices, the MSCI US REIT Index, the MSCI KOKUNAI Japan Equity Indices as well as the MSCI China A Indices a summary of the announcement will be made available at

MSCI Barra Press Release at

Thursday, February 5, 2009

GOP's corporate tax cut proposal

The most important advantage of outsourcing is lowering a corporate tax. Therefore, cutting US corporate tax is the most welcome proposition for American scientists and engineers.

From CNBC "Fast Money":

... Senate Republicans offered their own, cheaper economic stimulus plans focused on tax cuts – it’s a plan priced at $445 billion, half the cost of Democratic version which totals $885 billion.

It centers on cutting in half a 6.2 percent payroll tax on employees, cutting the corporate tax rate to 25 percent from 35 percent and lowering the bottom two income tax brackets to 10 percent and 5 percent, all for one year.

The GOP also proposed $11 billion to help prevent home foreclosures. "Our focus is first on housing, low interest mortgages and a tax credit for home buyers," explains Sen. Lamar Alexander (R) Tennessee on Fast Money. "We want to give every American the opportunity to buy a 4% mortgage."

Tuesday, February 3, 2009

A sequel in the ongoing Madoff scandal

A sequel in the ongoing Madoff scandal is available for download on the QWAFAFEW website at

Harry Markopolos, CFA, former President of the BSAS and former member of Boston QWAFAFEW's Steerage Committee, laments about lost opportunities.

Anyone need a good fraud investigator? A good guess is that the SEC will take him much more seriously in the future!

Nobel economist Joseph Stiglitz's radical proposal

The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist.

Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.

"The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" he said.

"There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks," he said.

Mr Stiglitz said the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure.

"The new banks will be more credible once they no longer have these liabilities on their back."

Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said.

Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities.

Mr Stiglitz's radical proposal is a "Chapter 11" scheme for households to allow them to bring their debts under control without having to go into bankruptcy. "Families matter just as much as firms. The US government can borrow at 1pc so why can't it lend directly to poor people for mortgages at 4pc. ," he said.

Monday, February 2, 2009

Why has the Muslim world failed to develop?

The level of societal development matters. Common set of social values shared by neighboring countries promotes peace and collaboration. European countries united after prolonged bloody wars.

On the other hand, when traditional society challenges modern democracy...

In November 2008, published Adnan Khan's 'Why has the Muslim world failed to develop?'. Here is the article:

The Muslim world with its vast resources continues to generate much interest among economists, thinkers and policy makers. The Muslim world since the end of the Uthmani Khilafah has had its borders drawn and redrawn after various powers interfered in the running of its affairs. The Muslim world includes the Arabian Peninsula, Turkey, North Africa, Pakistan, Bangladesh and the south eastern countries of Malaysia and Indonesia.

Development economics is a branch of economics, which deals with how simple forms of organization can transfer to complex forms of organization and production. Development is seen as the ability to increase production without any consideration applied to its distribution. Economists do make a distinction between growth and development - growth is seen as more of the same goods and services whilst development is the structural and technological infrastructure behind the production. In terms of GDP, the measurement used to calculate the value of total production of goods and services, the Muslim world is second only to China with growth rates of 7% in some countries. These are growth rates most European countries would be proud of. However reading between the figures reveals many problems.

If we define development as the building of the necessary infrastructure to fulfill the basic needs of the people such as food, clothing, shelter, security and education, here the Muslim worlds comes in at the bottom of the list. Wealth in the Muslim world suffers from huge misdistribution.

The Middle East for example relies heavily upon oil revenue's therefore it is affected greatly by changes in oil prices. Very little oil revenue actually trickles down to the population but rather ends up in US bank accounts. Prince Alwaleed Bin Talal Alsaud of the Saudi monarchy is valued at over $20 billion with half of his wealth invested in the US.

In the Arab world one in five Arabs still live on less than $2 a day. And, over the past 20 years, growth in income per head, at an annual rate of 0.5%, was lower than anywhere else in the world except sub-Saharan Africa.

In Pakistan 40% of land is in the hands of 23 families.

Government investment in infrastructure and public services is minimal considering the large population of the Muslim world.

The Muslim world's elections are at best a farce, with autocratic kings and presidents only rescinding their authority when they die.

Half of the Muslim world is treated as lesser legal and economic beings, and more than half the young, burdened by joblessness and un-Islamic economic policies want to get out of their country as soon as they can.

The role of the IMF and World Bank in countries such as Pakistan, Turkey, Indonesia, Bangladesh and Egypt has directly aided some of the underlying economic problems. The general solution provided by such institutions is the engaging of trade to climb out of poverty and for development. In reality there are a number of obstacles placed by the developed nations that ensure developing nations will never reach a level where they can compete. What this actually means is that Western goods should be imported rather than allow imports from poorer countries. The theory is that only via trade will nations pull themselves out of poverty. Whilst encouraging the third world to lower their market barriers such as tariffs and quotas on various goods, the Western nations do not do the same for their markets. Western economies have not been developed by such subscribed policy, as outlined by Dr Ha Joon Chang in his book "Kicking away the ladder." The continued failure of the World trade organization clearly shows the unwillingness by Europe and the US to lower its trade barriers whilst at the same time lobbying India and China to remove their barriers.

This situation in the Muslim world stems from the colonial era and is summed up best by David Fromkin, Professor and expert on Economic History at the University of Chicago: "Massive amounts of the wealth of the old Ottoman Empire were now claimed by the victors. But one must remember that the Islamic empire had tried for centuries to conquer Christian Europe and the power brokers deciding the fate of those defeated people were naturally determined that these countries should never be able to organize and threaten Western interests again. With centuries of mercantilist experience, Britain and France created small, unstable states whose rulers needed their support to stay in power. The development and trade of these states were controlled and they were meant never again to be a threat to the West. These external powers then made contracts with their puppets to buy Arab resources cheaply, making the feudal elite enormously wealthy while leaving most citizens in poverty."

The absence of any organized way of generating wealth and allocating wealth has created a situation where everyone in the Muslim world needs to fend for themselves and attempt to make the best out of a chaotic situation. This just compounds the problem further as many resort to bribery, stealing and fraud to make ends meet. This shows that the people in the Muslim world are not inherently corrupt or born to steal, rather as can be seen with the Gulf States many Muslims when given the opportunities are hard working and can be relied upon.

The question that really needs to be answered is where we begin to develop the Muslim world. The Muslim world fails in applying a set of consistent polices and this has resulted in such nations being unable to unify the populace on the direction of the economy. Many policies by the rulers are time specific or usually motivated by the political climate of the time. The unfortunate result of this is that a whole host of contradictory policies are applied within the Muslim world and hence the nation doesn't move in the same direction. Although Pakistan has the worlds largest untapped coal reserves it imports over 2 million tonnes of coal a year to meet its energy needs. Across the Muslim world there exist manufacturing companies and mining companies. However the contract to mine the Muslims world's precious resources always go to foreign companies.

The development of the Soviet Union is a good example of how consistent polices lead to development. Socialism emerged as a very powerful force across Europe and many were attracted to it after witnessing the wide disparities in wealth distribution in Capitalist nations. The Communists after gaining power due to the failures of the Tzar set about implementing a five year plan starting in 1928, in order to build a heavy industrial base.

The five year plan was a list of economic goals that was designed to strengthen the USSR's economy between 1928 and 1932, making the nation both militarily and industrially self-sufficient. The five year plan was to harness all economic activity to the systematic development of heavy industry, thereby transforming the Soviet Union from a primitive agrarian country into a leading industrial and military power. Carrying the plan out, the Stalin government poured resources into the production of coal, iron, steel, railway equipment, and machine tools. Whole new cities, such as Magnitogorsk in the Urals, were built with enthusiastic participation of young workers and intellectuals. This ambitious plan fostered a sense of mission and helped mobilize support for the regime. The Soviet Union played a direct role in the defeat of Hitler in World War 2 - which launched the Soviet Union to superpower status.

Islam is the only common denominator between everyone in the Muslim world. Islam has a glorious history in the region and propelled the Muslims from the deserts of Arabia to the far reaches of the earth. Therefore this would be the place to begin deriving economic policies for the Muslim world. These policies would be accepted by all Muslims as they are from Islam and would actually bring confidence in the Islamic rules once people see they can work.

Practically this means that Islam should be applied in the Muslim world and Islam's polices on trade, ownership, companies, public finance, investment, currency and poverty elimination would need to all be applied. The derivation of such polices from the same foundations would ensure no contradictions occur as they are all coming from the same basis. All foreign policies from Socialism, the Capitalist free markets, Nasserism, Kemalism and any other ‘ism' should be removed as these have proven to be failures.

China slumps as global recession deepens

Nouriel Roubini stresses that we are in the first globally synchronized recession and there are very few places to hide as the forces of recoupling shatter the myth of decoupling: first markets and then real economies have become almost perfectly correlated.

Here is Mike Head's "China slumps as global recession deepens" published on World Socialist Web Site on 17 December 2008:

In the latest shock to the global economy, China's industrial production is declining sharply, indicating that the entire national output is contracting. The official statistics for November are a staggering measure of how quickly the world slump is worsening, cutting off demand for Chinese exports.

Only months ago, China was still reporting double-digit economic growth and commentators were speculating that China's boom would help global capitalism avoid a depression on the scale of the 1930s. Now, Western analysts estimate that the Chinese economy is probably shrinking this quarter and will contract again in the first quarter of next year—meaning that China will join Europe, Japan and the US in recession.

China's overall industrial output grew just 5.4 percent over the year to November, implying a sudden contraction since mid-year, when the annual rate was running at 17 percent. Heavy industry saw the biggest fall, with steel production down more than 12 percent since November 2007, to 35.2 million tonnes.

Electricity production was down by 9.6 percent over the year, which analysts said was the largest fall since the Beijing leadership adopted its open pro-market policy three decades ago. Gross domestic product this quarter "must be contracting; everything is pretty bad," Macquarie Bank's China economist, Paul Cavey, told the Melbourne Age. "And we're not at the worst point yet."

As well as being hit by plunging sales, Chinese steel manufacturers have faced a 40 percent fall in global steel prices since July. In an unusually frank statement, Industry Minister Li Yizhong also warned that worse was yet to come. "Many factors are combining to produce a striking impact on industry. Our forecast is that we have not yet bottomed out, and the impact will continue to widen in December," Li said.

Li said it would take steel companies until March to run down the stockpiles of raw materials bought at high prices earlier this year. In the meantime, it was almost impossible for most producers to make money. "It's not just small companies that are losing money, it's also the big ones, so the situation is really rather serious," Li said.

China's reversal has enormous implications for the world economy. Most immediately, because China is the world's largest producer and consumer of steel, the industry's decline is battering companies that have relied on the country's steel boom for growth, from Chinese electricity producers to big iron ore miners such as BHP Billiton and Rio Tinto.

Hopes that Beijing's trillion dollar stimulus measures could offset the impact of the global collapse by boosting domestic consumption have been dashed by a precipitous 20-30 percent year-on-year fall in real estate construction, which has been a prime force in the economy. Sales of passenger vehicles also fell 10 percent in the year to November, while truck sales plunged 25 percent in the year to October.

There is visible anxiety in world financial circles that China's downturn could not only intensify the global slump but lead to mass unemployment and an explosion of social unrest within China, whose cheap labour regime has been central to corporate profits internationally for the past 20 years.

Under the headline, "China's economy hits the wall," Financial Times commentator Gideon Rachman wrote: [T]he economic crisis of 2009 could pose the toughest tests that the Chinese government has faced since the student uprisings of 1989, whose 20th anniversary will fall next year. For it is now clear that, far from being immune to the global financial crisis, China is very vulnerable... It would be a historic irony if the Chinese Communist party was thrown into crisis, not by the collapse of communism in 1989—but by the convulsions of capitalism in 2009."

The pessimistic outlook for China comes amid further signs of deepening global recession, including the release of the Bank of Japan's closely watched Tankan index of business. In the survey for the December quarter, the diffusion index for confidence among large manufacturers dropped to minus 24, down by 21 points from the previous survey taken in September. Looking ahead, predictions by the big firms indicated a further 12 points decline in the index over the next three months to minus 36.

The result was the second-steepest quarterly decline since August 1974, during the first global oil shock, and the lowest reading for big manufacturers since March 2002, at the tail of Japan's last severe recession.

With Japan now certain to record its third quarter of official recession at the end of this month, after shrinking by an annualised 1.8 percent in the September quarter, there was no signal that any class of business in the survey of 210,000 companies could see a bottom to the slump. Manufacturing and service companies at all levels forecast a sharp worsening in conditions between now and March.

Confronted by an unprecedented collapse in their export markets, companies from Sony to Toyota have started slashing jobs. Auto manufacturers have cut planned output for the next six months by 20 percent. "The economy is worsening very quickly," Hiroshi Watanabe, an economist at the Daiwa Institute of Research told AFP. "The wave of job cuts will spread to the service industries such as auto dealers, retailers and restaurants."

There were also further signs of deepening problems in Europe, where the number of people with jobs across the euro zone fell in the third quarter compared to the previous three months. The European Union's statistics office said the number of employed fell by 0.1 percent of the workforce, or 80,000 people, in the July-September period against the second quarter to 146.1 million. It was the first quarterly drop since the Eurostat records began in 1995.

Already in its first official recession, the 15-member euro zone economy will almost certainly sink deeper in the fourth quarter. A widely-used gauge of activity in the manufacturing and services sectors fell to a record low. The preliminary Markit composite purchasing managers index fell to 38.3 in December, down from 38.9 in November. A figure of less than 50 indicates a decline in output.

Economists said the results suggested that gross domestic product contracted by 0.6 percent in the October-through-December period—worse than the 0.2 percent declines in both the second and third quarters. Marco Valli, economist at UniCredit MIB in Milan, told London-based MarketWatch the data offered no sign that activity was set to bottom out.

European banks have been hit by the fallout from US investment adviser Bernard Madoff's alleged $US50 billion fraud. British-based HSBC confirmed that it could lose up to $1 billion and the bailed-out Dutch arm of Belgian bank Fortis admitted losses could reach $1.4 billion. Royal Bank of Scotland joined BNP Paribas and Banco Santander among the casualties, saying it might lose up to $612 million.

One of the most telling indicators of the worsening of the year-long world meltdown came in the US, where the US Federal Reserve cut its target for overnight interest rates to zero to 0.25 percent—its lowest level on records dating to July 1954—and said it would likely keep it at "exceptionally low levels for some time".

The latest 75-basis point cut leaves no more room for trying to stimulate the world's largest economy by lowering interest rates. US authorities have been unable to prevent the recession from intensifying despite a range of unprecedented multi-billion dollar initiatives designed to encourage lending by loss-ravaged banks and financial institutions.

Economists polled by Reuters last week expected the US economy to contract at an annualised 4.3 percent in the last three months of the year, and to continue to decline through the first six months of 2009. The grim data since then, including from China, has led many economists to predict an even deeper contraction, with some forecasting that output would fall at more than a 6 percent pace in the fourth quarter.

Sunday, February 1, 2009

Nouriel Roubini Discusses U.S. Banks, Recession and Risks

Nouriel Roubini has a firm opinion on how US government should handle banks. He expressed it in his interview with Bloomberg.

Peter Thiel's Interview with Bloomberg in Davos

Clarium's Peter Thiel was interviewed in Davos by Bloomberg's Erik Schatzker on January 28. He shared his views on the financial markets in 2009.

A year ago, in January 2008, in Davos, Peter Thiel expressed a few correct insights that are summarized below :

*Domestic Equity Market is not a screaming buy until the U.S. trade deficit goes to zero.

*We have a few years of turmoil ahead of us as the reversal of “mis-allocated capital” takes place.

*Fed can slowly change direction of markets, slowly but surely but throwing more money at system is a “strange cure” given easy credit caused the disease.

*He is wary of investing in ‘leveraged” plays like financials, and continues to like energy and technology.

*He likes tech, but not necessarily Microsoft; they are simply not innovating. Ditto on Dell, but he does prefer Google and Intel. Also select biotech themes.

Watch Peter Thiel's interview with Bloomberg's Erik Schatzker on YouTube.

UNCOMMON COMMON SENSE written by Aubie Baltin on December 22, 2008

Uncommon Common Sense

Aubie Baltin CFA, CTA, CFP, PhD.

The National Bureau of Economic Research (NBER) said; its Business Cycle Dating Committee determined that the U.S. entered recession in December 2007. WOW! Is that a fact? I've been saying we were in a recession for the last 10 months or so. Am I that smart, or was I just not in Denial? (See DENIAL Mar. 2007)

A devastating new financial and economic crisis is headed our way and there's no stopping it. And its impact could make the sub-prime sell-off, housing collapse and banking crisis look like child's play. WHY? Despite the government's bailout plan, home prices are falling, unemployment is rising, manufacturing is collapsing and prices are declining. Even Oil that GS and JPM predicted would hit $200 by 2008 and $300 by 2009 has been dropping like a stone along with the drop in demand. More Americans are holding on to their money and the global economy is slowly (maybe not so slowly) sinking into Recession and will most likely follow the USA into Depression: Resulting in a dangerous deflationary spiral that will continue to crush earnings and increase layoffs as businesses cut production, stop any and all expansion plans at best or declare bankruptcy at worst.

Tragically, most economists, analysts and investors have no clue as to how global deflation will not only undermine the world's markets...but will make the 1973-74 and 1980-82 Recessions look like just an afternoon snooze. In fact, be prepared for the Recession to quickly turn into a Depression that will challenge the 1930's and may even surpass it as the US is in much worse shape to day than it was back in 1929.

The reasons are staring us all in the face

Unlike rising inflation that you can choke off quickly by jacking up interest rates, deflation is a much more insidious animal to control. Falling prices make it difficult or impossible for businesses to either payoff their debt or to increase their borrowing, especially when interest rates are low. As a result, profit margins decline and quickly turn into losses and layoffs increase as consumers reduce their spending, fearing that their own job may be in jeopardy. The resulting chain reaction causes prices to fall further, making your cash not only worth more, but your debts more expensive to pay off-not only for individuals but for businesses as well. This will make it even more difficult and risky for banks to lend money since businesses won't show the growth needed to pay back their outstanding loans, forget about new ones.

The end result will be to crush the unwitting investors who fail to understand or refuse to see the dangerous situation that's unfolding.

My name is Aubie Baltin and I didn't write this report to scare you. I wrote it in hopes that because of my track record, especially over the last three years, you will heed my warnings and take the proper steps to protect yourself and perhaps even profit in the months and years ahead. You see, in my 50 years of investing, I've never seen such a dangerous situation forming and there does not seems to be even one person of influence who has any IDEA OF WHAT SHOULD OR COULD BE DONE TO MITIGATE THE ON RUSHING DISASTER.

Despite the government's bailouts of Fannie Mae, Freddie Mac, Bear Stearns and AIG, despite the $700 billion allocated to banks and despite the fact that Treasury Secretary Paulson claimed "the fundamentals of our economy are sound...the actions taken by the Treasury and Fed over the past three months are not working, with the markets losing more than 20% since October 3rd, while more than doubling the FED'S balance sheet with junk instead of Treasuries.

When you add up Paulson's actions to date...

* The Term Auction Facility
* The Term Securities Lending Facility
* The Primary Dealer Credit Facility
* The Commercial Paper Funding Facility, and
* The Money Market Investor Funding Facility's crystal clear that his policies have been more like Don Quixote battling windmills than guiding the economy with a sure and steady hand.

Why is the Estimated $8.5 Trillion Injected Into the System not Working?

The simple answer is because the money supply, the contraction of Credit and the Collateral behind all the outstanding loans is shrinking faster than the FED and the Treasury can create new money. By the end of October, between the drop in the equity markets and the decline in home prices over $ 13 trillion of wealth has evaporated: And the situation is going to get a whole lot worse before it gets better!

This Is Why You Must Reposition Your Assets Now

You needn't take my word for it. Just ask Japanese investors who lost 60% in equities between 1989 and 1992 and saw their home prices lose 70% of their value ! But while the specter of deflation will send millions of investors to the poorhouse, it could make millionaires out of anyone who understands how to take advantage of this dramatic shift. Will you be one of the winners or one of the losers?

As far back as November 2006, I published "Why Hasn't "IT" Happened Yet"; long before the word "derivatives" ever hit the front page and while total unregulated derivatives were still less than a $ trillion, I rationed that we were rapidly headed for grave danger of a global financial meltdown stemming from the untamable and unregulated growth of the now $600 trillion global derivatives market. Warren Buffet recognized the danger, calling it a time bomb waiting to explode but then somehow got caught by it: The shadow market that is 10 times the size of world GDP and has been labeled "the Phantom Economy." A Measly 5% slip wipes out $30 trillion.

In letter after letter I warned about the hidden financial time bombs, which were lying in America's banks, and which I believed could detonate at any time...setting off a devastating chain of events that would end up causing the greatest financial meltdown since the Great Depression. They didn't listen then and they are still not listening now.

Doing the same thing over and over again and each time expecting a different outcome is the definition of insanity.

The Worldwide Industrial Shutdown

The international economic data now being released is down right frightening. Not only is US industry contracting at the fastest pace in 26 years, but manufacturing indices from Europe, Russia, China, Latin America and Southeast Asia are all showing record shrinkages as well.

The World's Factories Are Turning Out Their Lights

US manufacturing activity contracted for the fourth consecutive month. The November ISM index fell to 36.2%, the lowest reading since May 1982. In the 15-nation Euro zone, manufacturing contracted by the most on record in November. Indices for Poland, Hungary, Sweden and the Czech Republic showed some of the steepest ever declines as Recession struck their main export markets. Even manufacturing in China fell by a record amount in November. Southeast Asia followed in the rout and Japan's exports fell 7.7%, the biggest drop since December 2001.

In The Background Hovers The Great US Deflation

The US is leading the worldwide parade. This can be seen from the fact that the debt deflation has carved $7 TRILLION US from US stock indices and another $6 TRILLION US from US home equity. That is a direct loss of financial wealth totaling $13 TRILLION US. In response the Federal Government committed an additional $800 Billion US, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 TRILLION US, which is only slightly more than 50% of what's been lost thus far..

STEEL - The Global Depression Indicator

Crude steel production for the 66 countries reporting to the World Steel Association was 12.4% lower than last year. The declines were particularly severe in China, down 17% from last October, and Russia down 27%. Some 90 million tons or two months worth of imports of iron ore are now stockpiled in Chinese ports due to a sudden collapse in demand by Chinese steel mills. Scrap steel, recently fell to $90 US per ton after having traded at $550 US in July! When both price and volume collapse simultaneously, it is a clear indication of a deep global Recession/Depression.

Deleveraging - Every bit of leverage is being pulled

"The brokerage firms are pulling in their lines and so are the banks. At the same time, there is nobody willing to put new capital into new investment." "Over leveraged is the clearest description of the US financial system today." "At eight of the largest US financial institutions, tangible equity equals slightly more 3.% of assets (which are rapidly declining in value) which implies over 30 times leverage." WHICH IS WHY THE BANKS ARE NOT LENDING. In a credit contraction, being in debt is terrible. In a credit deflation - which is stalking the world today - being in debt can be down right deadly. As credit deflates, it also contracts the total volume of credit money in circulation. That sends the deeply indebted or overleveraged into a near frenzy to re-gain liquidity; selling everything in sight including Gold to gain cash in their desperate attempt to stay solvent. Once the debtors have gained some cash and used it to repay some debt, they have de-leveraged. But they have also deflated the money supply even further. This is near fatal to any credit, fiat money based economy.

The Facts

The Fed and Treasury are acting the way they are because they think that there are no longer any other alternatives. They believe that by not acting, the entire US financial and monetary system will slide into a monetary and credit deflation which will, in turn, drag the entire US economy down with it into a Depression that will rival and perhaps exceed the one in the 1930s. Congress has signed on to this same idea. This can be seen from the Democrats who are now cooking up yet another "stimulus package" with numbers around $500-700 Billion which will probably be at a $Trillion by the time Obama takes office and bails out the car industry - all to be borrowed of course by the US Treasury and then spent on what, public works?. It assumes that the US economy and financial system would already be in a 1930s situation had the Treasury and the Fed not acted to the extent they have. It also assumes that the moment they both stop or even slow down, the same, sad end will be the result.

Excluded From American Thought

Two scenarios are willfully excluded. The first exclusion is the possibility that the Treasury will be unable to continue to increase its borrowing. The second exclusion is the possibility that the US Dollar will lose its current international standing as a viable currency, let alone continue to function as a reserve currency.

Totally Excluded FromThought

The situation in which the US finds itself in today is not unknown to political and economic history. The former British Empire was in a near similar position during the Crimean War (Against Russia in the Black Sea). (They too refused to learn from history; (Napoleon). Luckily saner minds in Britain prevailed. A peace was entered into with Russia and Great Britain withdrew. With British finances in a complete shambles the prescription (before Keynes came on the scene) of the British Classical Economists were followed. The British Discount Rate was raised and a severe economic recession followed. The higher Interest Rates brought a huge inflow of foreign funds. The internal economic contraction lowered prices, increasing exports while reducing imports. The balance of trade swung from deficit into surplus. Within three years, the British economy once again had low market rates of interest freely funded by internal business and private savings and Britain once again became the foremost economy in the world with an annual current account surplus of 4.6% of GDP.

What Can We Do?

There is no reason why the US could not follow a similar policy: To do so would entail a US military withdrawal from Iraq, from Afghanistan and especially from NATO (which is about to sign a deal with Russia which will exclude us anyway). That would cut the current Pentagon budget by at least 50% freeing up a massive amount of resources to re-invest in the private sector. And HIGHER, not lower, US interest rates would ignite that investment.

A Return to Free Market Economics

To use just one example: By removing all road blocks, plus providing huge incentives for oil exploration during the next 3 - 5 years, we could create 250,000 to 350,000 jobs quicker than all the Government programs put together. PLUS it would not cost the Government one red cent; in fact, they would collect $ Billions from selling oil leases both on and off shore. It would also go a long way in shoring up our balance of payments, increase our security and most important of all, help insure our access to power, with out which our economy will collapse in the not to distant future, as the world eventually resumes its growth and the problem of PEAK OIL re-asserts itself..

Give out permits to build nuclear power plants on government land (such as on surplus military bases), cut out the red tape, and circumvent environmentalist extremists and the courts. This also would bring money into the government while not costing us a penny in creating an additional 250,000 jobs plus, and that's not counting all the ancillary jobs that would be created. It would assure our economy's access to cheap reliable energy, without which our economy will stagnate, crushing the very people that Obama has sworn to protect.

The Money Factory

Although the US Federal Reserve credit issuance has been greatly expanded; but big as it looks, they are in fact puny numbers compared to the $13 TRILLION in wealth that has evaporated. The problem that the Fed and the Treasury have is that these falling prices and valuations of US stocks and real estate is the collateral which underpins the loans of our banks and other lenders. If $1,000,000 US has been lent against collateral, which is now only valued on the market at $700,000 US and if the collateral is repossessed, the lender is still looking at a loss of $300,000 (assuming everyone else is not trying to dump the exact same type of assets).

That is the precise problem that haunts the Fed and Treasury. So many loans are now "underwater" that the entire US financial and monetary system can be brought down in any systemic crisis that might accelerate out of control. This situation, so long in the financial background, has been the real cause of all the bailouts of those deemed too big to fail.

US Corporations Have Debts Too

The accelerating crash in real estate mortgages has its counterpart in US corporate bonds. US long-term corporate bonds declined in value by more than 18% on average through October, which is worse than any full-year decline going back to 1926! The sudden rout in US corporate bonds, particularly high-yield bonds, has been considerably worse than even the deeply distressed markets of the Great Depression were. Corporate bonds and commercial mortgage crashes are always the harbingers of an outright corporate collapse.

If you recall; as early as 2 years ago, I mentioned in missive after missive that the best and safest Investment that I ever saw was to Buy Treasuries and Short Junk Bonds.

The Third and Final Deflation Stage

In all past deflations, the third stage hits when the last lender goes broke. The last lender is the US Treasury itself. Historically, all deflations either end here or morph into hyper-inflation because there is literally nowhere else to go.

A Global Economic Overview

For the first time since the end of WW II, the entire world is now in a synchronized Recession/Depression. In all prior international recession periods, there were at least a few major industrial countries that were slowing down, but managed to stay out of Recession. This time, even the best economies are now in trouble.

A Global Financial Overview

The US sub-prime crisis was the spark that ignited the worldwide credit powder keg because so many other nations had bought these "investments" from the US financial giants. The holes they burned in international balance sheets were the triggers that set off the global credit crunch. This credit crunch froze the international payments system and escalated fast into a global deflationary situation with the global financial system close to a systemic failure.

The Chinese Recession Has Arrived

The internal Chinese economy is showing all the classical signs of having entered into its very own Recession, shattering the hopes of China taking over for the Us as the engine of growth. (an illogical idea at best)

Japan joins the march

Japan's exports fell 7.7% in October in the biggest drop and as the economy entered into its worst slump since 2001 and slipped deeper into Recession with its factory output tumbling 3.1%and consumer spending dropping 3.8%.

What Next? They Never Learn

On December 15-16, the FOMC meets for the last time before Mr. Obama is inaugurated. The Fed is expected to lower by at least 0.50% - or even more. The frantic repatriation of capital by US investors and the global de-leveraging, which have been boosting the US Dollar and Treasuries, is showing signs of winding down. The huge rise of the USDX is just about over with short-term Treasury yields at a rock bottom 0% a Fed rate cut to new historic lows will put both Treasuries and the US Dollar under huge pressure. The Fed surely knows this, but the KNOW NOTHING politician's and media pressure to cut will almost certainly be the deciding factor.

Lessons Learned The Hard Way

With all the experts they have at their disposal, Government's are only able to learn from catastrophe and not from history or experience." So, as individual citizens are spending less, saving more, shunning what they see as "risk" and trying to prepare as best they can for what they can clearly see as the "hard times" to come, Governments are spending like drunken sailors (I apologize to all drunken sailors, as least they spend only their own money), blowing out deficits, pouring "liquidity" into empty shells and furiously denying that there is anything that they can not spend their way out of. The final schism between the "private" and "public" sectors will come when the "government guarantees," now so eagerly sought begin to be shunned. In order for GM to survive long term, they would have declared bankruptcy by now and did what they now have to do without the Government's help and what's worse, supervision. Do you really believe that with Government oversight and new regulations but with the same old union and its work rules and pay scales, GM can now be made to succeed? Oh Really?

The Main Problem

When we allow our education system to be taken over by the far left, who promptly become entrenched by instituting a program of tenure so you can't get rid of them; we end up with all economists, politicians and journalists especially the ones who graduate from the real seats of power (Harvard, Princeton and Yale), using text books written by Socialists. These economists, who are all steeped in Keynesian economics, can't understand that what is consumed must first be produced. The consumer is first and foremost a wage earner and you can't have rising wages and an increasing living standard without prosperous, highly profitable and growing companies. The surest way to guarantee a falling standard of living accompanied with large unemployment is an excess profits tax. It doesn't dawn on them that high taxes on corporations are really high taxes on consumers because, unless the companies can pass the extra costs (taxes) on to consumers, the company goes out of business or shify production to low tax lower wage countries. The companies are not moving voluntarily, the government is driving them out.

There has never been a socialist system that has ever succeeded.

Where to Now, DOW?

There are many lessons than can be learned from the 1930's Depression. The most important lesson that must be learned as an investor is that although the worst of the Depression was 1936-37 and lasted into 1946, the bottom of the stock market was made in 1932. The entire Bear Market lasted for only 3 years. So please do not become mesmerized by the economic numbers coming out over the next three months, be prepared to witness some of the worst economic data you've ever seen or heard of. But the key to remember is that the market has most likely discounted much of the bad news. That's why the major indexes were already down more than 45% this year and why they crashed in September, October and most of November. My point is that the market is a discounting mechanism and always reacts to what the economic landscape will look like in the future, not the economic readings of yesterday which are being reported today. From that stand point, I thought that there was a good chance that the market, after breaking below its lows, would then complete Wave A of Wave {IV} with Waves B up and Wave C down yet to come.

NOTE: This market low that we just saw will not be the final bottom. It will only be a 1930-31 type {B} Wave bounce that may be large enough to trap even the best of the bears before the market resumes its Bear Market in 2009-2010. This last 3 days of pull-back may be minor wave (b) of the larger a,b,c, of Wave B which will then set the stage for Wave (c) that could carry the DOW back to the 10,500 +/- level. The market may have laid the groundwork for a couple of good up months ahead, despite what the economic indicators will be saying.

BUT BE CAREFUL, we are still in a major Bear Market. We have only discounted the Recession. The next stage of the Bear Market will be the discounting of the Depression.

FORGET ABOUT JUST BUYING AND HOLDING. IT'S A TRADERS MARKET but whatever you do, DO NOT chase rallies. BUY only into 500 to 1,000 point sell-offs. Better to be safe and stay in cash and wait for the shorting opportunities that are sure to come.


What's with all the bitching and complaining? Since 2001, I have been calling for a 16 to 20 year BULL MARKET for Gold. Did you think that this Bull Market would be different from all others and would not have even one pull-back in 16 years? So far Gold, except for the manipulated Treasury Bond Market, is the only Bull Market still standing. Thus far, the Gold Market has pulled-back a maximum 32% over 8 months. A normal Elliott Wave minimum correction is 38%, lasting an absolute minimum 9 months, but a more normal bull-back time wise would be 1.5 years. As I have pointed out to you time and time again, the maximum expected pull-back, especially if the 4th wave of one lesser degree is a diagonal triangle, would be back to the apex of that triangle which stands at $600 to $650. What we are witnessing is a less than normal correction thus far. If we were to have a parabolic up move, it would be fast and furious but it would not last any longer than did $147 oil. We may have hit $1200 or $1500 and then crashed just like Oil and the rest of the commodities have - I don't know about you, but I'm looking for $6,250 over the next 8 to 12 years. I have been warning you all along NOT TO BE A TRADER. Sell options against some of your positions if you must, but continue to accumulate on weakness. Unless you are experienced and successful traders Just hang on to that GOLDEN BULL the ride will be bumpy but well worth it and extremely satisfying once the ride is over. I for one will last longer than the 2.7 seconds on the Bull named Fu Man Chu..

Unless you are experienced, knowledgeable investors: Stick to GLD and GDX. Use DGP or margin if you want more leverage. If you still want more action, buy options. If GDX is not exciting enough and you want Juniors, there are a few excellent services out there that you can subscribe to. I am no longer able to do proprietary research on individual companies and I do not comment on other commentators that I do not know personally.

Just like during the heyday of the commodity bubble, I cautioned all investors that there would be a major supply response to continued high prices. The Laws of Supply and Demand may be asleep for awhile, but they are not Dead. The Demand side of the LAW is about to kick in for Gold and Silver! THERE IS A SUPPLY DEMAND PRICE EXPLOSION BAKED INTO THE SYSTEM JUST WAITING TO BE RELEASED.

So Keep the Faith and Enjoy the Ride. You Will Not Have Much Longer to Wait

December 22, 2008
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418