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"A penny for your thoughts"

Wednesday, October 15, 2008

World economy in a poor state, but could get a lot worse.

Authorities around the world have been scrambling to shore up public confidence in the global financial system by nationalising banks, guaranteeing deposits and putting together massive bank bailout packages. The global financial market is facing lack of capital in the banking systems and the lack of liquidity as the wholesale funding market is frozen.

04 Nov 2008 Chinese officials pledge more measures to boost domestic demand. Output from Chinese factories has sunk to a record low in the face of shrinking orders worldwide. In Yiwu in eastern Zhejiang Province, millions of dollars worth of goods are churned out every year for global giants like Walmart, and many more multinational brands. And manufacturers are feeling the heat. Beijing is adjusting its monetary policy along with other measures to minimise the impact of the worldwide slowdown. People's Bank of China (PBoC) imposed strict loan controls last year and the first half of 2008 to rein in credit growth and prevent the economy from overheating. But it has since eased its limits in order to help growth as China's economic expansion slowed to 9.9 percent in the first three quarters of the year from 11.9 percent in the whole of 2007. The central bank cut key interest rates on Wednesday to spur economic growth, the third such move in six weeks. The reduction, which came hours before similar moves by other central banks including the US Federal Reserve, was aimed at maintaining vitality in the economy.
Inflationary pressure remains large as the world oil price is still at a high level despite some corrections. China's growth slowed to nine per cent in the third quarter of this year, the lowest quarterly figure since the second quarter of 2003, partly due to a slowdown in exports. China's trade surplus for the first nine months of the year reached US$180.9 billion, down 2.6 per cent year-on-year, according to customs data. Source: CNA

Footage:23 Oct 2008 Asian markets suffer heavy losses Asian stocks tumbled Thursday as concerns about the worsening global economy played on investors, despite continued efforts by governments to ease the financial crisis. Markets ignored signs that the credit crunch may be easing and focused on the risk of a global recession, which could hit company profits, lead to rising layoffs and cut consumer spending. Worst hit was Seoul, which shed 7.48 per cent to a three-year low. Shanghai also gave up just over one per cent, while Singapore tumbled 4.14 per cent and Taipei eased back 2.72 per cent. The markets took their lead from Wall Street, where the Dow Jones slid 5.69 per cent on recession worries, falling oil prices and a poor outlook for corporates. European markets also fell heavily Wednesday as a blunt recession warning from British Prime Minister Gordon Brown cast a shadow over trading. "We must now take action on the global financial recession which is likely to cause recession in America, France, Italy, Germany, Japan and -- because no country can insulate itself from it -- Britain too," he told parliament. Source: ChannelNewsAsia

Footage:21 Oct 2008 Economists say China is not immune to global credit crisisChina's economic growth has slowed to nine per cent in the third quarter of 2008 - the slowest in five years. Growth in the first nine months of 2008 stood at 9.9 per cent, a decline from overall 11.9 per cent growth in 2007. In recent days, thousands of factory workers in the country's southern manufacturing hubs have been laid off. To sustain growth, Beijing has pledged to undertake measures such as encouraging banks to lend more, and supporting technological innovations in Chinese companies. It will also work on tax cuts, investments in infrastructure, and further curbs on the real estate market.
With inflation at a 15-month low, experts said the government should expand China's domestic demand. They also recommend that Beijing lower corporate taxes, and lift individual income taxes. Economists have pointed out that even with inflation and rising energy prices, China still has a strong growth potential due to its large labor pool, its vast domestic market, and its increasingly competitive companies.
Source: ChannelNewsAsia

Oct. 17, 2008- Legendary investor Warren Buffett advises "Be greedy when others are fearful," and time is right to jump back into stocks. Buffett has been moving his personal investments from safe Treasury securities into U.S. stocks and he expects his personal account to be 100 percent invested in U.S. equities if prices continue to look attractive according to an article he wrote in Friday’s New York Times. Buffett is ranked as the nation's richest individual with a net worth of $58 billion, and due to recent market turmoil he has surpassed his friend and Microsoft co-founder Bill Gates according to a recent calculation by Forbes magazine. Buffett said buying stocks now is better than trying to time markets and guess when a turnaround will happen. Since stocks began to tumble in September, Buffett and his investment company, Berkshire Hathaway Inc., have made large bets on U.S. companies, exacting rich dividend payments in the process. Charles Geisst, a finance professor at Manhattan College and the author of “Wall Street: A History.” was not immediately convinced that Buffett's strategy is right and said that his position is probably the opposite of what someone close to his age should be doing: keep more of their money in Treasuries. VIA
Related Post: Bill Gates lost as world's richest

17 October 2008- Friday sees a Wall Street rebound which helped to calm recent panic over the financial crisis but Asian markets are ever cautious over the spluttering global economy . A drop in oil prices and signs of an improvement in credit markets helped to soothe jitters in the region a day after a fierce selloff that left Tokyo reeling from its worst loss in two decades. But worries about the worsening health of the world economy continued to dampen the mood despite moves by world powers to pump billions of dollars into shaky markets and banks teetering on the brink of collapse. NAB Capital economist David De Garis noted with fears the global economy is headed for recession continue to reverberate around the world. VIA

Video Clip:16 Oct 2008 Global markets battered by recession fears The financial turmoil is hurting hedge funds across the world as profit opportunities shrink.Investors have also been withdrawing their money, weakening the size of the funds and their ability to be nimble in these times.But observers said Asian hedge funds have managed to come out ahead of their counterparts in the West. Despite their relative good standing, Asian hedge funds – like others in the world – are seeing concerned investors step up the focus and depth of their due diligence on funds. And as redemption pressures mount, hedge funds are switching to higher levels of cash holdings. It has increased from about 5 per cent a year ago to about 50 to 60 per cent currently. Despite the market turmoil, UBS – considered the third largest prime brokerage service in Asia, with a 17 per cent market share said it has yet to see any distressed Asian funds in its customer base. VIA

Video Clip:14 Oct 2008 Global stocks soar as world govts battle crisis
15 October 2008-Asian stocks were mostly lower Wednesday as a global market rally lost momentum amid growing fears of recession in some of the world's biggest economies. On Monday, the Dow had registered its biggest points rise in history and its biggest rally in percentage terms since 1933 as markets around the world rebound to government intervention to tackle the financial crisis. Investors took profits after stocks ended lower overnight on Wall Street, despite news that Washington will inject up to US$250 billion into ailing banks to try to end the worst financial crisis since the 1930s.A top US central banker said that the United States "appears to be in a recession". There are also growing fears Japan and Europe are heading for a spell of economic stagnation or recession. Markets across the globe have been extremely jittery since the middle of last month when Wall Street investment bank Lehman Brothers filed for bankruptcy after the US government refused to bail it out.
While panic selling on global markets has subsided for now, there are still deep concerns about the outlook for the US and global economies. The US dollar traded mainly lower against other currencies on Tuesday as investors moved away from the safety of the greenback amid a stepped-up effort by world governments to rescue the banking sector.

The euro climbed to 1.3618 dollars at 2100 GMT from 1.3576 dollars in New York late on Monday. Against the Japanese currency, the dollar firmed slightly to 102.07 yen from 102.01 yen on Tuesday. The yen meanwhile had found support on the view that Japan would remain relatively untouched by the credit crunch and as investors unwound risky so-called carry trade. Carry trade is when investors borrow in a country with low interest rates such as Japan before investing in higher yielding countries with higher interest rates. It entails selling the currency from the first country and buying from the second. VIA VIA
13 Oct 2008-European summit agrees on financial crisis rescue plan
Until this week the politicians trying to tackle the credit crunch had done little to restore this essential ingredient. In America Congress dithered over the Bush administration’s $700 billion bail-out plan and Europe governments have casually played beggar-my-neighbor politics, with countries launching deposit-guarantee schemes that destabilize banks elsewhere.

( One distinct exception is Singapore where flight of capital does not occurred as Monetary Authority of Singapore implemented trade-weighted monetary policy instead of interest rates and had allowed for a modest and gradual appreciation of the Singapore dollar. The Australian dollar had plummeted below par against the Singapore dollar last week from $1.36 in November last year. Yesterday, the Australian currency traded at par with the local dollar. Singapore has not yet issued a guarantee as at 13 Oct 2008 for all bank deposits. Finance Minister Tharman said Singapore banks have enough capital and they are not dependent on the wholesale funding market, unlike banks in some other countries. With the threat of inflation easing, the MAS has now shifted to a policy of zero appreciation. This strengthened against currencies like the sterling and the Aussie dollars . There is a slight possibility of people moving their money overseas as savers will face uncertainty in exchange rates plus Singapore banks are still in good health. )

Video Clip:15 Oct 2008 Singapore's banking system not in trouble, assures finance minister

16 Oct 2008-The Singapore government said it would guarantee all Singdollar and foreign currency deposits of individual and non-bank customers in licensed banks, finance companies and merchant banks. The guarantee takes immediate effect and will remain in place until 31 December 2010. Following on 17 Oct 2008 Malaysia has also issued a guarantee for all bank deposits until December 2010, following the lead of several other nations in a measure to maintain the stability of its financial system.

European leaders from the 15 nations met in Paris to tackle the financial crisis together in buying into banks by taking preference shares and guaranteeing inter-bank lending to help increase liquidity. The United States was reportedly also heading towards taking direct stakes in threatened banks in the coming days. The European talks came after leaders from the Group of Seven (The Group of 7, whose finance ministers typically gather four times a year, is made up of the United States, Japan, Germany, France, Britain, Italy and Canada.) richest economies pledged to support key financial institutions, take measures to get credit flowing, assist banks in raising capital and reassure savers. World Bank president Robert Zoellick said the financial crisis, the worst since the 1929 market crash, underscored the need for coordinated action to "modernize multilateralism for a new global economy."

Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems. Already seen in the unprecedented co-ordinated interest-rate cut on October 8th by the world’s main central banks, including the Federal Reserve, the European Central Bank, the Bank of England and (officially a coincidence) the People’s Bank of China. America and Britain recapitalize their banks most profoundly with the Fed doubled the amount of money available to banks on a short-term basis to $900 billion and announced that it would buy unsecured commercial paper directly from corporate borrowers. More surprisingly, Gordon Brown’s government produced the first
systemic plan for dealing with the crisis, not just providing capital and short-term loans to banks but also offering to guarantee new debt for up to three years.

China could do a lot to help the rest of the world economy (and itself) by loosening fiscal policy and allowing its currency to appreciate more quickly. The Group of 7 had reaffirmed that exchange rates should reflect economic fundamentals, a statement that was against governments that manipulate the value of their currencies to bolster growth, like China and Japan. Central bankers around the globe have routinely criticized both countries for intervening in currency markets to keep their currencies artificially low, policies that also lower their export prices and thus boost their share of international trade.

The credit bubble & financial excesses with dodgy lending, including a tide of cheap money from emerging economies, outdated regulation, government distortions and poor supervision failures were as evident outside America as within it to the current poor world economy state. The failure of confidence is based on three related issues: the solvency of banks, their ability to fund themselves in illiquid markets and the health of the real economy. The bursting of the housing bubble has led to hefty credit losses: most Western financial institutions are short of capital and some are insolvent.Liquidity is a more urgent problem necessitate government
intervention which stakes are also much higher against the belief that markets and prices "work best when allowed to operate freely".

Now that commodity prices have plunged, the inflation risk has dramatically receded across the rich world. With asset prices plummeting and economies shrinking, deflation will soon be a bigger worry. Even in the best of circumstances, the consequences of the biggest asset and credit bubble in history will linger.


* The Economist Print edition Print edition October 11th 2008
Saving the system
At last a glimmer of hope, but more boldness is needed to
avert a global economic catastrophe.
Read More: UK lenders will continue to rely upon wholesale funding and securitization.

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