Roubini: Economic Recovery to Be 'Very Ugly'

Nouriel Roubini, the economist whose dire forecasts earned him the nickname "Doctor Doom", told CNBC Monday that the economic recovery is going to be "very ugly."

When asked about the economy Monday, Roubini said, "We may be out of a freefall for the financial system," said Roubini. "We have seen the worst in that sense. But in my view there is a sluggish U shaped recovery that might go into a W double dip if we don't fix the problems in the economy."

The global recession may end towards the end of 2009 rather than sooner and the global recovery in 2010 will be anemic and well below trend as leveraged and income/profit-challenged households, firms and financial institutions are constrained in their ability to borrow, lend and spend. Meanwhile a perfect storm of persistently large fiscal deficits and public debt accumulation, monetization of such deficits that will eventually increase expected inflation, rising government bond yields, soaring oil prices, weak profits, still falling jobs and stagnant growth has inched a little closer on the radar of this cloudy global economic outlook. It’s a storm that could blow the recovering world economy back into a double-dip recession by late 2010 or 2011. It doesn’t have to come to pass. But it is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented once a more sustained global recovery is achieved.

On investing in today's markets: "A "Stay away from risky assets. I think from now on the surprise will be on the downside in areas like commodities."

Below is his interview.

So what is your forecast for the recovery right now? I've been hearing sub par growth. What exactly does that mean?

ROUBINI: First of all, in my view the recession is going to continue through the end of the year. It's not over yet, and while potential growth rate for the U.S. economy is 3 percent, I expect that the growth rate of the economy is going to be very anemic, below trend, then on 1 percent for the next two years. Why? You have U.S. consumers are shopped out, saving less debt burden. They're not going to consume very much. Your financial system is severely damaged, and credit growth is going to be limited, and now we have also this massive re-leveraging of the public sector with a large budget deficit and increases in public debt are going to eventually crowd out the economic recovery of the private sector. So I don't see a lot of economic growth ahead of us.

Are you worried at all about a double-dip recession?

ROUBINI: Yeah, the risk is that by the end of the next year, if budget deficit remains very large, around $1.5 trillion, and if the Fed keep on monetizing them, essentially printing money to try to prevent increases in interest rates, expect that the inflation is going to go up, and if expecting inflation were to go up, long-term government bond yields would go up, and mortgage rates will go up. Borrowing costs for consumers (INAUDIBLE) will go up, and that's going to crowd out the recovery, so there's even a risk of a double-dip recession.

If your economic projections are correct and I have to point out that they are below consensus, it would seem that the stock market may have gotten way ahead of itself here at the current levels. Do you agree with that?

ROUBINI: Yes. Some increase in stock prices are justified because we avoided the risk of a near depression. That was the risk we were facing in the first quarter. But markets have gone up too much, too soon based on economic fundamentals. If the recovery is going to be weaker, therefore profits are not going to recover as fast. If you are going to have still weaknesses in the rest of the world, Europe, Japan I think there will be downside risk for the stock market from this point on.

What would you expect those stronger signs to be? What do you look for?

ROUBINI: Well, we have to look whether there's going to be any stabilization of the job market, but unfortunately I see unemployment rate well above 10 percent this year and close to 11 percent at the peak next year. We have to see a recovery of the U.S. consumer, but there's a massive weakness because of consumers being hit by default (ph) in the equity wealth, in this housing wealth, falling labor income, rising debt and debt servicing ratio (ph). That's why I'm somehow bearish about the recovery and don't expect the recovery to occur anytime soon and that's going to be a negative for the markets.

Above transcripts are taken from Video Interviews listed below:



One more video interview: http://www.pbs.org/nbr/info/local-player.html?s=nbre07s2cf0q4c4

Read More in http://www.cnbc.com/id/32012679/site/14081545

Is it good time to invest in Oil?

Well, it all depends on your trading style. Looking at the charts for USO (my favorite Oil ETF), everytime you say it cant go lower, it does just that. For me, I am going to wait for oil to actually make a higher low (swing high) before looking at investing in oil for the long run. What's interesting is that even though Oil continues to go lower, the price at the pump has stopped going lower and in fact is higher than it was months ago when oil was more per barrel.

When crude breaks above $50/barrel which would be late March/early April. On a daily chart it's forming a sideways base after it's down-trend ended in December.

If you buy now you're taking a speculative view in anticipation of the upside possibility and would need a contingency plan at a price where you will cut your loses if you're wrong.

Some analysts say : oil has quite a bit lower to go. I think the recession is going to get worse yet and unemployment is going to rise more. We have large amounts of oil in storage, excluding the strategic reserve. I think the price will eventually go below $20. And rise to around $75 in a couple of years.

Best advice is till the recovery in the share market in the world market started to come, no one should purchase the crude oil in the MCX.

N.Y. Gov. Aims To Tax Internet Downloads

Morning Edition, February 16, 2009 · In an effort to curb New York's nearly $15 billion budget deficit, Gov. David Paterson is suggesting a tax on Internet downloads. His so-called "iPod tax" would levy a 4 percent fee on all music and video downloads — including pornography. Supporters say they're merely bringing the tax code into line with shifting technologies. But not everyone is on board with the idea of profiting off porn. The chairman of New York's Conservative Party says that taxing it legitimizes it.

Obama Fired up, Again!!!!!

A fired-up Barack Obama ditched his TelePrompter to rally House Democrats and rip Republican opponents of his recovery package Thursday night – at one point openly mocking the GOP for failing to follow through on promises of bipartisanship.

In what was the most pointedly partisan speech of his young presidency, Obama rejected Republican arguments that massive spending in the $819 billion stimulus bill that passed the House should be replaced by a new round of massive tax cuts.

“I welcome this debate, but we are not going to get relief by turning back to the same policies that for the last eight years doubled the national debt and threw our economy into a tailspin,” said President Obama – sounding more like Candidate Obama than at any time since he took the oath of office less than a month ago.

Obama, speaking to about 200 House Democrats at their annual retreat at the Kingsmill Resort and Spa, dismissed Republican attacks against the massive spending in the stimulus.

"What do you think a stimulus is?" Obama asked incredulously. "It’s spending — that's the whole point! Seriously.”

Israeli Ambassador slips up - Israel to launch war against Iran within a month

Bailed Out Banks Sought Foreign Workers For High-Paying Jobs

Major U.S. banks sought government permission to bring thousands of foreign workers into the country for high-paying jobs even as the system was melting down last year and Americans were getting laid off, according to an Associated Press review of visa applications.

The dozen banks now receiving the biggest rescue packages, totaling more than $150 billion, requested visas for more than 21,800 foreign workers over the past six years for positions that included senior vice presidents, corporate lawyers, junior investment analysts and human resources specialists. The average annual salary for those jobs was $90,721, nearly twice the median income for all American households.

As the economic collapse worsened last year _ with huge numbers of bank employees laid off _ the numbers of visas sought by the dozen banks in AP's analysis increased by nearly one-third, from 3,258 in the 2007 budget year to 4,163 in fiscal 2008.

More on http://www.huffingtonpost.com/2009/02/01/bailed-out-banks-sought-f_n_162877.html

US Economy shrank at fastest clip since '82

The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.

The new figure, released Friday by the Commerce Department, showed the economy sinking at a much faster clip in the October-December period than the 0.5 percent decline logged in prior quarter.

Although economists expected an even worse fourth-quarter performance — a staggering 5.4 percent rate of decline — the results were still grim.

The report provided clear evidence of the economy's rapid deterioration as the housing, credit and financial crises — the worst since the 1930s — feed on each other. It's a vicious cycle that has proven difficult for Washington policymakers to break.

House Passes Obama’s Stimulus Plan 2009 stimulus package , Barack Obama Stimulus Plan , economic stimulus package 2009 , obama stimulus package

obama stimulus plan details , stimulus bill , stimulus package , stimulus package 2009 , stimulus package details , Stimulus Plan

Much of the spending would be for items such as health care, jobless benefits, food stamps and other programs that benefit victims of the downturn.

The president said he understood skepticism about the size of the stimulus package, "which is why this recovery plan will include unprecedented measures that will allow the American people to hold my administration accountable."

Aid to the poor and unemployed

$43 billion to provide extended unemployment benefits through Dec. 31, increase them by $25 a week and provide job training

$20 billion to increase food stamp benefits by 13 percent

$4 billion to provide a one-time additional Supplemental Security Income payment

$2.5 billion in temporary welfare payments

$1 billion for home heating subsidies

$1 billion for community action agencies.

Health care

$40 billion to subsidize health care insurance for the unemployed under the COBRA program or provide health care through Medicaid

$87 billion to help states with Medicaid

$20 billion to modernize health information technology systems

$4 billion for preventative care

$1.5 billion for community health centers

$420 million to combat avian flu

$335 million for programs that combat AIDS, sexually transmitted diseases and tuberculosis

Infrastructure

$43 billion for transportation projects, including $30 billion for highway and bridge construction and repair and $12 billion for mass transit, including $6 billion to buy transit equipment like buses

$31 billion to build and repair federal buildings and other public infrastructure

$19 billion in water projects

$10 billion in rail and mass transit projects

Education

$41 billion in grants to local school districts

$79 billion in state fiscal relief to prevent cuts in state aid

$21 billion for school modernization

$16 billion to boost the maximum Pell Grant by $500 to $5,350

$2 billion for Head Start

Energy

$32 billion to fund a so-called "smart electricity grid" to reduce waste

$6 billion to weatherize modest-income homes

Science and technology

$10 billion for science facilities

$6 billion to bring high-speed Internet access to rural and underserved areas

$1 billion for the 2010 Census

Housing

$13 billion to repair and make more energy-efficient public housing projects, allow communities to buy and repair foreclosed homes, and help the homeless.

Environment

$3.2 billion to clean up Superfund and waste sites, leaking underground storage tanks, nuclear sites and military bases

$400 million for habitat restoration projects

$850 million to prevent forest fires.

Law enforcement

$4 billion in grants to state and local law enforcement to hire officers and purchase equipment

Tax Cuts For Individuals

$500 per-worker, $1,000 per-couple tax cut for two years, costing about $145 billion. Workers could expect to see about $20 a week less withheld from their paychecks starting in June. Millions of Americans who don't make enough money to pay federal income taxes could file returns next year and receive checks

Greater access to the $1,000 per-child tax credit for the working poor in 2009 and 2010, at a cost of $18.3 billion. Under current law, workers must make at least $8,500 to receive the credit. The change eliminates the floor, meaning more workers who pay no federal income taxes could receive checks

Increase the earned-income tax credit — which provides money to the working poor — for families with at least three children, at a cost of $4.7 billion

Provide a $2,500 tax credit for college tuition and related expenses for 2009 and 2010, at a cost of $10.3 billion. The credit is phased out for couples making more than $160,000

Repeal a requirement that a $7,500 first-time homebuyer tax credit be paid back over time for homes purchased from Jan. 1 to July 1, unless the home is sold within three years, at a cost of $2.6 billion. The credit is phased out for couples making more than $150,000

Tax Cuts For Businesses

Extend a provision allowing businesses buying equipment such as computers to speed up the depreciation of that equipment through 2009, at a cost of $5 billion

Provide an infusion of cash into money-losing companies by allowing them to claim tax credits on past profits dating back five years instead of two, at a cost of $15 billion

Repeal a Treasury provision that allowed firms that buy money-losing banks to use more of the losses as tax credits to offset the profits of the merged banks for tax purposes. The change would increase taxes on the merged banks by $7 billion over 10 years

Subsidize locally issued bonds for school construction, teacher training, economic development and infrastructure improvements, at a cost of $35.5 billion

Extend tax credits for renewable energy production, at a cost of $13 billion

Extend and increase tax credits to homeowners who make their homes more energy efficient, at a cost of $4.3 billion. Homeowners could receive tax credits of up to $1,500 for upgrading furnaces and hot water heaters and making other improvements through 2010

Paulson re-activates secretive support team to prevent markets meltdown

From News Source:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the 'plunge protection team' (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.

Mr Paulson has asked the team to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis".

"We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?" he said, fretting about the secrecy of the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal.

The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

"They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem," he said.

"In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall," he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.

US and Global Equities Prices would head again towards new lows

US and Global Equities Prices would head again towards new lows says Nouriel Roubini who predicted the financial crisis in July 2006. In February this year he forecast a ``catastrophic'' meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks exposed to mortgages and a ``sharp drop'' in equities.

This is what he says so....

For a few weeks since late November equity markets ignored the onslaught of much worse than expected macro news (and all the new were really worse than awful) and had a nice 25% bear market sucker’s rally. But the drumbeat of terrible – and worse than expected - macro news and earnings news and financial news has finally taken a toll on the delusional market belief that the worst was over for financial markets and for equity markets and that the US and global economy would recover in the second half of 2009. So equity prices have already reversed more than half of their most recent bear market rally as the lousy macro news have finally shocked in the last week the wishful thinkers.

Indeed, the retail sales figures published today confirmed a shopped-out, saving-less and debt-burdened US consumer is now faltering as job losses, income losses, fall in home wealth, fall in equity wealth, high and rising debt and debt servicing ratios and a severe credit crunch take a severe toll on the ability of consumers to spend. And reduction in spending and deleveraging of the US consumer will take years to rebuild the savings rate of a household sector now hit by a severe shock to its net worth (as equity and home values fall while debts have been rising) and shocked in its ability to generate income as job losses mount and the unemployment rate surges.

US and global recession will continue at least all the way until Q4 of 2009 (a nasty 24 months U-shaped recession) and that the recovery in 2010-11 will be very weak with growth in the 1% range that is well below a potential of 2.75%. And we cannot rule out that a more severe L-shaped stag-deflation (as in Japan in the 1990s) will take hold. Indeed, as I argued recently.

Goldman Slaps Software Stocks....

Here is a quote from the report:

"The worst of the IT-spending slowdown likely remains in front of us, as we start the clock on slashed 2009 budgets. We forecast 0 percent revenue growth for our group, below consensus at 5 percent, and 1 percent earnings growth, below Street at 2 percent."

Goldman presents a recommended list of big-name IT software stocks that they consider to be "safe" choices in the current environment. Microsoft (MSFT) and Oracle (ORCL) are on the list, as well as companies that suggest "strong cost-cutting discipline and mission-critical product sets" like BMC (BMC), CA (CA), and Symantec (SYMC). BMC and CA are big in system management and support functions while Symantec is, of course, focused on system and information security. The needs for these kinds of functionality doesn't go away.

There has been much discussion in the blogosphere about open source software and how it will see a surge of adoption do to its lower cost. Goldman quite rightly says this will not be the case. I have written that CIOs will hunker down and stick with the tried and true (which is not open source in most large-sized enterprises) and Goldman is in agreement, seeing a consolidation of functionality with big, established vendors and a moving away from the concept of seeking best-of-breed point solutions regardless of vendor.

Surprisingly, Goldman doesn't expect Salesforce.com (CRM) to prosper particularly in the current environment. Goldman doesn't see Salesforce as one of the heavyweights who will benefit from the "consolidation" mentioned previously. On this point, I would disagree. Salesforce.com and SAAS in general allows certain IT functions to be brought online with lower initial cost and that should remain an attractive proposition going forward no matter what the economic environment. Of course, it is always cheapest to do nothing and some enterprises will do exactly that, so Salesforce.com will not escape this downturn altogether.

So in terms of non-defense technology companies we are batting two for two: neither hardware not software will be spared over the next several quarters as the outlook remains dim for both.

From News Source.

Dollar is still Strong.....

The great challenge confronting the foreign exchange market at the start of 2009 is finding a good alternative to the US dollar. One of the ironies of market events during 2008 was that the US financial crisis produced a flight to safety in the dollar. The dollar emerged triumphant from a financial debacle that centred on $1,300bn (€960bn, £890bn) of subprime US mortgage loans. The fallout has triggered a $32,000bn decline in global stock market capitalisation and driven all the Group of Seven leading industrialised countries into recession.

The dollar slumped against the euro during the final weeks of 2008 but fears about the financial system still drove US Treasury yields down to zero on three-month paper and less than 2.1 per cent on 10-year notes. This fear factor is likely to sustain demand for the dollar during the early months of 2009.

There is not now a clear alternative to the dollar because all big economies have slid into recession. Real gross domestic product could contract by 1.5 per cent in both the US and Europe during 2009 and by as much as 2.5 per cent in Japan. The decline in world trade and commodity prices will also reduce significantly the growth rates of the emerging market economies. South Korea and Taiwan are already in severe slumps. The growth rate of China could halve.

Source FT... http://www.ft.com/cms/s/0/5b21dafc-db5a-11dd-be53-000077b07658.html?nclick_check=1

Fed Minutes: Pain & Unemployment Ahead... And Deep Recession

The minutes from the December FOMC meeting where rates were essentially taken to zero have now been released.  What is interesting here is that there is very little expected hope for anything great in 2009.  The FOMC has noted substantially weaker conditions persisting.  This quote pretty much sums it up, although even this minimizes the total commentary:

• "...investors seemed to become more concerned about the likelihood of a deep and prolonged recession."

The economic risks are substantial to the economy despite substantial easing to inflationary pressures.  It also noted that there were some who see inflation as too low, meaning the deflationary worries are there.  The Fed staff now admits that it sees a decline in GDP for 2009 and unemployment will rise significantly into 2010.

If you read through the minutes it reads like a tragedy.  About the only good news in there is that the FOMC noted the commercial paper markets had improved.  They improved because of that government guarantee, otherwise there would not even be that.

Economic Reports for Next Week

Monday: November construction spending is due shortly after the start of trading. Spending is expected to have fallen 1.2% in November after falling 1.2% in the previous month.

Monthly truck and auto sales figures are due throughout the session.

Tuesday: The Institute for Supply Management's survey of the services sector of the economy is due shortly after the start of trade. The December index is expected to have dipped to 37 from 37.3 in November, remaining deep in recessionary territory.

The government's November factory orders report is due around the same time. Orders are expected to have fallen 2.6% after dropping 5.1% in October.

Data on November pending home sales, a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 a.m. ET. In October, he number of homes under contract to be sold fell by a mere 1% year over year. Analysts had expected pending sales to slip by 3.6%.

Also, the Federal Reserve will release the minutes from its Dec. 15-16 policy-making meeting. At that meeting, the Federal Open Market Committee established a target range for the federal funds rate of 0% to 0.25% and said it would likely keep rates at that level for some time.

Wednesday: The House Financial Services Committee meets to discuss how the next administration might make use of the remaining TARP funds, amid criticism that the $700 billion bailout has not been working.

Also Wednesday, a House panel holds an economic recovery plan hearing that will feature testimony from some of the nation's top economists.

Thursday: The nation's chain stores will be releasing December sales reports, giving investors a better sense of how badly the consumer has been hit amid the recession.

Separately, the Fed is slated to release its monthly consumer credit report at 3 p.m. ET. Consumer credit, a measure of consumer borrowing, for November is forecast to show an increase of $0.5 billion. In October, consumer credit fell by $3.6 billion

Oppurtunities and Change to Look for in 2009

* The U.S. Dollar: By pumping an estimated $3 trillion into the global financial system, the U.S. government is setting the stage for the mother of inflationary conflagrations. According to classic economic theory, the greenback should be in an actual freefall right now – especially in the current low-interest-rate environment, where there’s the potential for still more rate cuts and for additional capital outlays by the U.S. government. And that’s just with the current administration. President-elect Barack Obama has made it clear that if an additional stimulus isn’t announced before he takes office, he’ll make that one of his first official acts. What’s saving the dollar, at least for now, is that there’s so much global uncertainty that the dollar is retaining its reputation as a “safe-haven” currency. And, for now, at least, a safe U.S. dollar trumps inflationary concerns. However, should global investors regain confidence for whatever reason, expect the dollar to decline sharply.

* Oil: Many people are focused on declining oil prices as a function of a perceived slowdown in global demand. We think that’s an erroneous analysis for three key reasons. First, oil is still largely priced and traded in U.S. dollars. That means that as the dollar has risen, oil has become correspondingly cheaper. In other words, much of the price decline we’ve seen can simply be attributed to a rise in purchasing power associated with a stronger dollar. Second, China, India and other newly capitalist (and still-reasonably robust) economies are still increasing their oil consumption at a rate that more than offsets the decline in consumption we’re seeing here in the United States and in other developed markets. And third, Brazil aside, there hasn’t been a major new discovery capable of offset global demand on anything more than a temporary basis for more than 30 years, and most major oil fields are in decline or soon will be. Increasing demand and diminishing supply are clearly bullish influences over the longer term. More immediately, however, a stronger dollar negates this and may well keep oil under $100 a barrel for much of 2009. Obviously a terrorist attack would change the ballgame significantly, meaning we could see a spike to levels exceeding our multi-year target price of $225 a barrel. A year ago at this time, we called for oil to spike well up over $100 a barrel, and touch $150, which it essentially did. Even with recent price declines, some energy-industry insiders are starting to subscribe to our bullish outlook: The Paris-based International Energy Agency (IEA) last week projected that long-term oil prices would reach $200 a barrel (although we think that will happen much sooner than the IEA does).

* Commodities: The story is much the same for commodities, in general, and we expect that longer-term investors will be amply rewarded. More immediately, the popular – though erroneous – assumption that a global slowdown will negate demand is driving prices lower, and may continue to do so for the next six months. Gold will be the most obvious casualty in this arena, as hedge-fund-redemption requests and margin calls continue to mount, which is why we expect the price of the yellow metal to remain lower far longer than most people expect (We’ll focus specifically on gold in an upcoming installment of the “Outlook 2009” series). When it does rebound, however, the returns will be high.

* Global Markets: There’s no doubt that the global markets have taken their share of lumps along with their U.S. counterpart in recent months. But we don’t expect them to suffer forever. Countries with high cash reserves as a percentage of gross domestic product (GDP) – such as China, India and Brazil – are becoming less dependent on the fractured U.S. consumer almost daily, and the economic decoupling we’ve seen developing for several years may really take hold in the New Year. This stands in direct contrast to the situation a decade ago, when the Asian Rim and South America were economic train wrecks and the United States and Europe held all the cash. Companies with significant global exposure to the Asian Region, Latin America and Europe – in that order – remain the best bets for relative safety and growth in 2009.

* Stocks in General: Many investors are questioning the wisdom of being in stocks at all. While we certainly understand the pain that sentiment is based upon – and are hurting, too – it’s important to remember that the last time stocks really performed this badly was during the 1930s. Investors who decided to “get out” entirely then missed the investment opportunity of their lifetime. Don’t make the same mistake. Data shows, unequivocally, that investors who buy when the world is going to hell in a hand basket –think 1932, 1942, 1982 and 2003 – enjoy the largest returns. That’s even true if you’re “early,” and buy ahead of the specific market bottom. However, history also demonstrates that investors who pile in at the market’s peaks – such as 1928, 1969, 1999 and 2007 — tend to incur the worst returns.

* Global Stocks in Particular: Led by cash-rich China, we expect global blue chips to remain the best relative bets for safety, income and appreciation potential in the New Year. We are especially focused on companies involved with infrastructure projects and with firms that derive substantial portions of their revenues from Asian consumers. The first is a no-brainer. According to the latest studies from a variety of sources, planned global infrastructure expenditures in this area exceed $40 trillion by 2030. There is not a bigger, more unstoppable trend on the planet today. If you want proof, notice that a big portion of China’s just-announced half-trillion-dollar stimulus package is devoted to infrastructure projects. Infrastructure companies there will certainly benefit. So will consumer-products firms that are positioned to benefit from the rise of an increasingly Asian consumer base, which boasts significant savings and pent-up demand. Many of the best companies are beaten down to the point that they now feature single-digital Price/Earnings (P/E) ratios – lower than we’ve seen in decades. Some are actually trading for less than cash value, despite a strong history of growth. And the companies we’re studying have solid cash flow – and excellent prospects of maintaining it.

Crises Today and the Future of Capitalism

The seminar titled ‘Crises Today and the Future of Capitalism’ was organized by Institute of Social Science (ISS), Planning Commission (Government of India) and Swiss Agency for Development and Co-operation (SADC). The seminar was held on 20, December 2008 at Mavlankar Hall, Rafi Marg (near Planning Commission). The discussion started on a remark on the 9/11 event by George Matthew from ISS. He pointed out the problem with the Lehman Brothers case in the backdrop of the current recession being faced by the United States (U.S.). He informed the audience that Prof. Stiglitz’s area of research was on screening and asymmetric information. The importance of State cannot be rules out according to Stiglitz, he said. He also informed that Prof. Stiglitz worked on how coercive institutions of the State can be constrained.

The first point that Prof. Stiglitz said was that the world is facing depression. The problem is similar to the crisis that happened in the 1930s. He informed that what started in the United States (U.S.) has spread worldwide. He asked what is the nature, the consequences and the responses to the present economic crises. He emphasized upon the required reforms to tackle these kinds of crises. He said that the central banks are too much worried to curb inflation at the cost of growth and fiscal expansion. He asked for the need of better monetary policies. The crisis is similar to the Great Depression in the era of 1930s, he informed. 75 years back the banking system was relatively easier. Today, the banks are more into complex financial and business relations. The banks are more into gambling like buying derivatives, which is risky, Prof Stiglitz said. He emphasized upon the point that financial system is a means to an end for a steady and sustainable economy. The financial system should look at raising gross domestic product (GDP) and productivity. The banks in the U.S. did not mobilize savings. Instead, they created risks. There was a contradiction between private investments and social returns. The CEOs and management of these banks have walked out with the money that belonged to the society. The Central Bank took the credit of low inflation. There was no attention on the asset market. There existed loose monetary policy. It was the housing bubble that led to consumption boom. The savings rate in the US has gone down to zero. There is short sightedness in the policies pursued by the U.S. In the early 1990s, banks in the U.S. used to engage in securitization. There was under-estimation of the problem of price decline. Students of Stiglitz often forgot to understand the warnings that he delivered. The U.S. has sold many toxic mortgages to Europe in the past, Prof. Stiglitz informed. Diversifications of asset do not help in the time of recession. There is a notion that has cropped up, which is called self-regulation. But this thing would not work in the present scenario. The credit rating agencies need to be criticized. There is a need to understand the present macroeconomic problem. One has to understand the bubbles created by the U.S. economy in the past. The U.S. is facing both social and economic tragedy, according to Prof. Joseph Stiglitz. People do not have money to educate their children. But why bubbles?—asked Stiglitz. The reason: the Central Bank thinks there should be lesser regulations for achieving more economic growth. The U.S. in the past faced consumption led boom. The tax-cut for the rich Americans is a bad decision by Alan Greenspan. There is need to give tax-cut to the poor. President George Bush (junior) made a mistake to go for the Iraq war, according to Prof. Stiglitz. There was price associated with war, he informed. In the decade of 1970s, there was a depression. The import bills of the U.S. used to be high due to high value of petroleum and petro-products. Latin America used to survive just by borrowing, during those days. However, in the 1980s L. America faced poverty, recession and unemployment. In the present scenario one should mention that the problem started in August, 2007. The problem related to bail-outs should not be ruled out, he said. Almost 50 million Americans do not have health insurance. There was a Bill to ensure them health insurance. But it was due to President Bush the initiative never materialized because he vetoed the Bill. Recovery of the banking system is necessary but not sufficient. The U.S. is going to face national debt, Prof. Stiglitz informed. Fiscal responsibility in itself is not enough. He also talked about the case of Freddie Mac. He informed that initially AIG said that it owns a debt of US$ 20 billion but later it increased the amount to US$ 80 billion in order to get debt relief from the U.S. government. It is quite important that the money given for debt relief is spent well. In fact, the United Kingdom wanted such kind of regulation but it was the U.S. which opposed a mechanism for monitoring the spending of the money given as debt relief. Prof. Stiglitz informed that the trickle down policy is not working at all. It is good news that Obama has been elected as President. Obama has promised creation of 2.5 million jobs. But there is need for creating 8.0 million jobs because due to recession unemployment has increased. The banks have gambled enough. They have not kept their balance sheets well. If the US$ 700 billion is used to create new accountable institutions rather than supporting old, corrupt institutions, then that would have been good. The present crises would change the entire debate on sustaining capitalism. The World Bank and the IMF need to look at the problem in a different way. Probably, the Congress men have been bribed in the recent case of bail-outs, he alleged. There is need for regulations in the derivative market. The U.S. has privatized profits at the cost of social losses, which is against the basic theory of capitalism. In the economic classes, much is lectured on 19th century capitalism, rather than on 20th and 21st capitalism. Many Central Bankers were using excessively simpler models. The entire economics profession has failed. Today, everybody claims to be a Keynesian. But there are various kinds of Keynesians. Globalisation has failed because of pursuing failed economic ideology. The Washington Consensus has failed. People have not understood market failures. Money is leaving developing nations to the U.S., where the crisis is taking place. Globalisation is managed in an asymmetric way. India and China need not feel shy. The United Nation has some level of legitimacy. So, it has to be brought into the picture. The problem has to be solved at the global level. There is insufficiency in global effective/ aggregate demand. Many countries have learnt from the problem that happened in 1997. Money has gone to the people who do not have needs. There is need for regulatory arbitrage. The offshore secret banks need to be exposed. There are companies who evade taxes. The kind of lending, which the U.S. is giving is not fair. Corporations in the developing countries should have access to credit. There is need to address the governance problem. Capital outflows are taking place from the developing countries to the U.S. Not only global equity but also global stability is required. The fall of the Berlin wall indicates the end of Communism. There was problem with the Communist system. September 15, 2008 can be regarded as the defining moment of market fundamentalism. The invisible hand is invisible because it is not there at all. There is a need to make globalization work for all.

Mr. Somnath Chatterjee, Speaker, Parliament of India, thanked Prof. Stiglitz and said that the pitfalls of globalization need to be understood. He said that public sector banks in India are relatively more insulated from the current global crises. He said that there are needs for more regulations. He asked for more transparency and accountability in governance. He added that India pursued mixed economic planning in its early days after Independence in order to avoid the pitfalls of extreme communism and extreme free market.

Americans Struggle With The Concept Of Spending Less Than They Earn

These are some quotes from people who are repentant now.

"We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done," said Ms. Gamble, who earns about $2,600 a month as a grievance counselor at a local prison.

Now, she and her husband — a prison guard who brings home $2,000 a month — are grappling with $10,000 in high-interest debt. They no longer go to the movies or out to eat, except occasionally to McDonald's. They quit their Internet service. Their car was repossessed. "What we say now is, 'If we can't afford it, we can't buy it,' " Ms. Gamble said.

I want to dig into some old stats related to American savings. Americans are spending more than they are earning, pushing the national savings rate to lows not seen since the Great Depression. The Commerce Department released a report saying that personal savings fell to a negative 0.5% in 2005.

This means that people spent everything they earned and more. This is the third time that the savings rate has been negative, the previous two times were both during the Great Depression in 1932 and 1933. The savings rate has been declining since 1984 when it stood at 10.8%, in 2004 it was 1.8%.

One more repentant..

Fran Barbaro has an M.B.A. and a résumé of computer industry jobs with salaries reaching $150,000 a year. She used to have a stock portfolio worth about $1 million. She hung original art on the walls of her three-bedroom house in Boston.
But divorce, illness and motherhood drained her savings. Her home is worth less than she owes, and she owes another $200,000 to credit card companies, banks and tax collectors.

Ms. Barbaro, 50, said she knew she was living beyond her means. But her house demanded work. Her two boys needed after-school programs running $25,000 a year. Medical bills multiplied.

"These were simple day-to-day expenses," she said. "The money was always there."

Until it wasn't. Her take-home pay is $5,200 a month, but her debt payments reach $4,400.

Top 10 Reasons People Spend More Than They Earn

Rule #1 of financial freedom is spending less than you earn. If you can’t do that, you’ll never be financially successful no matter how hard you work, how many hours you put in, how many promotions you receive, or how much money you make.

It’s a simple rule, and most would consider it common sense. But, the U.S. has a negative savings rate, meaning this common sense rule may not be so common place. I recently saw a statistic that claimed that about 43% of American families spend more than they earn each year.

It’s helpful to understand why people over spend, and be aware of any that might apply to you.

10.Keeping up with the Jones’ - Psychology plays a big role in our spending habits. We want to feel as successful or more successful than those around us. We spend a lot of money to keep up that image. The reality is, the neighbors probably can’t afford that new boat either.

9. Avoiding the truth - It’s easy to overspend when you don’t keep tabs on how much you have. People will go for years unaware of their true financial situation because they’re afraid to look at what kind of mess they are in. It’s easier (temporarily) to just avoid it. They’ll pay their minimums and add new credit cards as necessary ignoring the growing debt total.

8. Counting the chickens before they hatch - In National Lampoon’s Christmas Vacation, Clark Griswold made a large down-payment on his swimming pool expecting that his upcoming Christmas bonus would cover it. Instead, he was enrolled in a Jelly of the Month club. We are often similarly optimistic about incoming money. It’s spent before it’s received, and it’s often not as much as was expected nor received when expected.

7. Plastic doesn’t feel like real money - It’s common to spend more when using credit cards than cash. The experience of hading over a card that you get back is just not the same as handing over some cold hard cash and seeing it disappear.

6. Immediate gratification - It’s all around us. We’re bombarded with the immediate gratification mentality. “Instant pain relief”, “fast food”, “on demand video”, and the big financial one, “buy now, pay later”. We’re too used to getting what we want now even if we don’t know how we’ll pay later.

5. Lifestyle maintenance - Most people increase their expenses as quickly as they increase their income. The same cannot be said for decreases in income. Once we become accustomed to a certain lifestyle, it’s pretty difficult to cut back, even if our financial situation changes for the worse.

4. Poor as a child - Whether they’re trying to make up for their deprivation as a child, a fear of money being taken away that isn’t spent immediately, or a lack of financial understanding, being poor as a child is an often used excuse of overspending adults.

3. Sense of power - Spending money actually makes some people feel powerful. The more they spend, the more powerful they feel, and the only way to get that rush is to spend more money.

2. Prove self worth - Buying that fancy new car proves you are somebody, right? For some people spending makes them feel like they are worth something to the world.

1. Can’t say no - Some people feel like a failure when they can’t meet the wants of others. Whether it’s new toys for the kids, new outfit for the spouse, or a night out with the friends, some people just can’t say no, even when they can’t afford to say yes.

The Inevitable Collapse Of The Dollar

US is emulating Japan Style Policy

US is emulating Japan style policy in solving the current crisis.

US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.

In the mid of the crisis we saw Fed/Treasury were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.

Fed has copied the heretofore-seen-as-failed Japanese playbook.

Source New York Times:
The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.

Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....

Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.

Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.

Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.

Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.

In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.

Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.

Goldman Sachs Outlines 2009 Financial & Credit Expectations

Goldman Sachs has come out with a new financial sector outlook for 2009, and much of how you receive it will depend whether you see things as"half empty" or "half full." It is not a good outlook, but you can at least start to get an idea of what is left to come. Overall, Goldman Sachs expects that the fundamentals of the financial sector and economy will remain poor in 2009.

For starters, Goldman Sachs sees the total credit mess as a $1.8 trillion dollar problem. This implies that we are now roughly half way through the credit crisis without including the impact of a new de-leveraged financial world. Goldman Sachs also expects government intervention and government "assistance" to continue into 2009.

What is interesting here, albeit something we have expected for some time, is that the crisis will migrate away from residential mortgages. Goldman Sachs believes that the next waves of trouble spots will come from consumer loans and corporate loans.

Goldman's call also sees whole loans getting hurt further in the year with farther markdowns on the bank books.

Again, your take will revolve around whether you are a "half full" or "half empty" mindset. This does not at all argue that the worst is yet behind. But it also implies that the acceleration of bad news may be coming to a head despite more negative headlines.

That might not mark a bottom, but despite the massive numbers this scenario does not outline an Armageddon scenario.