Monday, 30 June 2008
BRUSSELS/AMSTERDAM - Fortis expects a complete collapse of the US financial markets within a few days to weeks. That explains, according to Fortis, the series of interventions of last Thursday to retrieve 8 billion. “We have been saved just in time. The situation in the US is much worse than we thought”, says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also Citigroup, General Motors, there is starting a complete meltdown in the US”
Sunday, 29 June 2008
I made 5 phone calls to friends who are in the "investment management" line. At least those who I know are somewhat successful ( > 7 yrs, live in private housing).
These is the consensus view (not necessarily the correct view):
1. US slowdown will span 3 quarters starting from beginning of 2008 until Sep 2008.
2. Even after Sep 2008, recover will be slow.
3. Asian markets always follow US stock market down. EVEN when the actual economy is decoupled. One of my friends did an analysis - there are many US recession that did not affect certain Asian economies much, yet the stock market fell.
4. When Asian market rebounds, for economies not in recession, it is expected to be sharp.
5. The market is in grind down mood. "Finding the bottom" mood. This is a slow process and can take weeks if not months and nobody not even the greatest expert can tell you when it is over.
6. Expected markets that will show some decoupling are Taiwan & Thailand (remember Thailand missed out on a large part of 2007 bull due to politics).
7. Commodities like Gold, Oil, Copper will probably rise further but do not buy because the best entry point is behind us.
8. US economy is in big trouble. The best scenario is a shallow weakening with exports sustained by Asian economic strength. Such a scenario will cause investors to switch to Asian which is pulling the US along. But the most likely scenario is not as nice as this, the US can potentially go into an L shape recession because the economy has a very large debt and the implosive effects are potentially damaging.
Whatever it is becareful & defensive but not too pessimistic. Be selective.
Oil may be the wild card. ....a plunge in oil price might help the market along and end the gloom. But still, this may a market with a few bottoms to go through.
"The worst should be over and I think that from the second half onwards the crisis should normalize: that is, the phase of exceptional turbulence on the markets should end," Baudouin Prot, chief executive of BNP, said in an interview published on Sunday.
"I still expect to stay volatile," he added.
He said BNP had only been touched "lightly" by the crisis in the U.S. subprime mortgage market as the bank had only 200 million euros of exposure.
Prot said he was in favor of a pan-European committee to supervise markets "with strong decision-making powers over banking."
But he added that it was also "important to keep a close eye on sectors of the financial industry which are still not supervised."
Prot reiterated that BNP was not interested in buying rival Societe Generale, as it said in March. "We haven't changed our view," he told La Repubblica.
He added that BNP was "under no pressure to make new acquisitions" but would not let any good opportunities slip.
Turning to Italy, where BNP owns lender BNL, Prot said the French bank would continue to invest in the Italian bank's growth.
He added BNP would not sell its 50 percent holding in consumer credit business Findomestic. The other half of the business is owned by Italy's biggest retail bank, Intesa Sanpaolo, and the two are fighting over control.
One morning last month, the manager of a Stop & Shop in Methuen, Mass., noticed a man, along with his young daughter, leave the store without paying for several bags of shrimp. When police arrived, they found something else on him, too: 20 cans of baby formula.
Call it a sign of the times. Steadily and alarmingly, shoplifting seems to be rising at many retail chains, and experts are pointing at a prime cause: the sputtering economy.
"Wages aren't keeping up with inflation, especially the price of food and energy," says Diane Swonk, chief economist at Mesirow Financial. "It just leaves less money for everything else, and that breeds a lot of temptation."
Retail and law enforcement experts agree that they've seen an increase in store theft during the current slowdown — and not only from customers.
"It's clear that both employee theft and shoplifting are up," says Richard Hollinger, professor of criminology at the University of Florida who compiles the annual National Retail Security Survey. "The most recent rise is being driven by the economy. A lot of people are on the financial edge."
When 116 retailers were surveyed recently about shoplifting, 74% said they believed that shoplifting incidents last year had risen from 2006, according to the National Retail Federation.
And when a smaller group of retailers were asked about shoplifting so far this year, nearly all said it has continued to rise, says Joe LaRocca, vice president of loss prevention at the National Retail Federation. They also said they felt the economy had been a contributing factor.
All told, retail theft is estimated to cost about $40.5 billion a year. And the rest of us, already squeezed by higher gas and food prices, end up paying for it: Stores pass on much of their losses to customers in the form of higher prices.
"Retailers can't afford to just eat that loss," Hollinger says. "Their margins aren't large enough. So this hits right on the bottom line, and they're trying to plug up all of these leaks, because the economy is so tight."
Among the reasons the sluggish economy is thought to be contributing to rising shoplifting by customers and store employees:
•Rising prices and growing debt. "Unfortunately, it's to be expected that when the economy moves into a slowdown, and families have difficulties meeting week-to-week and month-to-month bills, shoplifting is going to go up," says Bruce Hutchinson, professor of economics at the University of Tennessee at Chattanooga.
Most police departments don't collect data on the profiles of shoplifting suspects. But some who deal directly with the problem say they've detected a shift.
"In general, the shoplifter of the past was mostly trying to fuel a drug habit," says Sgt. Alfred Pratt of the Shrewsbury, Mass., Police Department. "But we've seen a change as the economy has declined. More common, everyday items are being stolen, such as groceries."
The district attorney's office in Knoxville, Tenn., says it's seen a similar change. "We get a lot of shoplifters, and I see the trend upward," says Samyah Jubran, a Knox County assistant district attorney general.
Now, she says, there's more food theft, and it tends to come from repeat offenders, many of whom seem to be struggling with financial issues.
•Fewer store clerks. Squeezed by the tightening economy, stores are looking to trim costs. One easy way is to reduce the number of sales clerks on the floor. With fewer employees greeting people at the door and watching shoppers walk the aisles, it's easier for shoplifters to grab and stash merchandise.
In April, when about two dozen retailers were asked about store theft so far this year, LaRocca says, most said they thought that reduced sales and staff cutbacks had been a contributing factor to the rise in theft rates, involving both consumers and employees.
If stores "don't have a lot of people on duty in the store, particularly in these big-box stores," Hollinger notes, "it leaves what are called dead zones. That's where shoppers can stuff things up their shirts or in their pocketbooks, take off the tags and do all sorts of things."
With fewer employees promoting merchandise, some retailers have felt the need to unlock and display high-price products, such as jewelry and watches, outside their usual glass cases. That might help spark more sales. But it's also likely to lead to more theft, says Mike Keenan, director of loss prevention at Mervyns department stores.
Job turnover, whether of sales associates or store managers, is a leading predictor of employee theft, Hollinger says. In 2006, retailers estimated that employee theft had caused 47% of their company losses, according to his most recent National Retail Security Survey. Hollinger's survey found that employees accounted for nearly half the total cost of retail theft.
Many employees who are caught are dismissed but not prosecuted.
"After dismissal, most are also required to provide civil recovery and pay restitution," Hollinger says. "Just because retailers don't always prosecute does not mean that they do not know where their merchandise and money is going."
•Rise in organized retail crime. The economic slowdown has led many shoppers to seek deeply discounted products through the Internet, says Paul Jones of the Retail Industry Leaders Association. Exploiting the opportunity, criminal teams are zeroing in on retail products and selling them cheaply, authorities say.
"It's become more lucrative for them," Jones says.
Gangs of professional thieves account for $15 billion to $30 billion in retail losses every year, the FBI and the retail federation estimated in 2005.
This year, 85% of retailers said they thought they'd been victims of criminal enterprises in the past 12 months, according to a survey the retail federation released this month.
The Internet has made it much easier for thieves to sell more stolen items, because "they used to have to sell at a garage sale or flea market or through a fence, and those were generally local," Keenan says. Now, he notes, it's easier to use the Internet to unload products across the country and the world.
Many people are willing to grab those deals, even if they suspect they might be buying stolen goods.
"Consumers are looking for a big bang for their buck," says Swonk, the economist at Mesirow Financial. "If it's stolen goods, they're going to get it at a better price than at the retailer. It's creating another market."
Yet, doing so could carry health risks in some cases.
"We've found that many people buy infant formula through different online auction sites," Jones says. "But they don't know if that merchandise is properly stored, if it has the correct date on it or if it is even the right merchandise."
Last week, after a two-year investigation with the FBI and IRS, the San Jose, Calif., Police Department busted a shoplifting ring whose thieves had stolen merchandise from grocery stores and discount retailers. Products that included Pepcid AC, Claritin and Tylenol were sold on the Internet and at flea markets, police said.
Last year, the FBI joined with the retail industry, which it relies on for shoplifting data, to pool information and help combat organized retail theft.
Only in recent years, though, have a majority of retailers been willing to discuss merchandise theft. "In 1991, when we started this process," Hollinger says, referring to his National Retail Security Survey, "it was like root canal."
But shoplifting and employee theft have imposed such financial burdens on retailers that more of them are seeking answers.
"It's the single largest category of property crime in America, bar none," Hollinger says. "Bank robberies, car theft — nothing comes close to this."
As long as the economy remains weak, many experts think the trend will persist.
"When the economy is down, shoplifting and other crime go up," says Mark Zandi, chief economist of Moody's Economy.com. "People are losing jobs or moving from a full-time to a part-time job. But they still have the mortgage to pay and the credit cards to pay."
It's a comforting one, predicated on the idea that the U.S. economy will avoid the recession that markets have priced in for some time. It's also a view that could be in for some serious revision as the year unfolds, and not in a good way.
The latest sign comes from a Harvard University report. Growing foreclosures and tighter lending standards are creating an environment that ``is shaping up to be the worst in a generation,'' Harvard's Joint Center for Housing Studies said on June 23.
``The slump in housing markets has not yet run its full course,'' said Nicolas Retsinas, director of the center.
The U.S. market seems likely to remain mired in a recession. And as Retsinas pointed out, housing markets historically recover only after an economy contracts and prices fall enough to improve affordability.
That's a bigger problem for Asia than many investors may want to admit.
There's much relief that Asia is holding its ground as the U.S. economy slows and credit-market woes humble Wall Street's biggest names. While asset markets are heading lower from Tokyo to Jakarta and Shanghai to Mumbai, healthy economic growth has confounded the pessimists -- so far.
The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn't decoupled from America as much as some would say.
The worst-case scenario -- a prolonged U.S. decline -- could be devastating, particularly at a time when record oil and food prices are hurting Asian households. Billionaire investor Warren Buffett laid it out in a June 25 Bloomberg interview. He's unsure when the U.S. will recover.
``It's not going to be tomorrow, it's not going to be next month, and it may not even be next year,'' said the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.
The idea that Asia will continue to display an impressive immunity to U.S. events ignores how dependent China is on the American economy. It also ignores how reliant Asia is on China's 10 percent growth. Slowing U.S. demand will chip away at that country's export-driven expansion exponentially.
China is one of several Asian economies with negative real interest rates. With its annual inflation above the central bank's benchmark lending rate, China would be hard-pressed to stimulate growth with lower borrowing costs or increased government spending.
Monetary quandaries abound in Asia. Bank of Japan officials, for example, are making it clear interest-rate deliberations have become increasingly challenging over the last two months.
``At the time of the June meeting, both downside and upside risks had risen compared with when we met in May,'' BOJ policy board member Seiji Nakamura said yesterday in Asahikawa, Japan.
The credit crisis that began with U.S. subprime loans is just one force crimping U.S. spending. A new Bloomberg/Los Angeles Times survey shows most Americans are feeling the pain from rising gasoline prices and many are tightening their belts. Seven in 10 of those surveyed said higher gas prices have caused them ``financial hardship.''
That may mean less spending on cars, flat-screen televisions, cellular phones, name-brand clothing items and other goods manufactured in Asia. With U.S. consumers accounting for 70 percent of gross domestic product, any pullback would have an outsized impact on global economies. Housing is arguably the key to all of this.
The U.S. will expand 1.4 percent in 2008, the weakest performance since 2001, according to a Bloomberg survey. U.S. growth may be cut by a half to a full percentage point if consumers spend less and save more, according to Deutsche Bank AG economists. For Asia, that is decidedly bad news.
So is Harvard's housing report and Buffett's concern that the U.S. is heading for stagflation. Rising home prices and easy access to credit have been the major drivers of U.S. growth in recent years. If U.S. housing remains weak, Asia's export- dependent economies are particularly vulnerable.
Here, recent comments by Federal Reserve officials are both good and bad for Asia.
The Fed this week left its benchmark rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Further rate cuts seem unlikely, something that could disappoint some investors. The specter of continued rate moves supported optimism about Asia's export markets.
Yet easy Fed policies also cause problems in Asia. Much of the liquidity that U.S. officials create ends up in Asian markets, increasing so-called hot-money flows. That has made it harder for Asian central banks to control money supply and inflation. Taking a longer-term view, an end to Fed rate cuts isn't a bad thing.
The catch is that with Asia's most important customer in trouble, the region's growth outlook is dimming. Here, the U.S. housing market is more of a linchpin than many in Asia think.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
Business Times - 28 Jun 2008
By LYNETTE KHOO
(SINGAPORE) Rising inflation and slower economic growth projections are eating away at sentiment on the Singapore stock market. With the picture unlikely to brighten in the near term, stocks could drift further south in the second half of this year, analysts say.
Since January, the Straits Times Index (STI) has lost almost 15 per cent to 2,955.91 points along with the broad sell-off across regional bourses and on Wall Street.
Trading volumes have also slumped 46 per cent from a year ago to some 150.5 billion shares in the first half of this year.
Analysts believe that investors are in for a tougher ride in the next six months as lingering inflationary fears and possible tightening measures by central banks continue to stoke market volatility.
'We started the year thinking that the second half will be better than the first, but we are beginning to doubt it more and more,' says CIMB-GK research head Kenneth Ng.
In May against a backdrop of choppy trading, the main market index was lifted to a high of 3,250 points on positive news of the Bear Stearns rescue, the aggressive interest rate cuts and the stimulus package by the US Federal Reserve.
But that did not last as the index subsequently slid towards March's low of 2,800 on worries over oil price spikes, slowing exports growth and further monetary tightening by central banks.
Already, analysts have priced in higher costs and lower demand into corporate earnings estimates.
They point to a host of concerns that will trouble the market in the second half - high oil prices and inflation, poor performance of US and European banks, slower consumer demand and easing economic growth.
'As these issues are likely to persist for a while and together with the lack of any strong positive leads, the market is already showing signs of a standoff, with a downward bias,' says Carmen Lee, head of research at OCBC Investment Research.
A survey by fund managers by OCBC Bank's wealth management unit released yesterday echoed these views.
Given the slowing consumer demand and rising costs, fund managers are concerned that earning expectations may be too high and warned that potential earnings downgrades could weigh on equity markets in the following months.
Kim Eng's technical chartist Ken Tai noted that the STI could break below 2,800 points in the second half before recovering back towards the end of the year on a potential Santa Claus rally.
'Market yield is 7.1 per cent but inflation is 7.5 per cent. The market has to correct lower in order for it to make sense for investors to buy,' he says.
But not all is lost. Analysts believe that market corrections also present opportunities for investors to accumulate stocks that can ride the inflationary wave, or are less adversely impacted by rising prices.
Offshore marine and oil and gas plays will continue to get attention as long as oil prices do not correct significantly in the near term, analysts say.
Yesterday, oil prices continued to edge up, with light, sweet crude for August delivery hitting a record US$141.71 per barrel in Asian trading.
Also looking good now are companies with pricing power, big cash hoards or high dividend yields as the average retail investor pulls money out of bank deposits in search of a better hedge against inflation.
'We couldn't find any reason to be terribly excited but we think there are still some stocks that investors could consider,' says Kim Eng's regional head of research Stephanie Wong.
She favours counter-inflationary stocks such as SingTel, MobileOne and Singapore Press Holdings (SPH), which she believes have pricing power.
She also likes stocks that may benefit from higher oil prices, such as Keppel Corp and ASL Marine.
Likewise, DBS Vickers' research head Janice Chua said in a recent report that her third-quarter picks were based on the inflationary theme and the 'urgent need to keep it in check'.
Parkway Life Reit is seen as a natural hedge against inflation as the minimum guaranteed rental growth is pegged at one per cent above the consumer price index, Ms Chua said. Shipping trusts and offshore ship charterers are also expected to benefit if the greenback strengthens as anticipated as their earnings are denominated in US dollars.
DBS Vickers is also positioning its strategy on what it reckons to be a rising interest rate environment that will bode well for the banks, and on the Formula One fever ahead of the event in September, the key beneficiaries of which are hotel and tourism-related stocks.
OCBC recommends a flight to safety towards defensive stocks. This would include blue chips for their profit track record and sound business models, while CIMB-GK recommends dividend exposure via SPH and local Reits, as well as some oil and gas exposure.
Analysts are, however, divided on commodity stocks. While most select counters in the agricultural commodities sector, Ms Wong of Kim Eng believes commodity prices could be a bubble in the forming.
'We are talking about investors who are taking a longer-term view - who want to buy into stocks with deep value, downside protection with asset backing, and decent yields,' Ms Wong says.
Last Updated: 12:01am BST 28/06/2008
Barclays' £4.5bn fundraising falls about £9bn short of what is necessary to absorb credit-related writedowns and bring the bank's capital in line with European peers, Citigroup claims in a note to clients.
The British bank's shares came in for more heavy selling following the note, dropping to 289½p at one stage yesterday before ending the day down 5¾ at 298p.
Citi analysts said that simply moving Barclays' core tier one capital in line with its closest peer, Royal Bank of Scotland, would require an extra £2.5bn. If Barclays was to write down its credit-related positions to the same degree as RBS the figure "increases to circa £9bn".
Barclays has taken just £1.7bn of writedowns this year, compared with £5.9bn at RBS, leading some to believe that it has not been sufficiently prudent in its assumptions.
The bank thought it had allayed some concerns this week by securing backing from several existing shareholders as well as new ones from Qatar and Japan for its £4.5bn recapitalisation.
One leading institution said: "Investors of some repute have studied the numbers properly and they've decided the shares are attractive enough to buy. That is clearly positive."
Citi estimates that Barclays will have a tier one capital ratio of 5.8pc at the end of 2008, which would be the "ninth worst [of 66 banks] in Europe". It adds that "Barclays has adopted a somewhat unusual accounting practice" with regard to its credit assets.
Globe and Mail Update
Stagflation might not be the bogeyman for stock and bond markets that it's cracked up to be, a top U.S. market strategist says.
Tobias Levkovich, chief equity strategist at Citigroup Global Markets Inc. in New York, has published a report looking at periods of stagflation - stagnant economic growth coupled with high inflation - over the past 40 years and analyzing returns experienced by various investment asset classes. He found that U.S. stocks and bonds were actually top performers during those periods, outpacing gold, oil, industrial commodities and residential real estate.
The data fly in the face of conventional wisdom, which holds that stagflation is a killer for both stocks, as a result of the lack of economic growth, and bonds, because of the high interest rates that result from inflation. They also suggest high-flying commodities such as gold and oil, which some investors have sought out as a shelter from a possible stagflation storm, might not be such solid bets after all.
"The idea that stock and bond markets may be poor performers during short bursts of so-called 'stagflation' may be more myth than fact, given historical study, while alleged investing in commodity-based protection seems equally unsound," he said.
Data suggest investors who bought high-flying commodities such as oil as a hedge against stagflation might not have made such a solid bet after all.
Mr. Levkovich noted that during the five generally recognized stagflation periods in the past 40 years (1970, 1974-75, 1980, 1982 and 1991), stocks and bonds actually had positive absolute returns in four of them.
On the other hand, gold prices have, on average, actually fallen slightly during stagflation periods, while oil prices have advanced less than 2 per cent - well behind the average gains of 6.2 per cent for the S&P 500 stock index and 6.7 per cent for the U.S. 10-year government bond total return index. Industrial commodities typically slump badly under stagflation: The Commodity Research Bureau's raw-industrials commodity index posted an average decline of 7.4 per cent.
Economists have been quick to point out that the current stagflation threat bears little resemblance to the deep economic malaise of the 1970s that gave the term prominence. In fact, many have qualified their stagflation references in recent weeks with phrases such as "mild stagflation," to differentiate current risks with the rampant inflation and high interest rate environment of the 1970s.
"The running parallels with the 1970s appear to be more thematic than quantitative, both in regards to inflation and economic growth," said Scotia Capital's Gorica Djeric in a report yesterday, who termed the current threat "stagflation lite."
But Mr. Levkovich argued that if the current short-term stagflation threat follows the script of the most recent U.S. stagflation episode in 1991 - the period that represents the best comparison, as both featured relatively mild economic downturn and inflation rates, high energy prices, a slumping housing market and financial institution troubles - then the outlook may be particularly bullish for equities and bearish for oil. In the 1991 stagflation period, the S&P 500 rose 12.4 per cent while oil prices slumped 26 per cent.
That history, combined with oil's massive outperformance of the S&P 500 this year, leaves oil "very vulnerable to a sharp pullback," he said.
"While the desire to continue buying commodities seems appealing, the run to date makes that option very costly."
The best place to put your hard-earned money is where it can make you some more money, the more the merrier. But with the plethora of financial invest
Record crude prices biggest difference from last market downturn in 2002
NEW YORK (AP) -- Investors who remember the stock market's steep and prolonged decline earlier this decade may be wondering if the recovery from Wall Street's current morass will also take several years to accomplish.
The dot-com bust, terrorist attacks, recession and corporate wrongdoing combined to send stocks plunging in 2002. Today's market has some similar problems, in particular the troubled economy and a devastated industry -- this time, it's the financial sector. But there's one variable that may be impossible to resolve: oil prices that have more than doubled in a year and show no signs of abating.
"The economic gloom is far greater today then it was in 2002 because we have concern about worldwide inflation and what oil is going to do to the economy," said Alfred E. Goldman, chief market strategist at Wachovia Securities. "The problem for investors is when all of this is going to end, and the bottom line is nobody knows. Nostradamus wouldn't have known, neither would Albert Einstein."
Crude oil has risen nearly 44 percent in the past five months, and OPEC's president said this week he believes oil could rise to between $150 and $170 a barrel this summer; it closed at a record high past $142 a barrel on Friday. That's still lower then the $200 peak recently forecast by economists at investment bank Goldman Sachs.
The uncertainty about where energy prices are going makes it harder for economists to make forecasts. Many believe the high price of energy will eventually reverse after oil goes so high that demand shrivels and supplies increase -- but calculating a timeline is difficult.
That leaves investors "just along for the ride," Wachovia's Goldman said.
Wall Street saw a return this past week of the volatility that had pummeled stocks since last summer but disappeared for a while during the spring. Investors were rattled not only by the uncertainty about oil's impact, but discouraging outlooks for the financial, high-tech and automotive industries.
This past week, the Dow Jones industrials plunged 4.2 percent, the Standard & Poor's 500 shed 3 percent and the Nasdaq composite index fell 3.8 percent.
The market is worried about the direct correlation between the cost of energy, especially gasoline, and consumers' spending habits. Higher pump prices mean Americans might think twice about discretionary items like going out to dinner, buying new clothes, or paying for a new big screen television. Or buying a new car.
Consumer spending accounts for more than two-thirds of U.S. economic growth. Though there are no signs that spending has dried up entirely, many market observers fear it could happen -- especially as gasoline hovers near a national average of $4.08 per gallon.
Wall Street's low point in 2002 was attributed to a host of problems such as the accounting fraud at corporate names like Enron, Adelphia Communications and WorldCom. Global tensions after the Sept. 11, 2001, terror attacks also hung over the market. There was still fallout from the near-collapse of the high-tech industry, and the country's collective problems had also sent the economy into recession.
But, with oil at about $30 a barrel, inflation was under control. The market's troubles were not seen as a systemic risk, as they are today.
"I knew we'd get through all the problems in 2002 because it was your plain vanilla, fairly shallow recession," said Stephen Leeb, president of New York-based Leeb Capital Management and author of "The Oil Factor."
"Right now, I think we're in one of the most threatening crisis of our history, and it is going to take a Manhattan Project to figure out what to do and it will take billions of dollars to implement it," he said, referring to the program during World War II to build the atomic bomb. "It can't immediately be cured because we need long-term answers."
The Federal Reserve, which kept interest rates on hold this past week, is well aware of the problem of expensive oil. The Fed statement released after its rate decision said "the rise in energy prices are likely to weigh on economic growth over the next few quarters."
But, Leeb and others believe this isn't something the Fed can solve on its own. The central bank's weapon against inflation is raising interest rates, which runs the risk of slowing down an already fragile economy.
The higher oil goes, the more important of an issue it will become during the election cycle: "Washington needs to actively take charge if we want to turn this situation around," he said. "People are recognizing that the Fed is now in a total box."
* If you’re not experienced in dabbling in the stock market, put your money in mutual funds – the risks in one stock are balanced by the returns in another.
* For the stock market investor to make money, the knowledge of when to sell and when to buy is a must. Buying when prices are low and selling when they’re high is the most obvious strategy, but things do not always work like clockwork in a market where no one can achieve the perfect timing. The trick here is to adopt the dollar-cost-averaging method where you buy stock for a fixed amount of dollars on a regular basis, irrespective of the price of the stock. Accordingly, the lower the price of the share, the more shares you own, and vice versa. The reasoning behind this strategy is that you’re minimizing your risk because the average cost per share of the stock will become lower with time. Set a time frame that suits you, monthly or fortnightly, and work on this systematic investment.
* Avoid herd mentality by following the crowd and investing in a stock just because most people you know (or don’t know) are doing it. Invest according your needs and capital.
* Take time to plan your portfolio – allocate your assets to various financial vehicles according to your needs. This is the fiscal equivalent of the good old adage “Don’t put all your eggs in one basket”. The reasoning behind this approach is the definition of the term “getting higher returns”. It’s not enough that you manage to beat the market when the going is good – what’s important is being able to protect your downside when the going tough and the markets are down.
* High interest rates are good but they’re not always the focus of an investment. Oftentimes an investment may be made in a low interest-yielding option because of other advantages like tax deductions.
Saturday, 28 June 2008
BARCLAYS Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the United States Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall 'below zero'. 'We're in a nasty environment,' Mr Tim Bond, the British bank's chief equity strategist, was quoted as saying in a report by the Telegraph yesterday.
'There is an inflation shock under way. This is going to be very negative for financial assets. We are going into tortoise mode and are retreating into our shell. Investors will do well if they can preserve their wealth.'
Barclays Capital said in its closely watched Global Outlook that US inflation would hit 5.5 per cent by August, and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral, the paper reported.
Mr Bond was quoted as saying: 'This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility.'
The Fed on Wednesday halted its run of aggressive interest rate cuts, holding rates steady at 2 per cent as it warned of inflation risks.
The Telegraph said the grim verdict on the Fed not raising rates was underscored by the markets on Thursday as the US dollar fell against the euro, helping to propel oil past US$140 a barrel.
The Barclays team was not the only voice warning of inflation. A former top Fed official said on Thursday that the central bank must quickly raise interest rates to stem inflation, or do lasting harm to the US economy if it fails to act.
Mr William Poole, the former St Louis Federal Reserve Bank president and noted anti-inflation hawk, said soaring energy prices had delivered a severe supply shock to the US economy that has impaired its productive capacity.
US carmakers are idling factories building sport utility vehicles that have become unaffordable with petrol at US$4 a gallon, while the housing downturn had sidelined a large chunk of the construction industry's capacity.
Mr Poole said in an interview with Reuters on Thursday: 'The longer they delay, the greater the risk it will get into inflation expectations and wages. 'A lot of people take comfort from the fact that inflation has not got into wages or core. But if you wait (for it) to get there, it is already too late,' he added.
Barclays' Mr Bond predicted that there would be a deep global recession over the next three years as policymakers try to get inflation back in the box. The bank also said the full damage from the global banking crisis would take another year to unfold.
Mr Rob McAdie, Barclays' credit strategist, was quoted by the Telegraph as saying: 'The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. 'We think smaller banks will struggle to raise capital. We're very bearish - in the long term - on high-yield debt. The default rate will reach 8 per cent to 9 per cent next year.'
He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers, which together guarantee US$170 billion of structured credit and US$1 trillion of US municipal bonds.
The two leaders, MBIA and Ambac, were stripped of their top credit ratings by Moody's Investors Service last week. Further downgrades could set off a fresh wave of bank troubles, said Barclays.
Some bank analysts disagreed with the view that inflation is the chief danger, said the Telegraph. Mr Bernard Connolly, global strategist at Banque AIG, told the paper that it would be madness to throw millions out of work by raising interest rates to fight inflation. Real wages are being squeezed by oil, come what may and it may be healthier for society to let it happen gently, he told the Telegraph.
Friday, 27 June 2008
Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".
"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."
The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year. Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.
Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.
David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said...
A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.
Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".
He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.
June 26 (Bloomberg) -- The global credit crisis will slow construction and U.S. economic growth for at least 18 more months, Nucor Corp. Chief Executive Officer Dan DiMicco said.
``We haven't seen the worst impact on the economy yet,'' the CEO of the largest U.S. steel producer said yesterday in an interview in New York. ``The impact of the tighter credit controls is just starting to affect folks.''
The credit crisis, sparked by U.S. mortgage defaults, caused $400 billion in writedowns at the world's largest banks and securities firms in the past year. Standard & Poor's and Moody's Investors Service have tightened credit-rating measures, making it more difficult for companies to borrow money, DiMicco said.
While the crisis originated in the U.S., it's a worldwide phenomenon that will last through 2009 at least, DiMicco said.
``After that, who knows?'' DiMicco said. ``There are two camps: one saying we're in a recession, the other saying we're getting close to a recession. You don't hear anyone saying we're heading toward a recovery.''
The Federal Reserve said yesterday that ``tight credit conditions'' will curb economic growth in the next few quarters. American Express Co. CEO Kenneth Chenault said credit indicators have deteriorated beyond the company's expectations.
Nucor, based in Charlotte, North Carolina, fell $2.79, or 3.6 percent, to $73.87 at 4:15 p.m. in New York Stock Exchange composite trading. The shares still have gained 25 percent this year.
S&P has downgraded 345 companies this year as of June 24, the majority in the U.S., Sudeep Kesh, an associate in S&P global fixed income research, said in a telephone interview from New York.
Nucor has already felt the credit crunch, even with an A1 rating from Moody's and an A+ from S&P, in both cases the fifth- highest rating. Credit-rating companies threatened to withdraw Nucor's investment-grade status earlier this year if the steelmaker borrowed all of the $3 billion it wanted to finance expansion and acquisitions, DiMicco said.
The prospect of a downgrade, which would have cost Nucor ``hundreds of millions of dollars,'' was enough to force it to borrow only $1 billion and to sell new shares for the first time in its history to raise the remainder, DiMicco said.
Turmoil in credit markets has meant that ``even credit- worthy borrowers like Nucor are having to jump through greater hoops,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois. ``The concept of Nucor being anything other than investment grade seems strange.''
Tighter credit controls will raise operating costs for property developers and government agencies building bridges, roads, railways and industrial properties, DiMicco said. That is compounded by higher costs for steel and key raw materials such as iron ore and coal, he said.
Nucor produces 22 million tons of flat- and long-steel products a year from mills in states including Louisiana, Ohio and Texas.
``How are the states going to handle the highway work, and where is the federal government going to do anything about the infrastructure?'' DiMicco said. ``You need to be able to borrow more to do the same thing as before.''
Thursday, 26 June 2008
Every year around this time, the New York Times prints a roundup of commencement addresses. I always find a little inspiration there to cut out and stick on my office wall. This year, its author J.K. Rowling's address to Harvard grads about the benefits of failure -- although if I were to nominate a group for the "least likely to fail" award, it would probably be that audience.
In any case, I had some thoughts for my own commencement address. Here's what I would tell the class of 2008 about money.
Believe the Clichés
Personal finance advice is so similar, and so often repeated, it's become a cliché:
• Live within your means.
• Set up an emergency fund with three months of living expenses.
• Stay out of debt.
• Join your company's 401(k) plan or open an individual retirement account; set aside at least 10 percent of your pre-tax income every year.
• Invest in a diversified portfolio of mutual funds to help your money grow over time, and make sure you're not paying too much in fees.
Clichés are easy to take for granted and easy to tune out. But here's the truth: Believe these clichés. Because if you actually follow the advice, it will transform your life.
The Roaring 20s
I'm convinced that real happiness comes from identifying your values, and then being brave enough to expend your strongest talents and best energy in their service. I think genuine happiness comes from naming what you care about most deeply, setting priorities around those values, and then translating them into real, concrete goals. Money is one instrument in the toolbox of resources and people and experiences that help you journey down that path toward the person you were meant to be.
Your 20s represent a personal finance paradox: You have the most financial power that you may ever have because of the phenomenon of compounding. (Someone who saves $2,000 a year for retirement between age 21 and 30 and then stops will have a bigger nest egg than someone who starts at 31 and saves until they're 65.) At the same time, your 20s can be a bit of a bust in terms of figuring out why you were put on the planet.
It's a confusing decade -- you charge out of college knowing everything and ready to rule the world, and spend the next decade realizing you know almost nothing at all. Then, in your 30s and 40s, you recognize that it's OK to know almost nothing -- and is actually a finer way to approach life, because you really listen to and learn from other people, take risks, and benefit from mistakes and failure. (If you continue to simply know everything, you don't grow and become an arrogant bore.)
The Ghosts of Purchases Past
So here's the problem: Many people lurch around in their 20s trying to establish their identities. One day, you pick up a magazine or see a television show that suggests one can establish an identity by buying $500 designer shoes. Or $900 designer golf clubs. Or some other stupid thing that costs a whole lot less to manufacture than you paid for it. Because you weren't just paying for straps of leather or sticks of iron but for an identity attached to a lifestyle that somebody made up in a brainstorming session in an advertising firm somewhere in New York, or in a scriptwriting meeting in Los Angeles.
And this isn't entirely your fault. You're bombarded with signals to buy in a way previous generations were not. There are 1,000 cable channels telling you on a daily basis that your face, body, home, and possessions are in need of an extreme makeover. Technology and credit card companies have made it effortless to act on those impulses.
And then you get into your 30s and 40s and have a better understanding of who you are and why you were put on the planet. You're now ready to use money as a tool to help walk down that road. That's when your 20s can come back to haunt you. Maybe you're still paying the credit card for the $500 shoes and the $900 golf clubs (or for all the money spent in chic bars showing off the shoes, and at golf courses showing off the clubs).
So you had some fun, but now you're playing catch up. That's usually when the magical thinking starts. You do things like buy a house with an adjustable rate mortgage (because you didn't save up a home down payment). Or you listen to some guru who tells you to put everything you have in gold or oil, or to buy stocks on margin or speculative real estate with no money down.
And maybe you have a couple of kids, and the media that told you to buy the shoes and golf clubs is now suggesting you invest in Suzuki violin lessons, private tutors, and traveling sports teams.
You're scrambling to save for retirement, scrambling to meet your rising mortgage payments, getting in deeper on that credit card to take a few fun vacations with your kids before they grow up and leave you, and God knows how you'll pay for college (since the gold-oil-stocks-real estate thing didn't work for you the way it did for the guru).
And it's really hard to follow your deepest values, and pursue that thing you were meant to do and become that person you were meant to be, because you're really stressed out about money.
I was a naïve kid from the Midwest living in New York City in my 20s -- naïve enough to believe all those clichés my father told me about staying out of debt and saving for retirement. So I did both -- it was just something I made a requirement, as routine as brushing my teeth. (And I had a lot of fun at the same time; I just bought my shoes at sample sales, frequented bars with free happy-hour buffets, and traveled to Europe on a shoestring.)
And when I was 37 (which happened a hell of lot sooner than I expected) and working 14 hours a day in television with two kids under age three, I could walk away from my full-time job and start my own thing. My values had shifted, and I knew I had to find a better balance between work and family. I had the luxury of using money to journey down the road in pursuit of my values -- not because I had a big win in oil or gold or sold a bazillion get-rich-quick books, but because I had stayed out of debt and consistently saved for almost two decades.
And that has made me happy.
Commence with Being Happy
So here's my advice:
• Live within your means.
• Set up an emergency fund with three months of living expenses.
• Stay out of debt.
• Join your company's 401(k) plan or open an individual retirement account, and save at least 10 percent of your pre-tax income every year.
• Invest in a diversified portfolio of stocks and bonds to help your money grow over time, and make sure you're not paying too much in fees.
Believe in the clichés. Follow the advice, make it as routine as brushing your teeth. Because one day it will open up a world of options, and transform money from a potentially huge source of stress into a resource to help you follow your values -- and hopefully figure out why you're on the planet.
Wednesday, 25 June 2008
The heads of ABN AMRO in Asia and OCBC Bank are sick of overpaying their traders. Remuneration in financial services is “inherently unfair”, according to David Conner, chief executive of OCBC. The pay gap between, for example, those in trading and operations roles is too extreme, he told Singapore’s Institute of Banking and Finance (IBF) conference last week.
In an impassioned attack on traditional reward structures, Conner said those pocketing the fattest pay cheques often don’t generate as much revenue for banks as others who get much less money.
Also addressing the annual gathering of banking bigwigs, David Wong, South East Asia chief executive of ABN AMRO, said the solution is to close the gulf in pay between risk takers and risk managers. Wong said firms should consider paying fund managers and risk managers almost the same amount. “The incentive structure has to change,” he added.
Professor Ronald Collard, a partner at PricewaterhouseCoopers, said these disparities are caused by banks rewarding front office staff based on their short-term performance.
DBS chief executive Richard Stanley said banks can help to address employees’ remuneration concerns by giving current staff the first shot at any new job openings.
Criticising the practice of poaching top talent from rivals, Stanley told the IBF conference: “If there are job openings internally, staff must know that they have a better shot at the job rather than it being filled from the outside…The bulk of senior management must be home-grown. We have to find good people and ring fence them.”
Morgan Stanley bankers who were hoping John Mack would take pity on them again this year are due to be disappointed. And Asia is no safe haven from the global carnage.
Last December Mack raided the coffers to stump up a 5% increase in average compensation for 2007 over 2006, but he now appears to have decided his people can do without. Whereas the average Morgan Stanley banker had accrued $108.3k in salary and bonus by this time last year, that figure is now down to $63.8k – a drop of 40%.
Instead of hanging on for a paltry bonus, the better bet at Morgan Stanley might be to get yourself laid off. The bank’s Q2 figures show that it made a total of $245m in severance payments to 660 staff last quarter, an average of $371.2k.
A nice new redundancy cheque may be easy to get your hands on later this year, even in Asia. The i-bank’s Q2 revenues fell 25% in the region – against a 14% drop in EMEA. This income slump has already taken its toll on headcount, with Tokyo in particular feeling the full force of Morgan Stanley’s axe. About 90 securitised products jobs have already gone. Real estate financiers have also been dumped.
One recruiter, who did not want to be named, describes the mood at MS: “Morgan Stanley's canning of their entire securitised product group in Japan has caused a lot of dismay. They've cut very deeply in Asia this quarter. It's not a happy place at the moment.”
Yukihiro Koshiishi, at Russell Reynolds in Tokyo, says the layoffs are part of a broader bloodletting by the bulge bracket. While Asian revenues at Morgan Stanley and its rivals are starting to suffer, Koshiishi believes that post-credit crunch troubles at the firms’ US and European headquarters are actually driving most of the staff reductions.
Morgan Stanley would not provide redundancy figures for Singapore and Hong Kong, but recruiters there believe that in most job functions it’s either cutting or resorting to replacement-only hiring.
Staff remain anxious, says one headhunter, who asked not to be named: "There have been rumours about upcoming redundancies in Hong Kong. I was talking to someone at Morgan Stanley this week who said that a lot of people there expect a reshuffle, but don't know exactly what's going to happen."
Worldwide the bank actually managed to end this quarter with 545 more staff than it had in May last year, but in the current belt-tightening climate its headcount now looks set to decline.
Tuesday, 24 June 2008
For the past year, many traders have repeatedly sought to find "the bottom" in financials and related stocks (i.e. homebuilders), but the reality is the sector is a long way from a true bottom. Beyond needing to further trim the fat, the financial sector is dealing with the double-whammy of stricter regulation and the 'deleveraging' process after years of massive credit extension.
That combination is going to result in slower earnings growth for the sector and a revaluation of brokerage stocks, which got well above their historic norms during the peak of the boom earlier this decade. Just like big-cap tech stocks like Cisco are still well below their bubble-era levels, it's going to be a long time before the Citis, Goldmans and Lehmans of the world revisit their recent peaks - if ever.
Monday, 23 June 2008
Much of the focus in China continues to be on the performance of the stock markets. Yesterday the market bounced around both above and below Friday’s close, before ending the day at 2874, up slightly less than 0.2%. That was the first positive day for the SSE Composite in nearly two weeks (after last week’s 14% decline), but a quick look at the trading patterns and trading volume didn’t seem to indicate much conviction.
Wednesday, the market dropped sharply again. It started the day with a little bit of buying – in the first half hour the market traded up nearly 0.7%, but as often happens with any strength, sellers took advantage to unload positions and prices quickly bounced their way down to 2769, down 3.7%, just 30 minutes before the close of day, before staging a late rally to close at 2794, still nearly 2.8% down for the day.
This puts us at 6.9% below the 3000 level which we broke last Wednesday and which, supposedly, was the level below which the government would intervene. As I have been pointing out during the past two months, this kind of rumored intervention means that when the market finally breaks the expected support level, it is likely to drop pretty quickly – and so far it has.
There is still a lot of discussion and rumor-mongering about whether or not the government will eventually intervene, with the introduction of index futures and the permitting of margin trading as being the most likely forms of intervention. My understanding is that Vice Premier Wang Qishan (the new economic “tsar”) and a number of other relevant policy-makers are worried, correctly I think, that China’s history of frenzied intervention has undermined the functioning of the market, and so they are reluctant to continue intervening in response to market behavior, unless of course they get any indication that the drop in the markets might causing social discontent or unrest, especially in the period before the Olympics.
So we are in a very unstable position. As of yet not a whole lot has happened to indicate that investors are furious – there have been small demonstrations and nasty comments about the failure of the government to protect investors on various investor-related websites, but not much more – so perhaps the government will hold off doing anything. I suspect that they are beginning to learn that active intervention brings with it the cost of declining credibility, and this declining credibility undermines their ability to intervene successfully in subsequent periods. Perhaps they want to keep their powder dry in case they have a bigger market problem in the near future.
But I suspect this situation is unstable because the market is still expecting some new measure to prop it up, and if the government continues to hold off intervening, I don’t see prices continuing at this level. In fact I would imagine that a lot of investors are eager to get out and just waiting to see if they can get one last chance to recoup some of their losses before doing so. My guess is that if we don’t get something positive soon, we’ll have another bad week next week, and if it is bad enough it may prompt some action by the government.
Away from the stock market, some more interesting numbers on the economy have come out recently. Fixed asset investment was up 25.6% year on year for the first five months of the year (it was 25.9% up over the same period last year). Industrial output was up 16.0% in May, compared to 18.1% last May. Both numbers may understate the decline in growth relative to earlier periods, especially the latter, because this May the “Golden Week” holiday was cut from five days to two days.
If we assume a five-day work week, presumably that means the working month was about 15% longer this year than in previous years, but I am not sure that this would be the best way to look at the amount of time worked. In fact the typical work week seems closer to six or seven days, and certainly in Chinese universities we were supposed to make up for the holiday by holding extra classes before the holiday (which, I always thought, sort of negated the point of the whole thing for my poor students). I don’t know that the real working hours are for the average Chinese worker and I don’t know if they typically faced pressure anyway to make up for the foregone work during the holidays, but I suspect cutting the holiday from five days to two days might not be as big an adjustment in output as many people think.
It is perhaps an indication of how frothy things are that, although some analysts read these numbers as indicating that Chinese growth is in good shape, many saw the numbers as indications that the Chinese economy is beginning to slow down and may run into trouble if something isn’t done. As I see it, both numbers suggest that the economy is still roaring along, and it may just be a statistical necessity that they begin to slow. After all, the larger the Chinese economy becomes, the harder it is to maintain the same levels of growth – this is partly just a question of arithmetic. This is especially true for export numbers. Still, rising inflation means that an increasing portion of the nominal growth is not real, so we probably are seeing a slowdown in domestic economic activity, driven primarily by a slowdown in global demand.
Needless to say, any perception of economic slowdown will make it all the more difficult for the authorities to achieve the consensus necessary for them to address the monetary imbalances. We may be entering into the toughest period of all – in which as the need for monetary tightening, via the currency regime, becomes all the more obvious, the opposition to monetary tightening becomes even stronger because of weakness in the economy. I guess that means more policy paralysis.
Meanwhile we are being hit with yet another natural disaster. Heavy rains in the past week are causing enormous floods across 20 provinces south of the Yangtze River. Once again we are likely to see pressure on the economy, from inflationary pressure to greater investment in reconstruction. One thing I ma not sure about is what the conditions of China’s food and energy reserves. My suspicion is that they are quite low – in part because of selling to reduce inflationary pressure.
Imagine that you’re the investment director for one of the new sovereign wealth funds (SWFs). A very important guy - you get to invest several hundred billion dollars, with far fewer committees and shareholder interest groups harassing you than if you're the head of U.S. institutions such as CalPERS or TIAA-CREF.
Last winter, you had delegations from all the big banks in New York explaining that they’d just had this teensy weensy hiccup in subprime mortgages and so were giving you an unparalleled opportunity to buy shares - or convertible bonds - at a modest discount to the market price. You bit and you bought - a few billion dollars in each of two or three of them maybe, a fleabite in terms of your overall funds to invest but real money for ordinary mortals.
Now you open The Wall Street Journal handed you by a flunky to see how your investment is doing….
And find it’s down an average of 15%. And that’s in dollars, which themselves appear to be turning into some kind of peso.
The Politburo will not be happy (if yours is the Chinese fund). You may even find yourself minus a hand (if it’s one of the Middle East funds). Worst of all, if you’re from Singapore’s Temasek Holdings, you may have to explain your poor investment decision to the razor-sharp intellect of the 84-year-old island patriarch Lee Kuan-Yew!
The reality is, according to a Financial Times calculation, the sovereign wealth funds, institutions and other investors who have poured $65 billion into cash-starved U.S. financial services companies since last October have lost $9.7 billion, or 15% of their initial investment. In some cases, like the monoline insurers, investors have lost 65% to 70% of their money in less than six months. Yes, that’s a small number compared to the cost of the War in Iraq or Barack Obama’s health plan, but if you’re running a large fund that made several of these investments, it could play merry hell with your job security.
So, when the financial services companies discover their next set of disasters, which they will, and come round for another emergency injection of equity capital, where are they going to find the buyers?
Make no mistake, there will be more disasters - we’re nowhere near through the woods yet. Lehman Brothers Holdings Inc. (LEH), which had previously avoided writeoffs, just declared a $2.8 billion second-quarter loss and is now fighting desperately for survival. American International Group Inc. (AIG), the insurance and finance giant, has written off more than $20 billion and fired its top management, but nobody thinks they’ve found all the problems hidden in their books yet.
Even Goldman Sachs Group Inc. (GS), which has so far been snootily superior about its lack of major write-offs and quarterly losses, now has $96 billion in “Level ” assets, three times its capital. “Level ” assets, for those who haven’t been following the bizarre accounting sub-plot to this saga, are those for which no meaningful market price can be found, so instead they are valued by in-house mathematical models. I hate to be cynical, but if I had borrowed twice my net worth and invested it all in assets for which there was no market price, I might be just a tad worried in a financial storm as big as this one.
There are two forces that make me believe Wall Street investment houses will report another round of unexpected losses.
The first is the continuing decline in house prices. The $300 billion that has been written off Wall Street balance sheets so far represents the worst paper - subprime mortgages that weren’t justified in the first place. Almost certainly that $300 billion figure is still too low, but there might be the hope of an end to the losses if not for the continuing decline of house prices, at a rate of about 2% per month nationwide.
Those declines are exposing huge new tranches of mortgages that were previously in good standing. If the principal amount of even a prime mortgage becomes substantially above the value of the home, and the borrower gets into difficulties, the odds of default increase. The large bumps in property taxes that municipalities are beginning to levy, to cover unexpected gaps in their tax receipts, exacerbate the problem. Future mortgage losses will probably greatly exceed those already written off financial sector balance sheets.
The second force causing further write-downs on Wall Street is all the other lending the banks did during the boom years that is now also turning out to be rubbish. To the extent mortgages default, credit card loans cannot be far behind, and indeed we are already seeing a sharp rise in credit card delinquency ratios, which particularly affects the regional banking sector. Then there are the acquisition loans, and lending in general to overleveraged companies that are turning out not to have the cash flow they had projected.
Finally, there is the new and terrifying area of credit default swaps, now with a total volume of an extraordinary $62 trillion, ten times the size of the U.S. corporate bond market. Theoretically, for every loser on a credit default swap there is a winner. But in practice, many of the losers will turn out to be hedge funds and other non-creditworthy riffraff, and the financial system will be left holding the bag.
The losses investors have suffered on past equity investment in U.S. financial institutions are now probably sufficient enough to deter further investment in such institutions. Thus the market may well be shut out from raising future capital. We are already seeing this problem in Britain, where a $600 million rights issue for the home mortgage lender Bradford & Bingley PLC (BDBYF.PK) was withdrawn, even after it had been underwritten, an extraordinary event that did not happen, for example, during the crash of 1987.
Sovereign wealth funds may be stupid, but they’re not THAT stupid. And nor is the equity market as a whole.
For the financial system, this is likely to bring further bankruptcies or emergency bailouts - except that the Federal Reserve may not be able to find banks to conduct a bailout, as JPMorgan Chase & Co. (JPM) did for Bear Stearns Cos. Inc. (BSC) When JPMorgan Chairman James Dimon says, as he did last week, that he believes the financial crisis is almost over, he may be indulging in desperate wish-fulfillment rather than cold hard analysis - Bear Stearns seems likely to cost Morgan even more money than previously feared.
So if your broker comes to you with a great deal for a U.S. financial institution, I would advise you to hang up. Don’t be lured by the promise of big dividends - soon the banks will be too cash-poor to pay. We’ve already seen dividend cuts from the likes of Citigroup Inc. (C) and Washington Mutual Inc. (WM). More cuts are on the way.
What can investors do about it? Simple - avoid fashionable companies involved in “symbol manipulation” and look for makers of actual PRODUCTS - things you can drop on your foot (possibly crushing it, if we’re talking about Deere & Co.’s (DE) John Deere 3510 sugar cane harvester). Just make sure the companies you invest in won’t need to go to their banks for extra money anytime soon, because the banks won’t have any to give.
The Journal, citing people familiar with the matter, said the layoffs are part of a plan to cut about 10 percent of the staff of the 65,000-member investment-banking group.Messages left with Citigroup spokesmen on Sunday were not immediately returned. The Journal said the fired employees could be notified as early as Monday.
The New York-basked global bank, along with much of Wall Street, is in the throes of recovering from bad investments on mortgages and leveraged loans that cut billions of dollars from its portfolio.
It was not immediately clear if the reported job cuts would be in addition to cuts announced by Citigroup in April. After reporting a $5.1 billion first-quarter loss, the bank said then it was reducing its staff by 9,000, in addition to the 4,200 job cuts the bank announced late last year.
As of the end of last year, Citigroup had about 147,000 full-time employees.
In May, Citigroup unveiled a three-year plan that included getting rid of more businesses, mortgages, real-estate operations and jobs.
The bank called for shedding between $400 billion and $500 billion of its $2.2 trillion in assets and growing revenue by 9 percent over the next few years as it tries to rebound from the huge losses tied to deterioration in the credit markets.
Earlier this month, the bank said it was closing the Old Lane Partners hedge fund that was co-founded by Chief Executive Vikram Pandit. The bank is shuttering the fund just 11 months after it was acquired for more than $800 million.
Saturday, 21 June 2008
Last Updated: 12:18am BST 19/06/2008
Life might seem uncertain and unpredictable at the moment but in reality it's proving quite the opposite. The bursting of the property bubble was widely predicted, albeit the nationalisation of a major high street lender was not.
Since then, warnings from various sources of mounting losses amongst the banks have been realised, even though the banks themselves have seemed in denial.
The warnings about consumers being left high and dry by their debt binge have come to pass while the tired old cliché about inflation being like toothpaste - once it's out of the tube it's hard to get it back in - has been in use by the Telegraph since the summer of 2006.
We may have offended some by resorting to the simile a little too much but we, like others, have been trying to make a point on prices for some time.
Yesterday's letter from Mervyn King to Alistair Darling about inflation revealed more about a UK economy that is behaving in line with expectations and therefore posing a set of problems that are fixable with the tools at our disposal.
However, while it's good news that this slowdown is proceeding in fairly predictable fashion, the bad news is that this inevitably means people are going to lose their jobs.
Unemployment will have to rise in order to help deliver the "spare capacity" in the economy that members of the Monetary Policy Committee so euphemistically call redundancies, closures and cancellations. Without these the MPC can't deliver the relatively soft landing it's hoping for and get us back to 2pc inflation by this time in 2010.
The tone of the King letter was relatively dovish. Given the economic slowdown already in train and which will get worse, interest rates are far from certain to rise in order to choke off inflation.
There is a warning, however, from the MPC in its letter. If pay growth does not remain subdued, and evidence suggests it may already be showing signs of taking off, then the economy will have to slow to compensate.
Either this will be delivered by inflation itself squeezing income and consumption, or rates will have to rise. With market interest rates charged by lenders already having risen, even though the base rate has been cut to 5pc, the economy is enduring a period of monetary tightening anyway.
My admittedly contrarian call at the beginning of June that rates might actually fall in August still looks a possibility after yesterday's letter.
Looking at the way the MPC meetings occur, the committee may leave it until September 4 once the next Inflation Report is out on August 13.
One of the reasons I originally gave for an August cut holds truer than ever and that's the rapidly falling growth in money supply - specifically the M4 measure of money supply. King even made specific mention of falling money supply growth in his letter giving us hawks-turned-doves further hope.
So, the good news is that things are predictably bad and getting worse as expected which, given some of the apocalyptic coverage, is a perfectly good reason to be cheerful.
UBM's merger of 'equals' always looked weak
UBM pulls out of £3bn Informa merger talks
"There are no such things as mergers, only takeovers. Mergers are mythical beasts - they prance round the wooded glade, horned foreheads and all, waiting to be shot down. That's what will happen to United Business Media's (UBM's) all-share proposal to merge with Informa." This prediction, which appeared, here on June 10, has taken only seven days to come to pass.
A new bidder, thought to be a financial buyer, has crashed the party holding out the prospect of paying a premium for Informa shares, something that David Levin, the chief executive of UBM, was unwilling to do. His proposal of a nil-premium merger between the two with existing management sharing control always looked weak.
The problem with this deal was that Informa's shareholders were going to have to accept the "jam tomorrow" method of creating shareholder value. This idea of great riches in the future in return for other people running your company has a patchy record in corporate activity of any sort, never mind nil-premium mergers.
Informa shareholders are better off pursuing a potential takeover bid, albeit one that might fail, rather than a flimsy-looking merger of supposed equals.
Sharing delivery trucks is a good way to go
Retail giants share trucks to cut costs and emissions
Today's news that a large part of the food and consumer goods industries have joined forces to collaborate on logistics ought to set every other industry thinking. Clothing retailers ought to consider if they can copy the likes of Nestlé and Tesco in pairing off and making their delivery trucks more efficient.
The drinks industry is another obvious candidate which maintains numerous logistics companies that run their own routes, regardless of their rivals, which results in delivery trucks travelling empty. In these days of high fuel costs, regardless of environmental concerns, that's got to be a scandal as far as shareholders are concerned.
The one shadow over today's truckers' initiative is the risk to competition but I'm sure we can rely on the Office of Fair Trading to be monitoring events with interest, its antennae twitching at the prospect of a new probe.
Business Times - 20 Jun 2008
By CONRAD TAN
(SINGAPORE) The three Singapore-listed banks should still see growth in net income this year as they pass on higher costs to customers, but could struggle to show growth next year as bad loans start to rise, ratings agency Moody's said yesterday.
The outlook for the banks' credit ratings - which measure their ability to repay their debt and stay solvent - remains stable, as all three have solid capital bases and ready access to funds.
DBS Group, OCBC Bank and United Overseas Bank are all rated 'B' by Moody's. Deborah Schuler, a senior vice-president at Moody's responsible for rating financial institutions in Asia, said that while profit margins are likely to fall this year, 'net income for most banks in the region is going to increase'.
However, fee income from non-lending businesses such as securities brokerage, wealth management and risk management services, is likely to be a 'mixed bag'.
Next year looks much tougher, as the effects of slowing economic growth and falling demand for exports start to hit borrowers, said Ms Schuler.
'Credit expense and non-performing loans are lagging indicators. We don't expect to see much of the stress on loan portfolios from the slower exports and GDP growth to show up till late this year and most of that will show up next year.'
Still, 'in 2009, we expect banks are going to struggle to show growth in net income but we're not expecting losses'.
Moody's says that the outlook for the banking industry in Singapore - which it publishes separately from its ratings outlook for individual banks - is negative. Its industry outlook for the banking sector through the rest of Asia is stable or negative, 'reflecting the global stress' that banks are facing.
That stress includes weakening demand from the US, Europe and Japan, the higher cost of funds due to the turmoil in credit markets and soaring fuel and food prices that are threatening the borrowers and pushing up costs for banks.
Still, banks in Singapore and elsewhere in Asia are expected to maintain their net interest margins - which measure how much profit they make on loans net of funding costs - by passing on some cost increases to borrowers, Ms Schuler said.
The local banks here also have an edge over foreign competitors because most of their loans are funded by retail deposits that are a cheaper source of funds than money borrowed from international markets, she said.
'The Singapore banks are going to be in a good position with a relatively lower cost of funds than the other banks in town. They will be able to bid for loans, charge a bit more for them and earn better spreads.'
Despite the gloomier outlook for the banking industry in Asia over the next few months, the outlook on credit ratings of individual banks is 'overwhelmingly stable', reflecting their generally good health, said Ms Schuler.
But as capital-rich banks benefit from large companies turning to them for funds as other sources of credit dry up, the risk of banks over-exposing themselves to individual borrowers is rising, she said.
In Singapore and Hong Kong especially, the relatively small size of the domestic markets means bank exposure to individual borrowers is higher than elsewhere.
The top 20 exposures for Singapore banks are more than 7.5 times their profits before provisions - 'substantially higher' than in the US.
Business Times - 20 Jun 2008
(MUMBAI) Investors are shying away from Indian equity funds as a sustained slump in the stock market wipes out a major chunk of their stunning gains in 2007, but the industry is not yet facing pressure from redemptions.
Diversified stock funds delivered returns of nearly 60 per cent in 2007, as the benchmark stock index rose 47 per cent.
But with the market down about a quarter so far in 2008, investors have seen the value of their holdings cut by almost a third and have started cutting back on new investments.
'There has been a slowdown in the flows of equity funds in the last two months,' Sanjay Prakash, chief executive of the Indian fund unit of HSBC, told Reuters. 'We are seeing net inflows every day, but very small amounts,' said Mr Prakash, whose firm saw its average monthly assets drop 0.95 per cent to 184.7 billion rupees (S$5.9 billion) in the six months ended May.
Mesmerised by a sixfold rise in the stock market in the five years to the end of 2007, investors saw a 23 per cent drop in the March quarter as a buying opportunity, pouring in 449 billion rupees into the funds, 67 per cent more than a year earlier.
But as the market slump persisted, euphoria has given way to caution. Flows into equity funds slumped to 45.9 billion rupees in April, the lowest since August 2006, and about 48 billion rupees in May, data from the Association of Mutual Funds in India (AMFI) shows.
The money is mainly coming from pre-set investment plans where a fixed sum is deposited regularly into the funds.
The industry body estimates that there are about three million of such accounts.
'Slowdown is in the high net-worth and institutional segment,' said Vikrant Gugnani, the chief executive of India's No 1 fund firm, Reliance Capital Asset Management.
He said that big-ticket investors were no longer looking at stocks, shifting instead into real estate, gold and fixed-maturity plans, which are essentially close-end bond funds investing in securities in line with their maturity profile.
Investors may not be topping up their funds, but they are also not in a hurry to pull out of them. Outflows of 36 billion rupees in May were the lowest since July 2006, AMFI data shows. Outflows in January, when the stock market hit a record high and before dropping sharply, were more than two times those of May, but inflows were even higher at a record of 212.5 billion rupees. Indian shares fell to a 2008 low of 14,645 on June 10\. \-- Reuters
Business Times - 20 Jun 2008
By LYNETTE KHOO
(SINGAPORE) Fund managers' view of global equities has nosedived to a decade low as fears of stagflation heighten, according to the latest Merrill Lynch Survey of Fund Managers.
The June survey shows that the net balance of fund managers who 'underweight' equities rose from 5 per cent in May to 27 per cent in June - the most negative stance that the survey has recorded in 10 years.
Only one per cent of the respondents believe equities are undervalued, down from 25 per cent in March. A net 42 per cent are 'overweight' cash, up from a net 31 per cent in May.
Merrill Lynch noted that investors have reacted to the stagflation fears by reducing their exposure to both equities and bonds and moving into cash, raising their cash positions back to the levels last seen in March.
'The prospect of stagflation is beginning to create a major headwind for equities,' said Karen Olney, chief European equities strategist at Merrill Lynch.
The net balance of fund managers expecting higher core inflation a year from now rose to 33 per cent this month from 25 per cent in May.
A significant number of fund managers now wonder whether monetary policy has become too stimulative. Merrill Lynch noted that it is the first time in 10 months that it is seeing managers expecting short- term interest rates to be higher a year from now.
'The market is waking up to the idea that global interest rates are too low; in fact, they remain below inflation,' Ms Olney said. 'Merrill Lynch expects a double rate hike from the European Central Bank (ECB) by October and would expect other central banks to follow.'
The Eurozone has borne the brunt of investors' shift away from equities into cash and has moved from the most favoured to least favoured over the past 12 months. Investors continue to 'overweight' the US, Japan and the global emerging markets (GEM).
Within GEM, fund managers are most bullish on Russia and Brazil while in the Asia-Pacific ex-Japan region, Taiwan, Hong Kong and Singapore received the most 'overweight' calls.
The Merrill Lynch global survey polled 204 fund managers managing a total of US$718 billion. Some 185 fund managers participated in the regional surveys.
While the credit crunch is losing its sting, inflation has replaced it as the greatest single threat to financial market stability, the survey shows.
The number of investors citing 'credit risk' as the No 1 threat fell from a net 95 per cent three months ago to 81 per cent in June but those who cite 'monetary risk' as the greatest threat rose from a net 23 per cent in May to net 65 per cent this month.
'The inflation shock has already happened,' said Alex Patelis, head of international economics at Merrill Lynch. 'What matters now is how persistent it is and how markets and policymakers react. At a global level, this begs for an accident that will awaken markets and policymakers to the risks.'
But worsening corporate earnings growth may tie the governments' hands in coping with inflation. A net 81 per cent of the panel believe consensus earnings estimates for the next 12 months are too high and a net 77 per cent expect corporate margins to decline.
Given the headwinds in global growth and equities, the risk appetite among fund managers has fallen in June, with the net balance of managers taking a lower-than-normal level of risk in their portfolios falling to an all-time low of 43 per cent. They are, however, increasingly positive about alternative investments.
Business Times - 20 Jun 2008
By CONRAD TAN
(SINGAPORE) Soaring inflation and the response it triggers from central banks is a greater threat to economic growth in Asia than the downturn in the US, a senior spokesman for ratings agency Moody's said yesterday.
Asian central banks that were previously easing monetary policy to help cushion their domestic economies from the impact of slowing growth in the US, Europe and Japan have now been forced to change direction because of a rapid increase in food and energy prices, said Thomas Byrne, a senior vice-president and regional credit officer for Moody's sovereign risk unit in Asia and the Middle East.
'Inflation has become our foremost concern,' he said at a news briefing to present the Moody's outlook for South-east Asian banks and governments. 'The policy response to inflation - tightening by central banks or reluctance to ease because of the inflationary pressure - this will probably have a greater effect on economic growth in Asia than the sub-prime and credit market crisis.'
Policy-makers who target only 'core' inflation - which exclude changes in food and energy prices on the premise that their volatility distorts the overall price measure - could risk acting too late to stem rising prices because higher food and energy prices do spill over to other goods and services, Mr Byrne said.
'When we look at inflation we tend to look at headline inflation,' he said.
The US economic slowdown and the turmoil in financial markets that started in the sub-prime mortgage market there will have a 'fairly moderate' effect on Asian trade, he said. 'So the trade channel won't transmit this drag very strongly into the Asian economic outlook.'
Instead, 'what's happening is that central banks aren't easing when they previously wanted to ease and some of them are actually starting to tighten or are tightening more vigorously' because soaring food and energy prices are driving up business and household costs.
This will have a greater effect on dampening economies in Asia than slowing exports due to weaker growth in the US, Mr Byrne said.
'Also, high inflation means that in real terms purchasing power is eroded, so the ability of household consumption to support growth is somewhat diminished.'
Still, 'globally, we don't expect this inflationary episode to be as severe as the ones in the 1980s or 1970s', he added.
And Asia as a whole 'won't have as high inflation as other regions - say, the former Soviet Union countries or the Middle East'.
Moody's credit ratings and ratings outlooks on most Asian governments are still stable, 'but the risks are on the downside', Mr Byrne said.
The firm expects the US will suffer slower growth this year but escape a recession. Moody's is forecasting real gross domestic product growth of 1.5 per cent in the US in 2008 and 2.5 per cent next year - well ahead of the International Monetary Fund's forecasts of 0.5 per cent and 0.6 per cent respectively.
But 'a lot of this depends on oil prices and the Fed's response - whether it starts to tighten later this year or not', said Mr Byrne.
Vietnam as a Prelude
We saw the collapse of the Vietnamese economy in the past 6 weeks. Most people will agree with me that Vietnam has minimal impact on global economy. (Indonesia is the world’s 20th largest economy, Vietnam is only 60th). I asked myself why it happened. Vietnam’s economy is a bubble but not really that big, not worth the effort (you know what I mean?)
I suddenly realized that this is an invitation call for raiders to prepare their assault on ASEAN. To raid the financial system of an economy, there is no meat if it is already in a bad shape (limited downside). Maybe China and India are too big for the predators to swallow (like elephants), but ASEAN is slowly emerging as the deers & buffaloes in the food chain.
The Inevitable Collapse of Philippines
The media is exposing the rotten structure of the Philippines economy these days. In the past 10 weeks, Peso is down 10% against USD. No doubt soft commodities are getting expensive due to the increased usage of bio-diesel and change in diets, but since when, did we use rice for bio-diesel or use rice to feed poultry to produce more meat?
It is not easy to raid ASEAN after 1997-2000. The only way to upset the trade balance is to jack up the import prices of staple food. Yes, governments can choose to have price controls, ignore the futures market BUT once there is hunger or death in the country, the government will need to start hoarding from the market and fall into this trap to prevent civil unrest. (This is happening to Haiti now)
Sore Losers in Thailand?
It is weird that the oppositions are protesting against the latest elected parliament. At first I thought these are sore losers. Then I realized it doesn’t make sense for the opposition to do what they are doing right now. (They have been making noises for ten weeks):
- The new parliament is just instated, should they be given more time?
- If the new govt collapse, the Army will still be the one running the economy, not opposition.
- Don’t the opposition remember that they regretted having the military in power last year?
Oh well, we know that high rice prices will not mess up Thailand but we wouldn’t know if there are elements that try to mess up the stability 2nd largest economy in ASEAN.
Everyone is waiting for something to happen.
Hehee, please note that these are my personal opinions and they are not a call to buy USD and JPY. Just for discussion.
June 19 (Bloomberg) -- Stagflation just ain't what it used to be.
While economic growth has almost stalled, and surging oil prices have doubled the rate of inflation since the start of last year, structural changes in the economy since the 1970s mean the U.S. is unlikely to witness anything like the conditions that ravaged it then.
``It's a mini-stagflation,'' said Allen Sinai, chief economist at Decision Economics Inc. in New York.
Compared to the 1970s, the economy these days is more flexible, thanks to deregulation and advances in information technology. And it's less inflation-prone, because fewer workers are able to win big wage increases, and policy makers including Federal Reserve Chairman Ben S. Bernanke are more aware of the risks of letting prices spiral.
``We learned a lot of lessons in the 1970s,'' said Stephen Cecchetti, economics professor at the Brandeis University International Business School. ``I don't see the same sort of things happening again -- partly because of policy and partly because our economy is a little different.''
The seeds of the 1970s stagflation were sown the previous decade when government spending on social programs and the Vietnam War grew and credit became more readily available. A more rigid economy, including a system of fixed exchange rates, couldn't respond to the challenge of a jump in fuel prices.
Today's economy is more flexible, fuel efficient and competitive. While the nation produced 10 times more last year than in 1973, energy use rose by only a third during that time, according to figures from Departments of Energy and Commerce.
Companies are also carrying smaller stockpiles, making it less likely they'd need to slash production when faced with an oil shock. The ratio of inventories to sales has been declining since 1982, when it reached a record 1.7 months, according to figures from Commerce. The ratio stood at 1.25 months in April.
``We live in a world where the automakers have their inventory on trucks on the way to the plants,'' said Cecchetti.
Airlines, one of the industries hardest hit by the jump in fuel costs, provide one example of how deregulation has spurred competition and helped hold down prices. Fares rose 1.8 percent last year, compared with a record 38 percent jump in 1980, during another episode of stagflation.
Chinese, European Pressure
``Companies have to price to markets,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. ``Competition today is much more pronounced than in the 1970s. If a manufacturer doesn't price something sufficiently low, then someone from China or Europe will price it lower.''
Gains in worker efficiency and low labor costs also indicate prices won't skyrocket. Since 1996, productivity is up 2.5 percent per year on average. From 1970 to 1995, the gain averaged 1.7 percent.
The shift away from manufacturing and toward services has also contributed to a drop in labor-union membership that's reduced the ability of workers to get larger wage concessions. Union members accounted for 12 percent of the workforce in 2007, down from 20 percent in 1983 when the Labor Department started keeping records.
Average hourly earnings for non-managers and production workers were up 3.5 percent in the 12 months through the end of May, compared with a record gain of 9.5 percent in January 1981. The percentage of union workers with automatic cost-of-living adjustment clauses in their contracts fell from 61 percent in 1976 to 22 percent in 1995, when Labor stopped collecting data.
Finally, Fed officials will be loath to surrender the low- inflation legacy bequeathed to them by former Chairman Paul Volcker, who raised the benchmark interest rate as high as 20 percent to bring prices under control. The cost was one of the worst recessions since World War II.
Sinai worries inflation expectations are already becoming ``unhinged'' and says much depends on how policy makers including those at the Fed react.
Households surveyed in June expected inflation of 3.4 percent over the next five years, according to the Reuters/University of Michigan survey published last week. While that would match the highest level in 13 years, it would still be well below the 9.7 percent reached in February 1980.
Under Chairman Arthur Burns, the central bank lowered interest rates in 1974 and 1975 to combat a slowdown, even as prices began to accelerate. Volcker and Alan Greenspan, who served as chairman from 1987 to 2006, spent most of the next two decades trying to get ahead of inflation.
Bernanke, Vice Chairman Donald Kohn and at least four Fed bank presidents warned over the past weeks that they must keep inflation expectations in check. Investors project the Fed will raise rates as soon as September, futures prices show.
``Monetary policy makers around the world certainly understand what they are doing much better than they did in the early 1970s,'' said Brandeis' Cecchetti. ``I'm sure that policy makers will not allow inflation to rise any more and they'll bring it back down.''