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Saturday, 30 August 2008

Flirting with Disaster: Preparation Is Key for Potential Catastrophes

by Laura Rowley

A tornado touched down in my brother's town this month. It didn't affect his home -- because most of it had already burned down over the Fourth of July holiday.

He and his family were away that weekend, and believe stray fireworks landed in the bushes next to the house. Thankfully, no one was injured. One of the firefighters, in the midst of battling the blaze, even had the presence of mind to grab an envelope labeled "graduation money" that my niece had taped to her bedroom wall. (Her high school graduation party was the previous weekend, and she hadn't made it to the bank yet.)

But everything else melted, and they have to recreate a list of their possessions mostly from memory.

Prepare for the Worst

With wildfires becoming more destructive in recent years, the 2008 tornado season one of the deadliest on record, and this year's Atlantic hurricane season forecast to be more active than usual, it's smart to ask "what if?" and protect yourself.

Preparing for disaster is one of those things -- like eating five servings of vegetables a day -- that people know they should do, but often don't. A recent study by the National Association of Insurance Commissioners (NAIC) found nearly half of Americans don't have enough insurance to deal with potential losses, and half have never taken an inventory of their possessions.

Focus on safety, a plan for communicating with family members, and accessing valuable documents in the event of disaster, suggests Tom Hazelwood, head of the disaster response program for the United Methodist Church for the U.S., Latin America and the Caribbean for last decade. He has provided assistance to victims of the Sept. 11, 2001, attacks, Hurricane Katrina, and California wildfires.

"Mostly the thing I see is the pure lack of planning -- people feel secure in their homes and think that it will never happen to them, and then it does," Hazelwood says. "Most people don't take the time to think through their vulnerabilities. Could your home get hit by a tornado or hurricane? Are you vulnerable to fire, flooding, or an earthquake? Every family should think through the possible events that could happen to them where they live."

Blown Away

Betsy Piette, a pastor in Parkersburg, Iowa, had contemplated those events, and it saved her life in May. She was trying to decide whether to attend a graduation party when tornado sirens went off. She climbed into the tub in a basement bathroom with a sleeping bag and pillows.

"I could hear the roar coming closer and closer -- and I started to hear things popping like transformers and trees," she says. "As it got overhead it was very loud, and I knew the house was going." The tornado took everything but the exterior walls, a wall of kitchen cupboards, a closet, and the bathroom where she rode out the storm.

Seven people died in the strongest tornado to hit Iowa in 30 years, and hundreds more lost everything they owned. "There were people with cash, savings bonds, and valuable coin collections in their homes," says Piette. "I heard someone say, ‘This [collection] was what I was going to retire on -- and it's gone.'"

Keep It Safe

Store originals of your most important documents in a safe deposit box, a basement safe that can withstand temperatures up to 1,700 degrees, or on a portable memory storage device. Hazelwood uses an external thumb drive that's password-protected, where he has recorded all of his financial account numbers and passwords, and stored scanned copies of his critical documents.

"I keep one thumb drive in my office, and one in my backpack. After a disaster you just have to find a computer anywhere that's working and you have all those documents with you," he says. "The recovery process is much faster for people who have those documents. If you don't, you're talking about months to get through that process."

Also make an inventory of your belongings, taking photographs of each room, and noting the model and serial numbers of the items. If possible, save receipts or canceled checks to prove the value of items in your inventory. (Remember to include seasonal items stored in the attic, basement, or garage, such as holiday decorations, tools, and sporting equipment.)

Store a copy of the data with a relative, in a safe deposit box, or online. Companies such as My Online Home Inventory allow you to upload the photos and descriptions in a secure file for an annual fee of $50. (The file should include a list of the 24-hour contact numbers for your insurer.)

Fully Covered

Meanwhile, make sure you have a replacement insurance that covers the real cost of replacing your home, rather than an "actual cash value," which covers your belongings after depreciation (i.e., if you have a 12-year-old television, you'll get an amount equal to the value of a 12-year-old television).

The NAIC survey found 43 percent of U.S. adults have replacement policies; 27 percent insured their homes for actual cash value; and 28 percent didn't know what type of policy they had.

Even if you do have replacement coverage, insurers have been narrowing the definition of "replacement," leaving some homeowners with inadequate coverage. To make sure you're covered, go to AccuCoverage, enter information about your home, and the site will provide the estimated cost of replacement. Compare this to the amount of coverage in Part A of your policy.

The California Experiment

In his book "High Wire: The Precarious Financial Lives of American Families," Peter Gosselin reports on California insurers who were low-balling quotes to get market share, with disastrous results.

"California is a natural laboratory, because we have wildfires that sweep in and take out a whole bunch of houses at once," Gosselin explains. "You can tell if it's a one-off thing or a pattern. When the Oakland Hills fires sweep in and wipe out all the houses in an area and you see that virtually everyone is underinsured, then you have a pretty good idea something is wrong."

Gosselin interviewed homeowners who had asked their insurance agents if their replacement coverage was too low only to be told the value was in the land, not in the house. "People who had gone to the trouble of making sure they were insured ended up with a huge hole in their finances that they didn't think was there," he says.

The Devil Is in the Details

In addition to proper replacement coverage, verify whether you need extra coverage for fires, earthquakes, or other special-situation losses, and check if your policy covers damage from flooding, wind, and hail (many don't).

Also consider a policy that covers your living expenses while your home is rebuilt. Finally, be sure to contact your insurance agent to update your policy if you do renovations or improvements.

Wall Street hit by bad news

NEW YORK - WALL Street took a tumble on Friday as weak economic data and a disappointing earnings report from computer giant Dell weighed on the markets and Hurricane Gustav churned toward the Gulf of Mexico.

Low volume may have intensified the losses with trade thin ahead of a three-day Labour Day holiday in the United States, analysts said.

The Dow Jones Industrial Average slumped 171.22 points (1.46 per cent) to end at 11,543.96.

The tech-dominated Nasdaq composite tumbled 44.12 points (1.83 per cent) to 2,367.52 and the Standard & Poor's 500 broad-market index retreated 17.85 points (1.37 per cent) to 1,282.83.

The main indexes closed lower for the week but held onto gains for a strong August. The Dow rose 1.92 per cent, the Nasdaq 2.44 per cent and S&P index 1.78 per cent in the month.

Ahead of the open, the Commerce Department reported consumer spending rose 0.2 per cent in July from June, the weakest gain since February, while personal incomes slid 0.7 per cent, the steepest drop since August 2005.

Inflation was running at a 4.5 per cent annual pace, the steepest since February 1991.

'Investors turned sour toward the market after both consumer spending and personal spending showed declines in July, said Ms Colleen King at Schaeffer's Investment Research.

'Dell's less-than-stellar earnings report didn't help the situation. If that news wasn't enough, continued concern over (Hurricane) Gustav's eminent distress also weighed on investors' minds.'

Ms King said 'fears of Gustav turning into another Katrina' kept the markets on edge going into the weekend.

Oil surged in the early trade but gave back the gains. New York's main contract, light sweet crude for delivery in October, fell 13 cents to close at US$115.46 per barrel.

Dell reported profits short of most forecasts and warned of 'conservatism' in tech spending that appears to be spreading around the world.

Mr Chris Lafakis at Economy.com called the Dell report an 'ominous warning', that hurt the broader tech sector.

Dell shares sank 13.8 per cent to close at US$21.73 following its report.

Elsewhere in the sector, Marvell Technology fell 4.4 per cent to US$14.11 despite a sharp rise in profits for the semiconductor group. Google shed 2.2 per cent to US$463.29 and Cisco Systems lost 2.5 per cent to US$24.05.

Financial shares came under renewed pressure after several days of strong gains.

Fannie Mae slid 13.9 per cent to US$7.23 and sibling Freddie Mac tumbled 13.8 per cent to US$4.55 amid ongoing worries about the future of the government-sponsored, shareholder-owned mortgage finance firms.

Also in the financial space, investment bank Lehman Brothers managed a gain of 1.39 per cent to US$16.09 and Citigroup declined 0.47 per cent to US$18.99.

Bonds fell, with the yield on the 10-year US Treasury bond rising to 3.813 per cent from 3.795 per cent on Thursday and that on the 30-year bond increasing to 4.412 per cent against 4.389 per cent.

Bond yields and prices move in opposite directions. -- AFP

Friday, 29 August 2008

Citi tells staff to cut costs

UNITED States-based financial giant Citigroup is well-known for its massive staff bonuses in boom times but now, hit by big losses, it is scrimping to cut costs.

The embattled group is clamping down on colour photocopying by staff and the purchase of new BlackBerrys, the popular portable e-mailing gizmo.

Other drastic measures detailed in a memo sent to staff worldwide include a ban on employees holding off-site meetings, apparently to cut down on the cost of refreshments bought outside.

Separately, sources suggested that up to 200 information technology (IT) jobs could go at Citi's Singapore operations.

In the internal memo, obtained by The Straits Times yesterday, New York-based Mr John Havens, the head of Citi's institutional clients group, urged employees to be much more frugal in their expenses. 'All new BlackBerrys will require pre-approval,' Mr Havens stated in the memo that originated from Citi's New York headquarters.

He added that the managing of expenses is a 'critical aspect' of the bank's strategy - and of employee's jobs.

He said Citi is trying to slash photocopying and printing costs. 'Colour presentations are unnecessary for internal purposes; therefore going forward colour copying and printing should only be used for client presentations.'

The memo also flagged a major review of the 'very substantial temporary workforce' at Citi. 'We will be conducting a detailed review of all our temporary workforce engagements to understand more efficient ways to fulfil our needs.'

The memo also said Citi would review its use of management consultants to determine if there are 'more efficient sources' to fill its needs.

'Going forward, all new management consulting engagements will require pre-approval,' Mr Havens wrote.

Citi has been hit by billions of dollars of losses in the wake of the US sub-prime mortgage crisis and credit crunch.

Sources at Citigroup's Singapore office said yesterday that the memo, dated Aug 15, was mainly circulated to the bank's institutional clients group, including trading and investment banking as well as hedge-fund management.

These measures aside, sources say a significant part of the cost savings at Citi is still likely to come from staff layoffs. They say that in Singapore, as many as 10 per cent of Citi's estimated 2,000 staff working in the information technology area - about 200 people - could be asked to leave the bank soon.

However, this could also happen through natural attrition as a number of staff here are keen to leave bank due to poor morale, they say.

A Citi source said the mood at the bank was similar to the gloom that took hold after the Sept 11, 2001 terrorist attacks. 'A lot of good IT people have already left for the likes of Barclays Capital and the attrition will continue,' he said yesterday.

He said the IT staff affected by this restructuring exercise could include those at the operational level, such as project managers, and vendor management and client management staff.

When contacted, Mr Adam Rahman, head of corporate affairs at Citi Singapore, stressed that the bank 'remains committed to investing in growing the business in key markets'.

'Managing expense and reviewing of cost structures is an ongoing exercise that helps to increase efficiency and productivity, and reduce waste,' he said. 'Given the current global environment, we are evaluating a tighter set of expense policies across our businesses.'

He did not comment on the question of the possible job losses.

Singapore is a key hub for Citi in Asia with about 9,000 staff, the bank said.

Across the industry, banks including Citi are not just chopping jobs and bonuses, but are also taking away perks.

The New York Times reported that analysts at Swiss banking giant UBS are now flying economy class on domestic flights, while Deutsche Bank employees were told they will not be reimbursed for 'adult entertainment of any kind'.

Meanwhile, Goldman Sachs traders in the US no longer get free water and soft drinks, it said.

Over 100 US banks in trouble

WASHINGTON: The number of troubled United States banks shot up 30 per cent in just three months to 117, the highest level in five years.

A top regulator also warned that conditions will worsen as the housing slump and credit crisis continue to pound the industry.

More than a year after the credit crisis first flared up, Ms Sheila Bair, chairman of the Federal Deposit Insurance Corp (FDIC), warned on Tuesday that the outlook for the ailing banking industry was bad - and getting worse.

With the swelling tide of toxic loans proving to be even more worrisome than feared, Ms Bair said she expected more banks to join the agency's watch list of problem banks.

'We don't think the credit cycle has bottomed out yet,' she told a quarterly news conference, adding that US banks will not return to high levels of earnings any time soon.

'We expect that banks and thrifts will keep building up reserves for the next several quarters,' she said.

The news pulled down financial shares before markets closed higher on the back of a surge in energy shares.

Nine American banks have failed so far this year. They include mortgage lender IndyMac Bancorp, which has drained the FDIC's Deposit Insurance Fund used to repay insured deposits at failed banks.

In a bid to replenish the US$45.2 billion (S$64.4 billion) fund, Ms Bair said the

FDIC will consider a plan in October to raise the premium rates that banks pay into the fund. Such a move will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other US banks, Ms Bair said, to encourage safer business practices.

Mr Charlie Peabody, a bank analyst at Portales Partners in New York, said such a weighted tax could hurt already troubled banks past the point of recovery.

'The tax will fall most heavily on the weakest, so the conclusion is, the weak are going to get weaker and the strong will be able to take advantage of the weak,' he said.

Ms Bair said 98 per cent of the 8,500 US banks continued to be well-capitalised. She also noted that the banking sector's exposure to the preferred securities of mortgage giants Fannie Mae and Freddie Mac was 'not problematic', but said some smaller institutions' exposure could cause them greater stress.

The agency said the majority of new banks on the problem list have landed there because of major exposure in commercial real estate, whereas before, the problem banks were distressed by residential products.

The FDIC said it continued to see stress in the commercial real estate market, especially in construction and development areas.

Delinquent loans - those more than 90 days past due - jumped by almost 20 per cent during the quarter to US$162.9 billion, it said.

IndyMac is now expected to cost the fund US$8.9 billion, topping the agency's prior estimates of US$4 billion to US$8 billion, the FDIC said.

REUTERS, NEW YORK TIMES

Monday, 25 August 2008

Investors Chase Phantoms

By Peter Schiff

In football, when a running back intends to cut to the left, he often first fakes right. This move is designed to make the defense commit their resources in the wrong direction. It is my experience that markets often follow a similar path. Just prior to a major move in one direction, markets often make a sharp move in the opposite direction first. With respect to the dollar, gold, oil and other commodities, many on Wall Street have bought into the head fake, and will soon be watching in amazement as the runner sprints to the end zone.

Over the last few months, as the dollar rose more than 10% against a basket of other currencies, and as gold and oil sank to multi-month lows, many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end. But rather than representing a sea change, these counter trend moves more likely signify that the established trends are about to kick it into a whole new gear. My take is that if you thought you had seen a bear market in the dollar and bull market in gold, oil, and other commodities, well, “you ain’t seen nothing yet”.

Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move. The best bull markets carry as little excess baggage as possible. With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing. Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals. Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling the bull market.

This recent correction saw the most dramatic change in sentiment that I have ever witnessed. But the head fake that caused the market to commit was in fact not worthy of a high school benchwarmer. With absolutely no significant developments that could explain either a top in the dollar, or a bottom in commodities, investors placed their faith in price moments alone. Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began. The rapid movement reveals how clueless participants in these trades had become. Even those fund managers that seem to understand the fundamentals were fooled by the sharp price movements and the rhetoric they spawned.

Lacking any real change in fundamentals, such abrupt changes in sentiment following extreme price swings are as bullish a sign as I have ever seen. There is absolutely no basis for a significant dollar rally, or further weakness in gold, oil, or other commodities.

The U.S. is the focal point of the world’s financial turmoil. We convinced creditors around the globe into loaning us trillions of dollars. Now that it’s becoming increasingly apparent we cannot pay the money back, Wall Street has concocted a scenario where our shell shocked creditors respond by loaning us even more. More alarming is that many brain dead investors see this as a likely development.

The fact is that the outlook for the dollar has never been bleaker and the prospects for gold and other commodities have never been brighter. The rationale for a new dollar bull market, or bear markets in commodities, is just as flawed as those used to justify investments in internet stocks and subprime mortgages. Interestingly enough, it’s mostly the same suspects advancing the arguments.

Bernanke: Financial crisis taking toll on economy

By Jeannine Aversa, AP Economics Writer
Bernanke says financial crisis taking toll on economy, inflation outlook uncertain

JACKSON, Wyo. (AP) -- Federal Reserve Chairman Ben Bernanke said Friday the financial crisis that has pounded the country -- coupled with higher inflation -- is taking a toll on the economy and poses a major challenge to Fed policymakers as they try to restore stability.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force" around this time last year "has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," Bernanke said in a speech to a high-profile economics conference here.

While Bernanke welcomed the recent drops in oil and other commodities' prices, and believes inflation will moderate this year and next, the Fed chief also warned the inflation outlook remains highly uncertain.

The Fed, he said, would monitor the situation closely and will "act as necessary" to make sure that inflation doesn't get out of hand.

The current financial and economic environment is one of the most challenging to Fed policymakers "in memory," he acknowledged.

Given those dueling economic cross-currents-- weak economic growth and higher inflation -- many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16, and probably through the rest of this year.

"They won't act until the coast is clear on financial stability and the state of the economy," said Allen Sinai, chief global economist at Decision Economics Inc. Many fear the economy will hit a rough patch later this year as the bracing effect of the government's tax-rebate checks fades.

Wall Street was buoyed by Bernanke's hope that inflation will calm down, a dip in oil prices and growing speculation that Lehman Brothers Holdings Inc. could be sold. The Dow Jones industrial average closed up 197.85 points at 11,628.06. Broader stock indicators also posted gains.

The economy is the top concern for voters and of keen interest to presidential contenders Sens. Barack Obama and John McCain, who are gearing up for their party's conventions. Financial and credit problems are expected to smolder into next year. And, the unemployment rate, which jumped to a four-year high of 5.7 percent in July, is expected to keep rising.

The bulk of Bernanke's speech dealt with the need to bolster oversight of the nation's financial system to make it better able in the future to withstand future shocks.

To that end, Bernanke recommended that regulators work on ways to assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies -- as is currently the focus.

"Such an approach would appear well justified as our financial system has become less bank centered," he said. "Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise." He added that "stress tests" for a range of financial firms might also be helpful.

Bernanke's remarks come amid renewed worries on Wall Street about the financial health of Fannie Mae and Freddie Mac. The mortgage giants' stocks were hammered this week as investors became increasingly convinced a government bailout is inevitable.

Although the Fed chief didn't mention the companies, he said one of the critical questions facing the country is how to strengthen the financial system and at the same time protect against "moral hazard," where financial companies might feel more inclined to gamble with risks because they believe the Fed or the government will ultimately bail them out.

"Some particularly thorny issues are raised by the existence of financial institutions that may be perceived as 'too big to fail,' and the moral hazard issues that may arise when governments intervene in a financial crisis," Bernanke said.

Bernanke repeated his call for Congress to provide new regulatory powers to insulate the economy from damage if a Wall Street firm collapses. He again urged lawmakers to give the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms and banks.

The Fed's handling of the credit, financial and housing debacles is spurring debate at this year's forum, which draws Fed policymakers, economists, academics and international central bank officials.

The Fed has taken unprecedented steps over the past year to battle the nation's worst credit and financial crises in decades.

To brace the wobbly economy, the central bank has slashed its key interest rate by 3.25 percentage points, the most aggressive rate-cutting campaign in decades. Those rate cuts aggravated inflation, though.

Charles Calomiris, professor at Columbia University's Graduate School of Business, believes the Fed should be more focused on inflation fighting: "The Fed needs to raise (interest rates) now, slowly and predictably to restore confidence in its continued commitment to price stability."

The Fed also has taken some debatable action to stabilize the shaky financial system and to get credit -- the economy's lifeblood -- flowing more freely.

The Fed agreed in March to let investment houses draw emergency loans directly from the central bank, and last month extended that option to Fannie and Freddie. For years, such lending privileges were extended only to commercial banks.

Critics question whether taxpayers are being put at risk and if expanded safety nets will encourage financial companies to act more recklessly in the future.

But Bernanke on Friday again defended the Fed's decisions saying they were needed to avert a financial catastrophe that could have plunged the economy into a deep recession.

Friday, 22 August 2008

S'poreans bracing for recession

by Rachel Chan

CLOSE to half of the Singapore respondents who participated in a recent survey said they are bracing themselves for a global recession in the next 12 months.

According to the Nielsen Global Consumer Confidence Index, 47 per cent - the highest among Asia-Pacific countries - of the 500 Singaporean respondents are steadying themselves for an economic downturn.

This is the first time, since the survey's inception in 2005, that Singapore's consumer confidence has dropped, said The Nielsen Company.

The survey is done biannually to measure confidence levels, spending habits and major concerns of consumers.

Singapore is sixth on the Consumer Confidence Index chart for the Asia-Pacific region, which includes countries like Malaysia, New Zealand and China.

Even Nordic nations like Denmark, Norway and Finland - countries that have consistently topped the Nielsen Consumer Confidence Index - share Singapore's pessimism.

Results from the quantitative online survey, conducted in April this year, show that Singaporeans have a consumer confidence index of 102, down from 114 in the second half of last year.

'Since the inception of Nielsen's half-yearly Consumer Confidence Index in 2005, Singaporeans' confidence levels have been on a steady rise, until the latest survey,' said Ms Vicky Santos, executive director for The Nielsen Company, Singapore.

Singapore respondents claimed their biggest fear was unemployment, followed by inflation.

However, Singapore respondents are saving more.

About 69 per cent of those who have spare cash save it for a rainy day, up from 65 per cent in May last year. The latest global average is 46 per cent.

The Nielsen Global Consumer Confidence Index noted extreme pessimism in New Zealand, Latvia and the United States.

These findings are based on more than 28,000 Internet users in 51 markets, spanning Europe, Asia Pacific, North America and the Middle East.

Norway, India, Indonesia and Denmark topped global rankings as the most optimistic nations, while Taiwan was the only market that posted a buoyant 14-point increase in confidence levels, at 83 points.

On the other hand, Portugal, Korea and Japan wallow at the bottom of the Confidence Index rankings as the most pessimistic nations in the survey.

Wednesday, 20 August 2008

Why Gold Got Crushed This Week -- and Why It Will Roar Back

Ay, caramba! Not to put too fine a point on it, gold bugs got hit in the face with a frying pan this week. The yellow metal dropped like a hot rock on Monday, hitting its lowest levels of the year.

So what in the world happened? And is all hope lost for gold?

The short answers to those questions are as follows.

1. South Ossetia happened.
2. No, all hope is not lost. In fact, gold will be a screaming buy again at some point down the road.

Let me explain...

Russia, Georgia and the Dog That Didn’t Bark

To start, you’ve probably read about the shooting war that flared up between Russia and Georgia (the country, not the state) over the past week or so.

One minute, Russian and Georgian leaders were focused on the 2008 Olympic Games in Beijing. The next minute, Putin was flying home as fighter jets scrambled and tanks rolled in to South Ossetia.

It’s a fascinating little conflict. U.S. politicians are putting all the blame on Russia, but things are a bit more complicated than that.

I’d love to dive in to the geopolitical implications of what just happened -- and they could be big in the long run -- but that would be a distraction from our gold discussion. So we’ll leave the political analysis alone for now.

To understand why gold fell through the floor, you first have to understand some basic trading psychology. One of the most powerful trading adages around -- and one we’ve mentioned in these pages repeatedly -- is that “it’s not the news, it’s the reaction to the news.”

As a trader, you look at how a market reacts to news, good or bad, to determine how strong or weak the trend really is. If a strong market reacts poorly to good news, that’s a sign that maybe it wasn’t so strong after all... or that maybe the strong trend is now weakening.

Conversely, if a bearish and beaten-down market shrugs off a round of further bad news, that’s a sign that perhaps the bearishness has run its course.

Getting back to the Russia-Georgia shooting conflict. The key “tell” for traders here is that gold didn’t jump up when conflict broke out. Under more normal conditions, you would expect gold to see a huge pop on news of military conflict in an unstable region.

So when that didn’t happen, it was sort of like Sherlock Holmes’ “dog that didn’t bark.” The fact that gold reacted poorly, when it should have acted strongly, caused traders to rush for the exits. And that stampede in turn caused the price of gold to fall through the floor.

Commodity Correction and Euroland Recession Fears

As you are likely aware, gold’s weakness comes against the backdrop of a massive commodity correction.

The Reuters / Jefferies CRB Index ($CRB) is down over 20% from its 2008 highs (although it is still substantially up on the year). The U.S. dollar has also exploded higher this month, putting in one of its strongest trading performances in years.

This is happening, in part, because of a big sentiment shift between the U.S. and Europe.

For a while it looked America’s economy was sick while Europe’s economy was strong. Now the buzz is that perhaps things are the other way around... maybe America will slip past the credit crunch mess relatively unscathed, while Europe takes the harder hit.

As a result of these whispers, along with fears of global slowdown, you have the dollar going up while commodities go down. (The euro has also gone into freefall, which WaveStrength Options Weekly readers should be particularly happy about... Adam recently sent me a note to gloat over the absolute killing he is making on Euro FX puts.)

The Worm Will Turn Yet Again

So that’s the long and short of it. Against a big dollar rebound and a general commodity correction, traders were already feeling anxious about their hefty gold and oil positions.

In other words, these guys were already as nervous as a long-tailed cat in a room full of rocking chairs when the Russia-Georgia shooting war broke out... and so when gold failed to respond the way it should to the prospect of military conflict, they ran like hell for the door.

But here’s the thing: This commodity correction is just that -- a correction. We’re in maybe the third or fourth inning of a nine-inning game. The idea that global slowdown will put an end to the commodities run is just silly.

A quick anecdote... I hardly ever read USA Today, except when I’m traveling. When they put it in front of my hotel door in the morning, I’ll occasionally flip through it over breakfast, just to see what mass-market America is reading.

In San Francisco this past week for the Global Opportunities Summit, I saw a USA Today headline that caught my eye. I forget the wording, but the gist was “Commodity Bull Market May Be Over.”

Now let’s be serious here, I ask you: If The Economist, the Wall Street Journal and the Financial Times can’t get the major market calls right -- upstanding publications that they are -- what are the odds that the all-time top for one of the biggest bull runs this century has seen is going to be called by freakin’ USA Today?

Pardon my French, but there’s evidence out the ying-yang as to why the commodities bull is far from over. We’ll get into that more in future Taipan Dailies... but I’m closing in on 1,000 words here so it’s probably time to put away the soapbox on this subject. (I think after I hit the ‘Send’ button, maybe I’ll go do some tai chi just to calm myself down.)

Oh, and as to why gold will come roaring back?

In a nutshell, inflation isn’t dead. Not by a long shot. That’s another thing Wall Street doesn’t really understand... why the prospect for a massive inflationary tidal wave actually requires slowdown fears to kick in first.

I’ll explain what I’m talking about there when I write to you again on Friday. That will help you see why a time is coming when you’ll want to buy gold with both hands. (I know I will be.)

Warm Regards,

Justice Litle
Editorial Director, Taipan Publishing Group

Jim Rogers Exclusive: Bigger Financial Shocks Loom...

Jim Rogers Exclusive: Bigger Financial Shocks Loom Consequences to Impact for Years
Stock-Markets / Credit Crisis 2008
Aug 19, 2008 - 05:00 AM

By: Money_Morning


Keith Fitz-Gerald wrotes: VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae ( FNM ) and Freddie Mac ( FRE ) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning .

Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won't be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.



The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”

During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:

U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he's handed out as he's tried to battle this credit crisis.
That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn't raise borrowing costs, market forces will make that happen.
And that the average American has no idea just how bad this financial crisis is going to get.
“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

Rogers first made a name for himself with The Quantum Fund, a hedge fund that's often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor's 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the recently released " A Bull in China ." And he made some historic market calls: Rogers predicted China's meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that's fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers' candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:

Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers: There was a train wreck, yes. Two or three – more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I don't know how long the rally will last and then we'll be off to the races again. Whether the rally lasts six days or six weeks, I don't know. I wish I did know that sort of thing, but I never do.

(Q): What would Chairman Bernanke have to do to “get it right?”

Rogers : Resign.

(Q): Is there anything else that you think he could do that would be correct other than let these things fail?

Rogers: Well, at this stage, it doesn't seem like he can do it. He could raise interest rates – which he should do, anyway. Somebody should. The market's going to do it whether he does it or not, eventually.

The problem is that he's got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that's what he could do. That would help. It would cause a shock to the system, but if we don't have the shock now, the shock's going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. ( JPM )] was one thing and then it's Fannie Mae ( FNM ), you know, and now Freddie Mac ( FRE ).

The next shock's going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management . They've been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the “ dot-com bubble ” shock, so I guess Bernanke could try to start reversing some of this stuff.

But he has to not just reverse it – he'd have to increase interest rates a lot to make up for it and that's not going to solve the problem either, because the basic problems are that America's got a horrible tax system, it's got litigation right, left, and center, it's got horrible education system, you know, and it's got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.

But this is academic – he's not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That'll be the best solution. Is he going to do that? No, of course not. He still thinks he knows what he's doing.

(Q): Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn't know anything's wrong – that anything's happening. Is that still the case?

Rogers: Yes.

(Q): What would you tell the “Average Joe” in no-nonsense terms?

Rogers: I would say that for the last 200 years, America's elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America's national debt.

Suddenly we're on the hook for another $5 trillion. There have been attempts to explain this to the public, about what's happening with the debt, and with the fact that America's situation is deteriorating in the world.

I don't know why it doesn't sink in. People have other things on their minds, or don't want to be bothered. Too complicated, or whatever.

I'm sure when the [ British Empire ] declined there were many people who rang the bell and said: “Guys, we're making too many mistakes here in the U.K.” And nobody listened until it was too late.

When Spain was in decline, when Rome was in decline, I'm sure there were people who noticed that things were going wrong.

(Q): Many experts don't agree with – at the very least don't understand – the Fed's current strategies. How can our leaders think they're making the right choices? What do you think?

Rogers: Bernanke is a very-narrow-gauged guy. He's spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America. There's no problem in housing finance. I mean this was like in 2006 or 2005.

(Q): Right.

Rogers: He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.

(Q): That's problematic.

Rogers : It's mind-boggling. Here's a man who doesn't understand the market, who doesn't understand economics – basic economics. His intellectual career's been spent on the narrow-gauge study of printing money. That's all he knows.

Yes, he's got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he's good at, we know. We've learned that he's ready, willing and able to step in and bail out everybody.

There's this worry [whenever you have a major financial institution that looks ready to fail] that, “Oh my God, we're going to go down, and if we go down, the whole system goes down.”

This is nothing new. Whole systems have been taken down before. We've had it happen plenty of times.

(Q): History is littered with failed financial institutions.

Rogers: I know. It's not as though this is the first time it's ever happened. But since [Chairman Bernanke's] whole career is about printing money and studying the Depression , he says: “Okay, got to print some more money. Got to save the day.” And, of course, that's when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

(Q): And now we've got a dangerous precedent.

Rogers: That's exactly right. And when the next guy calls him up, he's going to bail him out, too.

(Q): What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Rogers: Well, Volcker has said it's certainly beyond the scope of central banking, as he understands central banking.

(Q): That's pretty darn clear.

Rogers: Volcker's been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker. We've had couple in our history: Volcker and William McChesney Martin were two.

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party's out of control.

(Q): This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?

Rogers: Yes. We had two central banks that disappeared for whatever reason. This one's going to disappear, too, I say.

(Q): Throughout your career you've had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

Rogers: That's the way to invest, as far as I'm concerned.

(Q): So conceivably, history would show that the highest returns go to those who invest when there's blood in the streets, even if it's their own.

Rogers: Right.

(Q): Is there a point in time or something you're looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Rogers: Well, yeah, but it's a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts. Not all of them, but most of them last week.

So, if you're talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn't let the Chinese buy the oil company , wouldn't let the [Dubai firm] buy the ports , et cetera.

But I'm really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they're somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan's yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That's a collapse. That was also a bottom.

These are not predictions for the U.S., but I'm just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

(Q): Treason? Wow, I didn't know that .

Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other people's currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by '39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.

You know, even if Mother Teresa had come in [as prime minister] in '79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would've been great.

You give me the largest oil field in the world and I'll show you a good time, too. That's what happened.

(Q): What if Thatcher had never come to power?

Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And that's why she came to power…because it was such a disaster. I'm sure she would've made things better, but short of all that oil, the situation would've continued to decline.

So it may not be in our lifetimes that we'll see the bottom, just given the U.K.'s history, for instance.

(Q): That's going to be terrifying for individual investors to think about.

Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don't just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.

Even Zimbabwe, you know, took 10 or 15 years to really get going into it's collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it's a major disaster.

That's one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it's going to take them forever to do so.

(Q): Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we'll know we're getting close because they'll do it even after it's illegal – after America's put in the exchange controls.

(Q): They'll move their own money .

Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

(Q): We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can't do this, but it's alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we'll be at the bottom.

But we've got a long way to go, yet.

Ex-IMF Chief Economist Predicts US Bank Collapse

LONDON -- The global financial crisis is set to get worse, with a large U.S. bank likely to collapse in the next few months, a former International Monetary Fund chief economist has warned, the BBC reports on its Web site Tuesday.

Kenneth Rogoff said that despite hopes that the U.S. economy had turned the corner, it was "not out of the woods."

"I would even go further to say "the worst is to come'," he said.

"We're not just going to see mid-sized banks go under in the next few months," said Rogoff, who held the IMF role between 2001 and 2004.

"We're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," he said at a conference in Singapore, the BBC reports.

Reuter:Large U.S. bank collapse seen ahead

By Jan Dahinten

SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.

"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.

"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."

Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.
"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.

"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup

In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.

"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."

Tuesday, 19 August 2008

Bracing for Inflation

By John K. Castle

Growing evidence suggests American consumers, businesspeople, and political leaders should all be bracing for double-digit inflation, probably as early as 2009.

The relative price stability of the past 15 years is giving way to worsening inflation, despite the recent softening of oil prices. The Consumer Price Index for all items shows the inflation rate averaged 2.6% a year from 1992 through 2007 but has doubled since January, reaching an annual rate of 5.6% in July (BusinessWeek.com, 8/14/08). By next year, the monthly figure could hit double digits, and the inflation rate for 2009 overall could triple 2007's 2.85%.

I say this not only because I have looked at a broad range of statistics that point in this direction. I also run a private equity investment firm that owns companies in a number of industries -- including restaurants, the manufacture of gardening tools, oil and gas exploration services, and distribution of entertainment products such as books and videos -- that are already being forced to pass price increases on to the consumer.

The skyrocketing price of oil is obviously a central element in the accelerating price spiral. But a sea change in China's role (BusinessWeek, 6/19/08) is beginning to have a huge impact as well.

Increasing Commodities Pricing

Anyone who hasn't been living in a cave for the past year knows that oil prices have soared and pushed up the prices of gasoline, diesel fuel, and heating oil. Largely hidden from view, however, have been steep and continuing price increases across the whole spectrum of commodities.

Oil almost doubled in price, from $78.21 in July 2007 for a barrel of benchmark crude, to $145, where it peaked before dipping below $120. But from a longer perspective, oil sold for about $30 a barrel during 2003 and much of 2004. Thus it has actually quadrupled in five years. Coal, traditionally volatile, sold for about $30 a ton during 2003, peaked briefly at $63 in 2004, and went for $45.25 at the end of July 2007. A year later it hit $139.50 before slipping back a bit. It has tripled in 12 months.

Copper, another basic commodity, went from 82% a pound in July 2003 to $1.14 a year later, and to $3.72 by the end of last month. That's an increase of 350% over five years. The price of steel has climbed from under $240 a ton for hot-rolled steel coil throughout most of 2003 to $1,125 a ton last month, quadrupling in five years.

Grains have also soared in price (BusinessWeek.com, 7/18/08). U.S. corn prices jumped from $3.01 a bushel in July 2007 to $5.37 one year later. Wheat doubled from $3.05 a bushel in July 2006 to $6.02 last month. A Midwestern bakery owned by one of our portfolio companies turns out 13 million pies a year. The cost of ingredients of a standard pie jumped 100%, from $1.20 a year ago to $2.40 today.

In every sector, cost increases are so large and pervasive that producers who might once have tried to absorb or work around them are passing them on to customers as fast as they can. Dow Chemical (NYSE:DOW - News) recently announced successive price increases of 20% and 25%, plus freight surcharges, saying energy and feedstock costs had risen fourfold in five years.

China's Role

With commodity costs rising for so long, why are we feeling the impact so suddenly?

The answer is that China can no longer bail us out with low-cost manufacturing. For years, American manufacturers and retailers offset rising costs by sourcing more products from China, where they could be made cheaply. That kept prices down for American consumers and also restrained pressures on wages, abetting price stability. But now costs are rising quickly in China, too (BusinessWeek.com, 8/12/08).

The Chinese government, under pressure from the U.S., let its currency float upward by 21% against the dollar since depegging it in July 2005. It also increased its value-added tax by 11%, and removed rebates of the tax for most exporters. New labor laws, coupled with a tightening market for skilled workers, have pushed up labor costs by about 50% over the last three years. Meanwhile, Chinese producer prices rose by 10% in July, the fastest rate of increase since 1996. As a result, Chinese producers are demanding -- and getting -- price increases of 20% to 25% on goods they make and sell to U.S. customers.

Without the Chinese life preserver, prices at the big-box American retailers are likely to be soaring in the near future, and Chinese manufactured parts and components that go into U.S. cars and appliances are likely to experience similar gains.

Admitting We Have a Problem

Most Americans will have to tighten their belts and accept lower living standards unless this inflationary spiral can be stopped. There will be pain -- higher prices and a weaker economy, resulting in fewer jobs. Meanwhile, millions of Americans who are already feeling poorer because of falling home values and a soft economy will be further pinched by higher prices for heating oil, groceries, clothing, autos and appliances. Labor is unlikely to remain so quiescent, particularly as the expectation of inflation becomes clear.

The federal government and the Federal Reserve will be under pressure to take tough and politically painful steps to curb this inflation, including strengthening the dollar, raising interest rates, and tightening credit. But the Fed's ability to raise rates is constrained -- it needs to keep rates low to manage the mortgage-backed bond mess.

The first step in solving the problem is to recognize that we have one -- and it is serious. No American housewife has any doubts about that. Our policymakers shouldn't, either.

Financial Crisis Is Expected To Bring More Big Shocks

The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.

Among the predictions: the failure of some of the country's biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).


"I think the financial problem is halfway through the cycle," David Kotok, chairman and chief investment officer from Cumberland Advisors, told CNBC. "There's another shoe to drop ahead of us and it could be more severe."

Kotok thinks Merrill Lynch (NYSE:MER - News), Wachovia (NYSE:WB - News) and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities.

The cash companies need to shore up bad investments, "is up to about $50 billion and will probably top $100 billion before it's over," he added.

"Those firms—Merrill,| Wachovia| and others—are going to have to raise that cash," he said. "They are either going to have to get it from the Federal Reserve, through some direct or indirect means, which means more leverage, more Fed balance sheet, more regularly oversight or they're going to have to get it in the capital markets."

Watch the video at the left to hear Kotok's views on where oil and the dollar are heading.

Meanwhile, billionaire investor Wilbur Ross told "Squawk Box" that a thousand banks could fail before the financial crisis is over.

"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot."

And the impact on the credit crunch could be severe, he added.

"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity."

His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.

"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said. .

And a Barron's article over the weekend said the U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime.

The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities'
$19 billion of subordinated debt also suffering losses.

On CNBC, Kotok agreed that Fannie and Freddie are in jeopardy.

"Were it not for government aid and backing they would have already had to declare bankruptcy. Their portfolios have problems," he said.

"You see one brick at a time in the financial problem area become addressed. Here's Lehman (NYSE:LEH - News) trying to divest real estate holdings in a falling real estate market," he added.

Sunday, 17 August 2008

Clouds gather over bonuses

Mr Lee, who is in his 40s and a managing director at a foreign bank based in Singapore, is bracing himself for sharply reduced bonuses.

“We're still okay right now, but I'm worried for my situation if the condition does not change in six months time,” Mr Lee says.

Mr Lee's plight represents a growing concern among finance industry executives who realise they have little choice but to lower pay and hope for a rebound next time round.

Compensation experts are tipping annual bonuses to fall by as much as 40% this year, as the subprime concerns loom large and the sentiment in Singapore's financial sector remains cautious.

Pernille Storm, director of banking and financial services at Hudson Singapore, says investment banking has been hit the hardest as significantly fewer deals are being managed, but even within corporate and transaction banking, “on target” bonus expectations have moved down from six-months to around four-month bonuses.

Given the harsh environment, banks are eager to conserve cash and hold on to key employees. As a result, many of them now focus on other forms of monetary compensation. These include share options to reward their employees and non-monetary ones such as flexible working arrangements and recreation benefits, says Robert Half Singapore's managing director Tim Hird.

That said, actual bonuses this year proved higher than predicted as many banks paid up to avoid losing their top dealmakers and traders. And now, observers reckon the same scenario might just pan out when bonuses are next paid in February/March 2009.

“Those on the sell side who continue to bring in sales and revenue for their bank will continue to get their bonuses and increments,” predicts Lionel Lee, assistant regional director for Asia at Ross Human Directions.

Tan Soo Jin, vice-chairman of executive search firm Amrop Hever Group, believes for next year, bonuses will be significantly lower unless the person can deliver.”We do know that, even in bad times, some people can perform better than others,” he says.

Analysts say US housing market recovery not until 2009

WASHINGTON- As the US economy appears more than ever linked to the health of the housing market, analysts see no end to falling prices or recovery in the sector before 2009.

After several years of a sizzling boom, housing prices in the United States have fallen for the past year and a half, according to the closely watched S&P/Case-Shiller index.

In May, prices fell a record 16 percent from a year ago.

But for the majority of analysts, the price decline still is not enough to put the sector on the road to recovery.

"Home prices in the US are likely to start to stabilize or touch bottom sometime in the first half of 2009," former Federal Reserve chairman Alan Greenspan said Thursday.

But "prices could continue to drift lower through 2009 and beyond," he added.

Treasury Secretary Henry Paulson regularly repeats that the real-estate sector presently is the biggest danger for the US economy.

Paulson in late July warned that foreclosures and the number of existing homes for sale "are likely to remain substantially elevated this year and next and home prices are likely to decline further on a national basis."

Several factors are at work.

Housing prices, although lower, are still far from reaching pre-boom levels, according to a recent survey by TD Bank Financial Group.

Today's home prices are roughly at mid-2004 levels, while the S&P/Case-Shiller index shows they are still nominally 34 percent higher than 2002 prices.

"The correction isn't over," the TD Bank analysts said, adding that prices have further to fall, particularly in "cities such as Los Angeles, Las Vegas, and Miami which saw the largest price gains.

"The inventory of unsold homes on the market is so high -- 11 months' supply for existing homes, 10 for new homes -- that sellers will have to lower their expectations before the market can return to normal, which analysts generally see as a five-month supply."

The rising share of foreclosed homes in overall sales bodes negatively for home prices," said Ethan Harris, chief US economist at Lehman Brothers, who sees prices falling between 25 and 30 per cent in the correction phase of a cycle he sees ending in late 2009.

In fact, the owners of foreclosed homes are often banks, which today hold a sixth of the homes on the market, according to RealtyTrac, a real-estate industry data firm.

The banks have not been shy about disposing of these distressed assets. The Wall Street Journal this week reported on a house in Corona, California, that was sold for 198,000 dollars by a subsidiary of Credit Suisse and which was bought for 450,000 dollars in December 2006.

Another factor weighing on housing prices is the growing difficulty in obtaining a bank loan, and not just for high-risk borrowers.

In the second quarter, 75 percent of US banks tightened their lending conditions on standard mortgages, home loans to borrowers with good credit histories, the Federal Reserve reported recently.

And the fragile economy's woes -- rising unemployment, inflation-eroded purchasing power and financial turmoil -- hardly inspire optimism.

"The light at the end of the tunnel is a faint and distant one. Further, the risks to this outlook weigh heavily on the downside, with the main risk being the potential for financial markets to unravel further," said Celia Chen, director of housing economics at Moody's Economy.com.

"It will be well into 2009 before the market works off all the excesses accumulated during the housing boom," she said. - AFP/vm

HK bargain hunters turn to bulk buying to beat inflation

HONG KONG : Hong Kong shoppers, ever on the hunt for a bargain, are tackling soaring food prices by getting together and buying in bulk, but experts warn the trend could make the inflation problem even worse.

Hong Kong households have been struggling with inflation that officially hit six percent in July, but which many fear is actually higher as pork and rice prices have soared by up to 64 percent since the start of the year.

Feeling the pinch of the rising cost of living, one community project now uses the Internet to allow low-income families to pool their resources to buy in bulk at impressive discounts compared to retail outlets.

The 'Grassroots Family Joint Council - Mutual Help Bulk Purchase Scheme' was launched in July and has since garnered support from non-government organisations and charities in the Chinese territory.

"They started this scheme on their own as they thought that they would have better bargaining power to get better prices from wholesalers," said Pauline Fung, a social worker with the Caritas Youth and Community Service.

More than 20 wholesalers are taking part, some offering their goods at cost, said Fung, whose charity has facilitated the scheme since its launch.

Shoppers typically get together to make large purchases of just one product -- for example, baby milk powder, which they can buy at 170 HK dollars for an 850-gram can, rather than 195 dollars.

Mandy Iu, a high school student, said she uses bulk-buying for cosmetics, cheap products and "things I want to try and cannot buy individually."

Co-op members might feel they are beating the price rises plaguing consumers worldwide, in part because of soaring energy, food and commodity prices -- but some experts say the hoarding of products may exacerbate the problem.

"Stocking more at home will only push prices up," said Andy Fong, lecturer of Communications and Social Sciences at Hong Kong's Polytechnic University Community College.

Bulk buying to beat inflation becomes a self-defeating exercise, he said, because, like panic-buying, it is perceived by the market as increasing demand, which in turn pushes prices up.

"It will end up in a vicious cycle," he said, adding that a recent government move to subsidise the poor to help them deal with inflation was also short-sighted as it would encourage more consumption.

One of the providers, Laurence Lee's company BB-Land.HK, established an online store and bulk-buying scheme that now has 4,000 members who, he says, save around 10 percent on their shopping bills.

He said many shoppers in Hong Kong, long considered a consumer paradise, had become lazy when it comes to comparing prices and were now finding they had to shop smarter to stay ahead of inflation.

"If you want to get cheap things, you need to develop a shopping plan," he said, adding that bulk buying schemes could help change spending habits. "Bulk buying is a way to educate consumers to plan their shopping."

'Expect more layoffs this year'

LABOUR chief Lim Swee Say expects retrenchment this year to be higher than last year's, but still below the historical average.

Low-skilled manufacturing workers will bear the brunt of job losses.

These workers, typically categorised as plant and machine operators and assemblers, form almost 10 per cent of Singapore's workforce of 1.8 million.

Mr Lim, secretary-general of the National Trades Union Congress, gave his response yesterday when asked for his retrenchment projections following recent official figures showing a slowdown.

He said in an e-mail reply to The Straits Times: 'We expect the number to be higher than last year, but likely to be still below the average level of 10,000.'

On average, about 10,000 workers are laid off each year.

Retrenchments hit a high of almost 30,000 in 1998 during the Asian financial crisis. Last year, however, it dipped to a 10-year low of 7,675 following three years of strong growth and high job creation.

Latest official figures showed 4,174 workers were retrenched in the first half of the year. Most were in manufacturing.

The spectre of rising retrenchment was raised after the Government revised its growth forecast last week: from 4 to 6 per cent to a narrower 4 to 5 per cent.

The Ministry of Trade and Industry also said job losses were on the cards. It singled out export-dependent manufacturers, saying they would suffer a contraction in overseas sales this year, their first since the 2001 dot.com bust.

Later, Minister Mentor Lee Kuan Yew said layoffs were likely in industries exporting to the United States and Europe.

Mr Lim, who is also Minister in the Prime Minister's office, pointed to keen global competition as another factor contributing to retrenchment.

'Manufacturers keep moving to places that are either closer to their consumer markets or offer lower production costs,' he noted.

In his view, layoffs are inevitable and the solution is to retrain workers.

'We cannot try to slow down the pace of upgrading or resist continuous restructuring, as it will make us less competitive and lead to even more retrenchments.'

He said: 'The overall job market is still quite healthy. There are enough jobs for our workers and the key is to be adaptable.'

Economists are divided on how bad the layoff figures will be for the rest of the year.

Citigroup's Chua Hak Bin sees a tougher job market. 'Job growth is exceptionally volatile in an open economy like Singapore's and can turn sharply negative in a severe downturn.'

Standard Chartered Bank's Mr Alvin Liew is more sanguine, saying the slowdown may be a protracted one and its impact less severe than that of the Asian financial crisis.

'The impact will be more benign as we have many buffers. Our economy is more diverse and our workforce is better trained,' he said.

Still, he expects the unemployment rate to rise from 2.3 per cent to 2.5 per cent by year end. 'The real challenge will come in the first half of next year.'

OPEC official says output cuts may be needed

An Iranian official in the Organization of Petroleum Exporting Countries said Saturday that the producers group is considering leaving oil production levels unchanged or perhaps even trimming them to shore up flagging prices and defend market share.

"The market is oversupplied by at least 1 million barrels a day. If OPEC would like to remove this additional oil out of the market, then OPEC has to cut some production," OPEC governor Mohammad Ali Khatibi told Dow Jones in a telephone interview.

"There will be maybe two options. One option is maintaining the level of production. It means OPEC will roll over the production. The other option will be some decrease in production," he added.

The topic will lead OPEC's agenda when representatives of the group's 13 member nations gather Sept. 9 in Vienna to discuss production policy.
Oil prices peaked in early July at over $145 a barrel. They have since fallen 22% as the high prices carved deeply into demand, especially in the transport sector. The September crude oil futures contract closed Friday at $113.77 a barrel on the New York Mercantile Exchange, a fresh three-month low. See Futures Movers.

Khatibi's comments come just a day after OPEC said higher prices and weak economic conditions in most industrialized nations are slowing global oil demand.

"Summer strong oil demand growth in China, Middle East and Asia has not been enough to offset the huge decline in OECD oil demand in the second quarter," the producers group said Friday in its monthly oil report.
The group's latest estimate trims 2008 demand growth by 30,000 barrels per day -- its fifth consecutive month of downward revisions. The group now estimates global oil demand this year will average 86.9 million bpd. It sees demand inching up to 87.8 million bpd next year.

At the same time, the revised forecast sees oil demand from OPEC's members slipping to 32.1 million bpd, or 100,000 bpd less than in 2007. The 2009 forecast extends the trend, with demand for OPEC oil easing to an average of 31.3 million bpd. The drop is the result of slowing demand growth and oil coming into the market from newly developed fields in non-OPEC nations.

OPEC claims it has bumped up output to help calm the volatile oil market, pumping 32.64 million bpd in July, or 780,000 bpd more than in April. The group's monthly report also said OPEC is now producing "well above the demand for its crude."

Saturday, 16 August 2008

What jobs will be the most demanded in view of the changes in the financial industry 5 to 10 years down the road?

Accountants? Tax advisors?

Investment bankers seem to be falling out of favour soon, unless they are able to acquire new thinking and new skills?

The Future of Investing: A 2020 Vision

by Ricky McRoskey

In finance, things change. Forty years ago you couldn't buy a futures contract based on a currency, 25 years back the first collateralized debt obligation hadn't hit the market, and two years ago subprime wasn't a curse word on Wall Street.

But investors—and the folks who make money by packaging new investment products—always seem eager to move on to the next big thing. If financial history has taught us anything, it's that change is inevitable—change in everything from the way banks package risk, to the way governments regulate savings institutions, to the ways consumers can invest their savings. And with the recent upheavals in equity and fixed income markets, the financial industry is left to ponder: What change is next? What will the financial world look like in 2020?

The quick answer is an industry more transparent, more international, and more driven by individual investors than today's.

BusinessWeek asked financial professionals and academics their thoughts on what the financial landscape will look like in the year 2020. The experts foresee a world where investment banks will look more like government-backed depository institutions, mutual funds will be fewer, and stock exchanges will become international with super-governmental bodies regulating them. "A lot of the frameworks and walls built because of the old financial world we grew up in will come down," says Tanya Styblo Beder, chairman of the SBCC Group and a member of the board of directors at the International Association of Financial Engineers.

Disappearing Borders

One barrier that will fall is the distinction between foreign and domestic finance. Since 2000 developing nations have gone from producing 37% of the world's economic output to 45%, according to the International Monetary Fund, signifying a trend of greater parity between developed and undeveloped nations. With explosive growth in emerging markets and more companies with worldwide operations, a corporation's official "headquarters" will become less relevant, says Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School. "People think they're diversifying by investing in a country, and it leads to inadequate diversification," he says, "because the country of origin or incorporation is not the primary influence on the stock price."

More important for individual investors will be understanding where a company produces and sells its products, since an outfit based in France but selling products in Egypt doesn't truly represent the French economy. Siegel foresees the birth of the "international corporation"—a business globally diversified in where it produces and sells goods and not identified by its specific country. That, in turn, will necessitate a worldwide stock exchange, he says, and international accounting standards will become the norm. "We'll be thinking in terms of global markets all the time."

Yet the disparities today between regulatory bodies in emerging countries and developed ones will have to change, says Ravi Jagannathan, finance professor at Northwestern University's Kellogg School of Management. Many emerging economies haven't proven that their financial laws have teeth. So as wealthy people age in developed countries, they will want to invest their savings in countries with solid legal institutions that can enforce financial contracts. But "if you have young people in India, Africa, or Latin America borrowing from [the wealthy]," he asks, "how will the wealthy enforce those financial contracts?" Many of those emerging economies don't have the legal infrastructure to ward off corruption or reneged contracts, says Jagannathan. The answer will be a super-governmental international organization with executive powers, he says, which can oversee the flow of money across national borders. Think U.N. meets the Federal Reserve.

For the U.S. financial industry, one near-term possibility is that investment banks will start to raise funds via public deposits, says Charles Calomiris, finance professor at the Columbia School of Business. His reasoning: the Fed's willingness to salvage Bear Stearns and its decision to prop open the discount window in March signaled its increasingly hands-on relationship with investment banks. Banks like Goldman Sachs or Morgan Stanley do not raise funds through deposits but instead sell securities to private investors. That system traditionally avoided the "increased regulatory pressures" that deposit-taking commercial banks face, says Calomiris, but the system proved disastrous when the market for mortgage-backed securities dried up.

"The Other Shoe"

"Investment banks are no longer able to avoid prudential regulation, since Bear Stearns was just hugely regulated and primary dealers that are investment banks now have access to the discount window [Fed's borrowing mechanism]," says Calomiris. So if banks are forced to face increased regulation, their logical next step would be to embrace the benefit of federally backed deposits, as he says: "The other shoe has to fall, too."

Transparency will come to rule the financial world, say experts. Banks are afraid to lend today because they hold many customized over-the-counter assets (like collateralized debt obligations and credit default swaps), whose value is tough to gauge without a ready buyer. New financial products, says Calomiris, will be less arcane and more homogeneous so that buyers know exactly what they are buying and sellers know exactly what it is worth. Things like CDOs will be able to be traded widely and their value will be determined immediately by larger markets—so that, for instance, a banks' management can know how much a CDO is worth at any given time on an exchange. "A movement toward simplicity is going to improve liquidity," he says. "So instead of having 50 different ways to do a credit default swap, you could actually buy one on an exchange."

Mutual funds might diminish, too. Today, increasing numbers of investors are diversifying their portfolios by purchasing exchange-traded funds (ETFs), baskets of stocks whose value corresponds with a broad index like the Standard & Poor's 500-stock index. In 2000 there were 80 exchange-traded funds that held roughly $45 billion in assets, according to the Investment Company Institute. Today there are 697 such funds holding $578 billion. As investors flock to the funds' low management fees and built-in diversification, actively managed mutual funds that charge higher fees will lose their appeal. "You will find the actively managed mutual fund industry shrinking pretty dramatically," says Darrell Duffie, finance professor at Stanford's Graduate School of Business. "And individuals will become more capable of managing their own financial affairs."

Greater Trading Transparency

But actively managed funds won't disappear because there will always be a need for packaged financial products, says SBCC's Beder, since "a lot of people can't access the full range of products in a market." All of these changes toward greater efficiency and transparency in trading will build more diverse portfolios: those that are "more robust across a broader range of market conditions," according to Andy Weisman, chief investment officer at WR Capital.

Better software will let everyday investors visualize how their portfolio's risk is altered by the slightest tweak, says Duffie. Interactive charts will show investors how their risk exposure changes when they buy more Microsoft options, or hold fewer Chinese stocks, or short the price of oil. "People will click on an icon and visualize their financial future in terms of all scenarios," he says. New tools will also better reflect the correlations between different parts of investors' lives. "The idea that you just buy medical insurance on the one hand and invest in financial securities on the other will vanish," he says. People will be able to buy securities that pay off based on changes in their medical expenses, or they will be able to buy insurance against a reduction in their home value. Says Duffie: "Just use your imagination."

The subprime disaster reinforced that reactive thinking can't avert a financial meltdown, and diversifying risk is still an imperfect art. The hope for the future, says Robert McDonald, professor of finance at Kellogg, is that regulators will respect markets' need for competition and freedom while not turning a blind eye to their bad habits. "You can hope that a phoenix will arise from the ashes," he says. "The challenge will be to fix things without breaking them." Yet Robert Wright, a financial historian at New York University's Stern School of Business, thinks a regulatory fix will be elusive, as he puts it: "Regulators always tend to fight the last panic."

The Future of Investing: A 2020 Vision

by Ricky McRoskey

In finance, things change. Forty years ago you couldn't buy a futures contract based on a currency, 25 years back the first collateralized debt obligation hadn't hit the market, and two years ago subprime wasn't a curse word on Wall Street.

But investors—and the folks who make money by packaging new investment products—always seem eager to move on to the next big thing. If financial history has taught us anything, it's that change is inevitable—change in everything from the way banks package risk, to the way governments regulate savings institutions, to the ways consumers can invest their savings. And with the recent upheavals in equity and fixed income markets, the financial industry is left to ponder: What change is next? What will the financial world look like in 2020?

The quick answer is an industry more transparent, more international, and more driven by individual investors than today's.

BusinessWeek asked financial professionals and academics their thoughts on what the financial landscape will look like in the year 2020. The experts foresee a world where investment banks will look more like government-backed depository institutions, mutual funds will be fewer, and stock exchanges will become international with super-governmental bodies regulating them. "A lot of the frameworks and walls built because of the old financial world we grew up in will come down," says Tanya Styblo Beder, chairman of the SBCC Group and a member of the board of directors at the International Association of Financial Engineers.

Disappearing Borders

One barrier that will fall is the distinction between foreign and domestic finance. Since 2000 developing nations have gone from producing 37% of the world's economic output to 45%, according to the International Monetary Fund, signifying a trend of greater parity between developed and undeveloped nations. With explosive growth in emerging markets and more companies with worldwide operations, a corporation's official "headquarters" will become less relevant, says Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School. "People think they're diversifying by investing in a country, and it leads to inadequate diversification," he says, "because the country of origin or incorporation is not the primary influence on the stock price."

More important for individual investors will be understanding where a company produces and sells its products, since an outfit based in France but selling products in Egypt doesn't truly represent the French economy. Siegel foresees the birth of the "international corporation"—a business globally diversified in where it produces and sells goods and not identified by its specific country. That, in turn, will necessitate a worldwide stock exchange, he says, and international accounting standards will become the norm. "We'll be thinking in terms of global markets all the time."

Yet the disparities today between regulatory bodies in emerging countries and developed ones will have to change, says Ravi Jagannathan, finance professor at Northwestern University's Kellogg School of Management. Many emerging economies haven't proven that their financial laws have teeth. So as wealthy people age in developed countries, they will want to invest their savings in countries with solid legal institutions that can enforce financial contracts. But "if you have young people in India, Africa, or Latin America borrowing from [the wealthy]," he asks, "how will the wealthy enforce those financial contracts?" Many of those emerging economies don't have the legal infrastructure to ward off corruption or reneged contracts, says Jagannathan. The answer will be a super-governmental international organization with executive powers, he says, which can oversee the flow of money across national borders. Think U.N. meets the Federal Reserve.

For the U.S. financial industry, one near-term possibility is that investment banks will start to raise funds via public deposits, says Charles Calomiris, finance professor at the Columbia School of Business. His reasoning: the Fed's willingness to salvage Bear Stearns and its decision to prop open the discount window in March signaled its increasingly hands-on relationship with investment banks. Banks like Goldman Sachs or Morgan Stanley do not raise funds through deposits but instead sell securities to private investors. That system traditionally avoided the "increased regulatory pressures" that deposit-taking commercial banks face, says Calomiris, but the system proved disastrous when the market for mortgage-backed securities dried up.

"The Other Shoe"

"Investment banks are no longer able to avoid prudential regulation, since Bear Stearns was just hugely regulated and primary dealers that are investment banks now have access to the discount window [Fed's borrowing mechanism]," says Calomiris. So if banks are forced to face increased regulation, their logical next step would be to embrace the benefit of federally backed deposits, as he says: "The other shoe has to fall, too."

Transparency will come to rule the financial world, say experts. Banks are afraid to lend today because they hold many customized over-the-counter assets (like collateralized debt obligations and credit default swaps), whose value is tough to gauge without a ready buyer. New financial products, says Calomiris, will be less arcane and more homogeneous so that buyers know exactly what they are buying and sellers know exactly what it is worth. Things like CDOs will be able to be traded widely and their value will be determined immediately by larger markets—so that, for instance, a banks' management can know how much a CDO is worth at any given time on an exchange. "A movement toward simplicity is going to improve liquidity," he says. "So instead of having 50 different ways to do a credit default swap, you could actually buy one on an exchange."

Mutual funds might diminish, too. Today, increasing numbers of investors are diversifying their portfolios by purchasing exchange-traded funds (ETFs), baskets of stocks whose value corresponds with a broad index like the Standard & Poor's 500-stock index. In 2000 there were 80 exchange-traded funds that held roughly $45 billion in assets, according to the Investment Company Institute. Today there are 697 such funds holding $578 billion. As investors flock to the funds' low management fees and built-in diversification, actively managed mutual funds that charge higher fees will lose their appeal. "You will find the actively managed mutual fund industry shrinking pretty dramatically," says Darrell Duffie, finance professor at Stanford's Graduate School of Business. "And individuals will become more capable of managing their own financial affairs."

Greater Trading Transparency

But actively managed funds won't disappear because there will always be a need for packaged financial products, says SBCC's Beder, since "a lot of people can't access the full range of products in a market." All of these changes toward greater efficiency and transparency in trading will build more diverse portfolios: those that are "more robust across a broader range of market conditions," according to Andy Weisman, chief investment officer at WR Capital.

Better software will let everyday investors visualize how their portfolio's risk is altered by the slightest tweak, says Duffie. Interactive charts will show investors how their risk exposure changes when they buy more Microsoft options, or hold fewer Chinese stocks, or short the price of oil. "People will click on an icon and visualize their financial future in terms of all scenarios," he says. New tools will also better reflect the correlations between different parts of investors' lives. "The idea that you just buy medical insurance on the one hand and invest in financial securities on the other will vanish," he says. People will be able to buy securities that pay off based on changes in their medical expenses, or they will be able to buy insurance against a reduction in their home value. Says Duffie: "Just use your imagination."

The subprime disaster reinforced that reactive thinking can't avert a financial meltdown, and diversifying risk is still an imperfect art. The hope for the future, says Robert McDonald, professor of finance at Kellogg, is that regulators will respect markets' need for competition and freedom while not turning a blind eye to their bad habits. "You can hope that a phoenix will arise from the ashes," he says. "The challenge will be to fix things without breaking them." Yet Robert Wright, a financial historian at New York University's Stern School of Business, thinks a regulatory fix will be elusive, as he puts it: "Regulators always tend to fight the last panic."

Sunday, 10 August 2008

Diary of a finance intern

Courtesy of efinancialcareers

Week 1: Coffee and competitiveness

This week began with an all-intern training session where we looked at the different areas of the business and the different products. The next two days were spent in equities training with the other equity interns. Some interns had majored in finance but for those who, like me, are from completely different backgrounds it was all a bit confusing. I did however learn a lot, make a few friends and write a big list of all the things I needed to work on when I had some free time.

There are three interns on my desk and while it is nice to have the support it makes things very competitive. We were not due on our desk until Thursday morning, but we all decided to head there after training on Monday and so the competition began. I start work at around 6am and leave at around 6pm. Following this, I usually go out for drinks to get to know people and to prove to my colleagues that I am not tired or stressed. I had less than four hours' sleep two nights in a row but the days go quickly as there is a lot going on around me and I never even have time to think about how tired I am.

People are generally nice and very helpful, though it is obvious they are watching our every move. So far we have been asked to do some basic research and reporting, and a few translation exercises. We have been allowed to listen in on some client calls and to attend almost all the internal meetings our desk is involved in.

The most stressful part of my day is the morning coffee run. Something seems to go wrong with someone's order every day and it creates a tense environment,. Luckily, there are three of us so I am not on duty that often. The other stressful thing is the chitchat we get at least once a day reminding us that the market is bad and realistically there is only a job for one of us. We interns need to work as a team and yet show our individuality and skill. Not as easy as it sounds on a chaotic trading floor.

I will be spending all weekend reading the news and trying to understand the material from the training sessions. While we are not allowed in at the office over the weekend, I will still spend most of it catching up on week one and preparing for week two anyway. I feel very lucky to have been given this opportunity and I want to use it to learn as much as I can and to meet as many people as I can. With two other interns to do battle with, and to be friends with, I am going to do my best to keep my options open and open as many doors for myself as possible.

Week 2: Tears, translations and trying to sleep

All I can say is I am glad that week 2 is over. I was in every morning by 6.15 and I don't think I got to bed before midnight even once. By Thursday evening I was so tired that I started randomly crying on my way home. I spoke to a friend interning at another firm and she assured me she had been just the same the night before and it was good to know I was not the only one.

Monday this week began with reporting back on the major news from over the weekend and sending out a summary of it in both languages. I also summary translated a story which I thought was big and was really pleased and encouraged when a rather senior member of our team asked me to contact the analyst and provide some further information on the topic.

Tuesday was particularly exciting as I was given the opportunity to note-take at an analysts' meeting. The presentation itself was rather dry, but the questions that followed were really interesting and gave me a good insight into what investors are interested in.

On Wednesday, another intern and I helped at a seminar held in a nearby hotel. It was really fun to get out of the office but also a little stressful, as we were asked to run errands to rectify every little thing that went wrong. That was pretty tough considering it is the middle of summer and we were instructed to keep our jackets on.

On Thursday, I sat with an execution trader and a prop trader, which was a lot of fun and really insightful. They were both really patient with my questions and invited me back to have another look when there was a little more going on.

Friday was spent tying up loose ends and trying to finish all the little tasks we have been requested to do throughout the week. After discovering that would only be physically possible if we stayed all weekend, we were pulled aside by our mentor. He highlighted the importance of not taking on more than we could handle and advised us on how to say no.

I went out three nights this week. Friday night was an all-nighter, meaning I spent 24 hours straight with some of my colleagues. Luckily, they are all good people and I get on with them well, but I am starting to miss my friends and my personal time. We were told on day one of our training that this was a six-week job interview, which makes it all pretty tiring at times.

I will once again be spending at least some of this weekend catching up and trying to get ahead. I am pretty happy to do it though, as the more I learn the more I understand and the more I want to know.

I am feeling excited and little nervous about week 3. We will be given some more direction on our personal projects which will include having lunch with an analyst to get some more direction. I have promised myself I am going to sleep more, drink less and eat more healthily this week. Let's hope I manage to keep at least one of the three promises!

Week 3: Fun and humiliation as we reach the half-way mark

It’s three weeks down and three to go.We had our mid-internship appraisals this week and they were much more casual and far less informative than I had imagined. They say no news is good news, but for an intern who is fairly confident of getting a lot of stuff wrong, no feedback at all is a pretty scary thing!

This week was, as usual, really busy. We continued to start at 6am but somehow the evenings have begun to get later and we now leave at around 7 or 7.30pm and we are sometimes the last people on the desk.

All the interns are starting to look and act very tired, and by Thursday it is getting really tough to concentrate for 12 or so hours. This is of course in no way aided by the nightly drinking sessions which go on in the local bar – lasting sometimes until 1am. Not to mention the big Friday-nighter, which means staying out all night and bar hopping, looking for as many people from our desk as possible to prove we are out, we are having fun, and that we can handle it.

I got told off pretty badly this week over a misunderstanding. I was singled out in front of a group of people and, rather than clarify the situation first, the person just decided to yell. I had no idea what they were on about so I pretty much told them as much. I am not sure how well that will have gone down, but I was polite and to the point so hopefully I won't get randomly dumped on again.

Our final project began to really take shape this week. It was made very clear to us that it is a team project and that they are not interested in who does what exactly but in the overall end-product. I am very much looking forward to getting stuck into it, but I am also very nervous about how us three interns are going to get on now that we will have to spend all our weekends together as well as our weekdays – and we only have three weeks and two weekends to get this big piece of work out.

The main activities we were involved in this week were the analyst company visit meetings. Basically, we set up the room, hand out papers, greet people and generally make sure everything is running smoothly. For the most part I really enjoyed this work and being able to listen in on the meetings was really great. I was able to learn a lot but it was pretty stressful when things went wrong.

I am starting to get on really well with the members of my team and the team who sit behind us in the offce. There is a lot of banter going on and work has finally becomes a genuinely fun place to be, at times.

Our boss keeps telling us that the interns this year are really high calibre and it is hard to differentiate between them. For this reason our team is really asking and expecting a lot of us. We had to go in over the weekend to help prepare for Monday, to make sure we were up to speed and would not be asking any silly questions that we should have picked up through our weekend reading.

With only half the internship left I am starting to feel pretty nervous about my future, but I have decided that much of it is probably out of my hands anyway, thanks to the state of the market, so I am going to keep having as much fun and learning as much as I can in the hope that things all pan out for the best in the end.

Week 4: Where did the last month go?

I can hardly believe I have been interning for a month. When I first began, six weeks felt like it was forever, now I wonder how I am ever going to get everything done.

Things are really starting to get crazy with the interns and we quite often end up yelling at or being grumpy with each other. The truth of the matter is that none of us are trying to sabotage each other and socially we do all tend to get on pretty well – the problem is the market is bad and there is probably only one job, and we all want it!

I started trying to check out other desks this week and was invited onto a few by people I had met drinking at the company bar…. I thought this was a good idea but it seems it may have backfired. I think my boss now thinks I am not really interested in the desk I am on and I may well be out of the running! My boss asked me if I really wanted it. Of course I said yes, but I am worried that my actions are not making that 100% clear. So I have two weeks to prove to the desk even more than before that I am hungry for this and that I do want a job on this desk, or at least in the industry!

I also got a little sick of all the masculine stuff this week. I asked to play in a sports team and was simply told no. I asked my boss to treat me just the same as he treated the guys, give me the same little errands and challenges. He said he would, but I am noticing that he isn't. I decided to take some of the little challenges into my own hands and while it seemed to put the male interns out, the ladies on the desk loved it.

There were a few tears and moments when I wanted to give up this week. Not because the industry is tough and I can`t handle it (I can and am), but more because being good is not going to be enough to get a job this year. We were told the other day that our boss had to let one of our team assistants go just to take us on as interns. The desk I sit on is full and my boss has already told us that, with the market as it is, letting someone with a track record go to replace them with someone with no track record is just not likely to happen.

I feel like one of the interns is totally out of the running – she insists on a full hour for lunch and refuses to stay after 5pm. The other intern and I are good. People tell us we are good and our boss has already told us he will do what he can.

At the weekend, two of us were at the office with our boss preparing for the next day. I am more than happy to spend the time and to learn but I just hope there is a job at the end of it. I will get over not getting a job because I was not good enough, but I will probably be pretty dark if at the end of it all there never was anything for us to start with.

Week 5: Headcount horrors

This week was by far the worst week. We continued to plug away at our group project. It’s progressing very slowly and is going to end up consuming most of this weekend – great, more time with the other interns who I only spend an average of 80 hours a week with!

We were also given some extra news flow monitoring projects this week which made the busy mornings even busier. We still arrive at 6am but we are now really struggling to get things done in time for the morning meeting. We were also given a few rush projects and translation jobs for clients with totally unrealistic deadlines. This was a good opportunity for me to push back to set some boundaries, which is something the other interns and I have been told we need to learn to do if we are going to survive in the finance industry.

A new intern will join our desk this week from another department, just for the experience. Four interns on one desk is going to be chaotic so I am planning to use this as an opportunity to check out some other desks and areas of the business. One of the interns is already starting to sulk about the addition to our team. But the reality is that integrating them in and getting them involved in our daily work is another test, so I am viewing it as an opportunity rather than a threat.

The worst thing that happened this week was that our team had to let a couple of its members go. This was announced in a team meeting and it was so normal that it kind of scared me. No one batted an eyelid. Even though we had been working closely with them the day before, after the announcement the only concern was who was going to take on their clients.

This actually got me thinking – how can our desk be letting people go and still be seriously looking at the interns? I decided that they could not be and decided to confront my boss about it. Sure enough, there will be no extra headcount on our desk and even though we were “great interns” there will be no jobs for us.

My boss did not use these exact words but his message was pretty clear, nonetheless I was very disappointed and I am pretty determined to get myself onto a desk where there is an opening and where there is headcount. My boss has been making calls and pulling strings, so hopefully this will all fall into place.

There is now the opportunity to extend our internships for two weeks. I was hoping not to do this as I need to get back to my other job which I have taken a six-week holiday from. It is also exciting and has the potential to become a full-time position, and I really do need to do some of my university work some time soon.

The internship has been a wonderful experience and I really have learnt a lot. I am a little annoyed that there is no job for any of us but then again I am not surprised as the market is pretty bad and even though I have nothing to compare it to I can feel the tension on the trading floor.

This next week is all about me. I am going to leverage all the connections I have made and the relationships I have with other interns and see if I can create something for myself. I appreciate my boss being honest with me when push really came to shove, but I do wonder if this information could not have been shared with us in week three so I could have had longer to get on the desks with potential openings and really apply myself there.

Week 6: No jobs

I am glad to say that it is all over. The last week of my internship was complete and utter hell and I learnt first hand that most people in finance are not very nice, in fact most of them are downright nasty. There were almost no jobs this year. Only one of the 33 interns landed a position (it wasn't me) and the pool of lies and deception that continue to surround that situation is just heartbreaking.

I spent most of my last week in tears, both at my desk and in the bar. So rather than talk about what actually went on, I would rather offer some advice to future interns. I am the bigger person and I am not going to use this as a platform to slag people off. As a friend who is very successful in a very different business said to me last night, 'onward and upward!' And that is where I am headed!

Now for the advice…

1. Think carefully about where you do your internship. Conversion rates are very different for different firms, so when you decide where to go, have a think about your actual chances of getting a job, both on the desk, and with the firm. Talk to ex-interns if you can, ask how many other interns the desk and the firm is taking.

2. Take everything you are told with a grain of salt. You will be told that your mentor and the other team members are important in the end decision as to who gets a job. But the truth is it is more likely to be your boss and his mates. Not everything you hear is going to be a lie, but just try to keep your wits about you.

3.Trust no one. The whole industry is full of people who are out for themselves. Never forget that. Play them at their own game and hope you win. Never be nasty, they never will be to you. Just grin and bear it and smile. If you think you can find someone you can trust, and there may be someone, check and double check that your instincts are right before you open up too much to them.

4. Be humble, in fact bend over backwards for everyone on the desk. Do not even joke about not wanting to go halfway across town to buy a sandwich... smile and do it! Even when the people bossing you around are younger than you (and in some ways have less experience than you), respect the hierarchy and smile and bow down - that is basically what your first five years in the industry are going to be filled with anyway.

5. Accept that it is a boys' club. If you are a guy, play the game 100%. If you are a girl, hope you have something extra somewhere else which will make up for it. They will tell you it is all a level playing field, the reality does not really matter, just what you do with it. One piece of advice, if you are a girl, accept that you cannot be one of the boys, trying to be one will only result in tears.

6. Be yourself. The industry changes people. Fight it.

This internship was a great experience and I learnt a lot, both about who I am and about the industry. I respect the people I have worked with even if I do not necessarily like them.

If I had my time again I would have done a few things differently, but most importantly I would have lived by the rules above. The culture of the bank I worked in did not suit me and although I am gutted I did not get a job, it may have been a blessing in disguise.

I am currently considering other firms, but also other industries where I am having much more success.

For anyone else who becomes an intern, I wish you the best of luck and more success than I had.

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