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The Week Of Financial Crisis

Now that it’s Monday morning, when I look back at the financial chaos that took place last week, one term in particular comes to mind…

“Hell in a handbasket”

And Dr. Prieur du Plessis, the chairman and principal holder of South African-based Plexus Asset Management, best summed up the week of financial crisis in Market Oracle (UK) yesterday when he wrote:

Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.

Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Already, this week is off to a bang-up start. As I type this, the Dow is off over 400 points this morning, while in Europe, the pan-European Dow Jones Stoxx 600 index posted its biggest one-day percentage loss ever on Monday (according to preliminary data). The index fell 7.6% to 241.57, surpassing the 6.21% fall recorded back on September 11, 2001.

Source:

“Fear Grips Stock Markets as Economies Tip Into Recession”
Prieur du Plessis
Market Oracle (UK), October 5, 2008

World’s Highest Paid Investment Adviser: U.S. Faces Hyperinflation Or Depression

I don’t think I’ve ever mentioned this, but I am extremely grateful to Peter Brimelow over at MarketWatch. Without his column, I wouldn’t have access to the insights of Harry Schultz, the highest paid investment consultant in the world. For those readers not familiar with Mr. Schultz, I talked about him back on December 13. From that post:

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend).

Brimelow talked about Schultz’ latest U.S. economic forecast this past Monday on MarketWatch. He wrote:

Harry Schultz’ The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

“Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays.”

Schultz had earlier made his overview clear (I’m translating slightly from of his text-message style):

“Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.”

This apocalyptic vision is consistent with his earlier predictions, such as one I discussed in a February 18 post. Brimelow stated back then:

Schultz writes: “It’s a derivative crisis, stupid!… 9,000 U.S. banks failed in 1929-1932; look for new records… Hyper-inflation is a distinct possibility; stay awake!”

Among his more colorful recommendations: “Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations… Keep 6-12 months cash at home/office/ lawyer-doctor office. Pretend an emergency is coming, because it may be.”

…and from that December 13 post:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

Note the bailout prediction for Fannie Mae.

Fast forward to Schultz’s latest forecast. Brimelow wrote:

Schultz suggests just two alternative scenarios, both equally appalling:

“If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929.”

Gee, thanks.

Brimelow talked about what Schultz thought was going to happen next, and what those hoping to be one step ahead of the herd should do about it. He wrote:

In his latest issue, Schultz summarizes:

“Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.”

“For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark’s life preserver around your neck.”

Schultz, notes Brimelow, is currently negative on the U.S. stock market. But, the Swiss-based investment adviser predicts an upside target of $1,600 an ounce for gold as he believes its recent plummet in price is merely a correction.

Source:

“Unraveling according to schedule”
Peter Brimelow
MarketWatch, September 8, 2008

Top Credit Analysts Say Housing Decline Could Amount To $4 Trillion In Lost Capital

So far, credit crunch talk has revolved mainly around losses in the billions of dollars. No more. Reuters’ Walden Siew wrote today:

No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Siew interviewed Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc. The analyst informed him that:

• Wall Street write-downs and losses totaling at least $325 billion to date may ultimately mean $3.9 trillion in tighter credit conditions
• U.S. home prices may keep on falling until 2010, declining as much as 30% from their 2006 peak
• Further drops in subprime mortgage debt markets are expected
• High-yield corporate bond default rates, now at 0.75% from 0.34% at the beginning of 2008, may climb to 2.25% later this year and jump to 6.5% in 2009

Glenn Costello, a Fitch Ratings managing director, also said that there will be more defaults and delinquencies for U.S. home mortgages, with the highest default rates coming from mortgages originating in the last few years. The senior analyst warned:

There are a lot more mortgage defaults to come. We see an ongoing high level of default.

Source:

“Home price drop means $4 trillion in lost capital”
Walden Siew
Reuters, June 11, 2008

Merrill Lynch, Morgan Stanley Issue Recession Warnings

At a conference yesterday in Singapore, New York City-based financial services giant Merrill Lynch warned the U.S. economy is in a recession that will become more apparent as the year drags on. According to Channel NewsAsia yesterday:

Merrill Lynch said the world’s largest economy is already in a recession, and it expects to see a prolonged L-shaped recovery. This means the US may take a longer time to emerge from the economic doldrums….

Merrill Lynch said a key indicator of a recession is a slump in the housing market. It added that it expects the housing market in the US will see another 15-20 percent downside.

Staff from the firm said that government efforts to provide stimulus to the economy will only temporarily stem a fall in consumer spending, according to Reuters’ Kevin Lim. Merrill Lynch’s North American economist David Rosenberg told conference attendees yesterday:

I still maintain the business cycle is bigger than the government.

Rosenberg also predicted inflation in the United States would slow as consumer spending weakens, and that the Federal Reserve would cut interest rates to fight the recession. The economist warned:

No asset class security is priced today for a recession scenario.

Adding their two cents, economists from Morgan Stanley are concerned that the recession in the United States could rival the “the big five,” according to David Gaffen from the Wall Street Journal’s Market Beat blog today. Gaffen explained the “big five” were large-scale financial crises that resulted in a long-term underperformance in the respective economies. He wrote:

The long-term declines the firm looks at includes Spain in 1977 and Norway in 1987, and most recently Japan in 1992 – which they define as the worst, resulting in Japan’s so-called lost decade. Whether the current U.S. economic decline matches one of these situations, or looks more like the recent U.S. recessions “holds the key for risky asset prices,” they write.

However, Morgan Stanley economists do not agree with their Merrill Lynch counterparts when it comes to the topic of inflation. From the Market Beat post:

Morgan Stanley economists say that in this instance, inflation may not automatically recede as U.S. growth recedes. They say as a result that bonds may sell off if growth recovers in the U.S. and monetary policy remains loose, fueling price gains… “We believe that the Fed’s focus on keeping the financial crisis from sending the economy down the path of the Big Five will succeed, but lower rates and surging money growth will spill over into inflation. Bond yields are likely to follow inflation higher,” they write.

Sources:

“Merill Lynch says US in recession, but Asia to remain strong on consumer spending”
Channel NewsAsia (Singapore), May 14, 2008

“Tax rebate won’t stem U.S. recession: Merrill”
Kevin Lim
Reuters, May 14, 2008

“Regular Recession, or a Larger Disaster?”
David Gaffen
Wall Street Journal (Market Beat blog), May 15, 2008

Next Stop, Depression?

Back on March 29, ABC News’ David R. Francis talked about the economic forecast of Robert Parks, a finance professor at Pace University and former chief economist at three Wall Street firms. So, what’s so special about Parks that ABC News would be covering him? According to Francis, Parks is predicting that there is more than a 60% chance the United States will enter into an economic depression.

Even though the Federal Reserve has been cutting interest rates to stimulate the economy, Francis wrote:

Mr. Parks, however, doubts the cuts will do much to boost the economy. Rather, he sees a further steep fall in housing prices, continued major deficits in the federal budget and in the international trade balance, a tumbling dollar, and a weak stock market leading to a genuine depression with 30 to 35 percent unemployment, greater poverty, more loss of homes, plunging bond and stock prices, even some starvation.

Mother and child during Great Depression

Source: FDR Presidential Library & Museum

He also noted that Parks says he has never predicted a depression before.

The economist thinks that it’s a mistake to rely on money supply growth to help alleviate present economic conditions. Francis wrote:

As Parks sees it, Washington and Wall Street are mostly counting on Fed additions to the money supply to revive the free market and right the economy.

“Automatic recovery is in no way a reliable concept,” he warns, especially if deflation (falling prices) has begun. He recalls warning of the economic damage that the bursting real estate and stock market bubbles would wreak in Japan: That nation suffered stagnation from 1990 to 2001.

Source:

“Are We Heading Into a Depression?”
David R. Francis
ABC News, March 29, 2008

‘Dr. Doom’ Gloomy On U.S. Economy

Yesterday, Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, spoke to Bloomberg’s Brian Sullivan from Chicago about the state of the U.S. economy, Federal Reserve monetary policy, and the outlook for stocks, bonds, and commodities. Dr. Faber, also known as “Dr. Doom” by the press, is famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash. During the Bloomberg interview, the Swiss-born investment analyst talked about the following:

Federal Reserve monetary policy

We started in the U.S. to cut interest rates very aggressively on September 17, and we cut the Fed fund rate from 5 ¼ % to 3%. And what is the result? I tell you what the result is. The stock market since September 17 by the S&P is down 10%. The U.S. dollar is down 10%. Gold and oil are up 40%. Well done, Mr. Bernanke…

I tell you that, Mr. Bernanke, with his monetary policies, he will destroy the U.S. dollar.

Faber acknowledged that former Fed chair Alan Greenspan “is also to blame.” He said both Bernanke and Greenspan:

Kept monetary policies far too easy and this led to reckless lending, to reckless credit growth, that caused the problems that we have today…

The Fed has created a gigantic asset bubble, a credit bubble, and now the credit bubble is deflating and it will be very difficult for the Fed to reignite the credit bubble because we are in a process of deleveraging.

Domestic and international stocks

Over the last say 4, 5 years, U.S. stocks have grossly underperformed other markets in the world like emerging markets or the commodity markets. And so, on a relative basis, I think today emerging markets are more vulnerable than the U.S.. Say, you look at India or China, these markets could easily drop 30 to 40% here. Whereas the U.S. with the money printer we have will take the deflation rather through a dollar depreciation than through asset price decline in nominal terms through U.S. dollars.

Later on in the interview, Bloomberg’s Brian Sullivan asked:

And to complete your sunny disposition, you believe that we’re not going to see the bottom in equities until names like Google, RIM, and Apple go 50% from their highs. Correct?

Faber responded:

Yes, at least, at least or more, ideally more.

U.S. financial system

SULLIVAN: Are we going to see a multi-billion dollar bank in the United States fail?
FABER: I hope so.
SULLIVAN: You hope so?
FABER: Yes, of course. That is the only way to introduce some discipline in the financial system of the United States. If you bail out each bank all the time, you create tremendous moral hazard. And you perpetuate the mistakes that the Fed has already done. It is to be hoped that one major financial institution goes bust.

Derivatives

The derivatives, they haven’t exploded yet. That is, that is without, the main course that will then happen within the next 3 to 6 months.

At the end of the interview, Dr. Faber noted, “The bear market has to mature like a good cheese or a good wine.”

You can access the video, with a running time of 15:48, through this Bloomberg News Video link.

Source:

“Marc Faber Interview”
Host: Brian Sullivan
Bloomberg, March 5, 2008

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Gold: Not So Precious? Part 1

Last summer, I came across an article in the Wall Street Journal that talked about diversification in an investment portfolio. On August 15, Jonathan Burton wrote in “What Your Portfolio Really Needs” that stocks and bonds are essential to a diversified portfolio. He also suggested that real estate would be “nice to have.” On real estate, he recommended that investors think globally, as “the world is getting wealthier, and as the saying goes, they’re not making any more land.” I used to hear that one a lot during the housing boom. Actually, if you really think about it, that statement isn’t necessarily true. Look at Dubai’s Palm Islands. Anyway, before I go off on a tangent, Burton continued to say that for diversification purposes, don’t bother with sector funds, gold, and other commodities, as they are things you “don’t really need.” On gold, he said:

It insures against financial catastrophe and marches to its own drum. But as an investment, short-term risk is high and long-term reward is marginal. If you want gold, buy jewelry.

“I agree…fool!”

Just this past Tuesday, another Journal reporter talked about gold’s investment attributes (or lack thereof). Eleanor Laise wrote in “How to Survive the New Gold Rush” that even though the yellow metal has been on a tear lately, “it also carries substantial risks for investors.” She pointed out the following drawbacks:

• At the price that gold commands today, investors may be paying too much for any diversification benefit.
• Gold hasn’t always performed effectively as a hedge against inflation.
• The metal has extremely volatile price movements.
• Many gold investments come with significant tax consequences.
• Because it’s seen as a safe-haven, gold attracts “emotional, speculative” investors who “can amplify its price gyrations.”
• The dollar’s long decline may be near an end, which could hurt gold.
• Some advisers are no longer recommending gold to their clients.
• Gold doesn’t always perform in a crisis. A recent study by Trinity College in Dublin found that, while gold generally holds up well when stocks decline substantially, the effect is short-lived.

Laise threw in some traditional arguments as to why the yellow metal is a bad investment:

• “Yet gold doesn’t produce earnings or pay dividends, and its returns over the long haul often look less enticing.”
• “What’s more, gold has failed to keep pace with inflation in recent decades.”

Tomorrow, we’ll take a closer look at the allegations being made against the yellow metal in part two of the three-part series.

Stock Markets Fall Around The Globe

Returning to work on Monday is hardly ever fun. Losing a ton of money makes it even worse. While American financial markets were closed in remembrance of Martin Luther King, Jr., stock markets around the world were being hammered.

Indexes in Japan, China, Hong Kong, India, South Korea, and Singapore fell at least 3%. Indian stocks were punished severely, dropping nearly 11% at one point in the trading session before finishing off more than 7%. The Australian and New Zealand stock markets have now experienced losing sessions for 11 and 13 days, respectively.

Photo from DailyHaHa.com

The carnage in equities spread to Europe. The pan-European Dow Jones Stoxx 600 index ended down 5.4% at 309.67. At one point earlier in the trading session, the index earlier reached a low of 308.69, which was the largest one-day percentage drop since the September 11 terrorist attacks. The index has lost around 23% from its mid-2007 high of 400.99. The French CAC-40 index ended the day down 6.8% to 4,744.45. The German DAX 30 index was down 7.2% to 790.19. The U.K. FTSE 100 index declined 5.5% to 5,578.20.

Making its way to the Americas, the global sell-off spread to Canada and Latin America. The S&P/Toronto Stock Exchange composite index sank 4.7% to end the day at 12,132.14. Brazil’s Bovespa fell 6.6% to 53.694, and Mexico’s Bolsa index declined 4.8% to 25,444.

According to MarketWatch today, losses from financials were largely to blame after U.S. bond insurers came under attack by a ratings agency, and the proposed economic stimulus plan from President Bush failed to convince investors that it would be enough to prevent a recession in the United States. The stock sell-off occurred after the worst weekly performance on Wall Street for five years.

All eyes are now turned to Wall Street, which resumes trading Tuesday. As of this afternoon, the Dow Jones Industrial Average futures contract was down 520 points to 11,586, the Nasdaq futures were down 76.25 to 1,773.25, and the Standard & Poor’s 500 futures had fallen 60.3 to 1,265. According to MarketWatch:

If futures contracts traded on a day when U.S. stocks weren’t even due to open are anything near accurate, then markets will be in for a major decline on Tuesday, with concerns about bond insurers and the health of financial institutions dragging markets lower.

World’s Highest Paid Advisor: ‘Financial Tsunami Is Upon Us’

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend). I talked about him in my November 21 post where I discussed gold as a hedge and investment. Back then, Schultz said that gold will advance past the thousand dollar mark in 2008. Earlier today in his MarketWatch commentary, Peter Brimelow said that Schultz’s latest newsletter issue is “absolutely apocalyptical.” Schultz warned, “A financial tsunami is upon us,” which he attributes to lax credit and complications from the derivatives craze. MarketWatch’s Brimelow says:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

 Bank run from “It’s A Wonderful Life”

Sound terrifying? According to Brimelow, Schultz’s advice for protecting one’s self from the coming financial storm and vulnerable U.S. banking system included, most urgently, closing out time deposits and buying non-U.S. government bonds. Regarding the future of the U.S. dollar, Schultz warned:

…the second biggest danger is owning U.S. dollars in any form, (it) has crashed and going much lower … use dollar rallies to exit dollars or sell short … This is not a time to seek profits, but to protect what U have … Portfolio diversification is essential in troubled times.

Brimelow noted Schultz’s favored currencies are, “In order of preference: Swiss Franc, Australian dollar, Euro, and Canadian dollar.”

On the topic of gold, Schultz recommended that:

Exposure to gold shares and bullion should be a minimum of 35-45% of your total portfolio, with at least 10% in physical gold bullion and coins, and/or very rare coins…

The public is still not in the gold market. They will be in 2008 as the derivatives and credit crises bring down more financial institutions (amid recession) and eyes will be opened, via pain. While Rome burns, gold will smash through its old unadjusted-for-inflation $850 high on the way to $1,600, & who knows how far beyond …

Wow. Apocalyptical indeed. By the way, Brimelow noted that Harry Schultz is up 21.42% over the past year according to the Hulbert Financial Digest, versus 7.51% for the dividend-reinvested Dow Jones Wilshire 5000. Looking back over five years, Schultz is up 34.38% annualized versus 12.85% for the Dow Jones Wilshire 5000.

Is TOUT-TV Back?

Back on September 24, I noted that every now and then I come across allegations that CNBC is guilty of being a “cheerleader” for stocks and bonds. As I said earlier in the fall, I’ve always been suspect of business news channel programming due to the presence of network sponsors whose bottom lines depend on rosy economic news and bullish investment commentary. Turn on any of the business channels during the day and you’ll see tons of commercials for the financial services industry. Too much bad news, too little interest in buying financial products, and sponsors may make waves.

Anyway, when I woke up Monday morning, the first thing I did was turn on the satellite TV to see what was going on in the business world. The ticker showed that commodities were getting hammered. Not too surprising, as I expected there may be a correction, possibly a big one. However, I became a little disturbed when I turned on CNBC’s “Squawk On The Street.” As usual, Mark Haines and Erin Burnett were broadcasting from the New York Stock Exchange that morning. The two anchors noted that gold and oil were getting hit pretty hard. Fair enough. My problem was with the way they smiled as they reported it. Mark Haines also rubbed in that speculators trying to ride the trend Friday probably weren’t enjoying life too much that Monday morning. I don’t know about you, but I don’t recall CNBC anchors ever being so smug when stocks and bonds suffer the same fate. By the way, gold and oil are climbing higher as I type this.

What do you think? Is TOUT-TV back? Or did it never go away?

Jim Rogers Dumps His Dollars

Tonight Bloomberg is reporting that legendary investor Jim Rogers is shifting all his assets out of the dollar and buying other currencies, including the Chinese yuan, Japanese yen, and Swiss franc. Rogers told a crowd in Amsterdam gathered for an investors’ meeting organized by ABN Amro Markets that:

I’m in the process of — I hope in the next few months — getting all of my assets out of U.S. dollars. I’m that pessimistic about what’s happening in the U.S.

The 65 year-old commodities guru is forecasting that the Chinese yuan will quadruple in value over the next decade, while the U.S. dollar continues to lose value. According to Rogers:

It’s the official policy of the central bank and the U.S. to debase the currency.  The U.S. dollar is and has been the world’s reserve currency, the world’s medium of exchange. That’s in the process of changing. The pound sterling, which used to be the world’s reserve currency, lost 80 percent of its value, top to bottom, as it went through the whole period of losing its status as the world’s reserve currency.

The greenback has been falling for more than 5 years now. While the U.S. dollar lost 8% of its value last year against a basket of foreign currencies, it is already down another 7% to date.

Seeing that Rogers is pessimistic about the economic prospects for the United States, what are his feelings about bonds, a traditional safe haven? He said the bull markets in bonds and stocks are “over,” according to Bloomberg, and that “Bonds will be a terrible place to be for many years and will in fact be going down for many years.”

Such warnings from George Soros’ former partner are not new. Back on June 14 I talked about some of Jim Rogers’ forecasts, which included his thoughts about the potential for a U.S. recession. In that post, I brought up an iTulip interview with Rogers from April 3, 2007, where he predicted a recession would occur soon. Rogers had this to say:

I see a recession, and for a variety of reasons. Automobiles are in recession. Housing is in recession. There’s been an inverted yield curve for a while. You have a slowdown in business spending. The subprime mortgage and junk bond markets are a disaster happening or waiting to happen in the financial area. There are plenty of things going on. Plus we’ve had recessions every four to eight years since the beginning of time, so there’s nothing unusual about the fact that we’re about to have another one.