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Morgan Stanley Asia Chair Warns We Are In Early Stages Of Downturn

Stephen Roach, Morgan Stanley Asia’s chairman, appeared on Bloomberg Television this morning. From their New York studio:

ROACH: I think we’re still on a near-recession trajectory. The second quarter was clearly stronger than most of us, including myself, expected.
BLOOMBERG: Do you buy that GDP report? The only reason I bring it up— a lot of folks over the weekend said that report was misleading.
ROACH: Well, look, the numbers are the numbers. There were a lot of rebates paid to consumers. And, once again, savings-short over-indebted consumers went out and bought another DVD player or flat-screen TV they didn’t need. But there’s going to be payback in the second half of this year. And I think consumption weakness in the U.S. is going to be the big macro story for America and the rest of the world in the second half of this year.

Roach, who while serving as Morgan Stanley’s chief economist back in 2004 warned the United States had no better than a 10 percent chance of avoiding an economic Armageddon, added:

There’s more to this macro event than just the credit market contagion itself. Maybe two-thirds of that is behind us. But the impacts on the real side of the U.S. economy and the real side of the global economy are in the very early stages. So the overall macro adjustment scenario, I think, is still in the fairly early stages…

We’re in the early stages of the downturn of the U.S. and global business cycle. And investors, especially in equities, have to be wary of being too optimistic on the earnings implications of what could be a long, and drawn out, multi-year adjustment, for the American consumer.

You can watch the 6 minute 40 second interview here.

Source:

Stephen Roach Interview
Bloomberg, September 2, 2008

Goldman Sachs: Half The World’s Economy Threatened By Recession

Talk about an attention-grabber. Yesterday, Bloomberg’s Simon Kennedy wrote:

Goldman Sachs Group Inc. said countries that account for half of the world’s economy face a recession a year after the credit crisis began.

The U.S., Japan, the 15-nation euro area and the U.K. are “either in recession or face significant recession risks in the months ahead,” Goldman’s London-based international economist Binit Patel said in a report to clients today…

“Continued robust, albeit slowing, growth in China and the rest of the emerging markets” will deliver world growth of 3.6 percent next year after 3.9 percent in 2008, said Patel, who estimates emerging markets account for the other 50 percent of the world economy.

Bloomberg’s Kennedy added:

A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world’s largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.

“And The Winners Are…”

Source:

“Goldman Sachs Says Half of the World Economy Faces Recession”
Simon Kennedy
Bloomberg, August 21, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

BIS: World Economies Could Crash On Scale Not Seen Since Great Depression

I’m always interested in hearing what the Bank for International Settlements has to say. After all, it’s the bank for central banks. According to the London-based online publication Banking Times on June 9 (hat tip WhatReallyHappened.com):

The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

Reporter Gill Montia talked about the bank’s warning of a “Next Great Depression” in detail. Montia wrote:

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

The Bank for International Settlements is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks around the world, including the Federal Reserve. Established on May 17, 1930, it is the world’s oldest international financial organization.

Source:

“Central bank body warns of Great Depression”
Gill Montia
Banking Times (UK), June 9, 2008

Latest Bank Actions Draw Comparisons To 1929 Crash

With all the upheaval in the global economy lately, comparisons were bound to be made with another era symbolic of financial hardship. Last weekend, Philip Aldrick of the Telegraph (UK) wrote:

Perhaps the most intriguing parallel, though, is the crude attempt at self-preservation made by the investment trusts in 1929 and the banks now.

In the great crash, investment trusts with vast cross-holdings in each other tried to stem their collapse by buying up their own stock in what the economist JK Galbraith in his book, The Great Crash 1929, described as an act of “fiscal self-immolation”. At the time, “support of the stock of one’s own company seemed a bold, imaginative and effective course,” Galbraith wrote, but ultimately the trusts were just “swindling themselves”.

Yet, as I often bring up from time to time, the American writer Mark Twain once said, “History doesn’t repeat, but it often rhymes.” Aldrick notes that almost 80 years later:

Modern economists have compared the trusts’ actions with what the banks are now doing. “They seem to be just papering over the cracks,” says Brendan Brown, chief economist at Mitsubishi UFJ Securities.

To free their books of the estimated $1,000bn (£505bn) of sub-prime assets and $340bn of leveraged loans banks have been left carrying since the credit markets shut down last year, lenders are offering to sell these damaged assets cut-price and - crucially - are willing to lend investors the money to buy them. In other words, the banks are providing new debt for the old debt they no longer want.

At first glance, as with the investment trusts, the arrangement seems little more than trickery - recycling a bank’s own funds back into its own assets. As one senior industry expert described it: “It is like walking through a hall of mirrors in a fairground. There are far fewer people who really understand it than profess to understand it. Even the central bankers don’t know where all the risk is ending up.”

The Telegraph reporter highlighted a number of examples where banks provided funding for the purchase of debt or subprime assets they own:

• UBS sold a $22 billion portfolio of subprime assets to American fund manager BlackRock
• A consortium of banks financed last year’s £9 billion Alliance Boots merger by offloading £2 billion of the debt to private equity
• Citigroup and Deutsche Bank are each believed to have offloaded $10 to $12 billion of U.S. leveraged loans in recent months, partly funding the purchase themselves. Aldrick noted that these banks, along with Merrill Lynch, have found buyers for “tens of billions of dollars” of their subprime debt, using similar funding arrangements.

Ingenuity, or a disaster in the making?

Source:

“Banks’ credit crisis solutions have echoes of 1929 Depression”
Philip Aldrick
Telegraph (UK), June 1, 2008

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

Boycott Chinese Goods? Get Real

Earlier today I came across the following comments on a blog post about “saving” the U.S. dollar:

Boycott chineese goods, all of our good paying jobs are being shipped over sea’s mostly to china and how do the expect us to buy anything when we have no good paying jobs beside we have nothing to sell back which weakens our currency.

Stop buying products made from China! American jobs and money is being shipped to that country everytime you purchase those cheap and substandard products.

Hey, I’m all for “Buy American” and do it whenever I can. But, the reality is that it’s darn near impossible. Don’t believe me? Back on August 19, 2007, I happened to read an article in the Chicago Tribune about a Louisiana family who tried to go without Chinese-made goods for an entire year. Sara Bongiorni of Baton Rouge came up with the idea on Christmas Day 2004 when she noticed that 25 of the 39 Christmas gifts were made in China. It was then she decided to boycott Chinese goods for the entire 2005 calendar year. She eventually went on to write a book about the experience.

The mother of three had this to say of her family’s boycott of products made in China:

It was really all-consuming… You realize the inconvenience factor was tremendous. We totally take advantage of these things from China.

When local stores didn’t have a non-Chinese product that she needed, she was forced to turn to catalogs and the Internet, which ironically didn’t make things easier, as she often had to make phone calls to see if “imported” stood for “made in China.” Customer service agents would place her on hold for an eternity as they researched the origin of products she inquired about. Even a task as simple as shopping for sneakers turned into a nightmare. Mary Ellen Podmolik, special to the Tribune, wrote:

… when Bongiorni found that her 4-year-old son had outgrown his sneakers, her hunt for a replacement pair took her to a children’s shoe chain, two department stores and a discount shoe warehouse, all to no avail.

Two weeks later and fearing that her son’s toes were starting to curl in his too-small shoes, she found a pair of Italian-made sneakers online for $68. Before ordering them- in a size one larger than he needed- she found herself running outside to get a neighbor’s opinion on whether $68 was too much to spend for children’s shoes.

Often, the family of five had to improvise to avoid buying Chinese goods. Podmolik wrote:

When they needed a mousetrap, for instance, they tried fashioning one from an empty milk jug and broken pieces of cookies and chocolate. The mouse won.

At the time the article was written, Sara Bongiorni said:

I absolutely could not do it permanently. You’d have to be able to give up a telephone and a cell phone, computers.

She noted that her family’s experiment was somewhat easier because she had small children. It would have been different, she surmised, had her kids been teenagers with their need for electronic gadgets.

So, the next time someone blurts, “Boycott Chinese goods,” you may want to tell them, “Get real.”

Source:

“A family tries 12 months without ‘Made in China’”
Mary Ellen Podmolik
Chicago Tribune, August 19, 2007

Bank Of Central Banks: Stagflation Risk For U.S. Economy

Malcolm Knight, the general manager of the Bank for International Settlements, told Reuters’ Brian Love last week that stagflation might occur in the United States, with weak economic growth lasting well into 2009, if not longer. According to Investopedia, stagflation is “a condition of slow economic growth and relatively high unemployment- a time of stagnation- accompanied by a rise in prices, or inflation.” The BIS is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks around the world, including the Federal Reserve. Established on May 17, 1930, it is the world’s oldest international financial organization.

Reuters’ European economic correspondent wrote:

“I see a certain amount of scope for stagflation in a number of economies and that usually tends to result in subpar economic growth performance for an extended period of time, which could go well into 2009 or even longer,” said Knight, a Canadian who worked for more than 20 years at the International Monetary Fund.

“I think the U.S. economy is likely to experience weakness this year and in much of 2009,” said Knight, speaking to Reuters at BIS headquarters in Basel, Switzerland.

“Stagflation is a definite risk.”

Love noted that Knight’s outlook contradicts the White House’s assertions that the U.S. economy will rebound later in the year as the result of economic stimulus initiatives.

Source:

“U.S. risks stagflation: BIS chief”
Brian Love
Reuters, April 29, 2008

New Forecast: $1 Trillion In Losses From Credit Turmoil

According to Bloomberg today, former World Bank President James Wolfensohn is predicting that losses from the global credit turmoil may climb to $1 trillion. Wolfesohn, who was the head of the Word Bank from 1995 to 2005, said after addressing the European Pensions and Savings Summit:

“It does seem to be a major adjustment on any level. There may be a $1,000 billion worth of losses in it somewhere.”

He added that he “cannot recall anything similar, certainly in the last 30 to 40 years that I’ve worked.”

Bloomberg’s Brian Swint wrote:

The International Monetary Fund predicts that losses from the crisis, including those tied to commercial real-estate, may total $945 billion and says global economic expansion may be the slowest since 2003 this year. Wolfensohn said the fund’s loss forecast of about $1 trillion is now a “consensus estimate.”

Data compiled by Bloomberg as of this morning shows the world’s biggest banks and securities firms have so far reported credit losses and writedowns of about $310 billion linked to the U.S. subprime meltdown.

Now an advisor to Citigroup, Wolfensohn concluded:

I’d have to say in my working experience, this is a different sort of crisis, largely because of the extent of the overhangs in financial markets. I don’t think in my working lifetime, I’ve seen challenges to the major institutions in terms of writedowns and impact on market capitalization.”

Source:

“Wolfensohn ‘Pessimistic’ as Financial Losses Rise (Update1)”
Brian Swint
Bloomberg, April 28, 2008

Who’s To Blame For The High Price Of Oil?

I read the following the other day in a grocery store publication on Chicago’s northwest side. Regarding the high cost of oil and gasoline, the bureau chief of the paper wrote:

Whew! What is the answer? I think we should contact our elected officials, both state and national, and let them know we, the taxpayers, need some relief. Yes, I know about Bush’s economic stimulus package that is on the way- but I don’t want to put it all in my gas tank.

There’s no use arguing with most Americans over who’s to blame for high oil and gasoline prices. In their minds, “Big Oil” is the culprit, with a dash of President Bush, his oil buddies, and every level of government sprinkled in for good measure. But before you forward on that e-mail about a “gas station holiday” to five of your friends, consider this: Could it be possible that the high price of crude oil is mainly due to the basic principle of supply-and-demand? Just a thought. Bloomberg’s Mark Shenk wrote today:

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris.

And here in the good old US of A?

U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Shenk noted that economic growth in China and India of more than 8%, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for declining demand in the United States. According to the IEA, global oil use will increase 2% this year largely because of emerging market growth.

Regarding the topic of car ownership, China’s passenger car sales jumped 22% to 6.3 million units sold last year. Reuters’ Joe Mcdonald reported on the Chinese auto sector today, and wrote:

Auto sales in China are booming, with analysts and automakers forecasting growth at 15-20 percent this year. But demand for the biggest vehicles is even stronger, with sales of luxury cars and SUVs expected to surge by 40-45 percent…

“Chinese buyers typically like bigger cars and they have the resources to go for them,” said Tim Dunne, J.D. Power’s director of Asia-Pacific market intelligence.

Source: China Daily

Mike Wittner, head of oil research at Societe Generale SA in London, told Bloomberg:

Does the U.S. matter anymore? Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.

Still feel like contacting your elected officials?

Sources:

“Emerging Market Oil Use Exceeds U.S. as Prices Rise (Update2)”
Mark Shenk
Bloomberg, April 21, 2008

“Gas guzzlers a hit in China, where car sales are booming”
Joe Mcdonald
Reuters, April 21, 2008

The Specter Of Recession

Earlier today, Fed Chair Ben Bernanke put a stake through the hearts of Pollyannas with his comments about the U.S. economy. The Wall Street Journal’s Sudeep Reddy wrote:

Federal Reserve Chairman Ben Bernanke has uttered the “R” word. Responding to a question at today’s Joint Economic Committee hearing, Mr. Bernanke said publicly for the first time that “recession is possible” for the economy this year…

Mr. Bernanke said in his prepared remarks: “It now appears likely that real gross domestic product [GDP] will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies.” But, he added, “the uncertainty attending this forecast is quite high and the risks remain to the downside.”

Bernanke’s testimony before Congress took place on the same day the International Monetary Fund cut its forecast for global growth in 2008 and said there is a 25% chance for a world recession. Bloomberg’s Shamim Adam reported that the IMF was predicting the global economy will expand only 3.7% this year, the slowest pace since 2002, citing a document obtained by Bloomberg News at a meeting of Southeast Asian deputy finance ministers and central bankers in Da Nang, Vietnam. Adam wrote:

“The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,” the statement said. “The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.”

The Bloomberg reporter noted that when asked in a Bloomberg Television interview about the IMF’s analysis, U.S. Treasury Secretary Henry Paulson responded “that sounds overblown to me.”

Adam added that the U.S economy is forecast to grow a paltry 0.5% this year and “expand” 0.6% in 2009. However, the Agence France-Presse wrote yesterday:

The International Monetary Fund will next week forecast that the US economy will go into recession this year, a German newspaper reported Tuesday, citing a report to be released next week.

The US economy will experience at least two successive quarters of negative growth… and will grow only half a percent over the whole of 2008, weekly Die Zeit reported.

It is believed that the report will be released at the IMF’s spring meeting with the World Bank next week.

Sources:

“Bernanke: Recession Is Possible”
Sudeep Reddy
Wall Street Journal (Real Time Economics), April 2, 2008

“IMF Cuts Global Forecast on Worst Crisis Since 1930s (Update 3)”
Shamim Adam
Bloomberg, April 2, 2008

“IMF predicts US recession: report”
Agence France-Presse, April 1, 2008

War Declared On Offshore Tax Havens, Part 2

Earlier today I wrote a post about how governments around the world, faced with the possibility of a global economic slowdown, are cracking down on offshore tax havens used by their citizens. In fact, the Organization for Economic Cooperation and Development (OECD), which attempts to coordinate economic policies among the world’s 30 richest nations, has branded Liechtenstein, Andorra, and Monaco as “uncooperative tax havens.” Furthermore, other well-known low-tax destinations, such as Switzerland and Luxembourg, are now being targeted as well.

For a “different” take on this story, you might want to watch a Wall Street Journal Online video entitled “The Tale of Liechtenstein,” which appears on the MarketWatch website.

Unfortunately, the ending “and they lived happily ever after” doesn’t apply here.

MarketWatch Video Link

Sources:

“A cloak-and-briefcase assault”
William L. Watts
MarketWatch, March 7, 2008

“The Tale of Liechtenstein”
Wall Street Journal Online
MarketWatch

War Declared On Offshore Tax Havens

Faced with the possibility of a global economic slowdown, governments around the world are cracking down on offshore tax havens used by their citizens. Last Friday, MarketWatch said:

Tax-dodgers, beware: The world’s leading havens for secret stashes of money face an all-out assault, as governments wary of leaner times grow more eager to snare levies that would otherwise go missing.

MarketWatch’s William L. Watts wrote that the amount of money hidden in offshore locations is “considerable.” It is estimated that offshore tax havens costs the U.S. Treasury as much as $100 billion in tax revenues each year. Officials at the Organization for Economic Cooperation and Development (OECD), which attempts to coordinate economic policies among the world’s 30 richest nations, estimate that between $5 trillion to $7 trillion in assets are held in these offshore accounts. However, experts say the degree of secrecy surrounding these accounts makes it difficult to determine exactly just how much is parked in these individual tax havens.

Nevertheless, in an era of increasing economic uncertainty, governments are getting more aggressive in collecting taxes on offshore assets. For example, Watts talked about a recent incident where agents from Germany’s BND spy agency paid a former employee of Liechtenstein’s LGT Bank more than $6.1 million for computer disks which had information on hundreds of Germans with accounts at the institution. UK tax authorities also paid their informant around $198,000 for the names of some 100 British account holders and information on millions of dollars in uncollected taxes. Other countries are investigating whether their citizens may have been hiding funds in the Liechtenstein bank, which is owned by that country’s royal family. After news of the LGT Bank incident broke, OECD Secretary-General Angel Gurria declared:

Excessive bank-secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in the relations between democratic societies.

As a result, according to Watts:

The OECD has branded Liechtenstein an “uncooperative tax haven,” a label it shares only with Andorra, tucked between France and Spain, and Monaco, the more well-known and glamorous principality bordered by France and the Mediterranean.

Monaco: “Uncooperative tax haven”

Critics point out that the LGT Bank incident is nothing less than an assault on the notion of “tax competition.” Dan Mitchell, a senior fellow at the Washington-based Cato Institute, said low-tax countries (like Liechtenstein) force other nations to improve their tax systems or face capital flight. According to Watts:

Writing in a Wall Street Journal op-ed piece, he pointed to Liechtenstein as having a tax code that “rewards productive behavior” while noting that “German tax laws, by contrast, are rated among the world’s worst.”

Now, other well-known low-tax destinations are being targeted by the OECD. Two weeks ago, German Finance Minister Peer Steinbrueck said authorities would expand its efforts in locating hidden assets to Switzerland, Luxembourg, and other countries known for their highly-secretive banking laws. In addition, European Union finance ministers met last week and backed Germany’s call for the European Commission to speed up a study into the effectiveness of current tax rules. Kevin Conway, a London-based tax partner at the law firm of King & Spalding, remarked:

I think this is driven by a fear in these governments that (their) tax take is going to be down because economies are slowing down, possibly a recession on the way and these governments have very big expenditures to meet. They don’t want to raise taxes… but they will certainly cut down as much as they can on what they see as evasion and avoidance.

Source:

“A cloak-and-briefcase assault”
William L. Watts
MarketWatch, March 7, 2008

Recession? Send In The Fashion Police

Hell must have frozen over. Who would have ever thought that fashionistas would be discussing such “mundane” topics as the U.S. economy and recessions— unless, that is, they were involved in the business side of things? Yet, I’ve started to detect some of this chatter in world of fashion. Of course, just the discussion of such issues is reprehensible to some. According to one fashion blogger:

So many writers spend their days viewing society with a cynical magnifying glass — and oftentimes, bloggers are the worst….

I feel overwhelmingly bad about the state of… politics, celebrities, fashion, the world, etc. Instead of rose-colored glasses, I feel like I’m viewing things through black lenses. And goth is not my style.

Whatever you say. But some are actively discussing the prospect of a recession, and its potential impact on the industry. Yesterday, Isabelle O’Carroll wrote in the blog “Catwalk Queen” that:

We’re nearing the end of the fashion season and disgruntled rumblings are already being heard about the clothes. Even from designers such as Prada who usually wear their eccentric hearts on their sleeves the mood has been conservative and dare I say it a little sombre as the spectre of a US recession casts a shadow over the fashion world.

The hype surrounding the so-called ‘credit crunch’ which has led to repossessions and increasing debt in the US has sparked fears of a worldwide recession. The weak dollar has prevented buyers from large stores such as Saks Fifth Avenue and Barneys attending London Fashion Week. “London designers are the icing on the cake,” said Averyl Oates, the fashion director of Harvey Nichols. “And these days no one needs extra icing.”

With the prospect of an economic contraction looming, how have fashion designers responded? By attacking the recession head-on with even more opulent shows and extraordinarily creative designs. You go, girl! According to the Associated Press on February 25:

Luxury brands pulled out the stops in Paris on Monday with creative displays designed to ward off fears of recession that have cast a pall over the retail sector…

Guests including “Cashmere Mafia” star Lucy Liu watched the parade, set in a tent in the Tuileries gardens against a spectacular set of cascading water.

The no-expense-spared bash was Dior’s antidote to a retail climate undermined by fears of a U.S. recession, rising energy prices and a weak dollar.

“When times are tough, the mistake is to throw in the towel,” Dior CEO Sidney Toledano told The Associated Press. “I always use this metaphor: when the kids are not hungry, you have to cook even nicer dishes to stoke their appetite.”

“When times are tough, models grab orange mocha frappuccinos”
YouTube video link

Lauren Goldstein Crowe wrote on February 5 in Condé Nast’s Portfolio.com that:

You’d never know there was a recession looming from looking at the shows. They’ve been more opulent than ever…

Retailers fight recession in a number of ways. But for those at the top of the heap — stores like Bergdorf Goodman or Harvey Nichols — the best plan of attack is to bring in the most special pieces possible. Averyl Oates, the fashion director at Harvey Nichols said that while they are keeping an eye on the number of pieces they buy at the 8,000 pound mark, it is by and large, their lower priced goods that suffer in recession. It’s simply too easy for people to trade down to the high street for their jeans and casual clothes. But once you’ve worn a feather-adorned designer gown, or gold painted coat, or giant fur collared jacket, you’re just not going to be happy at Zara.

Will the fashionistas be able to defeat that menace known as recession? Will the author of this piece ever update his grunge-era wardrobe? Stay tuned…