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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

Banks May Write Down Additional $300 Billion

Yesterday, global strategy consulting firm Oliver Wyman said in a new study that an additional $300 billion in write-downs related to the U.S. subprime mortgage meltdown may be announced by banks before the crisis is over. Back on January 18 I noted that write-downs had already surpassed $100 billion. In a press release picked up by Yahoo! Finance yesterday, John Colas, Managing Director and head of the North American Corporate Strategy Practice at Oliver Wyman, said:

The credit crisis is unlikely to resolve itself before the end of this year. We also see strong likelihood of price corrections in emerging markets and this combination will extend the value loss and turbulence witnessed in 2007.

The management consultancy said in its “State of the Financial Services Industry” report:

We expect a stormy 2008. While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.

These other disruptions include:
• A significant slowdown in European real estate markets, especially in Spain and the UK
• The continued weakening of the U.S. dollar
• A collapse in commodity prices
• A fall in Chinese and Indian stocks

The financial services industry should expect “turbulent conditions for 2008 and beyond.” Oliver Wyman predicted that American banks are especially at risk. From its 2008 report:

North American financial services firms will have a tough year. Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.

In North America last year, the financial sector lost 13% in market value, second only to Japan. In contrast to the United States, the value of financial companies in Canada grew 12%.

For the first time since 2002, the global market value of the industry fell, according to the annual report. Controlling for exchange rates, the industry lost 7% of its market value last year. While $300 to $400 billion was gained in red-hot emerging markets last year, financial institutions lost more than $1 trillion in mature economies.

Soros: Worst Financial Crisis Since World War Two

George Soros, the Hungarian-born billionaire investor, philanthropist, and author, told the Austrian publication The Standard that the world was facing the worst financial crisis since World War Two. Speaking to other news agencies, the former Quantum Fund head also warned the economies of the United States and United Kingdom are threatened by recession. Soros, most widely known as “The Man Who Broke the Bank of England” after he earned $1.1 billion speculating on the British pound in 1992, said in The Standard interview released Monday that, “The situation is much more serious than any other financial crisis since the end of World War Two.” He explained that over the past few years politicians subscribed to something called “market fundamentalism,” which, he said, was “the wrong idea.” Soros told the BBC earlier today:

Markets have been left to their own devices and the authorities came to rely on the markets to right themselves. They ought to have known better. They ought to know that the markets don’t necessarily right themselves.

As a result, Soros said, “We really do have a serious financial crisis now.” Today at the World Economic Forum in Davos, Switzerland, the legendary investor explained:

From the 1980s we had the belief in the magic of the marketplace, and the authorities were so successful that they started to believe in this market fundamentalism. That’s gone too far.

He added, that in times of crisis:

They suspended the rules and they bailed out the banks. That created an
asymmetric incentive system, a moral hazard, that allowed the expansion of credit.

The current crisis has its roots in the U.S. housing boom and subsequent bust, along with the resulting subprime blowup. Now, Soros says the monetary authorities must be ready to rescue markets in turmoil and should impose more regulation, not less.

“Yeah, it’s that bad…”

When asked during The Standard interview about whether he thought the United States was headed for a recession, he said, “Yes, this is a threat in the United States.” He also added that he was surprised of how much the threat of a recession in Europe has been downplayed. Today on the BBC, when asked if the U.S. and U.K. economies were headed for recession, Soros replied, “I think it will be very difficult to avoid it.”

The chair of Soros Fund Management also talked about the outlook for the U.S. dollar. According to Reuters, at Davos today he said the world is no longer willing to accumulate dollars. Soros claimed:

Financial markets do need a sheriff … The rest of the world is unwilling to accumulate dollars. The present crisis is the end of an era based on the dollar as the international currency. We need a new sheriff, not Washington consensus.

According to Bloomberg, the U.S. dollar’s share of global foreign-exchange reserves fell to a record low of 63.8% in Q3 2007 as demand for U.S. assets waned after the collapse of the U.S. housing market (from International Monetary Fund data). This was down from 65% three months earlier. The greenback dropped 11% against the euro and 13% against the yen in the past year, continuing its decline in five of the past six years.

The legendary investor linked the growing financial crisis with the dollar’s decline. Soros told forum attendees today:

The current crisis is not only the bust that follows the housing boom, it’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.

“Everybody, sooner or later, sits down to a banquet of consequences.”
-Robert Louis Stevenson, Scottish essayist, poet, and author

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.

How The U.S. Housing Slump Became An English Football Club’s Problem

According to The Guardian (UK) yesterday, Liverpool Football Club, an English professional football (soccer) club, “could change hands for the second time in a year as their American owners encounter difficulties in refinancing £350 million of debt incurred in taking over and running the club.” The London-based newspaper attributed the problem to the global credit crunch. On February 6, 2007, Liverpool FC was bought by two American businessmen, George Gillett, Jr., and Tom Hicks. Gillett owns the professional ice hockey team Montreal Canadiens and co-owns the NASCAR auto racing team Gillett Evernham Motorsports. Hicks, a Dallas billionaire, co-founded the investment firm Hicks, Muse, Tate & Furst, and is chairman of Hicks Inc., which owns and operates Southwest Sports Group, the company that owns the Texas Rangers, the Dallas Stars, and Mesquite Championship Rodeo.

Faced with “steeply rising costs” from a new stadium and their manager’s demands for new players, The Guardian reported that the two American co-chairmen “have been attempting to transfer the debt, for which they are personally liable, on to the club itself.” The Americans’ purchase of Liverpool Football Club was funded solely with borrowed money. Their loan from the Royal Bank of Scotland grew to £350 million as it was used to fund several high-profile player acquisitions, development work and architect’s plans for a new 60,000-seat stadium, and to roll up the interest on the debt. The RBS loan is due for repayment next month. The Guardian’s Sunday paper, The Observer, said attempts to restructure the loan have failed so far, and that the two have yet to inject new equity into the refinancing. While RBS have asked Hicks and Gillett to each commit £20 million of their own cash to the deal, sources said “at least one of the pair is not prepared to do so.”

According to The Guardian:

The global credit crunch has made it harder for Hicks and Gillett to raise new revenues elsewhere and also affected the value of their other assets. Should they fail in their efforts to repay the £350m acquisition debt on Liverpool when it comes due in just over six weeks, there would be the possibility of the next owner of the club becoming RBS.

The bank, however, are extremely unlikely to allow the situation to develop that way…

Many believe that the U.S. housing slump served as the catalyst for the global credit crunch in 2007. Last week, the United Nations report “World Economic Situation and Prospects 2008” said:

The ongoing housing downturn in the United States became much more serious in the third quarter of 2007, with the meltdown of sub-prime mortgages triggering a full-scale credit crunch that reverberated throughout the global financial system.

If the Americans are unable to meet the deadline, the British newspaper reported that an Arab investment group, Dubai International Capital, may offer to buy out the pair, probably for about £500 million. This would allow the two businessmen to exit with a profit of £75 million each. DIC were extremely close to buying the legendary football club last February, only to lose out to Gillett and Hicks.

Jim Rogers: Coming Recession ‘One Of The Worst’

Commodities investor Jim Rogers told Bloomberg yesterday that the U.S. economy is heading for a recession that may be the worst “in a while,” and investors should sell the dollar as global currencies weaken. The chairman of New York-based Rogers Holdings said from Singapore that:

It’s going to be one of the worst recessions we’ve had in a while because we had so many excesses going into it… It’s going to be bad for all of us as currencies come under more and more stress and we have more inflation in the world.

In addition to sharing his views on a possible recession, the legendary investor said that the governments of the United States and United Kingdom have been “lying” about inflation. Rogers noted that he’s sold both the dollar and the pound, and said:

I hope by the end of this year all of my assets will be out of the U.S. dollar… The dollar is a currency that’s terribly flawed and it’s going to be under duress for many years to come.

The co-founder of the Quantum Fund with billionaire George Soros in the 1970s re-iterated his belief that the commodities bull still has a ways to run, despite the weakness of the greenback. Speaking to Reuters by telephone from his home in Singapore last Thursday, Rogers said:

I sound like a broken record, but it ain’t over yet. It’s got a long way to go… It’s come a ways, but we may be in the fourth inning of a nine-inning ball game, to speak in U.S. baseball terms.

Commodities prices are going to go up no matter what happens to the U.S. dollar, even if it rises, because there are serious supply/demand shortages which have developed over the past 25 to 30 years.

Commodities: still swinging away

In addition, the American investor noted:

I am still short the investment banks in America, and these are the guys (Federal Reserve Chairman) Bernanke’s trying to save. I think that’s been the single area with the most excess — that and home-building.

Rogers recently moved to Singapore after selling his New York townhouse for $16 million on December 17, a gain of 150-fold from the price he paid for it, according to The Morning Call this past Sunday. The investor and author bought the property for $107,000 in 1977.

Investment Bank Predicts Ron Paul Victory As Economy Weakens

Every year, the Strategy Team at Danish investment bank Saxo Bank puts together a list of ten long-shot predictions for the new year. It’s interesting to note that more than a few of these predictions have come true over the years. For example, at the end of 2006, Saxo analysts said they were bullish on oil “given the raft of alarming geopolitical scenarios with alarming implications for global supply.” Crude oil prices in 2007 almost reached $100 per barrel. Another prediction by bank staff was that the Federal Reserve would bring the federal funds rate down to 4% by the end of 2007. It now stands at 4.25%.

Here are some of the investment bank’s more notable predictions for 2008 (from Emirates Business 24/7):

World oil prices to hit $175 even if growth slows
Much of the conventional wisdom on oil has been proven wrong over the past few years, as previously unimaginable new highs in the price of oil have only been a reflection of the strength of global growth, rather than an obstruction in its path. With the weak US dollar and shrinking profit margins for refiners, the end consumer in many places worldwide hasn’t noticed a difference between oil prices at $99 compared to oil prices at $75. Even if global growth slows in 2008, it will continue to move ahead in the emerging markets of the world where marginal energy demand is growing the most. As “peak oil” becomes an accepted principle and supply and demand do a nervous dance, the price risk in energy remains firmly to the upside.

UK economy likely to go into a nosedive
The British economy may go into a nosedive in 2008, weighed down by some of the same factors that have toppled the US. The UK housing bubble is possibly worse than the US bubble and has only begun to unwind. The Bank of England has dragged its feet as the credit crisis has unfolded, which could worsen the situation compared to the Fed, where “Helicopter” Ben Bernanke has replaced “Easy” Alan Greenspan. The UK consumer is even more overextended in terms of all forms of debt than his US counterpart.

S&P 500 falls 25% from its 2007 high to 1,182
Why 1,182? That would be an exact 25 per cent drop from the 1,576 high the S&P 500 index reached in mid-October this year. History shows that a stock market drops 15 to 30 per cent when housing markets fail. “Easy Al” and “the slice and dice any manner of junk and pass on the risk to your clients” investment banking paradigm triggered the biggest housing bubble in US history. The unwind from the height has already been severe, but it has further to go. So we are daring to forecast that the fall in the major US index will lie at the extreme end of the scale.

Grain prices to double again as demand rises
This year saw the most spectacular gains in the grains complex in recent memory as wheat prices doubled and soybean prices rose to levels not seen since the wild grain markets of the 1970s. Human population growth has slowed on a percentage basis, but per capita consumption of grain is accelerating as emerging markets switch to higher protein diets, which have a multiplier effect on the grain market. Every kg of beef requires seven kgs of feed, for example. Chinese meat consumption has also doubled per capita since 1990 and milk consumption has tripled since 2000.

Many of the big US home builders to go bankrupt
As 2007 draws to a close, many of the stocks for the largest home construction outfits in the US are rallying after George W Bush rolled out his desperate attempt to stem the sub-prime tidal wave by fiddling with rate reset mechanisms and implementing other measures, which seem like pumping medicine into a dead horse. These steps are too little and too late, as the last phases of the US housing boom were one of the worst examples of overextension by any industry – driven by excess liquidity. At least three of the largest US home builders could go bankrupt in 2008.

Chinese equities likely to see correction next year
The Chinese stock market bubble in 2007 saw one of the most remarkable accumulations of paper wealth in financial market history. The rise in Chinese equities is certainly due in part to solid fundamental underpinnings, including a liberalisation of markets and remarkable economic growth. But there are a number of factors we believe may have resulted in an unhealthy overextension in equity prices that could mean an ugly correction in 2008 – possibly around the psychologically important 2008 Summer Olympics in Beijing.

Ron Paul elected President of the United States
The most outrageous! One would imagine a party with the least popular president to inhabit the White House – ever – wouldn’t stand a snowball’s chance in Texas of getting a new candidate elected to the presidency. But Ron Paul is no George W Bush, even if he is a Republican like Bush and is from Texas like Bush. His libertarian, anti-war platform is about three standard deviations away from the platform of any other republican candidate — or even Hillary Clinton, for that matter. Paul’s share in the Republican candidate polls has rocketed from one to six per cent in the space of a few months and there is the best part of a year to go until the election. As should be clear from this year’s outlook, we are quite negative on the US economy in 2008. A general slowdown and stock market turmoil must increase the odds of a Ron Paul nomination as he has been the only candidate to speak about the budget, account deficits and the dollar crisis.