Irrational Inexuberance

S&P 500 has moved back to the level that it was trading at in December of 1996, making this the worst year in history.

This recession will last how long

Singapore Confirmed in recession 2008

Final government data released on Friday confirmed that Singapore was in recession. The city-state's economy shrank at a worse-than-expected rate of 6.8 per cent on an annualised and seasonally adjusted basis in the third quarter, and the government said the economy may shrink next year.

US Fed's Gloomy Outlook

Big Three's CEOs automakers

Great Depression II by 2011

New-New Deal, bailouts, trillions in debt, antitax mindset spell disaster

By 2011? No recovery? No new bull? "Hey Paul, why do you keep talking about a bigger crash coming by 2011?" Readers ask that often. So here's a sequel to my predictions of 2000 and 2004, with a look three years ahead:

First. Dot-com crash

We pinpointed the dot-com crash at its peak, in a March 20, 2000 column: "Next crash? Sorry, you won't see it coming." Bulls-eye: The dot-com bubble popped. The economy went into a 30-month recession. The stock market lost $8 trillion.
And today, over eight years later, the market is still roughly 40% below its 2000 peak.

Video: Discussing the Great Depression

Dorothy Womble and William Hague survived the Great Depression. They share their stories of living during that time as children. (Nov. 14)Factor in inflation and the average stock has lost well over 50% of its value. Stocks have proven to be a very big loser, a bad investment for Americans, thanks to Wall Street's selfish greed, plus the complicity and naiveté of politicians, press and public.

Second. Subprime meltdown

We reported on warnings of another crash coming as early as 2004, wrote a sequel, also titled "Next crash? Sorry, you won't see it coming." Yes, we were early, but in good company. We wrote many more warning columns. Few listened.

Subsequent events, notably former Fed Chairman Alan Greenspan's admission of his failures in congressional testimony, prove that if he and other Reaganomic ideologues weren't so myopic and intransigent about proving their free-market deregulation theories, they could have acted earlier and prevented today's colossal mess. Instead, their ideology kept the bubble blowing, delayed the pop, making matters worse.

So once again, as history proves over and over, ideology trumps common sense, reality and the facts. Greed drives ideologues to blow bubbles. They pop. Crashes happen. The public is collateral damage.

Third. Megabubble cycles

We also detailed the broader, accelerating macroeconomic sweep of cycles last summer in columns like "20 reasons new megabubble pops in 2011." We summarized a long list of major warnings from financial periodicals -- Forbes, Fortune, the Wall Street Journal, Economist -- and from the voices of Warren Buffett, Bill Gross, a sitting Fed governor and a former Commerce secretary. Multiple warnings "hiding in plain sight," beginning with a Fed governor warning Greenspan in 2000 about subprime risk.

But the big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy."

Yes, they knew. And still both Paulson, a Wall Street insider, and Greenspan's successor, Ben Bernanke, a Princeton scholar of the Great Depression, stayed trapped in denial and kept happy-talking the public for months after the meltdown began in mid-2007. Get it? While they could have put the brakes on this meltdown years ago, our leaders were prisoners of their distorted, inflexible views of conservative Reaganomics ideology.

As a result, once again the "best and the brightest" failed America and now they and their buddies in Washington and Corporate America are setting up the Crash of 2011.
Now it's time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street's "greed is good" DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington's 41,000 special-interest lobbyists will drive America into the Great Depression 2.

30 'leading edge' indicators of the coming Great Depression 2

Every day there is more breaking news, proof Wall Street's greed is already back to "business as usual" and in denial, grabbing more and more from the new "Bailouts-R-Us" bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas -- anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 "leading indicators." Each problem has one or more possible solutions, but lacks unified political support. Time's running out. We're already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America's credit rating may soon be downgraded below AAA

2. Fed refusal to disclose $2 trillion loans, now the new "shadow banking system"

3. Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse

4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets

5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year

6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers

7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money

8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states

9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt

10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps

11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up

12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns

13. Fed also plans to provide billions to $3.6 trillion money-market fund industry

14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars

15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion

16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs

17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown

18. Big three automakers near bankruptcy; unions, workers, retirees will suffer

19. Corporate bond market, both junk and top-rated, slumps more than 25%

20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall

21. Unemployment heading toward 8% plus; more 1930's photos of soup lines

22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists

23. China's sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai

24. Despite global recession, U.S. trade deficit continues, now at $650 billion

25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities

26. Now 46 million uninsured as medical, drug costs explode

27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt

28. Outgoing leaders handicapping new administration with huge liabilities

29. The "antitaxes" message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

Will the next meltdown, the third of the 21st Century, trigger a second Great Depression? Or will the 2007-08 crisis simply morph into a painful extension of today's mess to 2011 and beyond, with no new bull market, no economic recovery as our new president hopes?

Perhaps some of the first 29 problems may be solved separately, but collectively, after building on a failed ideology, they spell disaster. So listen closely to "leading indicator" No. 30:

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government."

Reuters concludes: "Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. 'I just want to get people thinking about this, and to realize this is a road to disaster,' said Whitehead. 'I've always been a positive person and optimistic, but I don't see a solution here.'"

We see the Great Depression 2. Why? Wall Street's self-interested greed. They are their own worst enemy ... and America's too.

Malaysia no recession, ringgit rising and Inflation easing

KUALA LUMPUR) Malaysia's economy is not expected to fall into recession and its currency could gradually firm over the medium term, the central bank chief was quoted as saying last Saturday.

Economic growth next year will hit the 3.5 per cent official target, with policies in place to contain the fallout from the global slowdown, Bank Negara governor Zeti Akhtar Aziz was quoted as saying by The Star newspaper.

'We are not in a recession and we don't expect to be in one,' Ms Zeti said. 'In our case, we took action very early so there is the potential for containing the severity of the crisis.' She said the central bank was ready to adjust monetary policy to support growth.

'We have said that we would take swift action to support the economy,' Ms Zeti said, when asked where interest rates were headed. 'If it is necessary, certainly we have the flexibility to do so.

The fast-growing South-east Asian economy has been bolstered by rocketing crude oil and palm oil prices in recent years but some analysts say a sharp slowdown is around the bend due the economy's heavy reliance on trade. Malaysian bank RHB has forecast domestic economic growth at just 1.5 per cent in 2009.

Malaysia's official interest rate has been at 3.5 per cent for more than two years, putting it among Asia's lowest, and Ms Zeti reiterated an earlier assessment that inflation had peaked and said it would ease to below 3 per cent in the second half of 2009.

She also repeated a pledge to ensure an orderly foreign exchange market.'In the near term, we are going to see volatility but the medium-term underlying trend should be a gradual appreciation,' she said, referring to the ringgit currency's movements. 'What is key to us is that the market remains orderly. The central bank will be there to ensure orderly conditions.'

Inflation likely to ease further, this is in tandem with declining oil prices.

Malaysia's inflation rate, as measured by the consumer price index (CPI), is expected to ease further in October and well into next year in tandem with declining oil prices, economists said.

The CPI is a measure of the average prices of consumer goods and services purchased by households.

Malaysian Institute of Economic Research executive director, Prof Datuk Dr Mohamed Ariff, said inflation is expected to ease considerably next year as slower growth translated into weaker demand.

“Inflation will be a non-issue in about six months time,” he said. “The chances are that we are likely to face a deflationary situation come next year.”

The official October inflation data will be released this Wednesday.



Inflation had also eased slightly in September to 8.2% as transportation prices rose at a slower pace.

The prices in three main sectors of the CPI basket, namely transport, housing and utilities, as well as prices of food and non-alcoholic beverages, which collectively account for 89% of the CPI, are expected to decline.

“The recent decline in oil prices would be the main factor for the decline in the main components,” an economist told Starbiz, adding that the CPI was likely to ease from here onwards, starting from September.

She pegged October inflation at 7.8% and 5.5% for the year to October.

She also forecast this year’s inflation rate to be at 5.8%, and 3.4% for 2009.

“We believe that there is no indication the fuel prices would go up (again), leading to a second round of effects or increases in prices of food and raw materials moving forward,” the economist said.

Malaysian Rating Corp Bhd chief economist, Nor Zahidi Alias, concurred that the CPI should be softening as the impact of lower petrol prices started to trickle into the economy.

However, he did not foresee a drastic drop in the CPI until the second half of next year because of the base effect and moderation in aggregate demand.

After the government raised fuel prices in June, inflation surged to 26-year highs at 8.5% in July and August before easing to 8.2% in September.

But since August, the Government has cut fuel prices four times to reflect the declining crude oil prices from the record high of US$147 per barrel in July.

Two Fed chiefs with wildly contrasting legacies

LONDON 18 Nov 2008, The chairmanship of the Federal Reserve Board is, and always has been, a deeply political office.

This is in dramatic contrast to the status of central bank governors in Europe, who - whatever their stature and degree of independence -- can never entirely throw off the air of financial technicians. When they leave office, European central bankers may advise investment banks, join think-tanks, sit on company boards and play golf -- but they nearly always leave the limelight far behind.

The most recent former incumbents at the Fed, Paul Volcker and Alan Greenspan, two men who dominated the institution for more than a quarter of a century, are in a different league. They remain in the center of public interest. And they offer a study in contrasts that could hardly be more divergent.

On the one hand, Volcker, combined a towering presence with a sometimes startlingly unpretentious demeanor. He was a public servant in the best sense of the word.

After quitting the Fed in 1987 he became chairman of Jim Wolfensohn's investment banking boutique, but kept in the line of civic duty with strong of public service responsibilities, whether overseeing post-Enron accounting practices, investigating Nazi war-time gold transactions, or chasing corrupt officials in the United Nations' Iraq "oil for food" program.

During the 1970s Volcker gained huge international respect as the U.S. Treasury's globe-trotting trouble-shooter for international monetary affairs, presiding over the collapse of Bretton Woods and trying to patch up the aftermath. He won his inflation-busting spurs as the architect of a savage increase in interest rates in 1979 after the Fed moved on to direct targeting of the money supply -- thrusting the U.S. into recession, ditching Jimmy Carter's chances of re-election and paving the way for Ronald Reagan.

Volcker was hardly Mr. Popular at the time, but -- not just reflecting time's patina -- his reputation has gained a guru-like significance over the years.

Interestingly, as a genuine internationalist, he has always been a fan of the euro and probably ranks as the most senior American full-heartedly to back the now 10-year-old European currency.

At the opposite end of the spectrum stands Greenspan, whose stock has fallen in the past two years just Volcker's has risen.

In an example of what now appears to have been an absurd personality cult, Greenspan attained near-deity status as the Fed's all-knowing, all-determining monetary "Maestro." Tony Blair, then UK prime minister, and Gordon Brown, now his successor, were among the many who succumbed to his spell, arranging for Greenspan to receive an honorary knighthood in 2002.

As well as becoming an "honorary adviser" (whatever that is) to the UK Treasury after he retired (a post for which he received no payment), Greenspan was showered with highly-paid advisory posts, made several lucrative speeches on monetary policy, and dashed off his memoirs, published in September 2007 -- a hastily written work, which will rank as a significant contribution neither to literature nor to economic understanding -- and gave absolutely no hint of the burgeoning credit crunch.
In contrast to Volcker, Greenspan never believed in the euro, and confesses himself amazed that it started on time and has given every appearance of working.

Greenspan's memoirs are remarkably frank about his lack of fellow-feeling with his predecessor. His passages about Volcker in fact reveal as much about the author as about the subject: "Volcker and I were not personal friends...in conversation I always found him quite introverted and withdrawn. He didn't play tennis or golf -- instead, he liked to go off by himself and fly-fish. He was a bit of mystery to me."

Greenspan's theories on the benefits of derivatives, on the self-healing power of markets and the benign consequences of deregulation are now, as we all know (and as Greenspan himself, in Congressional testimony, has more or less admitted), largely discredited. Volcker's ties with President-elect Barack Obama make him, at the age of 81, an unlikely symbol of hope and regeneration and a possible candidate for the new Treasury team. Greenspan, a year older, of course expects no phone call from the new administration. He has more than enough time to reflect on how reputations that take decades to build can crumble in a much shorter time