Obama's Music Video - "Yes We Can"

Watch the music video produced by will.i.am, "Yes We Can". Video courtesy of Barackobama.com.

Hang in there, sell out means you are out of the game

Don't sell out, hold on in there.

The crisis today has many similarities with the Great Depression. We have forgotten our lessons from the past

THE past month must have been one of the toughest periods for investors and advisers. Equities markets collapsed like a pack of stacked cards. Many are saying the world has never seen anything like it before. But is this true? I took a quick trip back to 1929 to find out.

Real estate was the speculative favourite in 1920s America. The mantra was 'leverage up, buy a bigger house, even if you can't afford it'. Interest-only mortgages were already the standard. Then on black Monday, Oct 28, 1929, the stock market crashed.

Americans rushed to withdraw their money. Banks cut lending or closed their doors.

The economy collapsed. Greed, over-borrowing and bad loans led to the world's worst financial crisis - The Great Depression. Seeing similarities between the crises of 1929 and of today, I realised that when it comes to money, history tends to repeat itself. People are cyclical creatures who are generally greedy and cannot help but make the same mistakes.

The current plunge in stock markets has left investors so fearful that many have claimed this is the worst stock market crash in history. I wasn't sure, so I took another trip - all the way back to 1900. Looking at the top 10 stock market crashes since then, things became a lot clearer. The grand-daddy of all crashes was in 1930.

The market went down 86 per cent. Together with the 1929 crash, the Great Depression lasted 34 months and took 89 per cent from the market. The current crisis has brought the Dow down about 39 per cent so far. Although it is not the worst crash and the world has seen worse times than this, the question every investor is asking is whether today's crisis will be prolonged.

In my trip to 1929, I found out that just before Black Monday, everyone - from governments and experts to the newspapers - was bullish about the economy. Soon after the first crash on Oct 28, they quickly became positive again, predicting a quick recovery. Then on April 17, 1930, the market sank even further. Throughout the next two years there were plenty of recovery forecasts. But by the time the carnage was over, three years had passed. No one, not even financial experts or governments, knew how long the bear would last.

I also learned from the past century that no matter how deep and long crises were, markets always recover. The key question is whether you have time to wait for a recovery.

In the summer of 1929, John J Raskob, a senior executive of GM, claimed that US was on the verge of a tremendous industrial expansion. He maintained that by putting just US$15 a month into good common stocks, investors could expect their wealth to grow steadily to US$80,000 over the next 20 years. When the stock market crashed, Mr Raskob's advice was ridiculed and denounced for years to come. But was that fair? If one had followed Mr Raskob's advice and put US$15 a month into the market, after 20 years, the average annual return would have been 7.86 per cent, and after 30 years 12.72 per cent. Far from Mr Raskob's estimate, but not too bad, I must say.

The lesson is this: even in the worst crises, markets still recover with a respectable return. But if you want to shorten the time of your recovery, don't sell out. Keep investing but invest in the right things. If you sell, you are out of the game with no hope of recovery at all.

My trip to the past has taught me that all crises stem from the same cause - greed. Today's crisis is not new. It's just that we have forgotten our lessons. Don't try to time the markets. Michael J Mauboussin, chief investment strategist at Legg Mason Capital Management, found out that if you are able to accurately avoid the worst 50 days of the market, your returns jump to 18.2 per cent per annum. But if you miss the best 50 days, your returns dropped to a mere 1 per cent per annum.

Investors, be strong and courageous. You may be fearful. I am too. But history is behind us and for us. If you stop investing, you will perish. The crisis will surely pass. Don't ever give up.

Keynes’s economics revived

“Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” - John Maynard Keynes: 1883-1946

December 14, 2008
The Way We Live Now
The Remedist
By ROBERT SKIDELSKY

Among the most astonishing statements to be made by any policymaker in recent years was Alan Greenspan’s admission this autumn that the regime of deregulation he oversaw as chairman of the Federal Reserve was based on a “flaw”: he had overestimated the ability of a free market to self-correct and had missed the self-destructive power of deregulated mortgage lending. The “whole intellectual edifice,” he said, “collapsed in the summer of last year.”

What was this “intellectual edifice”? As so often with policymakers, you need to tease out their beliefs from their policies. Greenspan must have believed something like the “efficient-market hypothesis,” which holds that financial markets always price assets correctly. Given that markets are efficient, they would need only the lightest regulation. Government officials who control the money supply have only one task — to keep prices roughly stable.

I don’t suppose that Greenspan actually bought this story literally, since experience of repeated financial crises too obviously contradicted it. It was, after all, only a model. But he must have believed something sufficiently like it to have supported extensive financial deregulation and to have kept interest rates low in the period when the housing bubble was growing. This was the intellectual edifice, of both theory and policy, which has just been blown sky high. As George Soros rightly pointed out, “The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil. . . . The crisis was generated by the financial system itself.”

This is where the great economist John Maynard Keynes (1883-1946) comes in. Today, Keynes is justly enjoying a comeback. For the same “intellectual edifice” that Greenspan said has now collapsed was what supported the laissez-faire policies Keynes quarreled with in his times. Then, as now, economists believed that all uncertainty could be reduced to measurable risk. So asset prices always reflected fundamentals, and unregulated markets would in general be very stable.

By contrast, Keynes created an economics whose starting point was that not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty, and this made disaster an ever-present possibility, not a once-in-a-lifetime “shock.” Investment was more an act of faith than a scientific calculation of probabilities. And in this fact lay the possibility of huge systemic mistakes.

The basic question Keynes asked was: How do rational people behave under conditions of uncertainty? The answer he gave was profound and extends far beyond economics. People fall back on “conventions,” which give them the assurance that they are doing the right thing. The chief of these are the assumptions that the future will be like the past (witness all the financial models that assumed housing prices wouldn’t fall) and that current prices correctly sum up “future prospects.” Above all, we run with the crowd. A master of aphorism, Keynes wrote that a “sound banker” is one who, “when he is ruined, is ruined in a conventional and orthodox way.” (Today, you might add a further convention — the belief that mathematics can conjure certainty out of uncertainty.)

But any view of the future based on what Keynes called “so flimsy a foundation” is liable to “sudden and violent changes” when the news changes. Investors do not process new information efficiently because they don’t know which information is relevant. Conventional behavior easily turns into herd behavior. Financial markets are punctuated by alternating currents of euphoria and panic.

Keynes’s prescriptions were guided by his conception of money, which plays a disturbing role in his economics. Most economists have seen money simply as a means of payment, an improvement on barter. Keynes emphasized its role as a “store of value.” Why, he asked, should anyone outside a lunatic asylum wish to “hold” money? The answer he gave was that “holding” money was a way of postponing transactions. The “desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.” The same reliance on “conventional” thinking that leads investors to spend profligately at certain times leads them to be highly cautious at others. Even a relatively weak dollar may, at moments of high uncertainty, seem more “secure” than any other asset, as we are currently seeing.

It is this flight into cash that makes interest-rate policy such an uncertain agent of recovery. If the managers of banks and companies hold pessimistic views about the future, they will raise the price they charge for “giving up liquidity,” even though the central bank might be flooding the economy with cash. That is why Keynes did not think that cutting the central bank’s interest rate would necessarily — and certainly not quickly — lower the interest rates charged on different types of loans. This was his main argument for the use of government stimulus to fight a depression. There was only one sure way to get an increase in spending in the face of an extreme private-sector reluctance to spend, and that was for the government to spend the money itself. Spend on pyramids, spend on hospitals, but spend it must.

This, in a nutshell, was Keynes’s economics. His purpose, as he saw it, was not to destroy capitalism but to save it from itself. He thought that the work of rescue had to start with economic theory itself. Now that Greenspan’s intellectual edifice has collapsed, the moment has come to build a new structure on the foundations that Keynes laid.

Worldwide problem in 2009

The president of the World Bank warned Thursday of a worldwide struggle in the first half of 2009 as a deepening global economic crisis hits Asian countries.

Robert Zoellick also cautioned against a return to trade protectionism that could worsen the crisis.

Asia-Pacific region remained reasonably well-placed to weather the global slowdown but will see growth ease to 5.3 percent in 2009 from 7.0 percent this year.

It said the global economy would expand a mere 0.9 percent next year and world trade volume would fall 2.1 percent, the first drop in 26 years.

"In the discussions that I have had with people around the world, no one has a very good prediction for the length and depth of this crisis," Zoellick said.

Government monetary and fiscal policy, as well as open trade systems, will determine whether the situation can improve later next year, he said.

"Particularly I am concerned about the rising dangers of protectionism," he added, describing as "unfortunate" the difficulties encountered during the Doha Round of talks on a new global trade pact.

"The international system needs to stay on offence on trade because protectionist forces will raise their heads," he said.

The so-called Doha talks started at the end of 2001 in the Qatari capital.

They aim to boost international commerce by removing trade barriers and subsidies, but a deal has proved elusive.

Developing countries, including China and India, want the industrialised world to scrap agricultural subsidies, while Western powers are seeking greater access for their products in emerging markets.

"Whatever parties can do to try to get the Doha Round back on track would be vitally important," Zoellick said later at a dialogue session with students from a local university.

"This financial and economic and unemployment problem is serious enough.

"If we start to trigger a round of protectionism, as you saw in the 1930s, it could deepen (the global crisis)."

Pascal Lamy, the head of the World Trade Organisation (WTO), last Friday scrapped plans to hold a ministerial meeting on the trade talks, citing the "unacceptably high" risk of failure and dashing hopes that the long-delayed global trade pact could be clinched this month.

The World Bank, which provides financial and technical assistance to developing countries, said last week that healthy growth in recent years had left major economies such as China in good shape to fight the global crisis with macroeconomic measures.

But it said "in the near term, downside risks are substantial" due to recessions in developed markets.

Oil futures tumble 10% to end below $37 a barrel

J.P. Morgan analysts cut their 2009 oil price forecast to $43 a barrel from $69

Crude tumbled below $37 a barrel Thursday to their lowest level in at least four years, underscoring the market's preoccupation with a sharp slowdown in oil demand.

Year to date, oil prices have fallen 59% and are 75% since their record level above $147 a barrel in July.

Oil for January delivery fell $3.84, or 9.6%, to end at $36.22 a barrel on the New York Mercantile Exchange. Not since the middle of 2004 has the price reached this level.

Earlier, the contract hit an intraday low of $35.98 a barrel on Globex. The January contract will expire at the end of trading on Friday.

The February crude contract, which showed greater trading volume, fell $2.94 to end at $41.67 a barrel on Nymex.

"Below $38, we don't see anything until the $25 level," said Edward Meir, an analyst at MF Global. "This is admittedly a rather dramatic set of chart-based forecasts for a complex that only six months ago looked like it could do no wrong on the upside."

Traders have paid little heed to a production cut of 2.2 million barrels in current oil output by the Organization of the Petroleum Exporting Countries.

OPEC agreed Wednesday to cut 4.2 million barrels a day from its actual September production level of 29.045 million barrels a day.

The reduction in member nations' quota levels is effective on Jan. 1. Excluding previously announced cuts, OPEC will actually cut its daily production by 2.2 million barrels from current levels.

"There are doubts among market participants of OPEC's ability to comply with these cuts given the magnitude of the cut and their previous history," said Nimit Khamar, an analyst at Sucden Financial.

"Yes, it is a large cut by OPEC, which is positive, but going forward oil prices will only be supported by evidence of compliance and provided weakening demand does not deteriorate too much," Khamar said.

OPEC, which controls about 40% of the world's oil production, will hold its next scheduled meeting on March 15 in Vienna.

"If prices slide toward $30, no doubt OPEC will be meeting before then and perhaps announcing further cuts, which will be required in our opinion," Khamar said.

J.P. Morgan cuts oil price forecast

Strategists at J.P. Morgan slashed their forecast for oil prices in 2009 to $43 a barrel from $69 a barrel, citing "the ongoing deterioration in the world economic environment and the ensuing sharp contraction in global oil demand in both 2008 and 2009."

Commercial oil stocks have already risen to close to 60 days of forward consumption and are set to rise further before OPEC gets the market under control, which is estimated to take until the second quarter, the strategists said in a research report dated Dec. 17.

"While in the near term, recent extremely high volatility means a range of $15 a barrel around the mid-price forecast is appropriate, once a supply/demand balance is achieved, the stock overhang will mean that volatility is likely to fall sharply," J.P. Morgan said.

Also on Globex Thursday, January reformulated gasoline fell 5 cents to end at 92 cents a gallon and January heating oil dropped 7 cents to $1.37 a gallon.

Natural gas inventories fell by 124 billion cubic feet to stand at 3,167 billion cubic feet during the week ended Dec. 12, the U.S. Energy Information Administration reported Thursday. Analysts polled by Platts expected a reduction of between 107 billion cubic feet and 112 billion cubic feet.

January natural gas futures fell 7 cents to finish at $5.55 per million British thermal units.

Madoff big lie theory explained in simple terms

Today, after the fact, many are falling over themselves asserting that investors in Madoff's funds should have known better than to believe such performance claims. They're right, but the more interesting question is: Why did so few actually know better in advance?

A clinical psychologist, assures me that it's because we're primarily emotional beings. We like to think of ourselves as objectively analyzing the data under the cool light of reason, but far more often than not our emotions are running the show.

It takes courage to say that the king has no clothes, especially when the king is paying you handsomely.

That's why I often tell my clients to subject their strategies and their chosen advisers to special scrutiny during those times when they are performing well. That's when we are most likely to be lulled into a dangerous complacency.

Far better to find out then than later that if something is too good to be true, it probably is.

Tale of the TED

The TED spread, or the difference between US Treasury bill and eurodollar interest rates, is an indicator of perceived credit risk in the general economy. US government Treasury bills are considered risk-free while eurodollar borrowing costs, measured by the London interbank offered rate (LIBOR), reflect the credit risk of lending to commercial banks.

When the TED spread increases it is a sign that lenders believe the risk of default on interbank loans is increasing. Interbank lenders therefore demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of banks defaults is considered to be decreasing, the TED spread decreases. The TED spread fluctuates over time but has often remained within the range of 10 and 50 basis points (0.1% and 0.5%), at least until 2007. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.

US Fed promises explained - Central bank policy makers step up to assure banks and act as the "invisible hand."

The Federal Reserve made a few promises on Tuesday that are important to the ultimate recovery of the economy and financial markets.

First, the Fed cut its target for short term rates to just above zero and pledged to keep its target for short-term rates low "for some time."

This should give banks assurance that they will have access to cheap funds, economists said. This could help spur bank lending.

"Bank confidence in its ability to finance itself today and in the future is an essential for making loans," noted Stephen Gallagher, chief economist at Societe Generale.

Secondly, the Fed promised to employ "all available tools" to help the economy and financial markets.

In essence, the Fed intends to be "the invisible hand" in all financial markets, according to Joel Naroff, president of Naroff Economic Advisors.
"Wherever market failures exist, the Fed will be the market maker," Naroff said.

The Fed has already become the market maker for corporate paper and mortgages and mortgage-backed securities.

It has plans to become a market maker in loans to households and small businesses.

And a senior Fed official said that other credit markets could be helped.
At the moment, the spread between government credit and private credit are very wide. No one wants to take the risk on a private company.

The Fed hopes that its action will reduce the spread.

Will the Fed's action work? But by keeping credit flowing, the Fed is buying time for banks to heal.

In the mortgage market, the Fed purchases have already brought down the cost of mortgages, resulting in a spurt of activity.

"This latest change in monetary policy strategy by the Fed has the potential to be highly effective in our view, and will better reduce the cost of borrowing for a vast majority of consumers and businesses," said the economic team at Wells Fargo.

But how long will it take? That nobody knows.

Former Fed governor Robert Heller said the aggressive Fed easing campaign began in earnest after the collapse of Lehman Brothers in mid-September. He calculated that the lag on policy would take eight months, putting the recovery in mid-May.

Naroff said that the Fed's statement reminded him of John F Kennedy's inaugural address -- that the Fed would "pay any price, bear any financial market burden, meet any economic hardship, support any frozen market, oppose any negative economic activity in order to assure the survival and the success of the economy."

But Robert Brusca, chief economist at FAO Economics, noted that the Fed is like a backup quarterback on a football team. Like a team with a second-string quarterback, the market may be able to function somewhat but it could be bumpy.

Fed cuts rates to record low range of zero to 0.25%

The Federal Reserve pulled out all the stops in its campaign to save the U.S. economy Tuesday, slashing interest rates to just above zero and promising to try an array of new economic measures to stimulate spending.



The central bank's Federal Open Market Committee established a target range for the federal funds rate of zero to 0.25%, effectively cutting its key rate for overnight lending to banks by between 0.75% and 1%.

Rates would need to be kept low "for some time," the central bank said.

'The Fed will employ all available tools to promote the resumption of sustainable economic growth.' — Federal Reserve

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the funds rate has "hit rock bottom."

U.S. stocks leaped after the decision, with the Dow Jones Industrial Average closing up 359 points.

A senior Fed official told reporters that the Fed has switched tactics and will now focus on aiding credit.

The Fed has already targeted a few debt classes for assistance. The senior officials said that other classes, including below triple-AAA quality debt, may be purchased.

The official said the program was not quantitative easing as practiced by Japan in the 1990s.

While Japan simply wanted to increase the quantity of money, the Fed wants to focus on the asset side of the balance sheet.

The moves are just about as aggressive as the central bank could be on monetary policy.

The Fed gave clear signals that it has moved on to other measures beyond setting interest rates in its fight to keep the economy rolling.
Josh Shapiro, chief economist at MFR Inc., said the Fed is "petrified" about the economic outlook.

But the senior Fed official said that economists at the central bank generally are in agreement with Wall Street economists about the duration and depth of the recession.

After two quarters of very weak growth, the economy should start a slow recovery after mid-year, the official said.

The Fed statement said that inflation should continue to moderate in coming months.

The senior Fed official said that deflation, or a general price decline, was not a major risk at the moment, but that price data would be watched carefully.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth," the central bank pledged in its policy statement.

Going into next year, the focus of the Fed's policy will be to support financial markets and stimulate the economy "through open market operations and other measures that sustain the size of the Fed's balance sheet at a high level."

So the key will be the quantity of money in the system, not the price.
The Fed's balance sheet has risen to $2.25 trillion over the past two months from $850 billion and has made promises to spend about a $1 trillion more.

The Fed is using the money to ease strains in the market for the debt of Fannie Mae and Freddie Mac and mortgage-backed securities issued by these GSEs.

These purchases may be expanded, the Fed said.

"The FOMC is also evaluating the potential benefits of purchasing longer-term Treasury securities," the Fed said.

Some economists have questioned the necessity of buying longer-term Treasury securities, with the prices already low.

By February, the Fed is also going to begin buying credit card debt and student loans. This template could be expanded. Under this plan, the Treasury is assuming the risk of loss while the Fed is making the purchases.

Economists applauded this laser-beam approach.

Adding "$100 billion here and $100 there strategically injected into the right places" can have a big impact, said Steve Stanley, chief economist at RBS Greenwich Capital.

Other markets are clearly on the Fed's radar screen.

"The Fed will continue to consider ways of using its balance sheet to further support credit markets and economic activity," the statement said.
The senior official said that lower quality assets could be purchased.

The Fed's moves followed some of the worst economic data in decades reported in the past few days, including monthly consumer sales numbers that fell the most since 1932.

The vote to lower the fed funds rate was unanimous.

Drop in consumer prices is most since 1932

U.S. consumer prices fell in November at the fastest rate since 1932, the darkest days of the Great Depression, the Labor Department reported Tuesday, as prices for energy, commodities and airline fares plunged across the country. Core CPI flat in the month as energy prices plunge

The U.S. consumer price index fell by a seasonally adjusted 1.7%, the department reported, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947.

But on a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression. Read MarketWatch First Take commentary.

"This is scary stuff," said Mike Schenk, an economist for Credit Union National Association. "We are teetering on the brink of a massive downward spiral. Deflation is a threat."

The seasonally adjusted core CPI was flat in November. Read the report.
Economists surveyed by MarketWatch were expecting the CPI to fall by 1.4%. They forecast that the core CPI would rise by 0.1%. See Economic Calendar.

Energy prices declined by a seasonally adjusted 17%, the most since February 1957. Gasoline prices plunged by 29.5% in November, the most since the government began keeping records in February 1967. Fuel oil prices dropped by 7.2%. Commodities prices declined by 4.1% in November.

The CPI data is one of the last pieces of the economic puzzle that the Federal Reserve will have to mull before its announcement about interest rates later Tuesday. The policy-making Federal Open Market Committee is almost universally expected to cut its target for overnight interest rates to 0.5% from 1%.

U.S. stock indexes rose after the price data and data about housing starts were released Tuesday.

Over the past year, overall consumer prices have risen by 1.1%, down from their peak of 5.6% in July. Core prices have risen by 2% in the last 12 months.

Medical, food, clothing costs rise

Prices for certain goods rose in November, even as the overall number fell. Medical care prices, for example, climbed by 0.2%. They are up 2.7% in the past year. Also, food prices rose by 0.2% in November.

The cost of owning a house, meanwhile, rose 0.3% in November.

Falling transportation prices contributed to the overall decline. Those prices dropped 9.8% in November, the most in 61 years. They are down 8.9% over the past year.

The Labor Department also reported Tuesday that real average weekly earnings rose by 2.3% from October to November.

Within transportation, new vehicle prices fell 0.6%. Airline fares, meanwhile, dropped 4%.

In a separate report on Tuesday, the Commerce Department said that housing starts fell by a whopping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest since the department began keeping records in 1959.