VIX Market fear gauge below 40 for first time since October 2008

The VIX, otherwise known as the market's fear gauge, slumped back below 40 on Wednesday, the final trading day of the year, for the first time since early October.

The VIX , short for the Chicago Board Options Exchange Volatility Index, reached a low of 39.61 on Wednesday, a level unseen since Oct. 2. The VIX, based on a number of index options, shows the market's expectations for volatility over a 30 day period.

According to FactSet Research, it spiked to record highs of between 81 and 96 in late October, as panic gripped markets worldwide. Since 2003, readings below 20 were the norm.

How Iceland Collapsed

How Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system.

Cramer: Why China Is Key

Cramer believes China's recovery will be crucial to leading the U.S. economy to a rebound.

Four mistakes even the big names made with investment manager Madoff

Bernard Madoff, a 70-year-old, well-respected money manager, handled the investments of people including Wilpon, filmmaker Steven Spielberg, real estate and media magnate Morton Zuckerman, Bed, Bath & Beyond , co-founder Leonard Feinstein, and major financial institutions such as Britain's HSBC Banco Santander of Spain and France's BNP Paribas

Big names, right? But not too big that they couldn't get swindled: Madoff engaged in a typical Ponzi scheme, letting people think they were getting good returns. All the while, the red flags went unnoticed.

Now, some $50 billion of these investors' money has vanished, and whether the families and institutions that had their money with Madoff will even get it back is hardly clear.

So how could this have happened to these people? If it can happen to them, it can surely happen to you. Here are four big mistakes that people make in handing over their money:

If it's good for him, it must be good for me. Same as saying, "I don't need to ask any tough questions because my buddy over there says it's good." You simply can't assume that someone else has asked all the tough questions of an adviser, nor can you assume that they're asking questions about your personal situation.

Believing good actors. Madoff was apparently a great actor. He always played down his businesses and shrouded his business and "magic formula" in secrecy, creating an aura of exclusivity. The bottom line: Don't assume that what you see is what you get.

Failing to mind the store. I can't blame people for failing to keep their finger on the pulse when they've hired "experts" to manage their money. Especially when the "experts" have "experts" like accountants to ensure the books are clean. Still, it's up to you to look at your investment statements, question them and have the confidence to ask about items you don't understand. And watch out for advisers who can't be reached when the markets go south -- that's a big red flag.

Giving up personal responsibility. Too often, people simply wash their hands of their own finances. This latest scandal -- coupled with the multibillion-dollar bailout of the financial industry -- is just another testament to the fact that consumers must take control. By coming together, at places like WeSeed, America can share what they know, get smarter about the financial products they use and steer clear of scandals.

If there's one thing this fiasco has underscored, it's to take charge, be wary of things you don't understand and, if you are getting other people's help, make sure you understand what's behind it. It also reminds us that "experts" like accountants and even mortgage lenders aren't infallible. Anyone can claim to be a financial adviser, so be careful. Do your homework.

World Financial in the dark ages to come

International finance leaders delivered a grim forecast for 2009 on Sunday, warning next year could be even worse than this one despite a slew of government stimulus plans.

International Monetary Fund chief Dominique Strauss-Kahn predicted a "very dark" 2009 which could be worse than expected if states failed to take sufficient action to fight the crisis, facing economies big and small.

"Our forecasts are already very dark, but they will be even darker if not enough fiscal stimulus is implemented," he told BBC radio in London, predicting recession for advanced economies and decreasing growth for emerging ones.

"I can see that some measures have been announced, but I'm afraid it won't go far enough," he said.

The IMF has called for global fiscal stimulus of about two percent of GDP, equivalent to roughly 1.2 trillion dollars.

The governor of the Bank of Spain was even more pessimistic, warning the world faced a "total" financial meltdown unseen since the Great Depression of the 1930s.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais newspaper.

He noted that the inter-bank lending market was not functioning, spawning "vicious" cycles with economic activity among consumers, businesses, investors and banks essentially frozen.

"There is almost total paralysis from which no-one is escaping," he added.

Still, there was fresh movement to stop the meltdown, with a decision by US president-elect Barack Obama to boost by 500,000 jobs a three-million-job creation goal to kickstart the world's biggest and ailing economy.

Vice president-elect Joseph Biden also confirmed the Obama team was working on a second economic stimulus package which could top a trillion dollars according to some media reports.

"What we're doing is putting together what we think will be the economic package that will do two things. One, stem the haemorrhaging of the loss of jobs, and begin to create new jobs," Biden told ABC television's This Week programme.

"At the same time, we provide continuing liquidity for the financial markets."

Biden put no firm figure to the package that would follow the 700-billion-dollar Wall Street rescue deal inked by President George W. Bush in October -- and which has failed to reverse the plummetting US economy.

"There's going to be real significant investment, whether it's 600 billion dollars or more, or 700 billion dollars. The clear notion is, it's a number no-one thought about a year ago," he said.

Japan, too, took another step to jumpstart its moribund economy, drafting a record 88.55-trillion-yen (1.01-trillion-dollar) budget for fiscal year 2009 -- up 6.6 percent from the initial budget for this fiscal year.

The increase reflects an emergency economic package that Prime Minister Taro Aso announced earlier this month in a fresh bid to stave off a prolonged recession in the world's second-largest economy.

In Europe, the Irish government said it was injecting 5.5 billion euros (7.6 billion dollars) to recapitalise three major banks: Anglo Irish Bank, Bank of Ireland and Allied Irish Banks.

The government's move follows revelations last week that Anglo Irish's chairman and former chief executive, Sean FitzPatrick, failed to disclose an 87-million-euro loan from the bank. He resigned on Thursday.

The Luxembourg subsidiary of embattled Icelandic bank Kaupthing got a rescue offer from a group of Arab investors, the Luxembourg government has confirmed.

"Besides the signature of the Belgian state, this agreement needs the acceptance of the creditor banks," the government said in a statement Saturday about the offer.

Kaupthing Luxembourg was placed in suspension of payments in October following the near collapse of Iceland's once-booming financial sector under the weight of the worldwide credit crunch. Deposits in both Luxembourg and Belgium have been frozen ever since.

At least one German banker, however, thinks the doom-and-gloom forecasts are overblown.

"Some compare the situation to that of 1929, others talk about the worst crisis in near memory," said Wolfgang Sprissler, head of the German bank HypoVereinsbank (HVB) in an interview with the Sueddeutsche Zeitung to appear Monday.

"It bothers me that the institutes in their studies try to outdo each other with more pessimistic scenarios," he said, adding that what is needed are signs of "optimism."

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.