Gloom-and-doom scenarios are part and parcel of the package that comes when there is a major financial crisis in the market. It is said that when the US catches a cold, the world gets pneumonia. It hasn't been any different this time too. CITIGROUP today named Robert Rubin chairman and Sir Win Bischoff interim CEO after Charles Prince resigned amid billions of dollars in losses on mortgage-related securities. The company also said it will write off between $8 billion and $11 billion to reflect the declining value of subprime-mortgage-related securities since Sept. 30.Citigroup's New Meltdown is blamed on Credit Default Derivatives. (The problem at Citicorp is over the counter credit DEFAULT derivatives. This is not a revelation to be passed over lightly, but rather the next MAJOR variety of over the counter derivatives subject to a meltdown. This is very big. Merrill and Citi are two of the four majors and for all practical purposes the only dealers who granted these over the counter derivatives.)
In today's global financial environment, you have two schools of thought working in tandem – the pessimists and the optimists. I was listening to an investment banker, Jim Rogers, who was speaking at a hedge fund conference. According to him, he made predictions three years ago that investment banks would lose a lot of money on housing credits and today's events would seem to lend credence to his foresight. His advice in short is: sell US investment banks, US housing stocks (which he thinks will continue to go down), US dollar, avoid India and Russia; and invest in China and commodities.
He believes that the dollar is flawed; the US now is the biggest debtor nation going deeper into debt by a trillion dollars every 15 months, and US Fed chairman, Ben Bernanke continues to make "horrible mistakes" and America has given him the printing press which will have serious problems. I wish Jim Rogers reads Steve Conover on http://optimist123.com/ . He writes that one cannot ignore the good news the first estimate of third quarter economic growth came in better than expected, and that includes not just the overall economy, but also its net effect on a per person basis: real disposable income per person is up 3.1% over year ago. (The population is growing, but real after-tax disposable income is growing faster.) Good news. The first estimate of third quarter economic growth came in better than expected, and that includes not just the overall economy, but also its net effect on a per person basis: real disposable income per person is up 3.1% over year ago. (The population is growing, but real after-tax disposable income is growing faster.)
Best Debt Clock in the USA: by 'The Skeptical Optimist'
Total Debt = $ 8,981,740,158,
Public Debt =$ 4,963,790,115,131.42
GDP = $13,994,554,411,659.06
Total Debt-to-GDP Ratio= 64.18025513%
Public Debt-to-GDP Ratio= 35.46943591%
I hope above adequately answers Jim Rogers concerns on 'US now is the biggest debtor nation going deeper into debt by a trillion dollars every 15 months.' "Both debt clocks are currently ticking backwards, indicating that the burden of the federal debt is decreasing. Does he consider that good news?"
Rogers's views all in all seem to epitomize the dark clouds looming over Wall Street and the US economy in general. In my opinion, such advice and predictions are a bit off. Rogers's exit from housing 3 years ago means that he missed the boat when "serious profits" were being made in the sector that was riding at its peak; as an investor. The stocks' ability to race higher, even as the price of just about every commodity soars, can be seen in light of Labor Department report on third-quarter productivity. The productivity report Wednesday could allay some of that concern, according to Ed Yardeni, president of Yardeni Research. A highly productive economy allows for robust growth with subdued inflation; he expects the report to confirm such conditions' presence. Mr. Yardeni prefers to point to the positive aspects of rising commodity prices. They "have a very high correlation with corporate profits," he said, and are "the best real-time indicators of industrial activity."
"Commodities from oil to gold to wheat are confirming that the global economy continued to boom through the summer credit crunch," he said. "It supports the notion that the global boom has a life of its own apart from the subprime mortgage crisis and the U.S. housing market slump." A healthy third-quarter productivity report could extend the boom.
I join optimists like Stein who believe that the sky is not falling, and the reasons are simple. First that the Fed is not going to allow the big bank to fail. If the big banks in New York start to look really shaky which is a far-fetched possibility in itself, the Federal Reserve has all kinds of options to pick from. They can buy assets, even junky assets, and replace them with solid cash dollars. They did it before and will do it again. The Fed is not about to let these financial institutions fail, as the cost of failure would be exorbitant and detrimental to the nation and the world, so they would eliminate any chances of that happening. This very fact, on its own, removes a large slice of fear.
Secondly, the merger-and-acquisition business is reviving. Several very large private equity and public mergers-and-acquisitions are getting financing, like First Data and Allison Transmission, which is requiring higher interest rates than originally forecast. They are still getting done even when some gurus predicted that the whole merger-and-acquisition flow would dwindle to a trickle. Merger-and-acquisition is quite a significant prop under Wall Street, not the largest, but a good crutch nevertheless. If it stays even fairly strong, it would boost the market and be beneficial to investors. More than that, if the spread between low-rated debt used in mergers-and-acquisitions and risk-free Treasuries remains as low as it is, it is a sign that credit markets are nowhere near "frozen," as some experts would have us believe. Even if the channels of credit are not as open as they were a few months ago, it is still a good sign for commerce.
Thirdly, the housing sector, down drastically with at least 70% erosion of its values from where it was 18 months ago, is correcting dramatically, in part, by a surge in exports. Certainly, this correction has some way to go and exports are not a big enough portion of the economy to completely offset the losses in housing, but they are nevertheless an offset, especially in certain sections of the country like the upper Midwest that has really been suffering. Fourth, Federal and state spending remain extremely strong, which is an automatic stabilizer that keeps a huge segment of the workforce employed and buying products and services. The defense sector is especially strong and will continue to remain so for some time to come.
Last but not the least, there is still severe labour shortages in almost every area in the US. Barring upper Midwest, white-collar and sales jobs are going begging everywhere else in the country. As a general rule, recessions do not occur in periods of acute labour shortage. Indeed, one indicator of a recession would normally be serious employment, which is not the case, going by the latest US jobs rate data release.
In an article Productivity May Explain the Market by CONRAD DE AENLLE Mr. Yardeni believes that we are living through "the greatest global boom of all time" and that the productivity report will help to confirm that by coming in with a gain of about 3 percent. "That's very bullish because it suggests that we can have upward pressure on commodity prices and materials costs reflecting a global boom without spilling over into core inflation," he said. "It means the Fed doesn't have to raise interest rates." He said the productivity rate could touch 4 percent if the construction industry is removed from the equation. "For commodities and stocks it's a very bullish scenario, and for bonds it's not so bad, either," he said. "The situation is like Goldilocks on steroids ."
Notwithstanding that, if the market is pricing stocks as if there will be a major recession and pricing financials as if there will be a major collapse in New York, one may be look into these announcements as opportunities. It is not a smooth ride for sure, however today; the Institute for Supply Management announced its survey on nonmanufacturing segments of the economy. The Bloomberg poll forecasted an index reading of 54 for October, down from 54.8 in September it actually came at 55.8.if times are better than Wall Street is betting, then one ought to bet against Wall Street perhaps and take advantage of their panic.