391

American Consumption

The U.S. consumer is in a foul mood, and the effects on investors and the economy are likely to be harsh.

The Conference Board said on Oct. 28 that its consumer confidence index has dropped to an all-time low, from 61.4 in September to 38 in October. Americans were partly reacting to what they saw on the news in the past month: A plunge in the stock market, the dysfunctional credit markets, the failure of major financial firms, passage of a $700-billion bailout package in Washington, and a Presidential campaign focused on the economic crisis.

But consumers' fears aren't entirely a media creation (BusinessWeek.com, 10/28/08), economists say. Consumers are starting to feel the economic squeeze where they live.

Keith Hembre, chief economist at FAF Advisors, identifies three main culprits "conspiring to substantially depress household confidence": deteriorating asset markets, credit markets, and labor markets.

Asset market problems would include the quarterly retirement plan statements that showed a big drop in many people's net worth from declining investment—on top of the increasingly apparent impact of falling home values. Credit problems mean consumers can't borrow as easily to make purchases, from washing machines to houses. And the deteriorating job market is a result of falling profits in a variety of sectors, not just the financial industry. "With good reason, they're concerned about their jobs and the value of their homes and 401(k)s," says Stuart Hoffman, chief economist at PNC Financial Services (PNC).

The impact on the economy from this crisis of confidence may be even more doom and gloom. "When people believe there will be a recession, there will be a recession," says Jerry Webman, chief economist for OppenheimerFunds (OPY).

Americans can be expected to cut back on spending and to augment their savings accounts for tough times ahead. But that saving, however virtuous, will rob the rest of the economy of important revenue. That's a phenomenon economist John Maynard Keynes called the "paradox of thrift."

For almost two decades, Americans, known as the world's shopaholics, have spent freely. Consumer spending has increased steadily for 17 years ever since a mild decline in the last quarter of 1991.

But because of declining confidence and other factors such as the tough job market, many economists say they expect consumer spending to fall by 3% or more in the third quarter of 2008. That would be the worst drop in consumption since 1981.

Hardest-hit may be the makers and sellers of more expensive items, says Michele Gambera, chief economist at Ibbotson Associates, a unit of Morningstar (MORN). "Depressed consumers do not purchase anything big ticket because they have to beef up their precautionary savings, their rainy day funds," he says. Appliance maker Whirlpool (WHR), for instance, sharply reduced earnings estimates on Oct. 28 and said it would cut 5,000 jobs by the end of 2009 because of the economic conditions.

The timing of the recent market turmoil couldn't be worse for U.S. retailers, which are highly dependent on the holiday season. "It's going to be a tough holiday season," Hembre says. "Every indication is that people are not inclined to spend," Webman adds. The stocks of department stores Macy's (M) and Nordstrom (JWN) have lost nearly half their value in the past month, partly reflecting those holiday worries.

Discount stores such as Wal-Mart (WMT) and Target (TGT) also have taken their lumps, with Wal-Mart down about 9% in the past month and Target off 25%. "We continue to expect consumers to migrate toward discounters, off-price, and mass-merchant retailers during the upcoming holiday spending season. However, we believe that even these retail segments will experience slower trends relative to recent month run-rates," wrote Brian S. Postol, senior retail analyst at Jesup & Lamont (JLI) earlier this month.

At the end of one of the most fearful months in modern U.S. economic history, are there reasons for hope when it comes to the nation's consumers?

Hembre pins some hope on a stimulus package that could be approved by Congress and the next President in early 2009.

Hoffman points out that gas prices are falling fast, from above $4 per gallon during the summer to below $3 now. "One silver lining is that gasoline is going to save people a lot of money in the next couple months," Hoffman says.

The reality of smaller fuel bills didn't show up in the Oct. 28 consumer confidence survey. Fuel price declines take away a main driver of inflation, but consumers in the survey actually expressed more worries about inflation. "Though seemingly irrational, this propensity to provide pessimistic answers to all survey questions may capture the toxic combination of fear and anger that is rippling through the system," said Action Economics in an Oct. 28 report.

Many economists point out there is one positive effect of Americans cutting back spending. Yes, the short-term effects on the economy could be destructive, but Americans do need to save more. "In the long term, if consumers were trying harder to live within their means, we would have a more solid economy," Gambera says.

But Americans can't save more if they're not bringing home paychecks. With credit markets frozen, bank financing is scarce and unsolicited credit card offers aren't showing up in the mail as often. "It's going to be hard for consumers to borrow their way out of weak consumption," Webman says. Instead, the formerly free-spending American will have to earn his way back into shopping mode.

Unfortunately, the labor market may not cooperate. Economists expect the October unemployment rate to rise from 6.1% to 6.3%. Ironically, by saving their hard-earned money this holiday season, Americans could push that jobless rate even higher in coming months. The consumers' winter of discontent could grow colder and gloomier.

Source - Business Week

Moon Chips

Peak Coal; Soon

Coal provides over a quarter of the world's primary energy needs and generates 40 per cent of the world's electricity. Two thirds of global steel production depends on coal.

Global consumption of coal is growing faster than that of oil or natural gas - a reverse of the situation in earlier decades. From 2000 to 2005, coal extraction expanded at an average of 4.8 per cent per year compared to 1.6 per cent per year for oil: although world natural gas consumption had been racing ahead in past years, in 2005 it actually fell slightly.

Looking to the future, many analysts who are concerned about emerging supply constraints for oil and gas foresee a compensating shift to lower-quality fuels. Coal can be converted to a gaseous or liquid fuel, and coal gasification and coal-to-liquids plants are being constructed at record rates.

This expanded use of coal is worrisome to advocates of policies to protect the global climate, some of whom place great hopes in new (mostly untested) technologies to capture and sequester carbon from coal gasification. With or without such technologies, there will almost certainly be more coal in our near future.

According to the widely accepted view, at current production levels proven coal reserves will last 155 years (this according to the World Coal Institute). The US Department of Energy (USDoE) projects annual global coal consumption to grow 2.5 per cent a year through 2030, by which time world consumption will be nearly double that of today.

A startling report: less than we thought!

However, future scenarios for global coal consumption are cast into doubt by two recent European studies on world coal supplies. The first, Coal: Resources and Future Production (PDF 630KB), published on April 5 by the Energy Watch Group, which reports to the German Parliament, found that global coal production could peak in as few as 15 years. This astonishing conclusion was based on a careful analysis of recent reserves revisions for several nations.

The report's authors (Werner Zittel and Jorg Schindler) note that, with regard to global coal reserves, "the data quality is very unreliable", especially for China, South Asia, and the Former Soviet Union countries. Some nations (such as Vietnam) have not updated their proved reserves for decades, in some instances not since the 1960s. China's last update was in 1992; since then, 20 per cent of its reserves have been consumed, though this is not revealed in official figures.

However, since 1986 all nations with significant coal resources (except India and Australia) that have made the effort to update their reserves estimates have reported substantial downward revisions. Some countries - including Botswana, Germany, and the UK - have downgraded their reserves by more than 90 per cent. Poland's reserves are now 50 per cent smaller than was the case 20 years ago.

These downgrades cannot be explained by volumes produced during this period. The best explanation, say the EWG report's authors, is that nations now have better data from more thorough surveys. If that is the case, then future downward revisions are likely from countries that still rely on decades-old reserves estimates. Altogether, the world's reserves of coal have dwindled from 10 trillion tons of hard coal equivalent to 4.2 trillion tons in 2005 - a 60 per cent downward revision in 25 years.

China (the world's primary consumer) and the US (the nation with the largest reserves) are keys to the future of coal. China reports 55 years of coal reserves at current consumption rates. Subtracting quantities consumed since 1992, the last year reserves figures were updated, this declines to 40 to 45 years. However, the calculation assumes constant rates of usage, which is unrealistic since consumption is increasing rapidly. Already China has shifted from being a minor coal exporter to being a net coal importer. Moreover, we must factor in the peaking phenomenon common to the extraction of all non-renewable resources (the peak of production typically occurs long before the resource is exhausted).

The EWG report's authors, taking these factors into account, state: "it is likely that China will experience peak production within the next 5-15 years, followed by a steep decline." Only if China's reported coal reserves are in reality much larger than reported will Chinese coal production rates not peak "very soon" and fall rapidly.

The United States is the world's second-largest producer, surpassing the two next important producer states (India and Australia) by nearly a factor of three. Its reserves are so large that America has been called "the Saudi Arabia of coal". The US has already passed its peak of production for high-quality coal (from the Appalachian Mountains and the Illinois basin) and has seen production of bituminous coal decline since 1990. However, growing extraction of sub-bituminous coal in Wyoming has more than compensated for this.

Taking reserves into account, the EWG concludes that growth in total volumes can continue for 10 to 15 years. However, in terms of energy content US coal production peaked in 1998 at 598 million tons of oil equivalents (Mtoe); by 2005 this had fallen to 576 Mtoe.

Confirmation: a second study

The EWG study so contradicts widespread assumptions about future coal supplies that most energy analysts would probably prefer to ignore it. However, an even more recent study, The Future of Coal, by B. Kavalov and S. D. Peteves of the Institute for Energy (IFE), prepared for European Commission Joint Research Centre and not yet published, reaches similar conclusions.

Unlike the EWG team, Kavalov and Peteves do not attempt to forecast a peak in production. Future supply is discussed in terms of the familiar but often misleading reserves-to-production (R/P) ratio. Nevertheless, the IFG's conclusions broadly confirm the EWG report.

The three primary take-away conclusions from the newer study are as follows:

• "world proven reserves (i.e. the reserves that are economically recoverable at current economic and operating conditions) of coal are decreasing fast";
• "the bulk of coal production and exports is getting concentrated within a few countries and market players, which creates the risk of market imperfections"; and
• "coal production costs are steadily rising all over the world, due to the need to develop new fields, increasingly difficult geological conditions and additional infrastructure costs associated with the exploitation of new fields".

Early in the paper the authors ask, "Will coal be a fuel of the future?" Their disturbing conclusion, many pages later, is that "coal might not be so abundant, widely available and reliable as an energy source in the future". Along the way, they state "the world could run out of economically recoverable (at current economic and operating conditions) reserves of coal much earlier than widely anticipated". The authors also highlight problems noted in the EWG study having to do with differing grades of coal and the likelihood of supply problems arising first with the highest-grade ores.

All of this translates to higher coal prices in coming years. The conclusion is repeated throughout the IFE report: "[I]t is true that historically coal has been cheaper than oil and gas on an energy content basis. This may change, however ... The regional and country overview in the preceding chapter has revealed that coal recovery in most countries will incur higher production costs in future. Since international coal prices are still linked to production costs ... an increase in the global price levels of coal can be expected ..."

As prices for coal rise, "the relative gap between coal prices and oil and gas prices will most likely narrow", with the result that "the future world oil, gas and coal markets will most likely become increasingly inter-related and the energy market will tend to develop into a global market of hydrocarbons".

Implications for climate policy

Evidence that coal resource limits may constrain CO2 emissions would seem to be good news for climate protection advocates. However, the latter may be wary that industry-led opponents of emissions-reduction policies will seize on this new data to argue that governments needn't do anything about emissions, since rates of coal extraction will decline in any case.

Nevertheless it makes more sense for climate activists to embrace the news and use it to advantage, rather than to deny or marginalise it. They can argue that, even if society finds steep voluntary cuts in the use of coal to be economically onerous, there is really no alternative: declines in production will happen anyway, so it is better to cut consumption proactively than wait and be faced with shortages and price volatility later.

The findings of the 2005 USDoE-funded Hirsch report (PDF 1.17MB) (Peak of World Oil Production: Impacts, Mitigation and Risk Management) regarding society's vulnerability to peak oil apply also to peak coal: time will be needed in order for society to adapt proactively to a resource-constrained environment. A failure to begin now to reduce reliance on coal will mean much greater economic hardship when the peak arrives.

The new information about coal tells us that even if the economic price for carbon reduction is high, we have no choice but to proceed. There is no "business-as-usual" option, even ignoring environmental impacts, given the resource constraints. Nations that are currently dependent on coal - China and the US especially - would be wise to begin reducing consumption now, not only in the interests of climate protection, but also to reduce societal vulnerability arising from dependence on a resource that will soon become more scarce and expensive.

The reports' findings are not uniformly encouraging for climate matters, though. The IFE authors suggest that price increases for coal may discourage deployment of technologies to capture and bury carbon to reduce greenhouse gas emissions: in poorer countries, "producing cheap and affordable electricity is more important than producing environmentally friendly electricity".

A wake-up call on coal

Taken together, the EWG and IFE reports deliver a shocking message. For a world already concerned about future oil supplies, uncertainties about coal undercut one of the primary strategies - turning supposedly abundant coal into a liquid fuel - that is being touted for maintaining global transport networks.

The sustainability of China's economic growth, which has largely been based on a rapid surge in coal consumption, is thrown into question. And the ability of the US to maintain its coal-powered electricity grids in coming decades is also cast into doubt.

In summary, we now have two authoritative studies reaching largely consistent conclusions with devastating implications for the global economy. Surely these studies deserve follow-up reviews of the data by the International Energy Agency. If the EWG and IFE conclusions hold, the world will need to respond quickly with an enormous shift in the directions of energy conservation and development of renewable sources of electricity.

Climate concerns are already drawing some nations in these directions; however, even nations leading the efforts may not be proceeding fast enough. For China and the United States, the world's two most coal-dependent countries, the message could not be clearer: whether or not global climate concerns are taken seriously, it is time to fundamentally revise the current energy paradigm.

Source - Energy Bulletin

Eden

Collapse Indicator - Volvo Sales

The depth of the recession was revealed today as truckmaker Volvo admitted demand across the Continent has crashed by 99.7% as it took orders for just 115 new lorries in the last three months.

That compares to orders totalling 41,970 in the third quarter of 2007. Global orders for Volvo slumped 55% in the last three months while Scania, of which Volvo has majority control, said its western Europe truck orders collapsed by 69%.

Volvo, which also makes trucks under the Renault and Mack brands, reported a 37% plunge in third-quarter earnings to £230m.

'The downturn in the economy has been significantly exacerbated by the global financial crisis,' the company said. 'The important European market has declined significantly while North America and Japan continue to show weak demand.'

Volvo indicated that there could be thousands of job losses. It has already said 1400 jobs are going, and yesterday revealed that 850 jobs would be axed in its division making heavy construction vehicles.

Source - This Is Money

Unreal

European Meltdown

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.

Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.

Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.

Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.

The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.

Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.

The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

Source - Telegraph

Volupte

Competition For Bailouts

The bailout is now the hottest lobbying game in town.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

These groups argue that the credit squeeze is so severe and the risks to the economy so dire that their industries need financial support as well.

The Treasury is considering requests from a variety of industries, but has not decided whether to expand the program, officials said Saturday.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks. The Treasury's plan is intended to bolster banks' tattered balance sheets and get them to resume making loans.

As the Treasury now interprets it, these additional groups would not participate in the bank stock program. They could receive help from a separate part of the $700 billion rescue that will buy bad assets from financial institutions.

Steve Bartlett, the president of the Roundtable, urged the Treasury to broaden the definition of those eligible for the stock purchase program.

"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

Referring to U.S. subsidiaries of foreign companies, Bartlett said, "This is a global crisis and to not recognize the U.S. firms controlled by foreign banks or companies would create further impediment to the market's recovery."

A financial industry official said Treasury Secretary Henry Paulson met over the past week with various groups, including hedge fund managers, that were petitioning for assistance. The official spoke on condition of anonymity because the Treasury has not made a decision.

Some insurers technically would be eligible for stock purchases now if they own subsidiaries that are savings and loan institutions regulated by the Office of Thrift Supervision.

Last month, American International Group, the country's largest insurance company, received an $85 billion loan from the Federal Reserve. Since then, it has gotten further support in an effort to withstand the biggest upheavals on Wall Street since the Great Depression.

Complicating the government's decision-making is that the Bush administration will not be in charge after Jan. 20. Paulson, who has said he has no intention of staying on the job, has pledged to consult with both campaigns on his bailout actions.

Democrat Barack Obama's presidential campaign said Friday it supported the effort by the auto industry to get money from the $250 billion made available for stock purchases. That would be in addition to $25 billion recently approved by Congress for low-interest loans to help the struggling industry retool and build fuel efficient vehicles.

The debate over expanding the bailout comes as the Treasury is rushing to get money out the door to the primary recipients: banks that sharply curtailed lending after suffering billions of dollars of losses on mortgage-related assets as home foreclosures soared in the housing slump.

Lawmakers are pressuring the Treasury to do more in the foreclosure area, as well.

Sheila Bair, head of the Federal Deposit Insurance Corp., told Congress about efforts to provide government-backed loan guarantees for mortgages that are reworked to help homeowners in danger of default. That would give banks an incentive to speed up refinancing efforts because the government would back part of the reworked loan.

The Treasury also is moving ahead to get bank stock purchases approved. It announced on Oct. 14 that it was spending $125 billion to buy stock in nine of the largest financial institutions. An announcement was expected Friday about a second round involving 20 to 22 other banks.

But it was decided each bank would announce its own agreements with the Treasury, out of concern that excluded banks could suffer a stock sell-off from disappointed investors.

PNC Financial Services Group Inc. announced Friday it was acquiring National City Corp. for $5.58 billion, in what was the first instance of a bank using fresh investments from the bailout program to make an acquisition. PNC said it had received $7.7 billion in cash through selling stock to the government under the program.

Source - Associated Press

Garden

Auto-Destruct

The Big Three could soon become the Big Two. Is even that too many?

The question of whether all three Detroit auto makers will survive is out there, based largely on the inability of the debt-laden companies to get access to funding. General Motors is desperate enough for cash to consider merging with Chrysler. On Oct. 6, Fitch downgraded Ford Motor and Ford Motor Credit to CCC, the lowest junk rating. Deutsche Bank’s Rod Lache wrote Sunday that the auto industry may survive because of federal bailouts and restructuring. But, he wrote, “based on our belief that at least two of the U.S. Big Three automakers could reach minimum cash levels within the next 12 months, we continue to assess the risks to our universe.”

How close are we to an “Omega Man” scenario? Lache, who expects that in the event of a serious cash crunch “sales among the Big Three will decline virtually overnight,” provides a nice overview of what would happen to the Big Three-dependent businesses: auto-parts suppliers and retailers including American Axle, Autoliv, BorgWarner, Johnson Controls, Lear, Asbury and AutoNation.

Debt covenants blown: Lache expects American Axle, Lear, Asbury and AutoNation to all blow their debt covenants if the Big Three U.S. auto makers continue to struggle for cash. That will hit the retailers’ and suppliers’ shares hard. “In the current credit environment, the shares of any company potentially needing to negotiate credit facility amendments have been penalized severely,” Lache said.

Potential supplier bankruptcies: In an Oct. 6 report, credit rater Fitch wrote that production declines, lack of access to capital and higher commodity prices will conspire to spur bankruptcy filings among auto suppliers. “The potential contraction of trade credit throughout the industry, and the critical nature of trade credit to the capital structure of the supply industry and the Detroit Three, poses a high degree of risk in the event that capital market conditions continue to contract,” Fitch analysts said.

Who would suffer the most?: A tie between American Axle and Magna International. American Axle rakes in 78% of its sales from GM North America–by far the largest concentration of any of the suppliers to any of the auto makers. American Axle would see $832 million in lost sales from GM, according to Lache’s analysis. Magna International would suffer $1.2 billion in lost sales if GM went bankrupt, another $1.3 billion from a Ford bankruptcy and $1.5 billion from Chrysler.

Brands will be cut. No matter what: Credit Suisse analysts say the Big Three are simply stuck with too much stock. Lache noted, “outside observers have long questioned GM’s ability to sustain 8 distinct brands in North America. Those questions have only intensified as GM’s market share has drifted down towards 20%. And those questions would get stronger still if GM’s brands are increased from 8 to 11. In a worst case scenario, the cannibalization of GM and Chrysler products could negate cost savings, leaving GM with $16 billion more debt, 3 more brands, and 3,500 more dealers.”

Source - Wall Street Journal

Ethereal

Wall Street Phun

Traders and investment bankers might have more to worry about than dwindling bonus pools this year as mass firings on Wall Street are set to hit a record.

The fallout from this year's global credit crisis has claimed jobs throughout Wall Street, from hedge fund managers to floor traders and beyond. More than 110,000 people have lost their jobs so far this year, and some industry experts forecast it could come close to 200,000 before the year is over.

Even the financial industry's biggest name isn't immune. Goldman Sachs Group Inc., the world's biggest investment bank, made plans Thursday to cut 3,200 positions from its staff of 32,000. Barclays Capital is in the midst of purging 3,000 jobs as part of its takeover of Lehman Bros., and Bank of America Corp.'s acquisition of Merrill Lynch & Co. is sure to add thousands more.

Major U.S. financial companies are getting rid of redundancies caused by this year's rapid-fire consolidation. They are also adapting to an environment of more regulation, less risk and dwindling profits.

"Wall Street the way we know it is, frankly, gone," said Michael Williams, dean of the graduate school of business at Touro College in New York. "This was inevitable because there's just not enough money out there to support the huge staffs these banks and investment banks had before."

Williams and other analysts believe this next wave of cutbacks will be the biggest the U.S. financial industry has faced since massive bank failures in the 1930s.

He believes up to 250,000 financial workers -- perhaps even more -- could find themselves out of work by the second quarter of next year.

U.S. financial services companies have cut 111,201 positions through September, on top of 153,105 made last year, according to Chicago-based outplacement firm Challenger, Gray & Christmas. The Securities Industry and Financial Markets Assn. said there were currently 867,400 people employed by their members, which include securities firms, brokerages, stock exchanges and banks.

Source - Los Angeles Times

Emerging

Chinese Factories Shutter Down

In the good old days — oh, three months ago — Tao Shoulong would prowl the streets of this ancient city in his Mercedes-Benz. His wife and partner, Yan Qi, would cruise around in her Toyota Land Cruiser. Together, they would drink into the night with clients, suppliers and creditors, hatching plans to expand their Zhejiang River Dragon Textile Printing & Dyeing Co.

Tao built River Dragon from a start-up with four employees into one of China's biggest textile printing firms in just five years. He had even grander dreams: He wanted to see his company's stock trade on Nasdaq alongside the likes of Microsoft and Intel.

The dreams are dead. River Dragon shut down on Oct. 7. Tao and Yan have vanished, leaving behind more than $290 million in debt and a lot of anger in this city 140 miles south of Shanghai in the Yangtze River Delta. The company's demise put 4,000 workers on the street and jilted hundreds of suppliers and creditors.

The speedy rise — and speedier fall — of River Dragon is a depressingly familiar story in China these days. Thousands of Chinese factories have shuttered in the past year, done in by an export-killing global slowdown that began with the collapse of the U.S. housing market and the ensuing financial crisis. Local textile merchant Fang Xingquan, a River Dragon creditor, is among many who believe a sharp drop-off in exports was a key factor in the company's demise.

China's National Bureau of Statistics this week said the nation's economy grew at an annual rate of 9% in the quarter ended Sept. 30, the lowest since 2003. The state-run Xinhua news agency said the government is considering a series of actions to boost exports and stimulate home sales.

Many economists, including Yu Yongding of the Chinese Academy of Social Sciences, believe that China needs to keep annual economic growth of 8% or 9% to absorb the 24 million people entering the labor force every year or risk social instability.

Earlier this month, the International Monetary Fund predicted that Chinese economic growth would cool from 2007's sizzling 11.9% to 9.7% this year and 9.3% in 2009. Private forecasters are even more pessimistic. UBS Investment Research, for instance, forecasts 8% growth in 2009.

"China is being hit over the head by both the global crisis and the domestic slowdown," says Stephen Green, economist at Standard Chartered Bank in Shanghai.

Exports account for nearly 38% of China's economic output. JPMorgan Chase calculates that Chinese exports fall 5.7 percentage points every time global economic growth shrinks by a percentage point. And the IMF is predicting that global growth will drop 2 percentage points — from 5% last year to 3% in 2009. Chinese appliance maker Haier has already seen export growth drop to 10% the first three quarters of this year from 30% a year earlier, the official English-language China Daily newspaper reported.

What happens to China has big implications globally: China contributed 17% of world economic growth last year, the same as the United States, according to the United Nations.

Home prices collapsing

The Chinese economy is absorbing another blow beyond crumbling exports: collapsing home prices. Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, D.C., reckons a slowdown in construction could shave another 1 to 2 percentage points off China's economic growth.

"The property bubble is already starting to burst," says Yan Yu, a business management scholar at Peking University, researching the export center of Dongguan in southern Guangdong province. "House prices here in Dongguan have fallen by up to 50% this year," leaving many homeowners owing more on their mortgages than their homes are worth.

"People have worked all their lives and believed the hype and bought overvalued properties, then saw their savings vanish," says independent economist Andy Xie in Shanghai. "That carries more political risk" than rising joblessness.

The good news: The forecast growth rates are still pretty impressive by any other economy's standards; Chinese exports have proved surprisingly resilient, growing nearly 22% in September from a year earlier; and the government in Beijing is sitting on enough cash — $1.8 trillion in foreign exchange reserves — to go on a spending spree if needed to rescue the Chinese economy from catastrophe.

"Chinese authorities appear to be well aware of the global economic situation," JPMorgan Chase reported this month. The bank expects government to turn the spigot on spending, quadrupling the budget deficit to the equivalent of 2% of economic output from 0.5% this year.

The authorities aren't going to save everyone. The Chinese government has put pressure on small firms that foul the environment, pay miserly wages and turn out cheap products. "Beijing no longer wants to be the world's sweatshop for junk," CLSA Asia-Pacific Markets says in a recent report.

First, China cut tax breaks for exporters and imposed new export taxes on polluters, even targeting producers of disposable chopsticks. Then it introduced a labor law in January, requiring companies to give workers written contracts and making it harder for them to lay off employees or to hire informal part-time help.

The combination of tougher regulations, weakening exports, rising costs and a stronger Chinese currency has hammered thousands of small factories. The pain has been especially agonizing in Guangdong, a low-cost manufacturing center across the border from Hong Kong in southern China.

Guangdong's exports rose just 14% the first seven months of 2008 after growing 27% a year earlier. Industrial profits were up just 4% this year through May, compared with 49% a year earlier and puny compared with 21% growth nationwide. "Guangdong's weak performance is a signal of the government's determination to restructure the low-value-added export process sector and to force out of business firms that abuse labor and the environment," CLSA concluded.

Trouble in toyland

Firms that were already struggling with narrow profit margins have been squeezed. More than half of all China's toy exporters — 3,631 firms — shut their doors the first half of the year, the official Xinhua news agency reported. "Many toy factories have gone bankrupt this year," says Luo Yunzhang, founder of toy exporter Guangzhou Sixiren Toy, which makes playground equipment for Ohio-based Little Tikes, among other products.

"We saw exports start to dip in May, when the government began restricting businessmen's visits ahead of the (August) Olympic Games. … Now the global crisis is causing problems. When people are in difficulties, they spend less on things like toys," Luo says. Luo predicts that Sixiren's export revenue will drop by half this year, to $500,000.

China's textile industry is also enduring a deep slump. Textile exports have been tumbling since March. More than 10,000 small textile manufacturers went out of business the first half of this year alone, the government says. "The global crisis is seriously affecting the local textile industry," says Yu Xin of the China Chemical Fibers and Textile Consultancy in Hangzhou.

China's 30-year economic boom has produced towns that specialize in one product. There are shoe towns, zipper towns, air conditioner towns and sock towns. Shaoxing — a city of 4.3 million long known in China for opera, rice wine and scenic river vistas — has sold itself as China's Textile City.

The textile sector has been "an easy market, as it is not complicated, has low entry barriers and is a big employer," says Standard Chartered's Green. The local government gives tax breaks, and the industry has benefited from having a large number of suppliers and trained workers close by.

For a while, River Dragon looked like one of the winners. After working as a clerk at another firm, Tao started the company in 2003 with his wife, Yan, and four colleagues. River Dragon went public in Singapore two years ago, and Tao bought another textile firm last year, hoping the acquisition would give River Dragon the heft to list on Nasdaq. In July, Yan, the company CEO, announced that River Dragon had landed a $10 million contract to supply apparel to 76 U.S. universities. But the deal proved a mirage. The end came quickly. A day after the factory stopped production, River Dragon stock was dropped from the Singapore exchange. Corporate documents are missing, and Tao and Yan are long gone.

"I think they are still on the run in China," says Fang, the supplier. He says he was stiffed for more than $860,000 when River Dragon went under.

Keeping society 'stable'

About 300 suppliers and creditors descended on the River Dragon complex, looting warehouses in the hopes of salvaging something. Hundreds of workers demonstrated in the streets, demanding back pay for August and September. Worried about the unrest, the local government coughed up cash. "The government paid the workers to keep society stable," textile analyst Yu says.

As their export orders dry up, Chinese manufacturers are likely to look for customers at home in China or in other emerging markets such as the Middle East and Africa. "Soon we will see vicious price competition between companies who have lost exports," Green says.

In Guangdong, toymaker Luo hopes to push domestic sales up to $1.5 million this year from $1 million in 2007.

"The situation in the U.S. and other countries will not turn around quickly," he says. "We must rely more on the domestic market, as Chinese consumers increasingly have money to spend on toys. Profits are very thin in the toy business, both in export and domestic sales. I prefer exports. … Domestic sales involve more work. There are more customers. But their orders are small."

Independent economist Xie says China became overly dependent on demand from the U.S. and Europe that was stoked by too much borrowed money and inflated asset values. "It's all coming to an end," he says. "You need to look elsewhere for livelihood. Americans cannot spend money anymore."

Source - USA Today

Gitana

Out With The Plastic

Long the darling of the credit-card industry, American Express Co. is looking awfully beaten-up lately.

The New York company's stock price is down 55% so far this year, including a 34% slide in October. The percentage of loans deemed uncollectible in a pool on which American Express reports monthly performance data reached 6.7% in September, up from 3.6% a year earlier. Earnings due after the closing bell Monday are expected to show a decline of more than 30% from last year's third quarter, according to Thomson Reuters.

Known for pitching cards to affluent customers who were required to pay off their purchases every month, AmEx made a big push in the past couple of years to let many of its customers keep a balance and pay the interest that accumulates. While the company, run since 2001 by Chief Executive Kenneth Chenault, has insisted it didn't lower credit standards, those loans are coming back to haunt AmEx now, analysts say.

Figures released last week show that about 4.1% of AmEx loans were at least 30 days late as of last month, up from 2.5% a year earlier. That's still fewer delinquencies than at other large card issuers, including Bank of America Corp.'s rate of 5.9% in the third quarter.

But as the economy weakens, delinquencies and charge-offs are expected by analysts to climb even higher.

Seeing trouble on the horizon, American Express earlier this year tightened lending on cards that let people carry a balance from month to month. Now the company is getting even tougher on users of its traditional "charge cards," which must be paid off every month.

For example, AmEx recently slapped a $1,100-a-month spending limit on John and Monica Bell's platinum AmEx charge card. The reason: AmEx customers who pay with plastic at the same places where Mrs. Bell shops and have the same mortgage lender have poor repayment histories, according to a letter sent by AmEx.

"They're holding me accountable for someone else's credit," fumes Mr. Bell, a real-estate agent in Chadds Ford, Pa. His mortgage loan came from Countrywide Financial Corp., now part of Bank of America, and his wife uses the AmEx card at retailers Wal-Mart Stores Inc. and the Marshalls unit of TJX Cos. and to fill up her tank at Sunoco Inc. gas stations.

The couple runs up about $5,000 a month on the card, which previously had no limit, and always pays on time, Mr. Bell says.

Michael O'Neill, a spokesman for American Express, confirms card users can be affected by the credit troubles of people with common behavior patterns "If they're spending in a way that looks like a pattern of other people who had credit trouble before them, it gets added into the mix," he says, though that one factor isn't enough to trigger tightened charge limits.

In addition, AmEx is reining in programs and perks that don't pay off for the company. Last week, AmEx notified holders of platinum and super-exclusive Centurion cards that it is canceling a program that provided a free ticket on U.S. airlines for each full-fare ticket purchased.

A company spokeswoman says only a small number of customers had used the program, launched last year.

Since American Express also operates a network that processes card transactions, it is feeling a double whammy from the weakening U.S. economy. Retail sales declined 1.2% in September, according to the Commerce Department, a sharper drop than reported in July and August. Consumer spending, which accounts for more than 70% of the U.S. economy, is expected to shrink even further in the fourth quarter, many economists predict.

Every other card issuer, from J.P. Morgan Chase & Co. to Capital One Financial Corp., is grappling with the same problems as more consumers shut their wallets and fall behind on their bills. American Express is especially vulnerable, though, because it is one of the few remaining stand-alone card companies. The company relies less on corporate travel and entertainment, and has lopped off the rest of its non-core businesses, including financial-advisory operations.

But the business model dubbed "spend-centric" by American Express for its focus on rewarding customers who use cards for everyday purchases will continue to be hammered as long as the economy is suffering.

"If people aren't spending, it's not a positive for AmEx," says John Williams, an analyst at Macquarie Research in New York. Although he expects the company's stock to trade near current levels for the next few months, Mr. Williams raised his rating to "neutral" from "sell" on Friday due to the stock's steep sell-off.

In New York Stock Exchange composite trading Friday at 4 p.m., American Express was down 1.3%, or 31 cents, to $23.33.

AmEx also is likely to face questions Monday from analysts and investors about the tumultuous capital markets, which the company relies on to securitize its loans.

The company has said its funding sources are stable and secure, partly because its two bank units can borrow through the Federal Reserve's discount window. Even if the company were shut out of the credit markets, it has enough liquidity to keep itself going for at least a year, American Express said in a securities filing earlier this month.

Source - Wall Street Journal

V

Ghawar Is Dying

August, 2001 - "Ghawar is dying." Could those three simple words signal the beginning of the end for the industrialized human civilization on Planet Earth? No one in a position of knowledge or authority has uttered them publicly yet, nor are they likely to for a few years to come. So we do have some time--but not much. Then again, they may have been said quietly two years ago and we would never know. Life's funny that way. Too bad this isn't a laughing matter.

Some two hundred kilometers east of Riyadh, Saudi Arabia, is a stretch of uninhabited and unremarkable desert in the Empty Quarter. This hot, desolate landscape sits above the largest oil field in the world: the Ghawar. It's a big chunk of nothing one hundred and fifty miles long and twenty-five miles wide, but thousands of meters below its surface lie seventy billion barrels of oil patiently waiting to be pumped out. They've waited for millions of years. A few more won't matter. And after that? After that, Ghawar will no longer be dying. It will be dead. Nothing left but sand and sinkholes.

Before you sit back, all smug and comfy with that seventy billion barrel figure, let me do a bit of quick math for you: that's only an 875 day supply of oil for the world at the current rate of use. (And that rate rises every year, just as the Ghawar's not unlimited oil reserves get lower.) Admittedly, the Ghawar is not our only source of oil. (And unless you happen to be Saudi, its not even your oil at all, now is it?) Still, the Ghawar is The Big One, and when it goes, things will change--forever. The only questions are: When will it happen, and how will we know?

The when is easy, if vague: it could happen at any time from two years ago to twenty years from now. But how will we know? That's a far more difficult question to answer.

I can picture a Mercedes Unimog lumbering alongside pipelines in the desert, stopping at each well head. At each stop, a man climbs down from the machine and walks over to the well. He looks and records a number from the gauge, then returns to the truck. This scene plays out over and over. It would take days to record all the numbers from the wells in the Ghawar. Still, it must be done. Those hand-written numbers are given to a field technician who dutifully records them, one well at a time, in a computer database. All that data gets sent to the Saudi government, where the numbers are studied, analyzed, and agonized over. If the figures are the same as or higher than the last figures, life is good. If not, then what?

What if the Ghawar IS dying? It would be easy enough to play with the numbers for a year or two--until the decline rate starts to speed up and the loss can't be hidden. After that? Plan B might call for a declared "voluntary reduction" in oil production to "stabilize the market at the optimum level." Yeah, right. How in the world would you ever know exactly how much oil is being pumped or shipped from a country half way around the world to other countries you've never seen? The answer is obvious: You wouldn't. You never will. C'est la vie.

Somewhere in Los Angeles, on quite literally the other side of the world, an SUV pulls into a gas station and the driver gets out. The pump is turned on and a gas tank is filled. Sure, it cost more here at this big, fancy franchise than it did over at that little independent station, but the indy was closed today. Matter of fact, hasn't it been closed for about a week now? What's up with that? Ah, well. At least it's not that much more. What's an extra buck or two to fill the tank? No big deal. Unless Ghawar is dying, in which case it is a very big deal indeed--and will get considerably bigger before it's all over. Maybe this was a sign of a weakening pulse?

You're Invited to the Funeral

Measured up against the big scheme of things, the death of Ghawar and our oil-powered industrial civilization will fall somewhere between the Black Plague of 14th Century Europe and the meteor that wiped out the dinosaurs. Unlike the plague, this will effect humans world-wide, but unlike the meteor, it will effect only humans. Chickens may some day cross the road with impunity. Animals both large and small will prosper (Hey, you try whaling in a row boat!) And the earth will undoubtedly cool off a bit. Too bad we all won't be here to enjoy it.

With the death of Ghawar will undoubtedly come the deaths of humans. Many humans, it would seem, the result of probably unavoidable wars for the last remaining oil to the much-predicted pandemics and mass starvation. Estimates on the sustainable limit to humans on this planet have ranged from an utterly dismal 1/70th of the current population (about 100 million) to an almost cheerful (by comparison) two billion. Keep in mind there's six billion of us here right now, so some of you will have to leave. You'll stay for the funeral, though, won't you? I mean, after all, Ghawar is dying.

I don't expect to be told. Politics and the global economy being what they are these days, I really can't picture anyone standing up in front of a row of television cameras and announcing to the world that the largest field of crude oil known to man is, in fact, drying up. What's Arabic for, "Ghawar is dying"? It doesn't matter. It's a phrase we'll never need to know--or hear. If it is the biggest, it will also be the last. By the time Ghawar begins to die--and by the time we hear about it--hundreds of other oil fields all over the world will also be dead and gone. Ghawar will still be pumping crude oil at an impressive rate as the industrial world of man comes to a creaking, painful halt. That's the irony of it, you see: by the time the Ghawar starts to run dry, we will have either found another way to get things done or simply stopped doing them. There's a very good chance that the last of the oil in the Ghawar will remain in the ground, untouched and unneeded, forever.

So is the Ghawar dying? Does it matter? There may come a time when all the SUVs in Los Angeles will roll to a tank-dry halt. After the riots and the wars, after the yelling and screaming and dying, what's left of humanity (if we have any humanity left) will stand up, dust itself off and get on with Life. The Ghawar, virtually unknown today, will be all but forgotten by then. The troubles of Saudi Arabia and the Middle East will cease to be a common feature of the nightly news, as they would no longer have anything to offer the West--nothing left to fight over. Just footnotes in a history book.

Cries and Whispers

Maybe what's called for here, as Blutto Blutowski so eloquently put it, is a stupid and futile gesture that could serve as a mind-bite for the masses--some bit of mysterious innuedno that could spread like backfence gossip or a clever teaser ad. Tell people the world is running out of oil and they glaze like a donut. We know the direct approach doesn't work. We have to be subtle. Devious. Underhanded. But without any actual outright lying. (The truth is, after all, so much more annoying!) So how about bumper stickers? Everybody reads them when they're stuck in traffic or stopped at a light. You do. I do. And if you read it on a bumper sticker, it must be true, right? All we need now is a whole pile of "Ghawar is Dying" bumper stickers. It need not say any more than that. The truth is always mysterious and seldom obvious. Let 'em figure it out for themselves. Of course, the ultimate irony would be to see that bumper sticker on a big SUV--the very thing that's draining the Ghawar to death. That's right up there with "Honk if you hate noise pollution"! HA!

Ghawar is dying. If you whisper it quietly, maybe people will listen. If not, the approaching silence will get their attention soon enough.

Source - New Colonist

Reflect

World Bank Successes

Top 5 Alarming World Poverty Statistics:

5. More than 800 million people suffer from malnutrition.

4. The United States spends 0.16% of its budget on aid to poor countries, the second lowest percentage among all developed countries.

3. A worker in Bangladesh making garments for Disney would have to work 210 years in order to earn what Disney’s CEO gets paid in one hour.

2. 35,000 children a day die from diseases related to malnutrition, or 1 every 2 seconds.

1. Over three billion people (roughly half the world’s population) live on less than two dollars a day.

Top 5 Alarming United States Poverty Statistics:

5. In 1968, the minimum wage was 86% of the living wage. By 1998, that figure had fallen to 64%.

4. On any given night, 750,000 Americans do not have shelter, or 1 in 400.

3. 40 million Americans do not have medical insurance, 0r 1 in 8.

2. 10 million Americans go hungry each day, 40% of them children.

1. In 1996, one in four Americans under 18 was living in poverty.

Top 10 Alarming United States Wealth Statistics:

10. Since 1950, Americans have used up more resources than everyone who ever lived on earth before 1950.

9. In 2000, CEO’s earned 475 times what their average workers made.

8. 57% of those listed on the 1997 Forbes 400 started life as millionaires.

7. Americans spend more on trash bags than 90 other countries spend on everything.

6. 27% of people earning over $100,000 agree that “I cannot afford to buy everything I really need.”

5. Only 15% of Americans report that they would be satisfied with a comfortable middle-class lifestyle.

4. The Unites States comprises 5% of the world’s population, yet accounts for 40% of its gasoline consumption.

3. The average size of a new home today is double what it was in the 1950’s.

2. The average American consumes 5 times more than a Mexican, 10 times more than a Chinese person, and 30 times more than someone from India.

1. If everyone in the world consumed at the same rate as Americans do, we would need six planet earths to meet the demand for resources.

Source - The Seminal

Eden

Banking Cataclysm In The Making

THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call.

Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion.

Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger, wants £7 billion, while Barclays needs £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would give time for the market to digest the impact of the moves.

One consequence of the deal might be that Lloyds could renegotiate the terms of the HBOS takeover, although both sides are still keen for the merger to take place.

An economist who declined to be named said: “This is the biggest risk of the UK’s balance sheet ever undertaken. No-one knows the extent of the toxic assets these banks are exposed to.”

Separately, the future of Morgan Stanley, the American investment bank, is also in doubt today following a sharp sell-off of shares and warnings of a possible credit downgrade from Moody’s the ratings agency.

Mitsubishi UFJ Financial Group is reviewing the terms of a $9 billion (£5.3 billion) capital injection into the bank and may launch a takeover. HSBC, Citigroup, JP Morgan and Deutsche Bank are also assessing the situation. Morgan Stanley’s market value has slumped to $13 billion.

The British bank rescue could leave the government owning 70% of HBOS and 50% of RBS. As a result it could take board seats at both companies and exercise control over future dividend payments.

Crisis talks were taking place this weekend between the Treasury, the Financial Services Authority, the Bank of England and heads of the four retail banks. As part of the fundraising it is likely that banks will also have to own up to future losses from their exposure to sub-prime mortgages and other financial instruments.

Mervyn King, the governor of the Bank of England, has told the banks to ask for more than they need. This is to make sure that their capital position is strengthened sufficiently to absorb shocks and to withstand a long recession. Further capital is also available and the Treasury has increased the total amount to £75 billion.

It is thought all parties believe a co-ordinated rescue is the way forward. Final details will be thrashed out tonight.

The way in which the money will be raised has also been simplified. The government may have to underwrite an issue of ordinary shares. This would give pre-emption rights to existing investors, and those shares not taken up will be owned by the government. These could be placed in a new bank reconstruction fund that would hold them until conditions improve.

King had insisted on the recapitalisation of the banks as a condition for other elements of last week’s bailout package, including a doubling of the special liquidity scheme from £100 billion to £200 billion and a new £250 billion guarantee of bank lending.

The Bank of England has also increased the stress test required for banks to prove that they are in a strong capital position. This is called its “core capital ratio” and it has been boosted from six to nine.

Banking sources say the combined loss of capital of the banks as a result of the credit crisis was £150 billion but some of that has already been made up by earlier capital-raising exercises and some will not be needed because the banks will be more constrained in their future lending.

The Bank has also been pushing for early action by the banks on raising capital. “They say there’s no excuse for delay,” said one banking source. “We need to get on with it.” Banks concede that executives will lose their jobs. Among them, Goodwin and his chairman, Sir Tom McKillop.

In addition, Barclays is trying to raise about £3 billion from Middle Eastern sovereign-wealth funds, including the Qatar Investment Authority, as well as Asian investment houses, including Japan’s Sumitomo Mitsui Banking Corporation.

US Treasury secretary Hank Paulson gave a clear indication late on Friday that he would stand behind Morgan Stanley and Goldman Sachs to prevent another collapse on the scale of Lehman Brothers.Both banks were hard hit by last week’s historic stock-market sell-off. Morgan Stanley’s stock dropped almost 60% last week, while Goldman’s fell 29%.

Paulson’s assurances followed the G7’s plans to tackle the economic crisis. “We did not speak to any specific firm today. We spoke about firms that were important and firms that were important systemically,” he said. Questions over continuing liabilities stemming from the collapse of Lehman Brothers, Washington Mutual and the Icelandic banks continue to rumble through the markets.

An auction process on Friday night determined that the collapse of Lehman Brothers will cost providers of credit default swaps an estimated $233 billion payout — which has to be paid in the next two weeks..

While much of the exposure is expected to sit with AIG, the insurance giant that has been partially nationalised, a number of banks are thought to have issued insurance against bank collapses that will now be called upon. Pressure is mounting on the International Accounting Standards Board to abandon its “mark-to-market” accounting principles, which many believe has been one of the key factors in causing the credit crisis.

The rules insist that assets be held on a bank’s book at the most recently traded market price. As the markets took fright from exotic credit derivatives, the prices fell well below what is considered to be their true economic value — leading to bigger than expected paper losses being taken by the banks. As the markets have crashed, the problem has become ever more acute.

On Friday night, America’s chief accounting body, the Financial Accounting Standards Board, revealed that it would suspend the mark-to-market rules to take account of extreme market conditions. Institutions will be able to use their own estimates of an asset’s worth instead. The move follows pressure from the US Securities and Exchange Commission.

In a “position” statement, the board said: “In determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available.”

Questions also persist about the collapse of the Icelandic institutions, and the knock-on effects of their demise. It has emerged that the FSA told the London-based capital-markets business of Kaupthing to move some of its £20m cash pile out of a bank account held with its Icelandic parent company “several months” before the bank collapsed last week.

A senior source at Kaupthing Singer & Friedlander Capital Markets, run by former KBC Peel Hunt boss Tim Cockcroft, said the cash had been moved into four or five UK bank accounts following concerns raised by the regulator.

The news suggests the regulator may have been flagging concerns about Iceland to business customers while local councils and consumers continued to deposit cash with the banks.

A handful of Treasury officials have grown concerned about the potential for conflicts of interest emerging between the advisers working on the bailout deal and the financial implications.

For example, Goldman Sachs, which is advising Royal Bank of Scotland, also has large financial exposures to the bank.

There have been calls within the Treasury for an independent advisory boutique like Blackstone or Greenhill to be appointed to monitor conflicts of interest, but it is understood that these calls have gone unnoticed so far.

Source - Times Online

Web

Latin American Economics

The booming prices for Venezuelan oil, Brazilian soy beans and Chilean copper that brought prosperity to Latin America are heading for a bust that threatens to erode the hard-won gains of its poor and newly emerging middle class.

The global financial meltdown is cooling demand for commodities, the engine that fueled more than a decade of growth and erased generations of suffocating international debt.

For Brazilian farmer Aldemire Rostirolla and millions of others who rode the boom, the new reality is sobering.

Rostirolla worked 18-hour days for a dozen-plus years to coax corn, sunflower and soy from his sprawling piece of savannah on the edge of the Amazon. Now he may have to let his fields lie fallow as prices plummet for his crops.

Worried they might not break even in their next harvest, the 54-year-old farmer and his neighbors aren't sure it's worth investing in tractors or fertilizer. Some may have to sell their land because they can no longer get the loans they need to finance planting and harvesting.

"The question everyone here is asking is: How much more will commodity prices fall?" Rostirolla asked.

Latin America's reliance on raw material exports has long kept its economies from diversifying, driving them to take on huge foreign debt and triggering some of the world's biggest defaults. But as prices soared in recent years, governments used that commodity cash to pay down debts and build up reserves.

This "war chest" of public savings could help the region combat the global credit crunch, possibly enabling a rebound by 2010, said Eduardo Levy-Yeyati, head of Latin America research at Barclay's Capital in New York.

"They're going to suffer the crisis, but they're going to suffer less" than they would have in the past, he said.

In the meantime, though, much damage could be done.

Prices for commodities including crops, metals, oil and other raw materials have dipped by a third from their July peak.

That kind of slump has an outsize impact on Latin America, where most economies still haven't diversified enough, and some rely on commodities exports for nearly half of government revenue and hundreds of millions of jobs.

"I predict a rather dark, unpleasant future in coming months," as exports, investment and lending decline simultaneously in an unprecedented triple-whammy, said Peter Hakim, president of the Inter-American Dialogue, a regional think tank in Washington D.C.

"Commodities alone could do a lot of damage, but when it comes in this combination, things could be much more explosive," he said.

Latin America's major stock indices have lost at least 20 percent of their value in the past two weeks as wary investors pull cash from emerging markets. Brazil's commodity-heavy benchmark Ibovespa index is leading losses, down 35 percent since Sept. 25.

Add to that the ways the financial crisis has dried up credit for farmers and mine operators, and analysts see no easy fix.

"We're in the eye of the storm, so it's difficult to determine whether this financial instability will be temporary or whether it will cause lasting harm," said Luis Moreno, president of the Inter-American Development Bank.

Investors worry that Argentina, one of the world's top grain exporters, may not be able to maintain a budget surplus and keep servicing its debt now that soy and wheat prices have sunk more than 40 percent from this year's record peak. Chile, the world's top copper producer, had its first trade deficit in eight years last month, after copper prices slid 45 percent since May.

The hardest-hit countries are likely to be oil-reliant Venezuela and Mexico, analysts say. Both draw more than 40 percent of their federal budgets from oil, which has dropped more than 45 percent to hover around $80 a barrel since hitting a record high of $147.27 on July 11.

Venezuelan officials insist they'll keep funding President Hugo Chavez's sweeping social programs, which have paid for everything from free eye surgeries for poor Latin Americans to cheap home heating oil in the U.S. Northeast.

And while Venezuelan Finance Minister Ali Rodriguez warned of "significant restrictions" in next year's budget, the only examples he gave were to slash parties, cars and cell phone use by government workers.

A commodities collapse "could put Chavez and all his massive expenditures in a very tight skirt," said David Fleischer, a political scientist at the University of Brasilia.

Meanwhile, in Mexico, America's third-largest oil supplier, falling crude prices have pushed the peso to record lows, prompting the Central Bank to auction $8.9 billion in reserves this week to stem the decline.

President Felipe Calderon unveiled $4.4 billion in emergency spending on roads, schools, hospitals and an oil refinery to create jobs and boost growth. But his treasury department still slashed its growth forecast for 2009 from 3 percent to 1.8 percent — one of the lowest in the region.

Poorer countries have fewer options.

In Bolivia, some hard-hit mining companies have pressed local officials to cut their water and electricity bills to make up for lost export income. Prices for zinc, Bolivia's top metal export, have tanked 70 percent from a 2006 high, forcing private mine operators to lay off workers.

In the Andean town of Potosi, clogged with Hummers brought in during boom times, struggling miners are now desperate to unload the luxury vehicles. But they can't find any buyers, said Limbert Paredes, manager of the Potosi Mineral Refiners Association.

"When the boom passes, you've partied away all the money you've earned over the last two years, and you're back in misery again," he said.

Source - AP

Ripples

Trade Slowdown Looms

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

So far the problem is mostly being felt in U.S. and South American ports, but observers say it is only a matter of time before it hits Canada.

"We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver.

The port troubles occur as financial institutions worldwide experience an unprecedented level of failures; even the strongest global banks are taking shelter in government bailouts. Tuesday, the U.K was expected to invest as much as £45-billion ($87.01-billion) in three of the country's biggest banks, while the U.S. government rushed to put in place its US$700-billion rescue package for beleaguered financial market players. Ottawa has so far resisted pleas for direct financial aid for exporters.

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship.

The Baltic Dry Goods Index, the main measure of shipping rates, is down 74% from its high back in May when trade with China was still strong.

"The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.

While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

Jason Myers, head of the Canadian Manufacturers and Exporters, said exporters across Canada are getting caught up in the turmoil as customers delay payments, forcing them to shoulder the cost.

"What some companies are saying is we can't pay you until our customer pays us, so it becomes a question of who bears the financial risk and the cost," Mr. Myers said. "We're hearing about it more and more."

What that means is that manufacturers are getting hit as revenue slows and long-time customers disappear from the order book altogether. As profits decline, investment in product development starts to fall, too, he said.

The Canadian Wheat Board, one of the world's biggest grain marketers, has yet to refuse a customer because of poor credit, according to a spokesperson. "As of this moment we haven't run into that problem," said Maureen Fitzhenry.

Officials at Viterra, Canada's leading grain handler, were not immediately available for comment.

The meltdown in financial markets has resulted in a dramatic slowdown in maritime trade, with major ports in Canada and the United States preparing for sharply reduced activity after several of the busiest years on record.

Statistics from the Port of Vancouver have yet to officially register a drop but at Long Beach and Los Angeles, among the biggest U.S ports, imports have already declined 9% this year.

Source - Financial Post

Pensive

Cancer = Industrial Civilization

The World Cancer Report states that cancer rates could increase by 50%, to 15 million new cases, by the year 2020. Cancer rates are higher amongst industrial nations, with the United States amongst the top five, according to the World Health Organization. In spite of advances in science and technology, toxic exposure from the environment, chemicals in our food, water supply, personal hygiene products, and household cleaning products contribute to our nation’s ill health.

In this ground-breaking segment from The People’s Guide to Health, Happiness and Longevity, DLD speaks with CPD about the startling health risks created by toxic chemicals in everyday cleaning products.

Toxins in Our Homes

CPD: With toxins all around us, making us sick, what products should we avoid? What should we be concerned with that could damage our health?

DLD: Virtually any product that is in your home may have toxic chemicals in it, because there are toxic chemicals in every type of product. If you are not currently attempting to buy non-toxic products, then you probably have hundreds of toxic chemicals in your home. You might find particleboard furniture that emits formaldehyde, and chemicals in synthetic wall-to-wall carpet, a wood stove, and a fireplace. In the kitchen, aluminum cookware, canned food, and cleaning products may contain toxic chemicals. Coffee and chocolate may contain very dangerous pesticides. Now, as I point to this list, I don’t want you to think that you can never drink coffee or you can never eat chocolate. You can. You just need to buy organic products. You don’t have to be 100 % nontoxic all the time. You need to avoid enough chemicals so that your body can naturally regenerate itself and naturally heal itself, so that your immune system can work properly.

When you’re in a nontoxic environment, your body detoxes. If you go into a toxic environment, you put toxic chemicals back into your body. One of the benefits of having a non-toxic home is that all the hours that you’re in your house, your body is detoxing. Then, if you go out in the world and you’re exposed to something, your body’s much stronger.

Toxins in our Body

CPD: How do these chemicals get into our bodies in the first place?

DLD: There are four ways chemicals come into your body. You can ingest them; they can get absorbed through your skin; you can inhale them, because they’re floating around in the air, and, they can get splashed into your eyes. Those are the only four roots of exposure, but there are many ways that your body tries to get rid of them. A lot of symptoms that we think of as just being common symptoms, that we might take an over-the-counter drug for, are actually symptoms of your body trying to get rid of something toxic.

Those symptoms would include: sweating, vomiting, diarrhea, excessive urination, mucus membrane secretions. How many times do we suppress those symptoms when our body’s trying to cleanse itself?

If you can’t get toxins out of your body, your body starts collecting them in your fat tissue, in your bones, in your cell membranes, and in various other organs. You can end up with all kinds of illnesses, including cancer and heart disease. Your endocrine system also gets affected by toxic chemicals and that affects every area of your body. It affects fertility, reproduction, sex drive; you could be depressed. A lot of people who are exposed to toxic chemicals end up having hypothyroidism, because the thyroid gland is very sensitive to toxic chemicals. It affects your ability to lose weight or gain weight or maintain a regular weight.

Our bodies have a tremendous ability to heal and regenerate themselves. When we’re sick, we think that illness is something wrong with our body. What illness means is that something is right with our body; it’s our body trying to correct the problems. We just need to let the symptoms do their job, and you’ll come out well in the end. Don’t try to suppress them.

Living “Green”

CPD: I think people are afraid of “going green,” in their homes. First, you have to research all these products, and then find alternatives. They are afraid it may be difficult, or costly. But that’s not true, is it, Debra?

DLD: Let’s talk about cleaning products for a minute, because cleaning products are one of the most toxic products you’re going to find in your home, and they’re also one of the easiest to change.

Everybody can wash their windows with vinegar and water. You can get rid of ammonia. If you look on cleaning products, a lot of them have warning labels that say “Caution” or “Danger.” Find the ones that have the skull and crossbones on it, and those are the ones you cannot use anymore.

Most people are sleeping on sheets and bed linens that are saturated with formaldehyde. Formaldehyde causes insomnia. You have people all over the country buying millions of dollars worth of sleeping pills; all they need to do is change their sheets. You could get rid of a lot of toxic chemicals, our world would be perfectly fine, and we’d still be able to do everything we’re doing. It’s just a process of learning a different way.

Source - Natural News