January 18th, 2009
09:57 AM GMT
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LONDON, England – Dear President Obama,

Enjoy your inauguration, and party like there is no tomorrow, because that day is about as much fun as you are going to have.

You have a daunting and unenviable task, fixing the worst financial crisis since the Great Depression. It's clear - what's happened to date hasn't restored confidence in the banking sector.

Much more will need to be done and it needs to be dramatic and bold. Already being discussed is setting up a bank that would acquire the banks' toxic debt.

The thinking seems solid enough; if the bad debt is taken off the books, that will mean fewer write downs, free up capital, and that could lead to more lending.

That was the original idea behind the $700 billion bank bailout cooked up by the Bush administration. But then it couldn't figure out how to price all that bad debt, and so they decided to give the banks capital instead. That left the bad debt sitting there, leading to the renewed lack of confidence in the banking system. So going back to the original idea is now once again in focus.

The other idea, of course, is to guarantee the toxic assets that remain on the banks' books, such as authorities did this past week for Bank of America.

None of this will be cheap. It's estimated that up to $1.2 trillion in new aid could be needed. Of course, that's on top of the massive amounts of money already thrown at the problem.

Which brings me to my final point, the ballooning budget deficit. It's estimated it will more than double this year to about $1.2 trillion, or 8.3 percent of GDP, the biggest budget deficit in the post-war period. And that figure doesn't include the proposed $825 billion economic stimulus package. You yourself have said there is the potential to have trillion-dollar deficits for years to come.

No wonder you've appointed a chief performance officer to see where savings can be made in the federal budget.

I realize you have no choice but to pull out all the stops to try and get the economy moving again. It, along with getting the banks lending again, is priority number one. But for the sake of the long term health of the economy, rein in the deficit as soon as it's possible.

The U.S. national debt keeps growing and could reach a mind boggling 400 percent of GDP by mid-century if current tax and spending policies are not addressed.

You've been dealt a tough hand. The weight of expectation on you is huge. You've tried to play down those expectations, but they remain.

So enjoy your inauguration day, enjoy the adulation, and the overwhelming good will and optimism you've engendered.

And as the recession lingers on, I hope the public will be as forgiving as they have been hopeful. The problems the economy and banking system face are more than one very well intentioned and articulate man can easily cure.

As your wife Michelle reminds us, you may be a gifted man, but at the end of day you are still just a man. I wish you the best of luck.

  • If you could write a letter to President Obama what would you say? Are you optimistic that he will be able to solve the economic and banking crisis?
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January 5th, 2009
10:22 AM GMT
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Unless you were invested in government bonds or cash, 2008 was a brutal year.
Given the severity of the equity downturn in 2008, a case can be made for a rebound in 2009.
Given the severity of the equity downturn in 2008, a case can be made for a rebound in 2009.

The MSCI world index of 23 developed countries fell a record 42 percent. Emerging markets fared even worse, falling 54 percent in dollar terms.

So what happens in 2009? I think many of the same problems plaguing the global economy in 2008 will persist through 2009, including tight credit conditions.

Banks on their own won't loosen the lending spigot unless forced by governments. Consumers are feeling the pinch, although a sharp fall in petrol prices is giving some relief.

Analysts were too optimistic about earnings in 2008 and may be too optimistic about what happens this year, especially if credit remains tight.

In the U.S., profits at Standard & Poor 500 companies are expected to fall 11 percent in the first quarter, 6.2 percent in the second quarter and then rise in the second half of the year, helped by a rebounding financial sector, according to data compiled by Bloomberg.

For the full year, profits should rise by 4.5 percent.

The worst performing group will be the energy industry where earnings are expected to fall 29 percent. Retailers will also be hard hit, earnings are expected to be down 20 percent.

In Europe, profits are expected to decline for the full year, but by less than one percent, compared to a fall of 17 percent this past year. Asian companies heavily dependent on exports will also be hard hit.

As one analyst put it: "No-one will be immune from this downturn. It's time to see who's losing least, not who's winning most."

Given the severity of the equity downturn in 2008, a case can be made for a rebound in 2009. Markets have already rallied sharply. The MSCI world index of 23 developed countries is up 23 percent from its November low.

Investors are betting low interest rates, and government stimulus will revive economies. Other factors include valuations.

I concede those with a long-term view are likely to make money but will have to stomach the volatility that's still likely to persist.

As you know I've been bearish for some time. For now I continue to remain out of the market, not so much out of conviction, like last year, but more out of where my comfort zone lies.

Tell me what you think. Do you think this is a good time to get back into the market? Do you think markets will be higher or lower by year end?



December 11th, 2008
11:42 AM GMT
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LONDON, England - What do you if you're dealing with potentially the worst downturn in the post-war period, and the biggest financial crisis since the Great Depression?

What do you do if your job is to kick-start the world's biggest economy, but your normal tool - cutting official interest rates - isn't enough and you're fast approaching zero interest rates?

What you do is you go to unconventional means, you do what's called quantitative easing. And that's exactly what the U.S. Federal Reserve is doing.

The Fed is firefighting with several emergency programs aimed at easing the credit crisis. They include a commitment to buy $600 billion of debt tied to the housing market, and $200 billion to support business and consumer loans.

But the Fed can throw as much money at the problem as it needs, and has already more than doubled its balance sheet to $2.1 trillion. And that figure could soon rise to nearly $4 trillion, according to analysts.

Fed chairman Ben Bernanke has even been called "Helicopter Ben" after he gave a speech in 2002. In that speech he referred to the economist Milton Friedman who suggested once interest rates have been cut to zero, radical steps may be needed to infuse the economy with cash, and dropping money from a helicopter may be as good as any other method.

The Bank of Japan is the only major central bank in recent times to rely on quantitative easing. It used it to try and fight the economic malaise and deflation that plagued the economy in the 1990s - its so-called lost decade.

When consumers expect deflation they may hold off on making purchases, expecting they will be cheaper in the future, and that in turn only prolongs a recession.

The Fed, knowing what happened in Japan, is trying to make sure the United States doesn't have a similar fate. It has reacted much quicker.

It's still unclear if its strategy will ultimately work. And there are downside risks; all that extra money in the system could at some point lead to a resurgence of inflation.

That in turn could make foreigners less willing to invest in U.S. securities, which would lead to higher interest rates and a weaker dollar. There are also potential consequences for the budget deficit.

But for now, Bernanke and company at the Fed are not thinking about what happens down the road. Instead, they are focused on getting the U.S. economy back on track, and are willing to do whatever it takes to try and make that happen.

Do you think the Fed is taking the right course of action? Do you agree it could be storing up problems for later? I'm keen to hear your thoughts.



December 2nd, 2008
09:54 AM GMT
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It's official. The U.S. is in recession and has been since December of last year, according to the National Bureau of Economic Research, the folks who keep track of business cycles.

The last two recessions (1990-1991 and 2001) lasted eight months each.  And of the 10 previous recessions, only two lasted longer than a full year. I predict this one will at least match the ones in the early 1980s and 1970s that each lasted 16 months. It may even exceed those, but this is not your typical recession.

This is a recession generated first by a downturn in housing which then led to losses by financial institutions - a full-blown financial crisis, the likes of which we haven't seen since the Great Depression.

Credit losses and writedowns at the world's largest financial firms are approaching $1 trillion and when the final ink is dry, that figure will be much higher.

Financial institutions are repairing their decimated balance sheets, hoarding cash, and making it tough to get credit. I suspect this process of deleveraging will last at least another year if not longer.

Oppenheimer Analyst Meredith Whitney predicts that credit card companies will pull back on lending by more than $2 trillion over the next 18 months in what she calls a "dangerous and unprecedented" move for U.S. consumer spending.

So how long will it take the U.S. economy to get back to normal? I spoke with Rob Carnell today of ING. He's worth listening to on the U.S. economy because he and his team have been ranked by Bloomberg as being the most accurate in their forecast for the past two years.

He told me it could be 2011 before we see more typical levels of GDP growth again, typical being about 2.5 percent growth.   If he's right, and I suspect he will be, a lot more pain lies ahead for the U.S. economy and other economies as well.

Manufacturing activity in the U.S. is at its lowest level in 26 years and at a record low in the Eurozone and China as companies and consumers pull back. Unemployment is getting worse.

Oil prices have plummeted by more than two thirds in just six months as worries about a worsening global economy accelerate.  As one analyst wrote. "It's hard not to be concerned about the prospects for a multi-year global contraction.  The daily flow of news is unrelentingly negative and comprised of many issues that should take quite some time to resolve."

The bottom line is this economic downturn is going to be a drawn out affair. Expect a lot more bad news to come, and expect it to come for sometime.

Let me know your thoughts.

Are you pessimistic about when the U.S. and global economies will recover?

Do you agree that it could be at least two more years before growth gets back to more normal levels?

What else could authorities do that they're not doing to try and speed up the recovery?



November 19th, 2008
04:29 PM GMT
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LONDON, England - In the movie Wall Street, Michael Douglas preaches "greed is good." Well, we know what can happen when greed goes amok.

We're living in the aftermath of the worst financial meltdown since the Great Depression. And it's not over yet, there's more pain to come.

A lot of blame is being pointed at CEOs and bankers who helped sink us into this rat hole, and rightfully so. Now in an act of contrition, the fat cats who have made enough money to last a thousand lifetimes, are foregoing bonuses, saying it's the right thing to do.

Who are they kidding? Of course it's the right thing to do, but to call it an act of altruism would be disingenuous.

They are doing it because they know there is plenty of anger at the mess they have gotten us into and it's their way of trying to placate the public and politicians who have their sights on them. They know more oversight is coming, and they are sensitive to the political winds howling at their backs.

What is clear is the investment banking model as we know it is dead and profits will be harder to come by. Bonuses will be smaller in the future if one is still lucky enough to have a job. And most importantly, the criteria for the bonus model is changing.

UBS, one of the banks hardest hit by the credit crisis, is making important changes to how its top management gets paid. The idea is to put more emphasis on long term performance.

"As of 2009, UBS will introduce a new compensation model. Top management may receive variable cash compensation and variable equity compensation in addition to their fixed pay. A large portion of this variable compensation will be held in reserve and paid out only if the results of UBS warrant it. Otherwise, there will be neither variable cash nor equity compensation. This should bring about a cultural shift in the company. Those who are rewarded will be those who deliver good results over several years without assuming unnecessarily high risk."

In explaining why they adopted a new compensation model, UBS stated that they felt the old model was too aligned with short-term results, without consideration for the quality or sustainability of the bank's performance, and that it did not sufficiently take into account the risks assumed.

UBS predicts their bonus plan will be followed by other banks. "I'm convinced this is essential, and the entire financial services industry will have to adjust its compensation models to the new realities," UBS's chairman was quoted as saying.

It's too late to make those responsible for this current financial mess give back their bonuses. But if the UBS model becomes the industry standard, then there might be more sobriety in banks' risk taking in the future. At the same time, shareholders have to be less focused on short-term profits which also added to the casino mentality.

The acid test will come when times get better again. We can hope lessons will have been learned, making bankers more accountable, with bonuses tied to long-term performance not just illusory short-term gains.

Tell me what you think. How should bonuses be determined?
Should there be a limit on how much they make?



November 5th, 2008
11:00 AM GMT
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LONDON, England – It's been the most expensive presidential campaign in history, a grueling slug fest. But as difficult as the campaign has been, it's nothing compared to the challenges of dealing with the economy, the toughest economic challenges facing any president since the 1930s.

A deepening recession, consumer confidence at a record low, rising unemployment, the continued fallout in house prices, massive write-downs by financial institutions, the cost of a massive bail out, not to mention the looming huge health costs for retiring baby boomers. 

The reality is that a lot of priorities and promises such as health care reform are likely to be pushed to the back at least for now.

The number one priority for the Obama administration will be dealing with the deepening recession. A second government stimulus package will be pushed out quickly. It won't turn the economy around, but it will send the right signal.

But the challenges of spending their way out of recession are compounded by the huge deficit that the new administration will inherit.

The deficit for fiscal 2008 which ended in September was $455 billion or 3.2 percent of GDP. Analysts say it could be a trillion dollars for the current fiscal year or more than 7 percent of GDP.

But like so much else in this financial crisis, the immediate goal is getting the financial system and economy back on track; deficit reduction will have to wait.

Bill Clinton realized early in his administration he couldn't afford to fulfill some of his campaign promises and that fiscal restraint was more important.  It was an act of political courage, and when he left office, the Bush administration inherited a budget surplus.

George W. Bush pushed through tax cuts, Medicare prescription drug benefits and entered into a war on two fronts, and the cost has been enormous. During his administration the national debt has nearly doubled to more than ten trillion dollars. President Bush is leaving the new administration a country that is in a weakened position fiscally.

A lot of hopes are riding on Barack Obama. Not only will his leadership be tested in getting the country through its current economic crisis, but once times get better, it will be tested again in making fiscal discipline a priority.

His economic legacy, and the country's, is riding on both.

As always I welcome your thoughts.  Are expectations too high in terms of what the new president can accomplish?

Will it be possible to make good on campaign promises and still leave a fiscally responsible legacy?


October 26th, 2008
06:17 PM GMT
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LONDON, England - Grim reading in the Financial Times. Take the headlines this past weekend: "Dire data push anaemic forecasts down;" "Recession concerns trigger turmoil in equities;" "Uphill road back to economic growth;" "Endless calls to the business bereavement line;" "Homeowners forced to sell properties at loss" and "Oil cartel cuts output but price still falls."

Now I don't think the editors of the Financial Times, or any other of hundreds of media outlets are trying to talk the economy down.  I think they are reflecting the reality of what's happening in the real economy and markets.

But there are those who are blaming the media for making a bad situation worse. Take Chuck, here's what he had to say in response to my blog on market volatility:  "I really believe that the media needs to take some responsibility for the financial fiasco that we are going through. Not the bad loans, not the questionable securities; just for beating without let-up, the drumbeat of despair. The hype and hyperbole are incredible.

"Everyone seems to be trying to out-depress the other, as if there's a Pulitzer for a story of 100 words or less with the most gloom and doom. A constant barrage of cut-your-wrist headlines everywhere. Just look at your main Web page. Horrible but do you really need to keep pumping the bellows?" Chuck asks in conclusion.

I don't think the media is pumping the bellows. The bellows are broken, the money markets had frozen, credit remains tight, investors remain nervous, and the data in the economy remains almost uniformly bad.

Even the headline about "OPEC cuts production but oil price still falls" accurately reflected what happened. OPEC did announce production cuts and oil fell $3 that day on worries about a global recession and less demand.

Anyone who's read my blogs or listened to my on-air comments on CNN knows I've been bearish for a very long time, and I remain bearish. It will take considerably longer to unwind the massive damage done to the financial system. The global recession is gathering pace, not ebbing. I don't take joy in being bearish, I just tell it like I see it and so far, I've been proven right.

As for the media at large, a legitimate question is to ask why weren't more warning of an impending crisis. But even if they had, they would have been accused of being doomsayers. Even if warnings had been more frequent, it's unlikely people would have changed behavior. Few complain when markets and the economy are doing well.

Now that tough times are here, it's easy to blame the headlines, but you can't deny the underlying reality.

Tell me what you think.  Do you think the reporting is too negative or does it accurately reflect what's happening in the markets and real economy?

Do you think the media should be blamed for adding to the financial crisis?

Even if more in the media had warned of the impending crisis, do you think investors and the public would have taken it to heart?

Do you think your local media has been reporting responsibly on the current financial crisis?



October 20th, 2008
10:03 AM GMT
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LONDON, England - By the close of trading last Friday, several major markets had gains for the week. But wow, what a ride!

The bank rescue plan announced by governments helped to restore some confidence, but it's clear investors remain incredibly nervous. The volatility has been eye popping, but investors hope to build on the gains.

For anyone invested in these markets, watching it has been a gut-wrenching experience. Let me give you some examples.

Here in Europe, the Dow Jones Stoxx 600 index surged 13 percent in the first two trading days of last week, and then posted its biggest two day fall since 1987. The United States saw a more than 900 point gain for the Dow on October 13 and two days later it crashed more than 700points.

On Friday the S&P 500 swung between losses and gains at least 28 times. It was tenth consecutive session when the S&P had swings of more than 5 percent between the low and the high of the day.

That's much higher than the average this year of 2.2 percent. Last year the daily swings between the high and low was just 1.2 percent and 0.8 percent in 2006, according to Bloomberg. The S&P is now heading for its most volatile October since 1929.

What is this volatility telling us? I think it reflects the incredible uncertainty about the financial health of a number of companies facing what seems to certain be a global recession, and lingering concerns about the banking sector and access to credit.

As I mentioned in my last blog, I don't know if the worst is over for the markets. Opinion remains divided on that.

The economic data remains terrible, and that isn't going to change anytime soon. The question is how much bad economic news is already discounted by investors. The debate over that is adding to market volatility.

Tell me what you think. Do you agree the volatility is going to continue? What's that volatility telling us? How long do you think the volatility could last? Do you have the stomach to buy into these volatile markets?



October 13th, 2008
11:18 AM GMT
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LONDON, England - A huge sigh of relief that authorities have been pulling out all the stops to try and restore confidence in the banking system.

Watch me talk about the Business 360 question of the week and your responses to my blogs

Following the plunge in markets last week, governments and central banks had their backs against the wall to do something quickly and something that addressed the central issues.

Investors for now seemed satisfied that leaders finally realised the enormity of the crisis and acted decisively.

This is a critical step and should help relieve some of the funding stresses seen in the credit markets.

As Goldman Sachs put it: "Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses. This is because solvency risk should decline as the government offers protection."

Banks have been reluctant to lend to each other out of concern they won't get paid back, concerns heightened following the failure of Lehman Brothers.

Even well-run companies have found it tougher to get credit. A well functioning banking system is the lifeblood of any economy.

The question is whether the worst of the market rout is over? It's unclear. One thing that is clear, had authorities not taken bold steps over the weekend, the selling would have accelerated, further undermining confidence in governments ability to act and further damaging the financial system and economies.

As I mentioned in my previous blog, it's too late to avoid a global recession. The work of central banks and governments isn't over.

There are expectations that central banks will cut interest rates further and there's pressure on governments to stimulate their economies.

This is the worst financial crisis since the Great Depression, coming out of it will be a long and painful process.

Do you think the steps governments and authorities have now taken will be enough to restore confidence?

How long do you think the economic downturn could last and how deep could it be?

Do you think stock markets have already fully discounted the worst of a global recession?

Tell me what you think.



October 10th, 2008
07:30 AM GMT
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LONDON, England - I read a few surveys lately that alarmed even me. When asked the best place to keep your money, the stock market, a bank deposit CD, or under your mattress, 45 percent of those responding said under the mattress. Another survey showed 60 percent of those polled said a depression is likely.

Watch me talk about the Business 360 question of the week and your responses to my blogs

Not even I, who has been bearish long before this financial meltdown began, believe a depression is likely. That would imply among other things massive unemployment. I don't see that happening. A global recession, absolutely. And even that may have been prevented if authorities had responded sooner to the current crisis, including the ill-fated decision to allow Lehman Brothers to fail.

What authorities are dealing with now is a crisis of confidence that has a stranglehold on the financial system, most people have been affected directly or indirectly. You know from my previous blog that I strongly doubt the bailout plan the U.S. Congress passed would fix the economy there.

Now Treasury Secretary Hank Paulson is coming around to the idea that recapitalization of the banks does make sense. It would be a much better use of the $700 billion than just buying up the toxic debt. The bill passed by Congress allows for that, but up until now it wasn't where Hank and Company were putting their emphasis. It still remains to be seen how far they will go with recapitalisation versus buying up the toxic debt.

The UK government has come up with the most sensible plan to dealing with the crisis, one that has won kudos on both sides of the Atlantic. But what's still missing is a coordinated global approach for the recapitalisation of banks. It's needed. A global interest cut and other actions by central banks aren't enough to restore confidence.

The fallout from the credit crisis is too far along to prevent a global recession. But unless governments pull out all the stops and take radical action, confidence will continue to erode and economies will continue to weaken.  And those fearing the worst may not seem so extreme.

Tell me what you think, do you think governments need to recapitalize the banking system?  What will it take to restore confidence in the banking system? Do you think those who say a depression is likely are right or wrong?

Watch me talk about my blogs and your responses in Business 360

Watch me talk about the crisis



About Business 360

CNN International's business anchors and correspondents get to grips with the issues affecting world business, and they want your questions and feedback.

 
 
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