October 20th, 2008
10:03 AM GMT
Share this on:

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
Share this on:

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
Share this on:

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

October 3rd, 2008
09:11 AM GMT
Share this on:

LONDON, England – Anyone looking at the bail-out package as the salvation for the banking system or the U.S. economy is dead wrong. The problems in the economy and the banking system have gone far beyond what the package can fix.

We know it's not just a U.S. problem. There are fears of a worldwide recession.
We know it's not just a U.S. problem. There are fears of a worldwide recession.

There is a crisis of confidence in the financial system, and that won't be fixed by the bail-out package. There is a crisis of confidence in political leadership. There is a well deserved mistrust of Wall Street and others whose greed and recklessness got us into this mess. And there are signs the U.S. economy continues to get worse, including house prices which continue to decline.

And we know it's not just a U.S. problem. There are fears of a worldwide recession.

According to George Magnus, senior economic adviser at UBS, about 40 percent of OECD economies are in effect already in recession. He puts it all down to deleveraging, as banks cuts back on their lending. He's pessimistic as are others, as I have been in the past and continue to be.

As he told the Financial Times: "What got us out of the hold in 2001 was it was possible to cut interest rates very sharply. And there was a sector that was willing and able to crank up leverage, the household sector.

"Apart from the government, which is going to have to come in and offset the weakness in private borrowing and demand, I can't see anyone else in a position to spark an economic renaissance."

While the U.S. and other countries feel the economic fallout, the U.S. is paying another price for the unwinding of its excessive leverage and the resulting bail-out package, and it can't be measured in financial terms.

With the massive bail-out package the U.S. has lost its moral authority as the beacon of free markets and capitalism.

We took freewheeling capitalism to the limits and the wheels came off.

Others point to other economic models such as the Chinese model as offering more stability. The world is watching and the reverberations of this crisis for the U.S. will last long beyond the crisis itself.

Tell me what you think, do you agree that the bail-out package won't fix the real economy? Do you agree that the United States has lost is moral authority as the beacon of free markets and capitalism? Is the legacy of this financial crisis one that will linger long beyond the crisis itself?

I look forward to hearing from you.

July 23rd, 2008
09:18 AM GMT
Share this on:

If there one certainty in the markets, nothing is certain. Take the price of oil. It hit a $147 a barrel on July 11. Now it's trading at a $126 a barrel. Several factors have helped push the price down.

Will the price of oil continue to fall?
First is the weak U.S. economy - an inventory report last Wednesday showed a larger than expected rise in crude stocks. Also there was a sharp fall in U.S. natural gas prices which also undermined the rally in oil. Another factor is forecasters expect Hurricane Dolly to bypass fields in the Gulf of Mexico. A stronger dollar is also an important factor.

Consumer behavior is also playing a role. High oil prices have forced some consumers to rethink their driving habits. In short, when oil prices approached a $150 a barrel, consumers said enough is enough.

Now instead of talking about how high oil prices can go, the bears are talking about how quickly oil prices could fall.

For instance, High Frequency Economics, a respected economics firm out of the U.S. Wednesday wrote that oil prices could hit $95 by the end of the summer, and Lehman Brothers expects crude to average $90 a barrel in the first quarter of 2009. If they are right that would be good for consumers, the economy, and inflation.

We know what happens if oil hits $200 a barrel, we also know what happens when oil falls sharply. Last week it fell more than 11 percent and that along with some better than expected earnings helped the broader market rally 1.7 percent, having fallen to its lowest level since November 2005 on that Tuesday.

If oil prices continue to fall that would further help market psychology, but it wouldn't mean the end of the bear market - there are still a lot of problems in the financial sector and economy, and those will take considerably longer to unwind. I still think the long-term fundamentals favor oil prices remaining firm.

I'm not alone - T. Boone Pickens, the legendary oil man, has predicted this week that prices will hit $300 a barrel in 10 years unless the United States reduces its dependence on foreign oil.

What do you think? Do you think that the fall in oil prices is temporary? Do you think the reason oil prices have fallen sharply is because consumers aren't willing to pay higher pump prices, or is it other factors?

Posted by: ,
Filed under: Business

July 14th, 2008
08:04 AM GMT
Share this on:

LONDON, England – Could oil hit $200 a barrel by year end?   

Given the sharp rise already, what once seemed fanciful thinking now has to be taken more seriously. After all, oil prices have doubled in the past year. More frightening, if you take the crude oil inflation rate of the past five years (which has seen prices quadruple) prices would rise to $580 by 2013, according to analysis by ING.

We already know the pain being felt at $145 oil - what happens if it jumps to even $200 a barrel by year end?

According to ING, U.S. inflation would hit 7 percent. The impact on Europe would be more muted with inflation around 4.5 percent. That rise in inflation would prompt the U.S. Federal Reserve to raise its funds rate from the current level of 2.5 percent to 3.5 percent by year end, and the European Central Bank would raise its rate from 4.25 percent to 4.75 percent.

"In turn this would compound the downward pressure on economic growth. The combination of a squeeze on consumers' purchasing power from rising oil prices and higher interest rates would likely lead to a full blown recession in the U.S. with the contraction of output deepening in early 2009. Output in the Eurozone would also be badly hit, although growth might narrowly escape slipping into negative territory.

"This environment would surely intensify the credit crunch. With activity slowing markedly, asset prices would tumble and default rates would climb. On top of this, rising short-term rates would add to the banks' problems by squeezing their margins further. This is clearly a recipe for a vicious cycle in which financial sector woes and real economy weakness feed off one another," ING adds.

ING isn't predicting that oil will hit $200 a barrel by year end, and even it it did, it says it wouldn't be sustainable.

That's because the damage to economic activity would be enough to drive oil demand down sharply and with it prices, plunging back to $100 a barrel by the end of 2009, leading to deflation and a sharp fall in interest rates.

Of course, mainsteam forecasts don't have oil at $200 a barrel by year end. But given how wrong economists have been about the rise in oil prices, neither can we dismiss the possibility. One thing we know for sure, if it happens, it's going to be ugly.

Tell me what you think: Do you think oil can go to $200 a barrel, and what do you think the impact would be. Is there anything policymakers could do to prevent it happening, and whose fault is it if it does reach $200 a barrel? Can you can even imagine oil trading at close to $600 a barrel five years from now? I look forward to hearing your thoughts.  

July 7th, 2008
08:02 AM GMT
Share this on:

LONDON, England – The G-8 summit is meeting once again, and it's once again a reminder of how absurd the gathering is in the new world order.

We in the media slavishly follow and report on it, despite the fact that usually little if anything of substance is accomplished. It's time to have a rethink of its relevance or how it could make itself relevant.

For starters, let's acknowledge that the G-8 accounts for almost half the world's economic output, but it is developing countries and emerging economies that account for 70 percent of the economic growth. China isn't a a member of the G-8, but given its importance in the world economy it certainly should be, so should India and Brazil.

The G-8 will discuss climate change, and China is the world's biggest emitter of carbon. It's been invited to an outreach group at the summit to discuss climate change, but it should be at the center of the table.

High oil prices will also be high on the agenda. The United States, Canada, Russia, and Britain (all members of the G-8 produce 29 percent of the world's oil. But the G-8 plus China consume two thirds of the world's oil output.

Of course, the G-8 will express its concern, and possibly blame speculators for part of the reason for high prices. They'll also undoubtedly ask OPEC to pump more oil. How convienent to look outside their own borders for solutions. Instead, they should be strongly urging conservation in their own countries and giving business massive incentives to come up with cleaner fuel supplies and cars.

Also, if you were going to have a serious discussion about oil prices, wouldn't it make sense to have Saudi Arabia, the world's biggest oil producer at the center of the table.

They'll also acknowledge the need to do something about high food prices. But here are the facts thanks to economist Carl Weinberg of High Frequency Economics. The G-8 countries produce 41 percent of the world's wheat, 58 percent if you add in China,and consume the most of it.

The G-8 produces 48 percent of the world's corn, or 68 percent if China is included. As Weinberg points out, "You would think that the assembled majority of world suppliers and buyers of foodstuffs could cook up an answer to falling global grain inventories, which are already at the lowest levels seen in the 60 years that the USDA has produced estimates.

"You might think that the right places to start addressing global food shortages would be in the United States and Euroland – the world's biggest producers of corn and wheat respectively – where farmers are offered subsidies not to plant crops. However, the U.S. and Euroland hold on to their agricultural support programs tenaciously. The Heads are unlikely even to consider tinkering with these entrenched systems," Weinberg concludes. I couldn't agree more.

So the G-8 will address the major issues affecting the global economy, but if it wanted to really be relevant it would take bold measures instead of making vacuous statements. But that would take political courage, something in short supply.

It would also expand membership in the club. The outcome might not be any different, but it would at least be more reflective of the new world order, and that alone might give the summit gathering more relevance.

Tell me what you think, should the G-8 be expanded, does it have any relevance, or do you agree with me that these summits are pretty much a waste of time, and that if they are going to become more relevant, they need to reflect the new world economic order?

June 30th, 2008
07:19 AM GMT
Share this on:

Anyone who has listened to me doing commentary on CNN or read these blogs knows I am bearish, and have been for a long time. It's been the right call, and I have no reason to feel any optimism now.


Stock markets which rallied sharply following the rescue of Bear Stearns in March, have stumbled badly again.


The belief that the worst of the credit crunch was over has been proven wrong. Banks continue to reel from their ill judged decisions, with predictions that the write downs from the sub-prime crisis could total $1.2 trillion, or about three times the current amount.


Oil prices as I write are now over $140 a barrel, and could rise as high as $170 a barrel in the coming months, according to Chakib Khelil, president of OPEC.


Add in high food prices and inflation has become a primary worry for investors.


The rise of inflation is a global phenomenon. Close to thrre billion consumers are now living with double digit rates of inflation, according to economist Joachim Fels of Morgan Stanley.


Fifty countries now have inflation running at more than 10 percent, accounting for 42 percent of the world's population and including six of the world's most populous countries.


How far central banks will go in terms of fighting inflation is unclear, but it's a big worry for investors.


Rising inflation comes at time when worries over growth now have some talking about the possibility of stagflation in major countries like the United States. Hopes of a second half rebound in the U.S. have now faded.


It's the worst of possible worlds for investors, and anyone who thinks the worst is over, better think again.


Tell me what you think.

June 23rd, 2008
08:49 AM GMT
Share this on:

LONDON, England – Never have so many come for so little. For many, the outcome of the Saudi oil gathering at Jeddah is a huge disappointment.The Saudis announced they would raise daily production by 200,000 barrels a day to 9.7 million barrels.

But let's put this in perspective. It's doesn't even make up for the 300,000 barrels of lost production suffered by Royal Dutch Shell and Chevron in the past week due to militant attacks in Nigeria.

The Jeddah gathering had a huge build-up and came at a time when governments and consumers are feeling the double burden of record high oil prices and food prices. Some had hoped that Saudis would increase production by as much as 500,000 barrels a day.
The Saudis said they would expand production capacity, but that's in the future, not now.

The world is crying out for more oil. World oil demand is expected to rise by 800,000 barrels a day, according to the International Energy Agency.

So where does this leave all of us? With high oil prices continuing. As I've written prveviously, don't blame the speculators. What's going on in the oil market right now isn't a short-term problem but a structural shift, based on increased demand, and not enough production.

At close to $140 a barrel oil is trading at five times the average six years ago.

And there are predictions that it could even higher, possibly to $200 a barrels in less than two years.
Given the outcome of the Jeddah gathering, there's no reason to think those assumptions aren't corrrect.

The Saudis along with others attending the summit had to look like they are concerned. They touched on several issues surrounding the oil market, but with the exception of the Saudi production announcement, there's no real outcome.

Given how little the summit produced, it probably would have been better for everyone to stay home, at least that would have saved some jet fuel.

Tell me what you think.

June 20th, 2008
10:29 AM GMT
Share this on:

LONDON, England – Anytime you read an article or get an explanation about why oil prices are rising, soaring demand from China is always on the list.Now the Chinese government is taking some of the subsidy consumers enjoy by raising retail prices on gasoline and diesel by at least 17 percent. It's the first rise in Chinese fuel prices in eight months. Oil prices fell nearly $5 a barrel on the news to just under $132 a barrel.

The market's reaction underscores the idea that it isn't speculators driving the price higher, but issues about fundamental demand. And the market thinks that the higher prices the Chinese will have to pay at the pump will lead to less demand.

But not everyone is buying the argument. Why? First of all, even though its a big hike, it may not be enough to discourage people from driving. Secondly, refiners who have to pay world prices for oil have been operating at losses because they haven't been able to pass on the true cost. Refiners have cut production. Now, that prices are higher production could actually rise, helping to meet demand where they have been shortages and rationing.

Even with the price announcement, what the Chinese pay for their petrol is still way below market prices. One estimate said that China would have to raise fuel prices by 60 percent to come into line with international levels.

Of course, China isn't the only country to subsidise fuel. Other nations, in Asia, the Middle East and parts of Latin America all help foot the fuel bill. These countries make up half the world's population and their increased oil needs is what is pushing up prices. In places like the United States, Japan, and Europe, demand is is either flat or contracting.

If all those developing countries did away with subsidies, then that would probably would lead to less demand. But polticians know that would also likely lead to widespread social unrest, which has happened in some parts of the world. It would also mean less growth and higher inflation.

So even though the Chinese have raised prices, they are still way below market prices - and until that changes, and changes elsewhere, expect oil prices to remain high.

Tell me what you think - should the Chinese have raised prices more? Should governments do away with subsidies altogether? Looking foward to hearing your thoughts.

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.

Powered by WordPress.com VIP