European Banks Offer Another Potential Problem

Here in the U.S. we just finished the widely publicized "stress tests," which showed us a great deal of capital shortfalls with the major banks. This was more or less to be expected, but what is getting less press here at home are the potential problems over in Europe. Many people had mistakenly thought Europe was buffered from the financial problems being experienced in the U.S., but the more we look into it the more we see that is not the case. Many European banks were exposed to the same products and other issues that brought down the U.S. financial system, and the struggles these European banks are facing could bring down the global financial system even further. For more on this, read the following article from Money Morning.

Now that the results of the U.S. bank stress tests are finally in the books, the extent of the capital shortfalls are known and – in many cases – are actually being addressed.

But there’s now another problem looming – one that could ultimately weigh down the global financial system.

The problem: Europe’s banks.

As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.

Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.

Bank executives "[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1," Chief Executive Officer Stephen Hester told Reuters.

In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.

In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.

That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.

Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide "considerable comfort about the health of the banking system.”

But in the five months since that Institute of International Finance report was issued, it’s likely that European banks have experienced a major decline in their fortunes.

Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.

Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?

Market Matters

Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM). Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance. On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.

A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years. Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.

The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year. Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight. Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis. With stress tests out of the way, where will the next leaks come from?

Market/ Index	Year Close (2008)	Qtr Close (03/31/09)	Previous Week (05/01/09)	Current Week (05/08/09)	YTD Change
Dow Jones Industrial	8,776.39	7,608.92	8,212.41	8,574.65	-2.30%
NASDAQ	1,577.03	1,528.59	1,719.20	1,739.00	+10.27%
S&P 500	903.25	797.87	877.52	929.23	+2.88%
Russell 2000	499.45	422.75	486.98	511.82	+2.48%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	2.68%	3.17%	3.29%	+105 bps

Economically Speaking

U.S. retailers released same-store sales data for April and the results were actually quite promising. As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations. A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.

On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy. Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.

Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy. The contraction represented the smallest in six months and was below most analysts’ expectations. Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.

Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best. In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain. Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.

This article can also be found on moneymorning.com.

U.K. Budget Met With Fierce Opposition

If we thought things were bad over here in the U.S., at least we might be able to take some comfort in the fact it is looking as bad or worse in the U.K. Alistair Darlings just released the 2009 budget for the U.K., and while it does not look pretty, the IMF thinks he is being way too optimistic in his projects. From the looks of things the U.K. is going to be adding an incredible amount of debt to their already enormous deficit, and growth is unlikely to come for a few more years. For more on this, read the following blog post from Tim Iacono.

The new U.K. budget announced a short time ago is being greeted with boos and catcalls as taxes are being raised and debts continue to mount - they sound a bit like the state of California with the important distinction that the Golden State doesn't own a printing press.

This report in the Telegraph provides the details:

Alistair Darling has pledged to hit Britain’s richest workers and savers with a smattering of new taxes to help support the UK through its worst recession since the 1930s.

In what is likely to go down in history as the most downbeat and depressed Budget in peacetime history, the Chancellor pledged to raise the income tax rate for those earning over £150,000 to 50pc, hearkening back to the high tax rates imposed by Governments in the 1960s and 1970s.

He also confirmed that the Government will be forced to borrow £175bn this year and £173bn the next, and would have to increase the size of the national debt from recent levels of below 40pc to almost 80pc within the next five years.

It seems that almost every developed nation in the world is now in the process of turning Japanese in that national debt relative to GDP is rapidly approaching parity. In the U.S., we'll reach that point before you know it.

There's a complete summary of the new U.K. budget here.

If this video clip is any indication, it's getting a bit testy across the pond.

Darling has already downgraded his economic forecasts from just a few months ago which, as is the case for nearly all government projections, were overly optimistic for 2009. He now pegs economic growth at minus 3.5 percent this year with a rosier outlook for 2010.

In something of an embarrassment for U.K. government economists, the IMF cast a bit of cold water on their updated forecast for next year, predicting another period of contraction according to this report in the Guardian.

Britain will be stuck in recession for another year as consumers reeling from the housing crash cut back their spending, the International Monetary Fund warns today – undermining Alistair Darling's budget claim that growth will resume at the end of the year.

In its twice-yearly World Economic Outlook, the IMF predicts that recession in the UK will be "quite severe", with the economy shrinking by 4.1% this year, and continuing to contract, by 0.4%, in 2010. In the budget, Darling forecast 1.25% growth in 2010.

Somehow, given the way things have deteriorated over the last six months, it wouldn't be surprising to see even the IMF forecast prove to be too optimistic.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Hong Kong Set To Take Off Thanks To Bernanke

Thanks to the chairman of the U.S. Federal Reserve — Ben Bernanke — Hong Kong is about to take off. It might seem a little weird that Bernanke could impact Hong Kong so drastically, but because Hong Kong's currency is so closely linked to the U.S. dollar they are forced to follow the Fed's every move. That — coupled with the fact Hong Kong's stocks are undervalued — is creating a perfect storm for Hong Kong's market. For more on this, read the following article from Dr. Steve Sjuggerud at Daily Wealth.

Ben Bernanke has cut short-term interest rates in the U.S. to essentially zero... the lowest rate we've ever seen.

He's doing this, of course, to "juice" the economy – to give it a jumpstart. He doesn't know (or care, actually) that this action will inadvertently (but undoubtedly) cause one particular stock market to go absolutely nuts.

This stock market I'm talking about is Hong Kong. Today, we have the ultimate recipe for stocks in Hong Kong to skyrocket. The Fed has cut interest rates to essentially zero (causing Hong Kong rates to be next to zero in its unique money system). And yet Hong Kong stocks are incredibly cheap. They bottomed a month ago at a single-digit price-to-earnings (P/E) ratio.

We've seen this before:

• In 1992-1993, the Hang Seng Index shot from 5,500 to 12,000. At that time, the Fed had cut interest rates below the rate of inflation. So "real" interest rates were below zero.
• The Fed did it again from 2003-2005. And in that time, the Hang Seng Index jumped nearly 7,000 points, from a low of 8,600 to 15,500. (It continued to rise... peaking over 30,000 in 2007. That's four times your money from 2003 to 2007.)

And it's happening again, right now... The Fed has cut interest rates to zero, and the uptrend in Hong Kong has arrived. It's time to get in.

While Ben Bernanke is trying to help the U.S., he's unwittingly creating havoc on the other side of the globe...

Hong Kong is quite an incredible place... With no natural resources, the standard of living has gone from subsistence wages to one of the highest in the world in just a few decades.

I believe two things contributed to Hong Kong's boom... 1) Hong Kong has been for decades one of the "freest" markets in the world, allowing entrepreneurs to succeed or fail. And 2) Hong Kong has had a stable currency, thanks to its unique currency system. For the last 25 years, the Hong Kong dollar has been worth about US$7.80, give or take a few pennies.

Hong Kong's unique currency system is called a currency board. A country that has a true currency board has one U.S. dollar in the bank for every dollar of its own currency that it prints. How does it keep the exchange rate equal? Through interest rates...

Interest rates in Hong Kong dollars are always higher than in the U.S. Depositors are willing to "take the risk" on the Hong Kong dollar for the slightly higher yield.

As a result, Bernanke essentially controls interest rates in Hong Kong. Whether Hong Kong is in a boom or a bust, he doesn't care. So Bernanke could be raising or cutting interest rates at precisely the wrong time in Hong Kong's business cycle.

Therefore, Hong Kong's stock market is subject to wild booms and busts, based on what the U.S. Fed is doing with interest rates.

As I said, today we have the ultimate recipe for stocks to skyrocket in Hong Kong. Interest rates are next to zero. And Hong Kong stocks are cheap, hitting single-digit P/E ratios a month ago.

I have two nearly guaranteed "rules" for making money in Hong Kong...

First is the "Hong Kong Can't Help It Rule." That's when the U.S. Fed cuts interest rates below the "market" rate. This means "real" interest rates are below zero. When this happens, buy Hong Kong... It can't help it. It soars.

The second rule is the "20/10 Rule." In short, you want to be a buyer of stocks in Hong Kong when the P/E ratio falls below 10. And you want to be a seller when the ratio rises above 20.

Hong Kong stocks often soar by hundreds of percent after they fall below a P/E of 10. And often they lose half their value soon after they rise above a P/E of 20.

Right now is an extraordinary moment... both rules are in play... AND we have an uptrend in Hong Kong stocks that started last month.

You should consider buying Hong Kong shares now... Triple-digit gains are possible... and you can limit your downside risk by using a trailing stop. Those are my kind of odds!

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Moscow's Property Market Set For A Hard Fall

Somewhat surprisingly to many real estate observers, Moscow has become one of the most expensive cities in the world. While Moscow's real estate market held off longer than most, it appears that the gloom is catching up to the city now, and the aftermath isn't going to be pretty. Overseas Property Mall takes a closer look at the situation brewing in Moscow, Russia in their blog post below.

Moscow investors and banks are playing a deadly game of Russian roulette in a stand-off to see who flinches first as the city’s once booming property market falls to ruins around them.

Billions of rubles are tied up in commercial and residential property portfolios.

Homes, offices and shops are standing empty as rents are unaffordable, new build projects are being canceled, investors can’t refinance and the banks are sitting on a pile of yet to be realized toxic debt.

Russia’s fledgling property market has never seen a recession – since democracy and privatization prices have only gone one way – up.

Fueled by oil and gas profits, Russia is lagging a few months behind the rest of the world’s recession problems.

But the property market has the same intrinsic problems as those in the US, UK and other European countries:

• Oversupply of commercial and top-end residential accommodation
• Rents outstripping earnings
• Real estate prices starting to adjust downwards

According to the Moscow News, a professional couple with 75,000 rubles (£1,500) a month to spend on rent can only afford a two-roomed apartment.

Even at that price, which is quite low for a Moscow apartment in a reasonable area, there seems to be plenty of availability and some agents are struggling to move property, or are closing down.

In commercial markets, over the past few months, vacant office space has rocketed from 7.5% to 17.5%, says the Moscow Times .

Prestigious commercial projects have been canceled. Rents have fallen from £1,400 per square foot to £500 per square foot in the same period. Property prices have plummeted by at least 50%.

One Moscow property observer, Andre Bar’yudin says the market adjustment was a disaster waiting to happen because Russians are too naive in property dealing.

Under communism, a worker was allocated a property according to his job.

After the collapse of the Soviet Union, state-owned real estate was given away. Families were given the flats in which they lived. This created a large population of new homeowners with little of no knowledge of how a free market works.

Rather than buying and selling residential property, families swap and offer cash compensation to make up any unfairness in the pricing. About 80% of Russian residential deals are struck this way rather than through estate agent sales like in the UK.

The conclusion is outgoings outstrip yield and incomes, so the market adjustment was inevitable.

The bubble is about to burst as predicted, and this evidenced by Russia’s richest woman, billionairess Yelena Baturina reportedly going cap in hand to the government for cash aid as her property empire starts to disintegrate.

Ms Baturina won contracts worth billions of rubles from the Moscow authorities – coincidentally led by her husband, who is the mayor.

Her construction company has applied for a £570 million loan guarantee to stave off the creditors.

This post can also be viewed on overseaspropertymall.com.

Protectionism And The Global Economy

Coordinating a global response to the financial crisis is proving increasingly difficult, and the growth of protectionism is not helping. The global economy is set to shrink for the first time since 1945, and shockingly enough 200 million additional people could be facing poverty. It is clear something needs to be done, but with so many voices, and so many agendas, what hope do we have? For more on this, read the following post from Mark Thoma.

Lots of worry about the global economy, the lack of an internationally coordinated policy response to the downturn, and about the imposition of protectionist measures. First, Joseph Stiglitz:

A globally coordinated stimulus package needed, by Joseph E Stiglitz, Project Syndicate: This year is likely to be the worst for the global economy since World War II... Unless something is done, the crisis will throw as many as 200mn additional people into poverty.

This global crisis requires a ... globally coordinated stimulus package... [W]hile it is recognized that almost all countries need to undertake stimulus measures (we’re all Keynesians now), many developing countries do not have the resources to do so. Nor do existing international lending institutions.

But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive “conditions,” some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.

In many parts of the world, there is a strong stigma associated with going to the International Monetary Fund, for obvious reasons. ... It is thus imperative that assistance be provided through a variety of channels, in addition to, or instead of, the IMF...

At their November 2008 summit the G-20 leaders strongly condemned protectionism... Unfortunately,... 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package.

But it has long been recognised that subsidies can be just as destructive as tariffs – and even less fair, since rich countries can better afford them. If there was ever a level playing field in the global economy, it no longer exists: the massive subsidies and bailouts provided by the US have changed everything, perhaps irreversibly.

Indeed, even firms in advanced industrial countries that have not received a subsidy are at an unfair advantage. They can undertake risks that others cannot, knowing that if they fail, they may be bailed out. While one can understand the domestic political imperatives that have led to subsidies and guarantees, developed countries need to recognize the global consequences, and provide compensatory assistance to developing countries. ...

And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN Commission in calling for a new global reserve system. ...

Such reforms will not occur overnight. But they will not occur ever unless work on them is begun now.

Next, Charles Wyplosz argues that, in general, quantitative easing is a "beggar-thy-neighbor" policy:

One fiscal initiative not worth emulating, by Charles Wyplosz, Project Syndicate: When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25 percent, it announced that it would engage in “quantitative easing,”... More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. Will this be the first salvo in a war of competitive devaluations? ...

Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower-bound. Once there, traditional monetary policy is impotent...

This is why central banks are now searching for new instruments. Quantitative easing represents one such attempt. ... However, an important issue is rarely mentioned: In small, open economies — a description that applies to almost every country except the US — the main channel of monetary policy is the exchange rate.

This channel is ignored for one good reason: Exchange-rate policies are fundamentally of the beggar-thy-neighbor variety. Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective ... by switching demand toward domestically produced goods and services.

The risk is that countries that suffer from the switch may retaliate and depreciate their currencies. That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression.

The first casualty would be whatever small scope remains for international policy coordination. The second would be the world international monetary system. In fact, one key reason for the creation of the IMF was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies. ...

Alternatively, it may be that the SNB mostly wishes to talk the franc down to break the safe-haven effect. Having promptly achieved depreciation, it may have succeeded. In that case, the franc will not move much more in any direction, and there will be no need for further interventions. ...

Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage. ... It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loath to criticize it. In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome.

And:

The worst of all worlds, by Joseph S. Nye, Project Syndicate: The world economy will shrink this year for the first time since 1945, and some economists worry that the current crisis could spell the beginning of the end of globalization. Hard economic times are correlated with protectionism... In the 1930s, such “beggar-thy-neighbor” policies worsened the situation. Unless political leaders resist such responses, the past could become the future.

Ironically, however, such a grim prospect would not mean the end of globalization, defined as the increase in worldwide networks of interdependence. Globalization has several dimensions, and though economists all too often portray it and the world economy as being one and the same, other forms of globalization also have significant effects — not all of them benign — on our daily lives.

The oldest form of globalization is environmental. For example,... Bubonic plague, or the Black Death, originated in Asia, but its spread killed a quarter to a third of Europe’s population in the 14th century. ... The spread of foreign species of flora and fauna to new areas has wiped out native species, and may result in economic losses of several hundred billion dollars per year. Global climate change will affect the lives of people everywhere. ... The rate at which the sea level rose in the last century was 10 times faster than the average rate over the last three millennia.

Then there is military globalization, consisting of networks of interdependence in which force, or the threat of force, is employed. ... Finally, social globalization consists in the spread of peoples, cultures, images and ideas. Migration is a concrete example. ...

The danger today is that shortsighted protectionist reactions to the economic crisis could help to choke off the economic globalization that has spread growth and raised hundreds of millions of people out of poverty over the past half century. But protectionism will not curb the other forms of globalization. ...

This post can also be viewed on economistsview.typepad.com.

Bahrain's Economy Is Holding Up Well

Not many Americans have even heard of Bahrain, let alone thought about investing in the country, but while Dubai has been faltering badly, Bahrain is holding up well. Investors interested in the Middle East might want to give Bahrain a closer look, especially if they are considering investing in Dubai. For more on this, read the following article from Overseas Property Mall.

Bahrain has long been the forgotten little brother of glittery Dubai in the housing investment industry. For years we have been told countless stories on why we had to buy property in Dubai and all the while Bahrain has quietly sneaked up in the housing stakes.

Since reports of a falling Dubai have become stronger every month, Bahrain has only suffered “small damage”. After having spent many years in its bigger brothers shadow, Bahrain is ready to raise the stakes and claim back some of its past status as a strong and reliable financial business center in the Arabian world.

The Bahrain Economic Development Board’s chief operating officer Kamal Ahmed said:

“In tough times, people want to be in the most stable place. Of course, nobody is immune to the crisis, but we have certainly shown we are less exposed.”

The CBB (Central Bank of Bahrain) has established itself as one of the better regulators if we are to believe the latest news reports from the Middle East due to the lack of available finance overall. Some even say that Dubai’s loss has resulted into being Bahrain’s gain but clearly it is early days at the moment. Signs are positive though and industry watchers are positive that Bahrain might attract more investors in the next year due to its stable economy despite the global crisis elsewhere.

Ahmed further stated that it wasn’t the banks fault that Bahrain has lacked the attention it supposedly deserves but more so the lack of media attention overall.

The World Bank also helped to establish Bahrain as a strong business center by ranking it 18th in the world for doing business with last year. Another encouraging sign of a stable economy is the number of new lending institutions licensed in 2008. There were a total of 44 new start ups compared to 38 start ups in 2007.

Bahrain’s financial specialty if one could say that is Islamic finance. The launch of the Bahrain Financial Exchange in 2010 will also see the position of this small emirate strengthened overall.

But even so Bahrain’s economy is relative stable, the emirate has experienced plenty of heartache in the banking sector too. Profit margins of banks declined by 17.6 percent in 2008. During the same time, retail banks saw a surge of 112 percent in loan to deposit ratios.

Some financial organizations are also being scrutinized by the Bahrain government. With over 400 institutions in the country, there are too many right now to satisfy the lack of demand while showing healthy growth over time so eventually some of them will take the fall for sure.

This post can also be viewed on overseaspropertymall.com.

America's Tarnished Reputation Threatens Global Response To Financial Crisis

One of the biggest casualties from the financial crisis — and our handling of it — has been the loss of America's reputation on financial matters. As far as most of the world can tell we are the ones who started this financial mess — which is enveloping much of the world — and even worse we have appeared incompetent to fix it. Why then would the rest of the world listen to us when we try to piece together an effective global response? As Paul Krugman points out in his recent article, America quite possibly could have lost one of its most valuable assets — its reputation — right when they — and the world — need it most. For more on this, read the following blog post from Mark Thoma.

The financial crisis has damaged our global authority, credibility, and leadership, and that will make it much harder for the world to accomplish the essential task of coordinating a common response:

America the Tarnished, by Paul Krugman, Commentary, NY Times: Ten years ago the cover of Time magazine featured Robert Rubin,... Alan Greenspan,... and Lawrence Summers... Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis..., although it was a small blip compared with what we’re going through now.

All the men on that cover were Americans, but nobody considered that odd. After all, in 1999 the United States was the unquestioned leader of the global crisis response. ... The United States, everyone thought, was the country that knew how to do finance right.

How times have changed..., ... our claims of financial soundness — claims often invoked as we lectured other countries on the need to change their ways — have proved hollow.

Indeed, these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along. ...

Simon Johnson..., who served as the chief economist at the IMF..., declares that America’s current difficulties are “shockingly reminiscent” of crises in places like Russia and Argentina — including the key role played by crony capitalists.

In America as in the third world, he writes, “elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.”

It’s no wonder, then, that an article in yesterday’s Times about the response President Obama will receive in Europe was titled “English-Speaking Capitalism on Trial.”

Now, in fairness ... the United States was far from being the only nation in which banks ran wild. Many European leaders are still in denial about the continent’s economic and financial troubles, which arguably run as deep as our own... Still, it’s a fact that the crisis has cost America much of its credibility, and with it much of its ability to lead.

And that’s a very bad thing... I’ve been revisiting the Great Depression,... one thing that stands out ... is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate.

The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.”

Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight.

But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

The financial crisis has had many costs. And one of those costs is the damage to America’s reputation, an asset we’ve lost just when we, and the world, need it most.

This post can also be viewed on economistsview.typepad.com.

China Beginning To Use Monetary Leverage On U.S.

While the U.S. has racked up trillions in debt, China has been buying up this U.S. debt. Now China owns more U.S. debt than any other country on the planet, and of course with that comes a great deal of political power over the U.S. China owns so much of our debt that if they were to start selling it off in mass quantity it could collapse our entire financial system. China has not said that they have any intention of doing so, nor would it be financially wise for them to, however, the threat alone carries a lot of weight. One of Obama's campaign claims was that he intended to fight China's monetary manipulation, but with little surprise — after urging from China — the U.S. backed down. Now China is urging the U.S. to be more prudent with their stimulus spending — in order to protect the value of their investment. Kathy Lien dives more into this story in her blog post below.

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

CNBC VIDEO: Is US Debt Still Desirable to China?

This post can also be viewed on KathyLien.com.

The Most Indebted Countries By Percentage Of GDP

When you take a look at the list of the most indebted countries, you would assume that the U.S. would be tops on the list. That would certainly be the case if you just looked at the total amount owed, however, a better measurement of a country's debt load is to compare it to their GDP. When you do that the U.S. still looks bad, but we are no where near as bad as Japan — who runs away with the top spot. Kathy Lien looks at these numbers, and discusses some possible implications, in her blog post below.

The Economist has a great image on which countries have the most debt as a percentage of GDP. Japan tops the list followed by Italy and the United States. Japan actually has 2x more debt than the U.S. which I find particularly scary and leads me to wonder if Japan could face a ratings downgrade.

Source: Economist

This post can also be viewed on kathylien.com.

Beijing Is Turning Into A Ghost Town

After the incredible display at the Olympic Games last year it is hard to imagine Beijing as anything other than spectacular. Apparently things have gone down hill, though, for Beijing since the Olympics. Overseas Property Mall reports that with all the empty buildings now, Beijing has the feeling of a huge modern day ghost town.

Stories of Beijing being a ghost city are surfacing all over the Internet. They tell of a city which less than a year ago was prepped to bustle in anticipation of the Olympic Games and yet, a few months after it is all over the city looks deserted and half of the city center’s sky scrapers stand desolated and empty.

This is the story of Beijing, formerly glorified as the new "glitz town" of China and host to the Summer Olympic Games of 2008.

But fast forward less than one year and the outlook for the city is very gloomy indeed.

Take the example of a brand new baseball stadium that has just been demolished after opening last spring with an exhibition game between the Dodgers and the San Diego Padres. Those are sad stories that make us wonder what happened behind the scenes and why in the world big projects like these are being granted without checking their longevity.

Then there is the story of the million square feet of commercial real estate that sits EMPTY in the middle of the city before as mentioned . Just to give you an idea, 100 million square feet make up the better side of 14 years of commercial real estate supply in a good year.

Right now, the inner city of Beijing is home to a vast amount of eye catching and awe inspiring skyscrapers that are empty.

The question remains to what will happen to these buildings when no one pays rent? Plus as more and more corporations have to scale back their enterprises it is highly unlikely that this situation will change for the better real soon.

So what IS the Chinese government going to do with all these brand new, empty buildings? And where does this leave all the workers who are left on the streets, often without getting paid for their work since many developer simply went underground to avoid paying their wages?

We think we can all agree that the situation in Beijing is not a pretty one. In fact it is a very sad one. It makes one wonder how on earth it could ever get this bad.

Are our egos so big that we continue to build just for the sheer pressure of delivering better and bigger cities to host Olympic Games, giving no consideration to realistic demand and the environment?

You tell us.

Read the whole story here

This post can also be viewed on overseaspropertymall.com.

Currency Market Update: Look To The Australian Dollar

Yesterday's market rally got a lot of investors excited, but the rally was short lived. Currency expert Kathy Lien points out 3 reasons why investors should have been suspicious of the rally in her blog post below. In addition Lien offers some insight into the future of currencies, and suggests that the Australian Dollar might be a great investment opportunity right now.

The currency and equity markets are turning lower after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious. None of the reasons for Tuesday’s jump delivered real solutions. The market only rallied because Bernanke delivered no surprises. President Obama’s attempt at reassuring Americans also failed to comfort investors.

Instead we are faced with a weakening economy that is only confirmed by this morning’s plunge in existing home sales. Sales of existing homes plunged 5.3 percent to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. The median price of a home sold dropped 14.8 percent compared to the year prior. Such disappointing numbers are not much of a surprise given the big decline in housing starts and building permits. With banks and mortgage lenders reluctant to lend, even potential homeowners with sufficient capital have found difficulty attaining loans.

The British pound has been hit the most because Bank of England member Barker said that the weak sterling is helpful. UK officials have taken every opportunity to talk down the currency.

USD/JPY on the other hand remains an animal. Despite weak economic data and a turn in equities, the currency pair continues to rise.

My favorite is still the Australian dollar because of strong M&A flow, higher gold prices and the prospect of the country remaining recession free. The AUD/USD is also prime for a breakout.

This post can also be viewed on kathylien.com.

Defaults By Developing Countries Could Be Next Economic Timebomb

Just in case we needed one more thing to worry about, economic struggles in developing countries could cause them to default on their loans. This would have an effect on most developed countries, including the US. According to research compiled by Kathy Lien, though, the most vulnerable countries look to be in Western Europe. These countries lent a ton of money to developing countries, especially in Eastern Europe where unfortunately they are experience some very serious economic problems. Kathy Lien exposes more about this in her blog post below:

A time bomb is waiting to explode in the Eurozone with Western European banks at risk of defaults on Eastern European loans. This leads me to wonder how much the US and the UK are exposed to developing countries. So I compiled the following charts from the latest Bank of International Settlements data (as of September 2008).

Euro area loans to developing nations are heavily skewed towards Eastern Europe while UK lends predominately to Asia, Africa and the Middle East. The US on the other hand lends primarily to Asia and Latin America.

Default risk in Asian nations are lower than Eastern European nations, which makes the UK and US less vulnerable if a time bomb explodes in Eastern Europe.

Meanwhile USD/JPY hit a 6 week high this morning after President Obama announced a foreclosure program.

Follow the jump for Eurozone and Switzerland charts

This post can also be viewed on kathylien.com.

Don't Worry, The Economy Is Having This Effect On A Lot Of People

In a very embarrassing display, the Finance Minister of Japan attended a press conference clearly under the influence of alcohol. He was later forced to resign of course, but can we really blame him for needing a little drink? Kathy Lien talks more about this recent development in her blog post below. In case you want to witness the event, you can also see a YouTube video of the press conference at the bottom of the post.

For Japan and Prime Minister Aso, it was a big embarrassment today that the Finance Minister Nakagawa resigned after acting drunk at the G-7 news conference.

He slurred his speech, was sleepy eyed, very disoriented and at one point, mistakenly responded to a question on interest rates that was intended for the governor of the Bank of Japan, who was seated to his left.

He will be replaced by Economy Minister Yosano.

Here is a video of Nakagawa’s performance. It is in Japanese, but just watch his facial expressions. Nakagawa is on the left, BoJ Governor Shirakawa is on the right.

This post can also be viewed on kathylien.com.

What The Central Bankers Are Saying...

Central bankers wield a lot of power in today's economies. Their mistakes can make a profound impact on the economy of their country, and even other countries. When these powerful figureheads talk the economic world listens. The slightest slip of the tongue can crash markets or send them shooting through the roof. James Picerno from The Capital Spectator takes a look at some recent quotes from Central bankers from across the world in his blog post below.

Central bankers aren't gods, even if a few of them sometimes think otherwise. For proof of their mortal status one need only survey the various errors linked to this group in the 21st century. Yes, many central bankers made good, even superb decisions. But there were also some rather large lapses in judgment in matters of monetary policy and related matters in recent years. Arguably the ill-advised decisions overwhelmed the brilliant ones. A number of central bankers tell us so.

Of course, the private sector made more than a few errors too. In sum, the blame for the current troubles stretches far and wide. But when it comes to concentrated power, and the capacity for generating pain or pleasure, central bankers are second to none. They're an influential lot—influential on a grand scale. For that reason alone, listening to what they say is productive, or shocking—especially when they're deconstructing what went wrong in the run-up to the crisis now pummeling the global economy.

With that in mind, here are a few choice quotes (courtesy of The Bank for International Settlements) from recent speeches by members of world's most elite and potent financial club. We don't necessarily agree with all that follows, but we're listening closely.

Mario Draghi, governor, Bank of Italy, 16 December 2008
One striking aspect of the crisis is precisely how its unfolding has continued to catch both policy makers and private sector players by surprise. It started with defaults in a marginal segment of the financial services industry, then quickly spread to virtually all assets. From being a US-only event, it has become global, and in fact it is forcing and accelerating the redressing of world macro imbalances that have been with us for 15 years. The current recession is the result.

Amando M Tetangco, Jr., governor, Central Bank of the Philippines, 2 February 2009
The roots of the US financial crisis can be traced back to the early years of this decade when the United States aggressively eased its monetary policy to facilitate recovery from the dotcom bubble and the September 11 terrorist attacks. If you will recall, the US Federal Reserve began a cycle of cuts in the Fed funds target rate from 6.5 percent in May 2000 to as low as one percent by June 2003. On the fiscal front, large public deficit spending beginning in 2001 was pursued to prop up the economy which was then on the brink of recession. The low interest rate regime fueled a boom in mortgages, including among borrowers with doubtful credit histories or those fancifully called NINJA loans – that is, loans to No Income, No Job or Assets loans. Thus, house prices in the US began rising in 2000, surpassing the growth of disposable income. The excessive lending itself would not have brought in such great financial distress because if the borrowers turned out to be poor borrowers, then foreclosures would just have followed. However, what made this risky behavior turn into a crisis event was the bundling of mortgages by various financial institutions into complex securities such as collateralized debt obligations (CDOs) which were largely unregulated.

Hervé Hannoun, acting general, manager, Bank for International Settlements, 7 February 2009
The global financial crisis and its macroeconomic fallout have dramatically changed the agenda of the central banks, fiscal authorities and supervisors and regulators. The change is illustrated by a remark surfacing repeatedly in the current economic debate: “We are all Keynesians now.” In some sense, indeed we are. But history teaches us that, in designing economic policies, policymakers always need to look beyond the short time horizon that crises seem to impose on us. In my view, current expansionary policy responses risk a failure to capture two crucial and interrelated facets of the present crisis. The first is that it is part of an underlying adjustment towards more sustainable macroeconomic conditions. The second is that it is a crisis of confidence which requires a recognition of the rational expectations of economic agents and of the behavioral effects associated with expansionary fiscal policies. To restore confidence in a sustainable way, policy actions should be credible from a medium-term perspective, address existing economic imbalances and pay attention to economic agents’ expectations.

José Manuel González-Páramo, member, executive board,
European Central Bank, 6 February 2009
The start of the financial crisis was triggered in the summer of 2007 by the realisation that the risks associated with the US market for sub-prime mortgages were not properly reflected in the price of related instruments, particularly mortgage-backed securities. A market-wide reassessment of financial risk led to sharp increases in premia and spreads across all segments of the credit market. The rapidly falling market values of credit instruments hit both the net worth and the profitability of the banking system.

Philipp Hildebrand, vice-chairman, governing board, Swiss National Bank, 5 February 2009
Financial markets react to incentives, and these incentives were misplaced in the past. It is in our power to start lobbying for clearly defined and risk-limiting conditions. If the responsible authorities wish to enact more stringent regulation, we ought to give them our unconditional support.

Christian Noyer, governor, Bank of France, 11 December 2008
In many respects, the current crisis is about valuation. To be sure, the factors underlying and accounting for the crisis are numerous. However, one of its significant features is that the uncertainty surrounding the “true” value of complex financial instruments has undermined the confidence of global markets, increased uncertainty about counterparty risk and led to contagion across asset classes, financial markets and economic regions. The crisis has highlighted the fact that the valuation of financial instruments is not only a question of accounting. It raises issues about risk measurement and management by financial institutions, prudential issues via the definition of capital requirements and, more widely, financial stability issues. However, valuation is also without any doubt an accounting issue. It is therefore hardly surprising that the debate about the application of accounting standards to financial instruments is a highly topical one.

Jürgen Stark, member, executive board, European Central Bank, 10 December 2008

For too many years financial market participants were used to a macroeconomic environment with high global output growth, low inflation and very low interest rates. Macroeconomic policies led to global and domestic imbalances which became increasingly unsustainable with debt financed over-consumption in one region and high savings in other regions. An overall benign macroeconomic environment led to (i) a general carelessness or a tendency to under-price risks and (ii) to a search for yield which in turn accelerated financial innovation.

Lorenzo Bini Smaghi, member, executive board, European Central Bank, 9 December 2008
When analysing the current financial crisis the temptation might arise to attribute all the responsibilities to the excesses of the US financial system. I think this would be a mistake. While excessive debt creation and risk mispricing are clearly the root cause of the crisis, we should not forget that in order to make a market you need buyers and sellers. And this crisis is as much a crisis of sellers as of buyers.

This post can also be viewed on capitalspectator.com.

EU Leaves Interest Rates Unchanged In Risky Move

All over the world central banks are dropping key interest rates in an attempt to stimulate lagging economies. Why then would the head of the European Central Bank leave interest rates unchanged despite wide spread economic turmoil among EU countries? Kathy Lien shares her thoughts on Trichet's controversial decision, along with the potential impact to currency markets, in her blog post below.

Here is a snippet of my comments about this morning’s price action on FX360.com:

There has been a lot of action in the currency market this morning, mostly centered on the British pound and Euro.

ECB President Trichet is not buckling under pressure. After leaving interest rates unchanged at 2.00 percent, he refused to make any decisive comments on where interest rates are headed in March. Trichet is still buying time to see how the economy and price pressures respond to their recent rate cuts. The Euro has held steady because Trichet said he is not pre-committing or excluding anything. The zero interest rates that Prof Roubini is calling for is out of the question especially for a central bank that remains obsessed with inflationary pressures. Trichet acknowledged that inflation will continue to fall but he expects it pick up in the second half of the year and if oil prices rebound, the acceleration of price pressures could exacerbate. Rather than being completely downbeat about growth, Trichet said that even though the risks are clearly to the downside, there are signs of stabilization. By postponing rate cuts, Trichet is putting his credibility and reputation on the line.

The ECB cannot stop cutting interest rates at this time especially as we continue to see very weak economic data. German factory orders fell 6.9 percent in the month of December, more than double the market’s forecast. Trichet who is known for his candor has already admitted that 2 percent will not be the lowest level for Eurozone interest rates and the market may be right to bet on a 50bp rate cut in March. If he doesn’t plan to cut interest rates to 1.5 percent next month, he would not comment on the market’s expectations. Although zero interest rates is off the table, we do not think that the ECB will stop at 1.50 percent. Interest rates could fall as low as 1 percent, which is why we could see more weakness in the Euro.

EUR/GBP Crushed After BoE Rate Decision

EUR/GBP collapsed following the Bank of England’s decision to cut interest rates to 1 percent. Even though the yield advantage in EUR/GBP has increased from 50bp to 100bp in the Euro’s favor, the market is less focused on interest rate differentials and more focused on recovery. The pound is trading higher because the Bank of England and the UK are being rewarded for their aggressive monetary and fiscal stimulus. The Euro on the other hand is being punished for implementing sluggish monetary policy.

This post can also be viewed on kathylien.com.

Spain, The Latest Country To Have Credit Downgraded

Spain has become the latest country to have their credit rating downgraded. Next in line could be Portugal and Ireland. As a country, having ones credit downgraded is a huge blow to the economy. Most countries today rely heavily on borrowing to keep their economies moving along, and when credit ratings fall, borrowing costs go up, sometimes dramatically. For Americans this might seem like a European problem, and nothing for us to worry about, but with each new bailout, and with every trillion added to the deficit, the potential for the U.S. to have their credit rating downgraded is increased. That is still an afterthought at this point, but if it were to happen the results would be catastrophic. Kathy Lien takes a closer look at the latest credit rating downgrades in her blog post below, and attempts to answer the question: "What does it mean to have your credit rating downgraded?"

This morning, Standard and Poors downgraded the sovereign debt rating of Spain from AAA to AA+. With Greece’s rating downgraded last week and Ireland and Portugal on credit watch negative, this could be the beginning of more downgrades.

Therefore it is important to consider what it means for a country to have their credit rating downgraded:

To have your credit rating downgraded means higher costs of borrowing. The Euro is slipping as we are seeing an exodus out of Spanish bonds because some global funds are mandated to invest only in AAA debt. A credit rating reflects the risk of default. Therefore a lower credit rating means that a country is at greater risk of defaulting on their debt.

On a local level, we expect investors to shift their money out of Spanish debt and into countries with a higher credit rating such as Germany or even outside of the Eurozone. Spanish Bond prices have dropped significantly since the beginning of the year, driving yields higher. The gap between the interest rates on German and Spanish bonds have hit the highest level in 10 years, reflecting the sharp divergence in economic performance. Talk of Spain leaving the Eurozone is irrelevant because their cost of borrowing would skyrocket if they chose to do so. I think that there is a greater chance the countries being downgraded will be kicked out of the Eurozone.

This post can also be viewed at kathylien.com.

Forecasting The Current Recession

We all know that the current economic conditions are unlike anything we have ever seen before. This was a large reason why it took the folks responsible for identifying recessions so long to make the official announcement. It is very interesting to hear their reasoning behind the delay, and even to understand how these things are tracked to begin with. James Picerno from The Capital Spectator interviewed one of the officials that helps make these determinations which helps shed some light on the topic. You can read more about it in his blog post below.

Forecasting cyclical turning points in the economy (and inflation) is job one at the Economic Cycle Research Institute (ECRI), a New York consultancy. In fact, it seems to do so rather well, or at least it has in the past. Notably, ECRI has earned some well-deserved praise in recent years for correctly predicting the 2001 recession.

But the current downturn has been a little trickier. True, ECRI was warning of trouble in late-2007. Even so, the firm held out hope that a recession might be sidestepped. As discussed in a November 2007 report, ECRI explained that "the leading indexes are not yet in a recessionary configuration, thus a recession can still be avoided." Alas, it was not to be. With the clarity of hindsight, we know that the recession began in December 2007, as per NBER's official (albeit 12-month lagged) dating of the downturn's start.

To be fair, ECRI was advising that a downturn was possible well ahead of December 2007. Today, the firm counsels that the recession is well entrenched and that economic contraction looks set to roll on. "The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes," says Lakshman Achuthan, managing director of ECRI and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.

In an interview earlier today with The Capital Spectator, Lakshman talked of recessions, how we got into this mess and the outlook for, one day, better times. If you have a taste for the ugly details of the business cycle, read on…

Lakshman, ECRI did a nice job of predicting the 2001 recession. Were you ahead of the curve this time?

No, we were much more coincident, for a whole host of reasons. We said a recession was unavoidable in early March 2008. The reason we held out some hope that the recession could be forestalled was because of a weird confluence of events going on at the end of 2007 and early 2008 with respect to inventories—manufacturing stuff in the U.S. economy.

Typically recessions are kick started in many examples by a big inventory overhang that, all of a sudden, in sort of a Wile E. Coyote moment, give way and the floor falls out from under manufacturers. They realize that they have way too much inventory and they stop [producing]. That's how a lot of recessions tend to start.

But not this time.

No, it didn't happen that way. There was very little inventory and so we didn't have that kind of downturn in the economy. That gave policymakers the briefest window of opportunity to maybe push [the recession] off. But they weren't that worried and thought they had things pretty much under control. And we had growth abroad that was still drawing on U.S. manufacturers and so there was a widely held belief that we didn't have to worry about [recession] and that we were managing the home price decline and the emerging credit crunch quite well.

The economic cycle has in fact been some sending false signals, or certainly misleading signals in recent years, or so it seems. Inflation, for example, was running hot in the first half of 2008. But by the end of the year, deflation seemed to be the big threat.

Yes, it's been very schizophrenic. For example, the assumption in many models was that home prices couldn't go down; now the assumption is that they can't go up. All along the way there were plenty of prognosticators saying extreme things. Today there are some expecting a depression while others are expecting things to rebound in the second half of this year.

Looking back, you can see how this recession was set up. Certainly oil was part of the reason. We started to have oil spikes in 2005, and every year since then, through early 2008, we had oil spikes. Every time you had an oil price spike, someone warned of recession. When you had the housing market downturn begin in 2005, and you combine that with an oil spike, a lot of people saw recession.

But those were false signals, at least for a few years after 2005.

Right, and instead what we saw was that the economy accelerated to a four-year high with the growth rate in 2007. That's kind of an inconvenient fact. We actually grew faster than Europe in 2007. This wreaked havoc with all kinds of assumptions that decision makers had taken. In fact, the acceleration in 2007 may have lit the match for a lot of this credit stuff.

How so?

Because decision makers in the fixed-income markets and other markets were looking for a recession in 2007, but it never happened. You had the expectation on Wall Street, at Merrill Lynch and Goldman Sachs, for instance, of a 75-to-100 basis point rate cut by the Fed. And then one day in early June those two houses, which have a lot of followers, abruptly turned on a dime and said they didn't think there would be any rate cuts in 2007. What this did was immediately wreak havoc with all of the models pricing subprime credit groups, where the assumption was that rates would go down and so those instruments would maintain their credit ratings. The minute you took out the rate cuts, the guise fell away and everyone started running away from subprime debt very quickly. And that continues today.

So you had a housing price downturn that began in 2006 and then morphed into a credit crunch in 2007. These are massive things that take time to resolve. But they don't in and of themselves mean that you must have a recession. Our indicators were saying, yeah, things were bad, but it wasn't a guaranteed recession.

When did things take a turn for the worse in terms of triggering a real economic contraction?

We started to get a real recession risk in the second half of 2007. Our weekly leading index peaked in June 2007, about six months before the recession actually began in December 2007. In fact, by December 2007, our weekly leading index had plunged to its worst reading since the 2001 recession. However, because of these inventory issues I mentioned [there was an expectation that] maybe we would be able to buy a little bit of breathing room. That didn't happen. You saw the recession begin at the end of 2007. All the dead bodies started showing up in 2008 as the recession turbocharged the housing downturn and credit crisis.

What's the outlook now?

The outlook remains recession. Retail sales, the Fed Beige Books, industrial production, jobs growth—these are all coincident indicators and they confirm that we're in the most severe recession in the post-World War II era. This was forecast by our weekly leading indicators. Our leading index had earlier fallen to a 60-year low. So it's not a surprise that the coincident indicators are now weak.

What has changed in very recent weeks is that the leading indicators have begun to stabilize. I'm not suggesting that there's an imminent recovery ahead, but it is notable that we've gone from minus 30% growth rates to minus 25%, minus 28% or so. I suspect this is largely related to hope. We have a new year. We also have a new administration and some new stewards of the economy. There's talk of a new stimulus plan. The leading index may be showing there's some pause to this sharp decline. However, an objective reading of the index doesn't yet show a sustained recovery. That would require a very persistent and pronounced rise in the leading index for us to make that kind of forecast. What we know objectively is that the first two quarters of 2009 are going to be recession quarters.

The longest previous recessions were 16 months each, in the early 1970s and early 1980s.

If we date the current recession's start to December 2007, that suggests that we'll soon match the previous recessions' 16-month time frames. Does that mean we'll be getting close to the end of the current downturn later this year?

Saying at this point that the recession will end in the second half is really a coin toss—no one really knows. We don't know because the leading indicators haven't turned up yet. The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes. The good news is that the leading indexes can't see that far. A lot of it is going to depend on, for example, the stimulus debate. If the stimulus is three times the proposed size and it happens quickly, then that's one extreme and so there's probably a chance of some kind of bump in the second half of 2009. On the other hand, if the stimulus is delayed, or adjusted down, maybe there's less chance.

Keep in mind that the recessions of the early 1970s and early 1980s were also international recessions. The number of countries in recession around the world today is the broadest we've seen since World War II. It's broader now than it was in the 1970s and 1980s in terms of the diffusion and pervasiveness of the recessions globally. That informs our view of what may happen in the U.S. There's a linkage: The broader the recession, very often the longer it is.

This post can also be viewed on capitalspectator.com.

The Bank Of England Cuts Rates To Record Low

The Bank of England has been around for a long time and weathered many financial storms, but they feel the current storm is so bad that they have cut interest rates to the lowest amount on record. It doesn't appear that the rate cuts will stop there either, currency expert Kathy Lien predicts that more cuts are in the future given the Bank of England's pessimistic tone on the economy. So how will these rate cuts affect the British Pound? Kathy Lien discusses that as well in her blog post below.

As you may now, the Bank of England cut interest rates by 50bp to 1.50 percent, an all time record low for the 300 year old central bank

What I found most interesting about the BoE Monetary Policy Statement is the credit that they are giving to the weak sterling.

“But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.”

This is one of the arguments that I gave in my 2009 British Pound Outlook about why we expect the UK to be one of the first countries to recovery from the global economic downturn.

As for further rate cuts from the central bank, more is likely given the pessimistic tone of the BoE statement. Inflation is also expected to ease sharply.

However the GBP/USD has broken above the 50-day SMA and entered our buy zone as the rate cut confirms the aggressiveness of the central bank. As long as the currency pair remains above 1.4245 on a closing basis, we could see a move to 1.5585.

source: eSignal

This post can also be viewed on kathylien.com.

Currency Predictions For 2009

All things relating to the economy were crazy in 2008, to say the least, but now that it is over, what does 2009 have in store for us? Currency expert Kathy Lien attempts to look into her crystal ball and determine how the new year will be for the key currencies. Forex investors should make sure to check out her latest blog post below.

2008 has been a crazy year in the foreign exchange markets and hopefully 2009 will bring more steady times for the global economy as a whole. The tremendous amount of fiscal and monetary stimulus that central banks around the world have doled out should begin to have their effect in the second half of the year. Countries that will be the first to rise from the ashes are the ones whose currencies have lost the most value in 2008. In contrast, the countries whose currencies soared will have a much more difficult time recovering.

In 2009, we will be celebrating the 10 year anniversary of the Euro and in January, people around the world will cheer the inauguration of brand new US President. Obama embodies change and hopefully that change will help to pull the US economy out of recession.

Make sure you read my 2009 currency forecasts. I talk about what I expect fundamentally and technically for the following currencies in the year ahead.

US dollar forecast
Euro forecast
British pound forecast
Japanese Yen forecast
Australian dollar forecast
New Zealand dollar forecast
Canadian dollar forecast
Swiss Franc forecast

This post can also be found on kathylien.com.

Looking Back At 2008

2008 was a year to be remembered by investors, but certainly not in a good way. While most investors probably lost a substantial amount of money, hopefully they at least learned some powerful lessons. James Picerno from The Capital Spectator looks back at 2008 and some of the things investors should take away from it in his blog post below.

Two-thousand-and-eight is gone—and good riddance. But the blowback will be with us for some time, on a number of fronts. And that starts with reviewing the previous 12 months.

As our first table below shows, red ink was spread far and wide in 2008 in almost everything other than cash and bonds. Otherwise, double-digit losses were the rule last year. But if we look at the monthly tally for December, the view looks decidedly better. REITs, in particular, rebounded sharply last month, surging nearly 18% in December.

Most of the other asset classes followed suit, albeit with lesser although still robust gains for the month. The exceptions are cash and commodities. It's too soon to tell if the worst is over or if the rally is merely a fleeting affair in an ongoing bear market. But given the extent and breadth of the carnage, it's tempting to think that maybe, just maybe, positive returns await in asset classes other than cash.

Speaking of cash, a few words about last month's performance of 3-month Treasury bills (our proxy for cash) is in order. Although our table above lists December's performance for cash as zero, the number's in red because the return is slightly negative for 3-month T-bills if you carry the return out to two digits: -0.02%. In the grand scheme of the universe, no one will lose any sleep over this microscopic loss. But the fact that T-bills—the classic "risk-free" asset—posted a loss of any degree is extraordinary, and so it speaks to the times we live in.

Indeed, monthly losses in T-bills are so rare that it doesn't register in our databases, which admittedly only go back to the 1980s for "cash." That's not to say that it never happens, but you'll have to go back quite a ways to find monthly red ink in this corner of finance.

The source of last month's slight loss is no mystery, at least. The explanation starts by noting that the yield on a 3-month T-bill slipped to just about zero at the end of November—an astonishing state of affairs in and of itself. Then, in December, the T-bill yield rose a bit, albeit to a mere 0.11% by December 31 from roughly zero a month earlier. Slight as that is, it was enough to tip the monthly return to negative in the 3-month T-bill for two reasons. One, for much of December, the 3-month T-bill barely gave investors any yield to speak of, and since yield is the only source of return for these securities the pickings were fated to be slim at the end of November even under the best of circumstances. Add the fact that T-bill yields rose slightly set the stage for an ever-so-slight loss (rising yields translate into lower prices in bondland).

The fact that even cash could post a loss is a sign of the times, of course, although investors had bigger problems than worrying about miniature losses in T-bills. Indeed, as our second table below reminds, 2008 was a horrendous year for most asset classes. Horrendous, but not entirely surprising, at least in terms of how 2008 compared with previous years. Yes, the depth of the losses are shocking. But the reversal of fortune was overdue—long overdue in some cases.

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Consider emerging market stocks, which lost more than 50% last year. Shocking as the loss is, the volatility is not out of character for the asset class. Indeed, as the chart shows, emerging market stocks had been posting gains of 20% to 50% for each and every calendar year during 2003-2007. That extraordinary five-year stretch of price increases had to end eventually, of course, and for anyone who expected otherwise, well, they were living in a dream. Surely if an asset class can post a 50% gain in one year—as emerging markets did in 2003—something similar is possible if not likely on the downside.

A similar lesson applies to the formerly high-flying world of REITs, which also enjoyed an extraordinary bull market run that finally started coming apart in 2007 and continued in 2008.

Yet not everything was about losses in 2008, a year that witnessed potent gains for some corners of the bond world, which once again makes the case for owning a globally diversified portfolio. Foreign government bonds denominated in foreign currencies, for example, was an exceptionally bright light last year and so if you didn't own the asset class (via BWX, for instance), your portfolio probably paid a price.

The point is that cycles endure, even if the details aren't always 100% clear. What goes up in price eventually comes down. Meanwhile, lower prices precede higher prices. Although one must be extremely cautious about applying that view to individual securities, it generally works well over time when it comes to asset classes, which have a habit of surviving, which is more than one can say for some individual companies or certain bonds.

Timing, of course, is always debatable, even with broad asset classes, which is an argument for maintaining some mix of the world's capital and commodity markets through thick and thin. The question, as always, is how to structure the mix and manage the betas through time?

As it happens, that's the focus of a new monthly newsletter (The Beta Investment Report) that your editor will launch later this month (details to follow on CapitalSpectator.com). For the moment, though, we're simply gazing backward, in search of some basic perspective. Knowing where you've been and what history looks like is the foundation for looking into the future and assessing risk as well as opportunity. As always, a surplus of both awaits. The critical challenge is fleshing out the details, which is the mandate of our soon-to-be-launched newsletter.

This post can also be viewed on capitalspectator.com.

Brazil’s Economy Remarkably Strong, But For How Much Longer?

In the midst of worldwide reports of falling economies, Brazil’s economy has been remarkably strong. According to Bloomberg, Brazil’s GDP grew 6.8 percent in the third quarter of this year compared to last, up from 6.2 percent growth in the previous quarter year over year. Considering the state of the worldwide economy those numbers are staggering—so staggering that they beat the estimates of all 31 economists polled by Bloomberg. Compared to the constant underperforming of estimates in the U.S., this must be truly exciting for Brazil. On the downside, though, economists are predicting a slowdown for Brazil’s economy, and Morgan Stanley is even predicting a recession for Brazil, according to Bloomberg.

While the talk of recession is probably a bit premature, Brazil will likely see a substantial slowdown in their growth. Economists quoted in the Bloomberg article gave 2009 GDP growth ranges anywhere from 2 to 4 percent. The article also mentioned that certain industries in Brazil were starting to lay off employees, which is never a good sign. However, the layoffs that they mention are nowhere near the level that we are experiencing here in the U.S. We also should remember that 31 of 31 economists underestimated Brazil last time around, so who is to say they won’t do it again?

Brazil is an amazing country with investment potential that has interested me for quite some time. The country has almost every imaginable natural resource and is making great strides towards becoming a world power. I certainly think that we will begin to see a slowdown in their economy as external pressures take their toll on Brazil along with the rest of the world, but I don’t foresee a recession. I think Brazil will continue to grow, albeit at a slower pace than before. Once the global economy begins to turn around I see Brazil taking off once again.

We hear a lot about the BRIC economies (Brazil, Russia, India and China), but of those four Brazil seems to be the least discussed. India and China have their huge populations and incredible growth numbers, and Russia has its huge oil reserves. Brazil always trailed them in growth and in investment hype. To me, though, I think Brazil has as much potential as the others, if not more. India and China have huge populations, but they also are facing some huge problems, such as water shortages. They also are almost entirely dependent on other countries for their energy needs. Russia has abundant water and energy, but their government is repressive. Brazil has tons of fresh water, is energy independent, and though their government is not perfect by any stretch of the imagination, it continues to improve and seems to be headed in the right direction. In addition, the fact that Brazil has not had the same type of investment hype as the other countries is a good thing for investors. Over the long term I think we might see Brazil moving to the head of the BRIC class, and it might happen sooner than we think.

China's Looming Problems Give New Government Biggest Test Yet

China has been integrating many capitalist principals into its communist government for sometime, but until now the new blended policies have really yet to be tested. Tim Iacono at The Mess That Greenspan Made takes a closer look at China's looming problems and discusses how their new government is in for its biggest test yet.

There's a very good story in the Washington Post today about the slowdown in China detailing the impact of the sharp decline in the export industry and all the steps being taken by the government to counter the slowdown.

Being in the unique position of have huge cash reserves, the Chinese government has begun applying these funds liberally in the hardest hit areas.

In a report yesterday, David Burton, Asia-Pacific director of the International Monetary Fund, noted the Chinese economy "will slow but should remain relatively strong and help to support the rest of Asia".

This morning, according to this story at 24/7 Wall Street, "Dark Star" Nouriel Roubini predicts the Chinese economy "will fall apart".

Which will it be? We'll find out soon enough. Here's the Post article:

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

It sounds like the combination of a communist government and a free market economy is about to face its biggest test yet.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.

The Global Property Bust

Most of the focus in relation to the popping of the real estate bubble is centered on the U.S., but the U.S. is far from the only country in the world experiencing a property bust. Global Property Guide recently published a list of housing price changes across the world for quarter two of this year, and a vast majority of these countries experienced a fall. The U.S. had one of the worst price drops, with a drop of 18.93 percent; if you think that is bad, compare it to Latvia, which saw a fall of 33.08 percent. Overall, 21 of the 33 markets tracked saw a drop last quarter, but those numbers are likely underestimating the problem, according to the report.

Not only are some of the official statistics understating the problem, but these numbers don’t take into account the severe drop in transaction volume that is occurring in some places. For example, the country which saw the biggest gain in quarter two was China, yet the report states that “transaction volumes [in China] have fallen sharply, suggesting that buyers are now nervous.” Falling transaction volume is a precursor to falling property prices, so it looks like things are going to be getting worse even in the best of markets.

One thing to note, which really isn’t discussed in the report, is the relationship between mortgage availability and property prices. Markets which saw high leverage use, such as the U.S., are more vulnerable to severe price drops. This is especially true if extremely high-risk or subprime loans were used. Markets which stuck with traditional lending practices likely won’t experience as severe a drop, and likely did not see as high a price climb, either.

A lot of the run-up in prices in these emerging markets was caused by speculation, and while lending wasn’t really a huge concern in these markets, you need to pay attention to end use. If there is no immediate use for the property, it is likely that you are going to see the value drop now that investors aren’t willing to throw money around on a whim. Speculative investors are the ones being hurt the most right now; you can bet that they are going to be in need of cash soon, if they aren’t already, and willing to drop prices substantially. When buying property in an emerging market, pay attention to who the buyers are. If investors are buying from investors, that is not a good sign. At some point an actual end user needs to be the one buying, or else it is unsustainable.

Smart investors are going to remember this pattern--and it is a pattern rather than a new phenomemon--next time around. The boom and bust cycle will be back in the future--you can bet on that--so next time make sure you are prepared and watching for the signs.

America’s Huge Debt To Foreign Countries Leaves It Vulnerable

We talk a lot about how huge America’s debt is (about $9.7 trillion), but what doesn’t often get addressed is the ramifications of holding this debt. Rather than focus on the obvious ones, like enormous debt service payments, and the impact on the dollar, I am going to talk a little bit about the foreign dependence side of things. Americans as a whole don’t save much, if anything. In fact, recently we actually dipped into a negative savings rate as populace, spending more than we earned. Since Americans have been saving less and less, this means that we are leaning more and more on foreign countries to fund our expenditures.

More than 25 percent of the national debt is held by foreigners, according to the U.S. Treasury website. It is not outlandish to think that this could potentially pose a serious political problem. If, say China or Japan--the top two holders of U.S. debt--were to attack an ally country of ours, even though we would want to step in we might instead do nothing for fear that the attacker might take actions to damage our currency or economy. Think of it as a card that these countries have in their hats which they could play whenever it benefits them.

Another potential problem that arises out of this is our dependence on foreign countries. We need them in order to function as a country right now. If, for whatever reason, foreign governments decided tomorrow that they were going to stop buying U.S. debt, we would be in a world of hurt. While it is unlikely that this would happen overnight, as our debt load increases and more alternative options become available elsewhere, it is not outlandish to think that slowly but surely, foreign governments will start moving away from U.S. treasuries. This is already happening to some extent as more and more foreign governments are diversifying into Euros and other higher-performing assets via sovereign funds.

America’s dependence on foreign countries to fund our debt is concerning without a doubt, but at least in the immediate future it is not an insurmountable problem. We as a country need to acknowledge that there is a problem and take steps to correct it. To slow down the increases of foreign debt we need to start cutting back on imports and increase our exports. Obviously this is easier said than done, considering how we have become addicted to low cost imports, but it is necessary in order to balance the equation out.

Both Europe And Japan Economies Shrink: Emerging Economies Next?

In Q2 of this year, the Euro Zone saw its GDP shrink 0.2 percent and Japan’s GDP saw a decline of 0.6 percent, according to the New York Times. Since we have been focusing so much on the doom and gloom surrounding the U.S. economy, I thought it would only be fair to talk about the problems in the rest of the world, too.

This Euro Zone’s decline is the first quarterly decline that the group of nations has experienced since joining forces under the Euro in 1995, according to the New York Times. The Euro Zone’s two big economies, Germany and France, both contracted individually. Germany’s decline was more or less expected, and came in at 0.5 percent. On the other hand, France’s drop was a big surprise, according to the New York Times; it came in at 0.3 percent.

Japan, which represents another of the Group of 7 (G-7) economies, also has been hit hard. They reported a decline in their GDP of 0.6 percent. The G-7 consists of the U.S., Japan, U.K., Italy, France, Germany and Canada. When the group was formed, these seven countries represented the seven largest economies in the world. This make-up has changed thanks to China’s tremendous growth over the years, but these seven economies are still all toward the top of the list. Not one of these seven economies is doing well at this point, and it is possible that all of them could see economic contraction before the year is out. The U.S. has avoided one thus far, but let’s see how things look once the stimulus package impact wears out. The U.K. barely squeaked out gain in Q2 and many economists are predicting that their economy will contract in Q3. With the largest economies in the world all struggling, it seems we are set for a widespread global slowdown.

You can be assured that when all these countries slow down at the same time, the lesser economies of the world will suffer, too. No economy is completely shielded from all these economic powerhouses. Investors would do well to remember this, as well as that emerging economies, while offering diversification, are also much more volatile than developed economies. The biggest losses will likely be seen in the smaller countries. Don’t get me wrong--I’m a huge fan of emerging markets over the long term, but investors need to take proper precautions right now to protect themselves, because things are only going to get worse on the global scene.

China’s Olympic Opening Ceremony

Like millions of other people across the world, I watched the Olympics opening ceremony on Friday, and I can say that it was quite a spectacle. While it certainly was an amazing show, the likes of which I have never seen before from an opening ceremony, the price tag for this show made me choke. When the announcer said that China had spent $300 million on just this one show I was shocked. I knew they had spent $40 billion on the whole Olympics, but most of that went to infrastructure improvements and pollution cleanup. $300 million for a show just seems ridiculous.

To me, this just proves the point that China is trying to use these games to show the world that they are now a power to be reckoned with. What better way to do that than throw down $40 billion for the Olympics and $300 million for the opening show, both of which are unprecedented numbers.

The problem with this is that the world already knows China is now a powerhouse. We all know about the growth in their economy, and pretty much every country in the world wants a piece of China right now. They don’t need to prove a point that has already been made. While in one sense the employment created by all this spending is a good thing for China, one can’t help but feel the money could have been put to better use. China still has a lot of poverty in their country as well as many other areas of need, which could have greatly used some of these funds set aside for the Olympics. I don’t think there is any chance of China seeing a return on the money they have spent in the form of increased tourism (or anything else for that matter) after the Games, so really, most of this money will have been wasted on what the country considers a big party for themselves.

The Olympics is a great event with loads of history and tradition, but when countries start using it to make statements or impress the world (and to be fair, China is not the first, nor will they be the last to use the Olympics in this way) it is just a shame. Countries shouldn’t neglect the good of their people for the sake of a game. The Olympics bring in a large sum of money and countries should be smart and spend only on the Olympics what they can expect to see in return, anything beyond that is just a waste.

Europe’s Economic Outlook Doesn’t Appear Much Better Than U.S.

Seeing how the U.S. dollar, along with most other world currencies for that matter, has fallen against the Euro, one would think that the Euro Zone (countries of the European Union which use the Euro) was in great financial shape, but that isn’t necessarily the case. Spain and Ireland in particular are suffering mightily as they were unable to control the booms (see One Interest Rate, 13 Economies article), and now busts of their economies. The two stalwarts of the Euro Zone, France and Germany, have been holding the Euro up thus far, but now even their economies are starting to feel the heat. Oh, and don’t forget about the U.K.--even though they are not part of the Euro Zone, they are one of the largest economies in Europe and their outlook looks especially grim.

The German ZEW economic sentiment indicator has plunged to a record low, French business confidence has dropped, retail sales are down sharply and European companies are starting to default on their debt at alarming levels, according to Money Morning, an e-mail newsletter from MoneyWeek magazine. These are all obviously negative signs that point to the fact that the Euro Zone is heading in the wrong direction economically.

The U.K. isn’t doing all that great either. The U.K. had the same sort of run up in housing prices experienced in the U.S., only their down cycle is just beginning. Furthermore, their economy is driven by two key industries, construction and finance, both which are doing extremely poorly right now.

Even with the troubles being experienced in the U.S. the dollar could regain some ground against the Euro and British pound. While this might please travelers who are looking to visit Europe in the near future, there is a big concern to keep in mind with all this. When we talk about struggles in the U.S. and Europe, we are talking about the largest importing countries in the world. You can bet that if all these countries struggle at the same time, it will be felt across the world. We very well could be headed for a serious global recession of sorts, and investors certainly should be keeping that in mind.

China Olympics: Cost Versus Reward

With China’s Olympic Games coming next month I thought it would be fitting to look at the cost they have paid, and compare that to the potential rewards which come from hosting this prestigious event. There has been a debate for sometime about whether or not hosting the Olympic Games is good or bad for the city’s economy, and this year’s games are no different. Beijing will spend an estimated $42 billion on the Olympic Games, according to the Wall Street Journal, a number that far surpasses any other city’s previous commitment, but will they receive value from this investment?

Sure, $42 billion is a ridiculous number to think about, and on the surface one could say that there was no way the Olympics could generate that much money for a city. However, we must also consider what that $42 billion went towards. A good majority of these funds went towards infrastructure improvements, as well as environmental cleanup. In the rapidly growing economy of China, infrastructure is in high demand, and many of these improvements were badly needed. The bigger question is whether they got a little too extravagant with the improvements, and whether those additional funds could have been put to better use elsewhere. Not all of the improvements have been of the extravagant type, however; in some cases, residential areas now feature streets lined with port-a-potties.

In addition, the almost $10.5 billion spent on environmental cleanup--while not providing immediate economic benefits, per se--is hard to argue with. I’ve heard horror stories about the pollution in Beijing, as I’m sure most people have. In fact, the pollution is so bad that many Olympic athletes will be staying in South Korea or Japan and flying in solely for their events. So the fact that the government is finally trying to clean it up is probably a good thing. Now, if they can just keep the pollution under control once the Games are over, that would be the next step.

On the other hand, some of that $42 billion has seemingly been spent on extravagances and items which will be of little lasting value. For example, there really aren’t any plans for the bird's nest stadium after the Games, and it doesn’t offer protection from Beijing’s harsh winters and hot, rainy summers, according to the Wall Street Journal. If we want to see how the Olympic Games can adversely affect a city’s economy, we need to look no further than Athens. The $15 billion Athens spent readying itself for the last Olympic Games--ranging from building a light rail system to kenneling all the city's stray dogs for the duration of the event--sent the city into debt, and they have yet to recover. In addition, according to Tourism-Review, the Olympic Games don’t always result in increased tourism. They point out that during the Barcelona and Sydney games, for example, while they did see Olympic Games-specific tourism, the regular tourists stayed home. They ended up in the same place, tourism-wise, as they would have been without the games.

Increased tourism to China is unlikely, as the country is making it more difficult to obtain visas to visit the country. Many people who have already purchased tickets to the Olympics will not be able to attend because the country won't allow them in. Further, the city will be shutting down shops and restaurants that are near Olympic venues because they don't want crowds to form. The city is so paranoid about crowds that, on the 11th day of each month, the city's residents practice lining up (this is done on the 11th because the number 11 looks like two people standing in line).

When all is said and done, I think on the books, at least, this spending spree in Beijing will appear to be a loser. I also think that China knows this, but is willing to put up with a loss on paper in order to cement their image across the globe. They want to be seen as a modern world power, and what better stage on which to make this statement than the Olympics? They are being smart with a lot of the budget, putting it towards things such as infrastructure, however at the same time, they are building this infrastructure in a manner that is probably not the best long-term. One example of this is that they build brick buildings quickly and cheaply, then encase them in glass so that they look modern. They are being a tad more extravagant then they really need to be, and the infrastructure they are building is likely being maximized for Olympic venues. China is a growing world power; they know it, and they want the world to know it. The Olympic Games will likely prove this point, and for that, China is willing to waste a few billion dollars.

Global Real Estate Becoming More Transparent And Accessible

In the age of globalization, the world's markets are becoming ever more available to foreign investors, and while real estate has traditionally been one of the tougher markets to enter and navigate in foreign countries, it is getting ever easier. Nearly 50 percent of all countries improved their real estate transparency, according to the Jones Lang LaSalle Index from 2006 to 2008, with eight of those countries moving up a full tier. The only country to fall in the index was Venezuela. The Jones Lang LaSalle index ranks the transparency of countries based on five items: performance measurement, market fundamentals, listed vehicles, legal and regulatory environment and the transaction process.

While many countries still have a ways to go before investors can truly feel confident about investing there, this is a great sign that the world is recognizing the need for foreign investment. For investors, it is also great to see the number of investment opportunities continue to rise. Many people are fearful about investing in foreign markets, so out of fear they neglect them. Investors who take this stance are missing out on literally a world of opportunity. Know that while there are additional risks involved with foreign investment, there is also a significant reward variable to consider in addition to the main factor which should compel investors: diversification. Those investors who have 100 percent of their investments in U.S. funds, companies and other U.S. vehicles should seriously re-evaluate their portfolio.

Buying physical property in a foreign country can be rewarding, but it is not for everyone. That being said, if foreign real estate isn’t your cup of tea, then consider at minimum investing into some foreign funds, which could even include a foreign REIT (real estate investment trust). For the more adventurous, though, buying property in an emerging market, or even a developed foreign market, can be exciting and profitable.

If you are considering buying property abroad, the best piece of advice I can give you is to do your homework. Fully evaluate all the potential risk factors and then weigh them against the potential rewards; if an investment makes sense, then do it. Depending on the market you are entering you may also need to take additional precautions. If you are investing in an emerging market, I would recommend that you don’t invest more money than you can lose. Emerging markets and their governments and markets are not always stable, so things can go south quickly--but they also can get better quickly as well. To be safe, though, take extra precaution, especially if you are a new investor. Also, I always recommend seeking trusted local legal counsel (make sure to get referrals from other investors who have been successful), regardless of whether or not your agent tells you that you need one. Things don’t work in other countries like they do in the U.S., so be open-minded and patient (especially in Latin American countries), but that doesn’t mean let people walk all over you. Just realize that things are going to work differently and take a little longer in most places compared to the U.S.

Lastly, I want to point out that, especially in emerging markets, it is easy to get excited by promises of incredible returns and other such things, but there is a reason the developers are offering these returns: There is a lot of risk. Many developments that start never see completion for various reasons. Until you fully understand the market and how things work there, it is wise to only buy what you can see and touch.

Argentina Defaults On Debt

Argentina became infamous earlier this decade for defaulting on their debt during a major financial crisis, and now it appears they have defaulted once again. This time around, things aren’t quite as bad in the country, and the default is a little different, but their actions still qualify as default, according to an article written by a couple economics professors for the Wall Street Journal. Carmen Reinhart from the University of Maryland and Kenneth Rogoff from Harvard claim in their article that Argentina has manipulated their inflation data in order to pay out less on their inflation indexed debt, thus putting them in default.

The professors say that the government’s scheme began with the firing of their top statisticians. Now the inflation measurements that are being “officially” reported are drastically understated. According to the article, Argentina is reporting an inflation rate of less than 10 percent when by most external measurements, the real rate should be closer to 30 percent. The Argentine government owes around $30 billion in inflation indexed debt, according to the article.

Investors should know that circumstances such as this are always a risk when investing, especially in developing countries. Argentina isn’t alone in these types of actions, either. Across the world, countries manipulate their statistics to be in their favor. Sometimes they are minor “adjustments” and sometimes that are major and pretty blatant, like in this case.

I want to also point out that, while these types of things are more pronounced in developing countries, they happen here at home, too. The U.S. has adjusted things in their favor before (such as the gold price in the '30s) and still do it today (such as the CPI and GDP). So don’t be naïve and think this will never impact you because you don’t invest abroad; government manipulations of economic data happen here, too. Inflation indexed bonds just happen to be one of the easiest debts to influence, so invest in them with your eyes wide open.

Fuel Strike In Spain

In response to high fuel costs truckers in Spain have decided to go on strike. The truckers want the government of Spain to pass a law establishing a minimum price for their services, and to make sure that their contracts better reflect the fluctuating cost of fuel, which has risen by more than 20 percent since the beginning of the year, according to BBC News.

This fuel strike, which involves around 90,000 drivers--most of whom are self-employed--has the potential to cause some serious problems for Spain and its inhabitants. Already people are lining up at grocery stores and gas stations around the country, trying to get as many supplies as they can before stores start running out of goods. The striking truckers have warned the public that stores will only be able to last a couple days, according to the BBC article.

The truckers know that the country can’t run without them and they are making their voices heard, but are they going to be successful in their campaign? Part of the problem is that the Spanish government has a limited number of options available to it thanks to its arrangement with the EU. For example, it is required by the EU that member countries place at minimum a 15 percent value add tax (VAT) on fuel. In addition, the EU restricts the use of certain fuel subsidies, according to the BBC.

What the truckers want is more money to account for the business cost increase of more than 20 percent, and one way or another, they are going to have to get it. "We have no more solutions. We can't afford diesel any more. It's as simple as that," Jean-Claude Ferrand told Spanish national radio, according to the BBC.

If the government can’t offer subsidies what they might have to do is help negotiations between the truckers and the suppliers. Ultimately, either the government offers a subsidy or the suppliers are going to have to pay more to have their goods delivered. Looking at the options available it appears that likely the suppliers will be the ones fronting the costs, which of course will be represented in price increases and in the end borne by the consumer. Either way, though, it was going to come down to the consumer; they were going to pay for it either through their tax dollars or through increased goods prices.

Spain is making the headlines now, but with the way fuel costs keep rising, they are unlikely to be the last ones with this problem. Look for more and more truckers to substantially raise their prices or go on strike--or else out of business. Either way, supply and demand pressures are going to push prices higher to account for the increase in transportation costs.

Thailand Heading For Another Military Coup?

After the military coup in 2006, which stopped Thailand’s surging markets in their tracks and created fear in the eyes of investors, the last thing Thailand needs now--after rebuilding that confidence somewhat--is another coup.

After Samak Sundaravej was elected prime minister, many people feared that another coup may be imminent. After all, Samak is a close ally of the former prime minister Thaksin Shinawatra, who was the one ousted by the coup, so the precedent for such action has been established. Already protests have begun in opposition of Samak, just as they were going on in protest of Thaksin. Many Thais believe that Samak is just a proxy for Thaksin according to the BBC.

The bottom line here for Thailand is that if they want to restore investor confidence they need to quell this problem, and fast. The bigger these protests grow, the more speculation of a coup there will be and the lower investor confidence will shrink. Already Thailand’s stock market has fallen for five straight days, and the rumors of a coup are mounting, according to the BBC. If Thailand can put an end to the uprisings (in an acceptable manner) and cool down the rumors, it would go a long way towards proving that this administration is here to last.

Investors don’t like uncertainty, and when you are investing in a foreign country in particular, the last thing you want to see is problems with the country’s leadership. Thailand is a beautiful country with loads of potential, but in order to maximize this potential the country is going to have to establish some level of stability within their government.

Forget Talk Of A U.S. Recession, What About Canada?

In the first quarter this year, Canada’s economy shrank by 0.3 percent, according to Bloomberg. So while all the talk is about a U.S. recession, surprisingly, Canada may just beat us to the punch.

This news came as a shock to me because of how strong Canada’s economy has been, including their oil industry. The biggest problem area apparently was the auto industry. If the auto- and auto-related industries were removed from the, calculations then Canada’s economy would have actually still grown, according to Bloomberg. The biggest importer of Canadian automobiles, of course, is the U.S. and we just aren’t buying too many cars right now. Not only is Canada suffering from the drop in consumer confidence in the U.S., which is the number one importer of Canadian goods, but more importantly, Canada is suffering from their strong currency.

Ever since the Canadian dollar surged against the U.S. dollar, the trade balance between the countries has changed. Canadians are buying more U.S. goods and the U.S. is buying fewer Canadian goods because the U.S. goods are comparatively cheaper thanks to the weak U.S. dollar. Now the Bank of Canada is likely to cut interest rates in response. This should lead to the Canadian dollar dropping against the dollar, as it already has begun to do.

The Emergence Of Brazil As An Economic Powerhouse

Thanks to the commodities boom, Brazil has emerged on the world scene as a new economic powerhouse. This has not gone unnoticed by foreign investors who have been pouring billions of dollars into Brazil in an effort to capture some of the vast potential for profit. While it has only been a few years since Brazil was on the verge on economic disaster, it appears they have been able to turn things around in the country--and this time change may be for good.

I read a great article from The Wall street Journal this morning about Brazil that is definitely worth your time to read. The article talks about Brazil’s past problems, how they are overcoming them, some current investments happening in the country and even a little about the future prospects for Brazil.

In my opinion Brazil is here to stay. They are one of the few energy-independent countries in the world, they have the largest supply of fresh water in the world (Some think that water resources will soon be in higher demand than oil), they are packed full of just about every other natural resource you can think of, their currency has strengthened and stabilized and their government--while not perfect--has shown remarkable growth. As the government continues to grow and strengthen, and as they continue to combat the corruption and bureaucracy that is still holding them down, the sky is truly the limit for this country.

If you are interested in finding out more about physically investing in Brazil make sure to read NuWire’s article on Brazil Property Investment.

Cuba: Economy Finally Heading In Right Direction

Cuba’s economy was long held down by dictator Fidel Castro but his younger brother, Raul Castro, the new acting President of Cuba, has enacted some small reforms that are stepping stones toward economic improvement. He has legalized the sale of computers, DVD players and cell phones, allowed Cubans to stay at hotels previously reserved for tourists and, most recently, lifted the wage ceiling for employees in Cuba.

The wage restriction was a major damper on production in Cuba and one of the strongest sources of complaints from Cuban workers because they were paid the same regardless of how hard they worked. Naturally if employees can’t make more money the harder they work, there is little motivation for them to exceed the absolute minimum for productivity. The fact the Raul Castro has heard these complaints and is taking action is a great sign.

Cuba has been off limits for a long time for American investors, and there is much untapped potential in the country. For more insight about Cuba’s future investment potential, read my post: Fidel Castro Resigns: What’s Next For Cuba?

I look forward to more changes in Cuba’s economy and hope that it won’t be much longer until Cuba and the U.S. can reconcile their past differences.

Thailand Medical Tourism

Thailand’s medical tourism industry is one of the strongest in the world, so why didn’t it make the cut for NuWire’s recently published list of the Top 5 Medical Tourism Destinations? We received an e-mail from a reader asking why Thailand was not included on our Top 5, which was a valid question. Here is some background on Thailand’s medical tourism industry:.

The main medical tourism hospital in Thailand is Bumrungrad International Hospital in Bangkok. The hospital is state-of-the-art, equipped with top-of-the-line technology and a well-trained staff. According to Bumrungrad’s website, more than 200 of their doctors are U.S. board certified. The only difference between the care patients receive there and the care they receive in the U.S. is that it is much cheaper in Thailand. Bumrungrad serves more than 400,000 international patients annually. It is one of the biggest medical tourism hospitals in the world.

As a medical tourism destination, Thailand indisputably ranks as one of the top countries in the world, but it did not make our list because we were also considering each country’s investment potential. Thailand has been a great place for investors for years, but recent political turmoil there has been cause for worry. The military ousted the former prime minister and the new prime minister is friendly with him, so another military coup seems possible. If Thailand can prove its long-term stability, it could once again be a great place for investment as well as medical tourism.

Investment Opportunities From “The Tourism Time Bomb”

International tourism is ready to explode with investment opportunities, according to an article published in the Harvard Business Review titled “The Tourism Time Bomb.” The writers--Paul F. Nunes, a research fellow at the Accenture Institute, and Mark Spelman, global managing director of Accenture’s strategy practice--state that international tourism is growing exponentially, and that this growth will soon lead to dramatic changes in major tourism destinations as well other locations which are likely to benefit from the resulting overflow

The following are important excerpts from the article:

“According to the United Nations World Tourism Organization, international tourist visits are expected to double soon, from roughly 800 million in 2008 to 1.6 billion by 2020.”

“First, most tourism-related prices, such as hotel room rates in popular cities, will continue to escalate as demand outstrips supply.”

“Second, rationing, and the resulting waiting lists, will become commonplace. Some groups, for example, are already calling for limits on traffic to ecologically sensitive destinations, such as the Incan ruins at Peru's Machu Picchu.”

“Finally, jaw-dropping prices and decades-long waiting lists will prompt the creation and the expansion of destinations in both developed and developing economies. The Chinese, for example, are developing Hawaii-like Hainan island and Macao, a gaming paradise on China's southern coast.”

“Companies and governments are also creating facsimiles of popular destinations.” (for an example read The Brink Tank’s post: How Do You Say Rocco In Arabic?)

“Just as sites and structures can be successfully replicated in new locations, so can institutions. If the swelling ranks of global travelers can't all come to you, you can go to them.”

“As the scarcity of places grows, many companies will find opportunities to profit by meeting new levels of demand for authentic, and inauthentic, experiences.”

“A billion or two additional international travelers represent both a massive potential headache and an opportunity for business.”

Real estate in both urban and suburban areas is one of many investments that may benefit from this explosion. As demand increases, tourism and hospitality businesses should also perform well, and there are many new businesses that could be created to cater to international tourists. An entrepreneur’s imagination is the only limit.

Is Zimbabwe Leader Robert Mugabe On His Way Out?

According to an article in the New York Times, Zimbabwe’s leader Robert Mugabe could be on his way out of office. Several advisors on Mugabe’s staff are in negotiations with opposition leader Morgan Tsvangirai. The election appears to be much closer than the Mugabe camp anticipated and now some Mugabe officials are calling for the leader to resign.

The following is an excerpt from the New York Times article:

“‘The chiefs of staff are talking to Morgan and are trying to put into place transitional structures,’ said John Makumbe, a political analyst and insider in local politics who has spoken in the past in favor of the opposition.

“‘The chiefs of staff are not split; they are loyally at Mugabe’s side,’ said Mr. Makumbe. ‘But they are not negotiating for Mr. Mugabe. They are negotiating for themselves. They are negotiating about reprisals and recriminations and blah blah blah. They are doing it for their own security.’”

I sincerely hope that Tsvangirai will knock Mugabe out of power in a peaceful, democratic manner, and that he doesn’t fall victim to the power of his new position. It would be great news for Zimbabwe, Africa and the world. Zimbabwe was once an attractive emerging nation for investors and I want to see it regain that status.

A word of warning to investors eager for the potential of a Mugabe-free Zimbabwe: Even if Tsvangirai does take power, there will be a risk that things will not improve any time soon. It is best to wait for the new leadership to show some stability, in how they plan to run things before investing.

Corruption In Mexico’s Baja California Sur Taking A Toll On Land Owners

Corruption in the Los Cabos area of Mexico’s Baja California Sur is a bigger problem than some investors might think. According to a recent press release from the Association for the Protection of the Environment and the Marine Turtle in Southern Baja (ASUPMATOMA), government officials in Baja California Sur have seized hundreds of acres of beach front land from a group of investors and conservationists even though the claims being presented have been proven to be falsified.

The press release states that ASUPMATOMA has provided evidence that the land titles submitted by a Sinoloa company on July 27, 2007 were forged by a man who was recorded legally dead several months prior. State officials still proceeded to clear the land last week, actually reversing the charges against René Pinal, who is the main owner.

This land was being used as a sanctuary for sea turtles, and was open to the public to visit them in their natural habitat. However, it seems the government has other ideas for this valuable land: probably something more along the lines of hotels and resorts, which provide taxes to the government.

Corruption can be common in developing countries, adding extra risk to foreign investments, but this situation in Baja California Sur is more the exception than the rule. If these unsubstantiated seizures become more commonplace, then investors will have reason to think twice before investing in Mexico, but for now it seems to be a rare event.

ASUPMATOMA is still campaigning to fight the seizure. If you want more information about them or their cause, visit www.savetheseaturtles.org.

The Zimbabwe Situation: Is There Hope?

The Zimbabwe Situation, as it is being dubbed by some, is a combination of mass inflation and human rights and property rights violations. I think most people would agree that long-time leader Robert Mugabe is responsible for the present state of the country, and it's economy.

For those unfamiliar with the Zimbabwe Situation or Robert Mugabe, there is a website dedicated solely to providing information on the subjects: zimbabwesituation.com. I also wrote a blog post last month that talked about the inflation problems in Zimbabwe.

According to recent press covering the Zimbabwe Situation, there appears to be some hope for the upcoming elections. For years, the opposition party has been suppressed and elections have been rigged. Mugabe would punish any supporters of the opposition by cutting off their food supplies, among other things. Many people are not even registered to vote out of sheer hopelessness, and the last few elections in Zimbabwe have been—more or less—a waste of time.

This election seems to be different; there is a growing sense of hope among Zimbabweans. Both the opposition leader, Morgan Tsvangirai, and a rival leader from Mugabe’s own Zanu-PF party are running. Though Mugabe has employed some of his traditional election tricks, this election has been relatively peaceful, according to an article from BBC News.

Zimbabwe was one of the brightest stars in Africa prior to Mugabe’s destruction of the economy. The country is rich with natural resources, and it has much to offer both tourists and businesses, but investors will shy away until Mugabe is out of power. If Zimbabwe can elect a good leader who welcomes a free market, things could turn around for Zimbabwe. I’m not holding my breath, but hopefully someday soon we will see an end to the infamous Zimbabwe Situation.

New President Of Taiwan Calls For Closer Relations To China

For years the rift between Taiwan and mainland China has grown as the Chinese government asserted ownership of Taiwan and Taiwan called for independence. The Taiwanese government took a hard-line stance and heavily restricted travel and immigration from the mainland out of fear of sabotage or attack, but this has affected trade. Taiwan is now unable to compete with mainland China and other lower cost countries on several exports, and the economy in Taiwan, which was very healthy only a few years ago, is starting to suffer. For this reason, many residents of Taiwan were calling for change from their leadership.

Well, change is on the way. The people of Taiwan have elected Ma Ying-jeou as their new president. Ma is of the opposition party and favors closer relations with mainland China. According to an article in the International Tribune, Ma said in an interview yesterday that, in his first 100 days in office, he hoped to have an immediate effect on the economy by opening up Taiwan to mainland Chinese tourism. After that, Ma has other plans on how to better incorporate mainland China into Taiwan’s economy.

The former leading party of Taiwan, the Democratic Progressive Party, thinks closer relations with China will only result in disaster. If Taiwan can successfully reintegrate China into their economy without major disruption, then Taiwan’s economy should experience a nice surge. If the Democratic Progressive Party is correct in their conspiracy claims against China, and the situation turns ugly, then Taiwan may decline further.

Investors who think that Taiwan and China will live harmoniously should buy into Taiwan now. Taiwan’s tourism sector especially is in for a boost. As an indication of how investors are thinking, Taiwan’s stock market saw a 4 percent jump today in response to the election results. One should remember that certain Chinese leaders deeply despise Taiwan, and not discount the risks in this relationship. The Chinese seem to support Ma, so hopefully the two sides will be able to resolve the issues between them in a peaceful manner.

International Real Estate Investment: Best Countries For Long Term Investment

Many investors are now looking overseas for real estate investment opportunities as the era of globalization grows and the problems in the U.S. continue. Choosing the country in which to invest is one of the first steps, and one of the most difficult.

Investors must first decide what their motivation for the investment is. Is it to make money, or is it a combination of money and personal enjoyment of the property.

Global Property Guide is a great online resource that helps investors evaluate international real estate investment opportunities. The site calculates average rental yields for various countries and provides information on tax policies and long-term growth prospects. Based on the different investment factors, the site rates each country on a scale of 1 to 5 stars. The following is a list of the locations which have a 5 star rating, and are listed as the best places for long term real estate investment by Global Property Guide:

1) Buenos Aires, Argentina
2) Bahamas
3) Sofia, Bulgaria
4) Cairo, Egypt
5) Hagatna, Guam
6) Bratislava, Slovakia
7) Montevideo, Uruguay

Personally, I think that it is a good list, though I don’t know that I agree with the Bahamas’ and Bulgaria’s rankings. The yields in those countries aren’t all that great, and I think that Bulgaria has a serious bubble on their hands. The website offers a great resource for aspiring international real estate investors to start their search, but it should not substitute for real due diligence.

Nicaragua Breaks Ties With Colombia, And Venezuela Threatens To Seize Assets

In the latest drama in Latin America, Nicaragua has officially broken diplomatic ties with Colombia, and Venezuela’s Chavez is threatening to seize Colombian assets in the country. Naturally this has had a dramatic effect on the Colombian corporations operating in Venezuela, which was evident in the sell-off of those corporations’ stock yesterday.

In my previous post, I said that the chance of a full on war was minimal, which was echoed by U.S. defense secretary Robert Gates according to a CNN article. However, there could be serious economic consequences. It appears that Venezuela, Ecuador, and now Nicaragua might be preparing to engage in economic warfare.

I’m not sure if Chavez will actually follow through on his threats—as he tends to make a lot of them—but threats alone have already caused damage to Colombian investors. It doesn’t appear that this thing is going to end as quietly as many thought.

The Federal Reserve And European Central Bank: A Difference Of Opinion

The Federal Reserve and European Central Bank have a very different opinion when it comes to managing economic policy. This is especially apparent when one looks at how their respective currencies, the dollar and the euro, have performed against one another. It seems that every day, the euro is setting a new high against the dollar. There is a great article in The New York Times that talks about this very issue, but I will attempt to summarize it here. Let’s take a look now at how the two central banks ideologies compare.

The Federal Reserve’s number one priority is economic growth. Their thought is that if growth stalls, then so will demand and inflation. To the Fed inflation is simply a byproduct of growth, so they aren’t too concerned with controlling it directly. They would rather control growth, and thus indirectly control inflation.

The European Central Bank focuses on growth as well, but they are also very concerned with inflation. They do not necessarily agree with the idea that inflation can be controlled (at least to their satisfaction) solely by focusing on growth.

Growth has been slowing both in the U.S. and in the European Union, but the central banks have had very different responses. The Fed has responded with a series of rate cuts, and will likely make even more of them, while the European Central Bank has left their key interest rates in place. In the U.S., the drastic rate cuts haven’t had much effect in ramping up the economy, and growth has come to a halt. In addition, inflation has been increasing dramatically, inspiring some to proclaim that the U.S. is entering into a period of stagflation. Growth in the European Union has continued to slow and inflation is above target at around 3 percent, but on both counts they are doing a little better than the U.S.

It is extremely hard to compare economic policies in this way because the two subject economies are very different. It will be interesting though to see how the two differing policies turn out in their results. I’m not a big fan of how Bernanke runs things, and I’m leaning towards the European Central Bank working out better, but we will just have to wait and see.

The Kenya Elections: Violence And Entrepreneurial Dreams

Violence brought about by the elections in Kenya has stymied—but not stopped—an inspiring story of entrepreneurial innovation and spirit. Kenya’s Youth Ministry was holding a business plan competition to inspire and support entrepreneurs and create new businesses. From an initial 5,000 participants, the best 100 were chosen for further training and judging. Kenya recognized the need for new businesses and the benefits that they bring to the economy. Some experts estimate that for every one person who receives work in Africa, 10 others will have food, clothing, shelter, school fees and other necessities. Unfortunately, six weeks after the competition began, so did the horrific violence which has claimed over a thousand lives and displaced hundreds of thousands.

But now the entrepreneur competition has brought about a new life, and there is a film already being made about the events which have taken place. The film is called “Kenya Stories”, and it was originally intended to be a simple documentary about the competition, but it has now become something much more important. On their website, they discuss the film and the 100 top entrepreneurs in greater depth. Their goal is to generate interest in what is happening right now in Kenya, tell more about these aspiring entrepreneurs, and hopefully create support for the cause. They are looking for mentors, angel investors, referral business, networking help, donations and so on.

In the midst of such tragedy, it is truly inspiring to see how people can rise up. I wish the very best for each of these entrepreneurs, and hopefully we will witness their business plans come to fruition someday. I also wish the best for the “Kenya Stories” film team, and I can’t wait to see the finished product.

For more background information on the violence in Kenya, read The New York Times’ article.

Colombia, South America: What’s Going On Down There?

Things appear to be getting a little sticky down in Colombia, South America. The nation has shown signs of moving away from its long-standing reputation as the cocaine capital of the world, but it is now facing new turmoil. This time, the trouble is with their neighbors Ecuador and Venezuela.

In short, Colombia crossed the Ecuador border in a raid on the FARC (a Colombian guerilla group) which claimed the life of the FARC’s number two in command, Raul Reyes. The major conflict is that they did so without the permission of the Ecuadorian government, and naturally that did not sit well with them. The FARC is a group of leftist-leaning rebels who have the support of Venezuela and Ecuador, which are both leftist-leaning governments. That fact only adds another log to the fire.

In response to the raid by Colombia, Ecuador and Venezuela have both started moving troops to the Colombian border. There is no knowing where this will lead , but either way it doesn’t appear to be a good thing for people who have invested in Colombia.

Colombia was on the road to a dramatic turn around, and many investors looked to Colombia as a great emerging opportunity for investment. That still might prove to be the case, but until this situation gets resolved, most potential investors are going to wait to see how this thing pans out. Nothing scares away investors like the threat of conflict.

My thought is that Venezuela and Ecuador are just ruffling their feathers in response, and that they won’t take any military action beyond that. The bigger concern would be how this event affects Colombia’s economic relationship with its two neighbors and, potentially, other Ecuadorian and FARC sympathizers.

Edmonton Real Estate: Is Alberta Too Hot Right Now?

We have written several pieces in the past about investing in Edmonton real estate, but the question remains: how long can the boom last? It seems that the world is waking up to the economic powerhouse that Alberta, Canada—and Edmonton in particular—is becoming. The price of oil just hit another high, and oil drives Alberta’s economy. Is it too negative to think that the gravy train has to end at some point?

As long as the price of oil remains as high as it is now, Edmonton is likely to remain a hot commodity. The oil sands region in Alberta contains an enormous amount of oil, and being that it comes from a friendly, neighboring country, there will continue to be huge demand for their oil. With the amount of money flowing into the Edmonton economy, people there can afford to pay a premium for their living expenses. With that in mind it’s possible that the real estate values could continue their rise for awhile longer.

On the other hand if the price of oil were to drop off significantly, Edmonton, and Alberta as a whole, will be hurt dramatically. Edmonton has done a good job of working to diversify their economy, but the fact remains that oil is the number one industry in the area. It is also possible that environmental regulations could have an impact on the oil sands region. It is no secret that the oil sands produce an enormous amount of pollutants, and it is possible that restrictions could be placed on the production which could prove very costly for the oil producers and the area’s economy. Let’s also not forget that real estate values in the area have skyrocketed over the past few years, and history tells us what goes up, usually comes down. Read our article Resource Driven Real Estate Booms and Busts for some more insight.

Overseaspropertymall.com just did an interesting blog post on the subject. In their post, they looked at both sides of the argument and offered some insight as well. I would recommend that you check it out if you are curious about investing in Edmonton real estate.

Foreign Investment Property: Where Are The Highest Yields?

Many of our readers are interested in purchasing foreign investment property for various reasons. Some want to purchase foreign investment property as a vacation retreat, while others look at foreign property strictly as an investment and an alternative to U.S. real estate. If you are looking at vacation spots, then you should be concerned with more than the yield of a property. However, if you are buying foreign property solely as an investment, then yields will be one of the most important factors of the property you decide to buy.

Global Property Guide has published a list of the top 10 highest yielding foreign markets which might help you in your search for that perfect location. They identified the top 10 highest yielding foreign markets as: Egypt, Indonesia, Philippines, Panama, Ukraine, UAE, Jordan, China, South Africa, and Morocco.

Before you get too excited, consider that these figures are only based on highest yield. The rankings do not take into account the risks, taxes and fees associated with buying, selling and owning property in the country. One needs to analyze and account for these things before one buys property in a foreign country. Global Property Guide covers many different countries and offers additional information, including tax rates. They are a great place to start your research for foreign investment property.

Zimbabwe’s Inflation Tops 100,000 Percent

As the U.S. battles a serious inflation problem, we can at least be thankful it’s not as bad as the inflation issues Zimbabwe faces. Yesterday, Zimbabwe’s statistical office reported inflation of over 100,000 percent. That’s right, 100,000 percent; no extra zeros have been added for emphasis.

To give you an idea of what that type of inflation looks like, in Zimbabwe a simple loaf of bread costs around Z$3.5 million, according to VOA News. Can you imagine having to carry around 3.5 million dollars in cash just to buy a loaf of bread? As you have probably realized, this is not good for Zimbabwe’s economy; things have become truly disastrous there. Zimbabwe’s per capita GDP has shrunk from $200 in 1996 to around $9 now, according to CNN.

Unfortunately, a country that was on the rise has essentially been ruined by one man: Mr. Robert Mugabe. Since he won’t allow anyone to run against him in the elections, it doesn’t seem like he will be voted out anytime soon. The good news is that he is 84 years old, so he can’t last all that much longer. Castro resigned this week, so maybe Mugabe is the next dictator on his way out. Here’s hoping, anyway.

With the U.S. inflation rate at a little over 4 percent we don’t need to worry about problems of this scale, and I’m very thankful for that. But inflation in the U.S. is still a major problem. If people continue to overlook inflation, it will eventually eat their savings. Plan for inflation now, and invest accordingly. Ignore it, and your retirement could be in peril.

Nicaragua Featured In Sports Illustrated Swimsuit Photo Shoot

In another step towards Nicaragua’s world wide recognition as a travel destination, Nicaragua was one of the sites used for this year’s Sports Illustrated Swimsuit Edition. I believe two models had their shoots in San Juan Del Sur Nicaragua, one of main tourism destinations in the country. San Juan Del Sur is known for its great beach, fishing, and surfing. It also happens to be a growing destination for expatriates and real estate investors alike.

I’ve been to Nicaragua a few times and absolutely loved my time there. The people are extremely friendly, and the scenery is absolutely to die for. The people at Sports Illustrated obviously saw the beauty, and the rest of the world is slowly catching on to this as well. Seeing as the Sports Illustrated Swimsuit Edition is by far the largest selling issue for the company every year, millions more people are being introduced to not only beautiful models but a beautiful country.

Just out of curiosity, I looked around on some forums and blogs and it already appears that many people have taken notice and are asking about real estate opportunities in the country. Whether they follow through on that curiosity is another story, but any buzz is good for business in Nicaragua.

Those who are new to Nicaragua should check out the article we wrote about investing in Nicaragua real estate. Nicaragua also came in number 5 on our list of the top Latin American real estate markets. Any potential investors though should be warned that investing in Nicaragua is risky, and should be looked at as a long-term investment.

Those who have visited Nicaragua know that the country is beautiful, but needs a lot of work, especially in terms of infrastructure. There is a lot of development underway, but it is moving slowly. Most investors in Nicaragua are Americans, so investment in the country has slowed recently due to the problems in the U.S. Many investors are either choosing to wait, or were planning to use equity from their homes in the U.S. and have lost that investment capital altogether. The fact Daniel Ortega is now leading the country also isn’t helping things. However, tourism should continue doing well: It is one of the most affordable, beautiful and exotic locations that Americans can reach with relative ease (around 2 hours flying from Houston or Miami). If the U.S. does in fact go into a recession, people will be looking for lower cost places to travel, and that’s great news for Nicaraguan tourism and bad news for European tourism.

Over the long haul, Nicaragua should progress nicely. It offers great investment potential, but investors should use caution. Buying property in Nicaragua is not like buying property here in the states. You must understand the risks you are taking and not invest more capital than you can afford to lose. If you are careful, and invest with a long-term focus, then you will probably be happy with your investment when all is said and done. Beyond that, Nicaragua is an incredible place to visit (at least I’ve found it to be), so even if you find your self stuck with an investment property that you can’t sell, you should have a great time (and excuse for) visiting there.

For the sake of full disclosure, I do personally own property in Nicaragua.

Fidel Castro Resigns: What’s Next For Cuba?

Finally, the news that everyone has been waiting for: Fidel Castro officially resigned this morning (I know many people were, and still are, hoping for his death, but I’m not going to go there). Castro has been in power for the past 49 years in Cuba, and has by most measurements destroyed the country. Cuba is a land full of potential and promise, but it needs access to U.S. investors, tourists, and trade to fully realize it. Unfortunately, that relationship has not been able to materialize due to various political issues.

With Cuba’s proximity to the U.S. and natural appeal, it should have been an investor’s dream location. It might someday become just that, but some big questions remain: How will Fidel Castro’s brother, Raul Castro, run the country? Will Raul refuse to make any major changes while Fidel is still alive? Even after Fidel is dead will Raul (or Raul’s successor) continue on with Fidel’s policies?

Unfortunately for U.S. investors, many prime opportunities have already been taken by foreign investors, especially Europeans, but even the Europeans have had a tough go with all the regulations imposed by Castro. If Cuba decides to open up the country to foreign investment it can be certain that there will be countless opportunities for investors. The U.S. should be Cuba’s number one source for trade and tourism, and once trade and travel are allowed between the two countries, Cuba’s economy and property values will jump by leaps and bounds.

Investing in a newly opened Cuba would not be without risk though. Cuba has been a dictatorship for the last 49 years, and its government has not respected investors’ rights. There is a precedent and a possibility that another dictator along the lines of Fidel Castro could come along and seize property, or impose unfair regulations. Until Cuba’s government shows stability for an extended period of time, that concern will be at the front of every investor’s mind. Whether the potential reward possibilities are worth the risk is a decision every investor will need to make for themselves.

Cuba has always been intriguing to me: Great food, a vibrant culture, great location and climate, but off-limits. I hope that this new administration takes Cuba in a new direction, and that I’ll be visiting sooner rather than later.

Venezuela Leader Hugo Chavez Threatens To Cut U.S. Oil Supply

Exxon is in the midst of a fierce battle with Venezuela in response to the expropriation of Exxon assets by the Venezuelan government. The value of the expropriated Exxon assets was approximately $12 billion. According to Business Week, Exxon recently won an international court order that prohibits Petróleos de Venezuela (PDVSA), Venezuela’s national oil company, from selling any of its overseas assets pending a court ruling. Naturally, this infuriated Hugo Chavez who is not known for his calm demeanor and friendliness towards the U.S. to begin with.

Chavez has since threatened that he would cut off the Venezuelan supply of oil into the U.S.,but it is unlikely that he will follow through with his threats. According to Money Week Venezuela exports around 75 percent of its oil to the U.S., while the U.S. gets only about 13 percent of its oil from Venezuela. In addition the U.S. is just about the only country which has refineries capable of working with Venezuelan crude. If Chavez were to act on his threats it would cost his country much more than it would cost the U.S. Considering that he is already losing favor in his country (see prior post “Chavez Defeat A Victory For Democracy”), a move such as this could prove disastrous for him.

The announcement did cause a slight rise in the price of oil, even though most feel that these threats are idle. Predicting the price of oil is never easy and even the slightest rumblings from oil-producing countries can have a dramatic impact. Any price movement caused by these threats should likely be corrected over the coming days as threats prove empty. If out of pure spite Chavez decides to follow through and cut off Venezuelan oil exports to the U.S., investors can expect the price of oil to jump significantly. However, it is questionable whether it would reach the $200 level Chavez says it would. I personally doubt it, but with the volatile nature of the market you never know.

The Chinese New Year Has Begun: Welcome The Year Of The Rat

People who are not familiar with Chinese customs may not fully understand the importance of the Chinese New Year, but it's a huge celebration, and one which is not limited to only China and its citizens. The Chinese New Year, also known as the Lunar New Year, is a huge holiday throughout most of eastern Asia and is growing in popularity throughout much of the world.

China has more people than any other country in the world. There is also a growing number of Chinese people throughout the rest of the world. The U.S. and Canada, for example, have large Chinese populations who celebrate Chinese New Year. Many other countries in eastern Asia also celebrate this holiday, even though they are not Chinese. So now comes the question you have been waiting for: how does this impact investors?

With the growing Chinese population, and the significance of the holiday, investors should be able to see that there will certainly be investment opportunities. The opportunities, however, will likely be had by those individuals who understand the Chinese culture and how things work. If you needed another reason to get to know the Chinese culture, here you go. I personally love learning about other cultures, so this type of thing is right up my ally. If you are like me and love to experience and understand new cultures, then why not head to the nearest Chinatown and celebrate the Chinese New Year? You might discover a great new investment opportunity, or you might just have a lot of fun–you can’t go wrong either way.

The Chinese economy is growing at an astounding pace, and has been for some time. It won’t be long until China emerges as the number two economy in the world, and they may even end up overtaking the U.S. for the number one spot sometime down the road. It is my belief that learning about new cultures is never a waste of time, but if you were only going to pick one culture to learn and understand in your lifetime, the Chinese culture would probably be the best one to choose from an investment perspective. The investment opportunities stemming from this country are only going to grow, so why not get in on the front side?

NuWire published an article today about investing in Chinese real estate and last year at this time, we wrote an article about the Golden Pig baby boom in Asia. That article will give a little insight into how important the animals associated with each New Year are.

What Does Fat Tuesday, Or Mardi Gras, Mean To Investors?

Today is Fat Tuesday, which is the English translation of the French Mardi Gras, which marks the final day of Carnival and the last day before the start of Lent. This celebration has a long history and is celebrated in many countries across the world. I’m sure you are wondering how exactly this impacts investors, so let's get to that.

Many people might not realize how huge Fat Tuesday is or how much money these celebrations bring to local economies in areas that celebrate them. The biggest Fat Tuesday celebration in the U.S., as most people are probably aware, happens in New Orleans. Each year on Fat Tuesday--and to a lesser extent the other days of Carnival--hundreds of thousands of tourists gather in New Orleans. Last year more than 800,000 people gathered in New Orleans for Fat Tuesday. It doesn’t take a genius to realize that anytime that many people gather in one spot, there is going to be opportunity for investors.

During this time, hotels in New Orleans run near full occupancy and many locals rent out their homes--or rooms in their homes--to travelers. In addition to lodging, partiers also buy a ton of food and little trinkets (namely beads), among other things, which also spurs the local economy and businesses.

While everyone knows about New Orleans, there are some lesser-known areas that investors might be able to get in on which will see Carnival profits that investors could get in on at lower prices. Real estate prices in New Orleans have dropped substantially because of the damage caused by Hurricane Katrina. Property prices in the French Quarter are still pretty steep, though. If you are set on New Orleans, there is the potential to benefit from Go Zone investment incentives. Some other places in the U.S. that have big Fat Tuesday celebrations are Mobile, Lafayette, and St. Louis. Mobile and Lafayette also qualify for the Go Zone incentives.

In addition to U.S. destinations, there are many international places that celebrate Carnival. The Carnival celebrations in Brazil, the biggest of which happens in Rio de Janeiro, are among the most famous. Another large celebration--lesser-known than that in Brazil--happens in Montevideo, Uruguay.

There are numerous other places across the U.S. and the world that celebrate the Carnival season, and with the celebration come investment opportunities. There is plenty of profit potential in business and real estate across the board. Not only that, but it is also a lot of fun to party, especially--for me, at least--in other countries. To get a chance to experience other cultures and celebrate with them is always a great experience. So next time you go to that Fat Tuesday party, keep your eye open for investment opportunities. If that party happens to be in another country, all the better.

Thailand Elects New Prime Minister: Positive Sign For Investors

Thaksin Shinawatra was ousted as prime minister of Thailand by a military coup in 2006; Thailand subsequently lost a lot of foreign investor confidence. Now that Thailand has elected a new leader, one who desperately wants to revive foreign investment, how will the investment climate change?

The newly elected prime minister is Samak Sundaravej, an ally of Thaksin. If Samak is indeed able to get his new policies through, Thailand’s foreign investment climate should recover nicely--however that is a big "if." It will undoubtedly be hard for Thailand to regain investor confidence after the military coup, especially considering that a close ally of the ousted prime minister was elected. After all, what is to stop the military from doing the same thing over again?

Any time investors choose to invest in foreign countries, they face political risks. While it is likely to take some time for the new prime minister to regain the confidence of investors, this move is undoubtedly a step in the right direction. Any country being led by its military could make investors wary, so the mere fact that Thailand now has a prime minister will be a boost in and of itself.

In time, Thailand will likely regain the confidence and excitement foreign investors previously had for the country, but considering that Thailand is heavily dependent upon exports, and that the U.S. in particular is struggling economically, it could take some additional time for Thailand to see results. Thailand is an attractive country for tourists and investors alike, and the present time--while confidence is low--could prove to be a great time to buy.

The Yen Carry Trade Is Picking Up Steam Once Again

From Bloomberg:

“Australia's dollar led gains against the yen yesterday among the 16 major currencies, rising 1.1 percent as investors returned to the so-called carry trade.

In these trades, investors get funds in a country with low borrowing costs and buy assets where interest rates are higher, earning the difference. The risk in this strategy is that exchange-rate swings erode gains from rate differentials.

The Bank of Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations, compared with 11 percent in South Africa and 6.75 percent in Australia.”

From Daily FX:

“…with prices teetering on the edge of deflation, consumption remaining weak, labor market conditions deteriorating, and businesses reflecting some slowing, the BOJ would likely be doing more harm than good to the Japanese economy by raising rates from 0.50 percent.”

From Reuters:

“Fujii at Bank of America said the dollar and other currencies were likely to be underpinned against the yen by Japanese households and individuals investing winter bonuses in foreign assets in the next few weeks.

A variety of new funds have been launched this month to lure such cash looking for better returns than those available in Japan, where 10-year bond yields are just 1.5 percent and domestic stocks have underperformed other equity markets.”

Bank Of England Lowers Rates While Euro Zone Stays Put

From the Houston Chronicle:

“The Bank of England cuts interest rates for the first time in two years by a quarter of a percentage point to 5.5 percent amid fears that the global credit crunch will significantly slow economic growth. The European Central Bank holds its rate steady at 4 percent as it waits for more data on the economic outlook.

THE SIGNS: Calls for a rate cut in Britain, despite rising inflation, were accelerated by surveys showing the country's decade-long house price boom is coming to an end and deteriorating consumer confidence. The ECB was under less pressure to move, despite surging inflation, because of relatively solid economic growth in the euro zone.”

From Forbes:

‘”Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow,’ said the Bank of England.

Meanwhile, the European Central Bank said it would hold its key interest rate at 4.0% on Thursday, a move widely expected by economists after eurozone inflation showed no sign of easing last month.

‘The latest information has confirmed the existence of strong short-term upward pressure on inflation,’ said the ECB on Thursday. Monthly inflation estimates from the European Commission in November showed price increases hitting a six-year-high of 3.0%, up from 2.6% in October.”

From Guardian Unlimited:

“’The reappraisal of risk in financial markets is still evolving and is accompanied by continued uncertainty about the potential impact on the real economy,’ said Trichet. ‘We will therefore monitor very closely all developments by acting in a firm and timely manner.’

However, Trichet made clear the ECB was not dropping its guard on the danger of knock-on or ‘second round’ effects of high oil prices on broader inflation, despite the turmoil on financial markets.

‘We will ensure that second round effects and risks to price stability over the medium term do not materialise,’ he said.

The Bank of England cut interest rates by a quarter percentage point to 5.5 percent earlier on Thursday, while the Bank of Canada surprised markets with a similar cut on Wednesday. Economists expect another rate cut from the U.S. Federal Reserve on Dec. 11.”

Peru Trade Agreement Approved

From Bloomberg:

“The agreement will boost trade between the U.S. and Peru, which totaled $8.8 billion last year, by $1.5 billion. It will open the door for more Peruvian exports of asparagus and apparel and more American meat and grain into Peru, according to the U.S. International Trade Commission. It could also lure foreign investors to Peru.

It ‘will create more employment by opening up Peru for industrialists to install plants here to supply the U.S. market,’ Peruvian President Alan Garcia said in Lima today.
Proponents of free trade said the wide vote margin should set the stage for approval of three other trade accords, with Panama, Colombia and South Korea.”

From MarketWatch:

“’This agreement will level the playing field for American exporters and investors and will expand an important market in this hemisphere for U.S. goods and services, which will help strengthen economic growth and job creation in the United States,’ President Bush said in a statement following the vote.

Business lobbyists and trade groups hailed the pact, and held out hope that the framework on labor and environmental standards would pave the way for approval of pending but more controversial pacts with bigger trading partners.”

From Associated Press:

“Opponents also looked to the bigger picture, blaming past trade pacts, particularly with China and Mexico, for rising trade deficits and the loss of American manufacturing jobs. ‘One of the major reasons that the middle class in the United States is shrinking, poverty is increasing and the gap between the rich and the poor is growing wider is in fact due to our disastrous, unfettered, trade policy,’ Sen. Bernie Sanders, I-Vt, said.

The accord has strong backing from business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers. It is opposed by labor and other groups who say the tougher labor and environmental standards won't be enforced and that Peruvian peasants won't be able to compete with cheaper American farm goods.”

Chavez Defeat, A Victory For Democracy

From Time:

“And, to the astonishment of his opponents, Chavez did. At around 2 am this morning, Caracas time, Chavez conceded his first electoral defeat since winning Venezuela's presidency in 1998. After facing an unusually strong protest movement on the streets of Venezuela's major cities — led not by traditional opposition figures but by university students who'd grown fearful that Chavez was moving the country toward a Cuba-style dictatorship — his reforms were narrowly beaten back by a 51% to 49% margin. The result, and Chavez's graceful acceptance of it, may well have set not only Venezuela, a key U.S. oil supplier, but all of Latin America on a far surer path to democracy in the 21st century.”

From The Wall Street Journal:

“The outcome is a humiliating defeat for Mr. Chávez, who had turned the referendum into a plebiscite, telling Venezuelans that a "no" vote was tantamount to treason. Until now, Mr. Chávez had won every political contest he faced by landslide margins.

Chávez detractors charged that the referendum was part of a strategy to use elections to dismantle Venezuela's democracy and replace it with a Cuba-style dictatorship.”

From Bloomberg:

“The loss signals waning support for Chavez's drive to bring socialism to the region's fourth-biggest economy by concentrating power in his hands and increasing state control of private lives. Voters refused to abolish presidential term limits or allow government censorship during declared emergencies. Chavez also sought to shorten the work day and end central bank autonomy.

‘This is the first significant setback that Chavez has ever had,’ said Adam Isacson, director at the Center for International Policy in Washington. ‘He has lost popular support. He has lost support of some of the army and the poor.’

He has also lost confidence of investors. The government's 9 1/4 percent dollar bond due in 2027 fell 22 percent this year before the referendum, with almost half the loss coming in the month before the vote. The bond gained the most in two months afterwards, rising as much as 4.15 cents on the dollar to 103 cents and paring a tumble that has made Venezuelan debt the world's worst performer this year, according to data compiled by Bloomberg.”

In Venezuela Chavez Is Preparing For Big Vote

From Reuters:

“Chavez vows to accelerate his revolution through a referendum on Sunday, when Venezuelans vote on constitutional changes that create new forms of ‘collective’ and ‘social’ property and formalize the economy as socialist.

The reforms would also allow Chavez to stay in power for as long as he keeps winning elections, and increase state powers to expropriate private property.”

From The New York Times:

“Three days before a referendum that would vastly expand the powers of President Hugo Chavez, this city’s streets were packed with tens of thousands of opponents to the change on Thursday, a sign that Venezuelans may be balking at placing so much authority in the hands of one man.

Even some of Mr. Chavez’s most fervent supporters are beginning to show signs of hesitation at supporting the constitutional changes he is promoting, including ending term limits for the president and greatly centralizing his authority.

New fissures are emerging among his once-cohesive supporters, pointing to the toughest test at the polls for Mr. Chavez in his nine-year presidency.”

From USA Today:

“Even some longtime supporters say Chávez has gone too far in trying to cement his control over daily life. The government is ‘confiscating the rights of the people,’ says Ismael Garcia, a member of the National Assembly who helped Chávez regain power after an attempted coup in 2002 but now is campaigning against the referendum. ‘It's not democratic,’ Garcia says.

Chávez says the changes will allow him to implement a centralized socialist state better equipped to improve the lives of Venezuela's poor. The reforms would remove presidential term limits, cut the workday to six hours and make it easier for the state to seize private property. ‘Communal cities’ would be established under presidential control, which could allow Chávez to ignore elected local officials. The president also would be able to suspend civil rights in emergencies.”

How Might The Rest Of The World React To A U.S. Recession?

From The Wall Street Journal:

“The notion that the rest of the world has ‘decoupled’ from the U.S. came into vogue earlier this year, as overseas economies -- particularly emerging markets -- continued to post robust growth and Europe and Japan appeared to be enjoying a long-delayed upturn.

Policy makers joined the decoupling parade. In the spring, the IMF included a chapter in its April World Economic Outlook called ‘Decoupling the Train.’ The gist: The current weakness of the U.S. economy stems largely from housing woes -- and housing is less global than, say, computers and other parts of the U.S. economy. That is good news for the rest of the world.

But the U.S. is now flirting with something more severe than a mere slowdown. That -- along with rising oil prices and the specter of a global credit crunch -- is changing the picture.

Europe is showing signs of faltering, while Japan may be at risk of sliding back into recession. While developing economies like China are still on a steady boil, recent drops in their stock markets suggest investors are beginning to doubt their immunity to a U.S.-led slowdown.”

From Reuters:

“Confident commentary about emerging markets' resilience to a U.S. recession is being replaced by nervous re-examination of the so-called 'decoupling theory'. November saw emerging equities lose 15 percent after rising 45 percent year-to-date.

Many subscribe to the theory that world economic growth will increasingly be led by emerging markets and will therefore not be too badly affected even by a full-blown U.S. recession. Rising emerging powerhouses, led by China and India, the argument goes, can pick up a lot of the slack.”

From Seeking Alpha:

“As we look at different countries, they each have their thing (or things) that make them tick. During a U.S. event some of these places will hold up just fine.

The story in Vietnam seems like a candidate for ongoing health, a type of place I have previously described at being in its own world.

During the big bear market at the start of this decade, Australia was able to pull away and recover much faster than most other markets. That is the thing to this entire issue. There will be some markets that weather a U.S. downturn better than others. While this is obvious, it is also true.

Which countries will be the ones? I mentioned that Australia worked on the last go around. Norway not so much last time, but if oil stays high (above $80?) it might be a candidate. Norway obviously is a surplus country.”

The Dollar Is Causing Problems Around The World

From Money Week:

“If a country like Argentina builds a significant current account deficit, that deficit is dollar denominated whilst their currency is the peso. It’s just a matter of time before the peso collapses and the country is bankrupt. America is fortunate that their deficit is denominated in their own currency, which means they can just print more paper money. They have taken advantage of that privilege and behaved imprudently, not caring about the deficit because of the lack of risk it posed to them.

Oil producers and exporters such as China have chosen to manage their currencies to stay in line with the dollar and pile up their foreign exchange surpluses, in dollar denominated assets, particularly US government bonds. This process means inflating their own money supply.
Inflation in these countries has now become a serious issue and more likely than not will only be remedied by allowing their currencies to rise against the dollar to a more appropriate level.”

From 321Gold:

“Despite clear signs of surging prices in the U.S., the Fed took a major step in undermining its own credibility with its most recent forecast that inflation would remain below 2% for the next three years. As the forecast clearly paved the way for additional Fed rate cuts, Wall Street ignored its absurdity and heralded the announcement as legitimate good news. The celebration is likely infuriating foreign governments, who must be dumbstruck that the Fed can claim contained inflation at home while the declining dollar is fueling massive inflation problems around the world.

In order to maintain their pegs to the dollar, foreign central banks have been forced to print their own currencies to buy all the dollars accumulated by their exporters. This has resulted in upward pressure on consumer prices in their respective nations, with annual increases now reaching alarming rates. Bernanke's message of benign neglect means U.S. exported inflation will likely increase substantially in the years ahead, exacerbating the inflation problems for those nations now supporting the dollar.”

From Rabble:

“Everybody who holds U.S. dollars or securities is losing money, and stands to lose more when, to fight recession, American interest rates go down again, and the U.S. dollar plunges even further.

The U.S. Treasury Department says it is pursuing a strong dollar policy, which no body believes. The U.S. Federal Reserve makes monetary policy to suit the domestic economy, not the overseas holders of U.S. dollars.

The U.S. policy response to the falling dollar has been to blame those countries, principally China, and other emerging economies, which have continued to peg their currencies to the U.S. dollar, rather than allow their currencies to rise…”

Global Warming Will Cause Most Damage In Emerging Markets

From AllAfrica.com:

“The next disaster awaiting the continent would come as a result of global warming, another product of the West. There is a consensus that the continent will be one of the worst hit. In its latest report, the Intergovernmental Panel on Climate Change (IPCC) noted that ‘Africa is one of the most vulnerable continents to climate change and climate variability, a situation aggravated by the interaction of 'multiple stresses', occurring at various levels, and low adaptive capacity.’ Scientists are forecasting a doom of acute food and water shortages, war, floods, etc. The most pathetic thing is both people and governments of Africa are neither prepared for it nor do they possess the adaptive capacity to endure the situation. ‘African farmers have developed several adaptation options to cope with current climate variability, but such adaptations may not be sufficient for future changes of climate’, the IPCC report said. Over 75% of Africans live on subsistence farming, something that will be impossible in most part of the continent when temperature rise reaches 20C by 2050.”

From MSNBC:

“Scientists predict that all the glaciers in the tropical Andes will disappear by mid-century. The implications are dire not just for La Paz-El Alto but also for Quito, Ecuador, and Bogota, Colombia. More than 11 million people now live in the burgeoning cities, and El Alto alone is expanding at 5 percent a year.

The melting of the glaciers threatens not just drinking water but also crops and the hydroelectric plants on which these cities rely. The affected countries will need hundreds of millions of dollars to build reservoirs, shore up leaky distribution networks and construct gas or oil-fired plants — money they simply don't have.

‘We're the ones who've contributed the least to global warming and we're getting hit with the biggest bill,’ laments Edson Ramirez, a Bolivian hydrologist who coordinates U.N., French- and Japanese-sponsored projects to quantify the damage exacted on fragile Andes ecosystems by richer nations that use more fossil fuel and thus produce more greenhouse gas emissions.”

From TimesOnline:

“A report issued yesterday by the Intergovernmental Panel on Climate Change (IPCC) described how a warming world would threaten billions of people with thirst and malnutrition, endanger more than half of wildlife species with extinction and initiate a melting of the Greenland ice cap that could raise global sea levels by more than 22ft.”

Worker Strikes in Europe Could Soon be felt on Economies

From the Wall Street Journal:

“In France, a work stoppage by transport and power workers to protest changes to pension regimes sliced output at French utility Electricité de France SA by around 8,000 megawatts -- roughly 10% of the country's nuclear capacity -- and paralyzed transport routes.

Meanwhile, Germany's government said it fears its continuing rail strike could have a deep impact on the country's economy if it doesn't end soon. Chancellor Angela Merkel's administration is calling on state-owned railway Deutsche Bahn AG and the striking train drivers' union GDL to return to the negotiating table, government spokesman Thomas Steg said at a news conference.”

From AFP:

“Millions of French commuters were left stranded or forced to drive to work and the disruption looked set to continue after unions at the state rail company and the Paris metro operator voted to extend the strike until Friday.

Just 150 of the usual 700 high-speed trains were running and those commuter trains that did operate were packed with commuters and tempers flared. Roads into major French cities were choked with traffic.

Neighbouring Germany had to contend with the biggest strike in the history of its rail system as passenger train drivers joined freight drivers already on strike since Wednesday, heavily disrupting Europe's biggest economy.

Only two-thirds of long-distance trains were running, most of them high-speed trains, and fewer than half of all commuter services were operating.”

From Guardian Unlimited:

“With the train drivers threatening new strikes this week to back their claim for higher wages after the 2-1/2 day walkout to Saturday that was called the most damaging in Germany ever, Glos and Tiefensee warned the strikes were harmful to the economy. ‘We need a quick agreement once and for all,’ Glos told the Bild am Sonntag newspaper. The robust economic upturn is already being burdened by the high oil price and a strong euro. In an environment like this, a strike that hampers freight transport is poisonous for the overall economy.

‘Both sides need to be reminded about their responsibilities to the overall German economy and to consumers,’ he added.”

Earthquake in Chile Impacting Copper Prices

From Bloomberg:

“Copper jumped 6.1 percent in New York, the most in 16 months, after an earthquake hit Chile, the world's largest producer of the metal.

The 7.7 magnitude quake struck in Chile's northern desert, the U.S. Geological Survey said on its Web site. Chile's state- owned Codelco, the world's biggest copper company, and Freeport- McMoRan Copper & Gold Inc., the second largest, said some mines were restarting after a loss of power.

`You've seen a huge price jump after the earthquake news,’ said Eric Wittenauer, an industrial-metals analyst at A.G. Edwards & Sons Inc. in St. Louis. ‘This brings into question the supplies from the area and what kind of supply growth we'll be able to see in the region.’”

From Reuters:

“The quakes hit an area of many large copper mines. Chile is the biggest copper producer in the world, providing more than a third of annual supplies of the red metal.”

From FXStreet:

“The uncertainty surrounding the earthquake in Chile was high among copper futures traders immediately after wire service reported the event, said an analyst. He added that markets tend to "over-react" to such events, as traders always initially fear the worst-case outcome to such events. The midday Wednesday reports that operations at Codelco were back to normal should calm the copper market, said the analyst.”

Venezuelans are Heading to Panama

From Reuters:

“For Panama, the influx of wealthy Venezuelans has helped fuel a real estate boom that has been a big factor in the economy's growth rate this year of more than 9 percent.

Real estate salesman Jorge Blaisdell is selling 500 houses on the outskirts of Panama City that will go for between $300,000 and $800,000, and have been advertised extensively in Venezuela.

‘Some 80 percent of our clients are foreigners, and 75 percent are Venezuelan,’ Blaisdell said. ‘They are looking for a plan B.’”

From CBS News:

“The number of Venezuelans leaving is hard to nail down. According to the U.S. Embassy in Caracas, the number of nonimmigrant visa cards has risen from 70,366 in 2003 to 109,586 last year. But many Venezuelans are opting for other countries, as U.S. immigration laws have tightened in the wake of 9/11. Nearby Panama, with a similar climate and political and economic stability, is a popular alternative.”

From Mercopress:

“The profile of Venezuelans searching for information to leave the country has changed drastically in the last six years from single men and women to whole families and parents with adolescents who fear for the future of their children, according to Bermudez. ‘Uncertainty about the future and physical insecurity, because of ballooning crime are the main causes’. They are mostly middle and high class Venezuelans.”

Asia-Pacific Poised for Real Estate Bubble?

From Global Property Guide:

“The house price boom is now moving towards the Asia-Pacific region. Property prices in countries affected by the Asian Crisis are showing strong signs of recovery, prompting fears that a property bubble is developing anew in the region……Property prices in the Philippines, Singapore and South Korea rose by more than 10% y-o-y to Q1 2007, higher than in 2006…”

From Bloomberg News:

“Asia may be the only market to experience an increase in investment in the second half of this year, Jane Murray, the Asia Pacific head of research at Jones Lang LaSalle, said Wednesday in Tokyo. Global direct property investment rose 41 percent in 2006 to $699 billion, advancing for a third straight year.”

From Lanka Business Online:

“‘. . . Sri Lanka too has seen the property market being driven by the prospects of the cease-fire and the economic dividends that followed,’ said the statement by the Investor Education Division of Lanka Rating Agency (LRA).

These dividends were flushed liquidity, low interest rates and higher inward foreign remittances coupled with favourable macro-economic conditions.

‘However, these property market drivers are dissipating and this may trigger a reversal of trends in the fortunes of real estate,’ the rating agency warned.”

Poland’s Retail Sector Taking Off

From the Wall Street Journal:

“After Russia, Poland, with a population of 38.5 million, has the biggest retail-development pipeline in the region, says Michael Atwell, head of capital markets in Poland at real-estate-advisory firm Cushman & Wakefield Inc. ‘It's a huge market,’ he says. ‘International retailers are very keen to have a presence in Poland. Demand for shopping-center space is very high.’”

From The Moscow Times:

“Following in Russia's slipstream, Poland came second with 1.49 million square meters of new shopping space, while Spain and Turkey followed in third and fourth place, respectively.”

From Property Magazine International:

“With 22 percent of total investment turnover in the region, Poland remains the leading destination for commercial real estate developers in Central and Eastern Europe in 2007, according to the latest, September, edition of the Warsaw City Report, a regular publication by real estate services company Jones Lang LaSalle.“

Sub Prime Affecting Mexican Real Estate?

From the Latin Business Chronicle:

“… Mexico is not directly tied to the sub prime crisis because the mortgages in Mexico were underwritten with a tougher standard than in the U.S. But…it will cut capital worldwide.

From CNN Money:

“U.S. real estate investors are staking claims in Latin American countries where growth has returned after years of economic struggle. Property yields have hit 9% to 15% a year there, compared with roughly 5% to 8% in the U.S…

… In Brazil and Mexico, disposable income is rising and pent-up demand is lifting real estate returns.”

From Reuters:

“Bank of Mexico Governor Guillermo Ortiz said on Friday that a crisis in the U.S. subprime mortgage market has had little effect on emerging markets.

In contrast to previous financial crises that spread rapidly to emerging markets, ‘the crisis in subprime has barely touched emerging markets,’ he told a Federal Reserve Bank of Dallas conference.”