BasantJi,

 

An intresting article by Dr Doom can be found here

 

http://www.whiskeyandgunpowder.com/Archives/20060830.html - http://www.whiskeyandgunpowder.com/Archives/20060830.html

Mind you he is a bear since 2003

 

http://www.valuenotes.com/AGoel/ag_markets_09sep06.asp?ArtCd=86059&Cat=&Id - http://www.valuenotes.com/AGoel/ag_markets_09sep06.asp?ArtCd=86059&Cat=&Id =

 

Every swiss male has a fully loaded machine gun his house. Army is compulsory and when you finish, you take your gun with you for later call ups. Not many countries have both those statistics

Thanks to http://www.minyanville.com/articles/index.php?a=12177 - Minyanville

 

 

 

Finland is another country that is right up there in % in rifles.

something like an average of 3 per person.

 

Watch it http://www.cnbc.com/id/15840232?video=189117755&play=1 - here

 

Fed meets 8 times in a year "Normally" out of which 7 remain in 2007.

 

Next Fed Meet is on 21-March-2007

(Rate cut then would mean "Fed Panicking" IMO)

Ben looks like a deer caught in glaring headlights!

 

Also rate cut would result in further unwinding of CHF and Yen Carry which would add to the market panic.

 

 

 

BubbleVision,

Please explain this Yen Carry and CHF for my benefit as I have heard this phrase and I have no clue what it means.

Thanks

bit by bit. An interesing report on that.

 

Source: IndiaInfoline

 

Global Decoupling: A Marathon, Not A Sprint: Merrill Lynch

 India Infoline News Service / Mumbai Jun 08, 2007 19:12 

 

The bank’s economists are more bearish than most on the prospects for the U.S. economy, but are more bullish than consensus about the rest of the world.

 

The global phenomenon of a decoupling between the economies of the U.S. and the rest of the world is becoming more pronounced and is set to last, according to Merrill Lynch’s  mid-year 2007 global economics report, “Global Decoupling: A Marathon, Not A Sprint.”  First presented to investors in a Merrill Lynch report in 2006, the firm’s economists expand on how decoupling is unfolding, with three new calls.  The Merrill Lynch global economics team believes that:

 

First, the global economy will continue to grow in 2007 – with no sign of a significant cyclical slowdown.  The bank’s economists are more bearish than most on the prospects for the U.S. economy, but are more bullish than consensus about the rest of the world. 

 

Second, decoupling is not simply a cyclical trend.  Structural forces, such as a sustained investment spending boom outside the U.S., are driving this global economic force – giving it longevity. 

 

Third, inflation poses the biggest risk to global growth and the threat it poses is higher than the market is currently anticipating. Merrill Lynch forecasts non-U.S. inflation to rise to 3.4% in 2008 from 3.2% in 2007. 

 

Rest of the world takes up the baton

“If anything, our bullish call on global growth last September was not bullish enough,” said Alex Patelis, Head of International Economics at Merrill Lynch. “Looking into the balance of 2007 our view stands intact: this is a year of transition as the U.S. passes the global growth baton to the rest of the world.”

 

Consumer is key for U.S.

Merrill Lynch’s view on decoupling reflects how the U.S. economy has shifted to a lower gear.  David Rosenberg, Chief North America Economist, believes that the power of the consumer is key to the U.S. economy and he highlights signs that consumer spending could weaken.  For example, higher oil and gas prices and higher grocery prices could trim discretionary spending.

 

Asia shows resilience

The Asian economy is displaying resilience. GDP in the region is growing strongly despite a slowdown in exports to the U.S., thanks in part to higher exports to Europe and other parts of the world.  Furthermore, Asian domestic demand is gathering momentum.  TJ Bond, Chief Asia Economist, believes that a U.S. slowdown - and even a modest U.S. recession - would have a modest impact on Asian growth.

 

Fiscal policy boosts Europe

Klaus Baader, Chief Europe Economist, says that prospects for the Eurozone and other European economies continue to brighten. He notes that Europe’s trade performance has been ahead of expectations and the region has withstood tighter fiscal policies, and governments will be under decreasing pressure to raise taxes as spending deficits fall.

 

Japan poised for comeback

The Japanese economy is set to make a comeback after six slow months. Consumer demand will recover after the sharp rise in savings rates seen in 2006. Merrill Lynch believes that higher productivity should fuel a rise in corporate profits. Pragmatic monetary and fiscal policies will help the economy.

 

Canada could yet survive U.S. slowdown

Merrill Lynch also believes that Canada may struggle to boom economically in the face of a U.S. slowdown, but that prospects are encouraging after weak growth in 2006. Domestic demand and manufacturing have been driving a pick-up in first half growth.

 

Emerging Markets remain well positioned

EMEA (Emerging Europe, Middle-East and Africa) appears well-positioned to weather a U.S. slowdown, thanks in part to continued high commodity prices and strong demand for exports.  Latin America is on track to post a fifth straight year of solid economic growth and is grappling with how to ensure that positive effects of the favorable global environment reach the poorest members of its population.

 

Commodity super-cycle lives on

Dry bulk shipping prices point to the health of commodities markets, and it is clear that demand for bulk commodities such as iron ore, coal and grains is outpacing growth in shipping capacity.  A tripling in dry bulk shipping prices since the start of 2006 suggests that the commodity super-cycle remains in place. 

 

US dollar faces further weakening

Merrill Lynch expects the dollar to weaken modestly in the second half of 2007 against the euro and the yen.  Investment levels in U.S. assets could fall with the global savings rate at historical highs and savers looking more towards non-U.S. assets, but central banks will continue to support the dollar.

 

WASHINGTON (Thomson Financial) - A key committee in the US Senate is set to consider a bill later today that could lead to new trade sanctions against China because of China's currency policy, although the measure is already under fire from US manufacturers who say it does not go far enough.

The Senate Finance Committee is scheduled to consider a bill that calls for a range of sanctions against China if the yuan is found to be undervalued, including the possibility of higher tariffs imposed on Chinese imports. The bill could also lead to stepped up pressure against China in the International Monetary Fund and the World Trade Organization.

Under current law, the US is only required to hold talks with countries found to be manipulating their currencies, and the Bush administration has never cited any country for manipulating its currency. The last time the US found a country to be manipulating its currency was in 1994, when President Bill Clinton cited China.

The Senate bill is under heavy attack from a range of business groups and several other senators who say it is too weak, and would allow the US government to waive sanctions too easily.

In a separate Senate hearing yesterday, Brian O'Shaughnessy of Revere Copper Products said these waivers are 'fatal flaws' in the bill that will undermine efforts to help US companies.

'As such, the present bill represents a cruel hoax on the American factory worker who is expecting real relief from the impact of the protectionist policies of China,' O'Shaughnessy said.

And 300 New York manufacturers wrote a letter yesterday to the bill's chief proponent, New York Democrat Charles Schumer, arguing for stronger language in the bill.

As a result of these complaints, several senators are expected to offer amendments to the bill in an effort to make it harder for the US government to avoid a finding that China has a misaligned currency, and harder to waive sanctions after such a finding.

But Schumer and Finance Committee Chairman Max Baucus, a Montana Democrat, are expected to vigorously oppose any amendments.

Critics charge that Schumer's opposition to stronger language shows he is more interested in a public show of pressure on China rather than passing legislation that would lead to higher tariffs on Chinese imports. Committee approval of the bill could make it easier for Treasury Secretary Henry Paulson to extract promises from the Chinese government when he meets with Chinese President Hu Jintao in Beijing next week.

Last year, Schumer warned that a bill imposing a 27.5 pct tariff against Chinese imports would be voted on unless China agreed to immediately revalue the yuan. China made no such move, but Schumer withdrew his bill from consideration nonetheless.

After a terrible August, when the U.S. stock market appeared to be headed for the pits, October 1 saw a massive rally that sent the Dow Jones Industrial Average soaring above 14,000. Markets seemed to be celebrating the effects of the Fed's interest rate cut, and media reports said money was pouring back into equities. The following day, however, stocks began to fall again -- because the National Association of Realtors reported a sharp drop in home sales. In short, Wall Street still seems to be sending out mixed signals.

What will be the long-term effects of the Fed's decision to cut interest rates? Will the U.S. economy move past the sub-prime mortgage mess, or will it sink deeper into a morass and perhaps into a recession? What will be the effect of these developments on the European market? Knowledge@Wharton spoke with Wharton finance professor http://www.jeremysiegel.com/ - Jeremy Siegel and Jacob Wallenberg, chairman of the board of Investor AB, which is listed on the Stockholm Stock Exchange and is the largest industrial holding company in the Nordic region. In addition, he is vice chairman of Sweden-based SEB. An edited version of the transcript follows.

Knowledge@Wharton: Jeremy Siegel, you have been a consistent bull during this credit upheaval. Does the recent record price of the Dow vindicate your position?

Siegel: I'll tell you, I was taking a lot of heat from Knowledge@Wharton readers. They were emailing me and saying, "Jeremy, you don't look like you're very right here." My position was that yes, housing is in a mess. But still the credit structure outside of housing was strong and the economy wouldn't go into a recession. What we saw was that contagion and uncertainty just spread like wild fire and the Fed stepped in appropriately, in my opinion. With the Fed's backing, we are getting a lot of confidence back. The lower interest rates are a good reason the market is rising again.

Knowledge@Wharton: Jacob Wallenberg, we just heard about all of the problems in the U.S. market. Has the U.S. subprime crisis and the credit crunch had an impact in Europe as well?

Wallenberg: It has. Anyone who follows European news would see [mortgage lender] Northern Rock as a glaring example of this entire situation because there we had the run on the bank, which is about the last thing that any of us would [have predicted]. It just shows how fragile the system is when we have a situation of this nature. So, of course Europe is very much aware of what's going on and Europe is paying a price.

We have seen a few banks in Europe take significant hits. It's been in the news the last few days. It's not only Citibank that has problems. UBS took a significant write-down; so did Credit Suisse and I think that you are going to see a few other players. We have seen at least one German bank being protected by the system. I think that we are going to see more fall-outs as the third quarter results are being announced.

But what is interesting is that Europeans are less aware of the nervous situation in this country that has prevailed over the last two months. The reporting in the European media, with the glaring exception of The Financial Times, has been more moderate. If I call and speak to my American colleagues in France, those haven't been very happy calls over the last few months.

Siegel: What is also quite interesting about Northern Rock is that Great Britain does not have the type of deposit insurance that we have in the United States. It is much more skeletal, with just a few thousand pounds insured and then a fraction of anything above that. They are now debating whether they should have the FDIC [Federal Deposit Insurance Corporation] insurance that has actually been present in the United States for 70 years.

But what happened in the UK was that the Bank of England had to come around. It was one of the few banks that didn't do much and now it had to say, basically, "We're backing the deposits." That has put a lot of heat on Mervyn King, the head of the Bank of England. There are certainly a lot of ramifications in Europe and the United States. I don't see Asia involved yet, but there are probably some touches there.

Wallenberg: There will be investors that have [commercial] paper that will be affected one way or another, but maybe less so than the others.

Knowledge@Wharton: Jeremy, how can you explain yesterday's stock market?

Citibank and UBS reported huge write-downs and yet their stocks rose.

Siegel: That was sort of puzzling. I think there are a number of things and it actually didn't surprise me. First of all, they said, "These are our losses and this is our extent." They also said -- and this was important -- that "we expect a much more normal environment in the fourth quarter." That was very encouraging for the market.

Third, and this is something that I've been saying in some of my commentary in the last few weeks, is that we see loan demand coming back to the banks..... So many borrowers went directly to the market. The market now is way too expensive and what [these borrowers] are doing is coming back to the banks. The banks eventually can get fees on those loans because they have direct access to the Fedand the discount window.

Really, in the long run, this might be good for the banking system. I think that maybe several others are thinking, "Boy, they're cheap now." You pick up banks at 10 times earnings, 11 times earnings -- people are thinking that this might be an opportunity for the future.

Knowledge@Wharton: Does that mean that the worst of the subprime mess and the credit crunch is behind us? Or, do you think that there is still some risk?

Siegel: I think that the worst is over. Everyone is going to say that "There is going to be a big bomb and there is going to be a hedge fund that is going to go under" [and so forth]. Well, we haven't heard anything recently and that's another thing that is moving up the market. No news is good news. That's actually been the mantra of the market the last two months. No news is good news. We haven't heard any real big bombs and they are taking their losses with the write-downs.... We are slowly returning to normal here.

Wallenberg: I tend to agree with that -- especially the part, "No news is good news." That is hugely important because at the end of the day, this is all a matter of psychology. The consumer sits on his hands because he or she is concerned -- and that seems to slowly be going away. So, let's just hope and keep our fingers crossed.

But one question that goes through my mind, as a banker, is of course the underlying economic consequences of this -- and a lot of other things. Are we in the beginning of a real downturn in this market or aren't we? And on that particular point, I don't think we have seen the answer yet.

Siegel: I have been saying that there is a 25% probability of a recession. Most others have gone up to around 30%, 35%, 40% and some to 50%. I'm on the low side; I'm on the optimistic side. But I think that we're going to see 1% to 2% real growth, which is above the zero mark.

Housing is still bad and will remain bad. But we've gone through a year of bad housing and still managed to stay above water. I think that we can continue to do that in 2008 -- and then look better towards mid-year and further beyond.

Knowledge@Wharton: How do you think the Fed under Ben Bernanke is handling monetary policy? If the troubles in the real estate and mortgage markets continue, do you think there will be more interest rate cuts?

Siegel: I think that he has done extraordinarily well. The first move he made on August 17^th was lowering the discount rate for borrowing. The reason he didn't move the Fed funds rate then was because he didn't have all of the votes he needed on the Federal Open Market Committee. It was due to that. But the governors themselves decided the discount rate, so it was sort of unprecedented.

And then, to get a unanimous vote for a 50 basis point cut -- I thought this showed that his powers of persuasion are excellent. He's a consensus builder par excellence. And, let me tell you, that going into that meeting on September 18^th, he did not have unanimity among the bank presidents. There were probably three or four and he was able to convince them to go for the 50 basis point cut. I think that it's right.

There are risks and I'd like to ask Jacob about that. We've seen what's happened to the dollar. I think that it's a little overdone in the markets. A plunging dollar is not good. It does bring about inflation. That's the only downside that one sees so far on that. But, it's too short term to see how this really plays out. I don't know what your opinion is on that.

Wallenberg: Well, in all fairness, I am not an economist. I'm just trying to practice these things in day-to-day life. Of course inflation has to be the outstanding question at the end of the equation. But you know that is the reality; you don't have the answers to everything, every day. You just have to wait and see how this pans out.

Siegel: The news coming in on inflation is good. And we don't like to see oil over $80, although it's interesting because the actual wholesale price of gasoline has stayed low and natural gas has also stayed very low. So, those big items that feed into the CPI directly have not been up as much as oil and we're getting very moderate readings.

Knowledge@Wharton: Jacob, as a European banker, is inflation your biggest concern, or are there other issues that keep you up at night?

Wallenberg: Lately, over the last six months, inflation has been an issue. We have seen increasing interest rates but then we saw the whole subprime question coming in and a reversal on the interest rate side. If you ask anyone right now, it's the underlying risk -- a consequence of the subprime situation -- that is the core issue. I think that bankers are less comfortable with the situation.

We're very happy that UBS and the others came through and put numbers on what the expected losses were. Certainly, we can start to box the situation. So yes, we're slightly less concerned but it's not over yet. We're going to wait and watch it for a little while.

But, generally speaking, the European economy is not stuck in a housing price situation, with the exception of parts of England. So the underlying economic development is on a slightly more positive note. And we have seen that Europe has done quite well for some time, with the exception of Germany.

Overall, Europe is doing slightly better than the United States right now, which I think no one expected. It is nice when we can beat the almighty United States at their own game -- economic growth.

Siegel: Germany has not had that much housing inflation. But I hear that there have been some problems in Spain among home builders.

Wallenberg: You will find some pockets of that, of course.

Siegel: There was a lot of speculation that really started earlier in the summer. There are some pockets and it seems cities like London and New York City keep on defying gravity by moving higher. They are fueled by those people who have a lot of money and are still bidding freely for real estate.

Wallenberg: We have more Russians in London than you have in New York.

Siegel: It used to be the Arabs coming to London. Now are the Russians coming to London?

Wallenberg: Absolutely. It's an important part of the equation.

Knowledge@Wharton: Jeremy has said that he believes there is a 25% chance of a recession. I wonder if you also share that view, Jacob. And if not, what do you think would be the consequences for both the U.S. and for Europe in the world economy?

Wallenberg: I'm not going to put a probability on it, but I have a concern. Despite all the nice warm words, I think that there is a significant risk. And I think that, at the end of the day, if nothing else, for every day that we are not in a recession -- we are at least one day closer to a recession.

We have had a prolonged period of high economic growth and I look at the way that U.S. consumers have been behaving. I look at what Wal-Mart communicates and so on. It is obvious that the U.S. consumer is cautious -- more cautious than before. That might very well spill over into a recession or a recession-like economic environment. The question then is: Will that spill over into the rest of the world or not? And what do China and India mean in this overall equation?

Reasonably, there are more cushions today than what we would have had 20 years ago. Reasonably, Europe is stronger today, more on its own than ever before. So, maybe it's not going to spill over entirely. But on the other hand, this might be a locomotive of the United States economy. Despite the fact that I am not an economist, I cannot see the United States going into a recession without that having some significant consequences in the rest of the world. I really can't see that happening.

Now, when I say significant, I mean that other parts of the world could go into a recession as well. On the other hand, that's part of the game. It's even in the bible --seven good years and seven bad years. There is nothing peculiar about it. It's human psychology. 

Siegel: We've had 10 good years actually, between 1990 and 2000.

Wallenberg: I'm sure we could find other exceptions. But it's more the principle. You have to learn to live with these things -- and that's the voice from reality.

Siegel: I think that we are more in a mid-cycle slow down, very much like 1995. After the Fed raised rates dramatically in 1994, we had a big slow down, but no recession in 1995. And, here we are also suffering with the fall-out from a rise in rates and excesses that come when the rates are low for a long time.

I think that it is going to be the same -- that there's going to be a slow down and then a pick up. At least, that is what I hope because you know we had some very good years in 1996, 1997, 1998 and 1999 and another four years of expansion, before it got also overblown by technology and all sorts of other things that happened later on.

Knowledge@Wharton: What would be the appropriate strategy for investors these days?

Siegel: I always say, "Keep your eyes towards the long run. Don't panic." This was so evident in what we saw this summer -- all the gloom and doom, [people saying] "this is the end" and all that. A lot of people became safer and are now sitting on the sidelines and the market is back where it was. They are sort of regretting it. If you stay in there for the long run and allocate properly, you will see the dips as times to buy. I'm sure that you're not going to hit the bottom.

Right now, for instance, I'm very optimistic going forward. People are talking about this as just a very short-term rally over here. I think that if there are no big surprises [and that's what I believe will be the case] and risk normalizes going forward, that earnings are very good. Actually, there was a very interesting statistic that I read today. It is that we have only had half as many warnings for third quarter earnings -- which are going to start being reported in earnest, beginning next week -- at this point this year, as opposed to last year. 

That's a good sign. If the economy was really tanking, you would get a lot of warnings. This is because if you want to know the truth, CEOs now know pretty much what it is. If it's way off, then they usually have to let that information out. So far, that has not been a particularly high number and I think that this is also encouraging buyers. In fact, expectations may have been set a little too low.

Knowledge@Wharton: Jacob, do you agree?

Wallenberg: Let's put it this way, slightly different. I very much echo the view that if you have capital you can deploy long-term -- this is one of the great challenges that we have today -- that most fund investors, fund managers and so on, have to move very swiftly. They are rarely willing to sit it out for a longer time. This is for the simple reason that they are evaluated on a monthly, or even more frequent, basis. So you don't have the stamina because you are going to lose out vis-a-vis the competition. I think that that is one of the great weaknesses of the system as we know it today.

It is that people are so caught up in the short term -- and I'm now talking about the way we invest capital, not the way we run our companies. That will, in itself, be a challenge for any fund manager today. This is because it is going to be a bumpy road at the minimum. You have to have the staying power so that you can hang in there for a longer while. Then you can do fine. 

When Thomas Friedman wrote his popular book, The World Is Flat, one of its central arguments was that geography might soon become history. The proliferation of information technology and telecommunications networks has integrated the world in ways that were unimaginable in the past -- and this has transformed how companies produce and distribute products and services. One result of this transformation is the rise of networks of companies that are bound together through IT and logistics. How can firms strive for and gain competitive advantage in such an environment? Victor and William Fung, group chairman and managing director of Hong Kong-based Li & Fung, and http://marketing.wharton.upenn.edu/people/faculty.cfm?id=19 - Yoram (Jerry) Wind , a professor of marketing at Wharton, deal with this issue in their new book, Competing in a Flat World: Building Enterprises for a Borderless World. They recently spoke with Knowledge@Wharton.

An edited transcript follows:

A Note to Readers:

Knowledge@Wharton and Wharton School Publishing are pleased to announce a global competition for the best strategies for competing in a flat world. Two prizes will be awarded, one for the best strategies that work and one for the best insights from failures.

For information about the competition, click http://www.competinginaflatworld.net/ - here or go to http://www.competinginaflatworld.net/ - www.competinginaflatworld.net

Knowledge@Wharton: Your book, Competing in a Flat World, describes Li & Fung as "a flat business for a flat world" and also argues that you have evolved into a "network orchestrater." What does that mean and what implications does that have for your customers?

Victor Fung: Maybe the way to explain this is to start off by describing the fact that the way manufacturing is done today -- versus, let's say, even as recently as 10 years ago -- has fundamentally changed. There has been a major transformation over the last 20 years, culminating in the recent period, because of the presence and the use of enablers like IT and logistics.

Whereas manufacturing used to be done in one factory, under one roof and in one country, today the manufacturing process is being dispersed and being produced in stages, in many factories, sometimes over many countries. So when you have a particular order -- let's say of 100,000 shirts -- to manufacture, you may in fact do different stages of the production process in different factories and in different countries. Then you put everything together to make the final product using IT and logistics.

As a result of this change, when we make any product, we have to orchestrate a network of processes and suppliers in different parts of the world. It is very important for us to work very closely with this network; we don't control the entire network because they are all independent contractors. Therefore, when we talk about "orchestrating" that network, it means we have to make sure that all the pieces are synchronized and that the production comes out with a high quality -- and also with a very fast turnaround time. That would allow us to be very efficient in the production process.

Knowledge@Wharton: William, would you like to add anything to that explanation?

William Fung: Well, as Tom Friedman says in his book, the world is getting flatter in the sense that it is now easier to communicate and for parts and materials to go from one country to another for processing. Our ability to use the best factories, at the best locations, to manufacture any order, is becoming a reality.

Instead of the factory being located close to the market where its goods are consumed, production of a lot of labor-intensive goods can now take place in countries where labor is plentiful rather than in countries where these goods are consumed. That accounts for the necessity of a business like Li & Fung -- to be able to operate without borders in a flat world.

We have organized the business so that we have a very flat organization to cope with the need to respond quickly to the needs of our customers and without a hierarchical structure. That's the flat business aspect of the way we're organized to operate in this flat world.

Knowledge@Wharton: Li & Fung has a business history of more than 100 years; you started out in 1906 during the Qing Dynasty. How did you evolve into a network orchestrater?

Victor Fung: If I could take a stab at that question...a lot of the examples and the experiences that we cited in the book were because of the pressures of customer and consumer demands, rather than just some smart people saying that this is the way that we should be organizing the business. The business was organized in a way that responded to the needs of the market.

The response to these trends of the needs of the market started way back...I would say after the Second World War. This was when the prosperity in the developed markets, like America and Europe, led to a situation where a lot of the young people were unwilling to take up blue-collar jobs in labor-intensive industries to make the products that were being consumed in those markets.

This rationalization of manufacturing of labor-intensive goods around the world started in the 1960s and 1970s. Originally Hong Kong was one of those places where our whole economy, after 1949, became dependent on manufacturing for export and not for home consumption. This ability to manufacture in a different location from where you consume it started to spread from Hong Kong to places like the Asian Tigers [Taiwan, Singapore, Hong Kong and South Korea] and eventually to Southeast Asia. This rationalization of manufacturing led to a situation where we needed to create the kinds of supply chains that oversaw the manufacturing of these labor intensive goods and eventually to bring them back to the markets of America and Western Europe, where they were consumed.

We were reacting to this economic situation -- the ability to manufacture at less cost in countries where labor is plentiful and then to bring goods back to the countries where they are finally consumed. As a result, we had to organize the company in a way that we could control these more complex global supply chains.

William Fung: Today we are responding to a very important consumer trend. There has been a tremendous fragmentation of consumer demand. Instead of serving one huge market that is basically uniform in demand, you are seeing pockets of niche markets. That is becoming more and more evident.

As we see these niche markets develop, there is a need to come up with increasingly different products. At the same time, forecasting demand becomes much more difficult. This is because if you break up a large market into a fragmented number of smaller markets, the amount of wiggling around in each of the markets becomes more severe.

Therefore, in order to buy more accurately the right product at the right time -- and to deliver it at the right time to satisfy the demand -- you need to cut down the re-order cycle. We talk a lot today about "fast-response manufacturing." This idea of dispersed manufacturing, that I described earlier, allows us to use triple sourcing and double sourcing at different stages. This will give us a very fast turnaround time and the ability to shrink that turnaround time. As a result, we can delay the ordering as much as possible to satisfy the market demand as long as we can. In effect, it allows us to buy more accurately.

The reason this is all possible, of course, is because in the last 10 years there has been a tremendous development of information technology, the Internet and also what I would call modern logistics. With those two enablers we are able now to carry this model of dispersed manufacturing.

We are taking advantage of all of the factors that are described in our book Competing in a Flat World to satisfy this consumer trend towards more and more specialized market niches and different categories of products to satisfy different groups of consumers that we see today. I can see that this trend is actually just going to continue further and further as we go forward.

Knowledge@Wharton: Jerry, from your perspective how does the Li & Fung model of network orchestration compare with the models of other companies that are trying to deal with the same phenomenon of doing business in a borderless world?

Wind: We have to distinguish here between two situations. There is the immediate parallel -- other manufacturing companies today are concerned with supply chains. Every company today is struggling with how to come up with the best supply chain, and there are different models. Toyota, for example, has a dramatically different model with much closer links to their suppliers. This is different than the situation with Li & Fung, where they have close to 9,000 suppliers around the world, in many countries and they have designed a custom supply chain from this network.

The challenge and the strength of the Li & Fung model is selecting and creating this network of 9,000 or so suppliers -- and then for each order to customize a custom supply chain that is the best in delivering the right product, at the right price, at the right time, based on the right specifications of the consumers. Obviously when you're dealing with the supply chain area, the lessons from Li & Fung are tremendous. This is terms of how to do it more effectively and how to create the best possible offering for each one of their retailers and therefore meet the needs of the customers, as both Victor and William articulated before.

But the network is not limited to manufacturing supply chains. We see networks all over, in a sense. In every aspect of life today, we are encountering networks and there is no company today that can survive as an island, as a company by itself. That's why there are the companies that deal with networks of partners and others.

At the other extreme, consider Wikipedia, the free online encyclopedia -- which has been receiving a lot of attention. Wikipedia can be viewed as a network of participants; but there too it's not that it's totally organic and there is no governance and direction -- there is an orchestrater. There is a governing body and there are rules. So even the totally open Wikipedia follows some type of network orchestration guidelines that specify that you cannot alter certain entries or certain rules implied and the like.

Another example that people are familiar with is eBay. The company provides the platform and in a sense is orchestrating buyers and the sellers using its technology. The lessons from the network orchestration that Victor and William have created at Li & Fung are applicable to a wide range of businesses and not only on the manufacturing side.

Even those who are not involved directly in business may find it interesting to understand how value is created into today's environment - to meet the changing needs of customers - in this changing flat world.

Knowledge@Wharton: What are the major challenges involved in network orchestration and how do you tackle them?

William Fung: The major challenge we faced is the fact that the needs of the market are changing very rapidly. The need for flexibility is the reason why we went into a network of suppliers instead of a single monolithic, sort of hardwired, vertically integrated manufacturer in the first place. The need to keep providing all of the options needed by the market is obviously always a challenge.

Now couple that with the changing economics of the manufacturing in different parts of the world, and you will see that the network itself - it's a moveable feast. It is not something where you can say, "I've built now, and this network will last me for a long time." It doesn't work that way - it keeps evolving. Our challenge is constantly finding the right countries, the right factories within those countries, to provide the economics that's needed and sometimes the speed to market or the efficiencies needed by the market.

So one of the major challenges of this network creation is that it is ever-changing and we always have to be updating and renewing it. A lot of the products we are involved with are labor-intensive types of products to manufacture. And with labor intensive industries, it's almost like the first rung of the industrialization ladder for developing countries that are changing from an agricultural to an industrial economy.

Therefore our challenge has been to keep exploring new frontiers, new countries to do our manufacturing in that provide a better economic or other solution. It's not purely economic; it could also be sometimes that these countries have the raw materials that are needed for any particular product...wood for furniture, cotton or silk for our garments, or something like that. It's always an evolving situation and we constantly have to be on top of it.

Victor Fung: One of the main things you should know is that once you embark on a dispersed manufacturing model, where different parts of a manufacturing process can be done in different factories and in different countries, for a country to be participating in a global economy it no longer has to have vertical integration of the whole industry. In other words, you don't need to go from yarn to weaving and then making the garment to be in the garment industry.  If you are just in one segment of it, you can participate in that segment of the total supply chain.

That allows for a number of phenomena. First it allows the opportunity for much larger and wider participation for small and medium sized businesses globally. This, I think, is a huge phenomenon that is happening in the world today with a lot of consequences for economic development and job creation.

The second is, for countries to compete, they no longer have to build an entire vertical before they become competitive. They can actually be in a particular niche in a vertical. And indeed, they may be very specialized in a particular niche and then they can participate in different verticals. So it's an interesting phenomenon that's happening because this model is being implemented so widely now around the world.

William Fung: If I could add to that, with another example, with an industry that we're not actively involved with, like the automobile industry. Auto parts are now produced in different parts of the world. If you look at something like, for example, the small electric motors that power windows in a car in let's say Germany. These are now made primarily in the Far East, either in Japan or in China. There are so many well known companies that have specialized in these niche markets as Victor has said, of creating these products and trade and have basically become world leaders in that particular part or component. And, I think this is what the network of dispersed manufacturing can do for the industries, rather than having to do everything yourself in a vertical set-up. 

Knowledge@Wharton: What difference does it make if your company is an orchestrater or it's orchestrated by someone else?

Victor Fung: What we are talking about is team work. Whereas before, you might say that in the old model of a hierarchical, vertically integrated company, everything happened within one company, now we are not seeing competition between companies, but between different supply chains. In a sense, every time you see a product competing, it's one supply chain against another supply chain, with a number of players involved.

So once you have a team, there is always a need for somebody to orchestrate the team. Being a team member [I think] is a very important role. And then, for companies like Li & Fung, where we tend to not be doing any of the actual manufacturing ourselves, but we orchestrate the entire process of allocating the work, sometimes designing the product, getting the orders and so on. We act as an orchestrater -- and that is I think the major difference. On a full supply chain you need both types of players in order to be very strong.

William Fung: Yes, because if you don't have an orchestrater, what tends to happen is that people will focus on their particular sector of that supply chain and they sub-optimize. You need somebody to look at the holistic needs. A very good example would be that if you need the supply chain to respond very quickly to changes in consumer demand, rather than have a sort of buyer-seller relationship that is up and down your chain, you need a cooperative relationship.

This is where you say that "We don't know what the ultimate demand will be, but let's keep open capacity, so that when the orders do come, we can respond very quickly." If every player in the supply chain only minds his own sector, you're not going to have that kind of flexibility built in. And in order to do that, you will need someone to look at the whole chain to see how it is responding, and for them to say, "We need flexibilities built into this part of the chain and that part of the chain." Sometimes it's the raw materials supply; sometimes it's in making certain components and sometimes it's in the final assembly.

That is the difference between an orchestrater and a player, or someone who is part of the chain. You need someone to really manage the whole chain, as Victor has talked about.

Wind: But, if you talk about this from the point of view of management in general, at any firm, then I think that in every firm, the top management should consider what role they can play and if they can start playing the orchestrater role. So, this is going beyond the supply chain and the manufacturing side, with any firm that you are dealing with, whether it's in the financial services area or others - you have to basically look at the entire operation and try to be the orchestrater.

So in a sense, you can argue that every firm makes or boasts of an orchestrater and is also part of an orchestra - part of a network. But, ideally in terms of the changing management scene, we really see it as the role of management -- when they start thinking about division of the firm and the strategy of the firm. They need to start looking at this more broadly and say "How can I orchestrate the network that I am in charge of and what is the best way to do it"? They need to really perform more in the role of an orchestrater.

Knowledge@Wharton: Assume that you are the orchestrater. How should you structure incentives and penalties for the network members? In other words, how do you balance control and empowerment within the supply chain?

Victor Fung: That's a very good question. We have about 9,000 suppliers worldwide, operating in more than 40 countries, so it's a very large global network. And we keep in touch with that network through a very sophisticated IT system. Now, for every individual supplier, or member that we work with, our objective is take anywhere from 30% to 70% of that particular factory's output. You might ask, why 30%? Well, 30% is because we want to be large enough, as a potential buyer, to be meaningful to the factory. But, on the other hand, we don't want to take much more than 70%. This is mainly because we want that factory to be able to work with other people outside of the network, in order to get new ideas, new techniques, and so on - so that the network is constantly being renewed. 

You can see that within the network itself, we would then have really, what I would call a loosely orchestrated network - in which people are not participating 100% of the time in the network - they could be participating outside. And some people go in and out of the network. I'd like to describe the state of that network first.

Now, in terms of structuring the incentives, there are two major ones. The most important, is that being part of the network, we would constantly be feeding ideas, feeding orders, feeding new product development trends and so on, to the members of the network. And, we expect the network members to also contribute because they have exposure to people outside of the network.

The second, very important aspect is that Li & Fung has a whole spectrum of customers, going from buyers of low-cost and value-oriented basic products to very sophisticated luxury products. For any particular manufacturer, when they are operating at a certain level... we don't keep going back to the manufacturer every year and saying "We want you to keep producing the same thing, but at a lower cost every year." Instead, we try, over time, to migrate that particular member of the network up the value chain -- as we can keep increasing the number of sophisticated customers and products for that particular factory to work on.

One of the big incentives is this idea of being able to learn from us as an orchestrater, to be able to depend on us for a reasonable amount of the work that the factory does - and most importantly having the ability to use us in the network to upgrade oneself to actually higher and higher value added and more and more sophistication. I think that is very important. That, to me, is the real incentive for a member to stay as an integral member of the network.

Knowledge@Wharton: Is what you were describing what you call the "30-70" rule in your book?  

Victor Fung: That's right. That is the way we conceptualize a fundamental member of the network and that gives you an idea of how the whole network orchestration happens with these 9,000-plus factories, in more than 40 countries around the world, which form a part of our network.

Knowledge@Wharton: How do you decide who gets to be in the network and how long they can stay in the network?

William Fung: That is dictated by the needs of our customers. We have a wide range and a large number of customers, as Victor had pointed out, and different levels of requirements. But generally speaking, I would say that we select our factories very carefully. But even after the selection, it's through a process of working with them on specific orders and specific customers that these companies started to evolve [as members of the network].

Although Victor has said that IT is very important -- and it is -- we also have a lot people in the network who make qualitative decisions about how factories perform and how they are doing. The network itself is manned by 12,000 dedicated people. We don't have anybody who is manufacturing per se. We only have people who are involved in network orchestration.

We have 12,000 people in more than 70 offices, in more than 40 countries, around the world. It is this network of people who are scrutinizing, improving and changing the network of supplies all the time, depending on both the requirements of the market and the performance of the supplies themselves. 

Knowledge@Wharton: What are the principal political and policy implications from the rise of these networks? For example, do you think that there can be regulatory oversight in the context of nation states of such networks?

Wind: This is a topic that has been very close to Victor, for many years. This is an area where traditional trade statistics don't make any sense. If a product is manufactured in four countries, or six countries, what is the country of origin? I think this requires a fundamental change in the mental model that we have as to what is the country of origin because the original concept no longer makes sense... So, I'll let Victor answer.

Victor Fung: My view is very simply this: If you think about the WTO and the way we measure trade flows around the world, it assumes a very simple model, in which a product is made in Country A and it is shipped to Country B to be consumed. That is the fundamental assumption of the model. The question is where does the substantive transformation that creates the product take place...because that is where all of the value-added is.

But if you look at the model of dispersed manufacturing, the same product actually can be made in several countries before it becomes a finished product. And, if you say the substantive transformation then occurs in the final stage of finishing and basically that becomes the country of origin -- that last country, so to speak, gets charged for the full trade statistics, whereas it may capture only a portion of the total value added, it may only capture say 30% of the value added.

And so the problem with traditional trade statistics is that you are using a system to describe a world that has already evolved and no longer fits the model. Therefore, you get all of these distortions. A case in point is, for example, you hear about this huge trade surplus between China and the United States and it is causing a lot of friction in terms of trade relations and so on. But if you really look into it, maybe only 30% of the value-added occurs in China. A lot of the stuff is actually produced in the initial parts of the supply chain which originate somewhere in Southeast Asia. The parts and materials may go through one or two countries, before they end up in a product that is finished in China - but China gets charged for the full trade statistics.

So one of the most serious policy implications, if this model gets more and more widely used, is that the whole way that we look at the country of origin, the definition of where a product becomes substantively transformed, and the way we keep trade statistics, needs to be reexamined.

William Fung: Let me illustrate what Victor has said with a concrete example. If you look at your laptop, chances are that the memory device could have been made in Malaysia, the monitor could be made in Taiwan, and the laptop itself might have been assembled in China. But the highest value might be the Intel inside, the CPU chip.

Under the present trade statistics rules, if China exports that finished laptop to the United States, that becomes a Chinese export. Therefore, the trade flow is defined that way and it appears to be a Chinese export. But the value added on China's part, which is only the final assembly - which uses a lot of fairly cheap labor processes - could be far less than all of the other components entered and the technical software that goes into making that laptop.

So, you can see how the trade statistics could be totally distorted if you look at it in terms of value added -- rather than the final place where, as Victor said, it has been assembled. And, I think that there is a complete revamping needed in the world on how you record trade flows. This is because too much emphasis has been put on trade deficits leading to a call for sanctions against trade partners and so on.

And, I think that there is a rather unnecessary or almost impossible to achieve need for bilateral trade balances.  You know, it's almost impossible under this new world, where many countries participate in making a product... to call for bilateral trade balances between two countries -- whereas many countries participate in this whole process.

Knowledge@Wharton: What kind of policy changes would you like to see to address this situation?

Victor Fung: Well, we need to re-examine the whole issue of country of origin and not capture trade statistics the way that we are doing it. It should depend on allocating some concept of value added to different countries. But, of course this is a very deep theoretical issue that needs to be examined.

I'd like to touch on another major policy implication. As we see this model of dispersed manufacturing emerging further and further, what I see is an opportunity for more and more participation from small- and medium-sized enterprises from around the world.

At Li & Fung, because we splice the supply chain so finely and optimize each portion, we keep on talking about atomization of the supply chain. That is sort of an in-house term. But I think that the atomization of the supply chain also in a sense means the democratization of the supply chain since it allows more SMEs [small and medium enterprises] and smaller companies to participate. Many, many of our 9,000 suppliers from around the world are small and medium size enterprises. And, I think that that actually provides the world with a model for economic development, especially for some of the developing countries which is very crucial. It allows even SMEs in developing countries to participate in global supply chains.

Now, of course, there is a minimum price of entry. And in my mind, that minimum price of entry is that the governments that host these SMEs need to at least provide the SMEs with the minimum level of access on the IT front -- so that they can participate. And, also they have to have the infrastructure to be able to deal with the logistics of the goods flow in a very fast response manner. But once the government can actually provide those two enablers of IT and infrastructure logistics, then I think that SMEs can really participate. This democratization of the supply chain is a major trend in the world -- a major phenomenon and I think it is a very good development.

Knowledge@Wharton: One final question for all of you: What major lessons have you learned through this process of network orchestration that you'd like to share with Knowledge@Wharton's readers and listeners around the world?

Wind: The key lessons are captured by the framework that we propose in the book of trying to deal with network orchestration. They are primarily composed of three major dimensions. One of them is the need for a firm to start thinking not just about itself, the traditional firm - but how to balance the interest of the firm with the interest of the network.

I mention the concept that Victor had talked about in terms of competing network against network as opposed to firm against firm -- which has huge implications. So, how do you create this balance, realizing that you are operating as part of a network?

The second dimension we highlight is how you move away from traditional control. This is because in reality Li & Fung does not own any of the 9,000-plus companies. But yet, it has to deal with empowered companies, empowered consumers - so there's the whole balancing again between having a new type of control and the empowerment of the participants.

The third area is the need for balance between the traditional focus on specialization and capabilities for integration. It seems what we have here is a new paradigm for management that focuses on the network and the need to balance the network in the firm. This leads to new capabilities, new types of competencies that we need in terms of the orchestration of a network. So, we are learning from the lessons of this project and we're extremely excited about some of the implications. We are having a conference that is coming up in November and it is on network based strategies and competencies. This has been stimulated to a large extent by the work of this book.

William Fung: From the standpoint of running a firm on a day-to -day basis, one of the key words in my mind is speed and fast response. Your whole being is oriented now towards speedier response. The other word is outsourcing...radical outsourcing and orchestration of a network in that you don't really control everything in-house.

But at the same time you're focusing completely on turnaround time. If I were to construct a factory today, for example, the way that I would put a factory together would not be how to make very efficient long production runs. That is a thing of the past. The key in my mind is how to how to satisfy customers with very low minimum order quantities. You want to arrange a factory so that you can make line changes, very, very rapidly. And that flexible sort of production is going to be the key to the future.  

The way that you run an organization lightly and perform as a network orchestrater is that I think you really have to think constantly about speed of response. This means a very flat organization, total empowerment for people on the front lines, so that they can make decisions instantaneously on the spot. Also, you need to have a very strong IT network so that they have this information at their fingertips. At the same time, you have to think about an incentives system that will allow them to feel like they are entrepreneurs and that they are actually running their own small company. This has very serious implications.

If you can think of the opposite paradigm -- that the world did not go this way of global supply chains and orchestration of global networks but it went the other way with vertical integration -- then you would see a smaller and smaller number of larger and larger vertically integrated companies. Indeed, at one stage of the development, maybe 30 or 20 years ago, you actually did have this idea of saying that everything should be vertically integrated in house. That would be a completely different model. That would be a very vertically oriented hierarchical model.

And yet, we now have gone to a radically outsourced, very flat and very fast response organization. So, I think that that's the contrast and to me that's the major lesson from a managing of the firm standpoint.

Knowledge@Wharton: That's interesting. Would it be correct to assume that in your model network orchestration is not monopolistic? Or does the network become the monopolist?

Victor Fung: As I said earlier, it is the democratization of the supply chain. In fact, to us it's "the more the merrier. The more that we can get people into the network, the more we can actually have a network that hooks together more and more supplies -- the more opportunities we will have to optimize -- and the more we can involve people from different parts of the world and then they can bring different ideas -- a way of operating, and different capabilities into the network.

Wind: It is extremely important that you keep in mind that the lessons are really at all levels. The levels are obviously to the firm. The lessons are, in a much larger context, to public policy around the world and for economic development. And the concept of network orchestration is a very, very powerful one. So that even though there are implications in every one of these areas -- there are even implications for us at Wharton and in business schools around the world - in terms of what is management. Management under the model of network orchestration is dramatically different than the traditional concepts of management.

A Note to Readers:

Knowledge@Wharton and Wharton School Publishing are pleased to announce a global competition for the best strategies for competing in a flat world. Two prizes will be awarded, one for the best strategies that work and one for the best insights from failures.

For information about the competition, click http://www.competinginaflatworld.net/ - here or go to http://www.competinginaflatworld.net/ - www.competinginaflatworld.net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOL,

 

I completely agree. Unofficially, The US is in a Recession. The signs are clearly visible on Main Street.

Like the old Pepsi slogan, " Nothing Official About it "

 

Most Importantly, not having a moron in the White House will help tremendously. Almost anyone else will be better than him.

Wondering how much of this mess is the result of the his 8 year in office.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buffett is putting his money where his mouth is ! As he himself say its

for profit and not for charity.

 

This is what makes him the greatest investor on earth, mastering

"greed & fear"

 

 

 

A very interesting read of the worst case scenario: Complete meltdown of the financial systems...

 

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The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster by Nouriel Roubini

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting. To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown. That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and underplaying the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities. To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about. Such a scenario - however extreme - has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible. Start first with the recession that is now enveloping the US economy. Let us a**ume - as likely - that this recession - that already started in December 2007 - will be worse than the mild ones - that lasted 8 months - that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households - whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a ma**ive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it? Here are the twelve steps or stages of a scenario of systemic financial meltdown a**ociated with this severe economic recession. First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use "jingle mail" (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders' stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession. Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and a**ets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages - already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe. Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing - rather than reducing systemic risk - and making the credit crunch global. Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks. Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products. Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already ma**ive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses - and potential runs - on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines' downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system. Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead - with a short lag - to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a ma**ive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today. Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors' panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks' bankruptcies will add to an already severe credit crunch. Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone - not avoid - such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions. Eighth, once a severe recession is underway a ma**ive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD - or recovery given default - rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been ma**ive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing ma**ive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape - in terms of profitability and debt burden - than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a ma** of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher ma**ive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection - possibly large institutions such as monolines, some hedge funds or a large broker dealer - may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay. Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid a**ets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their a**ets are more long term and illiquid. Unlike banks these non-bank financial institutions don't have direct or indirect access to the central bank's lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system - stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can. Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown. The fall in stock markets - after the late January 2008 rally fizzles out - will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the ma**ive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of ma**ive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%. Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates - TED spreads, BOR-OIS spreads, BOT - Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors' risk aversion - will ma**ively widen again. Even the easing of the liquidity crunch after ma**ive central banks' actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks. Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of a**ets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying a**ets that are backing the distressed financial a**ets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of a**ets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation. Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of a**ets per dollar of capital. The recapitalization of banks sovereign wealth funds - about $80 billion so far - will be unable to stop this credit disintermediation - (the move from off balance sheet to on balance sheet and moves of a**ets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in a**et prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This ma**ive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe. A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in a**et prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties - driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities - will add to the impotence of monetary policy and lead to ma**ive hoarding of liquidity that will exacerbates the liquidity and credit crunch. In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century. Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question - to be detailed in a follow-up article - is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response - monetary, fiscal, regulatory, financial and otherwise - is coherent, timely and credible. I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

 

 

 

 

 

 

 

 

NEW YORK (AP) -- JPMorgan Chase & Co. was discussing a deal that would increase fivefold its offer for Bear Stearns Cos. to $10 a share, The New York Times reported Monday.

The talks Sunday were an attempt to satisfy Bear Stearns stockholders upset over JPMorgan's offer of $2 a share for the struggling investment bank, the newspaper said on its Web site, citing people involved in the negotiations.

ADVERTISEMENT if(window.yzq_d==null)window.yzq_d=new Object(); window.yzq_d['FIoLQUSOxJY-']='&U=13b0bhkiu%2fN%3dFIoLQUSOxJY-%2fC%3d638104.12369071.12766561.1383221%2fD%3dLREC%2fB%3d5264702';

The original price for Bear Stearns was part of a deal struck last week at the urging of the Federal Reserve and Treasury Department.

The Fed, which would need to approve any change in the agreement, was balking at the new price, the Times said. Such opposition could postpone the new agreement or derail it entirely.

In an attempt to speed majority shareholder approval, Bears board was trying to authorize the sale of 39.5 percent of the firm to JPMorgan, the Times said. State law in Delaware, where the companies are incorporated, allows a company to sell up to 40 percent without shareholder approval.

A spokeswoman for JPMorgan declined to comment Sunday night, the Times said. A Bear Stearns representative could not be reached.

A spokesman for the Federal Reserve would not comment on the central banks involvement in the negotiations, but denied it had directed the original sale price, the newspaper said.

 

Best is lies in between. I think China & India are the best example as on date. The day we inclined on any of this side we may also invite trouble for ourselves.

US set to lose financial S-power status

 

If the intensity of Bailout Packages increased at this rate few months down the line Federal Reserve might required Bailout package from Asian & European central banks.

 

In simple word US is up for sell.

The financial system devised by these wall st invest. bankers was complex and in the laseez fair economic system that is in place in the US was not looked into.Had the banks been more prudent this wouldnt have hapened.But the Govt bailout is not for the Investment Banks but it is to stall any further slowdown by the lack of demand which might prove to be deat kneel to not only US but majorly China and all the commodity exporters to China.

Candidates eye Warren Buffett as possible Treasury chief

'Economic 9/11' exacting grim psychological toll in US

 

All I can say is that America has lost all right to act as a champion for free markets. Now, I think everyone has got the right to do anything they feel like. I think when Thailand banned/restricted capital exits by foreigners, Americans where jumping up and down....now why did they stop short selling. A country which was a champion of the cause that if the world has to come down, let it be, has behaved like a sheep when faced with similar circumstances.

 

In all this uncertainty, if I can see anything uncertain, is that America is gone forever. I would be extremely glad, if India gets Uranium from there and launch a test to make fun of the restrictions imposed by them.

 

 

NYC National Debt Clock runs out of digits

We may see lot of bankrupties in Retail sector during next 6-12 months.

 

PS: Repeat that these views are for US Retail sector. I don't have much idea about Indian Retailers.(Though they may also be affected) 

 

 

Are you predicting that the DOW will suffer the same fate as these two?