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The global slump of 2008-09 has begun

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  • The global slump of 2008-09 has begun

    The global slump of 2008-09 has begun as poison spreads By Ambrose Evans-Pritchard

    The avalanche of bankruptcies has begun. Six US companies of substance have defaulted on bonds over the past fortnight, against 17 for the whole of last year.

    As a "non-believer" in the instant rebound story, I am not easily shocked by gloomy reports. But the latest note by Standard & Poor's -

    The Bust After The Boom - gave me a fright.

    The sick list is varied, though most for now are victims of the housing crash: Linens 'n Things, ($650m), Kimball Hill ($703m), Home Interiors ($310m), French Lick Resorts ($142m), Recycled Paper Greetings ($187m), and Tropicana Entertainment ($2.49bn).
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    Some 174 US companies are trading at "distress levels". Spreads on their bonds have rocketed above 1,000 basis points. This does not cover the carnage among smaller firms outside the rating universe.

    The California city of Vallejo (117,000 inhabitants) has just made history by opting for Chapter 9 bankruptcy, the result of tax erosion from a 26pc fall in local house prices. Half Moon Bay may be next.

    "This is the tip of the iceberg: everybody is going to line up for Chapter 9 in California," said John Moorlach, Orange County board chief.

    US consumers are juggling plastic to put off their day of reckoning. The Fed survey said credit card debt had jumped 6.7pc in the first quarter to $957bn, or $6,000 per working American, despite usury rates near 20pc.
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    The bears at Société Générale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30pc for the first time ever.

    Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50pc. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50pc to 75pc.

    "Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.

    "We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.

    Today's "bear rally" may live on into June. Don't count on it. Global bourses are no longer rising hand-in-hand with oil in exuberant celebration of liquidity relief (US, UK, and Canadian rate cuts).

    Crude ceased to be a friend of equities when it reached around $110 a barrel. At last week's close of $126, it became an outright threat. The Bush rescue package - $800 in rebate cheques per household - has been rendered null and void by the latest spike. The average US home is now spending over 8pc of income on energy or fuel.

    OPEC is playing with fire by refusing to pump more oil to offset rebel attacks in Nigeria. The cartel's output drop of 350,000 barrels a day in April is a hostile act at this point.

    But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire, too.

    The oil spike will burn itself out. China has hit the buffers. With inflation at 8.5pc, it risks political turmoil. Moreover, it has repeated Japan's mistakes in the 1980s, building too many factories shipping too many goods at slender margins into a crumbling export market.

    Lehman Brothers' Sun Mingchun says China will tip over in the second half of this year. "With so much latent overcapacity, an export-led slowdown could trigger a chain reaction which, in the worst case, could threaten the stability of [its] financial and economic system," he said.

    Britain, Europe, Japan, and China will go down before America comes back up. This is turning into a synchronised bust, after all. The Global Slump of 2008-09 is under way.

  • #2
    Re: The global slump of 2008-09 has begun

    But there again, why should Middle Eastern states help America as long as the White House keeps filling the US petroleum reserve to prepare for war with Iran? Bush is playing with fire, too.
    I keep wondering why the oil from Iraq isn't flowing as planned.
    Too many operational risks with Iran next door ?

    Comment


    • #3
      Re: The global slump of 2008-09 has begun

      Originally posted by Olduvai View Post
      I keep wondering why the oil from Iraq isn't flowing as planned.
      Too many operational risks with Iran next door ?
      Have a read through this thread. It might shed some light on your question.

      http://www.itulip.com/forums/showthr...Iraq#post33873

      Comment


      • #4
        Re: The global slump of 2008-09 has begun

        Nobel Prize winning economist Stieglitz has recently said that Oil exporting countries with dollar pegged currencies were currently better off leaving their oil in the ground rather than selling it and getting stuck with a devaluing currency that they can invest in bonds that will have a more than meager return.
        At the same time the pegging of their currencies is wrecking havoc in their own economies fuelling inflation to levels not experienced before. This inflation is showing in food, construction and industrial project alike. The state owned oil company in the country I live in has shifted their expenditure away from accelaration of projects. This shift has happened in the last six months. So while production will not be cut it is not being accelerated either.

        So I think the chances that OPEC will try to make up for Nigeria's lost output are small.

        Eastern Belle

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        • #5
          Re: The global slump of 2008-09 has begun

          I don't want to generalize, but many of the producing countries rely very heavily on oil income to fund government expenditures. Inflation is a problem, but rioting unemployed youths because they aren't getting their subsidies is a bigger problem. So while it may or may not be better to leave it in the ground, doing so would equal political suicide. You think Chavez likes exporting to the US? He has to.

          Lot of places aren't increasing production because 1) they can't (many developed countries); 2) dumb government policies (mexico); 3) onerous taxes that discourage reinvestment (russia); 4) sanctions/lack of technology (iran/venezuela); 5) terrorism (nigeria/iraq).

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