Can we expect Santa Claus rally this year?
Stock markets traditionally see upward swing during the 12 days of Christmas


By Zhen Ming


THE bottom line for investors in 2008: Recession, recession, recession.

Methinks, maybe not - there's still a good week left to prove the pundits wrong.

That's my take on the old adage about the Santa Claus rally - a phenomenon that often (but not always) proves remarkably reliable for stock markets around the world.

This year-end rally is usually a surge in the price of stocks that often occurs in the week between Christmas and New Year's Day.

There are numerous explanations for this yearly phenomenon - including tax considerations, happiness around Wall Street (none this year), people investing their Christmas bonuses (again, none this year) and the fact that the pessimists are usually on vacation this week.

For the Singapore stock market in particular, this Santa Claus rally does stand up to fairly rigorous statistical analysis.

Fact and fantasy

Fact and fantasy have marched arm-in-arm on three out of every four Christmases in Singapore in the past 20 years.

That is, if we were to systematically track the performance of this phenomenon as starting from 11 Dec (two weeks before Christmas) and ending on 5 Jan (on the 12th Day of Christmas, remember that song?).

Even during some years when Father Christmas failed to show up in time, he sometimes made up for it - by paving the way for a January Effect rally instead.

On Christmas Eve, the Dow Jones Industrial Jones ended the shortened trading week at 8,468.48 - a 683.13 point pullback from its intra-month high of 9151.61.

Meanwhile, the Straits Times Index closed at 1,736.99 - 3.19 per cent lower than its 1,794.16 closing on 11 Dec (the supposed start date for this year's Santa Claus rally).

But with five trading days still left before the 12th Day of Christmas, the question on everyone's mind: Has Santa skipped Singapore? Or is he just a bit too late this season?

To be sure, the gloomy economic data earlier this week was hardly surprising.

But, this time, it's not only US and European automakers that are hurting.

The Japanese automaker Toyota has already said it expects to post its FIRST operating loss in more than 70 years, an announcement that capped a year of record-breaking corporate losses and sheer drops in global stock markets.

Although stock markets have historically performed well in the weeks around Christmas and New Year's Day, expect investors hoping for a last-minute rally to ring out 2008 to be somewhat disappointed.

At this juncture, expect trading volumes in global stock markets to remain light, what with many traders already on vacation.

Silver lining

But there's an imminent silver lining here: Expect an amazingly volatile January Effect in 2009 when the so-called Big Boys return from their holidays.

These Big Boys (from Shenton Way to Wall Street) have already been quietly accumulating stocks on the sly, all in anticipation of January.

Here's my 'proof' of what's going on:

According to the latest Reuters poll, amid the gloom and doom, global investors quietly lifted their equity holdings for the second month running in December.

Surveys of 44 leading investment houses in the US, Japan, continental Europe and Britain showed an average mixed-asset portfolio holding 56 per cent in stocks, up from 54.8 per cent in November.

Recent uptick

But this recent uptick in equity holdings among the Big Boys still remained below the long-term average holding of almost 60 per cent.

Here's more good news (especially if you had timed your investment successfully): In the past few weeks, world stocks, as measured by the Morgan Stanley Composite Index, rose by around 20 per cent - after hitting a 51/2-year low on 21 Nov.

So, while (for many) Santa might have been late this year, (for me) he's already arrived - in late November, unannounced, and without fanfare.

By all means, do proceed to welcome January, with your eyes wide open. Only with the money you can live without.


Source: The New Paper, Sat 27 Dec 2008

Don't worry about gurus of gloom

By Zhen Ming


WITH just 10 days left before New Year's Eve, the countdown to 2009 will soon begin.

It's time now for me to look ahead and make some predictions for the New Year.

And as I gently wipe the dust from my crystal ball, all I can see initially is the word 'recession'.

And then I can also see signs of cutbacks, layoffs - and pure worry.

That's because, for many, the future is frightening.

A record 63 per cent of Americans in a recent ABCNews/Washington Post poll, in fact, think the US is in a 'long-term economic decline'.

So how bad is it out there? And what's in store for us in 2009?

To find out, I scoured cyberspace to seek the views of three gurus of gloom:

Marc Faber

Known internationally as 'Dr Doom' , the Swiss-born investment guru is publisher of the Gloom, Boom & Doom Report. He once warned investors months before the so-called Black Monday crash of 1987.

Dr Faber recently made the following predictions on Bloomberg television:

'Next year, if the economy in the US is as weak as I think it would be... I think sovereign wealth funds are going to be very busy supporting their own markets, they won't have much money to buy assets around the world.

'The next emergency measure will be that Americans are not allowed to buy foreign currency and transfer money overseas, and the next measure will be not permitting Americans to buy gold and so on and so forth.'

Nouriel Roubini

Also known as 'Dr Doom' but more among Americans, the economics professor at New York University reputedly saw the 2007 mortgage-related meltdown coming - long before many of his peers did.

Dr Roubini this month made the following scary predictions in Fortune magazine:

'We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst US recession in the past 50 years ...

'For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade.

'I wish I could be more cheerful, but I was right a year ago, and I think I'll be right this year too.'

Gerald Celente

As CEO of the Trends Research Institute (a panel consisting of 25 experts with a variety of backgrounds), he is renowned for accurately predicting future world events such as the fall of the Soviet Union and the 1987stock market crash.

Mr Celente told Fox News late last month that, by 2012, America will become an undeveloped nation, and that there will be a revolution marked by food riots, squatter rebellions, tax revolts and job marches.

In a subsequent interview, Mr Celente also added: 'It's going to be very bleak. There is going to be a lot of homeless, the likes of which we have never seen before. Tent cities are already sprouting up around the country and we're going to see many more.'

Mr Celente, who also successfully predicted the 1997 Asian currency crisis and the sub-prime mortgage collapse, last year told UPI that 2008 would be known as 'The Panic of 2008', adding that 'giants (would) tumble to their deaths'.

Mr Celente's predictions have seemed to come true, what with the collapse of the likes of Bear Stearns and Lehman Brothers.

So how worried should we be by these dire warnings? Should we lose any sleep over their predictions?

To be sure, many banks in the West have had to be saved, asset prices have plummeted, and a recession is now hitting the global economy.

To be sure, we're now in a period of what economists call 'forced liquidation', which has happened less than 10 times in the past 150 years.

And yet, we're still around.

And yet, if you were take a good look around, the streets of Singapore are still full of flashy cars, our shops still full of food, and most of us are still gainfully employed and comfortably housed.

So let's shrug off our irrational shivers and instead look forward to 2009.


Source: The New Paper, Sun 21 Dec 2008

Worst 5 money predictions of '08


By Zhen Ming


HERE'S my pick :

1 Jan 2008

PREDICTION: According to the Chief Executive magazine's annual poll, US CEOs expect the Dow Jones Industrial Average to sit at around 13,359, oil prices to be at US$96 a barrel and US Federal Reserve funds rate to remain at 4.25 per cent by the end of 2008.

REALITY: Fast forward to Wednesday, and the Dow is still largely directionless at 8,824, oil prices are at a four-year low of around US$40 a barrel and Fed rates are now at near zero per cent.

Oil, which peaked in July at about US$147 in July, could even decline to US$25 next year - despite the OPEC production cuts.

2 Mar 2008

PREDICTION: Jim Cramer, the volatile host of CNBC's Mad Money programme, when responding to a viewer's e-mail, arrogantly asserted:

'Peter writes: 'Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?'

'No! No! No! Bear Stearns is fine! Do not take your money out. ... Bear Stearns is not in trouble.

'I mean, if anything they're more likely to be taken over. Don't move your money from Bear! That's just being silly! Don't be silly!'

REALITY: Hopefully, Peter (the viewer put down by loud-mouthed Cramer) had the cow-sense to seek a second opinion.

Six days after the show's broadcast, Bear Stearns was sold for a pittance to JPMorgan Chase - after widespread speculation about the investment bank's massive exposure to subprime mortgage.

4 Sep 2008

PREDICTION: Donald Luskin, in his article 'Quit Doling Out That Bad-Economy Line' (appearing in The Washington Post), boldly proclaimed:

'Anyone who says we're in a recession, or heading into one - especially the worst one since the Great Depression - is making up his own private definition of 'recession'.'

REALITY: The day after Luskin's self-delusional forecast, Lehman Brothers filed for bankruptcy. And the rest is history.

5 Nov 2008

PREDICTION: Outgoing US Treasury Secretary Henry Paulson, on National Public Radio, prematurely bragged about the improved health of US banks:

'I believe the banking system has been stabilised. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it.'

REALITY: Paulson, who emerged in October with a US$700 billion 'bazooka' to blast away toxic assets in troubled US banks, ended up acquiring direct equity stakes instead (a move he himself had rejected earlier).

Unfortunately for Paulson, shortly later, Citigroup's stock price plunged 75 per cent in one week - closing below US$5 for the first time in 14 years.

June 2007

PREDICTION: Dennis Blair and Kenneth Lieberthal, in their Foreign Policy essay 'Smooth Sailing: The World's Shipping Lanes Are Safe', declared:

'In reality the risks to maritime flows of oil are far smaller than is commonly assumed. Tankers are much less vulnerable than conventional wisdom holds.

Limited regional conflicts would be unlikely to seriously upset traffic, and terrorist attacks against shipping would have even less of an economic effect.

REALITY: On Wednesday, the United Nations said Somali pirates in inflatable rafts have made US$120 million ($175 million) in pirate attacks this year.

In two months, they had hijacked 30 ships.

The UN on Wednesday approved air and sea attacks on Somali pirate bases.


Source: The New Paper, Fri 19 Dec 2008

Another Ox Year, Another Baby Bust?

By Zhen Ming


THE proverbial stork now comes much later and on fewer occasions, too.

Not surprisingly, the size of the average Singapore family has shrunk sharply.

Among women 40 years or older who have ever married (that is, among those who are quite likely to have already completed their child-bearing) the average number of children has fallen continuously since the 1990s — this, despite a slew of generous procreation incentives introduced in recent years.

Singapore women in their 40s, for instance, gave birth, on average, to a total of 2.75 children in 1990.

But by last year, most of them would have experienced motherhood, at most, only twice in their lifetime (an average of 2.07 children).

(My own better half is in this category and we have two grown-up daughters.)

Dwindling dramatically

Even among the older generation (women 50 years or older), the average number of children has also dwindled dramatically — from 4.69 in 1990 to only 3.03 by last year.

Amazingly, despite a faster-growing population in Singapore since the start of the new millennium (arising chiefly from the influx of new immigrants), the number of locally-born children has stayed consistently below 40,000 a year since 2003 — when a serious SARS epidemic placed a big dampener on the local economy.

Earth Dragon high

This low birth rate situation in 21st century Singapore pales in comparison to the all-time high of 52,957 newborns in 1988, during the auspicious Year of the so-called Earth Dragon, when the Singapore economy was also on the up and up.

To be sure, with three-quarters of all Singaporeans still of Chinese descent, zodiac signs will likely remain an important consideration as to when many newlyweds should start their families (and when we can expect a bumper harvest of new babies).

More recently, however, the cyclical ups and downs of the Singapore economy have become equally important for the many married Singaporeans who remain childless by choice, especially during their first five years of marriage.

But what do oxen, tigers and dragons (plus nine other zodiac sign animals) have to do with when our newlyweds will take their first plunge into parenthood?

And how has this time-tested formula for family planning been rudely interrupted by the periodic economic dislocations that we’ve experienced since the mid-1980s?

Back in 1985 (a Year of the Ox, a beast of burden), when Singapore experienced the onset of its first full-blown post-Independence recession, there was widespread workforce retrenchment.

Lag time

But given the (ahem) unavoidable lag of about nine months between conception and birth, the sharp drop in new babies showed up only in the following year (which back then also coincided with an avoid-it-if-you-can Year of the Tiger).

A similar delay-parenthood-if-we-can pattern showed up in mid-1997 (another Year of the Ox) when the onset of the Asian currency crisis led to another sharp economic downturn (this time, on a much broader, region-wide, basis).

Not surprisingly, Singapore went through a prolonged two-year baby bust — starting in 1998 (another Year of the Tiger) and spilling over into 1999 — before the return of confidence and a new Dragon Year in 2000 (at the height of the dotcom boom) helped our newlyweds overcome their fears about first-time parenthood.

Short-lived boom

But this baby boom soon proved short-lived when the ensuing dotcom bust of 2001 and then (horrors) the subsequent SARS slowdown of 2003 all but ensured that the number of new babies thereafter would stay permanently below 40,000 a year.

And just when you think the worst is over, here we are, once again, about to set off for yet another economic (and family-planning) roller-coaster ride.

The Ox returns

With the onset of the global credit crunch in late 2008 — and with further economic uncertainties in store for us next year (another Year of the Ox!) — expect the next baby bust to last at least two years (inclusive of another Tiger Year!).

But if life is an ever-repeating zodiac cycle (like what most Chinese families think it should be), expect a rebound in new babies by 2012 (another Dragon Year).

That’s when, thankfully, you can also expect a full-fledged global economic recovery.


Source: The New Paper, Sun 14 Dec 2008

Pity if hidden gems remain hidden

By Zhen Ming


SWEDEN'S Prime Minister Olof Palme died in 1986 in Stockholm at the hands of an assassin.

Back then, his murder in the middle of Stockholm's downtown shocked the world. (Political assassinations, until then, were virtually unheard of in Scandinavia.)

Mr Palme was born into an upper-class, conservative family in Sweden in 1927. Nevertheless, he still required a scholarship to study at the pricey Kenyon College (my alma mater in Gambier, Ohio), graduating with a BA in 1948.

At Kenyon, Mr Palme was an excellent student, earning all As in his major subjects (economics and political science). He was also a member of Kenyon's first varsity football squad. And, like me, he washed the college president's car for pocket money.

After graduation, Mr Palme spent three months hitchhiking his way through the US with only US$300 (S$450) in his pocket.

Mr Palme later said that what he heard and saw on that US trip - the deep economic inequality and racial segregation - influenced his political and social ideals.

Around the time when Mr Palme was still prime minister of Sweden, one Barack Obama was enrolled, on a college scholarship, at Columbia University in New York City, where he majored in political science with a specialisation in international relations.

Mr Obama then graduated with a BA from Columbia in 1983 and later entered Harvard Law School in late 1988 (here again, on another college scholarship).

He gained national media attention when he was elected the first black president of the Harvard Law Review. And the rest, as they say, is history.

Seventeen years after graduating with a Juris Doctor magna cum laude from Harvard in 1991, Mr Obama is set to be the 44th president of the United States.

Generations of outstanding men (and women) like Mr Palme and Mr Obama have all benefited from the generosity of the privately-funded US higher educational system.

For years, it all seemed so simple - donations would first roll in, the booming stock market would then multiply them, and the college endowments would then swell.

At the wealthiest schools, the millions would become billions, and even small colleges (like Kenyon) would start to amass sizeable fortunes.

But with Wall Street's recent meltdown, all bets are off.

With most endowments predicted to plummet by 30 per cent this academic year, many US universities are downsizing or even shelving long-term plans.

Even the wealthiest schools - among them Harvard, MIT and Dartmouth - suddenly find themselves in the unfamiliar situation of trimming budgets and freezing hiring to offset heavy investment losses.

In September, Harvard University announced that its endowment, the country's largest, had risen to a staggering US$36.9 billion as of 30 Jun.

But just last week, in a stark sign of the economic times, Harvard said the value of its investments had plunged 22 per cent, or about US$8b, in the past four months. It anticipates a further 30 percent loss by next June.

Now, many other top universities worldwide (including those in Singapore), while declining to provide specifics, have also publicly acknowledged substantial losses.

My hope for 2009 - that this swift reversal of university fortunes won't hinder a future Olof Palme or another Barack Obama from maximising his or her potential.


Source: The New Paper, Fri 12 Dec 2008

Detroit's rescue could also be S'pore's windfall


By Zhen Ming


IF the US government bails out the car makers, this could be good news for Singapore.

The US government will set conditions which car companies were reluctant to follow before.

President-elect Barack Obama plans to put one million 150-mpg (about 64 kpl), plug-in hybrids on US roads within six years and give American consumers a US$7,000 ($10,700) tax credit to buy these fuel-efficient cars.

This retooling of Detroit impacts Singapore.

Dr Michael Quah Cheng-Guan, a Harvard-trained American fellow at our Energy Studies Institute, said there would be a trickle-down effect that would help our economy.

'For instance, the need to develop and improve components of these electric systems would spin off R&D benefits to Singapore's strength in semiconductors, power control devices, IT command and control programs, and even to the new nano-materials, which will serve the high power needs for switch gear and associated peripheral components.'

But it will be a tough ride for US car makers, said Dr Quah, and it remains to be seen if the US can get over 'its obsession with what Singapore's (Ambassador-at-large) Prof Tommy Koh calls the 'Socially Unacceptable Vehicles (SUVs)'.

Said Dr Quah: 'The car lobby remains very strong simply because American car companies (and their suppliers) constitute a major industry in the US, where many jobs, including those in my home state of Michigan, are on the line.'

Last but not least, the US - as a country with 5 per cent of the world's population using 25 per cent of its energy resources - must admit that there are huge opportunities in energy-efficiency gains.


Source: The New Paper, Fri 05 Dec 2008

Buffett also bets big on derivatives


By Zhen Ming


IN his 2002 letter to his Berkshire Hathaway shareholders, billionaire investor Warren Buffett made headlines when he loudly condemned derivatives as "financial weapons of mass destruction".

These contracts sold to the world as a way to reduce risk were "time bombs, both for the parties that deal in them and the economic system", he strenuously asserted.
Back then, Buffett also made this gloomy prediction:

"The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts."

He did it too

But now the whole world has found out that Buffett had also allowed his insurance and investment conglomerate to make big (and disappointing) bets on derivatives.

On 7 Nov, Berkshire reported paper losses from derivative bets totaling US$6.73 billion at the end of the third quarter, causing the company’s shares to drop by 34.4 per cent in less than two weeks to a 52-week low of US$74,100 apiece.

When compared against their all-time record high of US$151,650 apiece, Berkshire shares had fallen by more than half by 20 Nov.

Berkshire shares have since then recovered by some 40 per cent to close at US$104,000 apiece on Friday after Buffett promised to tell all.

How did he err?

What went wrong for our 77-year-old Oracle from Omaha?

According to corporate filings, buyers of the derivatives would be entitled to billions of dollars from Berkshire if four stock indexes (including the Standard & Poor’s 500) drop below agreed-upon levels on dates beginning in 2019.

Berkshire explained it has contracts whose values depend on where the four stock indexes would trade between 2019 and 2027.

Berkshire also explained it could theoretically owe as much as US$37.04 billion on the contracts. But Buffett's follow-up email later said the four stock indexes would all have to fall to zero for Berkshire to be liable for the entire sum that's at risk.

You'll know next year

Acknowledging investor concern, Buffett said he will disclose more information on how he calculates losses on Berkshire's derivative bets in his next yearly letter to shareholders (expected around end-February).

The report will disclose "all aspects of valuation" and cover "deficiencies in the formula" for pricing the derivatives, "which we nevertheless use," Buffett said.

"If he'd stayed silent on this, the stock would have stayed at US$80,000," said Berkshire shareholder Michael Yoshikami.

Not surprisingly, in the past few months, Buffett has called on investors to begin investing in US stocks again, and has made a few high profile investments himself recently, including buying preferred shares of Goldman Sachs and General Electric.

Recovery — not so soon

Yet Buffett has also been equally candid about the downtrodden US economy. Although the Federal Reserve and others are suggesting that it will begin recovering in mid-2009, Buffett says it will take longer, and unemployment will continue to rise for some time.

"There are going to be more people unemployed," Buffett said during a Friday interview on Fox Business Network. "I'm not worried about five years from now. Five months from now, can be very painful," and "it will not turn around by mid-year next year."

In happier times, back on 23 Oct 2006, the price of a share of Berkshire became the first stock to ever close at the six-digit mark at US$100,000.

Back then, for the same US$100,000, you could buy a high-performance Mercedes-Benz CLS63 AMG coupe in America or a 74-day round-the-world cruise in a Royal Suite on the Queen Mary 2.

Back then, Buffett was hailed as the greatest investor alive. But his prior successes may have forced him to buy in billion-dollar chunks to impact Berkshire's bottom line.

This problem of too much cash for too few investing opportunities may have given rise to “cash intoxication” — resulting in Buffett's recent foray into currency and commodity speculation and even bets on derivatives.

Ironically, Buffett once said, "Wide diversification is only required when investors do not understand what they are doing."


Berkshire Hathaway’s Share Price Milestones

................................ Date ..................... Price per Share ... % Change

Average Cost1 .......... 1962 — 1963 ......... US$15 ................... NA

Six-Digit Record ........ 23 Oct 2006 .......... US$100,000 ....... + 666,567% (est)

All-Time High ............ 11 Dec 2007 .......... US$151,650 ....... + 51.6%

52-Week Low ............ 20 Nov 2008 .......... US$74,100 ........ - 51.1%

Latest Close ............. 28 Nov 2008 .......... US$104,000 ....... + 40.4%

1 Warren Buffett started accumulating Berkshire Hathaway shares in 1962 when they were less than US$8 apiece. By 1963, the average cost of his acquisition was estimated at around US$15 apiece whereas the company’s shares were then trading at about US$18 apiece.


Source: The New Paper, Sun 30 Nov 2008

Rise and fall of Citigroup


By Zhen Ming


YOU could almost sense that nervous, somewhat uneasy, almost palpably put-on calm among staff when you walked into any Citi Singapore branch last Monday morning.

But staff at the Singapore unit of Citigroup soon heaved a huge sigh of genuine relief on news of the US government's enhanced bailout package costing up to US$288 billion ($435 million) in capital and guarantees.

Privately, some staff, fretting over the prospect of 52,000 job cuts across Citigroup's worldwide operations, had spent a sleepless weekend wondering if they were next on the chopping block - even though it was announced that no more than 250 jobs (out of a total of 9,100 in Singapore) would be affected.

Calming ads

Citi Singapore had, in fact, gone to great lengths on all fronts to restore calm in recent days - taking out full-page newspaper advertisements to reassure its clients and sending e-mail updates to encourage its staff.

And now that Citigroup will live to fight another day, what lies ahead for this 'Citi that never sleeps' - a financial conglomerate that still boasts some 200 million retail account holders in 106 countries (roughly, one in every 32 people on this planet)?

An appropriate answer to this nagging question later on, I promise.

Changing fortunes

But first, let me retrace Citigroup's swiftly changing fortunes by tracking the highs and lows of its share prices during the past couple of years.

Towards the end of 2006, barely two years ago, Citigroup was, by far, the world's largest bank by market value. Not even ICBC, the world's current Number One, could come anywhere close to Citigroup in asset size and geographical reach.

Citigroup's share prices achieved an all-time high of US$57 apiece on 28 Dec 2006 - giving the bank an assumed market value of US$311 billion (assuming it had the same number of shares then that it has today).

Singapore investment

Earlier this year, on 15 Jan, when the Government of Singapore Investment Corporation (GIC) announced its decision to invest US$6.88 billion in Citigroup, the bank's shares were still worth US$26.94 apiece.

On Wednesday, Citigroup shares were US$7.05 apiece - giving it a market value of about US$38 billion.

Based on Wednesday's US$38.4 billion total market value for Citigroup shares, if the GIC were to convert its perpetual convertible securities into an estimated 4 per cent stake, then these shares would be worth a ballpark US$1.54 billion - that is, a paper loss of roughly US$5.34 billion.

Thankfully, Singapore's investment in Citigroup has built-in safeguards that allow the GIC to hold on to its interest-bearing 'perpetual convertible securities' until the day Citigroup share prices could hit the (publicly unknown) conversion price.

Meanwhile, the GIC will still get to collect a dividend of 7 per cent on the value of original sum invested for as long as we choose to do so. That 7 per cent works out to a fairly handsome payout of US$482 million a year.

Pain is not over

But Citigroup's sufferings aren't over yet.

When its shares tumbled last year on the bank's subprime mortgage woes, angry investors sued for fraud.

Now, stockholders are due to file a new version of their lawsuit as their losses have become much more stark.

A consolidated shareholder complaint in the case is scheduled to be filed in the US District Court in Manhattan by Monday.

An earlier version accused Citigroup and several individuals, including former CEO Charles Prince, of violating securities law by artificially boosting the bank's stock price by concealing its exposure to subprime-linked debt.

Citigroup believes the lawsuit 'is without merit, and will defend against it vigorously,' company spokesman Mike Hanretta said on Tuesday.

Meanwhile, how big do you think is the US$272 billion lost to date?

It is 1.8 times the size of Singapore's GDP for 2007. It is almost 1.4 times the worth of Coca-Cola and Google combined.

Citigroup’s Changing Fortunes

................................ Date .............. Share Price ... Assumed Market Value1

All-Time High ............ 28 Dec 2006 .... US$57.00 ...... US$310.6 Billion (Est)
When GIC Invested ... 15 Jan 2008 ..... US$26.94 ...... US$146.8 Billion (Est)
All-Time Low ............. 21 Nov 2008 .... US$3.05 ........ US$ 16.6 Billion
Latest Close ............. 26 Nov 2008 .... US$7.05 ........ US$ 38.4 Billion

1 For comparability reasons, Citigroup’s assumed market value is based on price of Citigroup shares on each date specified multiplied by the same number of Citigroup shares as of 25 Nov 2008. Citigroup has issued additional shares to new investors since the onset of the global financial crisis.


Source: The New Paper, Sat 29 Nov 2008

Time for Some Good News

The recession is here, but S'pore households
have enough wealth to weather the storm

By Zhen Ming

The Average Singapore Household’s Balance Sheet

...................................... End-2000 .............. End-2006

Assets

Currency & Deposits ....... $136,310 ............... $157,930
Shares & Securities ........ $ 75,340 ................ $120,360
Life Insurance Equity ....... $ 30,750 ............... $ 76,820
CPF / Pension Funds ...... $ 94,190 ................ $119,930
Residential Property ........ $386,830 ............... $384,920

Total Assets .................. $723,420 ............... $859,970

Liabilities

Mortgage Loans ............. $106,800 ............... $110,390
Personal Loans .............. $ 38,450 ................ $ 39,180

Total Liabilities ............ $145,250 ............... $149,570

Net Wealth ............... $578,160 ............ $710,400

NB: Numbers may not add up because of of rounding off. Assumes
average household size was 4.2 and 4.1 in 2000 and 2006, respectively.

Basic data: Yearbook of Statistics Singapore, 2008


BY now, you're probably fed up with reading all that bad news about the economy.

By now, you're also sick of listening to all those 'I told you so' stock market prophets of doom who - after years of being totally wrong - are finally having their day.

So let me, for a change, try to provide you with some year-end cheer instead - at least towards the end of this column on the upside of doom and gloom.

But first - yes, it's official, folks - recession has finally come to Singapore.

And yes, after years of free-spending and saying 'charge it' at every turn, we're again using words such as 'scrimp and save' and 'scrape up some cash'.

We're also cutting back on almost all fronts, regardless of how much we earn, by trimming grocery costs and buying fewer luxuries.

We're also saying 'no' and 'maybe' to travel for the holidays, eating out at restaurants, and entertainment such as going to movies.

Fear factor

Blame it, if you like, on a falling stock market that has eaten away at our wealth and on all those other consumers (not me) who feel panic and fear.

Blame it also on those kiasu banks that are now cautious about making new loans, causing a ripple effect in the economy as more businesses have trouble surviving.

The Government has taken emergency measures to break the downward spiral by making available $2.3 billion in loan and credit facilities to companies and $600 million for retraining workers.

The upside is that we should realise how blessed we've been since 1965 when we as a nation finally stood on our own two feet.

Since independence, like the proverbial hard-working ants that we've been, we've managed to squirrel away huge surpluses that are now the envy of many.

Not counting the mountain of foreign reserves held publicly (which, strictly speaking, we can't touch as individuals), even if we were to take stock of only the wealth that we've personally accumulated, we should be gratified to learn that the average Singapore household has done outstandingly well.

At the turn of the new millennium, at end-2000, the average household's private balance sheet showed a net wealth of $578,160.

This personal household wealth comprises an assortment of highly-prized assets - from currency and deposits, shares and securities, to life insurance, Central Provident Fund savings and the value of our homes less any outstanding loan (mortgage or personal) we may still have.

By end-2006 (the latest available data), six short years later, this net wealth had grown by 22.9 per cent to $710,400 per average household of 4.1 people.

Going by the rate at which we spent our money in 2006, even if all of us were to stop working all at once, it would still take us at least 8.75 years to totally run down our combined personal wealth totaling $762.6 billion to an absolute zero.

So never mind if others say the global economy need time (three, four, five years, according to Minister Mentor Lee Kuan Yew) to clean up the mess left behind by years of excessive debt and spending - we, as a people, will surely survive the worst that's yet to come.

So never mind if our own companies, too, need even more time to clean up their balance sheets - they will only emerge leaner to weather the slowdown and to expand even more when positive growth returns to the economy.

In the meanwhile, the hard times will only force a new generation of younger Singaporeans to regain control of their spending by foregoing a lifestyle beyond their means (through accumulating more debt than they can handle).

Rational behaviour

Lest we forget, during the current economic crisis, it is also important for all of us to keep a clear head and not get caught up in the fear.

After all, left unchecked, the credit crunch could inadvertently cause many of us to irrationally assume the worst and take drastic steps that can only make things worse.

To be sure, over time, this crisis will surely end and the economy will begin to expand once again.

So, go ahead, my friend, do spend more on Christmas gifts this year than last. But only if you can afford it.


Source: The New Paper, Sun 23 Nov 2008

Giants on their knees

The global financial crisis has cut the world's top banks down to size

By Zhen MIng


GIANTS are part of our folklore, so let's start with a folk tale.

Once upon a time in France, there was a 31-year-old derivatives trader by the name of Jerome Kerviel.

He worked for a giant bank named Societe Generale. The bank was 150 years old.

Bored by his daily routine (in our folk tale) - and allegedly pressured by mounting losses (in real life) - Jerome decided he would make unauthorised bets on the stock market.

And just like the magician's apprentice, who could not stop the multiplying brooms from nearly drowning him, Jerome was soon engulfed in an ocean of debt - his bank's, not his.

This debacle eventually cost his bank almost 5 billion euros ($9.6 billion).

His supervisors later said they had had no idea what he was up to.

This story is true and it happened in January. And it had an important lesson to the heads of banks - pay attention and don't get greedy.

Unfortunately, this lesson went unheeded. And now, after the severe global credit crunch, which was partly fuelled by greed, the once giant banks of Europe and the US are reeling.

Societe Generale and at least eight other equally well-known financial institutions have endured a drastic plunge in market values.

To date, according to The Boston Consulting Group, the losses incurred by all banks have translated into an ocean of shareholder red ink totalling nearly US$3trillion (about $4.6 billion).

Since Europe's loss - and America's, too - is now Asia's gain, expect a so-called 'new world order' for banks.

With Asia now boasting four of the world's 10 biggest banks by market value (and with three of the top five hailing from China), the Chinese have, in fact, become the banking world's new 'masters of the universe'.

By way of comparison, Bank of America (BofA), the world's second largest bank, is a distant also-ran behind Industrial & Commercial Bank of China (ICBC), the world's No 1 bank. (In market value terms, BofA is only 70 per cent the size of ICBC.)

As recently as 2003, at least half of the banks ranked as the world's top 10 were American (without a single Asian rival), according to data compiled by Bloomberg.

Now, there are four Asian and four US banks in this exclusive Top 10 Club.

More changes

And, oh, what a great difference barely a couple of years can make.

Less than 21 months ago, Citigroup was still the world's biggest bank by market value. Back then, ICBC was just into its fourth month as a publicly-traded company.

Not anymore. The US sub-prime mortgage market collapse has wiped out tens of billions of dollars off Citigroup's market value while ICBC's fortunes have held steady.

Through Friday, Citigroup shares had fallen 68 per cent this year, leaving the bank with a market worth of only US$52billion - barely twice the US$25 billion it received from the US Treasury. (Citigroup was still worth US$82 billion back in late October.)

Not surprisingly, Citigroup said Monday that it will have to cut another 52,000 jobs by early next year - this, on top of the 23,000 already eliminated so far this year.

But this latest retrenchment will still leave the 197-year-old bank with about 300,000 jobs worldwide (down 20 per cent from end-2007).

The good news: Citi Singapore, one of the largest banking sector employers locally, will face only 'modest headcount reductions'.

But if the job cuts were proportional, as many as 1,300 Citibankers here could be out of work - as compared to the 900 laid off worldwide by DBS Group.

Speaking of DBS Group, the plunging stock market in October has done 'the once unthinkable' - on 20 Oct 2008, it made South-east Asia's once largest bank the smallest of the three local banks by market value.

This swift reversal of fortunes allowed OCBC Bank to briefly overtake DBS Group in market value - the first time this has happened in seven years. (As of Tuesday, DBS Group was slightly ahead of OCBC Bank.)

So don't count on the volatility as being over yet for global banking.

With one in 10 US mortgages now 'delinquent' or 'in foreclosure', and with house prices still falling further, such 'toxic waste' will surely continue to burn holes in bank balance sheets everywhere.

Not the kind of news you'll want to hear every day. But not the kind you can well afford to ignore either.


Source: The New Paper, Thu 20 Nov 2008

G20 CRISIS MEETING
Great minds on the Great Crash


By Zhen Ming


YESTERDAY, the G20 - comprising leaders of 20 of the world's biggest industrialised and developing economies - huddled in Washington to discuss the global financial crisis.

There were calls for new controls, new monitoring mechanisms, and a 'supersized' International Monetary Fund (IMF) to cope with the crisis.

But will the G20's so-called Bretton Woods II effort save the world?

To find out, I brought together my own 'G5' dream team - a virtual think tank comprising five of the world's top economic gurus - all of them winners of the Nobel Prize in Economics.

Here's how they have weighed in publicly on what went wrong and what else should be done to fix the problem:

Blame the Republicans

Paul Samuelson (1970 Winner):

'Using markets is not the same thing as unregulated capitalism... Convincing proof... can be found in the deterioration in the US from 2001 to 2008.

'As CEO pay rose respective to median employee pay - from a more normal 40 to 1 ratio up to and beyond 400 to 1 - industrial progress deteriorated rather than accelerated...

'If America turns protectionist, blame past Republican deregulating - a fine instance of the Law of the Unintended Consequences.'

Fine tune

Reinhard Selten (1994 Winner):

'Apparently the market does not value new types of complex securities correctly. For this reason, it is necessary to establish rules for the registration of new types of securities.

'Securities, not unlike food, should be given risk-related labels ...

'We must take steps to ensure that proposed regulations are, on the one hand, as straightforward as possible and, on the other hand, cannot be circumvented.

'Of course, detailed institutional and legal knowledge is necessary to construct such rules - as is so often the case, the devil is in the details.'

Recession the more immediate problem

Robert Emerson Lucas Jr (1995 Winner):

'I think if the current Federal Reserve lending policies are continued aggressively our chances of avoiding a recession larger than that of 1982 are very good.

'At this point, I think this is the best that can be hoped for and it is a lot better than a replay of the 1930s ...

'The regulatory problem that needs to be solved is roughly this: The public needs a conveniently-provided medium of exchange that is free of default risk or 'bank runs'.

'The best way to achieve this would be to have a competitive banking system with government-insured deposits.'

IMF overstretched

Joseph E Stiglitz (2001 Winner):

'There is mounting evidence that the developing countries may require massive amounts of money, amounts beyond the capacity of the IMF.

'The sources of liquid funds are in Asia and the Middle East.

'But why should they turn their hard earned money over to an institution with a failed track record; one which pushed the deregulatory policies that have gotten the world into the mess we are in now; one which continues to advocate the asymmetric policies which contribute to global instability; and one whose governance structure is so flawed?

'Hopefully, at the summit in Washington, the leaders of Europe and Asia will lead the way, beginning the task of creating the global financial architecture that the world needs if we are to have a stable and prosperous 21st century.'

New regulatory mindset needed

Edmund S Phelps (2006 Winner):

'There is no question that the banking industry in the US has gone awry... That the banks chose to take on ever-greater levels of risk, with no end in sight until the collapse, was an effect of employee compensation ...

'Is regulation required here? Undoubtedly some new regulations are required here and there.

'Yet, many observers have argued the lack of restraints on the banking industry was more a failure of the regulatory authorities to exercise their powers than it was an absence of regulatory authority to act. A new mindset is required, above all.'


Source: The New Paper, Sun 16 Nov 2008

IF ALL HIT ROAD AT SAME TIME, S'PORE WILL HAVE ...

Islandwide

mega jam

Vehicles lined end to end will fill tightly every metre of main roads, expressways

By Zhen Ming


IMAGINE a nightmare day when every motorist in Singapore decides to travel at, say, 8am.

The vehicles clog up every main road and expressway bumper to bumper - such that none can move even a metre forward.

Yes, this can happen now.

By 2025, if all the projected 1.2 million motor vehicles we own by then were lined up, then they would occupy a total of 3.8 lanes of all our major roads.

That's when there'll be at least 6.5 million of us living on the island.

So, if all of us go out on the road at the same time, we'll have a mega jam.

Back in 1982 (when I first returned from America), when there were only 2.5 million of us, we were already close to gridlock with 3.2 lanes jam-packed.

Thankfully, a road expansion programme managed to keep pace with the rapid rise in car ownership in recent years, ensuring that the number of lanes occupied on a bumper-to-bumper basis was kept at 3.2 (to this day).

But this can't go on forever.

With 12 per cent of our land already allocated to roads, road expansion is slated to slow down to only 0.5 per cent yearly from 2009 onwards.

And while the vehicle population will still be allowed to grow at 1.5 per cent (that is, thrice as fast), the longer-term outlook for car ownership is definitely not too rosy.

Singapore's transport system must therefore be overhauled, yet again, if we are to soon realise our aspirations to be a thriving congestion-free global city.

A world-class global city of 6.5 million people will soon put us in a different league - not too far behind the likes of Paris (9.6 million), London (7.6 million), and Chicago (6.9 million) - but it will also mean a more crowded Singapore.

Faster than you may imagine, we will have to figure out how best to feed, shelter and move around 6.5 million people - instead of just the 4.8 million we now have.

Trust me, this target population will be hit - within the next 7-17 years - whether you think the country's population should continue to grow as fast as it did over the past three years (4.3 per cent a year, with the intake of more foreigners), or at a slower 'natural' rate (1.7 per cent a year, without new immigrants).

So, like it or not, whether it's mid-2015 (fast track) or end-2025 (natural pace), let's brace ourselves for 6.5 million of us - each with an average land area of only 109sqm (versus a more spacious 250sqm back in mid-1982).

This bigger population, in turn, calls for radical changes to vastly improve our existing land transport system, which must include enhanced measures to restrain the number of motor vehicles as well as our propensity to take them out for joyrides.

More ERPs?

With this in mind, expect Singapore motorists to face stiffer usage disincentives to ensure smooth-flowing traffic on our roads.

Expect the Electronic Road Pricing (ERP) system to play a more prominent role.

Expect ERP coverage to be more extensive and ERP charges to be much higher. And expect the so-called ERP II (the next generation ERP system) to soon make distance-based congestion charging possible.

That's because the Certificate of Entitlement scheme, blamed for failing to check the explosive growth in car ownership in recent years, is too dependent on the anticipated number of vehicles to be scrapped - a less-than-accurate forecast that requires fine-tuning.

Futile

Even with the lowering of our vehicle population growth rate to 1.5 per cent a year (from the present 3 per cent), with effect from Quota Year 2009, holding back the tidal wave of cars seems, to me, akin to King Canute's futile seaside attempt.

Given our land constraint, the projected increase in travel demand must be met largely by public transport.

A single-deck bus, for instance, can transport about 80 passengers at any one time, whereas the average occupancy of our cars is only about 1.5 persons per car.

Expect, therefore, more bus services and new roads built partly or wholly underground.
However, these roads won't come cheap. So guess where we can expect the money to come from?


Bumper to Bumper Gridlock

Year ... Vehicle Population ... Lanes Occupied*

1982 ....... 421,041 ....................... 3.2

2008 ....... 874,969 ....................... 3.2

2025 .....1,156,611 ....................... 3.8

* Refers to the number of lanes occupied on all major roads in Singapore if all motor vehicles in the country were lined up bumper to bumper (assuming the average vehicle length = 4.6 m).

NB: Motor vehicles include cars, taxis, buses, goods vehicles, motor cycles and scooters while major roads include all expressways, major arterial roads and collector roads managed by the Land Transport Authority. They exclude local roads.


Source: The New Paper, Fri 14 Nov 2008

Open Letter to

President-Elect Obama

Dear Mr Obama ...

spend your way out of trouble

Our columnist pens an open letter to the next president of the US

By Zhen Ming


DEAR President-elect Obama,

My heartfelt congratulations on your election as the 44th President of the United States of America!

I was deeply moved when I watched you triumphantly proclaim live on global TV that “change has come to America”.

It was already Wednesday afternoon in Singapore. But it still felt like as if I was really there with you, and with the countless jubilant supporters who had gathered at Grant Park in Chicago, Illinois on that historic Tuesday night to celebrate a truly “American moment”.

There you were, standing tall, as America’s first African-American President-to-be.

And there you were, on stage, with your lovely wife Michelle, with your two adorable daughters Malia and Sasha, and with that heart-warming promise of a cute First Puppy come Tuesday, 20 January 2009 (the day of your forthcoming inauguration).

But, amidst the euphoria, you also glumly reminded us of the tough challenges ahead:

"The road ahead will be long. Our climb will be steep. We may not get there in one year or even one term, but America — I have never been more hopeful than I am tonight that we will get there. I promise you — we as a people will get there."

Mr Obama, you had campaigned on a message of hope and change.

America agreed with you.

Consequently, you won 52.5 per cent of the popular vote in the largest turnout in a recent US presidential election.

We’re still 72 days away before we can officially call you “Mr President”.

Meanwhile, the US is in the midst of a painful recession, what with more than 10 million Americans out of work.

First priority

Rightfully, your first obligation is to solve the worst economic crisis the US has ever experienced in living memory.

What began with the bursting of the US housing bubble in 2007 has now unfolded into a far-reaching global crisis affecting everyone and everything — from banks to retail sales to the auto industry.

But as you set yourself to revamp the half-baked US$700 billion bailout for Wall Street and as you focus on creating more jobs for Main Street, do spare a kind thought, too, for Singapore and the rest of us who live outside the US.

So, as you tweak the US Budget for fiscal 2009, may I boldly suggest you just go ahead to pump-prime the US economy to save the world by way of racking up a deficit of US$1 trillion a year over the next four years during your first term in office.

Trust me, the US government can afford a much bigger Budget deficit — US government debt as a percentage of GDP is still way below those chalked up by the supposedly prudent governments of the European Union and even Japan.

Jobs, jobs, jobs

So, go on, spend wisely to create those five million “green jobs” you’ve promised through investment in renewable energy.

And, by all means, do create another two million new ones by rebuilding the country’s crumbling infrastructure.

Also, do overhaul the US education system so that “no child will be left behind”. (Education, by the way, is a shockingly tiny item in the US Budget whereas it is the second biggest priority for Singapore — and look where it has gotten us.)

On a brighter note, when the US economy has stabilized, we’re truly keen to welcome you to next year’s Apec Leaders Meeting in Singapore.

But if that’s still not possible, how about a whirlwind tour of Asean during the summer of 2010? That’s when Singapore will host the world’s first Youth Olympic Games.

Last but not least, may I wish you and your family a happy relocation as you prepare to move into the White House by late January!

Yours sincerely,

Zhen Ming


Source: The New Paper, Sun 09 Nov 2008

Oil prices have dipped to half of their record high, so ....

Utilities bill to fall by next year?


By Zhen Ming


I'M staring at my SP Services bill for October and it's not good.

Below the total current charges (inclusive of GST), I am reminded, with effect from 1 Oct, electricity tariff is 30.45 cents/ kWh - up 21.5 per cent from previously.

My only consolation is that this electricity tariff rate rise is not permanent.

In fact, it's quite likely that my monthly utilities bill will fall back by 2009.

That's because the outlook for oil is weak.

Oil fell again on Halloween (freaky Friday?) - the last trading day of October - as the global economic crisis put crude on track for the biggest monthly drop ever.

US crude fell US$1.82 ($2.70), or almost 3per cent, to US$64.14 a barrel by mid-day Friday. It is now down by around 35 per cent for October - its steepest monthly decline to date as demand worldwide slows. This, despite an OPEC output cut.

Simply put, oil prices are now at well below half the level of their July all-time high of US$147.27.
What's more, oil prices could soon test the US$50 level again.

Quite amazing, I'm sure you'll agree, when you look back at 2007 when oil prices rose from just above US$50 in January to near US$100 at year's end. (Back then, the crude oil spot price in the US actually averaged US$72 for the whole year.)

Good news

Good news, I suppose, for all heads of household who have to pick up the tab for the monthly utilities bill. And don't forget the Singapore motorist, too.

If I'm not sounding overly enthusiastic about this financial reprieve, it's because I'm also worried about the longer-term implications.

While it's good news to know that global demand for oil is shrinking (85.7 million barrels a day in 2007), it's bad news to learn that the world is having a hard time expanding oil supply fast enough to keep up with this dwindling demand.

Energy companies must therefore continue to invest despite the downturn to avoid another spike in oil prices once the economy recovers, the chief executive of the French oil company Total said Wednesday.

'Supply will remain short, and if we don't pay attention, the recovery will come and supply will be less and the price will climb again,' Mr Christophe de Margerie said during a speech at last week's Oil & Money 2008 conference in London.

Mr de Margerie's comments echo warnings by others that the tightening of credit might lead energy companies to abandon or postpone necessary oil projects, which could threaten supply in the future.

Output from the world's oilfields is already declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency (IEA) says in a draft of its forthcoming annual report, the World Energy Outlook.

More investments needed

Further investments are therefore needed to make up for the natural decline of output at existing oil fields, including those in the North Sea, Russia and Alaska.

'The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,' the IEA says.

Simply put, the oil industry is now running faster and faster, just to stand still.

The good news? This decline will not necessarily be felt in the next few years because demand is slowing down. But with the expected slowdown in investment, the eventual effect will be magnified in later years, oil executives warn.

The bad news? The IEA expects oil consumption in 2030 to reach 106.4 million barrels a day. All this increase in oil demand will come from emerging countries.

All in all, the world will need US$45 trillion - roughly three times the size of the US economy - in new energy investments.

Take it from me, one way or another, we'll all have to pay for this global effort.


Source: The New Paper, Sun 02 Nov 2008

Race to the White House

Who'll be the economic heavyweight?

The answer may surprise you —
the economy has historically preferred Democrats

By Zhen Ming


THE US election is five days away, but many believe it’s a done deal.

Two Thursdays ago, Paddy Power PLC, Ireland’s largest betting agency, announced that it was so confident in the outcome of this year’s US election that it would start paying out over 1 million euros (around S$2 million) on bets already made that Mr Barack Hussein Obama II will become the next president.

Bets aside, barring something sinister between now and next Tuesday, Mr Obama, the 47-year-old first-term US Senator from Illinois, will be elected America’s 44th President — and its first African-American one, too.

He will face the most financially-challenged economy for any new US President since Mr Franklin Delano Roosevelt took over amid the Great Depression in 1933.

But what if Mr Obama were to lose to his Republican rival, Mr John McCain?

Will that usher in a better, or bleaker, economic future for the US (and the world)?

Rethinking the known

According to conventional wisdom, Mr McCain’s free-trader mindset should be a definite plus point for world trade and a booster shot in the arm for the stock market.

Stock returns should therefore improve when the Republican maverick is in office since the Grand Old Party is traditionally regarded as pro-business and anti-tax.

Democrats, on the hand, have been much maligned for their anti-business, tax-and-spend platform (which seeks to redistribute wealth from the rich to the poor).

Well, guess what?

This conventional wisdom about how well or not the stock market will perform if one party or the other wins is, in the end, all urban legend.

According to a 2003 study, expect better stock market returns but only when the US Presidency is held by a Democrat!

Political cycles

Peace and prosperity for all — but only if the next US President were a Democrat?

Yes, say the University of California’s Pedro Santa-Clara and Rossen Valkanov.

They analyzed stock market returns between 1927 and 1998 in their book The Presidential Puzzle: Political Cycles and the Stock Market and uncovered these findings:

• When a Republican president held office, the value-weighted return of the US stock market delivered an excess premium of a miniscule 1.7 per cent over three-month US Treasury bills.


• But when a Democrat held office, the excess gain over T-bills was a chest-thumping 10.7 per cent.


• In the same vein, results from an equal-weighted portfolio were even more startling — with a whopping 16.5 per cent excess premium for Democrats as compared to a very dismal, NEAR-ZERO per cent, deficit discount for Republicans.

Is it possible, then, that the Democrats — the so-called anti-business party — will, ironically, generate much better results for business than the Republicans?

Frenetic 77-day transition

Whatever the case, “Dr Obama” will still have tough medicine to prescribe when it comes to deciding how best to turn the US economy around.

He will probably have to set aside some of the campaign promises (at least for now) to problem-solve five economic priorities on his to-do list. (See report, below.)

Expect, therefore, the 77-day transition period between the election and inauguration to be frenetic, frenzied and even frantic.

WHAT HE NEEDS TO DO IF ELECTED

1. Restoring public confidence through regular fireside broadcasts during first 100 days so that the US can meet and solve the financial challenges ahead.


2. Figure out how best to put his own stamp on the financial industry rescue plan to “part nationalize” more banks, insurers and assorted financially-distressed companies.


3. Revamp a regulatory structure largely built during the Great Depression so that it better reflects the speed and complexity of the current global financial system.


4. Burn the midnight oil, from 5 November onwards, to prepare a revised US Budget for fiscal 2010, due by early February.


5. Multi-task on all else, such as being prepared for terrorists to strike during the transition, while reviewing the campaign promises to expand healthcare coverage without increasing the tax burden of 95 per cent of all Americans.

Source: The New Paper, Thu 30 Oct 2008

When it's good to destroy

There's a silver lining during such gloomy times


By Zhen Ming


NOT all of The Great Crash is bad.

If history is to repeat itself, what will follow has to be not only good for the world's economy, but would probably be better than its previous model.

On Friday, on the 79th anniversary of the stock market crash that began the Great Depression, Wall Street joined stock markets around the world in a huge sell-off.

This massive sell-off sent major market indexes to their lowest levels in more than five years, on the belief that a punishing economic recession is at hand.

This fear of economic history repeating itself is part of the dog-eat-dog world of big-time business.

Except, here, we business-types prefer to call it 'creative destruction'.

Creative destruction is good

This is a term first coined by economist Joseph Schumpeter in his work entitled Capitalism, Socialism and Democracy (1942) to denote a 'process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one'.

In business, creative destruction - not unlike greed - is not only inevitable, it is good.

Creative destruction occurs when something new (usually better) 'kills' something older.

Out of this seemingly merciless destruction, a new spirit of creativity arises.

A great example of this would be the advent of personal computers.

The PC industry - led by Microsoft and Intel - destroyed many mainframe computer companies in the process.

A dozen years ago, James Grant - perhaps one of the wisest commentators on Wall Street - wrote a book called The Trouble with Prosperity.

Grant's survey of financial history basically captures his crusty theory of 'economic predestination'.

According to Grant, we all go through cycles of self-delusion, sometimes too giddy and sometimes too glum.

The consolation is that the genesis of the next business take-off usually lies in the ruins of the last economic shake-out.

Essentially, our economic triumphs and follies will always follow a predestined circular rhythm - one that can be influenced but never be circumvented.

Thus, if things seem dismal now, they will surely get better. Crisis, in fact, spawns opportunities and progress.

Heroic examples from history

And there are enough heroic examples from history that might encourage you.

Walt Disney, for instance, lost an acting job as a movie extra and started his famous cartoon company in a garage during the recession of 1923-1924.

Years later, in 1938, William Hewlett and David Packard teamed up in Silicon Valley during the Great Depression.

And then there's Bill Gates. He dropped out of Harvard College to launch Microsoft during a downturn in 1975.

The Great Depression debate

The recent bailout events - the stock market's wild swings - have thrust everyone from Seattle to Singapore into a debate about the risks of another Great Depression.

Has enough been done to protect the economy? Who or what caused this mess? Also, what does all this mean?

If you must know, it means that, in terms of the stock market, the Dow Jones industrial average will again find its way back down near 7,000 to see whether that is the new floor, or if it is somewhere even below that.

It means, buckle up, we're in for a lousy economy.

And it also means the financial sector is not out of the woods and more banks could get in trouble.

Rest assured, however, after a recessionary phase, the expansionary phase will start again.

After all, in the repetitive circle of business life, bad times can only breed good.

Something you can, most definitely, count on.


Source: The New Paper, 26 Oct 2008

NOBEL PRIZE WINNER PAUL KRUGMAN

He's speaking up for ordinary Joes


By Zhen Ming


THE problem first started with financial intermediaries.

Back then, the institutions whose liabilities were perceived as having an implicit government guarantee were essentially unregulated.

This led to severe moral hazard problems.

Consequently, the excessive risky lending of these institutions created inflation - not of goods but of asset prices.

The overpricing of assets was then sustained in part by a sort of circular process: The proliferation of risky lending first drove up the prices of risky assets which, in turn, made the financial condition of the intermediaries seem sounder than what it was.

And then the bubble burst.

Sounds familiar? Sounds like 2008? And sounds like the final bursting of the recent US housing bubble, doesn't it?

Yes, it does sound familiar. Yes, it does sound like 2008. And yes, it does sound like mortgage titans Fannie Mae and Freddie Mac getting themselves in deep trouble.

But it is not. It is instead an incisive analysis of what happened back in 1997. And the financial institutions that were in deep trouble back then were those in Asia.

This analysis was first made by none other Mr Paul Krugman, a professor at Princeton and concurrently an Op-Ed page columnist for The New York Times.

And as all economists should know by now, Mr Krugman, 55, will receive this year's Nobel Memorial Prize in Economic Science in Stockholm, Sweden on 10 December.

The prize, however, was awarded for earlier academic research that Mr Krugman had conducted, starting in 1979, on the 'analysis of trade patterns and locations of economic activity'.

Mr Krugman's solid-gold reputation, however, was only forged in the mid-'90s, when he was among the most consistent predictors of the 1997 Asian crisis.

A couple of years later, he correctly predicted that Asia would stage an impressive comeback.

But this enfant terrible of international trade theory, this self-proclaimed 'conscience of a liberal' - a larger-than-life critic of US President George W Bush - is not without controversy.

Back in September 1998, Mr Krugman irked the Western establishment, especially the International Monetary Fund, when he openly supported the controversial economic strategy of then Malaysian Prime Minister Dr Mahathir Mohamad.

Back then, Dr Mahathir had blamed machinations by Western speculators for Malaysia's woes. He had also imposed temporary controls on the outflow of capital - 'a step denounced by all but a handful of Western economists'.

At that time, in his September 1998 article for Fortune titled Saving Asia: It's Time to Get Radical, Mr Krugman had called for emergency currency controls.

Shortly after its publication, Dr Mahathir boldly implemented Mr Krugman's 'radical' recommendations.

Said Mr Krugman: 'As it turned out, (Dr Mahathir's) economic strategy was right.'

More recently, with the onset of the latest global financial crisis, Mr Krugman has shifted his focus to highlighting President Bush's many failed economic policies.

In his 9 Oct 2008 op-ed column entitled Moment of Truth, he said: 'Last month, when the US Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury secretary, was playing financial Russian roulette.

'Sure enough, there was a bullet in that chamber: Lehman's failure caused the world financial crisis, already severe, to get much, much worse.'

Tough line

But with the US elections only 12 days away, Mr Krugman has also flagged key bread-and-butter issues that concern ordinary Americans.

On supposedly 'ordinary American' Samuel J Wurzelbacher (America's by-now-famous and very-highly-paid 'Joe the Plumber'), he quipped: 'You may recall that in one of the early Democratic debates, Charles Gibson of ABC suggested that US$200,000 ($300,000) a year was a middle-class income.

'Tell that to Ohio plumbers: According to the May 2007 occupational earnings report from the Bureau of Labor Statistics, the average annual income of 'plumbers, pipefitters and steamfitters' in Ohio was US$47,930.'

For now, as far as Mr Krugman is concerned, the most important thing for him is to make ordinary Americans realise that 'the story of modern America is, in large part, the story of the fall and rise of inequality'.

Spoken like a true-blue bleeding-heart economist. And one with a liberal conscience too.


Source: The New Paper, Thu 23 Oct 2008