The stunning disclosure of a $7.1 billion loss due to the activities of a lone trader at Societe Generale sent shivers throughout the financial community. It certainly caused the sharp sell off in European and US equities Monday and Tuesday.There is speculation that it was this collapse in global equity values that prompted the US Fed to cut interest rates, even before the next Fed meeting scheduled for 29th and 30th of January. Incidentally SocGen is known worldwide as a leader in the derivative market and is reputed to have one of the best risk management systems in the world.
The person responsible for the loss is stated to be Jerome Kerviel, a 31 year old junior trader at the bank. But most people are not buying this story. They are asking how a junior trader could build up positions worth almost $73 billion without anyone asking questions about it.The positions were greater than the market capitalization of the bank, which is about $52 billion. The bank's explanation that he used the accounts and passwords of colleagues without their knowledge has few takers. Where did the margin money for these huge trades come from? Surely the bank's management knew about it. Adding to the mystery is the bank's statement that ' the trader did not enrich himself from the fraudulent trades.' The news generated buzz at the World Economic Forum at Davos, where the explanation put out by the bank was greeted with some skepticism. The French Prime Minister Francois Fillon remarked:' It is difficult to imagine how one person acting alone could, in a relatively short period of time, cause such considerable losses.'
The fraud was discovered on January 18th but the news was witheld from the public. This has caused considerable outrage amongst investors in SocGen shares, and they want to know the reason behind it, especially since rumors were already flying around the market that SocGen was about to announce a big hit.
To be fair to Kerviel his positions had caused losses of only about $2.6 billion. The rest were caused by SocGen's hasty reaction of squaring up the positions on Monday morning, instead of spreading out such action over a period of time. Maybe a sell off could have been avoided if they had acted more prudently. Curiously the bank is accounting for these losses in the financial year 2007 although most of the positions were built after January 8th this year. The bank has also reported a $2.99 billion subprime related loss, and plans to raise $8.2 billion in fresh capital. The police has picked up Kerviel for questioning and the bank will carry out its own investigation also. Most of the answers will have to wait till these are completed.
Democrats A Better Bet To Fight Recession-Poll Finds.
A Bloomberg/Los Angeles Times survey reported Friday that Americans are looking to Democrats rather than Bush to avoid an expected recession this year. More than two thirds of those polled felt that the economy was doing badly, up from 56% in December.
At the same time however, most agree that tax cuts which are included in the stimulus plan, is the most effective way to boost the economy. Extra spending money is what most Americans want, probably because rising oil prices have adversely affected all household budgets.
Almost 80% of those polled said a recession is likely this year, and only 16% said a downturn is unlikely. This perspective of the economy was shared by people irrespective of income group or political affiliations.
Where the Democrats really outscore Bush is in the number of people who felt that they can handle the economy better. 51% felt they will do a better job as against 29% for Bush. But these figures do not tell the whole story. It seems Bush's followers are still behind him. Two thirds of Republicans felt that Bush can handle the economy. For the Democrats the corresponding figure is 83%. It is the Independents who are overwhelmingly in favor of Democrats on this issue, voting 51% to 25% in their favor.
Although the outlook for the economy is clouded, two thirds of Americans rate their personal finances as very or fairly secure, and a majority expect to spend the same amount of money on purchases six months from now as today. This is reassuring news for economists who had forecast that falling home values and consumer confidence will slow personal spending, which accounts for almost 72% of US economic activity.The highest number of people, almost 20% held Bush responsible for the present situation, more than the 15% who blamed the mortgage lenders for it.
Bush's State of the Union address is on January 28th. People are already sure where the nation is headed. 63% said that the country is on the wrong track. What really surprised pollsters was that most Americans feel that tax cuts are are the best method for stimulating the economy, rather than an economic program focussed on health and education spending.
At the same time however, most agree that tax cuts which are included in the stimulus plan, is the most effective way to boost the economy. Extra spending money is what most Americans want, probably because rising oil prices have adversely affected all household budgets.
Almost 80% of those polled said a recession is likely this year, and only 16% said a downturn is unlikely. This perspective of the economy was shared by people irrespective of income group or political affiliations.
Where the Democrats really outscore Bush is in the number of people who felt that they can handle the economy better. 51% felt they will do a better job as against 29% for Bush. But these figures do not tell the whole story. It seems Bush's followers are still behind him. Two thirds of Republicans felt that Bush can handle the economy. For the Democrats the corresponding figure is 83%. It is the Independents who are overwhelmingly in favor of Democrats on this issue, voting 51% to 25% in their favor.
Although the outlook for the economy is clouded, two thirds of Americans rate their personal finances as very or fairly secure, and a majority expect to spend the same amount of money on purchases six months from now as today. This is reassuring news for economists who had forecast that falling home values and consumer confidence will slow personal spending, which accounts for almost 72% of US economic activity.The highest number of people, almost 20% held Bush responsible for the present situation, more than the 15% who blamed the mortgage lenders for it.
Bush's State of the Union address is on January 28th. People are already sure where the nation is headed. 63% said that the country is on the wrong track. What really surprised pollsters was that most Americans feel that tax cuts are are the best method for stimulating the economy, rather than an economic program focussed on health and education spending.
Chinese Comments Spark Global Stock Market Sell-Off.
That the US economy is doing badly has been well known for sometime now.However analysts had been suggesting that while US growth was weak, the rest of the world, particularly some of the emerging market economies like China and India, continued to enjoy high rates of growth, which would prevent the world economy from being dragged down by the US economy. In fact it was felt that these economies would prevent the US from sliding into recession,or at worst make it a brief and mild one, as their increasingly prosperous middle classes increased personal consumption and offset the loss of demand from the US consumer.Figures released last week by the Chinese government showed that their economy grew 11% in the last quarter, which suggested that the analysts may have got it right this time, and that the rest of the world was de-coupling from the US economy.
Comments by the Chinese Central Bank on Sunday that the Chinese economy was not de-coupled from the US economy shook the already fragile confidence of world stock markets and they collapsed when they opened for trading, Monday. Zhang Tao from the People's Bank of China warned that China's exports would be badly hit if US consumption weakens.He went on to add that increasing imports from the EU would not offset the loss of exports to the US because they would import less from China once their own exports to the US declined.
The markets were expected to react negatively to these comments and Asian stock-markets opened sharply lower,right across from Australia to India.Stocks fell for most of the day, making it the worst January for markets in a very long time. So far this year, Japan's Nikkei has lost 13%, Hong Kong's Hang Seng 14% and China's Shanghai exchange almost 7%. Europe fared little better when it opened for trade and looked set for the worst one day fall since 9/11.
The markets are clearly not enthused by President Bush's economic stimulus plan, and are nervous about a potential recession in the US spilling over to the rest of the world.The US remains the most important market for most of these export oriented economies. The most important factor behind the sell-off continues to be the crisis of confidence in the world financial sector. Despite reassurances about the extent of their exposure to the US subprime market, people are not willing to believe these global institutions, and expect further losses to be announced.
Many analysts however sound upbeat over the prospects of sharply lower interest rates by the end of the year. They cautioned that the markets looked oversold and could bounce back sharply if the US Fed. cut interest rates aggressively in its meeting at the end of the month, or even before then. Whether Bernanke rises to the occasion or not remains to be seen.
Comments by the Chinese Central Bank on Sunday that the Chinese economy was not de-coupled from the US economy shook the already fragile confidence of world stock markets and they collapsed when they opened for trading, Monday. Zhang Tao from the People's Bank of China warned that China's exports would be badly hit if US consumption weakens.He went on to add that increasing imports from the EU would not offset the loss of exports to the US because they would import less from China once their own exports to the US declined.
The markets were expected to react negatively to these comments and Asian stock-markets opened sharply lower,right across from Australia to India.Stocks fell for most of the day, making it the worst January for markets in a very long time. So far this year, Japan's Nikkei has lost 13%, Hong Kong's Hang Seng 14% and China's Shanghai exchange almost 7%. Europe fared little better when it opened for trade and looked set for the worst one day fall since 9/11.
The markets are clearly not enthused by President Bush's economic stimulus plan, and are nervous about a potential recession in the US spilling over to the rest of the world.The US remains the most important market for most of these export oriented economies. The most important factor behind the sell-off continues to be the crisis of confidence in the world financial sector. Despite reassurances about the extent of their exposure to the US subprime market, people are not willing to believe these global institutions, and expect further losses to be announced.
Many analysts however sound upbeat over the prospects of sharply lower interest rates by the end of the year. They cautioned that the markets looked oversold and could bounce back sharply if the US Fed. cut interest rates aggressively in its meeting at the end of the month, or even before then. Whether Bernanke rises to the occasion or not remains to be seen.
Shipping Industry Cuts Speed To Save Fuel.
In a simple answer to rising fuel prices and also in order to cut emissions, the world's shipping industry is cutting the speed of its ships.The world's merchant fleet transports 90% of its traded goods and also accounts for 5% of its total CO2 emissions.
Faced with a 70% spike in the cost of fuel last year, ship owners have decided to simply reduce speed in order to save fuel and also to cut greenhouse gas emissions, both at the same time. It is estimated that reducing speed by as little as 10% can lead to a 25% reduction in fuel use.
Shipping was excluded from the U N's Kyoto Protocol to slow climate change, but many nations want the industry to be made accountable for its impact on the environment in the successor to Kyoto, in 2012.
Slowing down has led to sufficient savings in terms of fuel costs to offset extra operating costs, charter costs and interest costs of longer voyages. But such action requires careful planning and is presently suitable only on certain routes.
Other ways being explored by shipowners to save fuel include using weather forecasts to pick optimum routes for vessel performance, proper maintenance of vessels and to improve engine efficiency. Ship efficiency is extremely important as the fuel bill for a big container ship adds up to a huge $900 million over an average lifespan of 25 years.
It is expected that engineers will now come up with new and more efficient engines which may be slower, instead of trying to get fleet owners to operate existing high speed engines at lower speeds.
Faced with a 70% spike in the cost of fuel last year, ship owners have decided to simply reduce speed in order to save fuel and also to cut greenhouse gas emissions, both at the same time. It is estimated that reducing speed by as little as 10% can lead to a 25% reduction in fuel use.
Shipping was excluded from the U N's Kyoto Protocol to slow climate change, but many nations want the industry to be made accountable for its impact on the environment in the successor to Kyoto, in 2012.
Slowing down has led to sufficient savings in terms of fuel costs to offset extra operating costs, charter costs and interest costs of longer voyages. But such action requires careful planning and is presently suitable only on certain routes.
Other ways being explored by shipowners to save fuel include using weather forecasts to pick optimum routes for vessel performance, proper maintenance of vessels and to improve engine efficiency. Ship efficiency is extremely important as the fuel bill for a big container ship adds up to a huge $900 million over an average lifespan of 25 years.
It is expected that engineers will now come up with new and more efficient engines which may be slower, instead of trying to get fleet owners to operate existing high speed engines at lower speeds.
America Is Up For Sale!
That's right, the US is on sale and what's more, at a discount if you account for the falling dollar.Fears of recession and lack of credit are forcing companies to look for money elsewhere. The sovereign wealth funds controlled by the governments of the Middle East and China along with some state controlled enterprises from other major developing countries are buying up shares, in fact being invited to pick up stakes in the most blue chip of American companies, which include among others, names like Citigroup and Merill Lynch.These foreign investors bought shares worth over $400 billion in 2007 in a host of US companies, dealing in a variety of businesses.
So sharp is the slowdown in domestic investment that states are pursuing a development strategy based on attracting foreign capital.Fears are growing that control over hi-tech companies, whose products could have military applications, may fall into foreign hands.These apprehensions are real and may become an issue in the forthcoming Presidential elections. Some candidates, particularly the Democrats, are already calling for greater transparency in the functioning of the sovereign wealth funds.
The US economy is weakening by the day, hit by the subprime crisis and the war in Iraq, but other economies remain strong, especially those which export oil and other commodities. What better place for them to invest their surplus cash than in the US.
The debate on whether this is a desirable trend or not will continue.The fact is that it marks a victory of sorts for state capitalism over free market enterprise, and has the potential to be used for pursuing political goals. The US is slowly but surely becoming exposed to financial decisions taken far beyond its national borders.
So sharp is the slowdown in domestic investment that states are pursuing a development strategy based on attracting foreign capital.Fears are growing that control over hi-tech companies, whose products could have military applications, may fall into foreign hands.These apprehensions are real and may become an issue in the forthcoming Presidential elections. Some candidates, particularly the Democrats, are already calling for greater transparency in the functioning of the sovereign wealth funds.
The US economy is weakening by the day, hit by the subprime crisis and the war in Iraq, but other economies remain strong, especially those which export oil and other commodities. What better place for them to invest their surplus cash than in the US.
The debate on whether this is a desirable trend or not will continue.The fact is that it marks a victory of sorts for state capitalism over free market enterprise, and has the potential to be used for pursuing political goals. The US is slowly but surely becoming exposed to financial decisions taken far beyond its national borders.
Bush Wants Cheaper Oil To Avoid Recession.
President Bush on his trip to Saudi Arabia made it clear that high oil prices were hurting the American consumer and could cause an economic slowdown. "High energy prices can damage consuming economies," he said amidst signs that the housing crisis was finally spilling over to other sectors of the economy.
The Saudi oil minister however gave no assurance about increasing output. He said that the Saudis, responsible for a third of OPEC's output would increase production when the market justified it.OPEC ministers are meeting in Vienna on February 1st to consider raising output. The Saudis are the most influential member of the oil cartel because of their large share of its output.
President Bush also acknowledged the role of supply and demand in determining prices. He accepted that a part of the rise in prices was due to rising demand from China and India.
The Saudi oil minister, Ali Naimi said that oil is not the only reason for the slowing American economy. "The concern for the US economy is valid, but what affects the US economy is more than supply of oil ," he said.
He was obviously referring to the fundamental shift that is taking place in the world economy. Years of reckless outsourcing have pressured US wages to the point that many think that US real wages are declining, and that the inflation rate is low only because of cheap imports from China.In such a scenario rising oil prices impact the US consumer adversely. On their part the Saudis no longer have the ability to control oil prices like they used to in the past. For one they have very little spare capacity left and are not in a position to flood the market with oil as they once were, and secondly an increasing portion of the world demand is being met by non-OPEC sources over whom they have little influence. This is not to suggest that they are not concerned about the slowing US economy. In fact they are very worried at the prospect of the US economy sliding into recession, as it would mean further pressure on the dollar, which would substantially reduce the value of their huge dollar denominated assets, besides a likely collapse in world oil prices.
The US government on its part is anxious to get some reassurance that OPEC will raise output, because the only option before it to rescue the economy from recession is to cut interest rates aggressively. This would however weaken the dollar further and have the effect of raising commodity prices, which the US can ill afford at the moment. This is an election year and the stakes are high.If the US economy goes into recession then there is nothing on earth that can put another Republican in the White House.
The Saudi oil minister however gave no assurance about increasing output. He said that the Saudis, responsible for a third of OPEC's output would increase production when the market justified it.OPEC ministers are meeting in Vienna on February 1st to consider raising output. The Saudis are the most influential member of the oil cartel because of their large share of its output.
President Bush also acknowledged the role of supply and demand in determining prices. He accepted that a part of the rise in prices was due to rising demand from China and India.
The Saudi oil minister, Ali Naimi said that oil is not the only reason for the slowing American economy. "The concern for the US economy is valid, but what affects the US economy is more than supply of oil ," he said.
He was obviously referring to the fundamental shift that is taking place in the world economy. Years of reckless outsourcing have pressured US wages to the point that many think that US real wages are declining, and that the inflation rate is low only because of cheap imports from China.In such a scenario rising oil prices impact the US consumer adversely. On their part the Saudis no longer have the ability to control oil prices like they used to in the past. For one they have very little spare capacity left and are not in a position to flood the market with oil as they once were, and secondly an increasing portion of the world demand is being met by non-OPEC sources over whom they have little influence. This is not to suggest that they are not concerned about the slowing US economy. In fact they are very worried at the prospect of the US economy sliding into recession, as it would mean further pressure on the dollar, which would substantially reduce the value of their huge dollar denominated assets, besides a likely collapse in world oil prices.
The US government on its part is anxious to get some reassurance that OPEC will raise output, because the only option before it to rescue the economy from recession is to cut interest rates aggressively. This would however weaken the dollar further and have the effect of raising commodity prices, which the US can ill afford at the moment. This is an election year and the stakes are high.If the US economy goes into recession then there is nothing on earth that can put another Republican in the White House.
First Quarter Budget Deficit Surges Thirty-One Percent.
Figures released Friday reveal a weakening financial situation for the US government, with the 2008 fiscal years' first quarter deficit rising 31.3%.
The cumulative deficit for the October-December period increased to $105.64 billion from $80.4 billion for the same period a year earlier.The slowing economy led to a slower growth in receipts which fell below increased spending, the Treasury department said.
Analysts expect the deficit for the whole year to widen to over $200 billion from $163 billion in the last fiscal year ending September 30th 2007.Deficits had peaked out at $413 billion in 2004 and had been steadily declining since then. The Bush administration had planned to eliminate deficits by 2012.
For December the Federal government has posted a $48.26 billion surplus, a record for the month. It is higher by about 15% from the surplus of $41.9 billion for the same month, last year. The December spending figure would have been higher, but because December 1st was a weekend, $17 billion in benefit payments were accounted for in November. Also, there was a Federal Communications Commission auction of $12.7 billion in advanced wireless licenses that was considered a reduction in outlay. Without these two special items the December surplus would have been lower by $30 billion to about only $18 billion, sharply lower than last year.
Total receipts for the first quarter of fiscal 2008 rose 5.7% from a year earlier to $606.21 billion, while spending rose 8.8% to $711.75 billion. Both receipts and expenditure were a record for a first quarter.
What is worrying is that this data comes when the Bush administration as well as members of Congress are discussing ways to revive a faltering economy, which could cost upward of $100 billion. Economists expect the deficit for the entire year to touch the $200 billion mark. If the economy does not revive soon it could increase all the way to $300 billion, they say.
The cumulative deficit for the October-December period increased to $105.64 billion from $80.4 billion for the same period a year earlier.The slowing economy led to a slower growth in receipts which fell below increased spending, the Treasury department said.
Analysts expect the deficit for the whole year to widen to over $200 billion from $163 billion in the last fiscal year ending September 30th 2007.Deficits had peaked out at $413 billion in 2004 and had been steadily declining since then. The Bush administration had planned to eliminate deficits by 2012.
For December the Federal government has posted a $48.26 billion surplus, a record for the month. It is higher by about 15% from the surplus of $41.9 billion for the same month, last year. The December spending figure would have been higher, but because December 1st was a weekend, $17 billion in benefit payments were accounted for in November. Also, there was a Federal Communications Commission auction of $12.7 billion in advanced wireless licenses that was considered a reduction in outlay. Without these two special items the December surplus would have been lower by $30 billion to about only $18 billion, sharply lower than last year.
Total receipts for the first quarter of fiscal 2008 rose 5.7% from a year earlier to $606.21 billion, while spending rose 8.8% to $711.75 billion. Both receipts and expenditure were a record for a first quarter.
What is worrying is that this data comes when the Bush administration as well as members of Congress are discussing ways to revive a faltering economy, which could cost upward of $100 billion. Economists expect the deficit for the entire year to touch the $200 billion mark. If the economy does not revive soon it could increase all the way to $300 billion, they say.
Credit Card Companies In Deep Trouble.
Credit card giant American Express warned Thursday that it will take a 4th quarter charge of $440 million because of slower spending and higher delinquencies last month. The company forecast 4th quarter delinquencies in its managed US lending portfolio will rise to 3.2% from 2.9% in the 3rd quarter, while the write off rate in the portfolio rose to 4.3% from 3.7%. It also expects card members spending to slow in 2008.
This confirms what many have been suspecting for some time, that mortgage woes are spreading to other types of loans, as the economy weakens and unemployment rises, producing a secondary pressure trend hitting financial companies.
Till the middle of last year, consumer loan losses were held in check as home prices rose, allowing borrowers to refinance mortgages or take out home equity loans, and use the cash to pay off credit card debts. But such activity came to a halt once the sub prime fueled credit crisis hit in August last year. Credit card defaults have been rising steadily since then and are poised to rise further. It comes as no surprise really, what is surprising that it took the consumer so long to get into trouble.
American Express says it is seeing the most weakness in the states of Florida and California, which have been hit hardest by the real estate meltdown. Shares of American Express slumped over 10% Friday, their biggest one-day slide in recent years. The problems are not confined to American Express. It is joined by Capital One Financial Corp., Discover Financial Services and Mastercard. Shares of all these companies took a beating.
Initially there were few signs that the sub prime mortgage woes were working into the credit card industry. Now that has changed, as Capital One and American Express have disclosed that consumers had loaded up on credit card debt to make up for the loss in purchasing power, formerly afforded by refinancing mortgages during the housing boom years.
The 1st quarter of 2008 is almost certain to be much worse for these companies. We are now in the holiday-season hangover period, when consumers face larger than average credit card bills. Given the likelihood of economic recession the consumers' ability to repay these inflated bills is under more pressure than ever before.
As the other credit card companies get set to report earnings, all eyes are on credit quality and the degree of acceleration in loan and asset deterioration. Investors could well be surprised by a combination of higher provisions and big write downs in the 4th quarter.
This confirms what many have been suspecting for some time, that mortgage woes are spreading to other types of loans, as the economy weakens and unemployment rises, producing a secondary pressure trend hitting financial companies.
Till the middle of last year, consumer loan losses were held in check as home prices rose, allowing borrowers to refinance mortgages or take out home equity loans, and use the cash to pay off credit card debts. But such activity came to a halt once the sub prime fueled credit crisis hit in August last year. Credit card defaults have been rising steadily since then and are poised to rise further. It comes as no surprise really, what is surprising that it took the consumer so long to get into trouble.
American Express says it is seeing the most weakness in the states of Florida and California, which have been hit hardest by the real estate meltdown. Shares of American Express slumped over 10% Friday, their biggest one-day slide in recent years. The problems are not confined to American Express. It is joined by Capital One Financial Corp., Discover Financial Services and Mastercard. Shares of all these companies took a beating.
Initially there were few signs that the sub prime mortgage woes were working into the credit card industry. Now that has changed, as Capital One and American Express have disclosed that consumers had loaded up on credit card debt to make up for the loss in purchasing power, formerly afforded by refinancing mortgages during the housing boom years.
The 1st quarter of 2008 is almost certain to be much worse for these companies. We are now in the holiday-season hangover period, when consumers face larger than average credit card bills. Given the likelihood of economic recession the consumers' ability to repay these inflated bills is under more pressure than ever before.
As the other credit card companies get set to report earnings, all eyes are on credit quality and the degree of acceleration in loan and asset deterioration. Investors could well be surprised by a combination of higher provisions and big write downs in the 4th quarter.
Credit Card Debt Surges In The U.S.
Figures released Tuesday show that consumer spending shot up sharply in November.This was led by an increase in credit card debt and auto loans.After showing a below market expectations increase in October, the November figures show a sharp rebound with consumer borrowing rising at an annual rate of 7.4%.This is compared to a 1% rise in October.The category which includes credit card debt, soared at an annual rate of 11.3%.This is mainly because of the continuing credit crunch, which has made bank loans and home equity lines of credit harder to get. So shoppers have turned to credit cards to finance their purchases.
Total credit went up by $15.4 billion which is much higher than the $8.5 billion expected by most analysts. Overall consumer credit increased to a record $2.51 trillion. This figure does not include debt secured by mortgages. Therefore a large part of the debt owed by most households is left out.
Analysts attribute the spike to increased consumer spending at the start of the holiday shopping season.However these figures tend to divert attention from the problems facing the US economy.Jobs in November and December rose by only 133,000, the lowest for these two months since 2002, and the unemployment rate went up to 5%. Disposable incomes, after adjusting for inflation, declined for a second straight month in November. Personal bankruptcy filings have increased 40% in the last one year. The US consumer is clearly struggling to pay off his personal debt. Policy makers are watching closely and hoping that the housing crisis does not spread further because declining asset values will affect the individual's ability to repay any kind of debt. Coupled with a weak labor market it can trigger a downward spiral which may worsen the present situation.
Many economists however view these figures as an encouraging sign. They reckon that strong consumer spending will help the US avoid the recession everybody is talking about, or at worse make it a mild and brief one. The inevitable rate cut by the Fed is expected to revive sentiment further.
Total credit went up by $15.4 billion which is much higher than the $8.5 billion expected by most analysts. Overall consumer credit increased to a record $2.51 trillion. This figure does not include debt secured by mortgages. Therefore a large part of the debt owed by most households is left out.
Analysts attribute the spike to increased consumer spending at the start of the holiday shopping season.However these figures tend to divert attention from the problems facing the US economy.Jobs in November and December rose by only 133,000, the lowest for these two months since 2002, and the unemployment rate went up to 5%. Disposable incomes, after adjusting for inflation, declined for a second straight month in November. Personal bankruptcy filings have increased 40% in the last one year. The US consumer is clearly struggling to pay off his personal debt. Policy makers are watching closely and hoping that the housing crisis does not spread further because declining asset values will affect the individual's ability to repay any kind of debt. Coupled with a weak labor market it can trigger a downward spiral which may worsen the present situation.
Many economists however view these figures as an encouraging sign. They reckon that strong consumer spending will help the US avoid the recession everybody is talking about, or at worse make it a mild and brief one. The inevitable rate cut by the Fed is expected to revive sentiment further.
Gold Price May Touch $1000 per oz. This Year.
Gold prices made record highs Tuesday, surging above $880 an oz., breaking its previous record of $875 an oz., set in 1980 after events in Iran.
Behind the recent stunning rise in gold prices is the steep fall in the value of the US dollar, which has prompted hedge and pension funds as well as long term investors to diversify into gold as an investment. Helping the trend is the growing anxiety that the US economy is not only slipping into recession but may also have to face continued inflationary pressures due to stubbornly high commodity prices. All commodities are at record or near record levels,particularly crude oil, which continues to hover near $100 per barrel.There is some 'safe haven' buying also, as tensions rise between the US and Iran, and because of geopolitical worries in Pakistan and Kenya.
Analysts and traders alike feel that the trend in gold prices is clearly up, as the likely response to the global financial crunch is a cut in interest rates globally, which will fuel inflation worldwide. Therefore, although the rise in gold prices was triggered by by the decline in the US dollar, it is the fear of looming inflation that is behind the current rally.Most analysts feel that the price of gold should touch $1000 an oz. in 2008 itself.They point out that although gold prices are at an all time high, they are still below the 1980 price if it is adjusted for inflation. If this is done then an oz. of gold at $875 in 1980 will be worth $2,115 to $2,200 today.Therefore there is clearly room for gold prices to appreciate further.
Another important reason behind the rise in gold prices is the increasing physical demand for the yellow metal from China and India where gold has always been prized as an asset.Their increasingly affluent middle class has increased its demand for gold.At the same time existing mines have not been able to increase output significantly.They are also having to dig deeper to get to the known deposits, which has raised the cost of production. Gold has also been boosted by the impending launch of the Shanghai gold futures contract. If the Chinese appetite for stocks is any indication then investment in gold futures seems to be a safe bet.
Behind the recent stunning rise in gold prices is the steep fall in the value of the US dollar, which has prompted hedge and pension funds as well as long term investors to diversify into gold as an investment. Helping the trend is the growing anxiety that the US economy is not only slipping into recession but may also have to face continued inflationary pressures due to stubbornly high commodity prices. All commodities are at record or near record levels,particularly crude oil, which continues to hover near $100 per barrel.There is some 'safe haven' buying also, as tensions rise between the US and Iran, and because of geopolitical worries in Pakistan and Kenya.
Analysts and traders alike feel that the trend in gold prices is clearly up, as the likely response to the global financial crunch is a cut in interest rates globally, which will fuel inflation worldwide. Therefore, although the rise in gold prices was triggered by by the decline in the US dollar, it is the fear of looming inflation that is behind the current rally.Most analysts feel that the price of gold should touch $1000 an oz. in 2008 itself.They point out that although gold prices are at an all time high, they are still below the 1980 price if it is adjusted for inflation. If this is done then an oz. of gold at $875 in 1980 will be worth $2,115 to $2,200 today.Therefore there is clearly room for gold prices to appreciate further.
Another important reason behind the rise in gold prices is the increasing physical demand for the yellow metal from China and India where gold has always been prized as an asset.Their increasingly affluent middle class has increased its demand for gold.At the same time existing mines have not been able to increase output significantly.They are also having to dig deeper to get to the known deposits, which has raised the cost of production. Gold has also been boosted by the impending launch of the Shanghai gold futures contract. If the Chinese appetite for stocks is any indication then investment in gold futures seems to be a safe bet.
New Oil Boom In North Dakota.
Oil was first found in North Dakota in 1951, near Tioga by the Amerade Oil Company. The discovery set off an oil boom in the Western part of the state. Western North Dakota is estimated to hold 400 billion barrels of oil, even more than the Arctic Natural Wildlife Refuge. Yet presently North Dakota produces less than 2% of the nations oil.This is because the oil is located in a geological formation called the 'Bakken,' shale. It is named after Bakken, the owner of the land where oil was first found. Hitherto technological limitations and the low price of oil made extracting this oil economically unviable. But thanks to new technology and high oil prices, oil companies are scrambling to get sites to start drilling.Even major oil companies are excited and they are investing hundreds of millions of dollars in new wells and production is picking up. Over the last one year 198 new wells have been drilled. What was once agricultural land which was easily available, has suddenly seen its value jump several times over.
The North Dakota oil industry has gone through several boom and bust cycles in the last 50 years. This is because the oil here is expensive to produce. Therefore in the past when oil prices were high the economy boomed, and when they fell the economy slumped. But analysts believe that this time round the boom is here to stay. They argue that oil prices are unlikely to fall below $50 per barrel and therefore the North Dakota oil boom will sustain over the long term.
Some uncertainties do remain however, as the oil is in a layer of rock almost two miles below the surface which presents technological challenges, and how much of it can be extracted is also not known. But the effort is worth it, as getting to all this oil is equivalent to finding five and a half new Saudi Arabias. The levels of exploration and drilling activities are rising, and North Dakota officials expect to approve permits for 500 new wells this year.
This high level of activity is straining the existing infrastructure. The roads and water systems are strained. As the oil industry encourages workers to switch from other jobs to oil, other businesses are now facing labor shortages and rising costs. Much of the natural gas that has also been found is presently being flared till new natural gas plants come up. All this has led to a boom in connected industries such as new pipelines to transport the oil and the natural gas, more housing for workers, electricity to run the various plants.These point to fundamental changes taking place in the local economy which is likely to be transformed for ever.
The North Dakota oil industry has gone through several boom and bust cycles in the last 50 years. This is because the oil here is expensive to produce. Therefore in the past when oil prices were high the economy boomed, and when they fell the economy slumped. But analysts believe that this time round the boom is here to stay. They argue that oil prices are unlikely to fall below $50 per barrel and therefore the North Dakota oil boom will sustain over the long term.
Some uncertainties do remain however, as the oil is in a layer of rock almost two miles below the surface which presents technological challenges, and how much of it can be extracted is also not known. But the effort is worth it, as getting to all this oil is equivalent to finding five and a half new Saudi Arabias. The levels of exploration and drilling activities are rising, and North Dakota officials expect to approve permits for 500 new wells this year.
This high level of activity is straining the existing infrastructure. The roads and water systems are strained. As the oil industry encourages workers to switch from other jobs to oil, other businesses are now facing labor shortages and rising costs. Much of the natural gas that has also been found is presently being flared till new natural gas plants come up. All this has led to a boom in connected industries such as new pipelines to transport the oil and the natural gas, more housing for workers, electricity to run the various plants.These point to fundamental changes taking place in the local economy which is likely to be transformed for ever.
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