Published November 15, 2007

What if China’s economy overheats

Repercussions of a hard landing due to inflation could be enormous because of the country’s importance to world trade

By DANIEL ALTMAN

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AS worries mount about a downturn in the United States, there are increasing signs of trouble in China, too. Despite the Chinese government’s efforts to dampen growth, the breakneck expansion has continued. If the Chinese economy overheats, what will it mean for the rest of the world?

The official inflation rate in China has risen to 6.5 per cent, and some economists think the real figure is much higher.

If demand for labour, equipment, raw materials and energy outpaces China’s ability to find supplies, prices could shoot up uncontrollably and shock the economy: a hard landing. Because of China’s importance to global commerce, the repercussions could be enormous – though not, perhaps, all bad. How bad is the inflation problem? Part of what makes it a problem is that no one really knows.

‘I don’t think it’s measured correctly, because the government has imposed price controls here and there,’ said Sung Yun-wing, chairman of the economics department at the Chinese University of Hong Kong.

The vastness of the economy and the prevalence of black markets add to the difficulties. But Mr Sung explained that China’s exporting success was bound to have increased its money supply, so more cash is chasing the scarce resources in the economy and driving up prices.

The problem may already have gotten out of hand. Even if the Chinese government keeps trying to slow the economy down – and there is some debate about how serious its efforts have been – there’s no guarantee of a soft landing, said Nariman Behravesh, chief global economist of Global Insight, an economic forecasting company.

‘The policy instruments are still pretty blunt in China in comparison to the United States,’ Mr Behravesh said, ’so there’s a big risk of a policy mistake which could trigger some kind of hard landing’. Using a big jump in interest rates could ‘overdo it’, he added.

If that happens, and China has its own downturn, the first effects will very likely be felt in its backyard.

China might well surpass Germany next year as the world’s third-largest economy and its second-ranking trader, but already, Mr Sung said, ‘it’s the No. 1 market for East Asian economies’.

Even Japan, Mr Behravesh said, is very dependent on China as an export market. But many emerging economies in Latin America and Africa would also be hurt, he said, because they sell masses of commodities to China.

The economic effects might not be so negative elsewhere, though.

‘It wouldn’t be so bad for the industrialised economies, in that lower commodity prices, in particular oil prices, would actually help us,’ Mr Behravesh said. The pressure applied to commodity markets by growing Chinese demand has been one of the main forces driving up prices.

In addition, Mr Behravesh pointed out, ‘we don’t export that much to China’. That rosy picture could darken, however, depending on the timing of a Chinese downturn. If it came at the same time as a severe slowdown in the US, the global economy would lose the strength of two very important engines, perhaps resulting in what Mr Behravesh called a ‘rolling global recession’.

But he gave a small probability to that outcome, perhaps only 15 or 20 per cent. The Chinese government, he said, was unlikely to tweak the economy until after the Beijing Olympics next summer, by which time the worst might be over for the US.

Mr Sung, the economics chairman, said China still had one chance to try to head off a crisis, by allowing its currency to rise in value more quickly. Doing so would make Chinese exports more expensive to foreigners and imports more attractive to Chinese consumers – two checks on Chinese industry. Making the yuan more valuable could also reduce the need for the money supply to grow, and thereby slow inflation.

A nearby economy once used a similar tactic with some success.

‘If you look at the situation of the Taiwanese economy back in the mid-80s, Taiwan had an extremely big current account surplus, rapidly increasing money supply and asset price inflation followed by consumer price inflation,’ Mr Sung said.

‘Then the Taiwanese dollar appreciated by a lot in just a few months. It didn’t disrupt the Taiwanese economy too much. I’m not saying that China can get out of the mess as cleanly as Taiwan did, but it is not impossible.’

But even if China did dodge the bullet, Mr Sung said, its problems might not be over. He asserted that China’s deeper problem was the composition of its growth. If it continued to grow through businesses’ investments in physical capital and through its exports, pressure on international markets and inflation could easily return. Increased spending by consumers, on the other hand, wouldn’t cause the same stresses.

In other words, it may not be enough for China to grow; it will have to learn to enjoy its growth as well. — IHT

Subprime hits even the Bank of America. The Iceberg vs Titanic drama is just unveiling itself.

Yours Financially Free,
Willy Lim

November 14, 2007, 6.23 am (Singapore time)

Bank of America sees US$3b debt write-down

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NEW YORK – Bank of America Corp, the second-largest US bank, said on Tuesday it expects to write down US$3 billion of debt in the fourth quarter, as fallout from the nation’s housing slump deepens.

The pretax loss stems from collateralized debt obligations, including those tied to sub-prime mortgages, and may grow if market conditions worsen, Chief Financial Officer Joe Price said at a Merrill Lynch & Co banking conference.

Bank of America is also setting aside US$600 million to help money market mutual funds exposed to risky debt maintain the US$1 per share net asset value that all such funds try to keep. It is also reserving US$300 million for a troubled investment, and setting aside more money for other housing-related losses, including to homebuilders.

Mr Price said the Charlotte, North Carolina-based bank nevertheless considers the losses ‘manageable.’

Bank of America joined Citigroup, Morgan Stanley, Wachovia Corp and other banks in projecting large fourth-quarter write-downs for exposure to mortgages and other debt that investors are no longer willing to buy.

Citigroup said it might write off US$8 billion to US$11 billion, while Morgan Stanley projected US$3.7 billion and Wachovia US$1.1 billion. Merrill Lynch suffered an US$8.4 billion write-down in the third quarter. Industrywide write-downs so far total well over US$40 billion.

Meanwhile, JPMorgan Chase & Co Chief Executive Jamie Dimon said ‘we think we’re fine’, as he discussed the third-largest US bank’s sub-prime and CDO exposures.

Mr Price said some CDOs that Bank of America is writing down are exposed to sub-prime mortgages, which go to people with poor credit. The bank has not offered such home loans since 2001.

The bank also expects to set aside US$300 million to help money funds exposed to so-called structured investment vehicles preserve a US$1 share price, and avoid ‘breaking the buck.’ This amount is on top of US$300 million set aside last quarter, Price said. Some SIVs have struggled as market liquidity deteriorated.

In addition, Bank of America expects to set aside US$300 million for a troubled ‘mezzanine investment,’ he said.

Mezzanine financing is often used in buyouts. A bank spokesman declined to elaborate.

The bank plans to resume stock buybacks no sooner than July 2008 as it rebuilds capital levels, he said.

Bank of America’s losses come after a third quarter when profit from corporate and investment banking fell 93 per cent, depressing overall earnings by 32 per cent.

Chief Executive Kenneth Lewis announced 3,000 job cuts, and ordered a strategic review of the corporate and investment banking unit that should be completed by early 2008. — REUTERS

November 14, 2007, 2.10 pm (Singapore time)

Asia would be hit by a US recession: M Stanley

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SINGAPORE – Asia would be hit by a recession in the United States because it heavily depends on the world’s top economy, a Morgan Stanley executive said, rejecting a view that Asia has ‘decoupled’ from the rest of the world.

The notion that the United States is no longer the driver of world economic growth has become increasingly popular among investors as a boom in China, India and other emerging markets has spurred demand for raw materials and manufactured goods in Asia.

‘Asia will not receive special dispensation from a US recession. It is export-led and while there’s a lot of intra-regional trade in Asia, the biggest end-market is the United States,’ Stephen Roach, the US bank’s Asia chairman, said in an interview on Wednesday.

Mr Roach, who sees more than a 50 per cent chance of a US recession next year, said that investors subscribed to the decoupling theory because it suited them.

‘It’s a scenario that says ‘you don’t have to worry about anything’. Don’t buy it. A recession in the US doesn’t spell the end of the world for Asia. All it means is that Asia has not repudiated the laws of the business cycle,’ he said on the sidelines of a conference for the bank’s clients in Singapore.

According to a Nov 7 survey ahead of the holiday shopping season in the United States, six in 10 US consumers believe a recession is likely in the next three to six months, reflecting concerns about jobs and the US housing meltdown.

Meanwhile, China’s growth is expected to top 11 per cent this year and the country appears to have largely escaped direct damage from the US sub-prime mortgage crisis.

‘What worries me is the view that many people have that there is a new Asia that is immune to anything and everything that occurs in the world economy. How can that be?’ said Mr Roach, who was Morgan Stanley’s New York-based chief economist for 25 years before moving to Hong Kong to become Asia chairman this year.

‘Asia is the best example of what globalisation has done for economic development and globalisation is about integration. You either believe in globalisation or you believe in decoupling. You don’t believe in both.’ — REUTERS

Frugality is a virtue. So our mothers were right!

Yours Financially Free,
Willy Lim

The World’s Richest People
The Frugal Billionaires
Asher Hawkins 11.14.07, 2:00 PM ET

Sure, billionaires fly private jets, live in massive mansions, dine at the world’s finest restaurants and shop at Gucci, Prada and Louis Vuitton. After all, they’re rich. But some of the world’s wealthiest people aren’t so flashy. They’re frugal–for billionaires, at least.

Take John Caudwell, who got his start as an auto-repair shop owner and went on to create a $2.2 billion fortune (when last measured by Forbes in March) by selling his 85% stake in cellphone outfit the Caudwell Group in 2005. An avid sportsman, he used to bike 14 miles to work every day. He cuts his own hair because going to a barber is a waste of time. He buys his clothes off the rack at British retailer Marks & Spencer (other-otc: MASPY – news – people ).

“I don’t need Saville Row suits,” he tells Forbes, adding that splurging on extremely pricey bottles of wine is often a waste. “I don’t need to spend money to bolster my own esteem.”

In Pictures: The Frugal Billionaires

Caudwell does have his indulgences. He owns both a Ferrari and a Bentley.

Jim C. Walton, the Wal-Mart (nyse: WMT – news – people ) scion and member of America’s richest family, has different taste in vehicles. He inherited his money–and spending habits–from father Sam. Worth $16.4 billion when we valued his fortune for the Forbes 400 list in September, Jim prefers pickup trucks to sports cars. Reportedly, he drives a 15-year-old Dodge Dakota.

Ikea founder Ingvar Kamprad built a $33 billion fortune selling affordable furniture to the masses. Yet the self-made Swedish tycoon drives a 15-year-old Volvo, flies coach, tries to avoid wearing suits and often eats meals at lower-tier restaurants.

Indian billionaire Azim Premji made his $17.1 billion fortune through tech-services giant Wipro. Despite being one of Asia’s richest men, Premji drives a Toyota Corolla, flies coach and stays in company guest houses instead of five-star hotels when traveling on business. He even served food on paper plates at a lunch honoring his son’s wedding.

Famously frugal investor Warren Buffett has been making headlines recently for railing against the Bush administration’s tax policy and sticking up for the middle class. And he walks the walk: Despite earning $46 million in taxable income last year and boasting a net worth of $57 billion, he lives in the same home he bought for $31,500 nearly 50 years ago.

Stanford professor David Cheriton made his billions by introducing Google (nasdaq: GOOG – news – people ) founders Sergey Brin and Larry Page to the venture capitalists at Kleiner Perkins Caufield & Byers. He was rewarded with a sizable chunk of Google stock.

Canadian Cheriton says he prefers to ride his bike around his Palo Alto, Calif., neighborhood, and relies on an old Volkswagen (other-otc: VLKAF – news – people ) van or a Honda (nyse: HMC – news – people ) sedan when he needs to get behind the wheel. He says he only flies commercial, prefers jeans to designer clothes and claims to reuse his teabags. He also cuts his own hair to save time going to a barber. His indulgence: two windsurfers.

When contacted about this story, Cheriton cited the Wikipedia definition of frugality: “The acquiring of and resourceful use of economic goods and services in order to achieve lasting and more fulfilling goals.” He says, “That’s certainly something I aspire to.”

Published November 13, 2007

Fears of bigger sub-prime losses spook markets

Asian stocks take a beating, with Singapore’s STI sliding a hefty 2.5%

By CONRAD TAN

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(SINGAPORE) Stock markets around the region were again mauled yesterday in a widely expected retreat after share indices in the United States ended sharply lower on Friday.

The sell-offs on Wall Street last week and those around Asia yesterday were triggered by fears that banks and other financial institutions are likely to suffer much larger losses than earlier expected from the turmoil that began in the US sub-prime mortgage market.

Shares in companies outside the financial sector were also hit, particularly those that depend heavily on export sales, as investors feared that the rising number of home repossessions and mortgage loans gone bad in the US housing market is spreading pain to consumers there who may spend less.

Worries that the US could be headed for an economic recession – never far from investors’ thoughts since late July when the financial market upheaval began – seem to have resurfaced with new intensity.

Some market observers have suggested that the US Federal Reserve’s ability to stave off a recession through further interest rate cuts may be hampered by rising inflationary pressures – a fear that has been stoked in the past week by higher oil prices and a fast-weakening US dollar.

But the broad consensus – for now – seems to be that the US economy is likely to see slower but still positive growth rather than fall into recession.

But the broad consensus – for now – seems to be that the US economy is likely to see slower but still positive growth rather than fall into recession, said economist David Cohen at Action Economics. ‘It doesn’t appear that the US is going off a cliff.’

Around the region, major share indices fell sharply yesterday. In Singapore, the Straits Times Index finished 2.5 per cent lower, while in Hong Kong, the Hang Seng Index fell 3.9 per cent. In Japan, the Nikkei 225 index was down 2.5 per cent, while the two main indices in mainland China ended 2.4-2.5 per cent lower.

The gyrations in the market are likely to last at least until early next year when companies report their earnings results for the current quarter, said Philip Lee, JPMorgan’s chief executive of investment banking in South-east Asia. ‘A lot of it is sentiment-driven. People want to see how the fourth-quarter results come out.’

The results, which would indicate the extent of the impact from the recent spike in oil prices and other factors, would be ‘a good harbinger of things to come’, he said.

Meanwhile, investment banking deals are still being done in China and India, he said. ‘People who can do deals are still doing them. Fundamentally, a lot of companies are still doing very well in this part of the world.’

But last week’s slide in the US dollar, which has weakened considerably against the euro and major Asian currencies since August, has also prompted fresh worries over demand for Asian exports destined for the US.

CIMB economist Song Seng Wun said there was ‘quite a lot of fear on the street’ of a US economic recession, but Singapore’s economy was robust enough to withstand a hiccup, though not a protracted downturn. ‘We do have some slack in domestic consumption which is still resilient enough to cushion us in the near term.’

Citigroup’s US research team is still forecasting a ’soft landing’ for the American economy, said economist Chua Hak Bin in a report yesterday.

But he warned that the evidence so far suggests that Singapore and other Asian economies are still vulnerable to a sharp downturn in US economic growth, although less so than in the past. ‘Arguments about decoupling is premature and probably 10 years too early. Asia or emerging markets will not be able to escape the effects of a full-blown US recession.’

Singapore’s prospects in 2008 ‘will hinge critically on the extent of the slowdown in US economic activity next year’, he said.

Still, ‘the current US slowdown is largely housing and construction-led, which has less of an impact on Asian and Singapore exports,’ he added.

Minister Mentor Lee Kuan Yew said on Sunday that Singapore’s economy was ‘doing fine’, but warned that ‘there are dangerous market signals’ – higher oil prices among them.

The market is entering the “Fear” phase.
Warren Buffett’s famous words comes to mind, “When the market is greedy, you must be fearful. When the market is fearful, you must be greedy?”

Are you preparing to be greedy soon?

Yours Financially Free,
Willy Lim

Published November 13, 2007

US economy: entering the fear zone The credit crunch and the weak dollar could force Americans to finally start to pay back the money they borrowed By LEON HADAR WASHINGTON CORRESPONDENT Email this article AS the US dollar reached an all-time low against the euro and oil prices rose close to US$100 a barrel and the housing market experienced one of the steepest downturns in two decades, the last thing that Congress and Wall Street needed was to have US Federal Reserve chairman Ben Bernanke tell them that they should expect a ’sluggish’ US economic growth in the near future. At the same time, he hinted that the US central bank had no concrete plans to cut interest rates anytime soon. Yes, the economy was slowing down and that there wasn’t much he could do about it. You’ll just have to get used to it. But that was exactly what Mr Bernanke did last Thursday during his much anticipated testimony before a joint economic committee on Capitol Hill. It is quite possible that both lawmakers and investors were fantasising that Mr Bernanke would suddenly remove a mask and that they would discover that it was Alan Greenspan addressing them, coming up with all the financial mumbo-jumbo that no one really understood but that nevertheless could make them feel so good. They must have been hoping that the Wizard from the Fed would bless the American and global economy with his magic touch, AKA interest rate cuts, and the good times would roll once again. But there was no Mr Greenspan and it was Mr Bernanke responding to a question from Democratic Senator Chuck Schumer from New York: ‘Our assessment is for slower growth, but positive growth going into next year.’ He added that ‘we hope’ that by the spring, early next year, that, ‘as these credit problems resolve and as, we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace’. But then, hopes never provided a strong basis for effective policies. And ‘do you think that the decline in the dollar will lead to inflation and higher long-term interest rates?’ asked another lawmaker. ‘The decline of the dollar has the potential to raise import prices and contribute to inflation,’ Mr Bernanke admitted. ‘And, therefore, we are very attentive to that risk.’ And what about the rising petrol prices and their long term impact on the American consumers and economy? ‘This is a big burden for the US economy, although we’ve been pretty resilient so far in dealing with higher oil prices,’ according to Mr Bernanke, stressing that while the price of oil ‘has its effects on consumer spending, it’s obviously also an inflation risk, both because oil prices are part of the consumer’s basket and therefore part of inflation’. And even ‘more concerning’ would be if those petrol prices were to feed through into other costs and lead to a broader rise in prices, he added. Hence it was not surprising that last Thursday’s testimony in which the Fed chairman seemed to be going out of his way to sound un-Greenspan-like, only added to the mood of gloom and doom that has been dominating Washington and Wall Street in recent days: The debacle in Iraq, fears of war with Iran, instability in Pakistan, rising oil prices, weakening dollar, housing crisis, credit crunch, weak US dollar, high oil prices – and now comes the head of the US central bank who not only expects the economy to slow down, but who also says that inflation is going to be a concern. So those of us who operated under the impression that you can’t have both a recession and inflation at the same time – inflation being a sign that the economy is overheating – learned from Mr Bernanke that the American economy was moving into a stage in which it could be suffering from both of them at the same time. That means that the Fed would be facing a dilemma since its main policy instrument – interest rates – is supposed to deal either with the threat of inflation (raise rates) or the threat of recession (cut rates) – but not with both at the same time. All of which raises the expectation of a ‘neutral’ Fed that is likely neither to raise nor cut interest rates in the near future, news to which Wall Street has reacted negatively. Indeed, there are growing signs that the mood of gloom and doom is being translated into a sense of fear among lawmakers and investors as well as the public/consumers who are recognising that things are going to get worse in both the foreign policy arena and the economy, and that America’s policymakers have no answers to how to get out of Iraq, avert a war with Iran, prevent Islamic radicals from taking over Pakistan’s nukes as well as how to ward-off recession and inflation, while doing something about the rising oil prices and the collapsing US dollar. Even more depressing is the fact that all these and other foreign policy and economic issues seemed to be intertwined: Instability in the Middle East that increases the US budget deficit and puts downward pressure on the US dollar while at the same time leading to a rise in oil prices which accelerates inflationary pressures but which could also create the conditions for a possible recession. And a weak US dollar could provide incentives for the Chinese – who hold bonds equal to almost half America’s debt and who see the value of their investments decline – to look at putting money into euros instead of the dollar as a Chinese official hinted last week. At the same time, since oil is priced in US dollars, there is pressure on oil producers to increase the price of oil when the value of the US dollar falls and perhaps even to consider the idea of oil being priced in euros. One could put a positive spin on all the bad economic news by suggesting that after several years during which Americans have been living beyond their means, with business and consumers accumulating debt and producing a huge deficit as though there was no tomorrow – the chickens are finally coming home to roost. The credit crunch and the weak dollar could force Americans to finally start to pay back the money they borrowed, increase US exports abroad and narrow the deficit while helping eventually to stabilise the US dollar. The problem is that there are too many economic and geo-strategic unknowns in this picture – the depth of the housing crisis and the credit crunch; the chances for a war with Iran and continuing instability in the Middle East; the level of growth in energy consumption by the Chinese and the Indians; US economic tension with the Chinese – that could make it more likely that a painful economic correction could be transformed into a dangerous economic crisis. Hence the fear in Washington and Wall Street.

We are just seeing the beginnings of a full-blown storm. We should start paying attention to what the market is telling us.

Yours Financially Free,
Willy Lim

Published November 9, 2007

Stocks tumble across Asia after Wall St drop

Nikkei index sheds 2%, Hang Seng 3.2% and Shanghai Composite 4.9%

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(TOKYO) Asian markets fell yesterday after Wall Street posted its second big drop in a week as investors worried about the extent of fallout from the global credit crisis.

Japan’s benchmark Nikkei 225 index sank 2 per cent, while the Hang Seng Index in Hong Kong tumbled 3.2 per cent. China’s benchmark Shanghai Composite Index lost 4.9 per cent in its biggest one-day decline in four months.

Shares also fell in Australia, India, South Korea and the Philippines. Stock markets in Singapore and Malaysia were closed for the Deepavali holiday yesterday.

In Europe, shares were trading lower at midday on intensified credit fears, but BHP Billiton’s takeover approach for Rio Tinto limited losses by boosting mining and British stocks in general.

Both the European Central Bank and the Bank of England held their key interest rates steady yesterday in the face of soaring oil prices and a surging euro.

ECB policy-makers meeting here left their main lending rate at 4 per cent for the 13-nation eurozone. Speculation remained, however, that they could signal an intention to tighten credit in December for a region that accounts for roughly 15 per cent of global gross domestic product (GDP).

At the same time, the Bank of England, also meeting yesterday, kept British rates at 5.75 per cent. At 1210 GMT, the FTSEurofirst 300 index of top European shares was down 0.4 per cent at 1,524.20, rebounding strongly from a 1.5 per cent fall earlier in the session.

‘There has been renewed concern about the US sub-prime loan problem amid reports that losses at US and European financial institutions are expanding, which increases uncertainty,’ said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

Jitters have grown since Citigroup Inc said on Sunday that it needed to take an additional US$8 billion to US$11 billion in writedowns.

Additional concerns about weakness in the US dollar, soaring oil prices and a record loss at General Motors Corp on an accounting adjustment sent the Dow Jones industrial average down 360.92, or 2.64 per cent, on Wednesday to 13,300.02. It was the third time in a month that the US bluechip index has dropped by more than 350 points.

Oil recouped early losses to resume its march towards the US$100-milestone yesterday, as resurfacing worries of tight winter supplies and continuing dollar weakness put the brakes on some early profit-taking.

By 1257 GMT, US crude for December delivery stood 57 US cents up at US$96.94. London Brent crude was 84 US cents up at US$94.08 a barrel, off lows of US$92.97.

Crude had dropped earlier yesterday amid concerns of weak US oil demand and falling stock markets, reversing some of the gains that had carried it to a peak of US$98.62, the latest in a succession of all-time highs.

Some investors are worried that global markets could repeat the plunge of August, when the sub-prime problems first came to the attention of the broader market.

‘What happened in August could happen (again),’ said Mizuho’s Mr Takeuchi.

In Japan, investors dumped financial and real estate shares such as Mizuho Financial and Mitsubishi Estate. The Nikkei 225 index fell 325.11 points, or 2.02 per cent, to 15,771.57.

A steadily strengthening yen against the US dollar also hurt exporters like Toyota Motor Corp and Sony Corp.

In Hong Kong, the benchmark Hang Seng index dropped 948.71 points, or 3.2 per cent, to 28,760.22, with property shares falling sharply.

Analysts warned that the market, which has surged this year, could fall further. ‘There’s no rush to buy stocks on dips as further downside may be imminent. It’s riskier to buy now,’ said Conita Hung, a director at Delta Asia Financial Group.

In mainland China, the market was hurt by declines overnight in American Depositary Receipts of large Chinese companies traded in New York.

‘The sharp decline in ADRs in the US has exerted selling pressure on their counterpart shares listed here,’ said Chen Huiqin, an analyst at Huatai Securities.

The drop shows how China’s still largely insular market is becoming increasingly linked to overseas markets, despite limits on foreign investment in mainland shares and on overseas stock purchases by Chinese.

China Southern Airlines fell 9.8 per cent yesterday after its ADRs slumped 6.9 per cent overnight, while PetroChina lost 5.5 per cent after its ADRs fell 7.2 per cent.

Oil prices had fallen back after rising above US$98 a barrel on Wednesday. Light, sweet crude for December delivery lost 27 US cents to US$96.10 a barrel in Asian electronic trading on the New York Mercantile Exchange. — AP, AFP, Reuters

Even the Chief Executive of Hong Kong Monetary Authority thinks that there may be a bubble. He is also concerned about the US sub-prime loans issue and how it may impact Hong Kong.

We must tune in to what the market is telling us: Rough seas amidst big storms in front.

Your Financially Free Advisor,
Willy Lim

November 8, 2007, 4.30 pm (Singapore time)

HK official warns of stock market risk Email this article HONG KONG – The head of Hong Kong’s de facto central bank warned investors Thursday of risks in the city’s stock market, which has surged in 2007 but suffered sharp recent falls amid fears of a share price bubble. Joseph Yam, the chief executive of Hong Kong’s Monetary Authority, said the southern Chinese territory’s bourse had seen the wildest swings in share prices over the past five months since the 1997 Asian financial crisis. ‘I want to remind market participants that when the market is performing well … don’t forget to be alert,’ he said at a meeting with legislators. He added that ‘underlying risks’ in a generally positive environment could not be ruled out. He said the city’s robust economic growth could be the reason why risks had yet to materialise and advised investors to be careful when investing in the stock market. Hong Kong’s Hang Seng index is up around 40 per cent this year, but suffered a fall of five percent on Monday, its largest-ever single day slide. It also fell 3.7 per cent by the end of Thursday morning. The chief executive said he was particularly concerned about a credit crisis in the US and its possible impact on Hong Kong. — AFP

“A reading of below 50 on the diffusion index suggests that the economy will contract in coming months. It had fallen to 27.3 index by August but the severity of the further drop in September echoed the situation in 1991 when the bubble economy collapsed. “

Japan is spiraling into a recession, the worst since 1991. If BOTH US and Japan falls into recession, the rest of the world will not be spared. If China suffers from a post-Olympic bust after 2008, we will be in for one of the worst recession ever. Point is: have you started building your Noahs’ Ark?

Your Financially Free Advisor,
Willy Lim

Published November 7, 2007

Signs point to Japan falling into recession

Sept diffusion index slumps to zero, first time since 1991 when bubble burst

By ANTHONY ROWLEY
IN TOKYO

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A SERIES of leading indicators sent an ominous warning yesterday that Japan’s economy may be headed back towards recession, at a time when political turmoil and fights over diplomatic issues are diverting the government’s attention.

Officials said the leading index appeared to have been influenced heavily by fallout from the US sub-prime mortgage crisis.

The diffusion index of leading economic indicators published by the Cabinet Office slumped to zero in September for the first time since 1991.

The news came as Ichiro Ozawa, president of the opposition Democratic Party of Japan announced that he was withdrawing his resignation from the party leadership.

Mr Ozawa made his decision to remain in the party following appeals from other DPJ officials to stay on, but the outlook for Japanese politics remains highly uncertain, analysts said.

Various indicators such as stagnant personal consumption, rising unemployment and slumping housing starts have been signalling for some time that the five year-long economic recovery is running out of steam.

Yesterday’s index covering areas such as new job offers, consumer sentiment and Tokyo stock prices sent the clearest warning yet that the economy is in trouble.

A reading of below 50 on the diffusion index suggests that the economy will contract in coming months. It had fallen to 27.3 index by August but the severity of the further drop in September echoed the situation in 1991 when the bubble economy collapsed.

The Bank of Japan last week scaled back its projection for real gross domestic product growth for the fiscal year ending March 31, 2008 from 2.1 per cent to 1.9 per cent and dropped its inflation forecast for the fiscal year to zero.

But in the light of recent economic indicators, GDP data for the third quarter of this year which are due out next week may show a sharp drop in output, some economists predicted.

Yesterday’s coincident index of economic indicators, which measures current conditions, gave a much more optimistic reading of 66.7 for September, leading one Cabinet official to say that the economy ‘remains in expansion’.

The leading index is considered a better indicator of things to come, however.

Officials said that the index appeared to have been influenced heavily by fallout from the US sub-prime mortgage crisis.

Former US Federal Reserve chairman Alan Greenspan told a conference in Tokyo yesterday that falling home prices and high levels of unsold properties presented a major risk to the US economy and financial markets. Speaking by video link to the private conference, Mr Greenspan said that he was ‘not sanguine’ about how quickly the glut of unsold homes could be reduced.

Finance Minister Fukushiro Nukaga said yesterday that he would carefully monitor the impact of US sub-prime mortgage problems on global financial markets.

‘Compared to the United States and Europe, our country has had little impact,’ Mr Nukaga said when commenting on fallout from Citigroup’s announcement that it might write off another US$11 billion of sub-prime mortgage losses.

If the guy behind the attack on the Thai Baht, causing the 1998 Asian financial crisis, is talking about serious US economic correction, you better pay attention to him!

Your Financially Free Advisor,
Willy Lim

Published November 7, 2007

Soros warns of ’serious’ US economic correction He says things are worse than what Fed chief sees Email this article (NEW YORK) Billionaire investor George Soros has forecast that the US economy is ‘on the verge of a very serious economic correction‘ after decades of overspending. ‘We have borrowed an awful lot of money and now the bill is coming to us,’ he said during a lecture at the New York University, adding that the war on terror ‘has thrown America out of the rails’. Asked whether a recession was inevitable, Mr Soros said: ‘I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing.’ On the same note, David Rosenberg, chief economist for North America at Merrill Lynch & Co in New York, forecast that the US economy will come close to stalling in the fourth quarter. The economy will probably grow at an annual rate of between zero per cent and one per cent, Mr Rosenberg said in his weekly report to clients dated Nov 2. He currently forecasts a 0.7 per cent pace of expansion this quarter. The third-quarter’s 3.9 per cent growth rate was artificially boosted by ‘non-recurring factors’ that will disappear in the last three months of the year, Mr Rosenberg said. Add to that the collapse in sub-prime-mortgage lending and a worsening housing slump and the expansion will slow, he said in an interview on Monday. ‘This is by far the most leveraged economic expansion in modern history,’ Mr Rosenberg said in the interview. Parts of the mortgage market ‘just aren’t coming back. This is going to have a deleterious impact on growth.’ A drop in gasoline prices even as oil prices jumped, a surge in auto inventories before threatened strikes and an increase in defence spending propelled third-quarter growth and won’t be repeated, Mr Rosenberg’s report said. On the forex market, Mr Soros, famous for his speculative attack on the Bank of England that made him more than US$1 billion, declined to nominate which currencies were more vulnerable currently. He also declined to comment specifically on the dollar. ‘I know exactly where the currencies are going to but I’m not going to tell that to you,’ he told the audience. Last week, investment guru Jim Rogers, who co-founded the Quantum Fund with Mr Soros in the 1970s, recommended selling the dollar as well as US investment banks and US housing stocks. In an interview with Bloomberg News Agency, Mr Rogers said that US credit markets are enduring their worst bubble ever and forecast that it may take six years for them to return to normal. ‘Never in American history have people been able to buy a house with no money down,’ Mr Rogers said. ‘We have the worst credit bubble, and it’s going to take a long time to work its way out. You don’t cure a bubble in five or six months. It takes five or six years.’ Mr Rogers, the chairman of Beeland Interests Inc, also said he’s pessimistic on the US dollar. He said he hoped the Fed raises interest rates to stem inflation, but if it does ‘the dollar is going to collapse’. — Reuters, Bloomberg