I would like everyone to watch this CNBC economic "round table". I don't know who this hedge fund guy is, but even though his fund is up 40% this year, he is an ubber doomer and even says he sees "dead people." He apparently disagrees with Marc Faber, and believes that bonds will be the place to be for the next 18 months, not after that.

CNBC



Can anyone enlighten me to this guy? Who is he?

Hugh Hendry, the colourful hedge fund manager whose funds have bucked the industry's gloomy trend this year, has blamed the dramatic falls in the stock market on the Government's ban on short selling.

Mr Hendry, who runs Eclectica Asset Management, also called on hedge funds to be more open in defending their industry. "It is untenable for the hedge fund community to hide behind its wealthy wall of silence. In the vacuum that is left behind people assume you are up to no good," he said.

Mr Hendry, who has described short selling as the "pursuit of truth", said: "Until the Thursday in September when short selling was banned we had not seen the stock market crash. Since then, we have seen some of the biggest one-day falls in stock market history."

The Financial Services Authority banned new short selling of banks on September 18 in an attempt to put a floor under the sector's bombed-out shares.

The ban removed potential buyers of stocks, Mr Hendry said. "No member of the financial community can afford to buy when the stock market is tanking. If you are short of a stock and the market falls 20pc, you buy it back," he said.

Mr Hendry, who co-founded Eclectica having worked for Crispin Odey's Odey Asset Management, has for the past two years "refused to enter the culture of risk taking", and warned of a deflationary shock including a downturn in the housing market.

He bought government bonds in 2006 and 2007 "and made no money".

This year, Mr Hendry has borrowed money to back his theory further so about double his shareholder funds are invested in government bonds. The approach has worked so far as Eclectica is up more than 40pc on the year.

Mr Hendry is appearing in a Dispatches programme on Channel 4 this evening looking at how the financial crisis unfolded.

"Banks were allowed to double up. If you do that in the casino there is a limit. We had no limit in the financial sphere for five years," Mr Hendry said. "If you look at the balance sheet of Royal Bank of Scotland it is bigger than the entire British economy."

But the ability to surprise and shock is part of the stock-in-trade of Hendry, the son of a Glasgow lorry driver, who is a regular talking head on the CNBC business TV channel.

WEEKEND INVESTOR
Are stocks cheap? It depends on earnings
Valuations at multi-decade low but economic, credit risks cloud profit picture
By John Spence, MarketWatch
Last update: 4:33 p.m. EST Nov. 21, 2008
BOSTON (MarketWatch) -- Call it the Great Give-Back. The market's latest swoon this week sent the Standard & Poor's 500 Index to its lowest level in more than a decade, and the benchmark has lost almost half of its value since October 2007.

Optimism is in short supply; so are stocks cheap? Is the U.S. market now the Great Give-Away?
The answer depends on who you ask, and which yardsticks are used to measure valuation.
Investors were cheered Friday on reports that President-elect Barack Obama will name Timothy Geithner, the president of the New York Federal Reserve and a former Treasury official, as Treasury secretary.

The Dow Jones Industrial Average ($INDUrallied in the final hour of trading, tacking on almost 500 points to close back above 8,000 -- a gain of 6.5%.
But that upbeat finish can't gloss over a market that seems to be littered with land mines. Citigroup Inc. (C Citigroup, IncC) has been pushed to the brink after a stunning decline in the banking giant's shares, and the strapped Big Three automakers begged Congress for a bailout this week.
A fierce debate is raging between bulls and bears over whether U.S. stocks are beaten down enough to risk wading in. Even after Friday's rally, the bears are winning the argument.
Yet in these extraordinary times, it can be helpful to put emotions on the back burner and consider market history. There is no doubt that fear is propelling markets, but over the long haul, the gravity of fundamentals and valuation drives returns.

One of the most common metrics of stocks' valuation is price-to-earnings ratio, or P/E, which is a rough gauge of how much investors are willing to pay for each dollar of future earnings. Price is simply the stock's value, but a big and nagging problem of P/E is how to measure earnings. For example, investors can use forward-looking earnings estimates or trailing profits.

Based on 2009 projected operating earnings, the P/E on the Standard & Poor's 500 Index (SPX
S&P 500 Index SPX) this week was around 10, according to Standard & Poor's. Valuations haven't been this cheap in decades, at least according to this measure. Meanwhile, 12-month trailing P/E was around 11, a level last seen in the late 1980s, according to Boston-based money manager Eaton Vance Corp.


Many market pundits think Wall Street's earnings expectations for 2009 are way too rosy as corporate America braces for what could be a nasty recession and more job losses. The financial system also looks susceptible to more tremors with credit markets still unsettled. Highlighting the fear, yields on three-month Treasury bills are virtually zero.

"Corporate earnings-per-share continue to be revised sharply lower, especially in cyclical sectors," said Sam Stovall, chief investment strategist at S&P. "While equity prices will likely precede an upturn in the fundamentals, we think the global economic and EPS outlook need to at least show tentative signs of stabilization before a lasting rally will ensue."

Nouriel Roubini, a New York University economics professor who predicted the financial crisis, in a recent commentary piece for Forbes magazine called 2009 consensus estimates for earnings "delusional" and "outright silly."

Roubini, who warned of the worst consumer recession in decades, wrote the U.S. consumer is "shopped-out, saving less and debt-burdened."

If earnings do fall sharply in an economic slowdown and profit margins are squeezed, then the market won't appear so inexpensive and stocks could sink to new depths, bears say.
Howard Silverblatt, senior index analyst at S&P, says profit estimates need to come down to reflect the economic challenges, and this is the time of year when companies and analysts typically cut forecasts. Most S&P 500 companies have already reported third-quarter earnings, and the results weren't pretty. Operating earnings fell 22% from the year-ago period, marking the fifth straight quarter of negative earnings growth, according to S&P.
Volatility jumps
Much of the damage has been centered in the financial sector, which has been pounded by the credit tsunami and write-downs on soured credit investments. The Financial Select Sector SPDR Fund (XLF
XLF) , an exchange-traded fund tracking large-capitalization financial stocks, was down 67% year to date through Nov. 20, trailing the S&P 500 by 19 percentage points, according to investment researcher Morningstar Inc.

Since October 2007, the weighting of the financial sector in the Russell 1000 Index has fallen, to under 15% from more than 20%. By comparison, after the Internet bubble popped, the technology sector's representation in the index slumped to about 12% in late 2002 from 31% at its height.
Uncertainty in the financials and other sectors has led to huge and unsettling swings in stock prices.

Volatility is "off the wall," Silverblatt said. One-day shifts of 5% or more -- as happened on Friday -- have become routine. The S&P 500 has moved at least 1% up or down on more than half the trading days this year, and investors have to go back to the Great Depression to see comparable volatility, Silverblatt noted.

Wall Street's "fear" indicator, the CBOE Volatility Index (VIX
cboe volatility index vix
VIX) , has spiked during the market turmoil. The market-sentiment benchmark measures the implied volatility of options on the S&P 500.
Highlighting investors' skittishness, the VIX jumped to a record intraday high of 89.5 on Oct. 24 and broke through 80 again this week. Prior to October, the VIX had only closed above 45 on four days, according to Russell Investment Group. Since Oct. 12, the VIX has stayed above 45 with an average reading well over 60.

If stocks are cheap, why are they falling?
Markets can certainly fall much further from here and this week's sell-off was a stark reminder of that, but successful contrarian investors know that trying to take advantage of opportunities when others are fearful requires an iron stomach and a long-term mindset. Many investors have already thrown in the towel on stocks for the foreseeable future, and the flight to quality has pushed Treasury bond yields to rock-bottom levels.

Stocks look cheap relative to bonds, but investors face the dilemma of trying to catch a falling knife, said Ernest Ankrim, chief investment strategist at Russell. It might be a good time to buy stocks, but they could get even cheaper if investors simply wait.
"The momentum against stocks is so strong that we have a hard time ringing the bell to overweight stocks," Ankrim said.

"The nature of bear markets is that they can go to extremes," added Duncan Richardson, chief equity investment officer at Eaton Vance. "Valuations can quickly go from reasonable to ridiculous."

An elevated VIX, fast-moving markets and investors trading on fear makes it even more difficult to value equities. Nervous investors have dumped stocks and piled into money market funds on overwhelming evidence the economy is worsening.
"It's easy to be pessimistic with all the selling," Richardson said. "The question is at what point does the market say it's safe to get back into the water."
It seems like U.S. companies are about halfway through the earnings decline, said Richardson, adding that stocks will have a tough time rallying until there is some improvement in troubled pockets of the fixed-income markets.

Merrill Lynch's investment strategy team is advising a cautious stance even though stock valuations have come down.

"The key question is when will equity expected returns outweigh the risks imbedded in the economy," Merrill wrote in a Nov. 17 note to clients.
Even though some well-respected investors such as Warren Buffett are moving back into stocks, "history shows quite clearly that being early can carry substantial performance penalties," Merrill said. "We believe it has historically been better to actually be somewhat late."

In other words, sometimes it doesn't pay to be a hero in a bear market. Until the risk-reward picture improves, the strategists recommended conservative themes such as high-quality bonds, defensive sectors and secure dividend-paying stocks.

At the same time, investors have reason to hope. The stock market has historically rebounded before the economy gets back on its feet. There have been nine recessions since 1950. At the midpoint of these slowdowns, the U.S. stock market jumped about 29% on average over the following 12 months.

No one knows how long this recession will last, but if investors wait for absolute evidence the economy and job market are turning around, they could miss out on much of the gains when stocks turn. See related story.

Yield signs
A combination of low Treasury bond yields and pessimistic forecasts for long-term capital appreciation in stocks has led to renewed interest in dividends. Since 1926, dividends have accounted for about 42% of the S&P index's total return.

The dividend yield on the S&P 500 is now higher than the yield on the 10-year Treasury bond -- the first time this has occurred in almost 50 years.

Bob Doll, global chief investment officer of equities at BlackRock Inc., in a Nov. 17 report noted more than 60% of the stocks in the S&P 500 have a P/E of less than 10, a situation not seen since 1982.
"To us, this suggests that valuation levels are helping to create a floor for equity prices," Doll wrote.
Still, the broader economy faces serious headwinds in the form of weaker consumer spending, falling home prices, rising unemployment and lingering credit issues.

"The bad news is that the severity of the credit issues may push the economy into a deeper recession and could limit the strength of any recovery," Doll said. "The risks clearly remain to the downside and the economy remains vulnerable to additional financial shocks."

A little at a time
Investors truly do have to go back to the Great Depression to see something similar to the pain and fear currently gripping the markets. Aside from Black Monday in 1987, the three next largest one-day declines in the Dow were during in 1929 Crash. During that year, the Dow peaked at 381.17 and fell to 198.69, a drop of 48%.

However, worse was to come and the 1930s were the most volatile decade on record for stock prices, according to Dow Jones Indexes.

The Dow plunged about 53% in 1931 and 33% in 1937, but it surged 67% in 1933 and jumped roughly 39% in 1935. Huge one-day swings were common during the 1930s as the Great Depression caused fits of euphoria and fear, a situation that today's investor can appreciate.
In volatile markets, one way investors can reduce risk is by dollar-cost averaging into stocks, rather than buying all at once. Nevertheless, they should set aside enough cash to cover any short-term surprises in this uncertain economic climate.

Additionally, financial planners encourage workers to max out their retirement plans as much as possible to take advantage of the company matching if their employer offers it, and also the tax benefits. This "free money" is a kind of leverage that lets investors scoop up more shares on the cheap in bear markets.

John Spence is a reporter for MarketWatch in Boston.

Studies of Japan and the great depression may not carry over to the case at hand today. Japan doesn't drive global demand as U.S. does and the Yen is not a reserve currency. Great depression occurred before Bretton Woods system in a much more isolated world than our world is today. The global imbalances of the past 50 years will have unforeseen consequences for proposed monetary and fiscal expansionary solutions.

We desperately need expansionary monetary and fiscal policy to boost demand. Otherwise, all the cost cutting will slow down the economy further, and the result would be what Keynes called the “paradox of thrift”.

My question concerns understanding the consequences of rapid monetary expansion, specially on emerging market economies and its near term impact on global flow of funds. It seems, if it's coordinated globally and in conjunction with fiscal stimulus, it could work, but no one as of yet has published a formula for exactly how? Many variables have to taken into account including amount of public debt, balance of international trade, current interest rate, unemployment and many more.

Printing money recklessly could also have political and social consequences. It could lead to hyper-inflationary food prices in poor countries and potential for social unrest, and instability around the world.

Things are bad now, but because we always reflect on past to guide us through future, we often forget that they could get a lot worse than we could imagine. I am still seeking to find out if anyone has a model for how the mechanics of a global expansionary policy would work and what potential side-effects it could bring about?

I personally believe that there are greater risks in hyper-inflation than in a shrinking money supply. We are currently feeling the results of an over expanding economy. This was caused by an oversupply of money due to low interest rates and poor regulation. For the economy to progress now we must have a return of condifance; and regulation to end speculation without risk. Futures and shorts must carry the same risk as waiting for the market to go up. With new rules the economy will perform correctly and the Fed can return to its first job of keeping the dollar strong.

Still, will there not be a political/social price to pay in case of rapid and potentially disorderly devaluation of the dollar, because commodity prices are quoted in dollar and many countries peg their currencies to the dollar? Should policy action be taken to lessen the damage, or should we trust that central bankers will manage an orderly devaluation?

Against what currency could the dollar lose its value? Not enough swiss frank to absorb the flight. May be Yen? Please, speculate if China could play a role and how?

Greetings:

This is certainly quite an elaborate setting that you provide. I am reasonably familiar with the material particularly the interpretation of the current “crisis” from an Austrian economics perspective which provides in my opinion a clear rationale behind the last boom and the unfolding bust which could lead to the second great depression.

Was in Korea last month during the week when the stock markets really started to cliff dive and where I delivered a keynote about logistics and Asian ports. Was telling the audience that their export-oriented paradigm was pushed as far as (and likely beyond) it was possible; an export-oriented strategy requires and import-oriented counterpart. Well, this counterpart is now broke and defaulting. This created a chill because the great exporters, namely Korea / China / Japan all have the same strategy and assume that imbalances are normal and enduring. As you said, this decoupling thesis will face a blunt reality.

My bubble graph is now used for oil prices:
Where next for oil price speculation

Very few thought that money markets, and such basic cornerstones such as the letter of credit and trade finance business, could seize-up as quickly and completely as they have. Most policy makers were likely only dimly aware of these markets existence until they stopped working and started causing wider problems. It is very hard to regulate, supervise and legislate markets that lawmakers themselves barely understand much less orchestrate a full, painless recovery. I think most of their actions will either fall under the category of too little, too late, or have unintended consequences possibly sowing the seeds of the next financial crisis.

I believe for this reason that we may be looking at a long L-shaped recovery as deleveraging takes place. If asset prices are not allowed to fall to their true economic value then the results will be (hyper)inflationary in the long-run...

I believe there will be inflation in the long run.
There is NO such thing as a free Lunch.
By hook or crook everything must be *paid* for.
Government seems hell bent trying to keep asset prices over-inflated by using what's the word? ---> "Liquidity Injections".
A $Trillion here another there and all this extra money starts to add up!
Much like a lunch these liquidity Injections must be *paid* for.
I don't hear too many politicians promoting raising taxes or cutting spending so I guess this will be paid fur using --> inflation

.

What is the chances of the U.S. government and congress raising taxes and cutting expenses ?

.

I remember back in the old days:
1) conservatives would accuse the Democrats for trying to increase spending
2) while the liberals blamed the Republicans for trying to cut taxes

Times have changed indeed.
The Republicans got liberal with their spending and the Democrats got conservative with their tax plan.

2009 Outlook: Pricing supply destruction

From demand destruction to supply destruction

In just five months, the commodity markets went from needing to price demand destruction to needing to price supply destruction. Evidence continues to mount that the collapse in autumn demand was not only a transient impact of the credit paralysis, exacerbated by US hurricanes, as we had previously believed, but instead a prelude to the wider damage that the sharp deterioration in credit conditions has inflicted on economic activity around the world. In many cases, this sharply weaker demand environment has temporarily seen demand levels fall far below constrained-supply levels to the extent that the large surpluses will likely need to be contained through production shut-ins motivated by sharp declines in spot prices; in other words, supply destruction.

It's all about spot prices in 2009

We have long held the view that spot prices resolve market surpluses and long-dated prices resolve long-term shortages. Accordingly, following years of focus on long-dated prices to address long-term supply shortages, the new need to resolve large surpluses suggests spot price movements will dominate
commodity price action in 2009. While this suggests near-term downward pressure on spot prices, the supply cuts and ensuing damage to long-term production potential due to a collapse in capex, sets the stage for a strong recovery in 2010.

To some the six-year bull run in commodities is definitely over, but depressed markets and deep cuts in output may yet set the stage for another bubble.

When that will be is uncertain given the crisis engulfing financial markets, but many investors take the view a significant recovery could be at least two years away.

Before then, many producers of grains, oil and industrial metals will have cut output or gone out of business because the prices they can charge for their products have fallen too far.

"Bubbles have happened in the past and they will happen again," said Ian Morley, a director at fund manager Quantum.

"It's not just hot money, but actually mass self-delusion by people in the market, including the so-called experts."

Breaking the link with stocks

Euro/dollar has risen sharply just recently and, most significantly, has shaken off the weakness in stocks. If this continues the euro could push on to much better levels than the 1.30-1.35 target range that we have talked about. However, we doubt that any breakdown in the correlation between euro/dollar and stocks will last. For this reason, amongst others, we think that euro/dollar will
slide again in the new year towards the 1.20 level.

The fall in euro/dollar since August has occurred alongside a slump in stocks. The correlation between the two has grown over this period as figure 1 shows. This is hardly surprising as dollar strength has been associated with the global de-leveraging and risk reduction process and one aspect of this has been equity sales. This might have made us think that as long as stocks continue to fall, euro/dollar will fall as well. However, this process has been interrupted in the last week, or so. The correlation has started to come back down, meaning that falls in stocks have been less inclined to occur alongside weakness in euro/dollar. Figure 1 plots the log normal 1 month correlation of the daily changes in
euro/dollar and the S&P 500. The correlation has fallen from around 0.75 a few weeks ago to below 0.50 and we suspect that it may fall further in the near term.

Does this mean that euro/dollar is leaving the travails of the stock market behind? We are not so sure. We mentioned a few weeks ago that euro/dollar can be seasonally strong in December. This strength does not seem to last into the new year and we think it will be the same this time around. With this in mind, we don’t think it is worth getting too excited about the slide in the correlation that we have seen just recently. For the euro to rally on a longer-term and meaningful basis we think that risk-averse investors have to start dipping their toes back into the water. This is clearly not happening yet and we are not hopeful that it will happen in the early months of 2009.

It is clearly possible that a turnaround in the currency market leads to greater risk taking and hence a better performance in assets like stocks, commodities etc. But clearly this seems unlikely based on recent events, where the slide in the dollar singularly failed to help stocks very much. Hence we have to remain somewhat sceptical that dollar weakness holds the key to asset price revival. What’s more, we think that the yen is the key currency right now, as regards risk measurement, not euro/dollar. When the yen starts to weaken consistently the global investment environment might start to look up. But, in our view, a sustainable and significant upturn in dollar/yen is much further away than a similarly sustainable rally in euro/dollar.

Spot price weakness likely to extend to long-dated prices

Dim demand outlook underscores risks to near-term prices

Oil prices declined sharply in the past week as a long list of exceptionally weak economic indicators underscored the severity of the economic downturn, further dimming the outlook for economic growth and commodity demand heading into 2009. We believe that should the sharp deterioration in demand continue, spot prices will likely remain under significant pressure and may have to
decline further to induce a reduction in supply. While we continue to closely monitor the severity of the demand declines, especially outside the United States, we believe that the risk to our very near-term price target of $50/bbl is skewed to the downside.

Pressure on spot-prices likely to extend to back-end

While the long-term outlook for energy prices is ever-more supported by the damage that possible prolonged weakness in oil prices may inflict on industry investments, the outlook for long-dated oil prices in the next few months is much less constructive. We believe that further downward pressure on spot prices may soon extend to long-dated oil prices following the typical pattern
in a downturn cycle, where extreme levels of contango like the current one, are followed by a back-end sell-off. As a consequence, we recommend a short position in the December 2011 WTI contract.

Oil market still fundamentally vulnerable to booms and busts

We believe that the exceptional fluctuations in oil prices during the past year are largely fundamentally driven and will likely continue to characterize the oil sector in the medium to longer term as a highly inelastic supply curve will continue to exacerbate the price impact of even moderate changes in demand. Further, a potential paralysis in industry investment underscores the risk of a marked price rebound when demand stabilizes in the medium term.

Bamboozled
The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.