This from Money Morning:

If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.

For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.

The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.

Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.

In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.

Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.

This will cause a reordering of the economic pecking order in the emerging markets.

From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well. In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.

Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.

In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.

Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.

In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.

For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally. In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:

• The iShares MSCI Brazil Index (NYSE:EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
• The iShares MSCI Chile investable index (NYSE:ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows.
• The iShares FTSE/Xinhua China 25 Index (NYSE:FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
• The iShares MSCI Taiwan Index (NYSE:EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
• The iShares MSCI Singapore Index (NYSE:EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.

Source: The Five Most Promising Emerging Markets ETFs for 2009

This from Money Morning:

Although ABB Ltd. (ADR:ABB) has been around for 120 years, it’s one of those rare companies that’s kept current with the times. It continues to do so and those efforts are generating tangible results.

Indeed, as Money Morning noted in its July 7 overview of ABB, the Zurich-based industrial giant is a virtual lock to benefit from the many billions in stimulus money governments around the globe will be directing into such infrastructure-related areas as highway, construction and power-generation.

These promising opportunities remain.  In fact – with the $586 billion stimulus China unveiled in early November, and the $825 billion stimulus plan that President-elect Barack Obama is kicking around, ABB’s growth opportunities have probably actually been enhanced, because infrastructure projects and job-creation are at the core of both packages.

In late October, ABB reported strong earnings for its third quarter, beating analysts’ estimates, while reaffirming its strong growth guidance for the firm’s still-to-be-reported fourth-quarter results.

In its third-quarter report, for instance, ABB reported strong (23%) year-over-year revenue growth, as well as a hefty increase in operating-profit margins (as measured by EBIT, or earnings before interest and taxes) to a healthy 14.5%.

So why are we revisiting our earlier report? What’s changed since we last looked at ABB? No surprise here: It’s the increasing uncertainty over the timing of these opportunities, given the ongoing – and, at times, escalating – global financial crisis. ABB took special note of this in the management report that accompanied its third-quarter financial statement.

“It’s too early to say how the recent financial-market turmoil will impact our markets in the short term, but our operational strength and flexibility, leading technology, competitive cost base and solid balance sheet put us in a good position to meet a tougher market. We are on target to deliver on our 2008 growth guidance,” ABB said in a statement that day.

After I published my cautious “Buy” recommendation, ABB shares rallied about 4%, a move that peaked near the end of July – which is right about the time that the Lehman Brothers Holdings Inc. (LEHMQ) saga began exerting pressure on the stock market. That saga – which culminated with the brokerage firm’s Sept. 15 bankruptcy filing – precipitated an entire chain of events, which included the rescue of insurer American International Group Inc. (AIG), and widespread de-leveraging in the hedge-fund sector, all of which we’ve covered closely here in Money Morning.

By October, this financial collapse had evolved into a credit squeeze that paralyzed the world’s key economies – including the United States – in October. As the U.S. financial system ground to a halt, and as the effects reverberated across the world, growth projections for almost every country were revised downward and international-bank financing all but disappeared.  Financing is a key issue in long-term infrastructure projects, since many of those big-ticket jobs could get delayed if financing is not readily available.

Thus, the financial crisis, has affected ABB’s stock price, both because of the forced de-leveraging and because of the downward revisions to estimated earnings per share. The stock came down from about $27 to a double-bottom low of $10 in October and November, and then rallied 50% to close the year at $15.01.

So what’s next for ABB’s shares?

For starters, the company is seeing a slowdown in large contracts: “Large project orders declined significantly, reflecting in part a comparison with a very strong quarter a year ago,” ABB stated when it reported its third-quarter results. “In addition, customers’ decisions on a number of industrial and infrastructure investments have been delayed as a result of the recent market uncertainty.”

ABB will be reporting its fourth quarter results on Feb. 12.  In late December, when it set the date for that report, ABB announced it would be taking a fourth-quarter provision of $850 million for anti-competitive price-fixing, for a legal provision for suspicious payments in the United States, as well as for a tax dispute, restructuring charges and asset impairment.  At the same time, however, the company announced it has found more than $1 billion in cost savings. That latter revelation is consistent with expected continued margin improvements, a conclusion reached in our earlier “Buy, Sell or Hold” column.

Although some issues of concern have arisen, there are a number of mitigating factors. These positive factors might even turn the story completely around in short order and will definitely be a huge plus in years to come.

As the company stated above, ABB has a number of very strong positives working in its favor. Sales in emerging economies outpaced sales in advanced economies for the first time in the company’s history in 2008. The afore-mentioned $586 billion China stimulus is heavily focused on infrastructure projects, as well as consumer spending (For an excellent overview of the overall investment opportunities China presents, take a look at my colleague Don Miller’s recent “Money Morning Outlook 2009 Series” installment on China. To read that report, which is free of charge, please click here).

But this infrastructure theme is not limited only to China. It’s a common threat that runs through virtually all the stimulus plans announced by countries all around the world in recent months. Even President-elect Barack Obama, in unveiling his own stimulus plan, made it clear that infrastructure will be a central component of his job-creating stimulus plan. One key goal: The modernization of the aging-and-inefficient U.S. energy grid.

Europe’s infrastructure is likewise old and in dire need of a major makeover. And emerging economies such as India, Brazil and Chile will continue to use their new-found wealth to stimulate their economies by staying on course with their ambitious infrastructure plans.

There’s an important point to understand here. Anytime major infrastructure investments are planned, investors can be assured that major investments in power-generation and power-transmission will be a central element of the billions in economic infusions. It has to be that way. You see, investments in power generation (and transmission) have a direct correlation with gross domestic product (GDP) growth. What’s more, as much as 90% of the world’s growth this year will come from emerging economies around the world – markets that are already driving sales for ABB.

For example, Chile’s stabilization fund has reached some $24 billion dollars, or 14% of GDP.  This type of savings by countries that pursued sound economic policies during healthy periods is now enabling those same countries to mitigate the effects of the worldwide financial crisis, even as they continue to grow.

There are relatively few emerging markets to totally steer clear of, although Argentina is certainly one to be avoided.

In sum, while the financial disruptions have slowed down the pace of infrastructure spending, stimulus packages are keeping those projects from disappearing completely – and are perhaps even serving to stretch them out.

ABB may be one of the few companies positioned to benefit from all these trends. The company has a bullet-proof balance sheet, strong margins and solid cash flow. These strengths will mitigate the fallout from the financial crisis and over the long haul will keep propelling this giant to higher profits.  The market has already discounted the slowdown, but has not discounted the cost-cutting efforts, whose details have been sketchy so far.  We continue to be very upbeat about ABB’s prospects and will look at any market weakness in the year’s first half as a buying opportunity.

Action to take:  Buy shares of ABB Ltd. (ADR: ABB). The stock has been buoyed in anticipation of the so-called “January Effect,” although the U.S. stock market has badly misbehaved since then.

Given the uncertainty, if you haven’t already established a position in ABB shares – as I urged in my prior column – then I would split my purchases so that they are made before and after the mid-February earnings report. But I would not “chase” it, and I would save some cash in order to possibly add the last 20% towards the end of the first quarter, as visibility about the U.S. and Chinese infrastructure plans improves, and as the company’s legal hassles become more clear.

Source: Buy, Sell or Hold: A New Look at ABB Spotlights a Company That’s Poised to Benefit From Global Bailout Plans

An estimated 600,000 migrant workers have left China’s southern Guangdong Province due to unemployment in 2008, the China Daily said.

Most of these people are migrant workers who left their farms for higher paying jobs in factories. Now, Guangdong Province Vice Governor Huang Yunlong says that the financial crisis has brought Guangdong “the most difficult year after the 1998 Asian financial crisis,” as he was quoted in China Daily.

Notably, Guangdong has been at the forefront of China’s economic reform. Since 1978, its annual GDP has surged by an average of 13.4%, which is 3.5 percentage points higher than the nation’s average. The province now has more than 996,900 registered companies.

But just as the province became the crown jewel of economic reform, it could quickly turn into a hotbed of labor riots. If so, the unrest could accelerate the trend of manufacturers moving to lower cost providers such as Thailand, Vietnam and Cambodia – further undermining China’s ability to rebound.

Only a few days ago, Reuters reported that China could face “surging protests and riots in 2009 as rising unemployment stokes discontent” after an article appeared in the state-run  Outlook Magazine, issued by the official Xinhua news agency.

This could be the tacit message from Beijing that it is bracing for major unemployment riots as tensions rise over diminishing jobs and pay checks.

The riots could result from a culture clash as seven million freshly graduated college students vie for factory jobs with an estimated 10 million rural migrant workers.

As we have seen in the past, China’s irons fist and systematic bribery have contributed to a sense of stability that has attracted one of the high rates of foreign direct investment in the world. This valuable façade could easily crumble in the wake of a widespread insurrection by the millions of unemployed.

So while investors who like China survey the landscape through the lens of the global recession, they should also be ready for a whack to their portfolio from the angry masses.

Where trade flourishes, business is good. But trade does not always flourish. The linked forces of globalization move in fits and starts.

The authors of Power and Plenty, a new book on trade over the last thousand years, tell us as much. “If anything,” they write, “history suggests that globalization is a fragile and easily reversible process.”

One of the looming threats in 2009 is the reversal in trade flows and increasing barriers to trade.

For the first time since 1982, The World Bank predicts global trade volumes will shrink in 2009. Undoubtedly, global trade enjoyed a boom over the last two decades or so. The global slump, though, is taking a bite out of that happy ride. Already, through November, exports from China, Taiwan, Chile and South Korea plunged by 20% or more.

The falloff in trade is worrisome enough as a globe-trotting investor. In the last several years, companies with operations overseas did much better than those confined to North America. In 2008, though, that wasn’t true. According to Bespoke Investment Group, stocks of companies that booked more than 50% of their revenues abroad fell 46% on average in 2008, versus a drop of 38% for those with no international revenue.

But there are signs that things could get much worse. Because like tea leaves steeping in a pot of hot water, the longer the economic slump persists, the more likely political trouble is to brew. The rise of barriers to trade is a particularly bitter brew of political trouble.

Already, a number of countries have taken actions to close their markets or protect domestic industry. Consider:

- Indonesia – new restrictions on over 500 goods as well as new fees for imports
- Russia – new tariffs on imported cars, poultry and pork
- France – a new state fund to protect French companies from foreign takeovers
- Argentina and Brazil – new tariffs on imported wine, leather goods, peaches and more
- India – a new 20% duty on imported soybean oils.

And then there is the U.S. bailout of the automakers, seen as an unfair subsidy by foreign competitors. This is only a partial list involving some of the bigger economies. However you view these moves politically, there is a good reason we should keep an eye on these things: They will affect how you invest.

For example, Russia is Europe’s largest car market. But now there is a tax on foreign cars of as much as 35%. Moscow wants to protect its automakers. The Russian people are poorer because of it. But as an investor, your favorite automaker, which may have had a nice business selling cars in Russia, may now find it tough going.

Moscow also put high imports on poultry and pork. Russia is the largest market for U.S. poultry. If you own a chicken producer, this is not good news. Your potential profits in a big foreign market are cut, and such tariffs could result in excess poultry staying in the U.S., leading to falling prices and lower profits at home.

All of these kinds of moves tend to happen when economies weaken. They can also bring about nasty trade wars.

In 1930, America passed the Smoot-Hawley Tariff Act. It raised tariffs on a number of imported goods. As the authors of Power and Plenty contend: “It triggered a wave of tariff increases.” By 1931, “average tariffs on foodstuffs had risen 53% in France, 59.5% in Austria, 66% in Italy, 75% in Yugoslavia, more than 80% in Czechoslovakia, Germany, Romania and Spain and to more than 100% in Bulgaria, Finland and Poland.”

These were hard to unwind. It took decades to reverse these anti-trade policies. They certainly didn’t help resolve the Great Depression.

I don’t think it is a coincidence that global trade expanded nearly fourfold since 1990, during a time when the average tariff fell from 26% to 8.8% by 2007.

A reversal of that trend spells bad things for investors. So far, we’re OK. Most of our companies sell goods that other countries can’t get enough of – things like fertilizers, road-building machines and power equipment. In many foreign countries, there is little domestic supply. China, for instance, it is trying to keep fertilizers in, not out. In fact, the Chinese have made it easier to import goods such as potash.

Still, it’s something to watch.

Source: Globalization Halt!

“What an awful year. And 2009 doesn’t look like it’s going to be any better.”

Our neighbor, Pierre, was describing the state of the agricultural industry in Europe…and, indirectly, why he couldn’t pay the rent. He leases some land from us at a price of about $150 per acre. He’s now far behind on his rent payments. Elizabeth had asked for a meeting to try to collect. Your editor sat off to the side, listening.

“Of course, I’d like to pay,” Pierre explained. “And I’m sorry I’m so far behind. But this is just a terrible time for us. I have to feed the cows. That’s the first priority. I have to feed them…and buy medicines and fertilizers…even though nobody is buying them. The meter turns over pretty fast – even though I’m not going anywhere. I’m not a meat producer. I’m a breeder. We’ve been breeding Limousine cattle here for more than a hundred years. These cows can trace their ancestry better than most people. But when farm prices fall, people stop investing in the quality of their herds.

“Normally, I sell about 20 top breeding bulls per year. This year, I’ve sold 5. There are many people who want to buy, but they don’t have any money. They don’t have any money because they can’t get good prices for their cows…and can’t get credit from the bank. So they don’t buy my bulls…so I can’t pay you.”

“Well, the publishing business is no picnic either,” Elizabeth replied. “Your customers don’t have any money…you don’t have any money…and now I don’t have any money either,” she added with a laugh.

We wondered how many conversations like this were taking place all over the world. The world’s money machine has broken down.

Yesterday, the Dow fell 31 points. Oil rose to $40. The dollar held steady at $1.40 to the euro. Gold rose $4 – giving it a nice gain of about 6% for the year.

Everything else is losing money. This will go down in history as the worst year for investors of all time. Oil, copper, and most financial stocks are down 2/3 from their highs. Stock markets generally are down 40% to 60% all over the world. Housing markets are down in most places too – with prices in Britain and America off about 20%.

Bloomberg reports that holiday sales were so bad it will “force store closings, bankruptcies.”

And USA Today reports that global trade is expected to shrink by 2% in ‘09, after rising at nearly 10% per year for the last decade. Smoot? Hawley? Who needs those knuckleheads? Global trade is collapsing without trade barriers. Because Americans aren’t buying.

And here, we can trace the breakdown in the entire world money machine…from the pistons that don’t fire to the crankshaft that doesn’t turn. Like the farming business in France, one man doesn’t have any money…so the next man is a little short…and so on all up and down the line.

And here, for the benefit of new readers, we offer a simple schema of the machinery of the Bubble Epoch: Americans bought stuff from the Chinese. The Chinese printed up yuan to buy dollars from Chinese merchants. Then, the nice Chinese financial authorities lent the money back to America. What else could they do with it?

So, you see, everyone had plenty of money. And the more Americans bought…the more money they had to spend. And the more they spent, the more the Chinese had to lend!

Of course, it didn’t take a genius to see that a system that depended on people buying things they didn’t need with money they didn’t really have couldn’t last long. In the event, it lasted longer than we expected. But still, not forever.

It broke down under the strain of its own absurdity.

But wait a minute. How come all of a sudden Americans don’t have any money? Won’t anyone lend any money to them? And why not?

Oh dear reader, throw us a bone!

The financial authorities are clumsily turning screws and tightening valves. They think they can fix the machine by simply getting more credit into consumers’ hands. But this machine is not that simple. In fact, it’s not a machine at all…but a living, organic thing. It has emotions as well as a brain. It is capable of self-delusion, deceit, corruption, wishful thinking, and extravagance.

Investors, businessmen, householders and consumers are all now reacting to the madness of the Bubble Epoch. They lent, spent, speculated and borrowed wildly – as if there were no tomorrow. Now, every day is tomorrow. And they’re afraid. After the sub-prime bubble popped, all the bubble delusions began to fall from their eyes. While once they looked through the glass rosily, now they look darkly:

Wall Street was not making them rich, after all – it was ripping them off! Houses didn’t go up forever – sometimes they went down! Things didn’t get better and better all the time; often, they got worse! Prominent analysts and economists often have no idea what they’re talking about! Alan Greenspan wasn’t such a genius after all!

Suddenly, they looked at their balance sheets and realized that they were in danger. Investors have lost half their money in 2008. Homeowners have lost about $4 trillion in America alone. They read the news. They talk. They know the whole thing is imploding. How are they going to pay their bills? How are they going to keep up their standards of living? How are they going to be able to retire?

Instinctively, reflexively, they cut back their spending. And when the pistons stop pumping, the drive shaft stops spinning, and the wheels stop turning. Americans don’t go to the stores, the stores don’t order more stuff, the ships don’t bring more stuff, the Chinese merchants don’t make money, the Chinese central bank doesn’t have to buy it from them, and then the Chinese have less money to lend back to Americans – who aren’t borrowing in any case.

The machine is busted. It can’t be fixed.

*** “The Undeniable Shift to Keynes,” begins a piece in the Financial Times.

Why the shift? Because Friedman has let us down. The Fed kept the supply of money and credit fairly constant, just as it was supposed to. Then, when credit got tight, it cut rates…all the way down to zero, just as it was supposed to.

Did that solve the problem? Nope. Because the economy is not a simple machine. It’s a complex, organic system. It cannot be controlled. It can only be survived. Tolerated. Enjoyed.

Let’s imagine that the Fed’s key lending rate was zero all year long. Even so, if you’d borrowed money directly from the Fed and used it to buy stocks, your rate of return would be about MINUS 50%. Or suppose you bought a house with a zero-interest mortgage? Your rate of return would be about MINUS 20%. Or, it could have been worse. You might have invested your money with Bernie Madoff, in which case your rate of return would be MINUS 100%.

What business…what investment…what durable consumer item is worth borrowing for under those conditions? Not many.

Besides, once the Fed gives away money at zero interest, what more can it do? Well, it still has some tricks up its sleeve, but its main monetary tool is worthless. It can’t cut rates further.

So, it turns to another great economist – Keynes. Instead of colluding to fix the price of money, Keynes said governments should make up for the lack of private spending with public spending. That is, instead of allowing consumers to use their resources as they wished, politicians should divert resources to their own pet projects. In its idealized form, if the private sector found no use for a working man, for example, the feds should put him to work on some socially-useful project – such as building a bridge or picking up trash.

Of course, if there are idle hands in an economy it’s because the feds have already distorted it. Typically, various government rules and safety nets make it difficult to adjust the price of labor downwards. So, when prices fall, labor rates become disproportionately high. Who’s going to pay a man $25 to make a gadget that sells for $15? No one. That is what causes unemployment. But rather than allow labor prices to fall, Keynes came up with a trick. Government should spend money, thus causing inflation. The rising prices will make labor seem relatively affordable again.

But like all the tricks and quick-fixes in economics, Keynesianism causes more problems than it solves. Governments rarely have any genuine savings. So, in order to spend, they either have to take money away from other spenders …or print it up. If they take it from other uses, the net gain, in theory, is zero. In practice, it is much less than zero, since most government spending is wasted. If it prints up the money, on the other hand, the inflationary effect is much greater…and ultimately ruinous. As we shall see…as the reckoning continues.

Source: The Breakdown of the World Money Machine

• With Morgan Stanley’s (MS) $2.2 billion loss in the third quarter, the carnage from the credit crisis passed the $1 trillion mark. About 67% of that came from U.S. financial firms, and about 30% from European firms, Bloomberg reported.

• A day after the U.S. Federal Reserve’s deepest rate cut in history, the dollar fell hit fresh lows against other currencies. It fell toward a 13-year low against the yen and a two-and-a-half-month low against the euro, Reuters reported.

• Gold and silver prices rallied yesterday (Wednesday) as the dollar declined. February gold futures climbed 4% to $872.90, while silver for March delivery climbed 7% to $11.45 an ounce on Globex, MarketWatch reported.

• A strengthening yen and plummeting car sales forced Honda Motor Co. (ADR: HMC) to slash its full-year profit forecast by 62%. Japan’s second-largest automaker may also post its first half-year loss in 11 years, Bloomberg reported.

• Trying to cut costs, troubled cell-phone maker Motorola Inc. (MOT) will suspend 401(k) contributions to worker retirement plans, freeze its pension plan, stop some raises and skim the salaries of two top executives.  “It’s a small step in the right direction, but it’s not going to save them either,” Nomura Securities technology specialist Richard Windsor told Reuters. “If you look at the degree the market has deteriorated since they last spoke to the Street, you could conclude that they will need more aggressive actions.”

• Europe auto parts supplier Valeo SA said it will cut 5,000 jobs, 9.3% of its workforce, in face of slowing demand for cars, Bloomberg reported. “For 2009, Valeo anticipates no improvement in production levels compared with the fourth quarter of 2008,” the company said in a statement.

• British retailer Woolworths will close its doors Jan. 5, leaving 27,000 people without jobs unless it finds a buyer. The 99-year-old retail company will close its 807 stores in tranches of 200 starting Dec. 27, Reuters reported.

• Online brokerage E-Trade Financial Corp. (ETFC) said it added a net of about 26,000 new accounts in November. However, total customer assets fell 42% since November 2007, and 8% from October, the Associated Press reported.

Global Investing Roundups Thursday, December 18th, 2008

The following is an excerpt from Bill Bonner and James Davidson’s crisis report, How to Survive and Prosper in the Coming Global Depression.

To read the full report, simply enter your e-mail address below. You’ll also begin receiving critical updates to the report via e-mail.

Contrarian Profits readers are probably familiar will Bill’s commentary from his Daily Reckoning column. But here is some information about James Davidson:

Davidson is a self-made multi-millionaire, venture capitalist and best-selling author.

His books include Blood in the Streets, Financial Reckoning Day and The Sovereign Individual.

As an author and editor of private financial advisory service Strategic Investment, Davidson has made a number of bull’s-eye crisis predictions.

He is the founder and chairman of the National Tax Payers Union, the largest and oldest grassroots taxpayer organization in US.

His forecasts and his war against taxes and deficits have earned him frequent invitations on programs such as Good Morning America, The Tonight Show and MacNeil-Lehrer.

Read on…

This Is a ‘Credit Cycle’ Bust

One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous.

We turn here to the words of American astronomer Carl Sagan because they so aptly describe our current economic predicament.

Americans have come to believe the particular bamboozle that we can get rich by spending…that we can get something for nothing.

As Bill put it in Financial Day of Reckoning, “Americans can no more retreat from this dream than Napoleon could have brought his troops back from Germany, Italy and Spain and renounced his empire.”

And here’s where our story gets really interesting.

Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.

- John Stuart Mill

Because what becomes clear is that this is no ordinary collapse.

Let us explain…

When left to themselves, the markets are natural phenomena. There is a wonderful simplicity about them.

Failure follows success. What goes up eventually comes down. Like a tree, they cannot continue to grow forever.

We can easily illustrate this by describing the pattern of pig farmers.

When the price of pigs rises, pig farmers naturally raise new pigs to increase production. About 18 months later, these new creatures arrive on the market. This increase in supply causes prices to fall. Farmers decide to cut back, which caused prices to rise again.

This is nothing more than the cyclical boom-and-bust cycle that defined the US economy from the end of World War II to 2001.

Then something changed radically. The Fed, under eager-to-please chairman Alan Greenspan, decided it could avoid the bust part of the cycle altogether.

The result is a different beast from your garden-variety downturn. You get a “credit cycle” bust instead.

This is exactly what we are experiencing now. And it’s more like the post-bubble depression of the 1930s than the downturn of 1973 to 1974 or 1981 to 1982…

‘Catastrophic Acceleration’ of Losses

Here’s the big worry.

The severity of this kind of bust depends on the magnitude of the bubble that preceded it. And the bubble that came before this bust was the biggest ever in history.

In fact, it wasn’t really a bubble at all. It was a “hyper-bubble.”

Now this hyper-bubble has popped, and the losses are catastrophic.

Billionaire investor George Soros recently explained just how dangerous the unwinding of these kinds of bubbles can be.

The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp.

The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage — borrowing for investment purposes.

At the peak of the boom both the value of the collateral and the degree of leverage reach a peak.

When the price trend is reversed, participants are vulnerable to margin calls and, as we’ve seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.

Of course, all this was inevitable.

Bill repeatedly warned the more than half a million subscribers of his newsletter, The Daily Reckoning.

No doubt, many got tired of hearing his warnings. But all he was doing was pointing out the obvious.

******************************************************************************************************

Audio Commentary from Resource Investor Rick Rule

Click to play with Media Player

Key points summary:

* The crisis is not limited to mortgages… Financial institutions are over leveraged
* There is a wipe out of shareholder equity in financial services
* Financial service companies don’t know what their derivatives are worth
* They are keeping liquidity for themselves because they don’t know value of derivatives of others banks
* The US is the leading edge of a worldwide trend of over-leveraged financial services
* An extreme example of over-leverage is Iceland

Rick Rule is chairman of Global Resource Investments. He has dedicated his life to all aspects of the natural resource industry. His contacts and knowledge of this market are unmatched.

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A Monster of Deleveraging

Instead of getting a typical bear market in 2001, we now face a monster of deleveraging as the biggest credit boom in history unwinds.

Deleveraging is simply the cutting back on the amount of money borrowed compared to equity.

In the case of this crisis, financial institutions sell off assets to recoup losses inflicted on their balance sheets by toxic mortgage-related securities.

These forced sales push down asset prices, hurting the balance sheets of other investors, forcing more asset sales and so on.

Nothing can stop this process. It’s a necessary cure for the credit bubble that Greenspan puffed up.

The problem is it is devastating the wider economy.

As The Economist magazine puts it, “What hurts finance affects the rest of the economy in spades.”

Because of leverage, a shortfall of bank capital of around $100 billion may reduce the potential supply of credit by $1 trillion.

This assumes banking system leveraging of around ten times…the geniuses running Lehman Brothers leveraged 25 times to equity.

But let’s assume that leverage of ten times to equity is about right.

So far, financial institutions have admitted to about $600 billion in credit-related losses and writedowns (net of re-capitalization via new equity issues).

This means cuts of $4 to $6 trillion to the potential supply of credit.

This, in turn, leads to higher cost and lower availability of credit to the real economy. And it forces consumers to reduce debt and consumption, most of which was based on borrowing in the first place.

This is bad enough. But it doesn’t end there…

So-called “negative feedback loops” mean the reductions in consumer spending and investment further hurt the economy. This puts further financial stress on corporations and individuals and triggers more debt defaults and more losses for the financial system. These then reduce lending capacity.

And so on…

Like a giant forest fire, the deleveraging process can’t be extinguished.

And although the government believes it can put the fire out with bonehead bailouts, at the very best all it can do is create firebreaks that limit the damage until the fire burns itself out.

Right now, the bailouts are stopping companies such AIG and Citigroup from going under. But banks are still refusing to lend to each other despite all the money the government is giving them.

The bottom line?

This massive unwinding is nowhere near finished.

Remember, Wall Street has only admitted to a small fraction of its mortgage-related losses and writedowns.

And the very, very bad news is total losses are estimated to clock in at $2.5 to $3 trillion…

PS. To read the rest of this report, simply enter your e-mail address below. You’ll also begin receiving critical updates to the report via e-mail.

Here are four thoughts to trip over as we round yet another sharp corner on the path to economic recovery.

1) The perfect world arrived last summer.

Deregulated US banking, housing and financial sectors led to a world of no credit.

This is the era for which a vocal financial publishing crowd has been begging. No regulations. No credit. No borrowing. No more extra debt.

So, how are you enjoying their world… is it the paradise as outlined in the millions of pages in books penned by our betters who sniffed because hoi pathetic polloi lived on credit?

Of course, you know we’re about to wreck this beautiful Eden with a big bite out of the borrowing apple.

Me, I can’t wait to realize Eve is naked.

And, I sure wish the publisher John Wiley and Sons was publicly traded, because its presses are going to be cranking overtime.

2) As you’ll see, we don’t have this problem here at IDE, but here’s a huge economic truth, one that’s created a lot of hypocrisy lately.

If you buy a corporate bond, you are a creditor. You have lent a company your money – commercial paper, secured debt, unsecured debt, senior debt and subordinated debt – you hope you’ll be repaid at a tasty profit.

That’s different from when you buy a stock – a share. In that case you buy a share of the company.

A bond must be repaid, usually at an agreed upon amount.

If the company goes bankrupt – defaults on its repayment to you – you get in line, somewhere near the back, and hope to get some of your money back, while most shareholders are S.O.O.L.

This is the world of credit.

What the hell is wrong with that?

Even better, today, we’re told that corporate bonds are one of the world’s safest investments. Here at IDE, Steve McDonald has, what I am told, a great bond trading program.

You should check it out because to heck with Polonius, I want to be the lender… as long as the return is high.

But, while hypocrisies are delicious, you need to be aware that if you buy bonds you will need to cut the crap when it comes to credit and borrowing rhetoric.

You buy a corporate bond… you tout corporate bonds… then you can’t strut around and complain about a credit-wrecked US economy.

That’s more than okay with me. I’d rather hear you talk about your fat profits than listen to complaints about that which is out of your control.

Ohhh, the prospect of sweet silence – quick, everyone go see Steve McDonald. The line starts here.

3) I do not care what the Debtors of Doom… or the Doomsters of Debt say… credit makes the world go round.

This is a centuries-old reality that somehow evaded a bunch of cranky two-century-ago Austrians.

They probably couldn’t get credit… thus, they couldn’t get hot chicks… thus they wanted everyone to spend cash to level the playing field when it came to chasing hot frauleins who swooned over bankers and barons and not pfennig-less economic geeks.

Honest, maybe there was no Federal Reserve, but credit is really old… the world revolved around it years before revolving credit.

Do you actually think Christopher Columbus put up his own cash to explore the New World?

4) While the Doomsters of Debt will choke on it, the indisputable truth is that credit will lead the globe out of its economic crisis.

You see, borrowing is good.

Next year will prove it.

During the past few months, we’ve seen some amazing – unprecedented – coordination between governments and central bankers that should pay off with some seriously revived growth. That’s all because virtually every country in the world will have low (and lowering) interest rates.

Under those circumstances, it is absolutely inconceivable that the combined power of global economic stimulus won’t work.

Sometime during the first four months of 2009, the creaky 2007-08 economies will be overwhelmed by an age-old force – cheap money and credit.

President Obama’s jobs program will start to take shape. He will force bankers to be bankers again and start lending all those government bailout dollars.

Low interest rates will heat up the housing market.

Homebuilders will crank things up a bit (hint: sometime in January or February take a good look at homebuilders’ stocks or a homebuilders’ ETF, then thank me around Christmas).

The stock market will heat up by March…

We’ll start blowing the bubble again… a huge one this time, because people will be in a race to make it all back.

Banking profits will start to soar and they’ll pay back Uncle Sam.

Homeowners will once again refinance to pay off other debt.

Suburbs and exurbs will expand farther from job centers.

The federal debt will be crazy.

People will be happy and employed.

Medicare and Social Security will still be a mess.

My generation will emulate its parents and steal from its children.

All will be right with the American world.

This is just the way it is now… a much larger scale of the way it’s always been… credit is one of the world’s oldest professions.

The seasons will go round and round… the Debtors of Doom will sell more “open-your-stupid-eyes” bad-news books…

The rest of us will dream of the trappings that make us look more upper class. We’ll pop beers, toss steaks on the grill and flinch at the thought of how close the end is.

Tell me different and I’ll tell you that you’re probably someone who enjoys it when bad things happened to good people.

But that’s not me, man. I not only know my place, I revel in it.

Fairways and greens, baby… and maybe a just hint of an illegal smile.

See you next week… seven days closer to full economic health.

Make Money, Not War
Andy

Source: Good Credit Cures A Bad Economy

“Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” said Zhou Xiaochuan, governor of the Chinese central bank. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.

“One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies,” Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. “This may actually help turn their relationship into a more equal partnership with less posturing on both sides.”

Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.

“International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis,” he said.

Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to “take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S.”

Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.

“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou said at a conference in Hong Kong. “My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?”

CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.

Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but “restructure the development model” and prepare “for a worst-case scenario,” the FT reported.

However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.

Source: China Blasts U.S. Economic Policy, Expresses Doubt in Financial System

The “experts” have forecast a -335K drop in jobs for November… But, your old Pfennig writer believes that this forecast is low. I think it will be closer to -375K… The reason I say that is the employment piece of the ISM report that printed the other day… The employment index of that report showed some real serious rot on the labor vine… I read a report last night, where an economist was attempting to show how the report should read -750K… As bad as -375K is, I don’t think the Bureau of Labor Statistics (BLS) would have anything to do with printing a -750K report!

The currencies rallied a bit yesterday, but settled down for a long winter’s nap in a tight range overnight ahead of the Jobs Jamboree data. The euro saw the bright side of 1.28 yesterday, but as I said, the range became tight overnight… You see no one wants to take a position on either side of the ledger ahead of this crucial labor report this morning. And the fact that Factory Orders in Germany dropped last month, isn’t helping the single unit this morning after yesterday’s rally.

OK, enough on that! Yesterday, I left you with the Bank of England (BOE) and the European Central Bank (ECB) meeting and us waiting for their rate announcements, which came about 1/2 hour after I hit the send button. The BOE cut 100 BPS (1%) from their rates, while the ECB opted for 75 BPS (3/4%)… I really do feel as though the BOE has taken a page from the U.S. and Japan’s book on how to deal with all this, and is on the road to zero percent rates. I don’t feel the ECB will go there… While they may go lower in the Eurozone, I don’t think ECB President Trichet, has any intention of following the “Japanese model”…

Trichet said something yesterday that made me believe that he won’t become Trichet-san… Trichet said that, “we mustn’t confuse Deflation with Dis-inflation” He went on to also say, “The ECB will NOT get trapped at rat levels too low”

So… We had Australia drop 100 BPS, New Zealand drop 150 BPS, Sweden drop 150 BPS, U.K. drop 100 BPS, and Eurozone drop 75 BPS all this week, and for the most part, none of these currencies got taken to the woodshed for debasing their currencies by such large margins… Normally, a 25 BPS rate cut can cause a currency some major problems… But nothing here… So… Why… Do… I… Think… This… Is… Happening…? Hmmmm… It’s probably a case of unconventional measures are seen as not working, so conventional ones have little chance. And… If you really get to the root of the credit crisis problem… It alls circles around the fact that the availability of credit not the cost of credit is the issue.

But that doesn’t stop these Central Bankers from slashing rates at an alarming pace, eh? I think these Central Bankers are quite aware of the fact that the markets’ focus has become so myopic on the Credit Crisis, that they could do a handstand on their desk while sticking out their tongue while announcing a rate cut, and the markets wouldn’t notice…

PIMCO (the world’s largest bond dealer) issued a report on pound sterling yesterday, that’s quite interesting… The writer, Myles Bradshaw, a money manager for PIMCO, said in a report yesterday, that, “if you were shorting the pound, now is the time to reduce those positions”… Hmmm… You see Mr. Bradshaw makes a strong / good point about how interest rates in the U.K. have been brought to levels not seen since Winston Churchill was around. And that may be enough to keep the U.K. economy from falling off a cliff…

Well, that goes against my earlier call that I believe the BOE will follow the Japanese model, and cut rates to near zero. I say this, because the U.K. has major problems folks, and I don’t think having rates at 1951 levels, has anything to do with how bad things will get here…

The China- America talks ended yesterday, with an agreement between the two giant countries to provide $20 Billion to fund trade and agreed to deep financial ties… However, the two couldn’t leave a meeting without needling the other… U.S. Treasury Sec. Paulson, urged China to continue to allow currency flexibility… And the Chinese told the U.S. to: “tackle your own problems, such as excessive consumption and debt” You can’t believe how that made me chuckle… Our leaders won’t talk about excessive consumption and debt, (I do, and have for years!) but the Chinese go right for the wound, that the U.S. tries to place a band-aid on… And they nailed it!

Did you see this news yesterday on the Fox news website… “Israel is reportedly drawing up plans to strike Iran’s nuclear facilities and is preparing to do so without U.S. backing.” Now… I’m not going to get into the what’s and so ons here… I merely mention this to point out something… After the news story hit the website, Swiss francs rallied strongly, which told me that it still holds the “flight to safety” badge… Unfortunately, though, Gold did not rally… Hmmm… Very disappointing…

OK, now that there was some denials of the story, the Swiss franc has given back it’s gains yesterday…

There was a story reported in the Wall Street Journal yesterday that certainly is a sign of the times, in my opinion… Here you go, and see if you get the same felling of this sign of the times that I did…

WSJ… “U.S. retailers reported some of the weakest sales figures in years for November, which included the Black Friday kickoff to the holiday shopping season.

Gap reported a 10% drop in same-store sales, while Macy’s fell 13% and Nordstrom dropped 16%. Target reported a 10% drop, worse than expected, though Black Friday sales were stronger than the rest of the month. But Wal-Mart topped estimates on increased store traffic and purchase size.”

I’ve had a lot of questions over the years about PPP… Well… PPP is Purchasing Power Parity, and is most well known in the Economist Magazine’s Big Mac Index, where the monitor the price of a Big Mac all over the world, with the idea that if a Big Mac is more expensive in Europe than it is in the U.S. the European currency is overvalued by the percentage of the Big Mac price difference. Well… You know, this is all good on paper, but you have to look at what’s going on in a country first… If for instance the wages of Europeans is on a whole higher than that of Americans, then their standard of life is “more expensive” and therefore the price increase in the Big Mac means nothing to me…

OK, so, now that I’ve gone through that exercise, it’s still a good thing to check PPP just to make certain things don’t get out of whack by too much of a margin… And in that light, my old Corp. FX guru, Ashish, sent me a note about PP yesterday, that showed the euro still overvalued VS the dollar, but by a far less amount than a few months ago. It showed the pound to be undervalued, along with the Swedish krone… Hmmm… Oh, well, none of these are too out of whack… And… As I told a crowd of people at one of the FX University Tours that I now use the Ipod index instead of the Big Mac index…

The lawmakers in Japan, have taken a page from the U.S. book and announced that they are looking at the possibility of allowing tax breaks on profits made overseas and brought back to Japan (repatriation)… You may recall that in 2005 the U.S. did this same thing, and really did a bang up job of propping up the dollar for that year… Should this law pass in Japan, it could very well spell a period of further yen strength. I’ll keep an eye on this…

The news from Canada just seems to get worse all the time, which has led to a large drop in the loonie in the past month. This morning, it was their version of the Jobs Jamboree, which showed a much larger than expected drop in jobs… -70K VS the -25K forecast… Take the Commodity prices collapse, the low interest rates, the parliament suspension possibility, and now a hickey on the economy with job losses, and you can see why the loonie has dropped by almost 6% since 11/21… UGH!

Speaking of Commodity prices… Our friend, Jim Rogers, was speaking again yesterday and made some great points regarding Commodity Prices… Here are a couple of quips from Jim Rogers… “Commodities will be the place to be if and when we come out of the downturn. The only thing where fundamentals are unimpaired are commodities. Farmers can’t get loans for fertilizer now. Nobody can get a loan for a zinc mine. So we are going to have some serious, serious supply problems before too much longer.”

And more importantly for some folks to know… Jim Rogers said that he, “hasn’t sold any commodities since the bull market began.”

We had the TV on the automakers pleas to lawmakers yesterday for bailout money… At one point it was really sad, as one of the Big 3 CEO’s, which by the way did NOT take private jets to D.C. this time as they did the last time, and really ticked some people off… This time they took hybrid cars) I think it was Ford’s CEO, was pleading his case, and the look on his face was so sad, it looked like he was saying, “please dad, can I have my allowance early, I’ve got this important date and she expects me to take her someplace nice”… Please dad? It was sad…

Someone in the news said that while everyone is ranting about the bailouts, it certainly seems to be a better course of action than to allow 100’s of thousands of autoworkers to lose their jobs… I guess he has a point there… But, who’s fault is this? Mine? Did I make awful choices the past 30 years regarding cars and how they were built, and what to build? I was telling Ty Keough the other day that I have never owned a Big 3 made car that didn’t have a major problem at one point… Transmission, engine, you name it I experience it, with all three! Maybe I was the exception, the black cloud if you will, but you can see how my view would be shaded here…

What? You didn’t think I was going to go to the Big Finish without talking about something controversial did you? HA!

So… Which way will the currencies go with a nasty Jobs Jamboree figure? Well, in the days before the Trading Theme was put into place… It would have meant “curtains” for the dollar… But with the Trading Theme allowing dollar strength the deeper, darker, and more dangerous the data gets, one would think that we would see more dollar strength, with a nasty Jobs Jamboree figure today.. We’ll have to go into the weekend on that note folks… A nasty Jobs Jamboree…

Currencies today 12/5/08: A$ .6420, kiwi .53, C$ .7755, euro 1.27, sterling 1.4685, Swiss .8250, ISK 261, rand 10.27, krone 7.2050, SEK 8.34, forint 209.90, zloty 3.06, koruna 20.3315, yen 92.10, baht 35.60, sing 1.5220, HKD 7.75, INR 49.60, China 6.8810, pesos 13.65, BRL 2.5380, dollar index 87.03, Oil $44.20, Silver $9.47, and Gold… $769.40

Source: It’s All About The Jobs Jamboree