Citigroup, America’s largest bank, is about to slash 10% of its roughly 65,000 workforce. That’s a whopping 6,500 former high-fliers who are going to wake up a a new jobless reality. “Some staff could be told today that their services will no longer be required,” says The Times.

A “new wave” of the credit crisis is now battering banks and lenders that steered clear of toxic subprime-related loans, says The Washington Post. Ordinary borrowers simply can’t pay back their loans thanks to the downturn in the US economy.

Billionaire speculator and head of Soros Fund Management says we’re facing the worst financial crisis since the Great Depression.

But many in the financial community are saying the worst is over. Why? Merryn Somerset Webb in Money Week says most fund managers are still in denial about the state of the market.

Merryn reckons you first need to believe in it to know how to invest…

How do you cope with a credit crunch? That’s the question I was asked to address in a talk to a group of Dutch pension fund managers earlier this week. The answer? First, you have to accept that it isn’t going away.

And this is where the problem seems to lie for much of the financial community – my reluctant audience included. For months now, we have had to put up with listening to men with important job titles telling us that the worst is over, and that we can “look across the valley” to the good times beyond the current gloom. But looking at the way this crisis is playing out, I’m pretty sure we won’t really be able to do that for some time to come.

In a recent note, James Montier of Société Générale reminds us of the stages of the average bubble. First comes a perfectly legitimate boom of some kind. Then comes the credit creation that makes it into a bubble. Next up is “euphoria” as “everyone starts to buy into the new era” as prices are seen as only ever rising. New valuation measures are introduced to justify absurd prices, and a “wave of over-optimism” means even the cleverest of people end up overestimating potential profits and underestimating risk. Sounds familiar doesn’t it?

Then the bad bit comes. First, “distress,” as the huge amount of leverage built up in the euphoria stage starts to be a problem and the market in question tanks. And finally “revulsion” – the stage where “investors are so scarred by the events in which they participated that they can no longer bring themselves to participate in the market at all”.

So where are we now? Well, we most certainly aren’t at revulsion. There are a few panicky voices out there. Witness the report out from analysts at RBS (NYSE:RBS) this week. It comes a little late to the table (after the market stripped of energy and mining is already down 30-odd per cent), but forecasts a “potentially very nasty August to October period” and notes that the housing/credit downturn will last “a long time”. Cash, says its author is “the key safe haven.” You can add to that the very public worries of George Soros – “we are now in a period of wealth destruction,” he says – plus a few other überbears.

But while they all make a lot of noise (and good headlines), there aren’t actually that many of them. Most ordinary fund managers are sticking with the echoes of their euphoria and lacing their strategies with copious quantities of hope. They think that equities are cheap and that the anti-crunch measures taken by the central banks over the last 10 months have pretty much done the trick.

I had a meeting with one manager recently who had a vast holding in Bradford & Bingley (BB) and said that he could see fabulous bargains emerging all over the UK market. B&B is clearly one of these would-be bargains, despite its exposure to the most obviously bad thing in the UK economy (buy-to-let), but he also pointed to Home Retail Group, owner of Argos, a company that looks cheap in price/earnings (p/e) terms.

I suspect he hasn’t a good year ahead of him. Equities only look cheap because most of the earnings forecasts are wrong. The ‘e’ bit of the p/e equation in the case of most retailers is probably more of a fantasy than a forecast – and, if you accept that collapsing house prices and falling real wages aren’t good for consumption, then it is likely to remain so.

Profit margins in the west have been at record highs for years. This looks to be just the time for them to revert to the mean. That implies a fall in company earnings in Europe of at least 20 per cent, say analysts at Morgan Stanley (MS).

Right now they are still forecast, for reasons I can’t begin to understand, to grow an average of over 10 per cent in Europe and 8 per cent in the UK. At the same time, the credit crunch is still very much with us. Try getting a mortgage, raising the limit on your credit card or borrowing money to start a new business if you aren’t convinced. There is also now no denying that the crunch is hitting real economies, nor that there are probably some very unhelpful rate rises ahead.

Both the Bank of England and the European Central Bank have made it clear that they haven’t gone soft on inflation, so with it looking increasingly entrenched everywhere from the UK to Argentina and Vietnam they are, as Hugh Hendry of Eclectica Asset Management puts it, looking more and more likely to “turn Austrian” (the Austrian school is pretty strict on inflation). Given the astonishing amount of debt in the system at the moment – both personal and corporate – that’s going to hurt. Mortgage debt alone, says Hendry, is more than 100 per cent of GDP. Look at all these elements and we seem to be more at the “distress” stage than at the end of the crunch, or indeed the bear market.

It’s verging on the impossible to predict the short-term movements of markets but it’s worth bearing in mind that a good rally doesn’t tell you a nasty bear market has ended. More often than not it’s just the bear keeping your hopes up, so it can have a good stamp on them a few months later.

Montier’s “road to revulsion” is littered with false hopes – just ask the Japanese, who in their grindingly awful bear market of the last 15-odd years have had to put up with several 40 per cent-plus rallies followed by similar mini-crashes.

The road can also take valuations down lower than anyone could consider reasonable and it can do so very slowly: the average duration of a real bear market, say Morgan Stanley analysts, is 14 years. If ours really started in 2000, that means there are six years to go.

So, returning to my opening question – how do you cope with the crunch? First you need to believe in it and then perhaps you need to make sure you have a lot more cash in your portfolio than you have shares in B&B and Argos.

Source: How to cope with the credit crunch

Traders focused instead on disruptions to Nigerian supply and heightened Middle East tensions — namely Iran’s threat of a “devastating” response to any attack on its nuclear sites by Israel.

On Friday, Pentagon officials said a large-scale Israeli military exercise in the eastern Mediterranean early this month may have been a dress rehearsal by Israeli forces for an attack on Iranian nuclear facilities.

Meanwhile, an oil summit in Jeddah in Saudi Arabia turned out to be something of a damp squib. The Saudis said they would produce more crude oil this year if the market needs it — pledged to add another 200,000 barrels a day in July to May’s 300,000 barrels-a-day increase.

“Mildy positive” is how one oil analyst put it…

Light, sweet crude for August delivery rose $1.42 at $136.78 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe.

“Bubble or not, oil prices have room to run higher,” says Merryn Somerset Webb in MoneyWeek magazine.

Oil is hogging the headlines again this morning, which is convenient. At near-$140 a barrel, the oil price is a good scapegoat for all our economic ills.

No wonder Gordon Brown hopped on a plane to Jeddah to attend yesterday’s meeting. Not only did it get him away from an increasingly hostile electorate, but it also drew attention away from his own shoddy economic policies and the mess they’ve left us in.

The upshot of the meeting was that Saudi Arabia confirmed it will raise oil production to a 30-year high. But no one thinks it’ll make a difference right away.

There’s plenty of debate over why the oil price is moving higher. I suspect that it’s run ahead of itself somewhat for the time being, though that’s not to say it can’t go any higher – I’ll get onto that in a minute.

But in the meantime, we should look on the bright side, even as we wince at the petrol pump. Because if the current oil price is indeed a bubble, it’s a good bubble…

What do I mean by a good bubble? There’s an interesting little piece by Sumit Paul-Choudhury in this week’s New Scientist. He talks about American journalist Daniel Gross’s 2007 book, Pop! Why Bubbles are Great for the Economy. In the book, Gross argues that bubbles aren’t necessarily a bad thing. They leave financial carnage, but they create the infrastructure of the future. For example, the internet boom and bust left us with a global fibre-optic network that would never have been built without the irrational exuberance of the dot.com era.

Paul-Choudhury quotes physicist-turned-risk specialist Didier Sornette’s argument that “it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns.”

In other words, it takes ridiculously high prices to persuade individuals to take the ridiculously large risks needed to make big changes in the way we do things.

So if, as various Opec members claim, the current surge in the oil price is at least partly down to speculation, then what particular benefits is this bubble bringing us?

Quite a few, as it happens. Assuming we aren’t actually running out, and the Saudis aren’t bluffing about their reserves, then a massive run-up in prices like this acts as a dry-run for a real emergency. If oil really ran out, and we didn’t have a replacement, we would be in such deep trouble it doesn’t bear thinking about (though if you want to scare yourself, a quick Google search on the words ‘Peak Oil’ will bring you up a host of websites with plenty to say on just how bad the end of the oil age could be). So a bit of panic now, while we are still pumping the stuff out of the ground to a comfortable level, is exactly what we need.

At $140 a barrel, there’s as much incentive as anyone needs to find new sources of oil (such as the tar sands, and even oil shale), and more importantly, substitutes. At $10 a barrel, no one’s going to take the time and trouble to find a way to make an electric car viable. At over $100 a barrel, it’s a Nobel prize winner.

There’s also more incentive for us to become more efficient consumers. In the developed nations, that means taking public transport and maybe walking or cycling more often. That’s one thing. But in many developing nations, where fuel prices are heavily subsidised, higher oil prices make it more and more painful for those governments to maintain these bonuses. Already, China and others are having to allow petrol prices to rise. That’s going to be painful, but in the long run it does two things.

It makes consumers in emerging markets more fuel-efficient; and it teaches their governments the folly of price controls.

All of this – a focus on new discoveries, the hunt for substitutes, increased efficiency on the behalf of consumers and governments – will eventually mean lower energy prices.

So if the oil price has run ahead of itself, effectively because investors and producers and consumers are all pricing it for a future shortage, then that’s a good thing. Because better to have to do all of this now, while we’ve still got petrol in our pumps, than have to do it once we’ve run out.

But when will the oil price come down? That’s a difficult question. I’m a believer in the argument that we’ve run out of cheap oil (certainly for now). The fact that there’s large and ongoing demand from emerging markets is also tough to argue with. So when I say that the price has run ahead of itself, I don’t mean we’re going to see $40 a barrel again any time soon.

However, we’ve known all this for ages – after all, we’ve written about it in MoneyWeek often enough. Nothing new has happened in the past 12 months in terms of supply and demand that could justify a 100% increase in the oil price. In fact, the global economic outlook has deteriorated sharply – which should mean that oil demand – or at least demand growth, will fall if anything.

But of course, the flipside of this argument is that if the oil price isn’t now driven by the fundamentals, then there’s no telling when the price will start to slip back. After all, it was obvious from at least four years ago that the housing market had lost sight of the fundamentals.

So how can you tell when the tide has turned? It’s not easy, but from my experience the most obvious sign of a turning point would be when everyone finally agrees that the oil price can only go higher. That’s when the big correction will hit.

Just before the credit bubble popped last year with the collapse of the Bear Stearns (BSC) hedge funds, the mood in the newspapers changed. There was talk of how even if credit terms were tightened, a ‘wall of money’ was waiting to come crashing in from the Middle East and Asia in the form of sovereign wealth funds. Even the most cautious commentators seemed to have thrown in the towel. Markets would stay high forever, the money would keep flowing – nothing had stopped it so far, so it seemed unstoppable.

Of course, then it stopped.

When it comes to oil, the mood is turning. City analysts’ forecasts are now ahead of the current price, rather than behind it. But there are still plenty of sceptical voices out there. That suggests to me that the oil price – and our petrol bills – still have plenty of room to run.

But cheer up. It just gives us all the more incentive to track down a substitute…

Source: The Bright Side to High Oil Prices

The price of an average home dropped 2.5 percent from April to 173,583 pounds ($344,000), Britain’s fourth-biggest mortgage lender said today in a statement. That’s the largest decline since the index started in January 1991. From a year earlier, prices fell 4.4 percent.

“Things are turning down in the UK – big time,” says Merryn Somerset Webb in Money Week.

“The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to ‘melt up’ – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.”