Credit & Collections: The 500 LB Gorilla in the Room

By: Alan Walsh, Owner, Huntington Consultancy

www.huntingtonconsultancy.com

info@huntingtonconsultancy.com

(714) 465-2749

 

A Topic That Makes People Uncomfortable

Credit & Collections is a topic that makes business people grit their teeth. By human nature, they instinctively shrink away from it.

Denying credit runs counter to our sales-oriented business mantra.. and few people like to make collection calls.

Sales forces resent the whole function as an intrusion on their selling activities and customer relations. They want no part of helping in the collections effort for fear of damaging their sensitive customer relations.. they want unlimited credit extended to everyone.. and they fear & resent the Credit Department contacting their customers.

Collections people tend to be shunned, and feel unappreciated. Senior managers are forever trying to find ways to blunt the Credit Department’s “teeth” for fear of damaging customer relations; and often intercede inappropriately in collection efforts.. short-circuiting the process and damaging the credibility of the Collection Representatives in the eyes of the customer. General Managers are usually sales-oriented, so they give a much more sympathetic ear to the Sales Staff than to the “evil” Credit Department.

Small businesses are especially sensitive to Credit & Collections.. because they covet every sale.. their credit review/assignment resources are usually slim to none.. and the owner is often the one who has to pick up the phone & ask for money because there’s no one else to do it. They find it awkward & painful to shift from selling-mode one minute –to- collection-mode the next. Many businesses have failed because the owner just couldn’t bring him/herself to make the hard calls. Turnaround experts make big fees taking control of businesses and doing hard collections the owner can’t emotionally deal with.

Yet Credit & Collections is necessary in every business. Even internet companies face the prospect of having customers challenge credit card transactions; and then having to justify getting paid to the credit card company.

 

Uncollected Receivables Raise Havoc to Company Financials

The damage done by an uncollected receivable is wide-spread. Not only does the company lose all the revenue to cover the money spent buying/producing the products & services and putting them in the customer’s hands.. but also the revenue that would cover the proportionate portion of overhead expenses, and the profit piece, are lost. Plus, most companies still pay the salesman a commission despite the fact that the sale was never collected.

 

Improving the Credit & Collection Function

No business can stand to have any significant losses due to uncollected receivables for long and hope to survive, and yet Credit & Collections is usually a less-then-optimum function in most companies; relegated to some corporate back-water. That having been said, this article presents some practical suggestions based upon experience by which companies can improve their Credit & Collections efforts.

  

The Corporate Culture Must Change

From the President/CEO on down to the people making the collection calls, an attitude and culture change is essential. This is done by recognizing what a sale really constitutes.

A sale is a mini-contract. You agree to deliver goods or services to the customer within a certain timeframe, at a certain price.. and the customer agrees to pay a certain amount to you within a certain timeframe. Failure to pay constitutes breach of contract –and- theft.

All communications with the customer regarding the unpaid receivable should be made in an unemotional, fact-based, even-handed manner; stressing the contractual business obligation. All communications with the customer should convey a consistent message; without short-circuiting interference being introduced at any level of the company. If the company decides for whatever reason to “eat” –or- forgive the debt, it should be done in a manner that doesn’t undercut the credibility of the Collections personnel in the customer’s eyes.

 

Get Sales Into the Picture

The organization that needs to make the biggest cultural change is Sales. They need to be made aware that they’re part of a bigger organization.. that uncollected receivables are hugely damaging.. and that they have a role to play.

 

The Expanded Role of Sales

Sales is the front-line of the company. They’re the company’s eyes and ears in customer relations. There’s much they can and should contribute to protecting the company.

• Sales physically visits customers, and is in a position to make observations that can be used in making credit extension decisions; such as the condition of the business.
• Sales can sniff out customers who look likely to default and/or disappear.
• They can advise Credit promptly when the customer actually closes their doors and/or vanishes.
• Sales can go out and pick up checks. It’s much harder for a customer to dodge unpaid debts when there’s someone standing at their desk.
• Sales can intercede when the customer isn’t answering collection calls.
• Sales can convey Credit messages from the company to customers in a close and personal manner.
• If a customer disappears, Sales can make local inquiries to get clues for tracking the customer down.
• Sales usually knows how to navigate the customer’s internal organization better than Credit.

In severe cases, company management should be prepared to make customer visits too.

 

Giving Sales Their Wake-Up Call

So, given the reality that Sales is the natural enemy of Credit & Collections, how does management elicit their cooperation?

A very direct and effective method is to pay their commissions based upon on collected sales. No Collection.. No Commission. Suddenly, collections become an important factor in their lives. They still won’t like it, but it will force a fundamental change to their mind-set. There’s nothing like hitting someone in the pocketbook to get their attention. Besides, why should they get paid for a sale that was never fully consummated?

It would also help for someone from Finance & Accounting to make a brief presentation to Sales showing the ways in which uncollected receivables damage the company. Most sales people are not very sophisticated in such matters, and need to understand it. They need to comprehend that their prospects are tied to the overall health of the company.

 

Management’s Wake-Up Call

Many companies pay bonuses to managers based upon company performance. But bad debts never seem to figure into the formula. Time for a change. There should also be some clear and coherent rules as to when managers can intercede in the credit & collection process; and how.

Credit & Collections is a Whole-Company Concern

At the very least, Credit and Sales should be meeting periodically to discuss customer statuses. Problem-accounts can be discussed and strategies for joint action devised. Sales should also have the opportunity to discuss the possible increase of Credit Terms for good customers who represent increased sales opportunities. I would expect the President/CEO would be paying attention to these discussions, if not actually participating.

Why do most companies restrict Credit Personnel to working from their desks? A surprise strategic visit to a past-due customer by a Credit Rep. can be very effective in shaking loose money and/or achieving a payment plan. Face-to-face contact is much harder to dodge than a phone call; and psychologically powerful. The Credit Rep. can also visit a new customer to gather information on determining appropriate Credit Limits; or reviewing the limits on an existing one. Besides, face-to-face contact establishes relationships.

In sticky “big-bucks” situations, perhaps the Sales Manager, and/or the President/CEO should be paying the customer a visit. Ratcheting up the attention in this way can be extremely effective.

Know Thy Customers

Of course you need to understand your customers and adjust accordingly. For instance, if you sell materials to a customer who does contract work, he’s not likely to get paid for his work until his contract is complete. When he gets paid, you get paid. Your payment terms will mature, and then he’ll start stalling you. Unfortunately, most aren’t sophisticated enough to bring this situation to your attention up-front, so bad relations ensue. This is an opportunity to become proactive and work out realistic terms that enable your companies to work together on a long-term basis; building loyal customers.

Turning the Tables.. Why Should Sales Have All the Fun?

Credit also needs to take the big-picture view and look for opportunities to promote the company with the resources they have at hand. For instance, years ago I developed an inventory-financing program that enabled new customers to acquire inventory, and existing customers to acquire inventory for expansion, on extended terms. The customer would be required to sign a lien against all their inventory until the debt was paid. The program was hugely successful and enabled us to increase our business by about 1/3 over two years. Only two customers defaulted, and we were able to recoup enough inventory to keep our bad debt losses to a pittance. Customers could use the inventory to open new stores, and have time to get them self-sufficient before the debt came due. It was a win-win for everyone, and of course made Sales very happy..  as well as building loyal customers.

Conclusion

There are other things that can be done, but this article should get the main point across and provide some food for thought. Credit & Collections should be made a whole-company concern, because the whole company is impacted.

Credit and Credibility: by Greg Canavan

Is it laughable, or lamentable? The market, that is. In the past few years, it has become a joke…a tool of manipulation, an unreliable source of information. Despite the outperformance of the US equity markets this year, ordinary investors (presumably people with savings they would like to invest in productive and attractive businesses) are not interested.

Reuters columnist Felix Salmon recently posted a few charts to highlight this trend. This one, originally appearing at ZeroHedge, shows the decline in trading volumes since the credit bubble bust in 2007/08.

Using the Monday after Thanksgiving as the comparison date (the first day of trade after the 2-day Thanksgiving holiday) trade volumes in 2012 are back to 1997 levels. So while you’re being told a recovery is underway, it’s clearly not a recovery in investor confidence or involvement in the stock market.

Read more: Credit and Credibility http://dailyreckoning.com/credit-and-credibility/#ixzz2DkEOKUxw

Negotiating with Goliath

Alix Stuart – CFO Magazine

May 1, 2011

Nearly 80% of companies responding to a recent survey from CFO Research Services say that most or many of their customers are larger than they are, which can certainly make it difficult to negotiate credit terms.

“Unfortunately, there’s not a lot that companies with fewer than 100 employees can do against, say, IBM to dictate payment terms,” says Andrew Lobsenz, a senior vice president for credit-monitoring firm Dun & Bradstreet. The percentage of business payments that were delinquent (those past due more than 90 days) held steady at around 5% for all of 2010, according to D&B research, still high compared with mid-2007, when the rate was around 2%.

So what’s a finance executive to do to keep on top of working capital? With the likes of Wal-Mart and Best Buy among its customers, Brightpoint, a $3.6 billion company that handles distribution and logistics for wireless handset makers, tries to keep most of them on 30-day terms. Still, for a “huge strategic deal,” the company might consider extending terms and factoring the receivables, assuming the customer was a good credit risk and the factoring fee would be small, says Vincent Donargo, Brightpoint chief accounting officer and controller.

Link to Full Article

Top Tips for Getting Credit

David M. Katz – CFO.com | US

October 15, 2009

These are days of great uncertainty for companies wanting to hang on to their ability to borrow money. Clark D. Griffith, a vice president and senior relationship manager with UnionBank in Los Angeles, says that one of the bank’s clients, a public company that had a credit facility backed by a syndicate of many lenders through June 2011, recently made “a strategic decision” to continue that arrangement for just a single year. And it cost the company a pretty penny.

What the borrower did was to strike an “amend and extend” arrangement with the syndicate, changing the terms of the deal in midstream and putting down extra money to extend it. To push its borrowing capacity out to 2012, the company cashed in its then-current interest rate of the London Interbank Offered Rate plus less than 1% of LIBOR for a rate that was “north of 3% of LIBOR,” according to the banker.

Speaking during “Where to Get Credit Now,” a panel at last month’s CFO Rising West conference, Griffith used the example to illustrate the world of whopping amendment charges, closing fees, and increased pricing that corporate borrowers — many of which are facing imminent loan maturities — are running into in today’s credit markets. In the current climate, finance chiefs are under intense pressure to negotiate extensions, renewals, or new credit facilities well before their current transactions expire, panelists agreed.

Link to Article

Bernanke’s Remedy: Pump More Blood Into a Corpse

By Mike WhitneyInformation Clearing House” — Credit is everything. Without credit expansion there’s no recovery because there’s no pick-up in overall demand. But credit growth is going backwards. The banks have tightened lending standards and the pool of credit-worthy applicants has vanished. Bank lending is off 14 per cent since October 2008. Private credit is presently decreasing at a 10.5 per cent annual rate. The situation is getting worse, not better.

October 05, 2009 “

From the UK Telegraph:

“Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation…

“Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an ‘epic’ 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“’For the first time in the post-Second World War era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,’he said. (Ambrose Evans-Pritchard, “US credit shrinks at Great Depression rate prompting fears of double-dip recession”, UK Telegraph)

Foreclosures, delinquencies and defaults are all up. Foreclosure activity is currently at 300,000-plus per month and rising. A huge shadow inventory is being kept off-market to maintain prices. The drip, drip, drip-effect of excess inventory dumped onto the market will keep housing in the doldrums for a decade. Homeowners are unable to borrow on underwater homes. Everything points to a long-term slump in spending.

Corporations are finding it harder to roll over their debt, bank loans are defaulting at a historic pace, and commercial real estate is imploding. Credit destruction is unprecedented, massive and ongoing. The capital hole is bigger than the Fed and bigger than the Treasury. It can’t be plugged with liquidity alone.

For now, the government can fiddle GDP with $800 billion infusion of stimulus, but what happens when the political will for more deficit spending dissipates? What happens when foreign investors demand the Fed stop writing checks on an overdrawn account?

The Fed has fixed nothing. The banks are still underwater, output is at record lows, and unemployment is climbing towards 10 per cent. Fed chair Ben Bernanke’s multi-trillion dollar rescue programs have kept a wobbly system upright, but nothing more. The economy’s underlying problems are still the same. The Fed’s quantitative easing (monetization) program has sent stocks surging, but done nothing to stimulate the economy. That’s because equities bubbles have negligible impact on aggregate demand; there’s no knock-on effect. The real economy is still flatlining while Wall Street parties on. Bernanke’s plan has been a total wash.

The government cannot deficit spend forever. Eventually, GDP will have to depend on wage growth and credit expansion. Given the political and institutional bias against labor, (and opposition to wages that rise with productivity) the only way to fuel the economy is through credit growth. And there’s the rub. Households have lost nearly $14 trillion in wealth since the crisis began and are in no position to resume borrowing at pre-crisis levels. Consumers are cutting back on spending and paying down debt. They have no other choice.

This is from Bloomberg News:

“Americans plan to refrain from boosting their spending even after the biggest drop in consumption since 1980, signaling concern about the direction of the economy over the next six months.

“Only 8 per cent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 per cent expect to ‘stay the course,’ a Bloomberg News poll showed. More than 3 in 4 said they reduced spending in the past year.

“Underscoring consumers’ austere attitudes, 77 per cent of respondents said they have cut back on spending during the past year, 59 percent said they have made a bigger effort to pay off debts and 48 percent have put more money aside as savings.” (Bloomberg News)

Savings are up and spending is down. The economy is headed into a long-term funk; the “new normal”. The Fed’s sleight-of-hand programs and Obama’s stimulus elixir haven’t changed the prevailing downward trend. If anything, they have made matters worse. Consider this from Janet Tavakoli, author of “Dear Mr. Buffett” in an interview with Max Keiser:

“Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay.” (Janet Tavakoli On The Edge With Max Keiser)

The Fed has done nothing to restructure the financial system so the same problems which killed Lehman and thrust the global economy into a tailspin, persist today. When the stimulus runs out and the Fed ends its $1.25 trillion purchase of (Fannie and Freddie) mortgage-backed securities and $300 billion in US Treasuries, interest rates will rise, housing prices will tumble, and the economy will nosedive. Bernanke will be forced back to the printing presses, the only hope for reversing the deflationary spiral. This will trigger the next crisis, a run on the dollar.

This is from an article by Alice Schroeder of Bloomberg News:

“In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed……Right now, the American economy is worth less than the value implied by the market value of its obligations.” (Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder, Bloomberg)

The system crashed because it was built on the false assumption that an unregulated shadow banking system could generate an infinite amount of credit without sufficient capital. This proved to be wrong. Capitalism requires capital. The trillions of dollars in loans, complex debt-instruments, off-balance sheet operations and derivatives contracts were all stacked atop a tiny scrap of capital which eventually collapsed beneath the weight of the debt. This system (securitization) which created the mess, cannot be restored. It required a strong currency, artificially low interest rates, and credulous investors who were unaware of the inherent risks of illiquid assets. Those conditions no longer exist, nor have they for more than two years. Even so, the Fed continues to pump blood into a corpse hoping for some fleeting sign of life. This is why an even bigger crisis cannot be too far off.

Link to Article

THE COFFIN SHAPED RECOVERY

THE COFFIN SHAPED RECOVERY

While often wrong, Bernanke is right about the recession. It’s almost over. But a depression is about to replace it.

There has been much discussion about this recovery, whether it will be a “U”, “V” or a “W” shaped recovery. The answer is none of the above. It is going to be “C -shaped” recovery, but not as in the letter “C” but as in coffin.

 

 

The Coffin-Shaped Recovery

It would be a miracle if trillions of dollars of debt could be wiped out with one stock market crash and be succeeded by a new bull market driven by another large offering of credit by the Fed.

But such a central bank-engineered miracle today is impossible. Capitalism’s natural cycles derive from central banker’s unnatural infusion of credit into previously free markets. The subsequent distortion causes market demand to expand (which everybody loves) only to be followed by the inevitable contraction—which everybody hates.

Usually, central banks wait until previous levels of excess credit have been absorbed in an economic downturn before embarking on a fresh round of credit creation. This time, however, it is different.

This time, the cumulative buildup of debt over previous cycles where contractions were cut short to minimize economic pain and attendant political consequences is now so large that any contraction is sufficient to bring down the extraordinary backlog of debt built up over previous cycles.

The current contraction is more than sufficient to do so as it is more severe than any downturn since the 1930s; and despite the frantic attempts of central banks to contain the cumulative forces unleashed by previous cycles of credit and debt, the enormous but fragile paper-based economy built by central bankers’ paper money is now collapsing.

To hopefully prevent the collapse from reaching its catastrophic end, central bankers have now intervened far earlier and with far more credit hoping to prevent the day of reckoning, a reckoning soon to be evidenced by an historic deflationary depression that will wipe out all accumulated unpayble debts, albeit at the cost of a functioning world economy.

Such is Ben Bernanke’s considerable task. Despite his outwardly positive demeanor, Bernanke is well aware that his desperate gamble hasn’t worked.

In these times, the last thing you want to be is Ben Bernanke’s sphincter.

(note: Martha declined to produce my relevant cartoon)

KEYNESIAN COPS, FRIEDMAN’S FOLLIES, AND THE FLAWED THEORY BEHIND THE RECOVERY

The current chairman of the US central bank is Ben Bernanke, a self-described student of the Great Depression; but, learning is limited by what is taught and regarding the Great Depression, Bernanke’s teacher unfortunately was Milton Friedman.

The reason why central bankers (and Ben Bernanke in particular) are flooding the global economy with money, i.e. borrowed, printed, or monetized out of thin air with such abandon (who would have thought bankers could act with abandon except, of course, when believing risk is non-existent and they’re betting someone else’s money), is because of Milton Friedman’s theory, to wit that economic contractions can be reversed by sufficient monetary expansion.

Laid bare, Freidman’s theory is another iteration of the Keynesian belief in the power of government intervention, albeit an intervention cloaked in Friedman’s more palatable—at least to those on the right—conservative garb.

Friedman argued that if the Fed had aggressively expanded the money supply in the 1930s, it would have then counteracted deflationary forces and prevented the Great Depression, an argument unfortunately as flawed as another of Friedman’s pet theories, i.e. thatfloating exchange rates would naturally over time bring global trade deficits into balance.

Note: When exchange rates were allowed to float in 1974 as encouraged by Friedman who also encouraged Nixon to abandon the gold standard in 1971, the US had a positive balance of trade. Thirty five years later, the US trade deficit is well over $800 billion and is growing over $20 billion each month (Hey, Milton, how much more time will it take to balance the trade deficit?).

Professor Antal Fekete warned several years ago that Friedman would someday be proved wrong and that we would collectively suffer the consequences; and, that just as during the Great Depression when banks hoarded the government’s cheap money instead of lending it, they would do so again when Friedman’s theory of monetary expansion was tried during another contraction.

Professor Fekete’s warnings have now come true. Today, US bank lending growth has entered negative territory at the same time cash reserves at US banks increased by 1,460 %.

Frank Shostak in Does A Liquidity Trap Pose A Threat, 9/23/09, on mises.org writes:

The latest data for lending in the eurozone the United Kingdom, and the United States display a visible weakening. In the eurozone, the yearly rate of growth of bank lending to the private sector fell to 0.6% this July from 9.3% in July last year. In the United Kingdom, the yearly rate of growth of lending to the private sector fell to 2.2% in July 2009 from 10.1% in July 2008. In the United States, the rate of growth of lending plunged to minus 3.8% in August 2009 from a positive figure of 8.6% in August 2008…At the end of July this year, [however], US banks were sitting on $729 billion of cash against $1.9 billion in July last year.

http://mises.org/story/3697 [bracketed words, mine]

Friedman’s theory is flawed and as suspect as the paper money Friedman and Keynes both promoted. Central banks can print all the money they want but that will not necessarily increase the money supply as central bankers are discovering.

Severe monetary contractions that cause deflationary depressions are so powerful they, like monetary black holes, can destroy money faster than central banks can create it.

The on-going monetary contraction is now clearly evident. Ambrose Evans-Pritchard, columnist for The Telegraph UK, points out the glaring truth that Bernanke and most of his paper-weight brethren would like to avoid:

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months… the M3 ‘broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

“Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March…. shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

http://www.telegraph.co.uk/finance/economics/2795017/Sharp-US-money-supply-contraction-points-to-Wall-Street-crunch-ahead.html

This is not your mother’s contraction. Instead, this is the mother of all contractions, a contraction far greater than even that which sent the world into the Great Depression in the 1930s.

This time, the amounts owed are exponentially greater than what was owed in the 1930s; and, the greater the debts, the farther the fall. Debt does not just disappear without consequences, nor can it be outrun, sic outgrown, as economists are desperately hoping, especially today when economies are contracting, not expanding.

Economic contractions cannot be reversed by expanding the money supply any more than wishful thinking by itself will change the world. Despite the best efforts of central bankers like Ben Bernanke, Friedman’s flawed theory cannot save the world from what is now about to happen—the mother of all depressions that may be capitalism’s last.

Keynes and Friedman, both brilliant, were both believers in paper money. Paper money has many powers, not the least of which is the power to mislead and delude.

Milton Friedman thought a lot Of paper money and more Like Keynes and others who thought the same Milton showed gold the door And now our gold is spent and gone And so is Milton too And now we’re left bereft and broke Not knowing what to do But Ben Bernanke’s at the helm Of the sinking ship we’re on And soon like Milton and our gold We, too, will soon be gone So let’s make a toast while we’re still here To those who caused our ruin To those convinced that they were right But didn’t know what they were doing

WHO BENEFITS FROM THE FRAUD OF PAPER MONEY

The substitution of paper money for gold and silver has always been imposed by those who govern upon those governed; and, in the US it was done so illegally. The US Constitution explicitly defines the US dollar in silver, not paper money. The current regime of fiat money in the US is not only a monetary abomination, it is de jure unconstitutional.

The imposition of fiat money in the US was done without the consent of the governed. However, those who govern approved it. This is because the advantages of paper money accrue to those who rule; and it is in their interests, not society’s, that paper fiat money becomes the coin of the realm.

The disadvantages of paper money are borne by society-at-large, i.e. entrepreneurs, workers, businesses, retirees, savers, etc. who pay retail for the credit dispensed wholesale to those better connected, e.g. are you able to leverage your investments 50:1 as can JP Morgan Chase, Goldman Sachs, etc.; and, can you to carry your underwater investments at full book value and borrow against them as it does Wall Street? And were you bailed out last year as were the banks?

I have always been amazed at those who identify with a system that primarily serves the needs of others and only incidentally theirs. I can only conclude that such identification is symptomatic of low self-esteem, as self-interest alone would dictate otherwise.

We are now headed towards a rendering so extreme that such divisions will become clear and perhaps the many will finally cease identifying with a system that benefits the few closest to the fountainhead of credit while penalizing the many farther downstream which usually includes them.

Modern economics is a sophisticated Ponzi-scheme cross-pollinated with a shell game designed for the advantage of government, banks and those at the front of the line wherein money is created out of thin air to be loaned to others who will in the end be indebted beyond their means to repay and whose economic futures will be destroyed by the inevitable confluence of the bankers’ compounding interest and their constant inflation of the money supply.

 

If you doubt this is so, an article The Event by Eric Andrews, is a must read, especially the areas directly concerned with money and its creation. If you already believe this is so, Eric Andrew’s article is even more important. Clear, concise, and conclusive, it points out the inherent problems with our debt-based system of paper money, a system that contains its own seeds of destruction, seeds which are now flowering, www.financialsense.com/fsu/editorials/2009/0921.html.

Andrews also points out where we are and perhaps headed without guessing when we will arrive. We face a minefield of possible scenarios as deflation, inflation, hyperinflation, or a combination thereof may soon be in our future as the bankers’ paper money is now about to self-destruct.

THE BARRICKADE TO GOLD CRUMBLES

We are in the final stage of the paper-boys’ efforts to preserve their crumbling fiefdoms against gold’s advance. In truth, gold is not advancing at all. It is standing still. It is the constant decline in the value of paper money that makes it appear that gold is rising. Extant virtue needs no movement.

While I am in deep admiration of Professor Fekete’s insights on gold and money, I do not envy the price he paid for his learning. Professor Fekete’s understanding of monetary chaos derives from a childhood in Hungary beset by a hyperinflation more severe than even that of the Weimar Republic or Zimbabwe.

Professor Fekete then escaped communist oppression in Hungary to make his way to Canada where he received a front-seat look at the central bank and corporate collusion underpinning capitalism’s fraudulent paper-money scheme.

Upon retirement, Professor Fekete had invested his savings in Barrick Gold Corporation, a Canadian gold mining company. But instead of an expected return on his savings, the professor got an unexpected education in how Barrick assisted central banks in suppressing gold.

Barrick’s forward selling of unmined gold from 1988 to 2003 put thousands of ounces of paper gold on the market which forced down the price of physical gold. For years, the forwards sales of Barrick and Anglo-Gold Ashanti were responsible for the downward spiral of gold’s price, a goal desired by investment banks doing the bidding of central bankers.

Professor Fekete, as a shareholder, clearly understood that Barrick’s forward selling (or so-called hedging operations) came at the expense of shareholders. It did, however, directly benefit the central banks who wanted to cap the price of gold. Today, the “Barrick-cap”, a major “Barrickade” against gold’s rise is no more.

This month, on September 8, 2009, Barrick Gold Corporation announced it was taking a $5.9 billion charge against 3^rd quarter earnings in order to buy back all its forward contracts, a considerable sum to pay for succumbing to the wishes of those in power.

Once again, Professor Antal Fekete was right. Sponsored by the Gold Standard Institute, Professor Fekete will be in Canberra, Australia, November 2-5 speaking on “The World Financial Crisis and the Vanishing Gold Basis”, see http://www.professorfekete.com. I consider the Professor to be a light in these dark times. I and others will also be speaking.

It is absurd to discuss the price of gold without discussing central bank or government efforts to force the price of gold down, an effort that may soon be ending due to the imminent advent of the end-game.

In my Youtube video, http://www.youtube.com/watch?v=5o36Dj-ukPo, I discuss the possibility of whether or not the US will again confiscate gold. I wish the possibility were not so.

But, today, governments cannot see an alternative to that offered by central bankers, the merchants of debt who have enslaved nations with their fraudulent debt-based paper money. As yet, there are no alternatives to the bankers’ offerings. But after bankers and governments fall—and they will—alternatives will then become clear

Buy gold, buy silver, have faith.

Darryl Robert Schoon

Where Has all the Money Gone? … This is a Recovery?

By Mike Whitney

The slight rebound in housing looks a lot different when one considers how much the Fed is meddling in the market. Fed chair Ben Bernanke has purchased $240 billion in US Treasuries to keep long-term interest rates artificially low while–at the same time–buying $740 billion in Fannie Mae and Freddie Mac mortgage-backed securities (MBS) to provide the financing for new home buyers. It’s the double-whammy; and that’s not all. Bernanke plans to continue buying agency MBS (monetization) until he reaches $1.45 trillion, which will make Uncle Sam the biggest player in the housing market by far. How’s that for central planning?

Ironically, the funds for Bernanke’s housing market rescue plan were never approved by Congress, which means that the Fed committed nearly-$2 trillion with “no down” payment. That makes the Fed’s Treasury buyback program the biggest subprime loan of all time. 

   The fact is, all the recent gains in home sales are all the result of direct government intervention. If interest rates were allowed to rise (as the would naturally) or if  Congress withdrew its $8,000 first-time home-buyer subsidy, or if FHA tightened its loosey-goosey financing (which requires just 3.5% down payment and low FICO scores, the same as subprime!) home prices and sales would continue to drop at a 10 to 15 percent year-over-year rate. Housing has stopped plummeting for one reason alone; the Fed bought the market.

  The same rule applies to the stock market, where the Fed’s quantitative easing (QE) and liquidity injections have sparked a 6-month bear market rally sending equities to the moon. It’s all Fed intervention. A recent report by Egan-Jones Ratings And Analytics traces the Fed’s lavish liquidity handouts pointing out the precise sectors of the market that have been most effected:

  “Massive monetary stimulus is good for asset prices (stocks, bonds, houses, commodities) in a weak pricing environment and soft economy. The Federal Reserve has doubled its balance sheet from $1 Trillion to $2 Trillion effectively adding $1 Trillion to our economy. In addition, the Fed has through an alphabet soup of facilities i.e. Term Auction credit, Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Term Asset Backed Securities Loan Facility, Primary Dealer and other Broker Dealer Credit, Other Credit Extensions, Term Facility, Maiden Lane LLC one, two and three, Money Market Investor Facility, added approximately $3 Trillion in loans and over $5.5 Trillion in guarantees of private investments. While these latter funds are technically loans, they get renewed regularly.

So where has all the money gone? The chart below shows the rise in the stock market causing the valuation to be somewhat extended in our view – some liquidity found a home here. Large rises in just the last month in small cap stocks, plus 17%; most shorted stocks, plus 17%; stocks with the lowest analyst rating out performing those with the highest rating by 380 basis points, all suggest some speculation……
Commodities have had a nice rebound from their lows with copper hitting new highs. High yield bonds have out performed investment rated bonds as investors are willing to bet on a faster recovery and start to reach for yield.
These are indications of excess liquidity finding outlets.” ( “Fundamentally…Disconnected”  Egan-Jones Ratings And Analytics, hat tip zero hedge.com)

Let’s summarize: The Fed is goosing the stock market and subsidizing the housing market. Bernanke has slashed interest rates to zero percent, underwritten the entire financial system with $12.8 trillion in loans and guarantees, and flooded the financial system with liquidity. The Fed has  also doubled its balance sheet to $2.08 trillion which is the equivalent of dropping the Fed Funds rate to -1 percent.  As Mark Gongloff of the Wall Street Journal opines, “The Fed is essentially paying people to borrow money.”

Indeed, the Fed has done its level-best to keep the market from correcting, but isn’t it a bit of a stretch to call it a “recovery”?

In truth,  Bernanke is in a pitch-battle with deflation and the outcome is still uncertain. Deflation has spread to every sector of the economy; retail, travel, luxury items, autos, building supplies, home furnishings, electronics. No business has been spared. The C.P.I. inflation-gauge has slipped into negative territory and is now at -2.1 percent. Prices are headed down and spending is falling fast. Unemployment is soaring, wages are dropping, and the average work-week has been sliced to just 33 hrs. And, as we noted, housing prices have flattened out, but only because of unprecedented government intervention into the market. Otherwise, real estate would still be stretched out on a marble slab.

  Most people think it should be easy to beat deflation. They think all the Fed has to do is flip a switch and print more money. But there’s more to it than that, especially when trillions of dollars in credit suddenly vanishes in a poof of smoke. That’s what happened last September when Lehman Bros imploded and reduced the financial system to rubble. Global stock markets crashed, interbank lending collapsed, capital flows stopped, and payrolls and inventories were slashed. The gigantic credit-purge thrust the economy into deflation, a condition which persists to this day.

 Economist Irving Fisher tackled the problem of deflation 76 years ago  in his masterpiece “Debt-Deflation Theory of the Great Depression”. Fisher showed how over-indebtedness eventually triggers a chain of events beginning with debt liquidation and ending in distress selling, huge capital losses, and violent economic contraction; the same challenge that Bernanke faces today.

Irving Fisher:

“Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized….

On the other hand, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.” (Irving Fisher)

Clearly,  Bernanke is following Fisher’s advice and doing everything in his power  to reflate asset prices and avoid a bigger crash. But it’s still too soon to tell whether his strategy will work. We’re still in the early innings of a humongous system wide credit-implosion event.  
 
 The term “deflation” relates to a drop in the general price level, something not seen in the United States since the Great Depression. As economist John Bellamy Foster points out,  deflation squeezes corporate profits even if costs and productivity remain the same.  When profits fall, heavy layoffs and wage reductions ensue.  

John Bellamy Foster:  “But the real fear of deflation has to do with the enormously bloated financial structure and the huge debt load of the economy…  In a deflationary economy,  debt has to be paid back with bigger dollars (worth more over time).  This then creates a debt-deflation spiral, enormously accelerating financial meltdown.  As Fisher put it, “deflation caused by the debt reacts on the debt.  Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes.”  Stated differently, quoting from The Great Financial Crisis (p. 116), “prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more defaults, leading to yet lower prices, and thus a deflationary spiral.” (Interview of John Bellamy Foster on the Great Financial Crisis, Monthly Review) http://www.monthlyreview.org/mrzine/foster270209.html

It is this “deflationary spiral” that Bernanke is trying to avoid at all cost, even if he destroys the currency in the process. (Which he appears to be doing) Despite the Fed chairman’s steely resolve, the economy has continued its historic nosedive. Consumer spending is falling and households are limiting themselves to the bare essentials. (US households lost $14 trillion in wealth in the last year alone.) Families everywhere are paring back their credit, paying down their debts and rebuilding their nest eggs with what’s left from their skimpy paychecks. Unfortunately, what’s good for the family balance sheet is poison for the economy.

From Bloomberg News: “U.S. consumer credit plunged more than five times as much as forecast in July as banks maintained more restrictive lending terms and job losses made households reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991. (Bloomberg)

US households and consumers have never been as strapped as they are today. They’re dealing with recession the only way they can, by pulling back and hunkering down. That will make it even harder for Bernanke to resuscitate the economy. There’s simply no way to force people to borrow when they’re not interested.  

Bernanke’s deflation-fighting strategy needs to be revamped. The country doesn’t need another credit bubble. The surge in delinquencies, defaults and personal bankruptcies all suggest that the era of easy money and lax lending standards is over. Why not “hang it up” for good. The Fed should be focused on rebuilding the economy from the ground up, paying particular attention to aggregate demand. Demand is what keeps the mighty GDP-flywheel in motion. Wall Street likes to stimulate demand through credit expansion and bubblenomics so they can skim fat bonuses on the front end and then bail out before stocks crash. But this perennial “boom and bust” cycle get’s old for ordinary working people, who just want a little stability and a paycheck that keeps pace with inflation. The best way to avoid “demand shock”–which is at the heart of every recession–is through wage growth and full employment. It’s that simple. When workers get better pay, they buy more more stuff and the economy thrives. Everybody wins!

Whose Economic Recovery?

By Danny Schechter

September 10, 2009

President Obama’s highly anticipated health care speech started on a totally different subject: The economy.
“When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression,” he told Congress and the people at home. “We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.”

“But,” he went on, “thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.”

Applause. Applause. Applause.

Are we back from the brink? And what brink is that? On Labor Day, HBO featured a powerful documentary about a GM Plant in Ohio that was shutting down. It showed the workers, teary eyed and forlorn, making the last truck on “their” assembly line. Their faces told the rest of the story as they asked themselves and each other, “What do I do now? What happens to my family and my life?”

They had no answers, and neither, alas, does Barack Obama.

A “jobless recovery” will not give these workers the money to buy into even the cheapest health care coverage, public option or not.

Look around Mr. Obama: the unemployment rate in real terms is over 16%. The consumer economy is shattered. The commercial real estate market is imploding, and, yes, more foreclosures are on the way according to the Washington Post:

A new report foresees another wave of foreclosures, as option adjustable-rate mortgages — an entire class of specialized home loans — will soon reset to higher payments. Estimated to jump by 63 percent on average, the higher rates will likely push many of the already-strained loan recipients over the brink. The loans, also called pick-a-pay loans, are a prime example of the risky lending techniques that created the housing crisis: Borrowers were allowed to pay back the loan with as little as they wanted each month, though that meant many paid less than the interest due…the report says the fallout from the loans could be felt for years, especially in states already hit hard by foreclosures.

Just who is back from the brink?

If you listen to the Fed, the glass is more than half full. If you listen to economists like Simon Johnson, it’s way more than half empty, as he wrote on Baseline Scenario:

In the absence of effective financial regulation – i.e., both during the 1920s and again since 1990 – the Fed has operated in a manner that encourages the formation of sequential bubbles. This destabilization of our financial system is not a minor matter; the damage caused – human, financial, social – is already enormous.

And we are very far from being done.

Don’t take my word for it. Lou Jiwei, the chairman of China’s sovereign wealth fund said recently, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Yes, We Can… Lose, that is, Mr. Lou. And Yes We Are, Mr. Obama. The problem is that we are still in some Bernanke fantasyland, thinking that if we keep saying everything is ok, it will be.

Here’s Washington’s blog on real unemployment as opposed to what the Bureau of Labor Statistics is saying:

… Paul Craig Roberts – former Assistant Secretary of the Treasury and former editor of the Wall Street Journal – and economist John Williams both said in December 2008 that – if the unemployment rate was calculated as it was during the Great Depression – the December 2008 unemployment figure would actually have been 17.5%.

Williams says that unemployment figures for July 2009 rose to 20.6% According to an article summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart,… unemployment could rise to 22% within the next 4 years or so.

Hello, Mr. President? Why can’t you bring to the discussion of the economy the same passion and fact-based arguments that you brought to the health care debate?

Why can’t you propose serious reforms on the financial sector? Why can’t we jail the financial criminals?

The answer seems to be that Wall Street will be a far more tenacious and resourceful enemy than the health care industry perhaps because they already own much of the Congress.

Remember Senator Dick Durbin’s comment, ‘the bankers run the place.”

Alan Blinder a former vice-chairman of the Fed fears that pressure for financial reform is losing steam in part because of the power of what he calls “The Mother Of All Lobbies.” He writes, “in the case of financial reform, the money at stake is mind-boggling and one financial industry after another will go to the mat to fight any provision that might hurt it.”

Obama acknowledged we are not out of the woods yet. (What woods?) But what are the likely consequences? How long can people live without anything coming in? How long can we live on upbeat projections?

“There is no doubt class antagonism is stewing,” says the editor of the blog Naked Captalism. He expressed a fear of a reaction that will go way beyond flag-waving tea parties:

… I am concerned this behavior is setting the stage for another sort of extra-legal measure: violence. I have been amazed at the vitriol directed at the banking classes. Suggestions for punishment have included the guillotine (frequent), hanging, pitchforks, even burning at the stake. Tar and feathering appears inadequate, and stoning hasn’t yet surfaced as an idea. And mind you, my readership is educated, older, typically well-off (even if less so than three years ago). The fuse has to be shorter where the suffering is more acute.

One is reminded of the title of that movie, There Will Be Blood. Rather than show contrition or compassion for its own victims, Wall Street is hoping to jack up its salaries and bonuses to pre-2007 levels. The men at the top are oblivious to the pain they helped cause. They are getting away with the crime of our time.

And the people – The People – who potentially can challenge all this by action on the ground are being mesmerized by the false hope that recovery is here or right around the corner. How long before they realize you can’t eat optimistic speeches?

Hide and Seek Credit

Edited by Joel Bowman

Sometimes less is not more; sometimes it is even less.

According to a Federal Reserve report released by the Feds this week, consumer credit contracted at an annualized rate of 10% in July.

“Non-revolving debt,” which includes loans for automobiles and mobile homes, plunged by $15.4 billion in July…even as the government’s “Cash for Clunkers” program artificially bolstered auto sales to a pace not seen since the heady days of May, 2008. Revolving debt, such as credit cards, fell by $6.1 billion over the same period.

Less really is less.

How does the situation look on the ground, we wonder? Could it be…gasp…even worse than what the Feds would have us believe? Could it be that the next round of economist forecasts will be off the mark?

Here’s what our humble, unpaid correspondents had to say…

First up, let’s hear from the Rude dentist: “I am the owner of a dental practice. I have been dealing with a bank that bought the community bank I worked with for the previous five years. I had an open 100k line of credit at the community bank that was reduced to 25k when the new bank took over. Of course, they charged doc stamps and changed the terms and this was last year in November.

“A few months later they reduced it to 10k because I was not using it. Then, this last weekend, they added an additional 25k line of credit (that i did not ask for) and because they “valued my business,” said they would only charge me one half the doc stamps and loan origination fees.

“As far as refinancing my home…forget it. It seems this bank is not loaning money, only churning existing accounts for additional fees wherever possible.

“I am looking for a new bank.”

Rude reader Charles writes with a similar story. “We have a 7 acre piece of property assessed at 1.3 million and looking to improve it by renovating an existing retail and residential operation. Current rents will cover payments for a $400K loan, which was denied because we do not have enough business experience.

“On the other hand we applied for a refinance of $125,000 on a home assessed at $210,000 and everything looked good until the bank found out we would use the money to improve this commercial property they then lowered the available money to 85K. There is money but it ain’t easy.”

Rude reader Kenny agrees, “To corroborate your private capital vs. government credit jet fuel story, my brother has several commercial buildings which he has contracts on to sell but nobody can actually get the financing to go through with the deals. Obviously no matter how bullish the end consumer is, if he cannot secure financing he can’t follow through.

“The phrase, ‘Show me the money’ comes to mind.”

“There’s no doubt about it,” writes Mike, an Agora Financial Reserve member. “[There is] absolutely NO MONEY out there to borrow for new projects unless you have the same amount of cash to back it up and no such thing as collateralization for any kind of loan. NO CASH, NO LOAN.

“As for current loans on real estate; banks are doing whatever is necessary to bleed cash out of you for principal paydowns. I came prepared and pushed all the keys across the conference table. They backed up. [The bank] essentially told me to go pound sand. So much for having loyalty to a bank, especially when it was they who were prospecting and throwing cash at me just two years ago.

“What really galls me it that people actually treat bankers as though they are intelligent. They got us into this mess and are keeping us in it. Most of them are just building up cash balances as they’ve figured out that their loan portfolios aren’t worth squat or anywhere near their current balance sheet figures and bad loan holdbacks. I’m sure this is a duplication of every note you’ve received thus far.”

Finally today, for our Rude contingent back home, a quick look at the Australian story…

“Our company is a start-up contracting company working in the electrical supply industry with work guaranteed from a large multinational company,” writes our Aussie correspondent.

“I am currently employed on wages by this multinational company as I am being trained to become a contractor for them. We have work for four years in advance with ongoing negotiations for an eight-year contract.

“After investing $60,000 of our own money to purchase some of the equipment our company requires we were advised by our accountant to purchase the remaining equipment with a bank loan for tax and operational reasons. We could buy the required equipment outright and have $120K of capital tied up which we have been advised against.

“We approached our own bank and were knocked back even though we have money to cover the loan and tangible assets of $5.00 for every $1.00 of the proposed loan.

“We have spent the last five weeks negotiating with all manner of financial businesses and, fingers crossed, may have finally found a company to assist us; but they require additional paper work to be completed.

“There is no doubt in our minds that the banks know the economic bubble is going to burst again and they (the lenders) don’t want to be burnt again. The Government-offered incentives have just been a quick fix with no real substance behind it to sustain it into the future.”

23 Singapore Business Times Investment round table – Equities: what’s on the horizon

OVERVIEW

STOCK prices around the world recently hit their highest levels for this year, buoyed by a wave of optimism about prospects for a global economic recovery – only to fall back to a three-month low this week on fresh doubts about the sustainability of that recovery. So, is it ‘for real’ or is it destined to run out of steam? The Business Times empanelled a team of key experts to answer this critical question, and to tell us whether the world faces a threat of inflation, deflation or stagflation in the coming months. There were mixed views on the prospects for equity markets, but interestingly, everyone on the panel was bullish about gold.

Panellists

Mark Mobius, executive chairman, Templeton Asset Management

Eisuke Sakakibara, former vice finance minister for international affairs, Japan, and now Professor at Waseda University, Tokyo

Jesper Koll, president and CEO, Tantallon Research, Japan

The Hon Robert Lloyd-George, chairman of Lloyd George Management, Hong Kong

Ernest Kepper, former senior official of the International Finance Corporation (IFC) and Wall Street investment banker who now heads an Asian financial consultancy

William Thomson, chairman, Private Capital Ltd, Hong Kong and senior adviser to Axiom Funds, London and formerly a Vice President of the Asian Development Bank

Christopher Wood, managing director and equity strategist, CLSA Asia-Pacific Markets, Hong Kong

Moderator: Anthony Rowley, Tokyo correspondent, The Business Times

Anthony Rowley: Let me start by asking: is the apparent recovery in the global economy for real, or a ‘phony’ one? And, are stock markets justified in behaving the way they have been doing lately?

Eisuke Sakakibara: I don’t understand why equity prices are so high – in Japan the US and elsewhere. In China’s case, there is obviously a very major bubble in the equity market. Also, I don’t see any reason why the US Dow Average should be more than 9,000 (as it is now)or why the Japanese Nikkei average is more than 10,000. I just cannot understand it.

Ernest Kepper: This is a phony recovery. A turn-up in the economy is not the same as the economy recovering all lost ground. To keep rising in the future, markets need a sign of real economic recovery, and that requires a surge in consumer spending, business investment and home buying, combined with a reduction in government spending.

I fully expect to see the markets rise for a while longer, even as high as Dow 10,000 or S&P 1,100. After that, I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares.

William Thomson: In the wake of Lehman’s failure the global financial system was staring into the abyss of a systemic meltdown. Governments then junked their economic philosophies and threw fiscal and monetary assistance at the problems on an unimaginable scale, just to keep things afloat. It has worked to the extent the system limps on and there has been a rally in the markets. But there has been no recovery in the real economy yet in the West. The pace of decline has slowed and the second half of 2009 could be modestly positive. But modest is the operative word since unemployment is likely to continue to grow well into 2010, reaching double digits even on the official count.

With housing foreclosures likely to keep climbing in the wake of extended unemployment, the consumer is likely to keep his wallet shut and try and repair his balance sheet. Modest economic recovery should continue as long as neither fiscal or monetary conditions become restrictive too quickly. But markets need a period of consolidation whilst they assess future prospects, so a broad trading range may be possible for the rest of the year. Dips can bought and rallies sold.

Anthony: Are any of you gentlemen more optimistic about the global outlook?

Robert Lloyd-George: This is not a ‘phony’ recovery. It may be slower and weaker than usual because of the debt super-cycle. But it is a real recovery – in trade, auto sales, consumer spending, corporate capital spending and so on.

We are ‘climbing a wall of worry’ because many economists (and hedge fund managers) do not believe in the recovery and still have 50 per cent cash, awaiting a correction, which may never come. Earnings, and GDP, figures will slowly improve and equity markets will strengthen well into spring of 2010.

Mark Mobius: The financial crisis was real in the banking system but not in the industrial economy. It impacted the economy because the banking system froze. However, markets are leading indicators and they are telling us the recovery is on the way now.

Jesper: I agree. There is nothing ‘phony’ about the recovery; globally, the policy response was swift and massive and very correct. Since the start of 2009, slowly but surely, global money and credit have started to flow again.

Markets have, of course, been pulled by the massive liquidity creation; the tell-tale sign was the US banks raising massive amounts of private capital this spring without much problem; and beyond financial companies, corporations in general have been very fast in cutting costs and slashing inventories. Many CEOs used the crisis as an opportunity to do all the harsh and hard things they had been wanting to do for years, but could not ; corporations are now mean and lean. Corporate profits for many companies are poised to explode in the coming two years; global stock markets are – right now – transitioning from a ‘liquidity market’ to an ‘earnings market’ ; in this phase, stock selection will become increasingly important.

Anthony: What is driving recovery in the markets – emerging markets especially?

Mark: In a word, money is what is driving the recovery. The money supply in most countries is rising at a very rapid pace. This money is finding its way into the economic system and is driving prices and economic activity. Added to this are the US$600 trillion in financial derivatives which amplifies money supply.

Jesper: In a word – growth. There is no question that the structural growth potential of ‘Chindonesia’ – China, India and Indonesia – is easily about two times, if not three times higher than that of the US, Europe or Japan. Even so, it will be interesting to see how long emerging markets sustain their growth premium. Valuations are now very stretched and if the US and Japanese recovery continues to gain visibility, these two markets could well start to outperform the emerging world for a couple of quarters.

Robert: Emerging Markets – Brazil, India and China anyhow – have clearly risen faster and stronger from the crisis, for good fundamental reasons – young consumers in hundreds of millions, and governments following ambitious infrastructure plans (in turn), driving demand for commodities.

Christopher Wood: Recovery is partly driven by the hope of a US restocking cycle and partly by the fact that Asia and emerging markets in general are becoming more domestic-demand driven.

William: We are in the midst of a historic shifting of economic power globally from a worn-out, complacent, over-leveraged, demographically challenged and decrepit West to a youthful, striving, high savings and increasingly well educated and confident Asia eager to take its place at the top table internationally.

Emerging markets cannot decouple completely in a globally integrated world but they do have greater flexibility to develop their own internal markets – as we have seen with the Chinese stimulus programme. This growth of emerging markets at the expense of the West is the story of the next 50 years.

Anthony: Let’s focus on China especially for a moment since that is where most of the action continues to be. How do you see prospects in the China market?

Mark: Excellent. Chinese stocks have already gone up a lot and they will correct downwards but that will be temporary.

Robert: I remain bullish on China. Their macro-economic planning and management during the crisis continues to defy the Western pundits. They have plenty of cash (US$2 trillion reserves) and plenty of confidence. The younger generation will consume and borrow more. Economic relations with Taiwan improve. Overseas trade will recover. The renminbi is internationalising.

Jesper: China is one of the countries most exposed to rising cost pressures. Profit margins are already very thin, competition keeps intensifying across most sectors, and skilled labour is scarce. The key to success in the Chinese equity market will be an intense focus on stock selection – the gap between winners and losers is poised to widen sharply.

We will see the rise of true multinationals from China, true global players who do not just manufacture, but actually control the distribution channels and branding across the globe. These will be the real winners emerging from China over the next couple of years.

Ernest: China took aggressive measures to increase bank lending which in turn supported a strengthening of the stock market and is producing what looks like the start of a bubble, which the authorities are now trying to contain.

The Chinese government’s stepping up bank lending was necessary but it’s time for the excessive lending to be scaled back now. China’s stimulus adds its own risk, including those of asset bubbles, overcapacity and non-performing loans.

Christopher: It is possible that the Chinese economy will grow by around 9 per cent in the second half of this year, after 7.1 per cent (year on year) growth in the first half of the year, due to surging public-sector and private-sector fixed-asset investment and resilient consumption. This assumes no real recovery in the West and a negative contribution to growth in terms of net exports. I am still overweight on China equities.

Eisuke: China will continue to grow at a fairly high rate of 7 or 8 per cent for some years to come and next year I think that China will be number two in terms of GDP.

That is only natural (because) China is a big country with a big population. China will need to emerge as a major economic power in the world.

William: The Chinese stimulus programme has been successful but the question is whether it is sustainable. It has involved a rapid expansion of bank balance sheets that could result in substantial losses a few years from now. As long as China’s export markets stabilise then China’s growth rate can be maintained at levels well above the West’s rates. China recognises the old reliance on exports must change and it will. The real question is how fast that transformation can occur. Chinese equities have had a great run and are overdue for a breather but they have a core position in any long-term growth portfolio.

Anthony: Let’s turn to wider issues. Is the world facing a risk of inflation as a consequence of all the liquidity that has been injected into economies, or deflation because of the global recession?

Eisuke: The global inflation threat is almost zero but there are some asset bubbles. If you think in terms of prices of goods, inflation fear is groundless but in terms of the prices of assets, there is a danger of bubbles in China, and even in Japan and the US. I don’t think there will be hyper-inflation.

Robert: I expect inflation to rise within 12 months. Deflation is politically unacceptable in Western democracies and monetising debt is the only way out. This is very bearish for government bonds but mildly bullish for equities, property, and commodities, provided that inflation remains below 10 per cent.

William: We have been printing money like never before: the Fed’s monetary base more than doubled in three months in late 2008. However, this has been going to fill up the black holes in balance sheets created by the credit implosion and velocity has dropped sharply. As a consequence it has yet to create inflation.

As things stand, we still need more quantitative easing and ultimately we need some inflation to reduce the real burden of our excessive debts. Renewed inflation would most likely come from currency depreciation especially the dollar which looks very weak at present and headed further south, possibly disastrously. I believe US government bonds are unattractive under such circumstances, selected equities are relatively more attractive, especially emerging markets on pull backs, as well as some commodities, including gold, silver and oil. Income producing property should also be attractive after the falls of the last two years.

Christopher: The risk in America and the West remains deflation. There remains almost zero evidence of re-leveraging in America.

Mark: Inflation is good for equities but not for bonds because bond rates must go up. Depending on how fast the money supply brakes are applied then the impact on equities could be positive or negative.

Anthony: While we’re talking about inflation, the gold price continues its upward climb. Where is it headed and why?

Mark: Gold has probably already discounted a lot of inflation expectations but when hyperinflation hits then gold could move much higher.

Robert: Gold is going to a minimum of US$2,000 an ounce by 2011, in my view, for all the reasons above. World money supply has doubled in the last two years. No new gold supply, plus dwindling faith in ‘fiat’ currencies all around the world. Neither the dollar, nor the yen, nor the Euro will fill the bill.

Christopher: I maintain a long-term bullish view on gold bullion, with my long-term target price set at US$3,360 an ounce.

William: Gold has been tracing out a huge consolidation pattern since it first crossed the US$1,000 mark in March 2008. The demand for physical gold has been huge during this period of financial crisis as gold performs its familiar role of asset of last resort as governments around the world have engaged in unprecedented levels of quantitative easing. I am looking for a significant breakout to higher prices in the coming months: US$1,200 by the end of the year is not impossible with higher prices next year.

Jesper: Gold is the best hedge we have to the principal risk, which is inflation; so I like gold and also inflation linked bonds as a hedge.

Ernest: Psychology is the driving force behind the price of gold. Unless you have a clear idea who is going to come and rescue your portfolio of paper investments, owning gold and silver is important. Gold is still the only asset class which has risen in price every year since 2001. In fact, it is a bargain for gold to be selling for less than US$1,000 per ounce!

Anthony: In conclusion, what could go wrong to derail the present recovery?

Mark: Money supply has had fed the markets. Excess money supply begets inflation and that is what could go wrong but that is something we don’t have to worry about for probably another year.

Robert: The only real problem I see is the high level of European government debt, which should not affect Asian markets.

Christopher: What can go wrong, and will go wrong, is that Western growth will remain anaemic in 2010 as a result of continuing de-leveraging.

Jesper: The biggest threat is inflation; if we get a new round of cost-push inflation we would be forced to call for a negative earnings cycle coming as soon as 2011. Another big threat is protectionism. Personally, I am hopeful this threat is low; I am very encouraged by the well coordinated response we have had to the global financial crisis, which suggests that global policy makers actually act rationally.

William: Many problems have been swept under the carpet and so a sustainable recovery to former growth rates does not seem to be on the cards for the US, the EU and Japan. The de-leveraging process still has a way to go and consumers, especially, have to continue to rebuild their balance sheets. Governments will have to restrain their expenditures and increase taxes, which will be neither easy nor popular.

Central banks also have to walk a fine line between taking away the punchbowl of quantitative easing and creating the fuel for future large scale inflation.

Ernest: There are two major things that could go wrong – the commercial property mortgage market and stimulus spending which could cause a bubble. Years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

Throwing billions of stimulus dollars at the banks is unlikely to produce a healthy economy because households are broke. At best, it may only lead to a temporary pickup in growth. Stimulus packages around the world are ultimately going to cause more damage than they prevent. These packages have simply delayed the coming downturn, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the downturn worse than had governments not injected massive amounts of money into the economy.

When the (current) debt bubble bursts, the world will enter a serious downturn. The bailout is much bigger than the dot-com and real estate bubbles which hit speculators, investors and financiers the hardest. When the ‘Bailout Bubble’ explodes, the system goes with it because neither the US President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another bubble.