IMF warning to governments a sign of the times

IMF warning to governments a sign of the times

TheStar.com - Business -
March 16, 2008
David Crane

There's something truly scary about the current financial crisis and the potential risks to the global economy when the International Monetary Fund warns that governments need to "think the unthinkable."

This is a sign that we are in uncharted waters and even the top experts don't know what will happen next. The IMF is saying that despite recent massive interventions in financial markets by the U.S. Federal Reserve, the Bank of Canada and the Bank of England, things could get much worse.

Indeed, we could be headed for the worst financial crisis since the 1929 stock market crash and the Great Depression of the 1930s.

The decline in the value of the U.S. dollar, a U.S. recession that's already here, a credit crunch making loans more difficult to get, and rising interest rates for businesses and homeowners are among the factors already at work since the subprime mortgage crisis emerged last August.

Failure to restore confidence in the financial system would make all of these factors worse. Governments could even be forced, in a massive bailout, to take over the bad investments made by banks. Losses by financial institutions from the subprime mortgage crisis have been estimated at $500 billion to more than $1 trillion.

Moreover, Goldman Sachs warns U.S. housing prices could fall 25 per cent from their peak and wipe out $5 trillion of wealth in American households. For many this would wipe out all of their home equity and even leave them owing more than their houses are worth. There are fears of a similar drop in prices in commercial real estate. In addition, the sharp fall in the stock market has wiped out considerable wealth.

And it's not over yet.

"The need to prepare systematically for potential risks has been demonstrated amply during the past few months," the IMF's John Lipsky has warned. "After all, the failure of both financial institutions and public authorities to anticipate the current challenges already damaged some core institutions, undermining confidence and weakening economic prospects."

One risk that Lipsky highlighted is the emergence of "a global financial decelerator" where the financial crisis could do even more damage to the underlying economy, affecting jobs and growth. In this scenario, rising defaults or margin calls could force the fire sale of assets by borrowers unable to come up with cash to meet the demands of their bankers.

These forced sales would push down the value of office buildings, businesses and other assets, leading to a further deterioration in the value of remaining collateral assets and a new round of defaults or margin calls.

The result would be asset-price deflation, a downward credit spiral and a deep recession. A growing number of hedge funds are already getting margin calls, selling assets at low prices or going into default.

The U.S. Federal Reserve has made two interventions of $200 billion each in recent days to support financial markets while the U.S. government is injecting $168 billion of tax rebates to American households in the hope they will spend. There's little evidence these kinds of actions are working so far.

Bank of Canada Governor Mark Carney has pointed out that "the end is not yet in sight," adding that "some of the world's largest financial institutions have recorded substantial losses, the cost of borrowing has increased, and the availability of credit has decreased."

Not surprisingly, "our economy is beginning to feel the effects of the deterioration in global financial conditions."

The failure so far to restore confidence in financial markets, with oil prices hovering around $110 (U.S.) a barrel and gold in the $1,000-an-ounce range as investors rush for safety, show why we should worry. The IMF's warning is spot on.

David Crane can be reached at crane@interlog

Friday, 21 Mar 2008
Gates Foundation to Sell Over Half Its Berkshire Hathaway Shares
Posted By:Alex Crippen
Topics:Bill Gates Warren Buffett
Companies:Berkshire Hathaway Inc.

Seth Wenig / AP
Bill and Melinda Gates pose with Warren Buffett after their 2006 news conference announcing Buffett's intentions to give the bulk of his fortune to the Gates Foundation.
The primary beneficiary of Warren Buffett's plan to give away almost all of the money that's made him the wealthiest person in the world will sell most of the Berkshire Hathaway shares it's already received from Buffett.
In a filing with the SEC, the Bill & Melinda Gates Foundation Trust reveals it has adopted a written sales plan to sell 550,000 of the 975,000 Berkshire Hathaway Class B shares it now owns.
At today's closing price of just under $4348, those 550,000 shares are worth almost $2.4 billion and the total holdings are worth over $4.2 billion.
The sales are planned for a three-year period starting April 1 this year. The filing also says the sales plan can be canceled at any time.
Why? "To facilitate the Trust’s compliance with federal excise tax rules limiting excess business holdings by private foundations."
The Gates Foundation, will be getting more shares, however, as Buffett continues his annual gifts. The AP notes that "Buffett is expected to give 451,250 Class B shares to the foundation this summer as part of his overall pledge to donate 10 million shares."
Current Berkshire Class A price:
Berkshire Hathaway Inc
US%3bBRK.A
132900.0 UNCH 0%
NYSE
Quote Chart News Profile[US;BRK.A 132900.0 --- UNCH (0%) ]
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Current Berkshire Class B price:
Berkshire Hathaway Inc
US%3bBRK.B
4440.0 UNCH 0%
NYSE
Quote Chart News Profile[US;BRK.B 4440.0 --- UNCH (0%) ]

No April Fool's joke +PDP Shorts Will Have To Cover Huge Soon

Market News: After the BellThe close: No April Fool's joke

RTGAMThe biggest movers on Tuesday say a lot about just what sort of stock market rally the U.S. enjoyed: It was a rush for the beaten up and unloved, as investors piled onto a rally out of a fear of being left behind.Citigroup Inc. rose 11.3 per cent. JPMorgan Chase [amp]amp; Co., rose 9.3 per cent. Lehman Brothers Inc., the subject of debate over whether it would survive just a month ago, rose 17.8 per cent.

And Fannie Mae rose 19.7 per cent.But the rush was far more widespread than it might first appear, sending all 30 stocks on the blue-chip Dow Jones industrial average into positive territory. The index closed at 12,654.36, up 391.47 points or 3.2 per cent. The worst stock - the worst - was Coca-Cola Co., and even it rose 0.9 per cent.In this new, upside down world, Treasury bonds tanked. The yield on the 10-year U.S. Treasury bond[amp]nbsp;approached 3.6 per cent from 3.4 per cent previously.[amp]nbsp;The broader S[amp]amp;P 500 closed at 1370.17, up 47.47 points or 3.6 per cent - with 97 per cent of the stocks rising.

The gains narrowed its losses for 2008 to just 6.7 per cent and certainly raises the question of what's driving the equity rally. Is it beginning-of-the-quarter rotations among institutional investors? Are investors betting that the massive writedowns announced earlier by UBS and Deutsche Bank will be the last? Or is this rally the result of relief over lower commodity prices?

There are many theories.In Canada, the S[amp]amp;P/TSX composite index managed to post a respectable gain of 88.15 points, or 0.7 per cent. It closed at 13,438.28, even though it was weighed down by a big retreat among high-profile commodities.

Gold fell to $887.80 (U.S.) an ounce in New York, down $33.70. Crude oil fell to $100.98 a barrel, down 60 cents.As a result of this commodity pullback, the energy sub-index fell 0.9 per cent and materials fell 1.8 per cent. Financials, however, rallied 2.6 per cent.[amp]nbsp;Copyright 2001 The Globe and Mail

All That Glitters

Respect that glitters
Thursday, March 20, 2008
The Contra Guys

TORONTO (GlobeinvestorGOLD) - Gold is searching for something Aretha Franklin sings about, "A little respect". Most articles that mention the record gold price are quick to point out that it really isn't such a big deal because in inflation adjusted terms, the price is still far below the $850 (U.S.) price it hit in 1980. That may be strictly true, but let's put that into context. That record close 28 years ago was the briefest of blips, a culmination of a sharp speculative frenzy set off by the Iranian hostage crisis and consequent oil shock, the Soviet invasion of Afghanistan, and the looming inauguration of cold war hawk, Ronald Reagan.

Just two months before, gold was trading at only $373. Two months after the high, it touched $481.50.

A better comparison would be to see how gold has done since it was deregulated in 1968. At that time it could be had for $35 an ounce. On that basis, the total return over the intervening 40 years has been better than 2,500 per cent, not a bad store of value for a "barbarian relic".
This time around the bull market in the mythic metal has a more solid feel. Sure, there is a heavy element of speculation, but it seems to be more broad based and less frenzied. Taking a position in gold is a lot easier now through vehicles like trust units and ETFs, and transaction costs are lower.

The main threat to those who want to see gold go higher is the potential for stepped up selling by central banks. That's always possible. However we take the conspiracy theories about how gold is being suppressed by shady powers in order to maintain confidence in the global financial system with a large grain of salt. The more logical scenario is that those who were reluctant to sell off their gold are feeling mighty good about their vaults right now and apt to holding on.

Meanwhile, those who dumped their gold, like our own Bank of Canada, which sold off nearly all of its reserves at a fraction of today's price to get rid of an "unproductive asset", are seeing the folly of putting too many eggs in the U.S. dollar basket.

If former U.S. Federal Reserve Chairman Paul Volker was still in the driver’s seat instead of Ben Bernanke, gold speculators might be cringing. His policy jacked up interest rates to 20 per cent inducing a fierce recession, a contraction of the money supply and a massive deleveraging of the financial system, crushing the gold price.

Instead we have Helicopter Ben, who while not facing the same scenario Mr. Volker did, seems to think that the cure for a drunken spree of excess liquidity is a double shot, straight up. Meanwhile, most other major central banks are nervous about the sinking U.S. dollar and firing up their own printing presses. As long as creating money out of thin air is seen as the solution, rather than the cause of the current financial difficulties, it should be a good time to hold the golden cards, not fold them.

Outside of the Contra portfolio we took divergent methods to gain exposure to gold. A few years ago one Contra Guy loaded up on units in Central Fund of Canada (CEF.A-TSX), which holds gold and silver bullion in a roughly 50-50 split. He is maintaining his position in expectation of further profits. The other contrarian is sitting on a bevy of penny plays that include Goldstake Explorations (GXP–TSX), Opawica Resources (OPW-TSX), Patricia Mining (Pat-V) and South American Gold (SAG-TSX), confident that at least one or two will double in the next twelve months. That's how we spell R-E-S-P-E-C-T.

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