Global financial meltdown 'not far-fetched'

[Stuart Mackey]

url dressed in a pink polka dot bikini

11:45AM Thursday November 08, 2007
George Soros

George Soros

NEW YORK, LONDON - Billionaire investor George Soros has given warning that the US is on the brink of a slowdown far more serious than the Federal Reserve is expecting.

Mr Soros said during a lecture at the New York University this week that the American economy is "on the verge of a very serious economic correction" after decades of overspending.

His statements have caused disquiet among investors and central bankers, as Mr Soros made US$1 billion by betting against the Bank of England in 1992.

"I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing," he said.

"We have borrowed an awful lot of money and now the bill is coming to us and the war on terror has thrown America out of the rails."

Bleak warnings of more pain to come in the credit sphere snowballed on Tuesday and fears of subprime losses yet to be unearthed has rattled money markets.

Bank of England Governor Mervyn King said it would take months for banks to reveal their full losses stemming from risky mortgages and former Federal Reserve chief Alan Greenspan said the housing debacle was a major risk to the US economy.

Red ink flowed as IndyMac Bancorp, one of the largest independent US mortgage lenders, posted a third-quarter net loss of US$202.7 million due to mounting delinquencies and a collapse in investor demand to buy its home loans.

The loss was five times larger than it had projected, giving life to investor fears of more skeletons in the financial sector's closet. Emblematic of the market's mood, Goldman Sachs had to deny swirling rumors that it may need to write down mortgage-related losses.

International Monetary Fund chief economist Simon Johnson said financial market anxiety may have entered a second phase that could cause more credit tightening. Meanwhile, BoE's King reminded investors the banking sector had a long slog ahead.

"I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," he said in an interview with the BBC.

As fears rise of more balance-sheet shock, economists worry that the deteriorating value of the mortgage debt and derivatives banks hold will choke off the traditional lending they do to the rest of the economy, dragging down growth.

Rising money market rates showed heightened concern among banks about the credit-worthiness of their counterparts.

London interbank offered rates for dollar deposits posted their biggest increase since late September.

"We are watching the credit markets with concern," said Johnson at the IMF.

In Europe, Germany's Commerzbank posted a third quarter net profit of 339 million euros (US$493 million) after writing off 291 million euros of assets exposed to the market for risky US mortgages.

Others have already announced far bigger hits.

The head of US banking giant Citigroup quit on Sunday, taking the blame for expected losses of US$8-11 billion before taxes, on top of US$6.5 billion it wrote off three weeks ago.

Charles Prince's departure came five days after Merrill Lynch & Co ousted its chief executive, Stanley O'Neal, following an US$8.4 billion write-down there.

Citigroup on Tuesday named Richard Stuckey, who helped stabilise the Long-Term Capital Management LP hedge fund, to fix its troubled subprime mortgage portfolio.

Estimates of eventual total losses vary but all the figures put forward are staggering.

JPMorgan thinks the financial services industry is sitting on US$60 billion in undisclosed losses. Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, characterises the subprime crisis as a "US$1 trillion problem."

Greenspan said about US$900 billion of subprime mortgages had been securitised into fixed-income instruments, and the excess level of unsold homes was driving price declines that are eroding the value of the securities backed by those mortgages.

"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.

Mr Soros, during his lecture, had declined to nominate which currencies were more vulnerable currently.

He also declined to comment specifically on the dollar.

"I know exactly where the currencies are going to but I'm not going to tell that to you," he told the audience.

Last week, investment guru Jim Rogers, who co-founded the Quantum Fund with Soros in the 1970s, recommended selling the dollar as well as US investment banks and US housing stocks.

Soros said that, for now, China is the "absolute winner" in economic terms, and will continue to see its economy soaring during the next few years.

"Now it is going through this fantastic transformation but in 10 years time I think you may well have a financial crisis in China," he said.

- REUTERS

[J]

The troubles surface one by one, first, peak oil starts going mainstream, and now the finiancial house of cards has been picked up by a high profile person in the financial sector. I wonder when the mass panic will begin...

[Xisiqomelir]

Someone suggest a worthy investment. I can't decide between oil futures, renminbi, Nintendo stock or attack dog food.

[Darth Wong]

The troubles surface one by one, first, peak oil starts going mainstream, and now the finiancial house of cards has been picked up by a high profile person in the financial sector. I wonder when the mass panic will begin...

It's probably more constructive to start talking about how one can position oneself to limit the personal exposure to the consequences at this point, ie- where to put one's money, what items or skills to acquire, etc.

[Sephirius]

Someone suggest a worthy investment. I can't decide between oil futures, renminbi, Nintendo stock or attack dog food.

Short Term: Canadian petrochem companies

Long Term Investment: something in 7.62mm with 3 to 4 thousand rounds for it, and provisions for a few months.

[aerius]

Someone suggest a worthy investment. I can't decide between oil futures, renminbi, Nintendo stock or attack dog food.

Hoard a ton of gasoline, then sell it for a massive profit in 6 months to a year.

[Admiral Valdemar]

I wonder if those people laughing at comparisons with the Weimar Republic will still think the same thing is laughable now, given the dollar is falling at a horrific rate. The way it's going, the US won't be able to afford to buy more oil for the SPR, which will reach below the five year minimum soon enough.

Then there's the housing, credit and food problems cropping up.

[Kanastrous]

Someone suggest a worthy investment. I can't decide between oil futures, renminbi, Nintendo stock or attack dog food.

Ammunition.

Saved up a lot of money-in-the-bank, off the last several years' work.

Looks like it might come in handy.

As TP, if nothing else...

[Admiral Valdemar]

Natural gas. Before it runs out soon after oil, there'll be a huge run on it as people switch to it for heating their homes (mostly the case in the UK already) or running their cars. That, and old king coal.

[Dartzap]

Indeed, several coal mines in Cornwall and Wales are starting to reopen at the moment. Maybe the Black Country still has some left as well? It could certainly do with the investment, heh.

[Chardok]

Methane Hydrate?

[Big Phil]

Why do so many of you seem to be cheering for a global meltdown? Do you really think you won't be affected?

[Dartzap]

Why do so many of you seem to be cheering for a global meltdown? Do you really think you won't be affected?

I take it you have never heard Always look On The Bright Side Of Life? The secound verse in particuler.

[Admiral Valdemar]

Why do so many of you seem to be cheering for a global meltdown? Do you really think you won't be affected?

Care to point out where anybody mentioned that? Of course we'll be bloody affected! You can't not be in the loop somewhere down the line, unless you truly live off the grid.

I don't know about cheering, since there is none, but keen interest there is plenty.

[Big Phil]

Why do so many of you seem to be cheering for a global meltdown? Do you really think you won't be affected?

Care to point out where anybody mentioned that? Of course we'll be bloody affected! You can't not be in the loop somewhere down the line, unless you truly live off the grid.

I don't know about cheering, since there is none, but keen interest there is plenty.

Between this thread and past threads on peak oil, there seem to be some people who take a certain amount of glee that the future isn't quite as rosy as it seemed to be (once upon a time). Nobody has ever come out and said "Yay! The future's going to suck!" but the tone of some posts is makes me wonder what some folks are thinking?

Maybe it's just me misinterpreting people's intentions, but usually when predicting a catastrophe, people hope they're wrong, rather than pointing out that their predictions are correct.

[Dartzap]

Welcome to the British and other assorted peoples psyche: If it can go wrong, it will go wrong. Don't try and be happy, because in the end you will just end up being disappointed.

[The Jester]

Nobody has ever come out and said "Yay! The future's going to suck!" but the tone of some posts is makes me wonder what some folks are thinking?

I would hazard a guess that the coming storm is quite frightening, so humour is a way of dealing with all the worry.

[Admiral Valdemar]

I hope I'm wrong. If, however, all the facts point to me being right, then what should I do? Join the ranks of billions out there who carry on regardless and don't even grasp that we live in an artificial bubble of prosperity in history? No thanks.

The Chinese curse of "May you live in interesting times" comes to mind. I may not like what is going to happen, but I can at least show an interest in it and be smug about knowing I somewhat tried to help others before finding it was hopeless since everyone treated those who grasped a finite resource could run out as loonies.

[Bug-Eyed Earl]

So in everyone's opinion, what's the next President going to have to do to either avert or deal with this directly?

[NeoGoomba]

Build a massive fortification somewhere in Texas where he and those of his cult can survive indefinately when the meltdown happens, letting the outside world rot while he waits for the Rapture.

Oh WAIT...you meant help OTHERS...

[Admiral Valdemar]

No one can avert it. Dealing with it? Nothing the US public will like or even read about, since no candidate who's mind is still on this planet is going to even hint at what is needed to get along in future.

Resource wars are a far more probable scenario, and the US has already begun that game.

[J]

No one can avert it.

Have you forgotten the power of the atom? A global nuclear war will solve Peak Oil and Global Warming for a century or two through the removal of a large percentage of the human population!

Dealing with it? Nothing the US public will like or even read about, since no candidate who's mind is still on this planet is going to even hint at what is needed to get along in future.

Indeed. An actual plausible mitigation plan will basically result in a complete upheaval of US society along with its financial and manufacturing systems. Any presidential hopeful who even hints at such a sea change will be laughed all the way into the rubber room.

Resource wars are a far more probable scenario, and the US has already begun that game.

As we all know, Iraq is all about FREEDOM, and has nothing to do with oil.

[Shinova]

Is the US even getting any real amounts of oil from Iraq with the state the country is in?

[Admiral Valdemar]

Is the US even getting any real amounts of oil from Iraq with the state the country is in?

Nope, but Iraq was never much of a major exporter in Saddam's final years and even less so now. It does have huge reserves, not that it matters when peak oil is production and not reserve numbers.

[J]

Is the US even getting any real amounts of oil from Iraq with the state the country is in?

According to the EIA, the US is getting around half a million barrels a day from Iraq. That's less than 5% of its total imports.