Wednesday, March 4, 2009

Warren Buffet says that US economy is in Shambles.....

I am posting here what WB wote in annual letter.
But this time seems WB has also gone horribly wrong.WB is going to come on air on CNBC and I have asked him a question on CNBC.Let us see whether CNBC put my question to WB or not.
But here I am pasting here some views by Jim Cramer and Jeff Mathew as well which one can read one after other.
What I have written in my last post on US Economy and Financial just a small trailer.I am seeing the US ecconomy deteriorating more then this and hence the global economy is now and would be in a very bad state.
AIG showing a $61 bn loss for a qr is a very big amt and I personally feel that the loss will keep on mounting.
I have asked the same question to the Oracle of Ohama , what I have written in my post that the Chinese trade deficit with USA is as big as $3 trillion and the Fiscal deficit of USA is over $1.5 trillion.How USA is going to balance it ?
Whenever I have met an Indian person living in USA and tried to talk and discuss about the US economy , they only says ,see what US has done to Chinese trade.They have broken the back of Chinese economy but I asked them , agreed that Chinese economy back is broken as China use to export majorly to USA.But what about USA's own economy?How USA is going to deal with its own problem?How the housing problem and Banks crisis and drying up of money is going to be solved?They says that people has to change the life style now and they need to start saving now onwards.That is what I was upto....means while disabling China economically USA people are going to pay a great price for that .
People will keep losing job and the unemplyement figures will keep on increasing.

For this read my last article which I have pasted under the heading " BUBBLE ECONOMICS - GLOBAL CRISIS: LURCHING FROM GLUT TO BUSTPAUL KRUGMAN "

It shows how the easy money were diverted in some fake funds and how Fund managers showed investor a big return which were never there.Bernie Madoff and likes type of episode will keep on coming .
Looking at the situation seems there is no end .Europe is going down with billions/trillions of dollar loss.There is a big big financial crisis globally and this is not going to end early.This recession which will get converted to deflation can long more then 4-5 yrs for USA and it can be even more then that.
THIS IS A FINANCIAL MESS......AND NO ONE IS SPARED and no one is going to be get spared......NO ONE SHOULD FEELTHAT HE IS SAFE ESPECIALLY THOSE LIVING IN USA.I am not writing just to sacre .I am seeing a very bad situation coming for USA unless US needs to think totally the different way. Even after that , how much the situation will get solved remained to be seen.
I am writing on US more this time because people here believes that the economy will make a comeback within a year.But that is not going to happen and no one should live in fools paradise that everything in US is going to be well soon.

When I came here in USA and started following Wall Sreet Journel and CNBC I was wondering what can happen if US stock market goes down.As I saw that all the money in 401K and IRS get used to be invested in US stock market and if the return is not there of 10%, which is the normal and minimum return people use to count, then what can be the fate of those money?
Fisrt around Feb 08 , I saw Bear Stren going broke.At that time it was said that this is just once in a life time.....but then a major jolt camein from Lehman Br , a 156 year old company and the CEO's have no guilt for taking such a company to bankruptcy.
USA system is said to be the most vibrant and trasparent and the investors world over use to invest in US stocks.But the trasperancy was never there.It was all fishy. Later after Bear Stern episode the financial Insti kept on taking money from Suadi Arabai, Dubai and other countries rich people and giving stakes to them which varies from 2 to 5% and all those money were drowned.
I am suspecting much deeper crisis and seeing Dow at much much lower level then this......AIG ,an insurance co, biggest in the world, when reports a $61 bn loss in only one quater is big big enough.If we consider $70 bn for 1 qr what can be the loss for the whole year?Can it be $240 bn?and that too for just one company!

Hence Read on:

Warren Buffet says that US economy is in Shambles.

Saturday, 28 Feb 2009 Warren Buffett Tells Shareholders He Did "Some Dumb Things" In 2008 Posted By: Alex Crippen Topics:Warren Buffett Companies:Procter & Gamble Co Johnson and Johnson Goldman Sachs Group Inc General Electric Conocophillips Berkshire Hathaway Inc.
In his annual letter to Berkshire Hathaway shareholders, Warren Buffett says he did some "dumb things in investments" last year.
The company's controversial "equity put" options are not included on that list. There has been some criticism of Buffett as the declining mark-to-market value of those contracts puts pressure on reported earnings. Fourth quarter net fell 96 percent to $117 million, largely due to 'paper' losses on those derivative positions. For the year, net fell to $4.99 billion from $13.21 billion the year before.
Buffett also predicts the economy will "be in shambles throughout 2009 - and for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."
He's still optimistic for the long-term, however, again pointing out that "our country has faced far worse travails in the past" but always "we've overcome them." He says confidently, "America's best days lie ahead."
The letter was posted this morning (Saturday)
on the company's websitealong with Berkshire's 2008 annual report.
Buffett admits that "I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."
The mistake of commission: buying a large amount of ConocoPhillips
[COP 36.42 -0.93 (-2.49%) ] stock just as energy prices were near their peak. Buffett writes, "I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year." He still thinks oil will eventually go well above its current $40-$50 range, "but so far I have been dead wrong."
Even if energy prices do rise, "The terrible timing of my purchase has cost Berkshire several billion dollars."
Buffett also reveals that he spent $244 million for shares of two Irish banks that "appeared cheap" to him. At the end of the year, they were written down to their market price of $27 million, for a loss of 89 percent, and they've continued to drop.

"The tennis crowd would call my mistakes 'unforced errors.'"
But he says he's not bothered by the overall "significant decline" in Berkshire's portfolio. "We enjoy such price declines if we have funds available to increase our positions."
Buffett confirms that he sold some stocks he would have preferred to keep to fund Berkshire's purchases of $14.5 billion in fixed-income securities from Wrigley, Goldman Sachs
[GS 86.79 -4.29 (-4.71%) ] , and General Electric [ Loading... () ] . He calls the holdings "more than satisfactory" based just on the high current yields they are delivering. Equity participation is a "bonus."
Those sales primarily involved Johnson & Johnson
[JNJ 49.35 -0.65 (-1.3%) ] , Procter & Gamble [PG 47.50 -0.67 (-1.39%) ] , and Conoco. (See last week's WBW post Why Warren Buffett Isn't a Hypocrite.)
"I have pledged - to you, the rating agencies and myself - to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits."
The letter also reveals a 9.6 percent decline in Berkshire's book value per-share last year, making 2008 the company's worst year since Buffett took over in 1965. Book value fell by $11.5 billion during the year.
There has been only one annual decline before this one. In 2001, book value fell 6.2 percent.
Compared to the S&P, however, Berkshire's drop is relatively small. With dividends included, the S&P's book value fell 27.4 percent, giving Berkshire its biggest "win" since 2002.
In the letter, Buffett notes that it was also the S&P's biggest decline during the past 44 years.
"By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game."
In a lengthy section on derivatives, Buffett calls them "dangerous" but defends Berkshire's 251 contracts. "I believe each contract we own was mispriced at inception, sometimes dramatically so."
He says the derivatives "float" (payments made to Berkshire by the contracts' buyers minus losses paid by the company) totaled $8.1 billion at the end of the year, money that can be invested.
And "only a small percentage of our contracts call for any posting of collateral when the market moves against us."
He specifically addresses the "equity put" contracts that have caused some concern among investors, revealing that Berkshire has "added modestly" to them.
The contracts, which insure against stock market declines over a period of many years, total $37.1 billion. They're written against the S&P 500, the U.K.'s FTSE 100, the Euro Stoxx 50 in Europe, and Japan's Nikkei 225.
Berkshire is only required to make any payments when the contracts expire. The first comes due in 2019 and the last in 2028. The mark-to-market, or 'paper', loss on the equity put contracts totals $5.1 billion.
Buffett emphasizes a point that he says is often misunderstood. "For us to lose the full $37.1 billion we have at risk, all stocks in all four indices would have to go to zero on their various termination dates." If the indices are down 25 percent, Berkshire would owe about $9 billion between 2019 and 2028, and would have had use of the $4.9 billion premium all along.
Buffett's conclusion: "We have told you before that our derivative contracts, subject as they are to mark-to-market accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother Charlie (Munger) and me. Indeed, the 'downs' can be helpful in that they give us an opportunity to expand a position on favorable terms. I hope this explanation of our dealers will lead you to think similarly."

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone all in. Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel.
Charles Dharapak / AP Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke appear before the House Financial Services Committee on September 24, 2008.
These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyones guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They wont leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy. In our insurance portfolios, we made three large investments on terms that would be unavailable in normal markets.
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash equivalents... Berkshires second component of value is earnings that come from sources other than investments and insurance...
In 2008, our investments fell from $90,343 per share of Berkshire (after minority interest) to $77,793, a decrease that was caused by a decline in market prices, not by net sales of stocks or bonds. Our second segment of value fell from pre-tax earnings of $4,093 per Berkshire share to $3,921 (again after minority interest).
Both of these performances are unsatisfactory. Over time, we need to make decent gains in each area if we are to increase Berkshires intrinsic value at an acceptable rate. Going forward, however, our focus will be on the earnings segment, just as it has been for several decades. We like buying underpriced securities, but we like buying fairly-priced operating businesses even more.

Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.
The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrowers income. That income should be carefully verified.
Putting people into homes, though a desirable goal, shouldnt be our countrys primary objective. Keeping them in their homes should be the ambition.
Early in 2008, we activated Berkshire Hathaway Assurance Company (BHAC) as an insurer of the tax-exempt bonds issued by states, cities and other local entities...
We remain very cautious about the business we write and regard it as far from a sure thing that this insurance will ultimately be profitable for us. The reason is simple, though I have never seen even a passing reference to it by any financial analyst, rating agency or monoline CEO.

The rationale behind very low premium rates for insuring tax-exempts has been that defaults have historically been few. But that record largely reflects the experience of entities that issued uninsured bonds. Insurance of tax-exempt bonds didnt exist before 1971, and even after that most bonds remained uninsured.
Mark Lennihan / AP Warren Buffett's municipal bond insurer write its first policy in January, 2008, backing a $10 million bond issued by New York City.
A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different. To understand why, lets go back to 1975 when New York City was on the edge of bankruptcy. At the time its bonds virtually all uninsured were heavily held by the citys wealthier residents as well as by New York banks and other institutions. These local bondholders deeply desired to solve the citys fiscal problems. So before long, concessions and cooperation from a host of involved constituencies produced a solution. Without one, it was apparent to all that New Yorks citizens and businesses would have experienced widespread and severe financial losses from their bond holdings.
Now, imagine that all of the citys bonds had instead been insured by Berkshire. Would similar belttightening, tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire would have been asked to share in the required sacrifices. And, considering our deep pockets, the required contribution would most certainly have been .
The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like todays could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable in fact, almost smug in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim cash is king, even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

This year we will be making important changes in how we handle the meetings question periods. In recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last year there were practically none. So we need to steer the discussion back to Berkshires businesses. Omaha's Qwest Center, site of Berkshire Hathaway's annual shareholders meeting
In a related problem, there has been a mad rush when the doors open at 7 a.m., led by people who wish to be first in line at the 12 microphones available for questioners. This is not desirable from a safety standpoint, nor do we believe that sprinting ability should be the determinant of who gets to pose questions. (At age 78, Ive concluded that speed afoot is a ridiculously overrated talent.) Again, a new procedure is desirable.

In our first change, several financial journalists from organizations representing newspapers, magazines and television will participate in the question-and-answer period, asking Charlie and me questions that shareholders have submitted by e-mail. The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be emailed at"> ; Becky Quick, of CNBC, at"> , and Andrew Ross Sorkin, of The New York Times, at"> . From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)
Neither Charlie nor I will get so much as a clue about the questions to be asked. We know the journalists will pick some tough ones and thats the way we like it.
In our second change, we will have a drawing at 8:15 at each microphone for those shareholders hoping to ask questions themselves. At the meeting, I will alternate the questions asked by the journalists with those from the winning shareholders. At least half the questions those selected by the panel from your submissions are therefore certain to be Berkshire-related. We will meanwhile continue to get some good and perhaps entertaining questions from the audience as well.
Current Berkshire stock prices:
Class A:
[US;BRK.A 74320.0 -4280.00 (-5.45%) ]
Class B:
[US;BRK.B 2421.0 -143.00 (-5.58%) ]

Jim Cramer who use to come everyday on CNBC US channel.I use to hear him CNBC.

Tuesday, 17 Feb 2009Jim Cramer Warns Investors: Don't Follow Warren Buffett This TimePosted By: Alex Crippen
Mad Money host Jim Cramer doesn't like what he sees in Warren Buffett's latest stock moves for Berkshire Hathaway, and doesn't think ordinary investors should follow the Omaha billionaire's lead this time around.
UPDATE: Cramer
writes in greater detail on about how he's "struggling" with Buffett's recent stock moves, which amount to "selling America."
Buffett's holding company released its
fourth quarter portfolio snapshot earlier tonight (Tuesday). It revealed a big reduction in Berkshire's holdings of Johnson & Johnson [JNJ 49.22 -0.78 (-1.56%) ] .
Here's Cramer's reaction after Rebecca Jarvis reported tonight on the Berkshire filing during a CNBC Special Report:,0,0,0 height=285 width=320 classid=clsid:D27CDB6E-AE6D-11cf-96B8-44455354000062
JIM: Rebecca, I've got to tell you. I listen and I know that he's a great man. And there's no doubt about it. He's a great man. And I know people love to see what he's doing. But I have to tell you, when I listen to what he sold, and what he bought, he's continuing to make a gigantic bet. And the bet is that everything is alive and well and good. And ever since he wrote that
New York Times piece, which I don't want to talk --
REBECCA: Four months ago to the day --
JIM: Yeah, and what, about 25 percent ago? Look, no one is ever going to say the man has lost his touch. I don't have that kind of arrogance in the show. I will tell you that people who are now going to sit there and buy in the after-market tomorrow morning the things that he bought, and sell the things that he sold, are not people that are going to profit, perhaps, within the time frame that they care about. The time frame that Buffett cares about --
REBECCA: He said that he'll hold onto it forever, Jim, if he could. That's --
JIM: That forever thing is so bad. I was at Chase the other day and they wanted to know when I wanted to pay my mortgage, and I was going to give them some forever rap. America ain't used to the forever game. America is about trying to put food on the table and pay the mortgage and we just don't have the luxury of being wrong. And that's what I think Warren's doing. He's got the luxury of being wrong. The rest of us do not.

Wednesday, 18 Feb 2009

Jim Cramer "Struggles" With Warren Buffett's Stock Moves Because He's "Selling America"

Posted By: Alex Crippen
CNBC's Mad Money host Jim Cramer is laying out his case against Warren Buffett's recent stock moves.
Last night (Tuesday), after
Berkshire Hathaway's fourth quarter portfolio snapshot, Cramer warned on CNBC that investors should not follow Buffett's lead because they will not profit "within the time frame they care about." (Transcript and video clip are in the WBW post Jim Cramer Warns Investors: Don't Follow Warren Buffett This Time.)
This morning,
on his site, Cramer goes into greater detail, explaining why he's "struggling with some of the things that Warren Buffett is doing with his cash these days."
Cramer's prime complaint: Warren Buffett was "selling America" last fall when Berkshire reduced its stakes in Johnson & Johnson, Procter & Gamble, ConocoPhillips, and U.S. Bancorp. "What's more American than these stocks?" he asks. (The post notes that Cramer is currently long Johnson & Johnson and ConocoPhillips.)
Cramer draws a contrast with Buffett's "now-fated"
October 16 New York Times op-ed piece that argued it was time to buy American stocks. Since then, the major market indexes have continued to plunge, so "those who bought America that day are feeling ... well, downright un-American. Or at least they're feeling poorer."
Cramer says that he is "sensitive" to that Times piece because at the same time he was advising an exit from stocks if investors needed to keep their money safe for a major purchase in the next year.
And he argues that while rich people can afford to buy for the long term as Buffett advises, everyone else can't.
"As long as Buffett was buying and not selling, or as long as he was at least holding, you couldn't knock him. But now it turns out he's putting a terminal value on something we thought we were to hold forever."
While Buffett is "obviously a tremendous investor" and "doesn't have to answer for anything," Cramer continues, "It is fair to say that many, many people relied on his judgment to buy stocks just like the quintessential American names of Procter & Gamble and Johnson & Johnson. To them, what can I say? 'Don't worry about it.'"
Cramer concludes that Buffett's "actions should be scrutinized just like anyone else's," so is starting its own Buffett Watch. (He cites his friend Doug Kass, "who has been on this case for months now" and who has
his own questions today about Berkshire's portfolio.)
"We need to know what's happening. Buffett's firm is too big, and he is too important to ignore. We need to know daily and some institution has to have the guts to do it. Glad it's us."

Jim Mathew's post:

Saturday, February 28, 2009

This Just In: Berkshire Equity Portfolio Back to its Cost Basis

The 2008 Chairmans Letter from Warren Buffett is in, and while it contains much of what youd expecta self-confession or two, that old Mae West Snow White joke, one humorous new aphorism (beware of geeks bearing formulas) and a metaphor that associates derivatives with social diseases, not to mention a sober assessment of the world economy, one no-punches-pulled prediction on inflation, as well as plenty of cheerleading for Berkshires managers and businessesthe biggest shocker in the letter is not actually highlighted, or even mentioned, by Buffett.The shocker is this: Berkshire Hathaways portfolio of equitiesthe stocks such as Coke and P&G and Washington Post that Warren Buffett himself, the Oracle of Omaha, famously purchased over the years at bargain pricesappears, as of yesterdays market close, to be worth not much more than Buffett's cost.Thats right.Based on the year-end portfolio presented in the letter (and it has changed only modestly over time, but now excludes two stocks, Burlington Northern and Moodys, in which Berkshire owns 20% and must report its holdings under the equity method,) Berkshires entire equity portfolio, which had a $37 billion cost basis and a $49 billion market value at year-end 2008, was, as of yesterdays market close, worth only about $37 billion.Now, we know what youre thinking: youre thinking, Warren doesnt mind, so why should we?Indeed, Buffett doesnt mindhe says so in this years letter, on page 5:Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me.Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that Price is what you pay; value is what you get. Whether were talking about socks or stocks, I like buying quality merchandise when it is marked down.Yet Buffett also disclosed what might go down as the second most surprising disclosure in todays letter: he had to sell some of Berkshire's stocks to make those headline-grabbing investments in GE, Goldman Sachs and Wrigley:To fund these large purchases [GE, Goldman and Wrigley], I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips).No, to answer the obvious question, were not suggesting Buffetts portfolio is any worse off than anybody elses.Yet the fact is, the value of Berkshires equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.And the fact that it appears to be right back to its cost basisafter decades of notis startling.Now, the calculation itself is fairly straightforward. Since year-end Berkshires equity portfolio has suffered losses of close to $1 billion or more in American Express, Conoco-Phillips, P&G, and USB, if the computers here at NotMakingThisUp are correct.And while some of those losses are certainly temporary, the hits to his financial holdings look more permanentas does the whopping $5 billion decline in Berkshire's 7% stake in Wells Fargo thus far in 2009.Virtually every other named holding in Berkshires portfolioincluding Coke, Tesco, Swiss Re, and even poor old Washington Postis also down year-to-date.Consequently, if our math is correct, Berkshires equity portfolio stands at roughly $37 billion as of yesterday's market close, dead even with its $37.1 billion reported cost basis at year-end 2008.(For comparisons sake, at the end of 2007, Berkshires equity portfolio had a $35 billion unrealized gain.)As a modest shareholder in Berkshire Hathaway, were rooting for the current, jaw-dropping state of affairs in Berkshires equity portfolio to revert to the meani.e. back to fat profits.Nevertheless, if anyone had doubts how bad it is out there (Buffett himself writes in todays letter, Were certain, for example, that the economy will be in shambles throughout 2009 and, for that matter, probably well beyond) look no further than the Berkshire portfolio.As for what may be the least surprising aspect of Warren Buffetts letter to shareholderswe think it is that Buffett himself acknowledged what we wrote in Pilgrimage to Warren Buffetts Omaha, page 208, in a chapter called What Would Warren Do?Far from being a forum for business discussion, as Buffett wrote [when describing the virtue of attending Berkshires shareholder meetings], not a single shareholder has even asked about the business.So Buffett, according to the final page in this year's letter, is changing the rules on asking questions at the upcoming meeting.More on those changes Monday, when we introduce the Pilgrimage to Omaha Top Ten List of Questions Wed Like to Hear Somebody Ask The Oracle of Omaha.Jeff MatthewsI Am Not Making This Up© 2008 NotMakingThisUp, LLCPilgrimage to OmahaThe content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Comments: Here Jim Mathew has nicely explained how WB's investment has come to square one....


Remember the good old days, when we used to talk about the subprime crisisand some even thought that this crisis could be contained? Oh, the nostalgia! Today, we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. Were living in a world of troubled borrowers, ranging from shopping mall developers to European miracle economies. And new kinds of debt trouble just keep emerging.
How did this global debt crisis happen? Why is it so widespread? The answer, Id suggest, can be found in a speech Federal Reserve chairman Ben Bernanke gave four years ago. At the time, Bernanke was trying to be reassuring.
But what he said then nonetheless foreshadowed the bust to come.
The speech, titled The Global Saving Glut and the US Current Account Deficit, offered a novel explanation for the rapid rise of the US trade deficit in the early 21st century.
The causes, argued Bernanke, lay not in the US but in Asia.
In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with whats happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect, exporting capital to the rest of the world. The result was a world awash in cheap money, looking for somewhere to go.
Most of that money went to the UShence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Bernanke correctly pointed out, money surged into other nations as well.
In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the US, were much larger compared with the size of their economies.
Still, much of the global saving glut did end up in America. Why?
Bernanke cited the depth and sophistication of the countrys financial markets (which, among other things, have allowed households easy access to housing wealth). Depth, yes.

But sophistication? Well, you could say that US bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.
And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today.
Reforms have made Iceland a Nordic tiger, declared a paper from the Cato Institute. How Ireland Became the Celtic Tiger was the title of one Heritage Foundation article; The Estonian Economic Miracle was the title of another. All three nations are in deep crisis now.
For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine.
But bubbles always burst sooner or later, and yesterdays miracle economies have become todays basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries currencies.
Nor is the damage confined to the original borrowers. In the US, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsedand that has taken a terrible toll on the industrial heartland.
Similarly, Europes bubbles were mainly around the continents periphery, yet industrial production in Germanywhich never had a financial bubble but is Europes manufacturing coreis falling rapidly, thanks to a plunge in exports.
If you want to know where the global crisis came from, then, think of it this way: Were looking at the revenge of the glut. And the saving glut is still out there. In fact, its bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.
One way to look at the international situation right now is that were suffering from a global paradox of thrift: Around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off. So thats how we got into this mess. And were still looking for the way out.

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