NEW YORK - Pessimism about a protracted economic downturn washed over the financial markets on Thursday, sending stocks plunging and seeing further tightening in credit markets.
News of declining factory orders and a seven-year high in jobless claims stoked fears that the US Government’s financial rescue plan won’t ward off a recession.
The Dow plummeted 348.22 points, or 3.22 per cent, to 10,482.85, while the broader S&P500 fell 46.78 points, or 4.03 per cent, to 1,114.28.
The NASDAQ, which carries tech and more recently listed heavyweights, lost 92.68 points, or 4.48 per cent, to 1,976.72.

LONDON - European stock markets fell on Thursday following disappointing economic data from the United States and a decision by the European Central Bank to maintain interest rates at current levels.
In London, the benchmark FTSE 100 index dropped 89.3 points, or 1.8 per cent, to 4,870.3.

FRANKFURT - In Germany, the benchmark DAX 30 index lost 145.7 points, or 2.51 per cent, to 5,660.63.

PARIS - In France, the benchmark CAC 40 index gave up 91.26 points, or 2.25 per cent, to 3,963.28.

TOKYO - Japan-listed shares fell more than 1.8 per cent on Thursday, hitting a three-year low on worries about the financial crisis despite the US Senate approving a mortgage debt bailout.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index shed 213.5 points, or 1.88 per cent, to 11,154.76.

HONG KONG - The benchmark Hang Seng index fared better, lifting 194.9 points, or 1.08 per cent, to 18,211.11.

WELLINGTON - New Zealand-listed share prices rose more than one per cent on Thursday, but investors remained cautious over the US rescue package after it was passed by the Senate.
The benchmark NZX 50 index rose 44.68 points, or 1.4 per cent, to 3,232.64 on light volume.
After an hour’s trade today, the NZ market had dropped 64.223 points, or around two per cent, to 3,168.42 at 0800 AEST.

SYDNEY - Local stocks may trade lower today after US equities markets fell by close to four per cent, while Europe suffered less but also was in the red.
The key Wall Street indices all were down, as were commodities, including oil, gold, silver, and copper.
At 0800 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was down 95 points at 4,680.
In economic news today, the Australian Industry Group and Commonwealth Bank will release their Australian Performance of Services Index (PSI) for September.
The TD Securities/Melbourne Institute will release its Inflation Gauge for September.
Contact Uranium Ltd will hold its annual general meeting in Perth.
Ellerston Capital Ltd will hold a general meeting in Sydney.
In Sydney, Climate Change Review head Professor Ross Garnaut will address the Committee for Economic Development of Australia on “Australia in a low emissions economy”.
Yesterday, the benchmark S&P/ASX200 index lost 33.5 points, or 0.69 per cent to 4,761.1, while the broader All Ordinaries shed 40.4 points, or 0.83 per cent to 4,774.1.

NYMEX

Oil prices closed at their lowest level in two weeks on Thursday, tumbling below $US94 a barrel on doubts that a revamped financial bailout plan will be enough to avoid a protracted economic slump, and revive dwindling US energy demand.
Light sweet crude for November delivery fell $US4.56 to settle at $93.97 a barrel on the New York Mercantile Exchange — crude’s lowest settlement since September 16.
Prices earlier jumped as high as $US100.37, but eased back later as traders digested the details of the revised bailout package.
Oil prices have fallen about $US15, or 13 per cent in the past month as traders’ concerns about waning global energy consumption have outweighed supply threats caused by Gulf coast hurricanes and militant attacks in Nigeria.
The slump in energy demand has accelerated beyond the US.
In India, domestic oil product sales totaled 2.41 million barrels per day in August, the lowest level this year, according to Barclays Capital research.
In the same month, Japan’s oil demand fell by 8.4 per cent.
Significant gains by the US dollar against the euro have also helped push down prices.
Recent data shows that US fuel demand is falling while supplies rise.

COMEX

Commodities prices plunged on Thursday as a rapidly strengthening US dollar and more gloomy readings on the economy compelled investors to dump positions in gold, grains and energy.
Gold for December delivery dropped $US43, or 4.8 per cent to settle at $844.30 an ounce on the New York Mercantile Exchange, after earlier dipping as low as $US833.50.
December silver shed $US1.65, or 12.9 per cent to settle at $US11.12 an ounce, while December copper sank 16.2 cents, or 5.8 per cent to $US2.6275 a pound.

Recently so much talk has been made about whether the global economy is coupled, decoupled…re-coupling, decoupling, or who knows what. Do individual countries economies move alone or are they all intertwined in one big global economic cesspool?

For example, if I showed you a chart of two indexes, but didn’t tell you what they were… you could tell me if they track each other just by looking at them.

Here we’ve got two indexes that over the last year seem to be following the same pattern. While they’re not exact… they track each other pretty well. The two lines on the chart represent the S&P 500 index and the iShares MSCI EAFE index (a broad measure of 21 individual country indexes).

Are these coupled, do they move together? Well in simple investing terms, the answer is yes. The S&P 500 index over the last year is down 22% and the MSCI EAFE index is down about 26%. So are global markets coupled?

Well the answer isn’t always as clear as the example seems…some are and some aren’t.

Just because the broad U.S. markets have been heading south all year and the larger more familiar international countries’ markets have also been on a year-long losing streak…don’t think that every market is following lock-step.
There are opportunities out there in the global markets. Not everyone is facing the same crises as the United States. Some South American countries, the Middle East, parts of Africa and others offer intriguing opportunities.

I’d be hard-pressed to say that a single American doesn’t yet know about Paulson’s proposed bailout of the financial system. It’s been dominating the airwaves lately and even the presidential debate devoted half of their time to the crisis at hand.

Despite the meandering dialogue of panels on CNBC and other business news sources, I want to be abundantly clear about one thing. This bailout constitutes the single greatest case of ignoring the free market in modern history.

As we went to press, it seems as if the bailout plan isn’t going to make it past Congress…but just the fact that they would propose it at all is a major affront to the free market system.

In fact, Henry Paulson repeated over and over again exactly how agitated, disgusted, annoyed, infuriated, angered, embarrassed, and irritated he felt about asking for this amount of money, or any money at all. Sounds sincere if you stop it right there.

But apparently those feelings weren’t enough to reinvigorate his free-market spirit, abolish potential bailout plans, do away with unnecessary regulation and let those who deserve to suffer, suffer.

The bail-out is back.

While you were heating a pot of coffee yesterday morning, the top brass in America were fast coming to agreement on the biggest financial ‘rescue-mission’ in history. Even as early as Friday the US market was optimistic. It put on 120 points.

The original 3-page bailout note is now an epic 100-page tome. It’s more foot-note than note. The US government votes on it today. Mercifully - despite the length - there are only a couple of key points you need to know.

Firstly, while the length of the plan has ballooned, the bail-out itself has shrunk. It’s down to a measly US$350 billion. The bailers still have discretion to raise that to US$750 billion. But the initial level of capital has halved.

The Republicans are now happier.

Executives of bailed companies will not benefit from the plan. Golden parachutes, bonuses and pay rises are out.

The Democrats are now happier.

What does all this joy mean? The whole deal is edging towards approval. It’s more likely to happen than not.

There are a lot of investors out there with faith in the idea. You can see them moving in and out of the market as the bailout saga itself ebbs and flows. Here’s the Dow over the past five days:

Out. In. Down. Up.

For the record, we don’t think much of the bailout here at MM. It’ll mean greater US debt, market intervention, and an extension of inflationary policies.

But it does present you with two pretty clear options for investing.

US Congressional leaders and the Bush administration have reached a tentative deal on a bailout of imperiled financial markets that could cost taxpayers hundreds of billions of US dollars.

The House could vote on it later today and the Senate on Tuesday. 

US House of Representatives Speaker Nancy Pelosi announced the accord just after midnight Saturday and said it still has to be put on paper. 

Treasury Secretary Henry Paulson talked of finalising the deal but added: “I think we’re there.”

The plan would spend up to $US700 billion, most of it on buying deeply devalued mortgages from the housing market’s collapse and other bad loans held by tottering banks and other investors.

The aim is to prevent credit from drying up and causing a meltdown of the US economy, which is still on the cards.

Media reports indicated the $US700 billion request could end up being cut by as much as half, with the rest subject to congressional approval at a later date.

The proposed bailout, first rushed to Capitol Hill by Paulson as a three-page proposal, has now ballooned into a document of more than 100 pages, CNN reported.

A Democratic Senator said $US250 billion would be immediately available and another $US100 billion could be used when requested by the president for debt purchases.

The Congress could bar the expenditure of the remaining $US350 billion only by passing a resolution to block it from being spent.

Several other provisions in the proposed bill include more oversight and a way for the Government to reclaim losses from companies on mortgage related assets that lose money.

In Europe Belgium’s Fortis looks like becoming the first large European continental bank to fall victim to the credit crunch, as the global chaos continues with Britain’s Bradford & Bingley mortgage lender and American regional bank, Wachovia also teetering on the brink.

The Belgian central bank and the country’s regulator are paving the way for a bailout of the huge banking and insurance group, which has a balance sheet of well over $A1.1 trillion and a market value at last Friday of just over $A25 billion.

The Belgian regulator is thought to be considering the creation of a “bad bank” for assets similar to the controversial scheme proposed in America as a means of ensuring a deal.

There were reports this morning that french bank, BNP, might mount a bid for Fortis.

Any uncertainty around the future of Fortis is likely to hit Royal Bank of Scotland, its partner with Santander of Spain in the consortium that bought ABN Amro last year for 102 billion euros just as the credit crunch was breaking. 

They refused to withdraw the bid, and were allowed to continue by the UK, Belgium and Spanish central banks and regulators.

The Dutch banking assets that Fortis bought as part of the deal are yet to be transferred out of the special company used to execute the deal, which is legally a subsidiary of RBS, which raised over $A24 million and has sold more than $A10 billion in assets in the past four months.

Fortis, which has 2,500 branches across Europe, replaced its chief executive last week which worried markets.

The Belgian government, regulators, and the Dutch central bank are all involved in the talks and a deal is expected to be announced over the next day to prevent a crisis of confidence that could spark public panic and a run on deposits across parts of Europe;something that would be a replay in Britain where Fortis is Britain’s third-largest private car insurer and the fourth-largest travel insurer.

There’s talk the Luxemborg Government might take a stake in Fortis to support it. 

In Britain Bradford & Bingley looks like being nationalised and then sold off.

The Bank of England, the Financial Services Authority (like APRA in Australia) and the government appear to have agreed to nationalise B&B and then sell it off, much in the way the US regulators closed and seized Washington Mutual last Friday morning and then sold the loans, deposits and branches to JPMorgan Chase.

Santander, the Spanish bank, is in negotiations to buy B&B, but it is insisting on conditions.

It would be the second British bank to be nationalized this year after Britain was forced to take Northern Rock into public ownership in February.

The FSA has been trying to find a single white-knight to take over B&B’s loans in their entirety, but Britain’s big banks refused to get involved.

B&B shares tumbled to a record low on Friday.

The UK government forced the merger between the country’s biggest mortgage lender, HBOS and Lloyds TSB.

Britain’s top five banks — HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS — and Santander already own about 30% of B&B between them after they stepped in to help save a rights issue that flopped in June. RBS, HBOS, Lloyds and Barclays (which bought the remnants of Lehman Bros. in the US) are in no position to extend a helping balance sheet, leaving HSBC and Santander which owns Abbey and Alliance and Leicester.

Some US commentators reckon possible suitors, one of whom is Citigroup (Which has gone from feather duster to potential white knight) might use the ploy JPMorgan ploy used with Washington Mutual: wait to see whether regulators will seize the bank, then buy the best assets and let the government sort out the rest of the mess.

Besides Citi, Well Fargo (which might be a target for Goldman Sachs) and Banco Santander are said to be in talks to buy Wachovia.

They were part of the same group that passed up a chance to buy Washington Mutual which JPMorgan bought $US1.9 billion.

Media reports say the possible buyers will wait to see what’s in the bill, but have been demanding Government aid. That’s something the Government refused in the case of Lehman Brothers and Merrill Lynch.

Wachovia shares fell 27% in New York on Friday.

The buyer may get help from regulators, who said the US benefited from seizing and selling WaMu because the Federal Deposit Insurance Corp didn’t have to use its $US45 billion deposit insurance fund.

JPMorgan plans to write down WaMu’s loan portfolio by about $US31 billion ($A37.2 billion) - a figure that could change if the government goes through with its bail-out plan and JPMorgan takes advantage of it.

JPMorgan said there will be another $US1.5 billion in merger costs.

The financial landscape has been ripped up by the bankruptcy of Lehman Brothers the investment bank; the government’s takeover of American International Group which was once the world’s largest insurer, based on market value; the shotgun marriage of Merrill Lynch to Bank of America; the conversion of Goldman Sachs and Morgan Stanley to regulated bank holding companies from investment banks, and the collapse of the nation’s biggest thrift, Washington Mutual, which ranks now as the biggest bank failure in U.S. history.

Goldman saw Warren Buffett snap up a $US5 billion shareholding to make his group the largest shareholder, and Mitsubishi of Japan grabbed a 20% stake in Morgan Stanley after they both abandonment the investment banking model to become old fashioned banks.

US economists say there’s an increasing chance that the Federal Reserve could make an emergency interest rate cut in the next few days in the wake of the $US700 billion bailout legislation going through to try and boost confidence across the US economy. Some reckon it could move as soon as tomorrow night, our time, to cut its Fed funds rate, its key overnight lending rate. The cut could be 0.25%, according to US futures markets, but it could be more if the Fed wants to send an emphatic point about the need to settle nerves and help the fumbling economy. The Fed’s next scheduled meeting of its key Open Markets Committee isn’t until the two-day session that ends on October 29. Some economists think that a so-called ‘intra-meeting’ cut might happen to boost investor and consumer confidence. But the speculation has had no impact on financial markets which have been shaken to their core by the banking and finance implosions of the past fortnight. US stocks fell sharply, with the stock market suffering it’s its steepest weekly slump since May, as Congress failed to approve a $US700 billion bank bailout the president said is needed to avert a recession. Bank lending froze around the world with short term rates in Europe soaring again to new highs and US Government debt yield maintaining near historic lows at the short end as investors, banks and others with cash kept it in the safest haven possible including central banks like the Reserve Bank where well over $7.4 billion was kept in cash over the weekend, according top early estimates on Friday (we won’t know the final amount until later this morning). But a deal over the weekend will provide temporary relief and markets will improve. Our market was up by around 0.9% in the overnight futures on Saturday morning. Such relief will be needed because confidence is being frayed. In Europe, central banks did swaps with the Fed, injected tens of billions of dollars into money markets and took other measures to boost liquidity in an unprecedented display of support. The Fed arranged with the European and Swiss central banks to inject $US13 billion ($A15.6 billion) into European markets. That took the total of such “swap” deals with central banks to $US290 billion ($A348 billion) as the latest vortex of the 14-month-old sub-prime crisis ripped through US banking and extended to banks around the world. The ECB was provided with an additional $US10 billion ($A12 billion) and the Swiss National Bank with $US3 billion ($A3.6 billion). The ECB and the Bank of England then loaned $US35 billion ($A42 billion) and $US30 billion ($A36 billion) respectively to commercial banks for a week, and the South Korean central bank said it would inject at least $US10 billion ($A12 billion) as well. The Danish central bank announced help for its money markets and Belgium and Holland central banks kept in discussion while the fate of the huge Fortis insurance and banking conglomerate was discussed after a succession of price falls late last week, without the help of stockmarket shorters.

Central banks in Europe used the reciprocal currency arrangements - known as swaps - with the Fed to keep eurozone money markets primed as banks closed out their third-quarter books, a situation that the RBA has also been trying to meet.

The RBA sold $US10 billion to local banks and institutions on Friday to inject more greenbacks, and today it hold its first auction of term deposits with the markets in an attempt to get the surplus cash out of the overnight market and onto its balance sheet.

That will then enable the RBA to re-inject this money into the markets to boost liquidity, if it wants to.

Both the Dow and the S&P 500 ended higher on Friday on hopes that the bailout plan will be approved. But Nasdaq finished slightly lower.

Europe fell on worries about the US, but Asia traded just about steady because at that stage it looked as though the failure of Washington Mutual might force the US politicians, especially the Republicans, to appreciate the seriousness of the problem. But that was not to happen.

The ASX 200 index ended down 22.6 points at 4904.8, while the broader All Ordinaries index shed 26.2 points, or 0.5%, to 4934.6.

Earlier in the day ASX200 index had been over 1% higher, but also nearly 2% lower as sentiment swung about the rescue of Washington Mutual and the bailout plan. The index managed to hold on to a 2% gain over the week, which was in contrast to the slumps in Europe and the US.

For the week, all three US stock indexes fell: the Dow dropped 2.15%, while the S & Poor 500 Index shed 3.33%, and Nasdaq dropped 4%.

After Friday’s close, the Wall Street Journal reported that super regional bank; Wachovia Corp had entered into preliminary talks with a handful of potential suitors, including Citigroup.

Whether that happens is up in the air with other market sources claiming possible buyers for Wachovia will wait till it fails and is seized by US regulators before bidding, much in the way JPMorgan moved to buy Washington Mutual.

China rose for the first time in weeks.

The CSI 300 rose 0.9% on Friday and 8.2% last week, the first weekly rise in nine weeks, in complete contrast to what was happening elsewhere.

Helping was the move by China Investment Corp, the country’s $US200 billion sovereign wealth fund, which bought shares in Industrial & Commercial Bank of China, Bank of China and China Construction Bank Corp., the nation’s three largest state-owned banks, in the past week, after a 58% fall in the CSI 300 this year.

China’s cabinet last week also agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market after prices and trading volumes slumped.

The State Council signed off on a plan submitted this month to allow margin lending and short selling.

China’s action contrasts with regulators in the US, Europe and Australia which have banned short selling in the past week to shore up financial shares battered by the global credit squeeze.

China has also scrapped the tax on stock purchases and eased company buyback rules to help put a support level under the market to halt the slide.

There are some very nervous bankers and others in the financial world awaiting the approval of the $US700 billion bailout from the US Congress and Government.

Amid uncertainty about the plan’s prospects, US cash funds and banks stampeded to safety, buying short-term government debt, selling commercial paper and withdrawing funds from the interbank market. As a result, the rates that banks charge each other soared, while yields on short-term Treasury bills plunged.

Now it seems the plan is headed for approval with: it has to be signed off by the rest of the two parties’ representatives, US Treasury and other regulators.

Republicans are refusing to agree to the scope and direction of the legislation and this could defeat it as Democrats say they won’t pass it without substantial Republican support.

President Bush held a meeting with Barack Obama and John McCain and others at the White House.

The legislation will go to the US House of Representatives tonight, our time, and the US Senate will meet on Saturday to debate and approve it.

But it needs consensus, and if that’s not apparent, then trading will be fraught tonight.

Wall Street kicked higher in anticipation; up 300 points at one stage, then down sharply, before rising at the end to be up nearly 200 points on the Dow. It closed before signs of a lack of agreement emerged in Washington.

Financial stocks rose 2.6% and were among the biggest gainers on hopes that the plan would unlock frozen money markets.

GE rose 4.4% even after the world’s fourth-largest company cut its third-quarter and full-year earnings forecast and suspended a share buy-back. It was GE’s the second earnings downgrade this year.

Escaping the bullish momentum, Washington Mutual, America’s biggest savings and loan plunged 25% to just $US1.69 on reports that regulators were struggling to broker the takeover of the company.

Oil rose, the US dollar was stronger (and the Aussie was back around 83.60 US cents) and gold weakened. US Treasury bond yields rose on the news.

Figures were released showing another sharp slump in new US home sales and industrial production. It was a reminder that the real problems remain and won’t be touched by the bailout plan.

Stockmarkets in Asia fell, especially in Japan and Australia, thought China’s were higher. 

Stocks in Europe were up in early trading and finished higher, with gains in the UK, France and London as news spread of the broad agreement on the bailout.

Money market rates in Asia’s biggest financial centres jumped on concern that the US Congress might hold up or water down the Treasury Department’s plan to bail out the financial system (or at least try to).

A cash freeze has gripped world financial markets as fearful banks hoard billions and billions of dollars and prefer to leave it on deposit with central banks and earn less than they could get from lending it to normal business and personal customers.

Not even Australia is exempt: our well capitalised banks were following suit and sitting on billions of dollars.

Banks around the world are refusing to deal with each other, or anyone else, so they are leaving tens of billions of dollars on deposit with central banks.

The drought has worsened significantly since the collapse of Lehman Brothers 10 days ago and still rising losses taken by bond holders and other investors.

Bank nervousness seems to have picked up from earlier this week as the progress of the US bailout proposal slows in the Congress.

If that proposal was to fail, markets would dry up and if there was to be a reason why the global economies slumps into recession or worse, it would be this cash drought. The money’s there, tucked away in cash management accounts and at central banks, but no one is willing to lend. There is no shortage of borrowers.

Central banks in the UK and Australia moved this week to try and ease the drought by moving to mop up the cash.

The drought has seen short term interest rates around the world rise sharply as banks choose to leave their money with the central bank, or invest in short term US Government treasury notes as the ultimate short-term safe haven.

Short term US treasury note rates have again fallen under 1% while short term US dollar (and some other currency) LIBOR rates in London has jumped sharply to levels seen in the dark days of early January.

The three-month US Treasury bill traded at 0.49% in New York overnight, down from 0.79% at the close Tuesday and 0.88% on Monday.

The demand for short term, security can be seen from the results of a huge US Treasury auction of $US34 billion in two-year bonds: demand was about normal for the moment at 2.2 times the amount offered. Market yields for the notes traded down to 2.02%,

In Australia yields on 90 day bank kills, the key short term funding source in the country, have risen to where they are higher currently than 180 day bills. It is normally the other way around. Spikes like we are seeing are signs of a cash shortage.

A cash freeze has gripped world financial markets as fearful banks hoard billions and billions of dollars and prefer to leave it on deposit with central banks and earn less than they could get from lending it to normal business and personal customers.

Not even Australia is exempt: our well capitalised banks are following suit

Banks around the world are refusing to deal with each other, or anyone else, so they are leaving tens of billions of dollars on deposit with central banks around the world.

The drought has worsened significantly since the collapse of Lehman Brothers 10 days ago and still rising losses taken by bond holders and other investors.

Bank nervousness seems to have picked up from earlier this week as the progress of the US bailout proposal slows in the Congress.

If that proposal was to fail, markets would dry up and if there was to be a reason why the global economies slumps into recession or worse, it would be this cash drought. The money’s there, tucked away in cash management accounts and at central banks, but no one is willing to lend. There is no shortage of borrowers.

Central banks in the UK and Australia have moved within the past 24 hours to try and ease the drought by moving to mop up the cash.

The drought has seen short term interest rates around the world rise sharply as banks choose to leave their money with the central bank, or invest in short term US Government treasury notes as the ultimate short-term safe haven.

Short term US treasury note rates again fell under 1% while short term US dollar (and some other currency) LIBOR rates in London has jumped sharply to levels seen in the dark days of early January.

The three-month US Treasury bill traded at 0.49% in New York overnight, down from 0.79% at the close Tuesday and 0.88% on Monday.

The demand for short term, security can be seen from the results of a huge US Treasury auction of $US34 billion in two-year bonds: demand was about normal for the moment at 2.2 times the amount offered. Market yields for the notes traded down to 2.02%,

In Australia yields on 90 day bank kills, the key short term funding source in the country, have risen to where they are higher currently than 180 day bills. It is normally the other way around. Spikes like we are seeing are signs of a cash shortage.

Three-month interbank offered rates in Hong Kong and Singapore have risen sharply as well (Hong Kong has just had a run on the Bank of East Asia on Wednesday, which frightened the market there).

Dealers said the three month rates (90 days) jumped past the levels when Lehman Brothers filed for bankruptcy and the U.S. government nationalized American International Group last week.

Three-month rates on yen loans rose to a two-month high and bill swap rates in Australia soared to the highest since August.

In China however, shares rose to a three-week high yesterday as parent companies continued to buy back shares of their listed subsidiaries after the central government made that move easier as a way of helping stop the market slump.

In Australia, banks kept $6.9 billion in their exchange settlement accounts instead of using it to lend to one another. That was the highest amount kept in the ESA at the Reserve Bank since the credit crunch started and it’s a sign the banks are fearful of liquidity risk, even with one another.

Japan’s trade account dropped into a surprise deficit in August as high oil prices pushed up import costs, but more importantly, exports slowed to a trickle.

Apart from January, which usually sees low levels of exports because of factory closures, it was the first monthly deficit since 1982, when Japan was reeling from the aftermath of the second oil crisis.

But, more important was the bad news from the export account.

Shipments to the United States had their sharpest fall ever from the same month a year earlier.

Exports rose 0.3% in August from August 2007, compared to a forecast of a rise of 2.4%.

Japan’s exports to the United States fell a record 21.8% last month, marking the 12th straight month of annual declines, on sluggish shipments of automobiles and consumer electronics.

Exports to the European Union fell for the third month in four.

A 6.7% rise in shipments to Asia and an 8.8% rise in exports to Japan’s new number one destination, China (for the second month in a row), couldn’t offset the slump in exports to the US and Europe.

Japan’s economy contracted in the second quarter at its sharpest rate in seven years thanks to slowing demand from the US and Europe and there are growing fears that it will shrink this quarter to put the country into a proper recession.

And major car companies, Toyota and Honda chopped back car production and exports in Japan and in the US and Europe in response to the slow down. Toyota’s global output was cut by a substantial 17%.

The federal government is now on course to engineer the greatest expansion of credit in history. The long-term consequences will ultimately be disastrous for American financial assets, particularly the dollar and Treasury debt.

Thus far in September the Fed has expanded its balance-sheet by some US$425 billion dollars. In just the past three weeks, the Fed has rescued Fannie and Freddie, AIG, spent tens of billions of dollars in efforts with other central banks and has extended a US$75 billion dollar lifeline guarantee to money-market fund investors.

But these figures pale in comparison to the estimated cost of Paulson’s new plan.

Clearly, the credit crisis requires desperate measures and only governments can help to alleviate or even quash systemic failure through unprecedented credit expansion. Like I’ve said all along, it’s Inflate or Die for Western capitalism.

The strains of deflation, however, will take time to extinguish. Markets are wrong to think we can all enjoy a sustained v-shaped recovery. This just won’t happen. Corporate profits will decline for at least the next two quarters.

But over the next 18-36 months, inflation is going to make a formidable comeback as the chickens come home to roost in the United States and Europe.

The cost to resuscitate the financial system is primarily an American problem and will result in a massive expansion of credit. So inflation is all but inevitable.

The best long-term short-sale in my book is Treasury debt. The dollar will eventually return to the basement but that might be delayed as the outlook in Europe grows more and more dim. Though I can’t make a long-term case for the dollar, the odds are high it can continue to rally over the next several months or more, especially if RTC II is passed.

Next on the chopping block for the bears is the Treasury market. The United States will have to pay its creditors higher interest rates in the future. U.S. funding costs will eventually rise significantly unless the United States cuts its bloated spending. And the odds of that happening are pretty much nil.

“We cannot protect all risk in the market, and we should not do it at the risk of the taxpayer.” — Richard Shelby, Alabama Senator

“Moral Hazard” is a pair of buzz words circling lunch tables, office cubicles and board rooms around the world. Why? Simply because the Fed and Treasury are taking matters into their own hands, trying to put an end to the losses wreaking havoc on the global financial system.

And in doing so, our government could be seen as endorsing the reckless lending that led us to this disaster in the first place.

However, what scares me most about these interventions is that some could create a humongous burden on the taxpayer.

The two-year US$85, billion loan from the Fed to AIG this week is an attempt to provide a controlled environment to deal with the pain, spare the financial system from the effects of extreme counterparty risk, protect the real economy and keep the bill off the taxpayer.

So what if the burden of this financial mess doesn’t end up in the taxpayers’ lap? Could there still be moral hazard?

Good question.

Because what kind of precedent are they setting? These are banks and institutions that took on toxic derivatives and securitized debt. They fattened up when times were good, but come crying for help now that the going has gotten tough. How many more will follow expecting the same treatment?

Perhaps this is the real issue.

So now we have the mega US government fund that will save the markets from imploding. It has stopped the rot in sharemarkets, but credit markets remain wary and uncertain. But for the time being, we have to assume that the bailout is going to work even if it could allow some of the folk who caused the current crisis to keep ducking reality and avoid taking their lumps. So it’s no wonder there are mutterings about the fates of Lehman Bros, Merrill Lynch and AIG: the usual collection of opportunists and lurk merchants want to know why the bailout came Friday and not last Sunday when Lehman failed, and then AIG was taken over and Merrill Lynch sent hurrying into the embrace of Bank of America. Lawyers are being assembled and loopholes looked for. So the cynics and smarter investors are asking who gets to bear the cost in the long run. The answer is the American taxpayer is the only one who will pay. So the poor American taxpayer who have already lost their homes in three million cases; faces that prospect in millions more; are losing their jobs (an extra 610,000 so far this year), will now having to support stumping up $US700 billion, and well over a $US1trillion if the costs of early support moves are added in. What about shareholders and managements of the institutions being supported by the Treasury plan? The plan will be rightfully extended to foreign institutions which hold these dodgy securities (That includes the likes of Barclays in London and Deutsche Bank in Germany), so what also about their management and boards? On all the evidence so far, it will do nothing to help end the root cause of the problem, the continuing decline in US home sales, new home starts and house prices. Until that happens, the cost to the US Treasury and to US and other financial groups will continue to escalate. It’s going to do nothing to stop that, or change the direction of the US economy which is sliding towards an increasingly nasty looking recession. An announcement is due from the US government shortly, led by Treasury Secretary Hank Paulson, Federal Reserve chairman Ben Bernanke and US Congressional leaders, detailing the final agreement and the scope of the legislation for the fund. The fund will be around $US700 billion, but that considerably underplays the true cost of the debacle so far. Since March Mr Paulson and Mr Bernanke have spent $US29 billion guaranteeing the bailout of Bear Stearns, $200 billion at least on the bailout of Fannie Mae and Freddie Mac, $85 billion on the bailout of AIG (the big insurer which wrote credit default swaps on a range of debt that it had no idea about) and at least $US50 billion guaranteeing money market funds. That’s $US364 billion. Seeing financial institutions around the world have already written down or lost over $US500 billion (and have raised around $US360 billion in new capital), the cost so far of the debacle that started with dodgy subprime mortgages and associated credit derivatives is well over $US800 billion (including Fannie, Freddie IAG etc). If the $US700 billion is for new purchases of bad securities (and it could be extended to non-US groups at the decision of the Treasury secretary), the cost will balloon.  That will allow the likes of Deutsche Bank, UBS, Credit Swiss and French and UK banks to unload their dodgy securities in certain cases. Assuming that the $700 billion is spent on new securities, the cost could be well over $US1.1 trillion, excluding already announced losses (and over $US1.6 trillion if they are included). Remember that a lot of analysts and commentators, plus bankers and their mates laughed at the International Monetary Fund when it said earlier in the year that the losses could be $US1 trillion. It was obviously very conservative. We are yet to see whether the debt to be bought will include non-mortgage related debt, say CDSs (Credit Default Swaps) and other dodgy credit derivatives issued over the debt of groups like General Motors or healthy US or foreign corporations’ debt. Will it include leverage buyout debt for the likes of private equity groups like Blackstone, KKR, CVC and the like? And on top of all the spending so far on the likes of Bear Stearns and AIG, there’s the $US500 billion spent or being spent a day by the Fed funding the markets in the US, Europe, Japan, Canada, Switzerland and other areas. There’s the $US180 billion swapped last week, there’s the monthly $US200 billion being lent to banks and other groups in the US each 28 days and there’s the daily $US33 billion being injected into US commercial banks each day and the $59 billion primary dealers last week (investment banks).

Even in a US economy that produces $US14.4 trillion worth of goods and services a year, that’s a lot of loot.

In fact a working paper from two IMF economists estimated that banking crises chew up an average of 16% of the GDP of an economy. That’s based on looking at 42 major banking crises around the world from 1970 to 2007 (and not including the current problem).

Spending all that money will intensify long-standing questions about America’s fiscal health, possibly at the expense of another drop in the value of the dollar.

No wonder the US dollar blew out on Friday, sliding to over $US1.44 on the euro (the Australian dollar rose by more than 1.5c in offshore trading on Friday night).

To mitigate the cost and make for a more brutal (to the selling groups) and equitable arrangement for US taxpayers, the purchases could be made by the US Treasury through a bidding process.

Companies that want to offload their dodgy assets would bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins. That’s a reverse auction.

The government would then be able to sell the assets back into the market when it wanted: the government could give the banks a share of the upside if there are any profits.

The Fed lent that $US85 billion to AIG at a margin of 8.5% over the rate banks lend to each other internationally (so-called 3 month LIBOR). That’s around 11% or a bit more in normal times outside of last week.

Using that as a yardstick, the pricing by the Fed could be brutal indeed.

So far it seems like the purchases will be aimed at dodgy housing-related debt of varying kind, but you can bet there will be pressure to offload corporate and buyout loans that are going bad. The property related debt specified in the proposed bill is residential (AND) commercial.

That alone will limit the Fund’s ability to concentrate solely on residential debt.

And what about personal loans, credit card and car loan debt tied to foreclosures and home equity loans which is another disaster area?

The idea seems to be that the US government will buy at below-market rates and sell for a gain when the housing market recovers: when that will happen, no one is willing to say.

The problem is that the dodgy housing-related assets have proven extremely difficult to value as the demand for them has disappeared.

And there is a nasty message there: those banks and financial groups that stayed away from this sort of toxic debt are being punished. The incompetent and imprudent will be rewarded by being bailed out. This is what moral hazard is all about.

The strong stock-market rally late last week reflects the belief that companies have been saved from the cost of making dodgy decisions on these loans from incompetent and risky decisions to speculate and gear balance sheets to generate big earnings for the company and themselves.

The inevitable death of weaker firms will be delayed, and in turn that will delay the reckoning that must occur before a sustainable economic recovery can take shape.

The US government is seeking to eliminate legal challenges by making the Treasury the sole and final arbiter and not allowing any legal challenges, a move that has upset Americans in the legal field (naturally).

While the proposal calls for the purchase of as much as $US700 billion of bad loans, it’s unknown what taxpayers will ultimately pay for the bailout.

The Bush administration’s proposal requests that the US Congress authorises an increase to America’s debt ceiling.

That’s set to rise to $US10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009, to accommodate a Federal Budget deficit already estimated at some $US580 billion.

But now the Administration wants to lift the ceiling to $US11.315 trillion to allow for the purchases of these dodgy mortgage-backed assets.

US commentators say that it’s unclear at this point if it will help homeowners.

If the Treasury buys an entire securitized loan, it could help struggling homeowners by modifying the terms. This could include reducing a loan’s interest rate or principal balance to help prevent foreclosure.

But if it doesn’t buy all the securities. It could be held to ransom by the other holders.

The bottom line remains: if the plan doesn’t stem the tide of foreclosures, home prices will not stabilize and the economy will not recover and banks and other financial groups will still be on death watch.

It will not help them lend more money for housing business, credit cards and the like.

Since 1998, the Morgan Stanley Capital International (MSCI) Emerging Markets Index has gained 13.5% per annum or 9.5% annually adjusted for inflation. That’s the highest total return posted by any broad global index over the last decade. This one number flat-out confirms that major markets have lagged behind emerging markets.

Indeed, emerging markets continue to post strong growth rates while the industrialized economies continue to struggle. Markets from the U.S. to the Eurozone are drowning under debt deflation tied to a financial crisis, rising long-term unemployment and declining standards of living.

The emergence of China as a major financial power combined with rich commodity-producing nations of Brazil, Russia and the Gulf States all point to a bright long-term outlook for emerging market plays.

It’s worth noting that emerging nations hit a bear-market low in late 1998 following the Asian economic crisis and the Russian ruble collapse.

At the time, this marked the best market-timing purchase among select global indices. We may see the same opportunity emerging here in the U.S. in the S&P 500.

For now, the S&P 500 Index remains hostage to a credit squeeze, deflation in housing, and a decline in domestic consumption. But that may all change soon.

Amid a 13-month credit crisis affecting most of the developed world, the United States might be at the cusp of outpacing other markets over the next decade. What happened in the emerging markets 10 years ago suggests this might be possible, at least from a contrarian investor’s standpoint.

NEW YORK - Wall Street shares zigzagged to a mixed finish on Friday in a market dragged around by reports and speculation about the fate of two troubled financial firms, Lehman Brothers and Washington Mutual.
In a volatile session that saw gains and losses reverse several times, the Dow Jones Industrial Average ended with a modest decline of 11.72 points, or 0.10 per cent, at 11,421.99.
The tech-heavy Nasdaq rose 3.05 points, or 0.14 per cent, to 2,261.27 while the broad-market Standard & Poor’s 500 index managed a gain of 2.65 points, or 0.21 per cent, to 1,251.70.

LONDON - European stocks closed higher on Friday, with investors betting that the US authorities will ensure that failing investment bank Lehman Brothers finds a saviour and ease the pressure on the banking sector.
In London, the FTSE 100 index was up 98.3 points, or 1.85 per cent, to 5,416.70 points.

FRANKFURT - Germany’s DAX 30 rose 55.99 points, or 0.91 per cent, to 6,234.89.

PARIS - France’s CAC 40 jumped 83.59 points, or 1.97 per cent, to 4,332.66 points.

TOKYO - The Tokyo Stock Exchange’s benchmark Nikkei-225 index closed up 112.26 points, or 0.93 per cent, to 12,214.76 ahead of a three-day weekend in Japan.

HONG KONG - Hong Kong share prices closed down 0.18 per cent on Friday, as weakness in Chinese banks offset earlier gains in property developers and energy firms.
The benchmark Hang Seng Index plunged 35.82 points to 19,352.90

WELLINGTON - The New Zealand share market rose to end the week, the benchmark NZSX-50 index closing up 28.15 points, or 0.844 per cent, at 3361.68.

SYDNEY - Australian markets have received a mixed lead from Wall Street, although the price of oil fell again in a special trading session overnight whilst gold and silver rose.
At 0722 AEST, the Sydney Futures Exchange’s September Share Price Index contract was 50 points higher, or 1.02 per cent, at 4,975.
In news today, the Australian Bureau of Statistics will release dwelling unit commencements data for June.
Reserve Bank of New Zealand assistant governor Dr John McDermott speaks at an Australian Business Economists lunch on “Monetary Policy Issues in New Zealand”.
Base metals and uranium explorer Aluminex Resources Ltd is to list on the Australian securities exchange.
On Friday, the benchmark S&P/ASX200 was up 89.5 points, or 1.86 per cent, to 4,903.8, while the broader All Ordinaries added 85.6 points, or 1.76 per cent to 4,957.1.

NYMEX

In energy trading on Friday, crude oil briefly fell below $100 a barrel despite threats to Gulf energy supplies from Hurricane Ike, suggesting traders still believe a soft economy will keep driving down demand.
Light, sweet crude for October delivery ended Friday 31 cents higher at $101.18 a barrel, after briefly sinking to $99.99.
That was the first time oil traded below $100 since April 2.
In a special trading session on the NYMEX last night Australian time, crude oil fell to a six-month low and gasoline tumbled amid signs that refineries along the Gulf of Mexico coast will soon resume operations after escaping major damage from Hurricane Ike.
More than 20 per cent of the US’s oil refining capacity was shut, limiting fuel deliveries and prompting the Department of Energy to release 309,000 barrels from its strategic reserves. New York Mercantile Exchange electronic trading opened early today to allow traders to respond to Ike.
Crude oil for October delivery fell $2.18, or 2.2 per cent, to $99 a barrel at 4.26 pm (0626 AEST) on the Nymex. Futures touched $98.46, the lowest since February 26.
Prices are up 25 per cent from a year ago.
Gasoline for October delivery fell 10.86 cents, or 3.9 per cent, to $2.661 a gallon in New York.
Oil in New York has fallen 33 per cent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels. Sales at US retailers dropped in August for a second straight month and July inventories at American businesses increased the most in four years, Commerce Department reports showed last week.

COMEX

Gold for December delivery rose $19 to settle at $764.50 an ounce on the New York Mercantile Exchange on Friday, after earlier rising to $770.50. It was gold’s first positive close in 10 days.
Other precious metals also traded higher Friday. December silver rose 24 cents to settle at $10.795 an ounce, while December copper gained 7.2 cents to settle at $3.194 a pound.

As I said earlier this week, the United States has by far the world’s most sophisticated system of financial surveillance. Today, I’m going to give you five strategies to sneak under that surveillance, and protect your assets in the process.

First of all, to avoid pervasive U.S. financial surveillance, I highly recommend offshore investments and relationships:

• Place a portion of your assets outside the United States. Yes, you do have to report offshore bank accounts and trusts to the IRS, but you can purchase some regulated contracts, such as insurance policies, in relative privacy (see Marc Sola’s article above for more details on such a tax-deferred policy).
• Transfer funds outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, into alternative currencies. The dollar has appreciated sharply in recent months, so it’s an ideal time to start diversifying your cash into greater currencies (you’ll get more “bang for buck,” because of the stronger dollar).
• Use attorney-client privilege. Many countries (including EU members) now require attorneys to report “suspicious transactions” to their domestic authorities. Keeping this requirement in mind, you can achieve considerable privacy by conducting business and financial transactions through an attorney. However, in virtually all jurisdictions, attorneys can’t provide advice that would result in or encourage the commission of a crime.
• Evaluate non-reportable offshore investments. Depending on where you live, certain offshore relationships or assets may not be legally reportable. U.S. persons need not report assets held in a non-U.S. safety deposit box, where no foreign financial institution has legal custody of those assets. Other non-reportable offshore investments for U.S. persons include real estate, vehicles and other assets not considered a “foreign bank, investment or other financial account.”
• Use cash. Despite the global crackdown on cash, you can still achieve significant privacy by using cash instead of debit/credit cards or checks. This is particularly true outside the United States. However, cash transactions (over US$10,000) are subject to substantial surveillance. An increasing number of countries also require that you declare substantial sums of cash when crossing domestic frontiers.