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Stiglitz warns US housing crisis to worsen as rates rise

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Nobel prize winning economist Joseph Stiglitz has warned that the Federal Reserve’s decision to end its $1.4 trillion mortgage debt purchase program this month is going to worsen the slump in the US housing market by driving up interest rates.

There has been no recovery in the US housing market this year, the biggest item of expenditure in the world’s biggest consumer market. New home and previously owned home sales are still falling. House prices continue to fall.

Mortgage rates to rise

In a Bloomberg interview in Tokyo Stiglitz said: ‘This withdrawal of the support risks increasing interest rates, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing’.

He claimed the main danger to the global economy presently is that central banks will ‘exit too rapidly’ from the emergency measures put in place to offset the financial crisis in 2008. He said it was ‘irrational’ to worry about inflation with consumer demand so subdued.

The former World Bank chief economist thinks there is a ‘significant risk’ of a double dip recession with growth weakening towards the end of the year.

The US housing market is locked in a deep depression. Mortgage resets over the next couple of years already threaten three to four million more foreclosures that will keep the market depressed and put further pressure on US bank balance sheets.

US mortgage rates are linked to the headline Fed funds interest rate but remain significantly higher for borrowers. So while the Fed may not have raised its key target overnight rate at its meeting this week, the withdrawal of mortgage debt-repurchase programs is as good as doing the same thing.

US economic slump

‘The deeper risks I see for the global economy are continuing weakness in the American economy’, Stiglitz therefore concluded. Indeed, the US housing sector is an enormous driver for the world economy consuming huge quantities of industrial materials from timber to aluminium.

It is even clearly possible to attribute the global financial crisis and the recession that has followed to the collapse of the US housing market due to the subprime loan implosion.

To recover from the financial crisis the root cause will have to be addressed first, and that means getting the US housing market on the road to recovery, not derailing it again with higher interest rates.

Written by Peter Cooper

March 18, 2010 at 9:27 am

Investment Dar shows how Kuwaiti investments went wrong

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The financial problems of Kuwait’s Investment Dar are a classic illustration of how investors can get carried away buying prestige assets in an oil boom when borrowing money is only too easy and neglect fundamentals.

It is not as though the 50 per cent shareholder in Aston Martin, and proud owner of the Australian continent on Dubai World’s The World archipelago of offshore islands, is alone. Kuwati investment companies blossomed in the recent oil boom with more than a hundred launched, and many of them are now in deep financial trouble.

Government rescue?

Investment Dar is just arguably the most high profile. Late last week the group announced it would be seeking government support under the $5.2 billion Financial Stability Law established last year.

It explained ‘although terms of a restructuring plan have been approved by more than 80 per cent of Investment Dar’s banks and investors, a small minority have continued to resist supporting the plan’.

The group is now seeking to borrow around $1 billion to refinance its $3 billion debt. Its shares have been suspended since last April following a failure to produce 2008 financial statements on time, and late last year Investment Dar defaulted on a $100 million Islamic bond, the first default of its kind by a major financial institution.

The Kuwait central bank has appointed a temporary supervisor to monitor the debt restructuring process, and news that 80 per cent of creditors had accepted an agreement to reschedule debts over five years first came last December. So Investment Dar’s fate is clearly a matter of national concern.

Yet this is clearly shutting the stable door after the horse has bolted. The quality of the investments made in the oil boom is the real problem.

Poor investments

Aston Martin makes great cars, but was any thought given to how such luxury car sales might hold up in a recession? The Dubai World project The World always looked commercially risky, and is now also a part of the $22 billion debt restructuring at Dubai World.

Kuwait occasionally pays off all the bad debts of its citizens with a munificent gesture from its oil wealth. But this kind of approach to debt carries a moral hazard. Investors start to think that they can never go wrong because the government will always pick up the tab.

But no amount of money will turn lead into gold when making an investment. And from the follies of the boom years, investors in Kuwait and the rest-of-the-world now have to go back to basics.

Written by Peter Cooper

March 14, 2010 at 9:24 am

Greek debt only the start of this global tragedy

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It is easy to understand global financial markets rising on news that the Greek budget crisis might be over, albeit greeting Greek’s bearing gifts has a poor historical precedent.

It is also far from certain that the Germans are going to offer the Greeks any gifts in return. Chancellor Angela Merkel knows political suicide when she sees it. But cutting public spending to lower deficits is going to become a global theme this year, and sadly one that will not help economic recovery, at least in the first instance.

Dubai austerity package

Dubai Government departments have just been asked to find another $1 billion in savings this week. So much for maintaining public expenditure to counter a difficult year for local business, but eminently sensible in view of the well-known debt problems of the emirate.

Yet look back at Europe. Last year German auto exports fell by 29 per cent, machinery exports by 24 per cent and chemical exports by 20 per cent. This is a formidable economic slump in what was until last year the world’s biggest exporter.

If, as looks inevitable, we now see public spending cuts in Greece, Spain, Portugal, Italy, Ireland and possibly Belgium, how does that affect demand for German exports? It can hardly be good news can it?

Californian example

Over in America it is the states led by California where the most immediate public spending cuts are necessary. Even in the home of deficit finance there is a limit to public borrowing, and the first weakness is going to come in local bonds.

The real point is that the Great Recession can hardly be declared over. It can at best be half way through and pausing before the second half.

Is it therefore good news when the Greek Government announces 4.8 billion euros in deficit cuts, including pay cuts for civil servants? Sellers of German cars are going to have an even tougher time in Greece.

And yet from a global perspective this has to happen. There has been a great inflation of asset prices driven by excessive debt, and public spending has risen on the back of it, and now we have a great deflation as the worst excesses are corrected.

Investment implications

Will this be a gentle process with no volatility in financial markets? Obviously not, and the bias must be to the downside until the debt problems of the world are solved.

Politicians have two ways to deal with such problems. The hard way is with spending cuts like those announced in Greece or Dubai. The easy way is to inflate debt away as the Federal Reserve and Bank of England are trying to do by printing money.

But none of this is good for economic growth rates or financial markets. A flight to cash, precious metals and commodities will be the result as markets for real estate, equities and bonds tumble.

Written by Peter Cooper

March 4, 2010 at 8:53 am

Abu Dhabi bails out Aldar Properties with $2.5bn deal

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The balance sheet of Aldar Properties has been transformed by the $2.5 billion sale of most of its Yas Island project, including the Formula One racetrack, to the Abu Dhabi Government.

The cash injection means that Aldar can comfortably settle debts of around $1.2 billion this year and still have enough money to continue with its construction program. Last year Aldar was hit by the real estate crash in the emirates which not only hit Dubai but also brought sales grinding to a halt in the UAE capital city.

2009 very tough

Net profit in 2009 plummeted 71 per cent from $924 million in 2008. Fourth quarter losses came in at $153 million due largely to an absence of land sales and $141 million in project write offs and $46 million in pre-opening costs for Yas Island, chief financial officer Shafqat Malek told Gulf News.

Aldar has developments worth $4.9 billion under construction and net assets at the end of 2009 stood at $4.5 billion. Over 10 years the group is committed to delivering projects in Abu Dhabi worth more than $20 billion.

Abu Dhabi clearly realizes that standing behind its construction industry in the current real estate slump is crucial to meeting its long-term objectives. Survival in a real estate crash is all about cash flow, and moving to guarantee the liquidity of key companies makes sense.

The controversial takeover of contractor Arabtec by a fund owned by Abu Dhabi Government is another example of the state stepping in to secure the future of companies required to build the new Abu Dhabi.

National assets

It makes sense to secure the future of such national champions rather than allow market forces to bankrupt and liquidate companies that have taken years to become established and have a proven track record of delivery on time and to budget.

Market forces do have a habit of shifting from one extreme to the other, and this has certainly been the case in the UAE property sector over the past 18 months. It is to be hoped that similar rescue packages can be engineered in other parts of the UAE where the real estate crash is causing considerable hardship.

And the sooner such clarification and re-capitalization can be achieved the better for all concerned. Abu Dhabi is also making some good long-term investments.

Written by Peter Cooper

February 17, 2010 at 8:35 am

Is millionaire right to give away his $4.5m fortune?

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Consider the curious case of Karl Rabeder, a self-made businessman from Austria who is giving away his $4.5 million fortune because he found being rich was making him unhappy. Is he mad or just eccentric?

Only The Daily Telegraph could come up with such a story. His fabulous $2.3 million home in the Austrian Alps (pictured above) is to go and his $1 million farm house in Provence. The interior furnishings business that made him rich has already gone.

Well earned riches

Most people in similar circumstances feel that they have worked very hard for what they have got, and generally think it should have been more or that they were cheated in someway. Mr. Rabeder apparently believes he will be happier living in a small hut and giving his money to charities in Central and Latin America to help the very poor.

The tipping point came on a three-week holiday staying in a five-star hotel in Hawaii that Mr. Rabeder and his wife thought soulless with themselves and the staff just actors on a stage.

Yet it would take a lot more than a bad holiday in America to persuade most people that being a multi-millionaire was not worth the candle. What about the financial security for the future?

If the big homes are a burden then downsize to something simpler and more practical. For most people this looks like a simple failure of imagination. They would have a Ferrari and be done with it. Mr. Rabeder is even selling his Audi A8.

Personal freedom

But then again the whole point of being wealthy is to be free to do what makes you happy. If giving your money away to enrich the poor gives you satisfaction then why not?

It is perfectly true that you can only live in one house at a time, drive one car and eat so many five-star meals without feeling sick. But this seems a curious allergic reaction to materialism and good living, a sort of personal communist revolution.

Perhaps in future years The Daily Telegraph will care to report back on their Karl whose Marxist credentials would have pleased the master, or will he be forgotten now that he is just another average citizen of modest means. Mad is the word.

Written by Peter Cooper

February 9, 2010 at 1:48 pm

Is the JAL bankruptcy or Cadbury deal the spirit of the age?

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The juxtaposition of two completely separate financial transactions on opposite sides of the world are signs of our times: the $19.7 billion knock out offer for UK chocolate giant Cadbury by US group Kraft; and the filing for bankruptcy by Japanese Airlines with debts of more than $26 billion.

Both are realities and not mere pontification on the state of the global economy. Deals are the wheels of commerce. But what does this tell us?

Premature takeover

Kraft is clearly being aggressive about global expansion and believes an economic recovery is coming. It thinks Cadbury is a good buy even if its biggest shareholder, none other than Warren Buffett reckons otherwise.

Is this another of those too-early-in-the-business-cycle takeovers that shareholders live to regret? Out of the 840 pence a share paid for Cadbury, 500 pence is in cash, so Kraft will be taking up debt and is therefore highly confident of the outlook.

So Kraft needs good luck – not something Warren Buffett has ever relied upon. In the long run bad things can and do always happen in business. Kraft is gambling on an upturn in the business cycle and has not even bought particularly cheaply at the bottom.

Then again what are we to make of the move by JAL into bankruptcy protection for a phased restructuring. The Japanese carrier is to cut around 16,000 jobs, reduce pensions for retired staff, move to more fuel efficient aircraft and restructure a $26 billion debt mountain.

That could not be achieved without $10 billion of government cash to keep the airline going during this process. Too big to fail, too important for national prestige or a state-backed dinosaur, you can take your pick.

Government dependency

But the JAL bankruptcy is also a symbol of everything that has gone wrong in Japan for the past 20 years: over investment in publicly funded infrastructure, market intervention, lack of innovation, price fixing, an uncompetitive currency rate and an ageing population.

At the very least the JAL bankruptcy shows that no government can support loss leaders forever, and that eventually market forces catch up with every nation. Will a new national champion emerge from the bankruptcy process? It really does beggar belief that it should be even contemplated.

But in the recent global financial crisis government support for ‘too big to fail’ companies like GM and Chrysler and banks too many to mention has become a symbol of our age. That this delays rather than avoids that ultimate end-game is clear from JAL, and in the meantime private enterprise is denied its true role in national reconstruction.

Sadly government intervention is the spirit of the age, and it never works.

Written by Peter Cooper

January 20, 2010 at 8:49 am

Not much ad revenue for Gulf media in 2010

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Reviewing business websites and newspapers over the past few days the most noticeable thing is the absence of advertising. Normally the New Year is a moment for a blitz from advertisers. What happened this year?

If you took away the telecom duopoly in the UAE – du and Etisalat – then only a few messages of self-congratulation from government departments would remain, and the occasional auto ad.

Ad shortage

It is not even enough to call for a consolidation of the sector to make those ads available stand out. There simply do not seem to be many adverts around. Some magazines still manage to pull the advertisers, although page rates are said to be at rock bottom.

How the media fares in 2010 is therefore going to be largely down to the depth of the pockets of the owners, rather than advertising revenue. It could pick up but where from?

Real estate remains depressed with no new launches in prospect. Hotels are struggling with falling revenues. Airlines are also under pressure. Banks are mainly in hiding. The UAE went into recession in 2009 and is not out of it yet.

Of course if you fast forward a year then high oil prices offer a hopeful scenario of a bottoming out in the local economy sometime soon and a gradual recovery.

Competition amongst hotels and airlines at least then ought to stimulate some advertising, and the banks might begin to look for new customers again. But advertisers always use times of recession to think about the future – not having much else to do – and as money returns it is inevitably refocused into where agencies think it will produce the best impact.

Most industry experts reckon online media will be the biggest growth market for the next few years. There is an ongoing migration to the Internet by readers as broadband penetration improves their experience online and lowers costs.

Web vision

It could be the newspaper websites that get the ads, not the printed version. Specialist websites should become more popular. Internet television should really take off.

Fortunately for advertisers this media is far more measurable than traditional media, most of which is unaudited still in the Gulf, presumably because the reader numbers are far less than those claimed, or in the case of television because it is impossible to measure the actual audience.

There are still magazines in particular that count their print-runs as circulation and sell advertising on these figures, and the unaudited ones may not even do that.

If what emerges from 2010 is a better appreciation of the real value of good media and a focus back on quality of editorial rather than quantity of paper then this will not have been entirely a wasted year.

Written by Peter Cooper

January 4, 2010 at 12:21 pm