Credit Crisis-the know how it happened!

Published in The Hindu - Sunday Magazine on Oct 5, 2008
The bursting of the speculative bubble in the U.S. housing market has destroyed
billions of dollars in investor wealth across the world, crippled the banking system,
expunged close to a million jobs…and India has not been spared either. With banks
failing by the day…definitely, these are uncertain times for the financial services
industry. While many people who have lost their jobs, are faced with permanent
shrinkage of their lifestyle, others in the industry are going through the trauma of
not knowing if and when their turn would come. Who is to blame?
Flashback to year 2003:
Rohit (name changed to protect identity), a good friend of mine and someone who
was officially considered to be a genius with an IQ of 150+, graduated from one of
the leading IIM’s. Rohit managed to make it into the New York Headquarters of the
most sought after firm that had arrived on campus for the first time – Lehman
Brothers – a top U.S. Investment Bank (then). On joining, he was assigned to
Lehman’s mortgage securities desk that dealt with Collateralized Debt obligations (or
CDO’s).
Following is an extracted transcript of a chat session I had with Rohit back in 2004:
Me: So man, you must feel like you are on top of the world.
Rohit: Yes dude, the job here is amazing, I get to interact with people around the
world, investment managers – who want to invest millions of dollars
Me: great…so tell me something interesting. What’s your job all about?
Rohit: You know there is a great demand for American home loans, which we buy
from the U.S. banks. We then convert these into what is called as CDO’s
(Collateralized Debt Obligations). In plain English – this refers to buying home loans
that banks had already issued to customers, cutting them into smaller pieces,
packaging the pieces based on return (interest rate), value, tenure (duration of the
loans) – and selling them to investors across the world after giving it a fancy name,
such as ‘High Grade Structured Credit Enhanced Leverage Fund’.
Me: Wow! I would’ve never guessed that boring home loans could transform into
something that sounds so cool!
Rohit: hahaha…actually we create multiple funds categorized based on the nature of
the CDO packages they contain and investors can buy shares in any of these funds
(almost like mutual funds…but called Structured Investment Vehicles or SIV’s)
Me: Dude, you make your job sound like a meat shop…chopping and packaging. So,
in effect when an investor purchases the CDO’s (or the fund containing the CDO’s),
he is expected to receive a share of the monthly EMI paid by the actual guys who
have taken the underlying home loans?
Rohit: Exactly, the banks from whom we purchased these home loans send us a
monthly cheque, which we in turn distribute to the investors in our funds
Me: Why do the banks sell these home loans to you guys?
Rohit: Because we allow them to keep a significant portion of the interest rate
charged on the home loans and we pay them upfront cash, which they can use to
issue more home loans. Otherwise home loans go on for 20-30 years and it would
take a long time for the bank to recover its money.
Me: and, why does Lehman buy these loans?
Rohit: Because we get a fat commission when we convert the loans into CDO’s and
sell it to investors
Me: Who are these investors?
Rohit: They include everyone from pension funds in Japan to Life Insurance
companies in Finland
Me: But tell me, why are these funds so interested in purchasing American home
loans?
Rohit: Well, these guys are typically interested in U.S. Govt bonds (considered to be
the safest in the world). But unfortunately, Mr. Alan Greenspan (head of Federal
Reserve Bank – similar to RBI in India ) has reduced the interest rate to nearly 1%
to perk up the economy after the dot-com crash & Sep 11 attacks. This has left
many funds looking for alternative investments that can give them higher returns.
Home loans are ideal because they offer 4-6% interest rate.
Me: Wait, aren’t home loans more risky than U.S Bonds?
Rohit: We have made home loans less risky now. In fact they have become as safe
as U.S Govt bonds.
Me: What are you saying, man? What if the people who have taken these underlying
home loans default? Then the investors would stop getting the EMI’s, and their
returns would take a hit. Wouldn’t it?
Rohit: Boss, may be some will default, but not definitely more than 2-3% of them.
Moreover, we have convinced AIG (a leading insurance company) to insure our
CDO’s. This means that even if there were big defaults – the insurance company
would compensate the investors.
Me: that’s amazing. What are these insurances called?
Rohit: Credit Default Swaps
Me: Definitely you guys are the most creative when it comes to naming.
Rohit: Thanks
Me: and why has this AIG guy insured millions of home loans?
Rohit: see man, the logic is simple. Home prices in the U.S always go up. In fact
over the last 3 yrs alone they have doubled. So even if someone defaults paying the
EMI, the home can be seized and sold for a much higher price. So there is no risk.
Insurance companies are actually competing to insure this, because they can earn
risk-free premiums.
Me: no wonder investment managers from all over the world want to put money in
your CDO’s. *end of conversation extract*
NINA and the Housing Bubble
A global financial cobweb started getting built around the American dream of
purchasing a home and it rest on the assumption that “home prices will keep rising”.
As demand for the CDO’s started growing across the global investment community,
the investment bankers (like Lehman) who were meant to sell these instruments also
started investing a significant portion of their own capital in these. I guess after
selling the story to the whole world, they themselves got sold on the seemingly
foolproof concept. Gradually the markets for CDO’s and Credit Default Swaps started
expanding with traders and investors buying and selling these as if they were shares
of a company, happily forgetting the underlying people behind these products who
took the home loans in the first place and on whose capacity to repay the loans, the
safety of these products depended.
As Wall Street firms like Lehman were churning more and more home loans into
CDO’s and selling them or investing their own money, there was a pressure on the
banks to issue more loans so that they can be sold to the Wall Street firms in return
for a commission. Slowly banks started lowering the credit quality (qualification
criteria) for availing a home loan and aggressively used agents to source new loans.
This slippery slope went to such an extent that in 2005, almost anyone in the U.S
could buy a home worth $100,000 (45 lk INR) or more – without income proof,
without other assets, without credit history, sometimes even without a proper job.
These loans were called NINA – ‘no income no assets’.
The U.S. housing market went into a classic speculative bubble. Home loans were
easy to get, so more and more people were buying houses. The increased demand
for houses caused the price to increase. The rising prices created even more
demand, as people started to look at homes as investments -- investments that
never went down in value.
When I touched base with my friend Rohit in late 2005, he was on cloud nine. During
the previous one year, he managed to buy a home in Long Island (a posh area near
New York City ) worth almost a millions dollars, and got himself a Mercedes. All this
was interesting to hear, but what shocked me was that although he was earning
close to $20,000 a month (that is what CEO’s in India make) he was not able to save
anything because his lifestyle expenses where growing faster than his salary.
The popping of the Housing Bubble
In late 2006, Mortgage lenders noticed something that they'd almost never seen
before. People would choose a house, sign all the mortgage papers, and then default
on their very first payment. Although no one could really hear it, that was probably
the moment when one of the biggest speculative bubbles in American history
popped. Another factor that lead to the burst of the housing bubble was the rise in
interest rates from 2004-2006. Many people had taken variable rate home loans that
started getting reset to higher rates, which in turn meant higher EMI’s that
borrowers had not planned for.
The problem was that once property values starting going down, it set off a reverse
chain reaction, the opposite of what had been happening in the bubble. As more
people defaulted, more houses came on the market. With no buyers, prices went
even further down.
In early 2007, as prices began their plunge, alarm bells started going off across
mortgage backed securities desks all over Wall Street. The people on Wall Street,
like Rohit, started getting calls from investors about not getting their interest
payments that were due. Wall street firms stopped buying home loans from the local
banks. This had a devastating effect on particularly the small banks and finance
companies, which had borrowed money from larger banks to issue more home loans
thinking they could sell these loans to Wall Street firms like Lehman and make
money.
Everyone got into a mad scramble to seize and sell the homes in order to get back at
least some of the money. But there were just not enough buyers. The guys who had
insured these loans thinking they had near zero risk (e.g. AIG) could not fulfill the
unexpectedly huge number of claims. The best part was that since these insurance
policies (credit default swaps) could themselves be traded, multiple people had
bought and sold them, and it became so tough to even trace who was supposed to
compensate for the loss.
Back to 2008: The carnage
The global financial cobweb built around mortgages is on the brink of collapse. Firms,
large and small, some young some as old as a 100 years have crumbled as a result
of suing each other over the dwindling asset values. Lehman’s India operations- that
employed over a thousand staff is up for sale and many of the employees have been
asked to leave. The Indian stock market has crashed almost 50% from its high (and
so have markets around the world) as the Wall Street giants sold their investments
in the country in an effort to salvage whatever is good in order to make up for the
mortgage related loss. Hedge funds, pension funds, insurance companies all over the
world have lost billions in investor’s money. Many Indian Bschool graduates with
PPO’s (pre-placement offers) in the financial sector ( India and abroad) have either
received an annulment or indefinite postponement of joining dates. IT firms that built
and maintained software for the U.S. mortgage industry or the related Investment
Banks, have shut down their business units, laid-off people or transferred them to
other verticals.
For all the hoopla over the sharp and sophisticated people on Wall Street, the current
financial crisis has exposed the fragility of the system. Wall Street is blaming the
entire episode on people who could not repay their home loans. But the reality
seems to point towards the stupidity of people who lent all this money, financial
institutions that built fancy derivative packages and in effect facilitated billions in
trading and investments in these fragile low quality loans.
The U.S. Govt is planning to grant 700 billion dollars to the Wall Street firms to
compensate the financial speculators for the money that they have lost. Isn’t this like
rewarding greed and stupidity? The head of a leading Investment Bank has stated,
“This is necessary to sustain financial ingenuity. We don’t want to spend this money
on ourselves. We just want this money to go into the market so that we can carry on
trading complex securities, borrowing and lending money.” (Yeah…right, so that one
can act as if nothing had happened without analyzing too much into it). The real
question is: who is going to compensate the common investors across the world who
have lost their wealth in the resultant market meltdown? (either directly or through
pension funds).
After being unreachable for a month now, finally I heard back from my pal, Rohit,
saying he is back in India to take a break from the roller coaster ride that he had
lived through. After Lehman’s collapse he has lost his job and probably the house
that he had bought by taking a hefty loan. I really don’t know whether to feel happy
for him, for getting an opportunity to learn a lesson or two from the experience or to
feel sad for him for losing his job. May be I’ll get a better sense of things once I meet
him next week.

"Buy....I am"... said Warren Buffet on Thursday October 16,2008

Hope you have read and enjoyed some of the articles that I have complied or brought to your attention since last few years....including the one where I spoke about the SubPrime Crisis last August and its plausible effects before the contrary to my opinion bull run till December 08.


This article here is NOT a Top Analyst or an Expert Fund Manager's view. These were Warren Buffet's word of advise to all long term investors. As you all know it is the most successful Investor talking....listen to his every word.
Warren Buffet wrote in the New York Times, October 16,2008
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.


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Parag Karia MSc., AFP, LUTCFInvestment AdvisorRonshu Consulting303 Hoysala Apartments# 6 Cunningham RoadBangalore- 560 052Contact:Mobile: 98450 22818Email: ronshu@vsnl.net http://paragkaria.blogspot.comhttp://www.linkedin.com/in/paragkaria

AMFI Certified (Association of Mutual Funds Of India)
IRDA Certified (Insurance Regulatory & Development Authority)
LUTCF(Life Underwriter's Training Council Fellow-April 2007(The Amercian College,USA&IAIFM)
AFP TM, (Associate Financial Planner, Financial Planning Standards Board, India)
MDRT Qualifier 2003,2004,2005,2006
Member, FPSB (Financial Planning Standards Board, India)
Member,The American College(LUTCF Program)
Member MDRT,USA(Amongst 1% of Worldwide Insurance Advisors, Million Dollar Round Table, USA)
=============================================================================================

Why the Dollar Bubble is about to Burst!!.. or will the USA ever allow it?!!

Dear Friends,

 

This is a long article i know, but take time to read every word here in detail and gain a view on how globally we are all connected economically,politically and socially,though it was always so since a long time, it has become  more apparent in the recent years with the global impact of any action good or bad  being  immediate and severe.

 

Warm regards

Parag

 

Why the Dollar Bubble is about to Burst? or will the USA ever allow it?!! The Voice (issue 264) ran an article beginning, ' Iran has really gone and done it now. No, they haven't sent their first nuclear sub in to the Persian Gulf . They are about to launch something much more deadly -- next week the Iran Bourse will open to trade oil, not n dollars but in Euros' This apparently insignificant event has consequences far greater for the US people, indeed all for us all, than is imaginable. Currently almost all oil buying and selling is in US-dollars through exchanges in London and New York . It is not accidental they are both US-owned. The Wall Street crash in 1929 sparked off global depression and World War II. During that war the US supplied provisions and munitions to all its allies, refusing currency and demanding gold payments in exchange. By 1945, 80% of the world's gold was sitting in US vaults. The dollar became the one undisputed global reserve currency -- it was treated world-wide as `safer than gold'. The Bretton Woods agreement was established. The US took full advantage over the next decades and printed dollars like there was no tomorrow. The US exported many mountains of dollars, paying for ever-increasing amounts of commodities, tax cuts for the rich, many wars abroad, mercenaries, spies and politicians the world over. You see, this did not affect inflation at home! The US got it all for free! Well, maybe for a forest or two. Over subsequent decades the world's vaults bulged at the seams and more and more vaults were built, just for US dollars. Each year, the US spends many more dollars abroad that at home. Analysts pretty much agree that outside the US , of the savings, or reserves, of all other countries, in gold and all currencies -- that a massive 66% of this total wealth is in US dollars! In 1971 several countries simultaneously tried to sell a small portion of their dollars to the US for gold. Krassimir Petrov, (Ph. D. in Economics at Ohio University ) recently wrote, 'The US Government defaulted on its payment on August 15, 1971 . While popular spin told the story of `severing the link between the dollar and gold', in reality the denial to pay back in gold was an act of bankruptcy by the US Government.' The 1945 Breton Woods agreement was unilaterally smashed. The dollar and US economy were on a precipice resembling Germany in 1929. The US now had to find a way for the rest of the world to believe and have faith in the paper dollar. The solution was in oil, in the petrodollar. The US viciously bullied first Saudi Arabia and then OPEC to sell oil for dollars only -- it worked, the dollar was saved. Now countries had to keep dollars to buy much needed oil. And the US could buy oil all over the world, free of charge. What a Houdini for the US ! Oil replaced gold as the new foundation to stop the paper dollar sinking. Since 1971, the US printed even more mountains of dollars to spend abroad. The trade deficit grew and grew. The US sucked-in much of the world's products for next to nothing. More vaults were built. Expert, Cóilínn Nunan, wrote in 2003, 'The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.' Dr Bulent Gukay of Keele University recently wrote, 'This system of the US dollar acting as global reserve currency in oil trade keeps the demand for the dollar `artificially' high. This enables the US to carry out printing dollars at the price of next to nothing to fund increased military spending and consumer spending on imports. There is no theoretical limit to the amount of dollars that can be printed. As long as the US has no serious challengers, and the other states have confidence in the US dollar, the system functions.' Until recently, the US-dollar has been safe. However, since 1990 Western Europe has been busy growing, swallowing up central and Eastern Europe. French and German bosses were jealous of the US ability to buy goods and people the world over for nothing. They wanted a slice of the free cake too. Further, they now had the power and established the euro in late 1999 against massive US-inspired opposition across Europe , especially from Britain - paid for in dollars of course. But the euro succeeded. Only months after the euro-launch, Saddam's Iraq announced it was switching from selling oil in dollars only, to euros only -- breaking the OPEC agreement.. Iran , Russia , Venezuela , Libya , all began talking openly of switching too -- were the floodgates about to be opened? Then aero planes flew into the twin-towers in September 2001. Was this another Houdini chance to save the US (petro) dollar and the biggest financial/economic crash in history? War preparations began in the US But first war-fever had to be created -- and truth was the first casualty. Other oil producing countries watched-on. In 2000 Iraq began selling oil in euros. In 2002, Iraq changed all their petro-dollars in their vaults into euros. A few months later, the US began their invasion of Iraq . The whole world was watching: very few aware that the US was engaging in the first oil currency, or petro-dollar war. After the invasion of Iraq in March 2003, remember, the US secured oil areas first. Their first sales in August were, of course, in dollars, again. The only government building in Baghdad not bombed was the Oil Ministry! It does not matter how many people are murdered -- for the US , the petro-dollar must be saved as the only way to buy and sell oil - otherwise the US economy will crash, and much more besides. In early 2003, Hugo Chavez, President of Venezuela talked openly of selling half of its oil in euros (the other half is bought by the US ). On 12 April 2003, the US-supported business leaders and some generals in Venezuela kidnapped Chavez and attempted a coup. The masses rose against this and the Army followed suit. The coup failed. This was bad for the US . In November 2000 the euro/dollar was at $0.82 dollars, its lowest ever, and still diving, but when Iraq started selling oil in euros, the euro dive was halted. In April 2002 senior OPEC reps talked about trading in euros and the euro shot up. In June 2003 the US occupiers of Iraq switched trading back to dollars and the euro fell against the dollar again. In August 2003 Iran starts to sell oil in euros to some European countries and the euro rises sharply. In the winter of 2003-4 Russian and OPEC politicians talked seriously of switching oil/gas sales to the euro and the euro rose. In February 2004 OPEC met and made no decision to turn to the euro -- and yes, the euro fell against the dollar. In June 2004 Iran announced it would build an oil bourse to rival London and New York , and again, the euro rose. The euro stands at $1.27 and has been climbing of late. But matters this month became far, far worse for the US dollar. On 5th May Iran registered its own Oil Bourse, the IOB. Not only are they now selling oil in euros from abroad -- they have established an actual Oil Bourse, a global trading centre for all countries to buy and sell their oil! In Chavez's recent visit to London ; he talked openly about supporting the Iranian Oil Bourse, and selling oil in euros. When asked in London about the new arms embargo imposed by the US against Venezuela , Chavez prophetically dismissed the US as 'a paper tiger'. Currently, almost all the world's oil is sold on either the NYMEX, New York Mercantile Exchange, or the IPE, London's International Petroleum Exchange. Both are owned by US citizens and both sell and buy only in US dollars. The success of the Iran Oil Bourse makes sense to Europe , which buys 70% of Iran 's oil. It makes sense for Russia , which sells 66% of its oil to Europe . But worse for the US , China and India have already stated they are very interested in the new Iranian Oil Bourse. If there is a tactical-nuclear strike on - deja-vu - `weapons of mass destruction' in Iran , who would bet against a certain Oil Exchange and more, being bombed too? And worse for Bush. It makes sense for Europe , China , India and Japan-- as well as all the other countries mentioned above -- to buy and sell oil in Euro's. They will certainly have to stock-up on euros now, and they will sell dollars to do so. The euro is far more stable than the debt-ridden dollar. The IMF has recently highlighted US economic difficulties and the trade deficit strangling the US-- there is no way out. The problem for so many countries now is how to get rid of their vaults full of dollars, before it crashes? And the US has bullied so many countries for so many decades around the world, that many will see a chance to kick the bully back. The US cannot accept even 5% of the world's dollars -- it would crash the US economy dragging much of the world with it, especially Britain . To survive, as the Scottish Socialist Voice article stated, 'the US , needs to generate a trade surplus to get out of this one. Problem is it can't.' This is spot on. To do that they must force US workers into near slavery, to get paid less than Chinese or Indian workers. We all know that this will not happen. What will happen in the US ? Chaos for sure. Maybe a workers revolution, but looking at the situation as it is now, it is more likely to be a re-run of Germany post-1929, and some form of extreme-right mass movement will emerge... Does Europe and China/Asia have the economic independence and strength to stop the whole world's economies collapsing with the US ? Their vaults are full to the brim with dollars. The US has to find a way to pay for its dollar-imperialist exploitation of the world since 1945.. Somehow, eventually, it has to account for every dollar in every vault in the world. Bombing Iran could backfire tremendously. It would bring Iran openly into the war in Iraq , behind the Shiite majority. The US cannot cope even now with the much smaller Iraqi insurgency. Perhaps the US will feed into the Sunni v Shiite conflict and turn it into a wider Middle-East civil-war. However, this is so dangerous for global oil supplies. Further, they know that this would be temporary, as some country somewhere else, will establish a euro-oil-exchange, perhaps in Brussels . There is one `solution' -- scrap the dollar and print a whole new currency for the US . This will destroy 66% of the rest of the world's savings/reserves in one swoop. Imagine the implications? Such are the desperate things now swimming around heads in the White House, Wall Street and Pentagon. Another is to do as Germany did, just before invading Poland in 1938. The Nazis filmed a mock Polish Army attack on Germany , to win hearts and minds at home. But again, this is a finger in the dam. So, how is the US going to escape this time? The only global arena of total superiority left is military. Who knows what horrors lie ahead. A new world war is one tool by which the US could discipline its `allies' into keeping the dollar in their vaults. The task of socialists today is to explain to as many as possible, especially our class, that the coming crisis belongs purely to capitalism and (dollar) imperialism. Not people of other cultures, not Islam, not the axis of evil or their so-called WMDs. Their system alone is to blame. The new Iranian Oil Bourse, the IOB, is situated in a new building on the free-trade-zone island of Kish , in the Persian Gulf . It's computers and software are all set to go. The IOB was supposed to be up and running last March, but many pressures forced a postponement. Where the pressure came from is obvious. It was internationally registered on 5th May and supposed to open mid-May, but its opening was put off, some saying the oil-mafia was involved, along with much international pressure. In 2007 Crude was trades around 60 usd. Everyone know dollar was getting weaker and weaker day by day. Than US with the help of their two NYMEX & IPE exchange started rising the price of crude by Future trading on crude( called speculation). Today crude is around 140 usd. It means whole world who were paying 60 usd, now paying 140 usd, means demand of dollar increase to 230% and dollar start again rising. Even OPEC recently that in hike og crude, 60% contribution is due to speculation (Future market). Moral of story is USA has & will go to destroy any nation to keep its monopoly of dollar in world.    A response by a Richard, I found on the net: I have been aware of this new Iranian Oil Bourse and its consequences for some time, about a year now and yes this is a hugely significant event. If you follow global economics / politics for long enough you realise that everything America does is to secure its future position. Gulf war (oil reserves) etc. The most recent event has been a long time coming, the debasement of the US$ making US$ debt near worthless - to undermine China's grip on world trade by making the massive $ reserves China holds worth massively less and force a revaluation in Chinese Yan. (However the Chinese have not devalued the Yaun as much as the US would like). Why did they do this? To kickstart the US economy into an export driven economy by making the $ worth far less, thus make US exports dirt cheap to the rest of the world. The trick here is HOW they can devalue the US $ thus once again making it an export powerhouse - competitive with the other low wage economies AND retain the Dollar as the worlds reserve currency. How did they do this? Simple .... they went to war with Iraq in 1994, they kept interest rates artifically low offically to stave off recession post war, deliberately causing a credit boom, printing money like never before creating massive liquidity and thus inflation, great for a set period of time. The society became one based on debt, credit cards and overvalued houses used as cash machines until people could simply no longer sustain the ever expansive level of debt. No country has more debt per person than the UK and US thus this is why the housing price crash is going to be so massive here. The only way that excess liquidity can be got rid of is to inflate it away, - but the reason why inflation will not go as high as in the 1980's is because of the LEVEL of debt people have now, thus people will stop spending far more quickly than back then (essentially what we are seeing now), retail sale figures, abrupt housing crash. The reason why america went to war with Iraq was because Saddam Hussain wanted to switch to Petro Euros rather than Petro $, and it is the same reason why America is looking to war Iran. America desperately wants the $ to remain the reserve currency however this will not happen EXCEPT by controlling the oil physically. America does have a back up plan - if they are unable to retain the dollar as reserve currency - if international opinion prevents it the they will resort to the backup plan, its called the Amero, kinda like the Euro of the Amercias. If America fails to retain the $ as the global reserve currency then it is likely the $ will continue to weaken, thus the Amero will be introduced (currency is already being printed in preperation). And guess what ..... the Amero will be backed by US stocks of GOLD - NOT based on Oil. Housing price crash follow massive credit creation like night follows day and recession follows house price crashes like the sound of a bomb blast after the bright flash. For those that understand global political and economic cycles the events of the last year were inevitable and expected. The credit crunch is nothing new, its just part of the housing price cycle, what has made this cycle different from previous cycles was the size of the boom and thus the size and speed of the crash. Why the global house price crash? Simple! Purely due to the US$ status as the reserve currency and the worlds exposure to US debt. PS: for NRI s in the USA: For those who are thinking of buying a house in the USA now ..... delay - wait a year since you gain nothing by buying now even if you think you are buying a bargain now - it wont be a bargain in a years time. The best case senario for buying now is to break even and the worst case senario is to lose 20 -30%, and of course you can get better returns. You might as well put your money into a savings account returning 10% a year - ok so you wont make any money due to real inflation but at the same time you wont lose much - but you will be liquid for when the bottom of the housing crash does come in about 12 months time.

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Parag Karia  MSc., AFP, LUTCF
Investment Advisor


Ronshu Consulting
303 Hoysala Apartments
# 6 Cunningham Road
Bangalore- 560 052

Contact:
Mobile:  98450 22818
Email:   ronshu@vsnl.net

 

AMFI Certified (Association of Mutual Funds Of India)

IRDA Certified (Insurance Regulatory & Development Authority)

LUTCF(Life Underwriter's Training Council Fellow-April 2007(The Amercian College,USA & IAIFM)

MDRT Qualifier 2003,2004,2005,2006(Amongst 1% of Worldwide Insurance Advisors, Million Dollar Round Table, USA)

Member, FPSB (Financial Planning Standards Board, India)

AFP TM, (Associate Financial Planner, Financial Planning Standards Board, India)

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Warren Buffet's Interview...

There was a one hour interview on CNBC recently with Warren Buffet, the second richest man who has donated $31 billion to charity. Here are some very interesting aspects of his life: 1. He bought his first share aged 11, and he now regrets that he started too late! 2.. He bought a small farm aged 14, with savings from delivering newspapers. 3.. He still lives in the same small 3-bedroom house in mid-town Omaha that he bought after he got married 50 years ago. He says that he has everything he needs in that house. Out side of His house does not have a wall or a fence. 4 . He drives his own car, everywhere and does not have a driver or security people around him. 5. He never travels by private jet, although he owns the world's largest private jet company. 6.. His company," Berkshire Hathaway", owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. He has given his CEO's only two rules. Rule number 1:" Do not lose any of your shareholder's money". Rule number 2:" Do not forget-The rule number 1". 7. He does not socialize with the high society crowd. His pass time after he gets home is to make himself some pop corn and watch TV. 8. Bill Gates, the world's richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for "half hour". But when Gates met him, the meeting lasted for "Ten hours" and Bill Gates became a devotee of Warren Buffet. 9. Warren Buffet does not carry a 'cell phone', nor has a computer on his desk.
His advice to young people: "Stay away from credit cards and invest in yourself and Remember:- A. Money doesn't create a man; it is the Man who created money. B. Live your life as simple as you are. C. Don't do what others say, just listen to them. But," Do what you feel good." D. Don't go for a brand name; just wear those things in which you feel comfortable. E. Don't waste your money on unnecessary things; Just spend on "Those who really are in need". F. After all it's your life..., so why give the chance to others to rule your life."