The U.S. economy turning the corner?

The U.S. economy has contracted for the second quarter in a row, again more than an annualised 6% in the first quarter of 2009. But, will the economy start to recover?

Alan Rappeport of the Financial Times reported as follows:

The US economy continued to contract in the first quarter of this year as business investment collapsed in the face of eroding global demand.

Preliminary commerce department figures showed on Wednesday that US gross domestic product declined by an annualised rate of 6.1 per cent in the first quarter, after declining by 6.3 per cent during the fourth quarter of last year. The decline was worse than the 4.7 per cent that economists expected and marks a slight improvement from the fourth-quarter contraction, which was the sharpest since 1982.

The US economy has not contracted for three consecutive quarters since the first quarter of 1975 and the last six months have been the weakest such period in 51 years.

The economic slowdown was blunted by an uptick in consumer spending and a rebalancing of the trade gap due to a steep decline in imports. In the first quarter imports plunged by 34.1 per cent while exports fell by 30 per cent, as trade dried up. It was the biggest quarterly decline in exports since 1969.

Business investment was the biggest drag on economic growth. The 51.8 per cent decline drained 8.83 percentage points from GDP, as the recession spread from consumers to companies. Private businesses decreased inventories by $103.7bn in the first quarter compared with a decline of $25.8bn in the fourth quarter. That sapped 2.79 per cent from overall GDP, as companies worked to clear stocks.

“What started out as a housing-led downturn that would hit consumption hardest is now clearly having a much bigger impact on businesses,” said Paul Ashworth, US economist at Capital Economics.

Economists took hope that the US consumer proved resilient, with spending rising by 2.2 per cent compared with a decline of 4.3 per cent during the last quarter. Spending was focused on durable goods and lifted overall output by 1.5 percentage points.

Government spending, which helped to buoy GDP in the last quarter, eased so far this year. Federal consumption was off by 4 per cent in the first quarter compared with a 7 per cent increase the quarter before, as defence spending dipped.

Although the US economy has been mired in the worst recession since the Great Depression and unemployment, at 8.5 per cent, sits at a 25-year high, better-than-expected data and a stock market rally had recently offered some glimmers of hope. And though most figures continue to show declines, there had been signs of stabilisation in consumer confidence, home sales and construction.

Economists predict that the impact of the $787bn government stimulus package will not be felt until the second half of this year and that the economy could contract further in the second quarter before flattening.

The US government’s latest 10-year budget outline projected that the economy would contract by 1.2 per cent in 2009 before rebounding to 3.2 per cent growth in 2010. However, many economists suggest those forecasts are overly optimistic.

US consumers regaining confidence?

Rex Nutting of MarketWatch reported on the latest consumer confidence data coming out of the USA:

U.S. consumers are considerably less gloomy about the economy. The consumer confidence index jumped to a reading of 39.2 in April from 26.9 in March, the Conference Board reported.
The 12.3-point month-to-month gain was the fourth-largest ever in the 32-year history of the survey. The index bottomed at a record low 25.3 in February. March's revised reading of 26.9 was the second-lowest on record.

Economists had been expecting the index to rise about five points, to 30.5, for April, according to a survey conducted by MarketWatch. "The survey results do not alter the dismal way in which consumers continue to view the economy, but they fit the 'green shoots' idea currently driving market prices," said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

Consumers were a little happier about the present situation than they were in March, but the big improvement came in the expectations index, which surged to 49.5 in April from 30.2 in March -- the biggest increase since the fall of Baghdad in the spring of 2003.

"The sharp increase in the expectations index suggests that consumers believe the economy is nearing a bottom," said Lynn Franco, director of consumer research for the Conference Board. "However, this index still remains below levels associated with strong economic growth."

The present situation index improved to 23.7 in April from 21.9 in March, still a very weak reading. The percentage of consumers saying business conditions are "bad" fell to 45.7% from 51%, while the proportion saying conditions are "good" increased to 7.6% from 6.9%.

"The closely watched question on views of the current labor market showed only marginal improvement," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley.

Indeed, survey respondents saying jobs are hard to get fell modestly, to 47.9% from 48.8%, while the percentage saying jobs are easy to get also fell, dropping to 4.5% from 4.7%, and pointing to further job losses.

The short-term outlook brightened, but consumers remained pessimistic overall. Those expecting conditions to improve in the next six months rose to 15.6% from 9.6%, while the percentage saying conditions will worsen further declined to 25.3% from 37.8%.

Who else to blame?

By now many industries, organisations and individuals have been blamed for being asleep at the wheel while the financial crisis was taking shape. However, one group in particuliar, namely journalists, have escape critism by large, perhaps for obvious reasons.

Recently, Lionel Barber, editor of Financial Times, set the record straight in a speech he gave at Yale University. An abrigded version of his speech appeared on FT.com on April 21, 2009:

These are the best of times and the worst of times to be a financial journalist. The best, because we have a once-in-a-lifetime opportunity to report and analyse the most serious financial crisis since the Great Crash of 1929. The worst, because the newspaper and television industries are suffering, not only from the shock of a recession but also from the structural shock of the internet revolution.

Now comes a third shock. The financial media are accused of mis­sing the global financial crisis. Asleep at the wheel. Head in the clouds. No cliché has been left unturned as reporters, commentators – yes, even editors – have been castigated for failing to warn an unsuspecting public of impending disaster.

First, by way of mitigation, journalists were not the only ones to fall down on the job. Political leaders were happy to break open the champagne at the credit party; many lingered long after the fizz had gone. Regulators in the US, UK and continental Europe all failed to identify and contain the risks building within the system. Many economists, too, fell short. Only a few – such as nouriel Roubini, now celebrated as the thinking man’s prophet of doom – identified pieces of the puzzle, even if they failed to piece them together.

Why did financial journalists not pay more attention to these warnings? First, the financial crisis started as a highly technical story that took months to go mainstream. Its origins lie in the credit markets, coverage of which in most news organisations counted as a backwater. Most reporters working in this so-called “shadow banking system” found it hard to interest their superiors who controlled space and who were more interested in broadcasting the “good news” story of rising property prices and economic growth.

A second related problem with the credit derivatives story was that it took place in an over-the-counter market with little disclosure and very little day-to-day news. Inevitably, the temptation was – and still is – to run with the stories that are much less opaque such as public company earnings. Yet the big innovations and the big money came in the credit markets.

The second criticism is that the media were too interested in building up a good news story. The comedian Jon Stewart’s on-air demolition of Jim Cramer shows there is a case to answer. Mr Stewart went so far as to suggest that CNBC, which hosts Mr Cramer’s Mad Money show, overlooked market shenanigans as it was too close to its core community: Wall Street traders and investment bankers.

Journalists routinely face tensions between relying on their sources and burning them with critical coverage. The incentive to “go along” to “get along” is always present, in competition with a journalist’s instinct to speak truth to power.

In the final resort, there can be little debate that the financial media could have done a better job. In this spirit of self-criticism, I identify four weaknesses in the coverage.

First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.

Second, journalists, with a few notable exceptions, failed to understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac, the mortgage finance giants. Of course, it was hard for journalists to attack the ideal of broader home ownership in America, but that is no excuse.

Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.

Fourth, financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. The same applies to regulators and economists. For too long, too many experts treated the financial sector and the wider economy as parallel universes. This was fundamentally wrong.

Many of the most important developments of the past decade – the rise of radical Islamic terrorism, the opening of the Chinese economy as well as two credit bubbles – have largely been unanticipated or failed to attract the attention they deserved. Journalists, in this respect, have a crucial role to play. Flawed they may be, but they still have the capacity to be the canaries in the mine.

"Invest in South Africa" says U.S. fund manager after ANC's decisive win at the polls

Polya Lesova, a reporter for MarketWatch, published the following story:

With the African National Congress poised for a strong victory in South Africa's general election this week, now is the time for investors to get exposure to attractive stocks in the African continent's biggest economy, says a fund manager at T. Rowe Price. "We think stocks are cheap. It's a good environment for stock picking," said Joseph Rohm, manager of the T. Rowe Price Africa & Middle East Fund, which had $151 million in assets as of late March.
"We'd look to accumulate some of the better quality companies [in South Africa] on the back of the election," Rohm said in a phone interview Friday.

Rich in natural resources, South Africa is a major exporter of gold, diamonds, metals and minerals. Its economy has been hurt recently by a drop in manufacturing and falling commodity prices.

South African equities have underperformed other emerging markets this year. Johannesburg's benchmark All Share stock index is down 4% year-to-date, while the MSCI Emerging Markets index is up 13%.

"With the ANC, you get a continuation of existing policy and business friendliness," Rohm said. "I don't think there's a shift to the left."

The ANC's Zuma, a key leader in the fight against apartheid, is seen as charismatic, but has been plagued by corruption allegations. Also, some investors are wary of Zuma because he is supported by the Communist Party and trade unions.

"Does he [Zuma] have to reward all the voters that put him into power?" said Nigel Rendell, senior emerging markets analyst at RBC Capital Markets. "His support is from low-income people. We need to watch that fairly closely, that he doesn't put undue pressure on [Finance Minister Trevor] Manuel."

Analysts stressed the importance of keeping the widely respected Manuel in charge of the finance ministry.

"The number one concern is economic policy and that means does he [Zuma] keep Trevor Manuel at the finance ministry," Rendell said. "He has to. He really has no choice. He is wise enough to know that."

Rohm agreed: "What will be important is the reappointment of Trevor Manuel. We'd like to see a continuation of the strict fiscal policies that we've had. He's done a fantastic job over the last two terms."

Among the risks facing South Africa are the twin deficits the country is now running as well as rising unemployment, Rohm said.

Still, Rohm believes that now is a good time to buy attractive South African stocks.

Massive losses and massive problems...

In its latest Global Financial Stability Report the IMF is expecting financial institutions to lose about $4 trillion ($4,000bn) in the wake of a deteriorating global economy.

Sarah O'Connor of the Financial Times, published the following report:

"The deteriorating global economy means financial institutions now face total losses of $4,100bn on loans and other assets, the International Monetary Fund said on Tuesday, urging governments to take “bolder steps” to shore up institutions – including nationalising them where necessary.

The IMF said that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis.

The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added.
Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest.

The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions,” it said.

The report is likely further to unnerve investors, even though the writedown estimates are lower than those of some private economists. US banks have so far taken about half of the writedowns they face, while European banks – particularly vulnerable because of their exposure to emerging European markets – have only taken one-fifth. But if banks took all the writedowns they face immediately, the IMF calculates it would wipe out their common equity altogether.

That highlights the urgent need to inject more capital into many banks and other institutions. To restore their balance sheets to the state they were in before the crisis – defined by the IMF as a tangible common equity to tangible asset ratio of 4 per cent – US banks need $275bn in capital injections, euro area banks need $375bn and UK banks $125bn.

But the IMF expressed concern that taxpayers were becoming weary of supporting the financial sector. “There is a real risk that governments will be reluctant to allocate enough resources to solve the problem,” the report said.

One possible step would be for governments to convert their preferred shares in banks into common equity, the IMF suggested. This is something that the US government is considering, a senior official has told the Financial Times, though some have criticised such measures as “nationalisation by the back door.”

Even if governments do take bold action to shore up the system, the credit crisis will be “deep and long-lasting”, the IMF warned. It said that deleveraging and economic contraction would cause credit growth in the US, the UK and the eurozone to contract and even turn negative in the near future, and only recover after a number of years.

The IMF was also gloomy about the prospects for emerging markets as foreign investors and banks withdraw funds. It estimated the refinancing needs of emerging markets are around $1,800bn, while net private capital will flow out of such economies this year.

Reshaping global financial regulation was another major topic in the IMF report. It suggested creating two tiers of regulatory oversight: one to gather information, and a smaller one for systemically important institutions with “intensified” regulation. It also mooted the idea of levying an extra capital surcharge as a way to deter companies from becoming “too-connected-to-fail” in the first place.

Next up: The great inflation...

Which economic scenario will follow recession? Martin Feldstein, professor of economics at Harvard and member of Pres. Obama's Economic Recovery Advisory Board, shared his views in an article published on FT.com:

The US last week showed its first signs of deflation for 55 years, prompting inevitable fears of further deflation in the future. Yet the primary reason for the negative rate of US inflation is the dramatic 30 per cent fall of commodity prices. That will not happen again. Moreover, excluding food and energy, consumer prices are up 1.8 per cent from a year ago. That is the good news: the outlook for the longer term is more ominous.

The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. The president’s budget implies a fiscal deficit of 13% of GDP in 2009 and nearly 10 per cent in 2010. Even with a strong economic recovery, the ratio of government debt to GDP would double to 80 per cent in the next 10 years.

There is ample historic evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions.

The key fact is that inflation rises when demand exceeds supply. A fiscal deficit raises demand when the government increases its purchase of goods and services or, by lowering taxes, induces households to increase their spending. Whether this larger fiscal deficit leads to an increase in prices depends on monetary conditions. If the fiscal deficit is not accompanied by an increase in the money supply, the fiscal stimulus will raise short-term interest rates, blocking the increase in demand and preventing a sustained rise in inflation.

So the potential inflationary danger is that the large US fiscal deficit will lead to an increase in the supply of money. This inevitably happens in developing countries that do not have the ability to issue interest-bearing debt and must therefore finance their deficits by printing money. In contrast, when deficits do not lead to an increased supply of money, the evidence shows that they do not cause sustained price increases.

A primary example of this was the sharp fall in inflation in the US in the early 1980s at the same time that fiscal deficits were rising rapidly. Inflation fell because the Federal Reserve tightened monetary conditions and allowed short-term interest rates to rise sharply.

But now the large US fiscal deficits are being accompanied by rapid increases in the money supply and by even more ominous increases in commercial bank reserves that could later be converted into faster money growth. The broad money supply (M2) is already increasing at an annual rate of nearly 15 per cent.

The money supply consists largely of government-insured bank deposits that households and businesses are holding because of a concern about the liquidity and safety of other forms of investment. But this could change when conditions improve, turning these money balances into sources of inflation.

The link between fiscal deficits and money growth is about to be exacerbated by “quantitative easing”, in which the Fed will buy long-dated government bonds. While this may look like just a modified form of the Fed’s traditional open market operations, it cannot be distinguished from a policy of directly monetising some of the government’s newly created debt. Fortunately, the amount of debt being purchased in this way is still small relative to the total government borrowing.

The Fed is also creating a massive increase in liquidity by its policy of supplying credit directly to private borrowers. Although these credit transactions do not add to the measured fiscal deficit, the unprecedented Fed purchases of more than $1,000bn of private securities have led to the enormous $700bn increase in the excess reserves of the commercial banks. The banks now hold these as interest-bearing deposits at the Fed. But when the economy begins to recover, these reserves can be converted into new loans and faster money growth.

The deep recession means that there is no immediate risk of inflation. The aggregate demand for labour and goods and services is much less than the potential supply. But when the economy begins to recover, the Fed will have to reduce the excessive stock of money and, more critically, prevent the large volume of excess reserves in the banks from causing an inflationary explosion of money and credit.

It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.

"Inflation is looming on America's horizon" by Martin Feldstein, Financial Times, April 19, 2009.

Equities: A leading indicator of economic recovery

Alan Greenspan, former chairman of the US federal reserve, said in a recent article published on FT.com that equity markets hold the key when and how economies will recover from the current turmoil:

Global economic policymakers are currently confronted with their most daunting challenge since the 1930s. There is considerable fear in the marketplace that the unprecedented set of stimulus programmes and efforts to recapitalise banks with sovereign credits will fall short of success.

Over the past two centuries, global capitalism has experienced similar crises and, up until now, has always recovered and proceeded to achieve ever higher levels of material prosperity.

In one credible scenario, behind the unprecedented loss of wealth during the last year and a half, lie the seeds of recovery. Stock markets across the globe have to be close to a turning point. Even if a stock market recovery is quite modest, as I suspect it will be, the turnround may well have large (and positive) economic consequences.

For a few months before the August 2007 disruption, the crisis was wholly financial. The world's non-financial sector balance sheets and cash flows were in good shape. But the contagion from the crisis in finance took hold in the autumn of 2007. Global stock prices peaked at the end of October and then progressively declined for nearly a year into the Lehman crisis. Global losses in publicly traded corporate equities up to that point were $16,000bn (€12,000bn, £11,000bn). Losses more than doubled in the 10 weeks following the Lehman default, bringing cumulative global losses to almost $35,000bn, a decline in stock market value of more than 50 per cent and an effective doubling of the degree of corporate leverage. Added to that are thousands of billions of dollars of losses of equity in homes and losses of non-listed corporate and unincorporated businesses that could easily bring the aggregate equity loss to well over $40,000bn, a staggering two-thirds of last year's global gross domestic product.

This combined loss has been critically important in the disabling of global finance because equity capital serves as the fundamental support for all corporate and mortgage debt and their derivatives. These assets are the collateral that powers global intermediation, the process that directs a nation's saving into the types of productive investment that fosters growth.

At some point, global stock prices will bottom out and rise. A rise in global private sector equity will tend to raise the net worth (at market prices) of virtually all business entities. In a bull market, the vast majority of stock prices rise. Newly created equity tends to be arbitraged across global businesses. In the current environment, new equity will open up frozen markets and provide capital across the globe to companies in general, and banks in particular. Greater equity, after addressing the shortage of bank net worth, will support more bank lending than currently available, enhance the market value of collateral (debt as well as equity), and could reopen moribund debt markets. In short, liquidity should re-emerge and solvency fears recede. Restoration of normal global lending could be as effective a stimulus as any fiscal programme of which I am aware.

Widespread capital gains will add equity to balance sheets, but aside from increasing liquidity and decreasing insolvency, they do not in themselves raise economic activity. The fact that claims on business entities are, in effect, purchasing power, does. Most automotive dealers, for example, being compensated for the inconvenience, would presumably accept shares of stock as payment for a car. We see this process more generally in the so-called wealth effect, where the creation of capital gains augments spending and gross domestic product, whereas capital losses lower spending.

We too often think of fluctuations in stock prices in terms of "paper" profits and losses that are somehow not connected to the real world. But the evaporation of the value of those "paper claims" over the past 18 months has had a profoundly deflationary impact on global economic activity. Failures of intermediation have hobbled many economies over the decades, most conspicuously Japan in the 1990s. The household wealth effect on personal consumption expenditures has been documented, but stock prices have a statistically highly significant impact on private capital investment as well. Such analyses suggest that much of the recent decline in global economic activity can be associated directly or indirectly with declining equity values.

Of course, it is not simple to disentangle the complex sequence of cause and effect between change in the market value of assets and economic activity. A significant part of stock price dynamics is driven by the innate human propensity to swing intermittently between euphoria and fear, which, while heavily influenced by economic events, nonetheless has a partial life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but a key cause of it.

Stock prices are governed through most of the business cycle by profit expectations and economic activity. They appear, however, to become increasingly independent of that activity at turning points. It is this property that makes them a leading indicator, which is the conclusion of most business cycle analysts.

The substitution of sovereign credit for private credit has helped to fend off some of the extremes of the solvency crisis. However, when we look back on this period, I very much suspect that the force that will be seen to have been most instrumental to global economic recovery will be a partial reversal of the $35,000bn global loss in corporate equity values that has so devastated financial intermediation. A recovery of the equity market, driven largely by a receding of fear, may well be a seminal turning point of the crisis.

The key issue is when. Certainly by any historical measure, world stock prices are cheap, even after the recent run-up. But as history also counsels, they may or may not get a lot cheaper before they decisively return to more normal levels. What is undeniable is that stock market prices today are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). But history tells us that there is a limit to how deep, and for how long, fear can paralyse market participants. The pace of economic deterioration cannot persist indefinitely.

It is the rate of decline of product, labour and financial markets that generates much of the uncertainty that, in turn, fuels fear. To an employed person, it is the rate of job cuts, more than the level of unemployment, that fosters job insecurity and the economic responses that go with it. The current pace of deterioration is bound to slow and with it there should come a lessening of the level of fear. One cause of fear is uncertainty. Today we are at an outer extreme of historic credit risk.

As the level of fear recedes, stock market values will rise. Even if we recover only half of the $35,000bn global equity losses, the quantity of newly created equity value and the additional debt it can support are important sources of funding for banks. As almost everyone is beginning to recognise, restoring a viable degree of financial intermediation is the key to recovery. Failure to do so will significantly reduce any positive impact from a fiscal stimulus.

The G20 Rescue Package

Daniel Pimlott published the following article on FT.com about the decisions reached at the G20 summit:

World leaders on Thursday agreed to “fight back” against the global recession with $1,100bn in funding for the International Monetary Fund, regional development banks and international trade finance, but did not commit themselves to a new round of fiscal stimulus.

“This is the day that the world came together, to fight back against the global recession,” Gordon Brown, UK prime minister and host of the London summit, told a news conference at the end of the G20 summit of leaders of advanced and emerging economies. “We will do what is necessary to restore growth [and save jobs].”

A total of $1,100bn could be made available to fight the international financial crisis, including $750bn in funding for the IMF, $250bn for trade finance and $100bn for multilateral development banks, according to the communiqué issued at the end of the summit.

On top of the funding measures, G20 leaders pledged to crack down on tax havens, extend regulation of the financial system to large hedge funds, set tougher pay rules in the financial services and oversee credit ratings agencies.

But there was no agreement for a new global round of fiscal stimulus, upsetting hopes in the US, UK and Japan after Germany and France pressed for an emphasis on tougher regulation to prevent future crises.

Angela Merkel, the German chancellor, told reporters that the G20 agreement is “a victory for common sense” and an “important step toward order” in markets.

At a separate and simultaneous news conference Nicolas Sarkozy, president of France, claimed victory in the battle for tighter regulation.

”Since Bretton Woods, the world has been living on a financial model, the Anglo-Saxon model - it’s not my place to criticise it, it has its advantages - clearly, today, a page has been turned,” he said.

The new funding for the IMF to support poorer nations and those hardest-hit by the crisis is likely to come in part from $500bn in loans from member countries. Mr Brown said that $100bn each would come from the EU and Japan and $40bn from China.

Another $250bn will be made available as the IMF essentially follows the US and UK down the route of quantitative easing by creating new special drawing rights – the organisations’ own ”basket” currency.

There will also be aid for poorer countries funded by the sale of gold from the IMF.

The money for trade finance, which is needed after global trade volumes have collapsed over the last few months, is likely to be supplemented by some measures by China to support trade, officials said.

On financial regulation, the G20 agreed to “extend regulation and oversight to all systemically important financial institutions, instruments and markets”, including for the first time big hedge funds. It also said that credit agencies would be registered and monitored for the first time, after the failing of credit ratings played a big part in exacerbating the credit crisis.

The communique said that the G20 would extend “regulatory oversight and registration to credit rating agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.”

Mr Brown added that there would be a “common global approach” for the first time to clean up banks’ balance sheets, although he did not give details.

Further financial regulation means that there would now “be an international norm which will define the capital base of banks,” according to Mr Sarkozy.

”We have decided to reintegrate off-balance sheet items ... in the calculations of capital requirements formulated by supervisors.“
G20 nations also agreed to move forward with plans to better regulate bankers’ pay.

Meanwhile, the OECD published a blacklist of countries considered tax havens because they do not co-operate with efforts to identify individuals and companies dodging taxes.
And despite the lack of fresh fiscal stimulus, the G20 emphasised that the fiscal expansion already planned over the next two years was equivalent to $5,000bn, or a 4 per cent boost to overall output.

Combined with the massive scale of monetary policy easing undertaken by many countries, the G20 said in its communiqué that “taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times.”

The failure to secure big steps towards fresh fiscal stimulus will leave many disappointed with the outcome of the summit. Observers will also be keen to see details of the “common” plans for banking systems.

When to turn bullish again...

Paul Farrell wrote the following piece on MarketWatch: He believes we are at the start of a next bull run and that the many doomsayers will be proven wrong. Furthermore, he lists six reasons why investors should be feeling bullish and start investing.

OK, so you're one of millions of investors impatiently waiting on the sidelines, sitting with $2.5 trillion cash under your mattress, waiting for the right moment, that signal screaming: "Bottom's in, start buying!" Yes, it'll go down again, but the bottom's in, thanks to a great March, possibly the third best month since 1950, so it's time to jump back in and buy, buy, buy!

You heard me, I'm calling the bottom, beating Dr. Doom to the punch again. Last time we were predicting the recession. This time we're calling the market bottom and a new bull.

Dr. Doom? Of course I'm referring to you-know-who, Nouriel Roubini, the notorious "party-boy economist," as Portfolio magazine calls him, the ubiquitous New York University professor with his well-oiled PR hype machine that's made him the "go-to" media darling with endless economic predictions.

Portfolio pinpoints Roubini's claim to fame in his February 2008 blog, "The Rising Risk of Systemic Financial Meltdown: The 12 Steps," where he announced the recession actually started in December 2007.

But today Roubini's got a huge problem, one that'll hurt his fans, investors and credibility.

Last December, Newsweek reported Roubini was predicting "the recession will last until the end of 2009," about nine more months. He also boasted that "eventually, when we get out of this crisis, I'll be the first one to call the recovery ... Then maybe I'll be called Dr. Boom."

Roubini is a great showman. A century ago he would have outdone P.T. Barnum with his incredible boast, a prediction rivaling historic ones made by other well-known New Yorkers: Babe Ruth's famous home run in the 1932 World Series after pointing his bat into the center field bleachers and Joe Namath's prediction of an upset win over the heavily favored Colts in the 1969 Super Bowl.

Warning: Here are 6 reasons why Roubini can never fulfill his promise ... why he may go down in history, as Portfolio suggests, as the designated "one-hit wonder" ... but worse, any investor waiting for a Roubini "call" is playing Russian roulette, a loser's game ... you will miss the market's real turning point:

1. The stock market turns before the economy bottoms

Regardless of what Dr. Doom or any economist boasts, the stock market has a mind of its own, it's a leading indicator. Stocks historically kick into action earlier than the economy recovers, often six months ahead of the economy's bottom.

So while economists' predictions pinpointing a recession may appear earlier than bear market predictions by the notoriously optimistic Wall Street pundits, the cycles work the other way in a recovery: A stock market bottom and new bull may occur six months before the economists call the ending of a recession and an economic recovery. So Dr. Doom's "call" will naturally come months after the stock market in fact turns.

2. Stocks make big money fast then go to sleep

Back in January, Wall Street Journal columnist Jason Zweig reported on some fascinating research: "History shows that the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss -- and promptly lapses back into its usual stupor."

And the numbers back it up: "Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain, has studied the daily returns of the Dow Jones Industrial Average back to 1900." He "found that if you took away the 10 best days, two-thirds of the cumulative gains produced by the Dow over the past 109 years would disappear. Conversely, had you sidestepped the market's 10 worst days, you would have tripled the actual return of the Dow."

3. No one can predict the next big move

Unfortunately, markets are notoriously unpredictable, ruled by mobs of irrational investors who are all bad guessers, No one can predict in advance when those "10 worst" or "10 best" days will actually occur. Not on Main Street. Certainly not on Wall Street.

Why? In his classic, "Stocks for the Long Run," Wharton economics Prof. Jeremy Siegel studied all the big market moves between 1801 and 2001. Two centuries of data. Siegel concluded that 75% of the time there was no rational explanation for big moves up in stock prices or big moves down. Lesson: Market timing is a loser's game.

4. Famous media-darling pundits inevitably flameout

A month ago Newsweek's science columnist and former Wall Street Journal legend Sharon Begley wrote a fascinating piece, "Why Pundits Get Things Wrong." Her opening: "Pointing out how often pundits' predictions are not only wrong but egregiously wrong -- a 36,000 Dow! euphoric Iraqis welcoming American soldiers with flowers! -- is like shooting fish in a barrel, except in this case the fish refuse to die. No matter how often they miss the mark, pundits just won't shut up."

Think of all the media darlings you know as Begley reviews the data: And "the fact that being chronically, 180-degrees wrong does not disqualify pundits is in large part the media's fault: cable news, talk radio and the blogosphere need all the punditry they can rustle up, track records be damned."

The data comes from Philip Tetlock, a research psychologist at Stanford University: "Tetlock's ongoing study of 82,361 predictions by 284 pundits" concludes that their accuracy has nothing to do with credentials such as a doctorate in economics or political science, or on "policy experience, access to classified information, or being a realist or neocon, liberal or conservative."

What matters? "The best predictor, in a backward sort of way, was fame: the more feted by the media, the worse a pundit's accuracy. ... The media's preferred pundits are forceful, confident and decisive, not tentative and balanced. ... Bold, decisive assertions make better sound bites; bombast, swagger and certainty make for better TV."

They can be totally wrong, so long as they're assertive and entertaining. "The marketplace of ideas does not punish poor punditry. Few of us even remember who got what wrong. We are instead impressed by credentials, affiliation, fame and even looks -- traits that have no bearing on a pundit's accuracy."

5. Even the best economists make huge errors
Go back a decade to that classic article in BusinessWeek, "What Do You Call an Economist With a Prediction? Wrong." Four years later in "So I Was Off by a Trillion," BusinessWeek punctuated the message, reporting on Michael Boskin's classic error. Boskin, a Stanford economist and former chairman of the Council of Economic Advisers under Bush 41, "circulated a startling paper to fellow economists. In it, he argued that the future tax payments on withdrawals from tax-deferred retirement accounts ... were being drastically undercounted. That meant federal budget revenues could potentially be in for a huge, unforeseen windfall ... of almost $12 trillion."

That also meant a political boost for Bush: "Larger than the sum of the 75-year actuarial deficits in Social Security and Medicare plus the national debt." Later, however, Boskin checked his numbers and "concluded that he had made a serious mistake: A key term had been left out ... possibly wiping out most of the estimated $12 trillion in savings."
No surprise: Political ideologies often motivate "objective" economists.

6. Will the real Dr. Doom please stand up?

Roubini actually shares the Dr. Doom title with many others, including Hong Kong economist Marc Faber who publishes the "Gloom Boom Doom Report;" legendary Salomon Bros. strategist Henry Kaufman; and Houston billionaire Richard Rainwater, whom Fortune mentioned as Dr. Doom.
In addition, in one of our columns

last summer, we reported on many others whose predictions of a coming recession predated Roubini's claim, though not called "Dr. Doom." They include: Pete Peterson, a Blackstone Group founder; Pimco's Bill Gross; Harvard financial historian Niall Ferguson; Warren Buffett; former SEC chairman Arthur Levitt; Jeremy Grantham whose GMO firm manages $100 billion; "Black Swan" author Nassim Nicholas Taleb; and long-time Forbes columnist, economist Gary Shilling.

Noteworthy, way back in 2004 Shilling specifically warned: "Subprime loans are probably the greatest financial problem facing the nation in the years ahead." And later in June 2007 Shilling

said: "Just as the U.S. housing bubble is bursting, speculation elsewhere will come to a violent end, if history is any guide. Some astute pioneers, including Richard Bookstaber, who designed various derivative-laden strategies over the years, now fear that financial derivatives and hedge funds -- focal points of today's huge leverage -- will trigger financial meltdown." Then in a November 2007 column "17 Reasons America needs a recession," Gross predicted a bailout of "Rooseveltian proportions" ahead.

Yes, we were warned. In fact, seems everyone knew. But our denial was too powerful, hidden under our new culture of infectious greed.

The examples go on and on ... strongly suggesting that the "Roubini Hype Machine" may well be the "one-hit wonder" Portfolio calls him. He was not ahead of the competition with his December 2007 recession call. So if you're one of America's 95 million investors waiting for Roubini to call a bottom before getting back in the market, you'll miss the real turning point.

One final, crucial warning: This next bull will be short. First, it will suck money out of the mattresses of investors who are sitting on cash. Then Wall Street will recreate the insanity of the '90's dot-coms and the recent subprime-credit mania.

But underneath it all, Wall Street's bulls will be setting the stage for yet another catastrophic bubble and meltdown. So please be careful when "Dr. Doom's PR Hype Machine" proclaims that Roubini's finally morphed into "Dr. Boom" later this year. It'll be too late.