MELTDOWN
by Egon von Greyerz
RESCUES

Central banks and governments are now in a frantic state to save banks and financial entities that are falling like dominos on an hourly basis. It is almost impossible to keep up with all the businesses that have collapsed worldwide only in the last week. The authorities around the world have no choice. They will print any amount of money to save whoever needs to be saved. Also the whole world is waiting for the US rescue package of $ 700 billion to be passed. This might help for a few days or weeks but not much longer

Let us be very clear; no rescue package or action
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NO, THE EMPEROR HAS NO CLOTHES
by Egon von Greyerz
MELTDOWN
For anyone who has been reading our reports in the last few years it comes as no surprise that the banking system is crumbling. In the last week we have seen AIG being nationalised, Lehman go bankrupt, Merrill Lynch swallowed up by Bank of America and HBOS bought by Lloyds TSB. The week before Fannie and Freddie were nationalised.

We have been warning investors that the banking system is bankrupt and have named all the above names and some others as being vulnerable. So finally the world has realised that the Emperor Has No Clothes. What is happening now is not surprising. What
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MARKET UPDATE
We are currently going through a correction in all markets. Dollar up, precious metals down and stockmarkets up. This is a typical thin summer market shake up with exaggerated moves due to the fact that most of the heavy investors and traders are on holiday. Therefore central bank intervention to boost the dollar and computerised, black box trading are currently managing to push the markets further than normal. But remember that central banks run out of ammunition very quickly and the black boxes are lemmings just following any short term trend.

The corrections in the precious metals, albeit always unpleasant to experience, are totally normal. We have seen it many
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GLOBAL WARNING
by Egon von Greyerz

In the last few days various reports have been published from organisations such as the BIS (Bank for International settlement in Basel), Barclays Bank, Royal Bank of Scotland (RBS). They are basically all saying the same thing namely that the world financial situation is extremely precarious.

BIS says: “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point.” BIS goes on to say: ”The magnitude of the problems yet to be faced could be
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HOW TO SURVIVE AND PROSPER IN A STAGFLATIONARY ENVIRONMENT
by Egon von Greyerz
Today’s financial world is a minefield. There is massive divergence in performance in different markets and sectors; European stockmarkets are down around 15-20% this year, US slightly less whilst some Asian markets are down in excess of 30%. Certain sectors such as Banks and Property are down 50-80%. On the other hand we have seen substantial gains in commodities, especially food and energy (crude up 42%, corn up 59%) and also in precious metals. These trend are likely to continue for at least 2-3 years and probably a lot longer during which time commodities (especially precious metals) will outperform
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IS THE BANKING SYSTEM
A HOUSE OF CARDS?
by Egon von Greyerz
The answer to the above question is an unequivocal YES! We have for a long time warned investors of the fragility of the banking system due to the combination of the unmanageable mountain of OTC (over the counter) derivatives totalling $ 525 trillion combined with reckless lending in mortgage loans, personal credit, credit cards, car loans as well as too aggressive commercial lending both in real estate and private equity. Without the rescue of Bear Stearns we would have had a systemic crisis with catastrophic consequences for the world economy. But in the short term the Fed (and other central banks)
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IS IT TIME TO PANIC?
by Egon von Greyerz
The question above is clearly justified. Especially after the Fed has cut the discount rate by 1 ¼ % in the last ten days. This is undoubtedly panic action. And the cut is not due to the fall of the stockmarket. The reason for the cut is in the statement issued by the Fed on 30 January: “Financial Markets are under considerable stress” . This statement is Fed speak for the fact that the financial system is fighting for survival.

Derivatives – Financial Weapons of Mass Destruction

We forewarned investors already in November and December about the looming problem of Credit Default Swaps (CDS), a
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Credit Insurers
by Egon von Greyerz
It is Friday before Christmas and most people have already started the holiday celebrations. We normally don’t send out frequent reports especially not in Late December but the dominos are falling so rapidly that we feel obliged to avert investors.
The bond insurers are now officially in trouble. ACA Capital has lost $ 1.1. billion in the recent quarter and has only $ 1.1 billion in cash for future claims. There are more losses in the pipeline. ACA has now lost its AAA rating and been downgraded to CCC (a twelve rating downgrade). Due to the rating downgrade they now need $ 1.7 billion in new capital
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BANK SOLVENCY
The ECB adds $ 500 billion, the Fed adds slightly less. Morgan Stanley writes off $ 9 billion and is saved by a capital injection from China. This is in addition to all the write offs of major banks totalling $ 80-90 billion so far. But remember this is only the tip of the iceberg. Write offs are likely to be at least $ 400-500 billion. And this is before any major problems have emerged in the derivative area. With $ 600 trillion of derivatives outstanding and with virtually no reserves against these derivatives (everybody assumes that they are covered by a counterparty). Just a ½% loss would absorb
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OUTLOOK FOR 2008
by Egon von Greyerz

Sadly we are not bearers of good news for the upcoming holidays or for 2008.

Let us first summarise what we are predicting in this report:

The current problem in credit markets are likely to develop into a major recession or depression for the world economy in the coming years. The only question is if we will have a short period (12-24 months) of stagflation first, fuelled by money printing. The result would be the same whether it starts now or in a few months’ time, namely a deflationary downturn that will last for several years and have a devastating effect on the world economy.
The credit crisis
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