As we move into the last few days of 2008 governments around the world are slashing interest rates to near 0% and flooding the system with money. The auto bailout confirmed that the Federal Government (we the taxpayers) will not have any additional Lehman like failures. The fact that the TED spread (difference between the three month interbank lending rate (LIBOR) and the 3-month Treasury Bill (risk free short-term lending rate) continues to narrow sharply, suggests that the frozen capital markets may be thawing at a faster pace than generally believed. Decisive action by the incoming Obama team may just generate sufficient confidence to restart economic activity. This may well bring the recession to a quicker end than expected only to face the "interest rate bubble" in the face of much higher inflation.

"A woman must have money and a room of her own to write," said Virginia Woolf in 1928 in A Room of One's Own, which has since become a feminist classic. Her point applies much more broadly than to the struggle for women's rights. Indeed, any human being needs space and money to be creative. The idea can be extended further: people need to be able to think independently. The economic system is now plagued by a lack of independent or critical thinking, and the role this absence has played in the global financial crisis is becoming clearer by the day. The idea that professional investors apply rigorous independent analysis to everything they do has already taken a harsh beating this year. Some do, but many do not. That the slicing and dicing of loans could turn a bad risk into a rock-solid investment was the false belief that has already wiped out $1,000bn dollars of value on mortgage-backed securities and other structured deals. It is no longer controversial, even at securitisation industry forums, to state that an over-reliance on credit ratings bred complacency. The scandal surrounding Bernard Madoff's alleged giant $50bn Ponzi scheme is another blow to the belief there are a lot of smart investors out there. Once Mr Madoff got the seal of approval in the form of recommendations from respected investors, it appears others blindly followed. Some of the most revered hedge funds, as well as investors specialising in allocating money to hedge funds, appear to have lost billions invested in Mr Madoff. The willingness to invest in something your peers appear happy with is not dissimilar to the impulse to buy securities on the back of strong credit ratings. Herd behaviour again highlights the lack of independent thought or critical enquiry - which even experts paid to apply such analysis have succumbed to in a long boom. It confirms again the importance of psychology on investment decisions. he degree to which investors can be relied upon to think independently in future is now the core question that will determine how the financial system is restructured. Faith in "self-regulation" - requiring a large degree of critical analysis - has clearly evaporated. If anything, the Madoff scandal makes it even more likely reliance on third parties - from rating agencies to bond insurers to feeder funds - rather than investors' own judgment will be discouraged and prohibited. These questions will now be examined by a new batch of Obama-appointed regulators . The issue is that, once you remove a common reference point such as credit ratings that allow for a degree of commoditisation, the potential scale of the financial system shrinks dramatically. If every transaction has to be individually vetted, and complexity disappears because there are few common reference points, lending and borrowing will revert to a more local and smaller business. The effect of regulation would be the opposite of the boom in credit that followed the deregulation of recent decades. Towards the end A Room of One's Own, Ms Woolf says it is time for a peroration - the concluding part of a discourse. Her's seems an appropriate call to responsible investors - as well as lax regulators: "I should implore you to remember your responsibilities, to be higher, more spiritual; I should remind you how much depends on you, and what an influence you can exert upon the future."

For the entire article from the FINANCIAL TIMES click here:

The benchmark 30-year fixed-rate home mortgage in the U.S. fell to a national average of 5.17% this week, the lowest since Freddie Mac began its weekly rate survey in 1971. With the Federal Reserve cutting its interest rates to near 0% and a continued decline in rates on the long-term Treasury notes that mortgages closely track, rates on other types of mortgages dropped again, though not as much as the 30-year. "Interest rates for 30-year fixed-rate mortgage rates fell for the seventh consecutive week, moving these rates to the lowest since the survey began in April 1971," said Frank Nothaft, Freddie Mac chief economist. "The decline was supported by the Federal Reserve announcement on Dec. 16, when it cut the federal-funds target to a record low and stated it stood ready to expand its purchases of mortgage-related assets as conditions warrant." The 30-year mortgage fell for a seventh consecutive week, from 5.47% a week ago. A year ago the 30-year averaged 6.14%. The 15-year fixed-rate mortgage averaged 4.92%, down from last week when it averaged 5.20%. A year ago the 15-year loan averaged 5.79%. The 15-year mortgage hasn't been lower since April 1, 2004, when it averaged 4.84%. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.60%, down from last week when it averaged 5.82%. A year ago, the five-year ARM averaged 5.90%. One-year Treasury-indexed ARMs averaged 4.94% this week, down from last week when it averaged 5.09%. At this time last year, the one-year ARM averaged 5.51%. The sharp decline in rates has spurred a flood of mortgage refinance applications, the Mortgage Bankers Association said Wednesday. THE CHART BELOW IS THE TED SPREAD - The spread between the 3-month LIBOR and the 3-month Treasury Bill. When inter-bank lending is at normal levels the spread is below 1%.

For the entire article from THE WALL STREET JOURNAL click here:

Congress will use the remaining $350 billion in a U.S. bank-rescue package to force the Bush administration and President-elect Barack Obama into providing foreclosure aid as the pace of people losing their homes soars. Lawmakers will agree to release the funds in exchange for Treasury Secretary Henry Paulson and Obama agreeing to programs that cut interest rates and forgive a portion of a mortgage's principal, House Financial Services Committee Chairman Barney Frank said in a telephone interview yesterday. Frank said legislation is being drafted that will set the conditions on spending the cash after Paulson used almost half the $700 billion Troubled Asset Relief Program to boost bank capital. Paulson resisted calls to support foreclosure relief. "The Democrats are finally getting it, that this administration is not going to do anything to help homeowners, and they are getting more proactive," John Taylor, president of the National Community Reinvestment Coalition, said in a telephone interview. "Paulson has had the chance to do something like this all along, but has chosen not to. I think he'll do it if a quid pro quo is held over him." Frank, a Massachusetts Democrat, said in the interview he's drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion in exchange for foreclosure help, aid for General Motors Corp. and Chrysler LLC and provisions to hold banks accountable for stepped up lending to consumers. The measure would adopt a Federal Deposit Insurance Corp. foreclosure plan, revamp the Hope for Homeowners loan-relief program that has attracted few lenders and support a Treasury program to cut rates on some fixed-rate home-loans.

For the entire article from BLOOMBERG NEWS click here:

The screeching volatility that has been the hallmark of the stock market this year may take a break for the holidays. Traders expect thin volume in the week ahead with few players taking on major positions. Home sales, durable goods data, consumer sentiment and the final days of holiday shopping will all give new clues as to the health of the economy during the dismal fourth quarter. Stocks chugged higher in the past week, with the broader indexes edging out slight gains. The S&P 500 was up 0.89 percent at 887.60, and the Nasdaq gained 1.5 percent to 1564. But the Dow lost 50 points, or 0.6 percent to end at 8579. The Bush Administration's announcement that it would provide loans to General Motors and Chrysler eased investor concerns about a snowballing bankruptcy in the auto industry. The big action though was in other markets. Treasury yields touched near record lows; the dollar swung lower in wild trading, and oil prices tumbled to an almost five-year low. Gold, meanwhile, found buyers in a week of uncertainties, gaining 2 percent to $837 per troy ounce.

For the entire article from CNBC click here:

THIS Christmas the world economy offers few reasons for good cheer. As credit contracts and asset prices plunge, demand across the globe is shrivelling. Rich countries collectively face the severest recession since the second world war: this week's cut in the target for the federal funds rate to between zero and 0.25% shows how fearful America's policymakers are. And conditions are deteriorating fast too in emerging economies, which have been whacked by tumbling exports and the drying-up of foreign finance. This news is bad enough in itself; but it also poses the biggest threat to open markets in the modern era of globalisation. For the first time in more than a generation, two of the engines of global integration-trade and capital flows-are simultaneously shifting into reverse. The World Bank says that net private capital flows to emerging economies in 2009 are likely to be only half the record $1 trillion of 2007, while global trade volumes will shrink for the first time since 1982. This twin shift will force wrenching adjustments. Countries that have relied on exports to drive growth, from China to Germany, will slump unless they can boost domestic demand quickly. The flight of private capital means emerging economies with current-account deficits face a drought of financing as well as export earnings. There is a risk that in their discomfort governments turn to an old, but false, friend: protectionism. Integration has less appeal when pain rather than prosperity is ricocheting across borders. It will be tempting to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies. The lessons of history, though, are clear. The economic isolationism of the 1930s, epitomised by America's Smoot-Hawley tariff, cruelly intensified the Depression. To be sure, the World Trade Organisation (WTO) and its multilateral trading rules are a bulwark against protection on that scale. But today's globalised economy, with far-flung supply chains and just-in-time delivery, could be disrupted by policies much less dramatic than the Smoot-Hawley act. A modest shift away from openness-well within the WTO's rules-would be enough to turn the recession of 2009 much nastier. Incremental protection of that sort is, alas, all too plausible. Add all this together and it is hard for a free-trader not to worry. So what is to be done? The first requirement is political leadership, especially from America and China. At a minimum, both must avoid beggar-thy-neighbour policies. Second, a conclusion of the Doha round would help. A deal would reduce the risk of broader backsliding by cutting many countries' bound tariffs-and it would establish Mr Obama's multilateral credentials. Third-Doha deal or not-is greater transparency. A good recent idea is that the WTO publicise any new barriers, whether or not they are allowed by its rules. The best insurance against protectionism, however, is macroeconomic stimulus. Boosting demand at home will reduce the temptation to divert it from abroad. By historical standards policymakers are acting aggressively, as the Federal Reserve did this week. But the effort is unevenly, and poorly, distributed. Emerging economies from which capital is fleeing have little room to boost spending. Some creditor countries (notably Germany) are holding back on fiscal stimulus, while the world's biggest borrower (America) is acting the most boldly. A bigger push to boost domestic demand in creditor countries coupled with more help, through the IMF, to cushion cash-strapped emerging economies would ease the world economy's adjustment and brighten the prospects for free trade. In the 1930s protectionism flourished largely because of macroeconomic failures. That must not happen this time.

For the entire article from THE ECONOMIST click here:

AS foreign investors pour cash into United States securities, particularly short-term Treasury bills, they are pulling it out of the higher-yielding bonds issued by the government supported-entities Fannie Mae and Freddie Mac. The moves appear to indicate that even after the government bailout of the two agencies, there is some lingering doubt that the government would actually stand behind their debts if their situation grew much worse. The Treasury Department reported this week that in October, overseas investors and governments were net sellers of $50 billion of agency securities, even though they yield significantly more than comparable Treasuries, which the investors bought at a record rate. Over the summer, prices of agency securities fell as the financial crisis grew worse and some investors began to doubt whether the "implicit" government guarantee behind the agencies could be trusted. In July and August, foreigners were net sellers of $64 billion of such securities, an outflow unlike any previously seen. That flight was one reason the government stepped in on Sept. 7 to effectively nationalize the agencies, although shares remain publicly traded. At first investors seemed reassured, but the confidence has now waned. Despite the nationalization, the government has stopped short of putting its full faith and credit behind the bonds. The new data is the first indication that may have mattered to many overseas investors. The accompanying chart at the top shows the monthly flows this year of foreign cash into Treasury securities and agency securities. More foreign money came into Treasuries in October - almost $91 billion - than in any previous month. Most of the money - $56 billion in October - has gone into Treasury bills rather than into longer-dated bonds and notes. That flow helped to push down interest rates on bills to historically low levels, sometimes even a bit below zero, as investors sought complete safety. Until the housing market began to show significant weakness in 2007, foreign flows into agency securities were running at almost $300 billion a year, and the flow stayed strong until the summer scare. The other chart shows that over the 12 months through October, foreigners put just $65 billion into Fannie Mae and Freddie Mac, the lowest for any such period since 1998. Unless there was a revival of overseas interest in those securities in November and December, 2008 could become the first year to see net sales, at least since the data became available in the early 1990s. Until the late 1990s there was relatively little overseas investment in agency securities. But as the Clinton-era budget surpluses reduced the supply of available Treasuries, foreign investors discovered these investments, which seemed to be close substitutes. Even after large budget deficits resumed early this decade, the overseas demand for agencies continued to grow until questions about their solvency began to be heard. Now, virtually all the foreign money is going into Treasuries - at a rate of more than half a trillion dollars a year.

For the entire article from THE NEW YORK TIMES click here:

One Solitary Life Born in an obscure village, He was the child of a peasant woman. He worked in a carpenter shop until He was thirty years old, and then for three years He traveled around the country, stopping long enough to talk and to listen to people and help where He could. He never wrote a book, He never had a hit record, He never went to college, He never ran for public office, He never had a family, or owned a house. He never did any of the things that usually accompany greatness. He had no credentials but Himself. But when He was only thirty-three years old, the tide of public opinion turned against Him, and His friends all rejected Him. When He was arrested, very few wanted anything to do with Him. After the trail, He was executed by the State along with admitted criminals. Only because a generous friend offered his own cemetery plot was there any place to bury Him. This all happened twenty centuries ago and yet today He is the leading figure of the human race and the ultimate example of love. Now it is no exaggeration to say that all the armies that have ever marched, all the navies that have ever set sail, all the rulers that have ever ruled, all the kings that have ever reigned on this earth, all put together have not affected the life of humanity like this One Solitary Life.

 

Please be sure to add JdeVilliers@LJLFunding.com to your "Safe Sender's" list so that you can continue to receive this information without disruption.

Please click here for instructions on how to do this.