Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.
(Fortune Magazine) -- Credit crises have always been painful and unpredictable. The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing. It is also accompanied by a plethora of new and ingenious financial instruments. These are designed overtly to spread risk around and to sell fee-bearing products that are in great demand. Inadvertently (to be generous), they have been constructed to hide risk and confuse buyers.
How this credit crisis works out and what price we end up paying has to be largely unknowable, depending as it does on hundreds of interlocking and often novel factors and how they in turn affect animal spirits. In the end it is, of course, the management of animal spirits that makes and breaks credit crises.
But even if this crisis is contained, we are facing some near certainties that should be understood.
First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.
House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began.
From these high levels, prices are guaranteed to fall. In doing so, they will reduce consumer borrowing and spending power. They will also increase mortgage defaults, most of which lie ahead, and lower financial profits and confidence.
Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times).
Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower.
Third, and most important, risk will be repriced. Last year a broad base of risk measures - including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality vs. low-quality stock values - reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.
For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better.
Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. All of this has been provided.
These conditions always produce excess and are always extrapolated. Unfortunately, like almost all other investment factors, they eventually move back to normal.
As wonderfully favorable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully. The important point to make here is that even if all works out well on the credit front, it will still happen slowly.
Jeremy Grantham is chairman of investment firm GMO, where he oversees quantitative products and investment strategies.
(http://www.fortune.com)
2.9.07
UK tested poison gas on Indian soldiers
The Associated Press
Article Last Updated: 09/01/2007 10:37:27 AM PDT
LONDON—British military scientists tested mustard gas on hundreds of Indian soldiers during more than a decade of experiments that began before World War II, a British newspaper reported Saturday.
The experiments to determine whether mustard gas damaged Indians' skin more than British soldiers' began in the early 1930s and lasted more than 10 years at a military site in Rawalpindi, now in Pakistan, The Guardian reported, citing newly discovered National Archive documents.
The tests caused large numbers of burns, some of which were so damaging the subjects had to be hospitalized, a 1942 report cited by the newspaper said.
"Severely burned patients are often very miserable and depressed and in considerable discomfort, which must be experienced to be properly realized," the report said.
The Ministry of Defense said it could not comment until Monday.
During World War II, nearly 2,000 American military personnel participated in experiments conducted by the U.S. Naval Research Laboratory. They were often promised weekend passes and were not told the nature of the experiments, which included prolonged exposure to mustard gas and Lewisite, a chemical that contains arsenic and can damage the skin, eyes, respiratory and digestive tract.
The experiments in Rawalpindi were part of a much larger program intended to test the effects of chemical weapons on humans, The Guardian reported. It said more than 20,000 British servicemen and women were subjected to chemical warfare trials between 1916 and 1989 at the Defense Ministry's Porton Down research center in southwest England.
Some of those involved in the experiments later said they had been tricked into participating, and claimed they had been exposed to mustard gas and hallucinogens such as LSD.
An inquiry into the deaths of some of those involved in the testing concluded in 2003 that there was not enough evidence for a criminal prosecution.
(http://www.montereyherald.com/)
Article Last Updated: 09/01/2007 10:37:27 AM PDT
LONDON—British military scientists tested mustard gas on hundreds of Indian soldiers during more than a decade of experiments that began before World War II, a British newspaper reported Saturday.
The experiments to determine whether mustard gas damaged Indians' skin more than British soldiers' began in the early 1930s and lasted more than 10 years at a military site in Rawalpindi, now in Pakistan, The Guardian reported, citing newly discovered National Archive documents.
The tests caused large numbers of burns, some of which were so damaging the subjects had to be hospitalized, a 1942 report cited by the newspaper said.
"Severely burned patients are often very miserable and depressed and in considerable discomfort, which must be experienced to be properly realized," the report said.
The Ministry of Defense said it could not comment until Monday.
During World War II, nearly 2,000 American military personnel participated in experiments conducted by the U.S. Naval Research Laboratory. They were often promised weekend passes and were not told the nature of the experiments, which included prolonged exposure to mustard gas and Lewisite, a chemical that contains arsenic and can damage the skin, eyes, respiratory and digestive tract.
The experiments in Rawalpindi were part of a much larger program intended to test the effects of chemical weapons on humans, The Guardian reported. It said more than 20,000 British servicemen and women were subjected to chemical warfare trials between 1916 and 1989 at the Defense Ministry's Porton Down research center in southwest England.
Some of those involved in the experiments later said they had been tricked into participating, and claimed they had been exposed to mustard gas and hallucinogens such as LSD.
An inquiry into the deaths of some of those involved in the testing concluded in 2003 that there was not enough evidence for a criminal prosecution.
(http://www.montereyherald.com/)
Thousands of Americans Choose Army for $20,000 Signing Bonus
Saturday , September 01, 2007
LEXINGTON, S.C. — Bored with life on his family's South Carolina horse farm, Willard McCormick decided that military service was the right plan for his future. And when the Army dangled its new, $20,000 recruiting bonus in front of him, the decision got a lot easier.
"I wasn't going to go right away, but I heard about the bonus and decided to jump on it," McCormick, 19, said a couple of days after signing up.
The new bonus comes with a "Quick Ship" provision that cuts the average 40-day wait time between sign-up and departure for basic training.
McCormick, who leaves for basic and infantry training at Fort Benning, Ga., on Sept. 6., said the accelerated departure doesn't bother him or his family.
"My three brothers are ready for me to go," he said with a smile.
Since the bonus was unveiled in July, more than 6,200 recruits have signed up to begin basic training before Oct. 1, a move that boosts end-of-fiscal year recruiting numbers, Army officials said.
"People are calling here saying $20,000 is more than they've made in the past two years," said Staff Sgt. Brent Feltner, 27, commander of a strip-mall recruiting station in this central South Carolina town.
Feltner said most recruits are happy to leave early. "Maybe they want to get out of South Carolina, get away from Mom and Dad," he said.
The Army's offer stands out to many in a state where the unemployment level is fourth highest in the country, at 5.9 percent in July, up from 5.5 percent in June. It was 6.2 percent in July a year ago.
Plus, the bonus comes on top of other benefits, such college tuition assistance, and medical and dental care.
"There's not a job out there that they can enter with zero experience, that will help them pay for college," Feltner said.
Half the bonus is paid out on completion of basic training and training in individual specialties, some of which can take at least a year, Feltner said. The remainder is to be doled out over the course of active-duty enlistment, which must be for at least two years, although some specialties require longer enlistments.
The accelerated sign-up program does not shorten training time or send soldiers into the field before they've had their specialized training, said Douglas Smith, spokesman for the Army Recruiting Command at Fort Knox, Ky.,
The Army has offered bonuses before -- some ranging from about $10,000 to $15,000 -- but $20,000 is the largest amount Smith said he's seen in his 26 years with the military.
"We've had a good August. It's been a good tool to use," said Smith, who added the bonus will help the Army reach a goal of recruiting 80,000 soldiers in fiscal year 2007.
After missing its monthly recruiting goals for two consecutive months, the Army announced in August that it had slightly exceeded its target for July. It signed up 9,972 people, up from the 9,750 it was hoping for.
Despite the possibility of being sent to fight in Iraq and Afghanistan, those opting for the Army bonus seem to have already made up their minds to join the military -- they just haven't settled on which branch to join, Feltner said.
"It helps to solidify their decision," he said.
Sgt. John Tate, another recruiter in the Lexington office, said the Army's job options, not just the bonuses, play a big role in recruiting. One female recruit who signed up recently opted to become a paralegal with a subspecialty in airborne parachutist training.
"She wanted to jump out of planes, but she also wanted inside, office work," Tate said.
(http://www.foxnews.com/)
LEXINGTON, S.C. — Bored with life on his family's South Carolina horse farm, Willard McCormick decided that military service was the right plan for his future. And when the Army dangled its new, $20,000 recruiting bonus in front of him, the decision got a lot easier.
"I wasn't going to go right away, but I heard about the bonus and decided to jump on it," McCormick, 19, said a couple of days after signing up.
The new bonus comes with a "Quick Ship" provision that cuts the average 40-day wait time between sign-up and departure for basic training.
McCormick, who leaves for basic and infantry training at Fort Benning, Ga., on Sept. 6., said the accelerated departure doesn't bother him or his family.
"My three brothers are ready for me to go," he said with a smile.
Since the bonus was unveiled in July, more than 6,200 recruits have signed up to begin basic training before Oct. 1, a move that boosts end-of-fiscal year recruiting numbers, Army officials said.
"People are calling here saying $20,000 is more than they've made in the past two years," said Staff Sgt. Brent Feltner, 27, commander of a strip-mall recruiting station in this central South Carolina town.
Feltner said most recruits are happy to leave early. "Maybe they want to get out of South Carolina, get away from Mom and Dad," he said.
The Army's offer stands out to many in a state where the unemployment level is fourth highest in the country, at 5.9 percent in July, up from 5.5 percent in June. It was 6.2 percent in July a year ago.
Plus, the bonus comes on top of other benefits, such college tuition assistance, and medical and dental care.
"There's not a job out there that they can enter with zero experience, that will help them pay for college," Feltner said.
Half the bonus is paid out on completion of basic training and training in individual specialties, some of which can take at least a year, Feltner said. The remainder is to be doled out over the course of active-duty enlistment, which must be for at least two years, although some specialties require longer enlistments.
The accelerated sign-up program does not shorten training time or send soldiers into the field before they've had their specialized training, said Douglas Smith, spokesman for the Army Recruiting Command at Fort Knox, Ky.,
The Army has offered bonuses before -- some ranging from about $10,000 to $15,000 -- but $20,000 is the largest amount Smith said he's seen in his 26 years with the military.
"We've had a good August. It's been a good tool to use," said Smith, who added the bonus will help the Army reach a goal of recruiting 80,000 soldiers in fiscal year 2007.
After missing its monthly recruiting goals for two consecutive months, the Army announced in August that it had slightly exceeded its target for July. It signed up 9,972 people, up from the 9,750 it was hoping for.
Despite the possibility of being sent to fight in Iraq and Afghanistan, those opting for the Army bonus seem to have already made up their minds to join the military -- they just haven't settled on which branch to join, Feltner said.
"It helps to solidify their decision," he said.
Sgt. John Tate, another recruiter in the Lexington office, said the Army's job options, not just the bonuses, play a big role in recruiting. One female recruit who signed up recently opted to become a paralegal with a subspecialty in airborne parachutist training.
"She wanted to jump out of planes, but she also wanted inside, office work," Tate said.
(http://www.foxnews.com/)
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