Carpe Diem

Hello, and Merry Christmas! I trust you were all good boys and girls and that Santa has been good to you..... I decided that I believe in Santa, all these Christmas films have convinced me of his existence. So this will be my last post of 2008 (I will do a review of 2008 in early 2009), and lot has happened since my last post, so let's get going:

• BROWN SAVED THE WORLD! Priceless.
  
• We had the world's largest ever fraud discovered this past week. It is believed that the total fraud by Bernard Madoff (appropriately pronounced Made-0ff) was $50bn. It was a classic Ponzi scheme; a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. For example Ferdi gives me £100 to invest, then Mo likes the idea and thinks I will do well so he gives me another £100, I use some of Mo's £100 to pay Ferdi a dividend/interest/"profit", then Calum wants to get in on the action, so he gives me £200, I then use Calum's money to give both Ferdi and Mo some money.....and so on. Everything goes swimmingly until a few people start asking for their money back, and that's what happened with Madoff. Here are a few facts that the impotent US regulator, the SEC, missed: first, this graph, can you tell what's wrong with it? It's flat, there is no volatility! Second, the the firm that audited Madoff's company had three employees, one was a secretary, one a 78 year old and a 47 year old accountant. And finally, he could never explain to anyone how he earnt his money.
  
• The main fallout from the Madoff scandal will hit other hedge funds, as people lose trust in hedge funds and want their money back, so-called "redemptions". This will mean that the hedge funds will have to sell their assets in order to give investors their money back, so expect shares to fall again in the new year. The main selling point of hedge funds was their claim to be able to make money in any market, absolute returns. This claim has been demolished this year, with many funds losing over 20% of the value of their assets. Thus I expect the hedge fund industry to contract considerably as they have lost they lustre and they will find life tough when they become regulated.
• The retailer Zavvi (formerly Virgin Megastores) has gone into administration, this is the fallout from Woolworths going bust as one of Zavvi's main suppliers, EUK, was owned by Woolworths and Zavvi could not get any new stock for the important Christmas period. I think that their business model is dead, I personally buy all my DVDs and games from Amazon or another online retailer, as it is cheaper and easier. I recently had a stroll through M&S and the shop was empty but full of rubbish clothes, so I expect M&S to hit an iceberg soon, along with BHS, another rubbish shop. Remember pensioners are their main customers, and they will be the most affected by the falling interest rates, as they relied on their savings to top up their pensions.
  
• The Fed has cut interest rate from 1% to 0.25%, America has arrived at ZIRP (Zero Interest Rate Policy) and just like Japan did in the 1990's. This means that conventional monetary policy is now useless, as interest rates cannot go any lower.
• Credit Suisse is employing an interesting employee compensation scheme, it is paying its top executives a bonus but not in cash or shares but in illiquid mortgage securities, the toxic stuff that those very employees bought but is actually worth nothing now! A very cunning plan, Baldrick would be proud.
• According to the US Commerce Department, the US recession began in December 2007. That means it's already the longest downturn since the 16-month recession of 1981-82. That downturn and another 16-month slump in 1973-75 are tied as the longest recessions since WWII. I expect that at the very earliest we will see the light at the end of 2009, ergo this shall be the longest recession this side of WWII.
• Finally, here is a map of Britain with all the job losses plotted. Notice how many are in London, and especially in the City.
  

Every post will come with this 4 bad bears graph, click to enlarge, courtesy of this website.

To finish off I will say some quick words on 2009. If you keep your job in 2009, you will have a great year. Prices in the shops will be lower, there will be some fantastic bargains and great investment opportunities. In a recession cash is king. You will be relatively richer, your status will rise relative to others and you will attract a greater quality of mate (not a friend but a member of the opposite sex) and this fantastic article attests you will thus be happier.....life is about surviving in order to be able to reproduce! On that note Merry Christmas and a Happy New Year.