Have we seen it all?! The year of recession

Rare crisis... There have been very few cases where you've had this kind of financial disruption without a significant effect on the economy Fed Chairman, Ben Bernanke ENTIRE US ECONOMY “IS IN DANGER”, CRISIS DEVELOPED OVER TIME, IN AN EXTRAORDINARY ECONOMIC PERIOD US President, George Bush “What you need first is to restore confidence and the main worry right now is confidence” Head of IMF; Dominique Strauss-Kahn

Housing market Health of economies measured by deceleration of housing market Housing has immense impact on macroeconomics for several years In theory this slow down should have happened a while ago….but it’s a cycle Recessions or slowdowns – , , , 2001 (Recessions) –1987 and 1995 (slowdowns)

Growth of Sub-prime lending Source: Center for Responsible Lending/Inside Mortgage Finance

Recession

Crucial Events of the Credit Crunch USA: FED takes control of Fannie Mae and Freddie Mac (market initially reacts well) 1 week later - Lehman files for bankruptcy - no assistance from the government Insurance giant A.I.G. in desperate need of loans, FED decides to help. Merrill Lynch sells itself to Bank of America - to avoid Lehman fate. Europe: Fortis forced into a break-up talks, partly bought by BNP Paribas and local govt’s Dexia, French-Belgian lender - receives major capital injection

Market events EURUSD 1.23+, falling from (July 08) Oil falls to $62+ region - July: $147 Gold down to $700+ region – July: $985 region Indicies fall in double-digits Source: SaxoTrader 2

Consequences; Extreme instability Source: Bloomberg Volatility shoots to extreme levels Cost of borrowing spikes likewise - USD 3 month LIBOR rates

Action taken to fight the crisis... Fed passes the long awaited $700 billion plan..... injects $250 bn in return for partial ownership Fed cuts rates to 1.50% -- in a co-ordinated action with other central banks... Goverments announce guarantee of all bank deposits, e.g. Ireland, Denmark, UAE, Denmark, Austria... UK allocates up to 50 bn GBP for recapitalisation/share- purchase of major UK banks Iceland takes over Kaupthing Bank hf, 3rd lender to be taken over

Two Interesting Things

Middle East Booming….at a cost!

Middle East Inflation fears: –10% Saudi Arabia –11% Kuwait –13% Oman –12% UAE –15% Qatar Dollar peg previously a major discussion point, but easing now with recent USD gains Recent Oil falls a concern to OPEC, big reductions put in place... Economists: e.g. Iran needs oil to be $70+

Perfect storm Commodity High (YoY) Low (YoY) Correction % Current (27 Oct) EURUSD % USDJPY %92.79 Gold %725 Crude Oil %62 S & P %830 I will reprint John Hardy's 50% retracement numbers for indications:

Main calls EURUSD: previous and targets met, now next level – Q USDJPY: Down to test Gold: below 700 by Q Crude: by Q S&P: Down to test our long-term minimum target of < Fed funds: 0.50% by Q ECB: 1.50% by Q2 2009

Thank you UAE!