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MSCI World Index May Lose 14% Before Bear Market Ends, If History Is Guide The MSCI World Index, the global benchmark for stocks in developed nations that tumbled into a bear market last week, may not stop falling until it reaches a three-year low, if history is any guide. The measure of 1,742 companies in 23 markets slid 1.1 percent to 1,345.47 on July 11, bringing the loss since its October record to 20 percent. A decline of another 14 percent would match the average slump of seven bear markets since calculations on the index began in 1969, data compiled by Birinyi Associates Inc. and Bloomberg show. Shares around the world dropped for six straight weeks, the longest streak since October 2002, as losses and writedowns at banks exceeded $400 billion, oil prices rose to a record and growing concerns about the health of Fannie Mae and Freddie Mac caused their stocks to plunge more than 60 percent. Companies in the Standard & Poor's 500 Index will report a 14 percent decline in second-quarter profits, according to estimates of analysts compiled by Bloomberg. ``It is unlikely we have seen the low point for equity markets,'' said Tony Dolphin, director of strategy and economics at Henderson Global Investors in London, which oversees about $125 billion. ``The next few months will see worse news on economic growth, profits and inflation, and worries about the financial sector are also likely to persist.''

Goldman Leads Long and Wrong Wall Street by Capitulating on New Nifty 50 Goldman Sachs Group Inc. called international sales a ``life saver'' in April for companies like 3M Co. UBS AG predicted at the end of last year that global growth would boost Cisco Systems Inc. Morgan Stanley said in January that emerging markets would fuel gains in General Electric Co. All of them were wrong. 3M, Cisco and GE tumbled more than the Standard & Poor's 500 Index this year, sending Morgan Stanley's ``New Nifty Fifty'' index of companies that depend on overseas sales down 18 percent, the worst start in six years. The money-losing advice is the latest misstep by Wall Street, which overestimated fourth-quarter profits by the largest margin ever and failed to anticipate that rising inflation and more than $400 billion of bank losses would spur the biggest sell-off in global equities since 1970, according to data compiled by Bloomberg. Goldman, the world's largest securities firm, told clients last week to quit the trade it advocated three months ago -- buying a basket of companies with the most overseas sales and selling a group with the least -- after it lost 1.3 percent. David Kostin, Goldman's New York-based U.S. investment strategist, wrote that ``the market is not currently trading the long-term effects of international growth, focusing instead on inflationary pressures and the weak consumer.'' Almost $13 trillion has been erased from equity markets around the world since October, as the worst U.S. housing slump since the Great Depression left the economy on the brink of a recession while record commodity prices stoked global inflation. Investing in Multinationals a Dud

BIS: Economy Nears 'Tipping Point' (WSJ) The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said. In its annual report, the central bank for central banks said the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control." "Over time, this could potentially even lead to deflation," it said. For central bankers from around the world gathered in Basel for the BIS annual meeting Sunday and Monday, the report made for chastening reading. Not only does it highlight the difficulty of the dilemma facing central banks confronted with slowing growth at a time when inflationary pressures are rising, it also lays much of the blame for their predicament at the feet of the central banks themselves. The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom. It added that if a repeat of the current financial crisis is to be avoided in the future, central banks must be prepared to keep interest rates high even when there are no obvious signs that inflation rates are about to pick up. It also suggested that regulators make banks set aside more capital during boom times -- an approach that could curb their risk-taking and lessen their need to pull back on lending during busts.

• Inflation Up in Developed World, OECD Says Consumer-price inflation in the developed world rose to a seven-year high in May as energy costs rose, the OECD said.
• European Recession Fears Grow European recession fears grew as Denmark became the first country to slip into a technical recession and a raft of weak data indicated others could soon follow. German, British Manufacturing Drop as Economic Growth Slows Across Europe, Europe's Economic Growth Accelerated Less Than Estimated in First Quarter,
• Euro Area Faces Spiraling Inflation More European companies are passing cost increases on to customers, heightening inflationary risks that the European Central Bank is likely to address Thursday with an interest-rate increase.
• Bank of Japan Says Economic Conditions Worsening in Eight of Nine Regions

European Industrial Output Drops Most in 16 Years, Led by France, Germany European industrial production fell the most in almost 16 years in May, as the euro's gain against the dollar, soaring energy costs and cooling global growth weighed on the region's largest economies. Output in the 15 nations that share the currency dropped 1.9 percent from the previous month, the biggest decline since December 1992, the European Union's statistics office in Luxembourg said today. From a year earlier, production decreased 0.6 percent, the first annual drop in three years. The euro-area economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, according to economists at Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital. Exports from Germany and France fell in May, while Europe's manufacturing and services industries contracted in June, according to the latest purchasing-managers indexes.

IMF says some emerging markets at 'tipping point' on inflation With food taking up more than half of household spending in emerging and developing economies, the IMF warned that the share of undernourished could rise rapidly to above 40% of the total of their populations. "Some countries really are at a tipping point," said IMF Managing Director Dominique Strauss-Kahn in a statement. "If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their economies," he said. Annual food price inflation for 120 low-income and emerging market countries rose to 12% for the three months ending March 31, accelerating from 10% during the preceding three months, the report said. Emerging and developing economies have been the main source of increased demand for commodities, it said. But unfavorable weather conditions, higher fuel costs, increased production of biofuels and recent restrictions on trade for products such as rice have also stoked the increase, the report said. Since January 2007, higher food prices have cost 33 nations that are poor and are net food importers a combined $2.3 billion, or 0.5% of their annual gross domestic product.

• Bernanke's Emerging-Market Disciples May Need to Emulate Volcker Instead

Key Countries

India's Economy Hits the Wall Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation. But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries. A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use.

·         Goldman Sachs lists ten things India needs to do to grow 40 times by 2050

Hot and bothered  Despite strict capital controls, China is being flooded by the biggest wave of speculative capital ever to hit an emerging economy. Mr Wright reckons that total foreign-exchange assets rose by an astonishing $393 billion in the first five months of 2008 (see chart), more than double the increase in the same period last year. China’s trade surplus and foreign direct investment (FDI) explain only 30% of this. Deducting investment income and the increase in the value of non-dollar reserves as the dollar has fallen still leaves an unexplained residual of $214 billion, equivalent to over $500 billion at an annual rate. Some economists use this as a proxy for hot-money inflows. But some of it may reflect non-speculative transactions, such as foreign borrowing by Chinese firms. Mr Wright therefore estimates that China received up to $170 billion in hot money in the first five months of 2008. This far exceeds anything previously experienced by any emerging economy. Michael Pettis, an economist at Peking University’s Guanghua School of Management, reckons that speculative inflows during that period were perhaps well over $200 billion, because hot money also comes into China through companies overstating FDI and over-invoicing exports. Foreign firms are bringing in more capital than they need for investment: the net inflow of FDI is 60% higher than a year ago, yet the actual use of this money for fixed investment has fallen by 6%. Some of it has been diverted elsewhere.

Oil Boom Threatens Asian Boom The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia. The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete. No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century. Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin. Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded. China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up. China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France. Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant. A Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime. Whether or not this is fair, it is clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers. Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.

Energy 

IEA sees pump prices cooling demand until 2012 The International Energy Agency on Tuesday cut its five-year forecast for global oil demand as more consumers park their gas-guzzling autos and sluggish production looks to tighten the oil market. Addressing another high-profile topic, the Paris-based agency said there is "little evidence" that large investment flows into the oil futures market have sparked an imbalance between supply and demand and led to the surge in oil prices. In its Medium-Term Oil Market Report, the IEA forecast global demand will rise to 86.87 million barrels a day in 2008, down 1.4 million from the 88.27 million barrels it projected in last year's report. It also lowered its demand forecasts for the years 2009 to 2012, citing prospects for weaker economic growth as well as the dampening effect of the sharp rise in oil prices. The IEA is still forecasting global consumption of oil products will increase 1.6% a year on average through 2013. But that's largely thanks to demand from non-OECD countries, including China and India. The agency also said slowing production worldwide caused it to cut outlooks on global oil supply levels in production from Organization of Petroleum Exporting Countries members and non-OPEC nations alike. There exists the potential for a "modest build" in the oil supply cushion, the IEA said, adding that this should expand by 1.5 to 2.5 million barrels a day through 2010 and then grow at about 1 million-barrel-a-day levels through 2013. This would mean total global supply capacity is expected to be 94.5 million barrels a day in 2010 and 96.2 million barrels a day in 2013. Both figures are revised lower from the IEA's outlook last year. Total non-OPEC production should rise to 51 million barrels a day in 2013 from an estimated 49.9 million barrels a day this year. OPEC crude capacity should reach 37.9 million barrels a day in 2013, according to the report.

• IEA Sees Oil Market Tightening Global oil markets will remain tight over the next five years, the International Energy Agency warned, in a gloomy assessment that offered little respite for consumers battered by record-high oil prices.

Saudi Oil: A Crude Supply Awakening? Saudi Arabia's ability to calm panicky oil markets has been waning for years. With oil prices doubling since last summer, to more than $140 a barrel, Saudi King Abdullah on June 22 convened an extraordinary meeting (BusinessWeek.com, 6/22/08) of OPEC members, international oil industry CEOs, and foreign leaders in an effort to calm the markets. The kingdom's message was clear: Saudi fields can pump oil to market quickly, if demand warrants. However, it appears that for at least the next five years, and possibly longer, the Saudis are likely to produce less crude than promised, according to fresh data on the kingdom's oil fields obtained July 9 by BusinessWeek. Saudi officials have said they would increase production to 12.5 million barrels a day next year, from the current 9.5 million barrels a day, and could even ramp up to as much as 15 million barrels a day if the market demanded it. But the detailed document, obtained from a person with access to Saudi oil officials, suggests that Saudi Aramco will be limited to sustained production of just 12 million barrels a day in 2010, and will be able to maintain that volume only for short, temporary periods such as emergencies. Then it will scale back to a sustainable production level of about 10.4 million barrels a day, according to the data. BusinessWeek obtained a field-by-field breakdown of estimated Saudi oil production from 2009 through 2013. It was provided by an oil industry executive who said he had confirmed it with a ranking Saudi energy official who has access to the field data. The executive, who has proven reliable over several years of reporting interaction, provided the data on condition of anonymity to protect his access to the kingdom and the identity of the inside contact who confirmed the information. Saudi Aramco officials in the kingdom could not be reached for comment on July 9. Three industry analysts in the U.S. said the document's overall conclusion—that the Saudis cannot sustain higher than 12 million barrels a day maximum production for the next few years—appeared to be reasonable.

• Drowning in oil (this is great for a laugh !!), Face value: Matthew Simmons, high priest of "peak oil"

OPEC's empty toolkit The leaders of OPEC have a long list of culprits for high oil prices: the falling dollar, U.S.-Iranian tensions, and shady speculators. Here's one they seem to forget: OPEC. The Organization of Petroleum Exporting Countries consistently claims that supply is not a problem - that there's plenty of oil to meet demand. But last year, as the price of oil nearly doubled, OPEC was actually cutting production. The cartel produced 1.5% less last year despite adding two countries, Angola and Ecuador, to its ranks. That cutback at a time of growing demand helped drive prices up. To get the full context for OPEC's cut, we need to go back to the fall of 2006, when the world was a very different place. The price of oil was falling fast, from a high of $78 in August to below $60 by late October. Hedge funds were reportedly piling into the market and driving the price lower. The poo-bahs of OPEC probably had flashbacks to the mid-1980s oil-price collapse. The cartel decided it was time to act. On Oct. 20, OPEC voted to drop production by 1.2 million barrels per day.That day may have been the last time OPEC had control of the oil market. By mid-January, oil bottomed at $51 per barrel and then began its extraordinary rise. Now we're flirting with $150. Saudi Arabia called an emergency oil summit last month, the main purpose of which seemed to be to get out the message that rising prices weren't the cartel's fault.But it's disingenuous for OPEC's leadership to suggest that reduced production had nothing to do with rising prices. OPEC pumps 44% of the world's daily oil production and, by its own count, has 78% of the world's proven reserves. In an increasingly tight market, there's no room for the largest group of producers to drop its output without directly affecting prices. And indeed, in announcements before and during the summit, the Saudis pledged to boost production by some 500,000 barrels a day. The scary thought - held by observers like peak oil guru Matt Simmons and commodities investor Jim Rogers - is that the cartel can't do much more than that because the easy oil is already out of the ground.

Strategic Issues

Bye-bye global boom. Hello bipolar world While gross domestic product growth is cooling a bit in emerging markets, the results are still tremendous compared with the U.S. and much of Western Europe. The 54 developing markets surveyed by Global Insight will post a 6.7% jump in real GDP this year, down from 7.5% last year. The 31 developed countries will grow an estimated 1.6%. The difference in growth rates represents the largest spread between developed and developing markets in the 37-year history of the survey. Put another way, the American consumer is still hungry, but the world consumer is voracious.  Consider the growing middle class in China, which is expected to multiply sevenfold by 2020, to 700 million people, according to Euromonitor, and India, where the number of middle-income folks will grow more than tenfold, to 583 million, says consultancy McKinsey & Co. First they want new homes with electricity - witness the quadrupling prices since 2000 of steel, oil, and copper. Then, as incomes rise, so does demand for everything from toothpaste to telephones, from automobiles to airplanes. At first blush this sounds like great news for Global 500 companies: Chinese and Indian consumers essentially offsetting belt-tightening by Americans and Western Europeans. And indeed, overseas growth has been a bright spot - so far - for many of the world's largest corporations. For the rest of the planet, a slowdown in the emerging world would be a double-edged sword: Once-hot markets for, say, L'Oréal lipstick or Tide detergent would cool, hurting corporate growth prospects. A less ravenous China or India, though, would surely lead to a drop in the price of many commodities, including oil, offering much-needed relief to pocketbooks worldwide.What is the CEO of a Global 500 company to do? Listen to the doom-and-gloom economists and act cautiously, or keep pushing into fast-growing but fragile economies? Smart executives are doing a bit of both, seeking new growth markets with the full understanding that their plans will be shaped and changed by global forces.

Free Trade Has Never Been More Vital When Sir Robert Peel offered Gladstone the vice-presidency of the Board of Trade in 1841, Gladstone complained that while “the science of politics deals with the government of men, I am set to govern packages”. If Gladstone were alive today, I suspect that he would not hold a similar view. Trade is once again near the top of the political agenda. Seven years after the Doha Declaration, talks continue at the World Trade Organisation (WTO) in Geneva. The need for a successful conclusion has never been more urgent and the Director-General of the WTO, Pascal Lamy, has called a meeting of ministers on July 21 for what may be the last throw of the dice. Negotiations focus mainly on agricultural and industrial goods, with potential progress in the liberalisation of commercial services, anti-dumping regulations and fishing subsidies. The main issues centre on the proposed reduction by developed countries of subsidies and levels of protection enjoyed by their farmers, in exchange for freer access to developing country markets for their industrial goods and services. The WTO operates, however, on the principle of “a single undertaking” by which nothing is agreed until everything is. But there are clear signs of fatigue in Geneva, putting all the progress made to date at risk. Reaching agreement on the Uruguay Round in the early 1990s was similarly protracted but most experts agree that it helped to create millions of jobs and increased world income by hundreds of billions of dollars. We must not risk failure in Geneva - ministers should redouble their efforts to reach agreement when they meet later this month.