Global No-Confidence Vote: The Perfect Storm

Oil has plunged, the dollar is at a six-month high, and things are now looking up for the US, right? Well, remember, the dollar's strength is coming at the weaknesses of other currencies, and the recession that infected the US has spread to other countries now. The Asian and European economies are slowing down from their breakneck pace. In the short term the dollar looks good, and oil hedge money is flowing from commodities to the dollar. In the long term, we're going to be back on the downward slide.

There is now an increasing probability that the global economy - not just the US - will experience a serious and protracted recession. Macro developments in the last few weeks suggest that now all of the G7 economies (the group of the major advanced economies including US, UK, Japan, Germany, France, Italy and Canada) are already in a recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the Eurozone including Spain. Ireland the the other Euro members; New Zealand, Iceland, Estonia, Latvia and some other South-East Europe economies) are also on the tip of a recessionary hard landing.

And once this group of twenty plus economies enters into a recession there will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and China) and other emerging market economies. The IMF defines a global recession as a global growth rate below 2.5% as emerging market economies usually grow much faster (6%) than advanced economies where growth averages about 2%. For example, a country like China - that even with a growth rate of 10% plus has officially thousands of riots and protests a year - needs to move 15 million poor rural farmers to the modern urban industrial sector with higher wages every year just to maintain the legitimacy of its regime; so for China a growth rate of 6% would be equivalent to a recessionary hard landing. It now looks like that, by the end of this year or early 2009, the global economy will enter a recession.

Just in time to greet our new president. It's not that the dollar is strong, it's the weakness in the dollar is now spreading to other currencies like the British Pound.

The pound slid to its lowest level in almost 21 months against the dollar after an industry report showed U.K. house prices fell in July, adding to evidence the economy is slowing.

The currency snapped a three-day gain versus the euro after the Royal Institution of Chartered Surveyors said the number of real-estate agents and surveyors reporting lower prices exceeded those reporting gains by 83.9 percentage points last month as the credit squeeze brought the market to a ``virtual standstill.''

``The pound is still being swept along by a broader dollar move,'' said Michael Metcalfe, head of macro strategy at State Street Global Markets in London. ``There is also an assumption the Bank of England will have to capitulate and focus on growth rather than inflation.'' Investors should sell the pound versus the dollar, Metcalfe said.

The pound fell as much as 0.7 percent to $1.8969, the weakest level since November 2006, and was at $1.8990 by 5:41 p.m. in London, from $1.9108 yesterday. The British currency has lost 4.8 percent against the dollar in the past month. It slipped to 78.43 pence per euro, from 78.03 pence.

All 11 regions in the U.K. tracked by RICS showed negative price balances on the month, the group said today.

Property values declined by the most in at least a quarter of a century in July, HBOS Plc reported on Aug. 7. Banks have curbed lending as they nurse losses and writedowns from the collapse of the U.S. subprime-mortgage market that have totaled about $493 billion worldwide.

As the problems in the US spread: housing prices falling and energy prices and food prices rising, credit markets griding to a halt, and consumer spending down, the rest of the world will suffer the same problems as the US, affecting the whole global market. Financial losses continue to pile up, signaling we still have a long way to go.

"You're going to continue to get write-offs from the financial sector," he added. "Investors will either look past that or periodically they are going to stare at that with shock and cause sell-offs."

Besides the writeoff, UBS will split off its investment banking unit that made it Europe's top casualty of the credit crunch—and scared off wealthy clients—a move that analysts said signals the sale of the beleaguered business.

The world's biggest banker to the rich gave in to shareholder pressure to restructure on Tuesday, admitting there were problems with its one-bank model as it reported fresh writedowns and clients withdrawals in the second quarter.

UBS joins U.S. peers Citigroup and Merrill Lynch in taking more big hits in the quarter from exposure to risky mortage assets.They remain the three hardest hit banks and investors are still worried about yet more subprime costs.

JPMorgan said trading conditions have "substantially deteriorated" in the third quarter compared with that of the second, and spreads on mortgage-backed securities and loans have "sharply widened." The estimated losses exclude hedging, the firm said.

The writedowns were partly driven by Merrill Lynch's recent decision to sell $30.6 billion in risky debt to Lone Star funds for just $6.7 billion, or about 22 cents on the dollar, FT said.Merrill's move ratcheted up pressure on rivals to cut the values of their own subprime assets as they grapple with mounting debts and weakening economies.

So keep in mind that the commodities bust will be short-lived. Oil will rise again and soon as the Euro, pound, yuan and yen continue to weaken. The dollar and the US economy is not surging forward, we're simply dragging down the rest of the world to our level.

Be prepared.