It took a while before it became clear (or at least, accepted) that the problem was system-wide. Initially, it was smaller, local banks that got into difficulty.

The first Japanese bank failed in August 1995 (the first since the war). This was dismissed as a local difficulty because it was Hyogo Bank, a regional bank affected by the Kobe City earthquake in that year.

The blanket deposit guarantee was introduced in June 1996, but it did not prevent runs on the banks for two reasons. One was credibility. Saying the money was safe was one thing; proving it was another. Second was practicality. Imagine your bank does go bust. Even if there is no question about whether you will get your cash back, you are faced with complete uncertainty. Far better to get it out straightaway.

The specifics of every banking crisis vary by country and by cycle, but the general forces are the same. When expanding gearing gives way to contracting debt, the stage is set for a liquidity crisis.

For Japan, this occurred in 1997-98. Two large brokers and one big money-centre bank failed, followed a few months later by the nationalisation of two long-term credit banks. A similar liquidity crisis has struck the West.

It is not obvious that the process in the US and the UK has been shorter. If you define the stock-market peak as 1999-2000 and the rally since early 2003 as no more than a relief rally (analogous to Japan’s recovery from 1992 to early 1996), then the timetable is actually similar.

A liquidity crisis has a sharp impact on lending to other parts of the economy. As a result, the economy slows and the debt built up by households and businesses becomes harder to support. This gives rise to the third and final phase: a solvency crisis. Japan’s big banks reached that point about five years after the liquidity crisis.

Three kinds of adjustment are needed before stability can return. First, asset values must discount the credit- constrained world. That is already happening with a vengeance, but take care not to assume too quickly that the process is complete.

A sucker rally (or three) should be expected, to make sure that hope is extinguished before share and house prices can return to any sustainable rising trend.

The Nikkei plunged about 40% in 1990-92, rallied by about one third, then traded between 15,000 and 20,000 from 1992 to early 2000. This range included three rallies of more than 30%.

Second, the banking sector needs to write off bad debts, consolidate (a polite way of saying shrink), and rebuild its capital base. In banking terms, completing the MUFG merger in October 2005 marked the end of the crisis.

Third, the real economy must also adjust to the new credit constraints. In Japan’s case, car sales, land prices, bank lending and the household spending index have, like share prices, returned to the levels of the early 1980s.

Corporate gearing ratios are at levels not seen for 40 years. Its economy has been through a wrenching adjustment over a long time.

Could it take this long in the West? Experience has taught that we should not rule out such a possibility. You could argue that the imbalances in the West are greater and have been allowed to build for longer than in Japan. It is that build-up of imbalances which will determine the scale and duration of this adjustment period rather than the actions of politicians and regulators (who have a tendency first to deny, then to fight the last battle rather than this one).

The author heads the Société Générale Asset Management Japan Core Alpha team

Source : http://www.timesonline.co.uk/tol/money/investment/article5061770.ece

"The pace of economic activity has slowed markedly in recent months," the
Fed said "Moreover, the intensification of financial market turmoil is likely to
exert additional restraint on spending, partly by further reducing the ability
of households and businesses to obtain credit."

Although inflation has been high, the Fed believes that the recent drop in
energy prices and the weaker prospects for economic activity have reduced this
threat to the economy.

In Europe, which also has been hard hit by the financial crisis, the Bank of
England cut its rate by half a point to 4.5 percent, while the European Central
Bank sliced its rate to 3.75 percent.

In addition, the Fed reduced its emergency lending rate to banks by half a
percentage point to 1.75 percent. Given the intense credit crisis, banks have
been ramping up their borrowing from the Fed's emergency "discount" window.

In response, the prime lending rate for millions of borrowers will drop by a
corresponding amount. The prime rate applies to certain credit cards, home
equity lines of credit and other loans.

The hope was to spur nervous consumers and businesses to spend more freely
again. They clamped down as housing, credit and financial problems intensified
last month, throwing Wall Street into chaos. Many believe the country is on the
brink of, or already in, its first recession since 2001.

The Fed's last rate cut was in late April, capping one of the most
aggressive rate-cutting campaigns in decades as it scrambled to shore up the
faltering economy. After that, the Fed moved to the sidelines, holding rates
steady as zooming food and energy prices during that period threatened to ignite
inflation. In the past few months, energy prices have retreated from record
highs reached in mid-July, giving the Fed more leeway to drop rates again.

At its last meeting in September, the Fed struck a more dire tone about the
economy, hinting that a rate reduction once again could be in the offing.

Even with the unprecedented $700 billion financial bailout quickly signed
into law by President Bush on Friday, the failing economy and the jobs market
probably will get worse. Many believe the economy will jolt into reverse later
this year -- if it hasn't already-- and will stay sickly well into next year.

One of the most crucial pillars of the economy -- the jobs market -- has
cracked, and wage growth is slowing. This means that consumers will be even more
hard-pressed to spend in the fashion that helps grow the economy.

Increasingly skittish employers slashed payrolls by 159,000 in September,
the most in more than five years. A staggering 760,000 jobs have disappeared so
far this year. The unemployment rate is 6.1 percent, up sharply from 4.7 percent
a year ago.

The unemployment rate could hit 7 or 7.5 percent by late 2009. If that
happens, it would mark the highest rate of joblessness since the months
immediately following the 1990-91 recession. Some economists say the jobless
rate could rise even more before the situation starts to get better.

Mounting job losses, shrinking paychecks, shriveling nest eggs and rising
foreclosures all have weighed heavily on American voters. The economy is their
No. 1 concern, polls have shown.

Spooked consumers and businesses have pulled back so much that some analysts
fear the economy stalled -- or even worse, shrank -- in the July-to-September
quarter. Many predict the economy will contract in both the final quarter of
this year and the first quarter of next year, meeting the classic definition of
a recession.

The financial crisis that intensified in September is forcing a seismic
shake-up on Wall Street.

Lehman Brothers, the country's fourth-largest investment bank, filed for
bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it
alone anymore, found help in the arms of Bank of America. American International
International Group was thrown a financial lifeline. And, the last two
investment houses -- Goldman Sachs and Morgan Stanley -- decided to convert
themselves into commercial banks to better weather the financial storm. The
number of banks that have failed this year are up sharply from last year. On
Friday, Wachovia Corp. said it will be acquired by Wells Fargo & Co. wiping out
Wachovia's previous plan to sell its banking operations to rival suitor
Citigroup Inc.

The dollar fell against 14 of the world's most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan, while the Standard & Poor's 500 Index rose 4 percent. The plan may end the rally that began in June and drove the U.S. currency up 10 percent versus the euro, 2 percent against the yen and almost 13 percent compared with Brazil's real, strategists said.

Paulson's plan, sent to Congress Sept. 20, would mark an unprecedented government intrusion into markets and increase the nation's debt ceiling by 6.6 percent to $11.315 trillion. Officials may also start a $400 billion Federal Deposit Insurance Corp. pool to insure investors in money-market funds.

Dollar `Downdraft'

``The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,'' said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.

Paulson and Federal Reserve Chairman Ben S. Bernanke began plotting the rescue last week after New York-based Lehman Brothers Holdings Inc. filed for bankruptcy, the government seized control of American International Group Inc. and Merrill Lynch & Co. was forced into the arms of Charlotte, North Carolina-based Bank of America Corp.

Morgan Stanley dropped as much as 44 percent Sept. 17, the biggest one-day decline in its history, and Goldman Sachs Group Inc., where Paulson was chief executive officer from 1998 to 2006, lost 26 percent. Both are based in New York.

Dollar Hegemony

The dollar fell 2.5 percent to $1.4831 per euro as of 4:05 p.m. in New York, after dropping 1.7 percent in the week to Sept. 19. It slid 2.1 percent to 105.24 yen, extending last week's 0.5 percent decline.

In the four days following Lehman's bankruptcy, the ICE future exchange's Dollar Index, which measures the currency's performance against the U.S.'s six biggest trading partners, dropped 1.2 percent. It fell 2 percent today, leaving it little changed this year.

``After years of doubting the hegemonic status of the dollar, this proves it's still there,'' said Stephen Jen, London-based head of research at Morgan Stanley. ``But of course this situation is definitely not stable. The capital leaving the emerging markets is only going into the dollar and that's a powerful force. It's a very uncomfortable balance.''

By the end of the year, the euro will weaken to $1.43 and the yen will trade at 108 to the dollar, according to analyst surveys by Bloomberg. The dollar will depreciate to 1.65 against the real, compared with 1.83 on Sept. 19.

Growth, Deficits

Although the dollar may suffer short-term, at least one analyst says the U.S. government's planned rescue will strengthen the currency before long. Paulson's proposals will return foreign-exchange markets to the trend of the past months, according to Adam Boyton, senior currency strategist at Frankfurt-based Deutsche Bank AG, the world's biggest currency- trading bank. Since the end of June, the Dollar Index has gained 5 percent.

``It's a positive plan that's ultimately good for the dollar,'' said New York-based Boyton. ``It reduces risk and volatility and gets the focus back on macroeconomic fundamentals, which suggest weakness throughout the rest of the globe next year, with returning strength in the U.S.''

The U.S. economy may expand 1.5 percent next year, according to the median estimate of 80 analysts surveyed by Bloomberg. That compares with 1.1 percent for the euro-region and 1.15 percent for Japan, the world's second-largest economy.

`Huge New Supply'

The rescue comes as the U.S. budget deficit and the current-account balance, the broadest measure of trade, grow. The Congressional Budget Office projects the spending shortfall will increase to $438 billion next year from $407 billion. The current account deficit is up from $167.24 billion in December.

``Investors may start to worry about the amount of debt the U.S. is taking on and its impact on the dollar,'' said Geoffrey Yu, a currency strategist in London at UBS AG, the second- largest foreign-exchange trader. ``The fact that they mentioned taxpayer money implies that they're going to issue debt. If there's going to be a huge new supply of Treasuries, this will be dollar negative. It's too much for the dollar to take.''

Traders are also concerned the bank bailout will spread to other U.S. industries suffering from the credit crunch that's holding back an economy growing at its slowest pace since 2001. Detroit-based General Motors Corp., the world's biggest automaker, said last week it will tap the remaining $3.5 billion of a $4.5 billion credit line to pay for restructuring costs.

`Damaged' Currencies

Lower interest rates may also weigh on the dollar. Futures on the Chicago Board of Trade show there's a 45 percent chance policy makers will lower their target rate for overnight lending between banks to at least 1.75 percent by January from 2 percent currently. A month ago, they showed a 50 percent chance of an increase to 2.25 percent.

Rates in the U.S. are already the lowest of any Group of 10 industrialized nations except Japan, where they are 0.5 percent. The European Central Bank's benchmark is 4.25 percent.

Another drawback for the dollar is that the Fed's key rate is 3.4 percentage points less than the rate of inflation, the most since 1980, so investors lose money by investing in short- term U.S. fixed-income assets.

``People thought that the Fed was done cutting,'' said Andrew Balls, an executive vice president and member of the investment committee of Newport, California-based Pacific Investment Management Co., which oversees almost $830 billion. ``In the longer term the diversification away from the dollar will remain intact. The U.S. hasn't done itself any favors in making its assets attractive to foreign investors.''

Brazil, Australia

The biggest beneficiaries may be Brazil's real and Australia's dollar, as demand for higher-yielding assets rebounds, according to Goldman Sachs. The two currencies, the biggest losers versus the dollar since July, may rebound 7.7 percent and 4.6 percent, respectively, in the next two weeks, Goldman Sachs forecasts.

``The currencies that have been damaged the most have the best growth,'' said Jens Nordvig, a strategist with Goldman Sachs in New York. ``You're going to see a lot of flows back into these currencies now.''

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
Last Updated: September 22, 2008 16:09 EDT

What Happened In The Last Month?



The chart below shows it may be a mistake to assume the move in the dollar will not last very long. Like all the charts we present, the purpose is not to predict or forecast, but to understand possible realistic scenarios which could play out.



Secular and Cyclical Trends

The long-term story for a weak dollar remains intact. The long-term story for strength in commodities remains intact. These stories (or fundamentals) apply to a period that could last almost twenty years and are referred to as secular stories or trends. Based on history, it is important to understand that counter-trends or cyclical retracements of secular trends can be of significant magnitude and duration. More importantly, they can destroy principal even when you have correctly identified the long-term fundamentals. The chart below of gold prices from 1973 through 1981 illustrates the point. Even if you have the story right, are you willing and emotionally able to suffer a 48% loss in a core position?



The chart of the NASDAQ (below) illustrates our task, which is to balance the desire to stay with a secular trend with the need to protect against large and hard to recover from losses.



What Could Be The Motivation To Want A Stronger Dollar?

While complex financial markets never have singular and simple cause and effect relationships, we can identify a few of the major contributors to the significant shifts which have occurred in the last month. When examining the related movements between the dollar and commodities, the classic chicken and egg question always comes into play. Of the many possible reasons to set an orchestrated dollar move in motion are:

* A weak dollar has contributed to global inflation which cannot easily be addressed by central banks raising interest rates in the face of slowing economies and a credit crisis.
* European exports have been seriously negatively impacted by the weak dollar/strong euro.
* Additional evidence of European economic weakness has surfaced in recent weeks.
* The same issues, exports and economic weakness, also apply to the emerging market economies.





The major drawback for the U.S. is the weak dollar has helped fuel a significant increase in exports. The surge in exports has propped up America’s GDP in recent quarters. From the Saturday, August 16, 2008 edition of The Wall Street Journal:

"A stronger dollar, if sustained over a longer term, could put the U.S. economy on shakier ground by raising the cost of exports. Without the improving U.S. trade position, the U.S. economy would have contracted in the second quarter. Exports grew at a robust 9% annual rate during the quarter, helped along by the cumulative effects of the dollar's weakening in recent years."

When Fundamentals and Technicals Fail to Align

My read-between-the-lines of the current economic environment includes:

* The Fed’s attempt to prop up the economy by lowering interest rates has not and is not working, which is no secret to anyone.
* The availability of credit is contracting which is exactly what the Fed was trying to avoid by lowering rates.
* Stock markets around the globe are not anticipating a significant recovery anytime soon.
* Banks still have serious problems with continued deterioration of their balance sheets caused primarily by falling home prices, which have no rationale hope for finding a permanent bottom anytime soon.
* The recent slide in commodity prices underscores the contraction of credit, housing outlook, and anticipated future economic weakness. This is not good for stocks.
* At least for the time being, financial markets are placing economic weakness and the possibility of deflation ahead of any concerns about possible future inflation.
* All asset prices, including commodities, are on the ropes.
* Based on the evidence we have today, a rapid reversal in the U.S. stock market is possible between current levels and 1,365 on the S&P 500 (now at 1,298).
* A possible, but much less probable, outcome is for stocks to respond positively, in a rapid upside move, to falling commodity prices and break through 1,365. The basis for this scenario is that capital is flowing out of commodities and could rush into stocks if managers feel they are being left behind. The move could take the form of an upside "blow off" where the panic buying is quickly replaced with panic selling.

The concepts above appear to be supported by recent disconnects between some fundamental and technical elements in both commodities and stock markets.







Stocks Remain in Downtrend



At Some Point Nothing Else Matters Except Protecting Principal

When asked their secrets of success, money managers who consistently have been top performers almost without exception state the importance of "cutting losses and letting winners run." Similarly, when the best professional managers are asked to name common mistakes made by individual investors, they typically put the failure to cut losses at the top of the list. The cruel reality of the markets is when you lose 30% you need to make more than 30% to get back to break even. As the chart below shows, if you lose 30%, you need to make 43% to get back to break even. The two boxed rows show the danger of “staying the course” while bear markets destroy your hard earned principal. If you "rode out" the 2000-2002 bear market in the S&P 500 Index, your losses from peak to trough would have been roughly 45%. To get back to break even, you would have needed to earn an 82% return from the bottom which was made in October of 2002. When losses begin to pile up, at some point you have to put both the fundamentals and charts on the back burner and focus on preserving principal in order to have the opportunity to fight another day.



The previous statements and charts are not meant to be forecasts, but simply an assessment of current risk/reward profiles and probabilities as we see them. If the odds shift to more favorable or alternate outcomes, we are keeping an open mind and will gladly adjust our thinking as new evidence unfolds.

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

Despite the high prevailing prices, demand in 2008 is expected to total 86.9 million barrels compared to 85.96 mb/d in 2007. For 2009, global oil demand is expected to reach 87.7 mb/d.



Anemic economic growth in the US, particularly in energy intensive areas such as construction and auto manufacturing, along with consumer resistance to high gasoline prices, is expected to cut into demand on an absolute basis with US disappearance expected to total 20.2 mb/d. The decline is likely to persist into 2009, with forecasted demand expected to total 19.8 mb. European demand given the significantly lower base along with the high retail prices will likely stagnate at 15.1 mb/d.

Due to the forecast for an absolute decline from the US and Europe, growth in demand will be reliant upon emerging market economies. In China, the domestic economy is beginning to show strains from high inflation which is encouraging an increasingly proactive role on the part of the government to moderate capital investment and likewise demand in order to control inflationary pressures. In India, fears have been apparent over the high cost of subsidizing domestic consumption of oil products. Subsequently, demand if anything might fall short of expectations as governments restrain growth through more rational pricing policies that do not strain national budgets. Subsequently, forecasts suggesting growth in Chinese demand in 2009 to 8.42 mb/d from 7.96 in 2008 might be overly optimistic. For non-OECD areas, demand is expected to reach 39.71 mb/d, an increase of 1.4 mb/d over forecasts for 2008. However, any shortfall in Chinese demand might hold out the potential for non-OECD demand falling short of forecast.

Supply Increases Enough?




Just as demand has responded to the higher prices, global crude oil supply availability has also started to expand. Although concerns remain over the depletion of existing fields in the US, North Sea and Mexico, high prices have encouraged an expansion in supplies from areas in Brazil, Saudi Arabia, Iraq and Nigeria. In addition, aggressive biofuel and LNG programs are beginning to have an impact. Only with higher prices could the gains in substitute programs and deep sea drilling have been achieved. The belief that the high price environment is finally becoming ingrained in assessing the potential profitability of projects is helping encourage investment, particularly in Brazil and the Gulf of Mexico. The high prices have also raised the pain threshold by which the costs, including environmental impact associated with drilling on the Continental shelf, are being reassessed.

Despite the favorable price environment, the gains on the production side are still not spectacular; yet appear to be enough for now to provide the basis for a balance tending toward surplus supply/demand situation. Led by steady gains in emerging markets and stabilization in developed areas, demand will eventually resume an upward growth path. The ability of supplies to keep up with these gains will be a key variable to the future price environment surrounding crude oil and the structure of its forward curve.

For 2009, global oil supplies including biofuels, natural gas liquids and condensate are expected on a preliminary basis to total 87.8 mb/d compared to 87.3 mb/d forecast for 2008. OECD supplies are expected to fall to 19.3 mb/d compared to 19.5 mb/d in 2007. European supplies are projected to fall the sharpest, reaching only 4.2 mb/d in 2009 compared to 4.5 mb/d in 2008. North American supplies will actually show an increase as production from the Canadian tar sands and higher US output attributed to further increases of ethanol supplies and expansion in production in the Gulf of Mexico more than offset declines in Mexico due to lower production from the Cantarell field.

In non-OECD areas, supplies are projected to increase by .5 mb/d to 28.5 mb/d. Major concerns are linked to the Russians, where abrupt policy changes and a punitive tax regime is discouraging investment. With uncertainty associated with the government support of joint ventures, foreign investment in new projects is likely to lag. A bright spot remains Brazil, but even there deepwater development will demand patience and substantial capital. In Asia, supplies are showing increases as the demand for energy remains buoyant and absorbs what increases might be attained in Vietnam, China and Thailand.

OPEC production levels led by Iraq and Saudi Arabia have continued to expand. Recently, OPEC production reached 32.4 mb/d. This is as much as 1.8 mb/d above year ago levels. Concerns had recently been expressed that due to dwindling spare capacity, OPEC had lost their pricing power. However, given recent declines it looks like the Saudis once again hold sway over the market. Currently they appear to have a desire for a stable price environment which will not threaten demand. What the breaking point might be on both the downside and upside remains to be seen but Saudi statements have tended to foreshadow any change in policy and will have to be watched closely. For 2009, it looks like sustainable capacity will likely expand by upwards of 1 mb/d. However, OPEC remains wary of committing further capital into new and expensive production until the depth of the recent economic slowdown and impact of renewables can be more accurately gauged. A move back below the 100.00 area could encourage calls by more radical OPEC members such as Venezuela and Iran to reign in production.



Conclusion




A surplus supply situation is likely as we move into 2009 based upon current supply/demand trends. Demand prospects will not only be influenced by apparent off take linked to economic activity but also by speculative involvement which will continue to be driven by the dollar and inflationary trends. Efforts to thwart institutional involvement will continue to be a potential weight on the market. On the supply side, Saudi Arabia will likely come under increasing pressure to cut production if prices break back near the 95.00 area particularly if the statistical balance has moved into surplus. Inventory levels, which have been slow to reflect a build in OECD countries, will need to be monitored closely. An increase in inventory levels would not only put pressure on prices but also provide validation to OPEC that supply availability has overtaken demand. The rebuilding in inventories could provide the basis for values falling back toward the 94.00 level, similar to what occurred in July of 2006 when values reached a high of 78.40 before falling back to a low of 50.00 basis the active contract. A key reflection point looks to be near the 110 level basis the nearby contract. Eventually OPEC looks like it will need to intervene and cut production to move supply/demand back into better balance.

Longer term, we see the potential for values to move higher as emerging markets try to satisfy a growing need for energy and production lags. Nevertheless, it will take time to shake off the economic malaise in the developed countries and rebuild demand growth in emerging markets.

Questions or comments about this article, please contact Steve Platt at 1.877.377.7931

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.

All Charts Courtesy of DTN.


About the Author


After graduating from Georgetown University in Washington, D.C., Steve Platt joined an economic consulting firm focused on agricultural policy and research. In 1979, he relocated to Chicago and worked for two major brokerage houses as Senior Analyst and Research Director, servicing the needs of both institutional and retail clients. In 1998, Steve set up and was given operational control of a trading desk at Morgan Stanley, DW Inc. specializing in precious metals, foreign exchange, and futures. The desk also serviced specialized spec and hedge futures accounts trading in U.S. and International markets. Over the years, Steve has been quoted in major financial publications and seen on a variety of financial news programs discussing market fundamentals. Steve can be reached at (877) 377-7931.

Source: FutureSource.com

Peak Oil Implications
Demand

Demand for oil has consistently risen globally. Should demand continue to rise when total output has reached its peak, basic economics tells us that oil prices will steadily rise with demand. And when production falls - which will occur when oil becomes harder and harder to find - oil prices will rise at a much greater rate. Oil exploration will become much more aggressive, and alternative oil sources - such as Canada's oil sands - will be increasingly exploited to squeeze out every last drop of oil.

Alternative Energy

Alternative energy sources will become much more popular as countries are forced to move to a sustainable energy supply, and as fossil fuels simply become too expensive. The way we live our lives would dramatically change if oil-based energy becomes economically out of reach. For example, people will probably live closer to where they work, leaving municipalities strained in their attempts to provide adequate transit as well maintain social services and infrastructure at a much higher cost.

When and if peak oil does arrive, it needn't be all doom and gloom. It can be a major investment opportunity as there are areas in the market that will benefit. Some of these investment opportunities include:

* Oilfield Services
As the amount of reserves oil companies hold starts to diminish, oil companies will need to increase oil exploration and drilling to replenish reserves - after all, they are in the business of selling oil. As oil producers increase spending on exploration, it is the oilfield services sector that will win by receiving more orders and seeing higher revenue. Oilfield services companies provide the tools and equipment required in the exploration of oil including drilling rigs, offshore rigs and transport equipment. Therefore, with a dramatic increase in drilling, oil field service companies are likely to be in demand, making them a hot investment.

* The Oil Giants
Investing in the top guns of the oil industry is a good bet, peak oil or not. If peak oil is reality, the steady decline in supply will drive the price of oil up causing each company's oil inventory to steadily increase in value. This will result in higher valued stocks for these companies. Basically, the higher oil prices are, the more oil and derivative products will be sold, which should increase profits.

* Alternative Sources of Oil
As conventional oil is depleted and becomes harder to find, oil companies will increasingly look to unconventional sources to boost production. Additionally, higher oil prices brought on by higher demand and lower production make these alternative oil sources financially feasible. The oil sands in Canada and Venezuela are examples of such an unconventional source, where bitumen - a heavy crude oil - is mixed together with sand and clay. This substance is extracted and refined to produce oil.

Oil shale is another alternative. Extracting oil from oil shale - rock containing kerogyn that can be converted to synthetic crude oil - is an even more intensive process than that of the oil sands. Oil shale production is only a viable alternative when oil prices are over $70 per barrel.

Some processes exist that convert coal to synthetic oil. However such methods will likely only be interim alternatives because coal is also a finite resource.

* Alternative Energy
The most obvious option in the peak oil dilemma is to move to something other than oil for our energy needs. This option isn't yet as feasible. Alternative energy only accounts for a small percentage of energy sources, but the onset of peak oil will force society to look elsewhere to meet its energy needs. If the optimists are right and peak oil is decades away, we have time to develop new technologies to harness alternative energies. But with the hype generated by high oil prices and peak oil speculation, this industry is getting a boost.

Because such a very small percentage of our energy sources include alternatives to oil, it could be said that the market for these products has nowhere to go but up. Energy sources such as geothermal, solar and wind energy will be sought after as solutions. Additionally, because many of the technologies that harness these energies are built using oil dependent machinery, there will be an additional push to develop technology for this purpose as well.

Hybrid and electric cars have become increasingly popular in recent years due to high gasoline prices. Expect a greater degree of growth in this area with the arrival of peak oil and higher prices at the pump.

All of the technology required to produce alternative forms of energy will need further research and development to ensure greater efficiency and economic viability. Investments in the companies leading these R&D initiatives will likely bear much fruit. As oil production falls and oil prices rise, research will become more intensive as industry puts both feet forward to develop the next generation of energy technology.

Investments to Avoid

In general, the investments to avoid in a peak oil situation include companies that rely on oil and other petroleum products as a major input cost. For example, transportation companies and airlines are susceptible to price fluctuations in oil and would be hurt by the extremely high prices that would be the result of a peak oil situation.

Conclusion

Peak oil brings with it several opportunities for investors. Whether it's oil, oil field services, or alternative energy, investors can cash in on this phenomenon. But be careful. If we reach peak oil, it will mean dramatic changes to society in the way we live and do business. Watch your investments closely and be sure to adjust to a changing marketplace.

John Hanley has a Bachelor of Arts degree in political science from the University of Alberta. He is a freelance writer and has lived in Edmonton, Alberta with his wife Mikaela for the past eight years. John grew up in Saskatchewan and previously worked as a radio broadcaster.


Source: http://www.investopedia.com/articles/07/peak-oil.asp?viewall=1

Yet whatever the demand/supply dynamic, there comes a point in all markets when price reaches the limits of the economy's capacity to pay. It's already happened with housing in America, Britain and many parts of Europe, where the same arguments about insatiable demand on limited supply as are now deployed by bulls of the oil price were once used to explain and justify ever-rising real estate prices.

As we now know, a large part of the house price spiral was down simply to a ready supply of cheap credit chasing an asset which everyone thought immune to Newton's law of gravity. As a consequence, ever greater quantities of money were poured into the market, until it eventually became essentially unaffordable. Prices are now correcting accordingly. Many of the same bubble characteristics are observable in the commodity markets, and particularly the oil price.

In the last year, the oil price has nearly doubled, a rate of appreciation which in absolute terms is without precedent. Admittedly, the oil shocks of the 1970s were in proportionate terms much worse. In the first of these shocks, the price quadrupled and in the second it doubled again.

Yet even accounting for inflation, the price today is much higher than it rose to back then. The effect, given the short time frame of the appreciation, could therefore be just as profound.

Western economies will be better at absorbing these increases than they were back then. Europe in particular is partially protected by the strength of the euro, which means the effective appreciation for single currency members is only half as much as it is in the US. All the same, the pain is already acute, with energy-intensive industries such as airlines facing profound structural change as they seek to adapt to expensively priced oil.

Though the focus of attention has been on the damage done to the full service airlines, the first casualties in the airline industry are likely to be among the low-cost operators, which rely on highly price-conscious customers. What's more, already finely tuned cost structures make it harder for them to absorb high fuel prices by economising elsewhere.

As energy and fuel bills rise, consumption is likely to suffer across the board, threatening a return to the "stagflation" of the 1970s. Even so, the West isn't as dependent on oil as it was back then and, as I say, per capita consumption of energy in the developed world is already so high that it can easily be reduced without causing undue hardship.

The pain caused in the developing world is, on the other hand, likely to be much more extreme. Here there is little room for reduced energy consumption. As higher energy and food prices eat into already squeezed family budgets, there is the threat of serious economic and social dislocation.

Yet the bull case for the oil price depends on this demand continuing to rise in an almost exponential way. In fact, very little has happened to the mix of supply and demand over the last year which in itself would justify a doubling of the oil price. What has changed is the willingness of markets to believe that growing demand underpins a permanently higher oil price. As with housing, that's likely to be only partially true.

As with all bubbles, it is impossible to know when prices will correct. The oil price could as easily go to $200 a barrel before once more returning to earth. Yet return it certainly will if it succeeds in pushing the global economy into recession. Central bankers seem to be succeeding in insulating their economies from the worst effects of the credit crisis. They may find the oil price an altogether tougher nut to crack.

www.independent.co.uk

Dictionary.com defines inflation as “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”. American Heritage says inflation is “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services”. I added the italics for emphasis.

So if anyone ever tells you rising prices are inflation, realize they either don’t know what they are talking about or they are intentionally trying to mislead you. Rising prices are only inflation if they are directly caused by an increasing money supply. The problem is rising money supplies often coincide with supply imbalances in specific commodities, so usually both inflation and simple economics are co-drivers.

For example, global oil demand is growing as China, India, and the rest of the developing world drive more cars and transport more goods. But supply growth can’t keep pace, as big new oilfields are exceedingly rare. So much of oil’s bull is fundamental, it has nothing at all to do with inflation. But at the same time, oil priced in euros has risen slightly less than half as much as it has in dollars. So about half of the oil bull seen by Americans is largely driven by dollar inflation.

So as you live your life in constant sticker shock this summer, realize that varying large fractions of the rising prices you see are purely fundamental. Global demand is straining global supplies. Rice is a great example of this today. But the remaining fractions of price increases we are seeing in the States are the result of true monetary inflation. You can thank the Federal Reserve for this unwelcome development.

The Fed is the greatest engine of inflation the world has ever seen. Its only function is to create new US dollars out of thin air, every one of which is pure inflation. Every second of every day, the Fed ramps US money supplies at much faster rates than underlying US or global economic growth. The result is higher prices thanks to relatively more fiat-paper dollars bidding on relatively fewer real goods and services.

And as if the steep fundamentally-driven price increases we’ve seen in oil, gasoline, and the grains are not bad enough, Ben Bernanke’s Fed is pouring rocket fuel on this fire. The Fed is so worried that some real-estate speculators might actually have to take responsibility for their own bad decisions that it is flooding the market with inflationary new dollars at a truly breathtaking and frightening pace.

While it is a case of the fox guarding the chicken coop, the offending Fed maintains measures of various money supplies. For nearly half a century, the M3 measure of US money was the broadest measuring stick. But the Fed suddenly discontinued this popular measure, without explanation, in early 2006. Conspiracy theorists pointed out M3 had been growing much faster than M2, so perhaps the Fed was trying to hide this. And provocatively M3 was killed right when Ben Bernanke officially took the helm.

When the Fed took my M3 away, my replacement favorite broad money supply measurement became MZM, or money of zero maturity. It is equal to the M2 money supply less time deposits (like CDs) plus money-market funds. It effectively measures the supply of US money redeemable on demand, hence available for immediate spending. While economists argue about whether M2 or MZM is a better broad measure, my research leads me to cast my vote with MZM.

And if you look at MZM growth today, it is frightening. While the Fed and Keynesian (socialist) economists argue that money-supply growth is largely out of the Fed’s control, this is a foolish thesis. If the Fed shut down its proverbial printing presses and stopped bullying around free-market interest rates, money supply growth would plummet and inflation would soon evaporate. Make no mistake, the central bank issuing the currency is to blame here!

This chart renders the Fed’s annual year-over-year growth rate in MZM along with the YoY growth rate in Washington’s lowballed Consumer Price Index. Wall Street generally accepts the CPI gospel on inflation, so I included CPI growth here as well to show how ridiculously improbable it is given true monetary growth. The raw MZM is rendered in the background. Its accelerating growth is very disturbing.



In Alan Greenspan’s final years at the Fed leading into early 2006, the blue MZM YoY growth rate was trending lower. It was always still positive, so money supplies were growing. But monetary growth only becomes inflationary when it exceeds the growth rate in stuff on which to spend it. If money is growing at 3% a year but the US economy is also growing at 3%, then little or no monetary inflation will be witnessed.

The week Greenspan left office, I wrote an essay on his monetary legacy. He did a horrible job. Like a Communist boss in old Russia, he continually tried to manipulate prices and failed. At the time, I thought he was one of the greatest inflationists in history. But after seeing Ben Bernanke’s sorry record since he took office, it is crystal clear that this new central banker is trying to radically out-inflate his predecessor.

Left with low broad money growth by historical standards, Bernanke’s Fed soon started accelerating it in late 2006. Then in early 2007 the subprime crisis erupted, and the Fed panicked. Rather than letting reckless real-estate speculators (both banks and mortgage holders) go under and clean out the system, the Fed rewarded them. It started ramping money way faster in the curious hope endemic to central bankers that more cheap money will magically fix an imbalance that previous cheap money created.

Until this point, MZM growth was still near 8%. This is faster than economic growth and definitely inflationary, but all over the world central banks inflate their own currencies by 7% to 8% a year on average. So 8% in early 2007 was on the high side, but still reasonable in light of fiat-currency history. But as subprime problems snowballed, the general credit crunch hit last summer.

Again Bernanke’s Fed, rather than trying to fight inflation and preserve the dollar’s purchasing power, decided that its real-estate speculating buddies in the banking industry shouldn’t have to bear the fruit of their own bad decisions. By the end of 2007 monetary growth was running a scary 12%, but it was stabilizing. The Fed was gumming up healthy free-market cleansing action with floodgates of new money.

Then in early January 2008, the global stock markets sold off aggressively. Fears of an impending US recession drove heavy selling overseas. This worldwide selloff was so extraordinary that we are unlikely to see anything resembling it again for decades. But instead of reining in monetary growth, the Fed accelerated it. Absolute annual MZM growth peaked at a staggering 16.7% in March 2008!

You read that right. There were 16.7% more US dollars available for spending this March than last! This is incredible, especially during challenging times when the US economy was barely chugging along around 2.2% growth for all of 2007. Sooner or later all this excess money will eventually bid up prices. Some of this inflation will be perceived as good, primarily the part that flows into stocks. But the part bidding up scarce food and energy is not going to make Americans very happy.

Now these growth rates defy the imagination. At 12% growth compounded annually, it only takes 6 years for something to double. At 16%, this drops to well under 5 years. If the Fed doesn’t stop this madness, there could be twice as many dollars floating around in 5 or 6 years as there are today. Even with modest economic growth, this means general price levels would probably almost double. And this inflation is totally above and beyond all the supply-and-demand-driven global commodities bulls’ increases!

Bernanke’s Fed has been ramping money-supply growth so fast that actual MZM is starting to look parabolic even on a short-term chart. In just over 2 years under him, MZM has ballooned 25.1% unchecked! And since the Fed almost never shrinks money supplies, all the inflation evidenced in this parabola is already in the pipeline. Eventually this excess money will filter into and really drive up general price levels.

Now since MZM includes money-market funds, stock-market performance does affect it too. So some analysts argue that this staggering MZM growth is largely the result of market turbulence. This thesis is problematic though. Whenever stocks change hands, so does cash. Buyers’ money is transferred to sellers’ accounts where it is still, amazingly enough, money. Unless cash is routed into time deposits like CDs, stock buying and selling shouldn’t affect MZM all that much. This same logic applies to bonds.

Another interesting point is MZM really started accelerating in late 2006. But the US stock markets didn’t top until one year later. In the year leading into its October 2007 top, the S&P 500 surged 15.9% higher. This is a great year highly unlikely to drive heavy stock selling and cash accumulation. Yet MZM still soared by 11.9% over this very span. The Fed recklessly running its printing presses was the culprit, not stock selling.

Thanks to this incredible monetary spike, a massive growing gap exists between the annual CPI growth and the annual money growth. Since monetary growth is the direct driver of all true inflation, shouldn’t the CPI reflect this MZM surge eventually? Theoretically yes. But since the CPI has become a US government propaganda tool rather than an honest inflation gauge, it probably won’t. Nevertheless, this MZM surge will certainly flow into real-world inflation and drive up general price levels of nearly everything we consume.

Now the 5 years rendered in this first chart really isn’t all that long. While 16% MZM growth is staggeringly extreme over this short span, is it extreme relative to history too? Absolutely! This next chart zooms out to the past 20 years to provide perspective. Bernanke’s Fed is really pushing the limits monetarily, blasting out shiny new fiat dollars at the fastest rate in decades with the exception of the 9/11 crisis.



The incredible acceleration in YoY MZM growth rates in 2007 is even more apparent in this long-term chart. And the post-9/11 high is very telling. By the looks of this, the Fed sees bailing out real-estate speculators as its highest priority since trying to maintain a functioning economy in the intense fear and uncertainty after the September 2001 terrorist attacks! The Fed is clearly scared today, and it is doing the only thing it can do. Inflate.

Bailouts are terrible for capitalism, even for the people getting bailed out. When speculators make bad decisions, they should face the full consequences so they learn from their mistakes. Failures are good because the assets used inefficiently and unprofitably by the bad speculators are naturally redistributed by the markets to those who will manage them efficiently for profits. Yet the Fed willingly keeps short-circuiting this important process which keeps making matters worse.

In late 1998, the Fed ramped money supplies to try and stave off necessary deleveraging following the Russian debt default that led to the implosion of elite hedge fund Long-Term Capital Management. But that deluge of cash soon found its way into stocks, particularly the speculative tech sector. The Fed’s LTCM bailout directly led to the tech-stock bubble by providing the surge in liquidity that drove the latter parabolic.

Then when the tech bubble burst, Alan Greenspan desperately tried to bail out stock speculators by slashing rates and radically ramping monetary growth in early 2001. Later that year when MZM growth was already 16% yet stocks kept grinding lower, the 9/11 attacks hit. So the Fed flooded the reeling system with even more newly-created money and pushed MZM nearly parabolic with staggering 22% annual growth!

But all this excess cash had to go somewhere too. Eventually all money the Fed creates will bid on something. Greenspan’s massive monetary growth in 2001 directly led to the housing bubble that he brazenly tries to accept no responsibility whatsoever for today. The torrents of excess money, which the Fed refused to take back out of the system after 9/11, flooded into real estate. And then that bubble started crashing in late 2006.

See the pattern here? The Fed gets scared because some speculators might actually lose on their bad bets so it floods the system with money to help them. But all of the money created in these huge surges eventually has to find a home somewhere, so another bubble is born. And then that bubble pops, scaring the Fed more. So it ramps money growth again, birthing a new bubble. It is a nasty vicious circle.

Other than abolishing the unconstitutional abomination that is the Federal Reserve, which isn’t going to happen since Washington would then have to live within its means financially, all we can do is try and anticipate the Fed’s bubbles and deploy our capital to ride them. Without a doubt, the massive surge in MZM under Bernanke is going to go somewhere. I suspect it will flow into and eventually create bubbles in the next hot sector, commodities.

It is ironic that the surges in money never go into the sector the Fed is trying to bail out. The tech-stock bailout attempt went into housing. And the housing bail out is already starting to flow into commodities. This is a serious problem for the Fed. When monetary inflation hit tech stocks and housing, people saw it as good. But when monetary inflation hits commodities, most folks aren’t going to be thrilled.

Despite their surges so far, commodities are not in bubbles yet because the majority of mainstream investors aren’t heavily involved yet like they were during the peaks in the tech-stock and housing bubbles. Bubbles are impossible without popular manias. And if Bernanke’s inflation indeed flows into commodities, they could prove to be the biggest bubbles yet. This money inflation gravitating towards an already fundamentally-hot sector is like a perfect storm of bullishness.

Today something like 2/3rds of the world’s population is starting to strive to live and consume like we blessed few do in the first world. Yet the world’s commodities-producing infrastructure was never designed to cope with such immense and fast-growing demand. It will catch up eventually, but prices will have to rise and stay really high for a long time to entice enough new capacity online to supply increased consumption.

So even if we were on a gold standard with no fiat-paper inflation whatsoever, commodities prices would still have to rise tremendously. But to have such a fundamental secular bull coincide with massive monetary inflation is incredible. Relatively more dollars bidding on relatively fewer already-fundamentally-scarce commodities is going to seriously amplify these bulls. And eventually the general public will flood in to speculate leading into the final apex, driving a superspike like never before witnessed.

Accelerating monetary inflation on top of global supply shortfalls is a truly incendiary mix. It leads me to believe we haven’t seen anything yet in commodities. At Zeal we’ve been riding these commodities bulls since the early 2000s. We were early contrarians starting way back when everyone thought commodities would never rise again. Since then our subscribers have made fortunes mirroring our trades.

So if you want to thrive in the coming inflationary times, subscribe today to our acclaimed monthly newsletter. We are constantly researching the markets, looking for high-potential opportunities in commodities stocks. You can learn from our hard work, see the logic behind all our real-world trades going forward, and mirror them with your own capital as you wish. The opportunities approaching are immense.

The bottom line is the commodities price increases we have seen lately are not all inflation. A large portion, the majority in most cases, is due simply to global imbalances in production and consumption growth. Inflation is purely a monetary phenomenon, it has nothing to do with supply and demand in individual commodities. It has everything to do with relatively more money chasing after relatively fewer goods and services.

But while investors wrongly attribute too much to inflation today, a massive surge in real inflation is already baked into the pipeline. Bernanke’s Fed has flooded the markets with cash in a futile attempt to bail out real-estate speculators. This new money has to go somewhere, and it will probably be commodities. We may as well buy in ahead of it and reap the big profits to come.

Adam Hamilton, CPA

May 16, 2008

The FOMC clearly remains concerned about the economy, which is unsurprising given souring confidence, deteriorating labor market conditions, and the housing collapse that is far from over. Furthermore, credit markets remain very tight and the financial markets remain under stress, which is why the Federal Reserve has been so keen to boost liquidity via the creation of new and expanded lending facilities. However, it is worth noting that the FOMC called their past easing of monetary policy “substantial.” This comment along with concerns that “inflation expectations have risen” and their high uncertainty about the inflation outlook suggests that the rate cut cycle may be nearing an end.

The markets remain extremely choppy following this rate decision, as the US dollar, Treasuries, and DJIA have yet to make any sort of significant directional move. View our FOMC Preview from Wednesday for our view on how EUR/USD could play out.


Comparing the FOMC statements **New Language Highlighted

April 30, 2008

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta and San Francisco.

March 18, 2008

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.




Written by Terri Belkas, Currency Analyst for DailyFX.com

# Overall numbers significantly worse than expected. Headline jobs supported by an 18,000 government rise, but private jobs down 98,000, after -109,000 in Feb and -79,000 in Jan. The Q4 average was +45,000 so the turnaround has been very fast. Manufacturing (-48,000) and construction (-51,000) were worst but also a 35,000 drop in business services; small declines in retail, financial… Trends are awful; unemployment will keep rising, squeezing spending. –Ian Shepherdson, High Frequency Economics

# The recession that has yet to enter its most intense phase will continue to extract a painful price in terms of overall output and the rate of productivity. We do expect that firms will continue to shed workers, but in levels that will not resemble the retrenchment in the labor sector in the aftermath of the dot.com crash, but will be significant enough to create a noticeable reduction in aggregate demand. We expect that the shape of the recession will see one trough reached in the spring of 2008 and the early winter of 2009. –Joseph Brusuelas, IDEAglobal

# The softness in March payroll employment was relatively broad based across industry classifications with the biggest losses coming from sectors such as construction, manufacturing, and temporary help. Within construction, the bulk of the job loss continues to be tied to the fall-off in homebuilding but we are also beginning to see some significant weakness in nonresidential workers.–David Greenlaw, Morgan Stanley

# Interestingly, job losses in the construction sector were nearly evenly split between residential and commercial and suggest that issues in the real estate sector are spreading beyond housing… One noticeable trend is that while the pattern of large job cuts is unchanged, the diffusion index of industries creating jobs continues to fall… The spread of labor market weakness bolsters the case for a recession this year and is among the most troubling aspects of the report. –Drew Matus, Lehman Brothers

# In past recessions the numbers of job losers climbed well over 100k per month. The downbeat labor report confirms why consumer confidence sank so deep this quarter and why the FOMC will have to keep lowering interest rates at their future meetings. –Brian Fabbri, BNP Paribas

# Despite continued protestations from some, the U.S. economy is in recession. GDP likely grew slightly in the first quarter, but employment, production and other more relevant data show declines. Industry data such as the ISM reports suggest that the broader retrenchment is mild by historical standards, and fortunately asynchronous. Exports (agriculture in particular) are booming, while domestic industries retrench. –Steven Wieting, Citigroup

# While the headline number was a little worse than expected, after correcting for the American Axle strike private sector employment declined at an average monthly rate of about 87,333 in the first quarter of 2008, which is not a particularly shocking number. Declines of this order of magnitude are consistent with our view of a shallow recession in the first half of 2008, with the economy overall projected to decline by just under a half a percentage point, on average, in the first two quarters of 2008. –Brian Bethune, Global Insight

# The clear deterioration in job market conditions over the last several months had been more a function of weak hiring on the part of U.S. businesses, as evidenced by the steady climb in continuing jobless claims as initial claims remained fairly low. This has begun to change, however, and the pace of layoffs is accelerating. –Richard F. Moody, Mission Residential

Compiled by Phil Izzo, The Wall Street Journal

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion when the market closed on March 14 to being sold at the bargain-basement price of about $236 million two days later.

The Federal Reserve rushed in to take unprecedented actions. It provided a $30 billion line of credit to facilitate the sale and is employing Depression-era provisions that for the first time are providing direct Fed loans to investment banks. Most analysts said the Fed was justified and that its efforts highlighted the severity of the dangers facing the financial system.

The turmoil produced wild swings on Wall Street this week with the Dow Jones industrial average surging on Tuesday after the Fed aggressively cut a key interest rate only to plunge on Wednesday on renewed worries about the economy and then to stage a 262-point gain on Thursday. Markets were closed Friday.

More turbulence is expected in coming weeks because there remains a great deal of uncertainty about how many more victims the credit crisis will claim.

The problems began last year with rising defaults on mortgages as a housing slump intensified, but they have now spread to other parts of the credit markets with institutions growing fearful about making other types of loans.

It is the ability to get credit that makes the financial system and the economy it supports function. When banks stop lending to other institutions that, like Bear Stearns, depend on credit to conduct their day-to-day operations, the results can be catastrophic.

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

Because of Bear Stearns, many analysts are raising the odds that a 2008 recession could be worse than expected.

"The potential freezing up of the financial system could have pretty negative ramifications on bank lending which would have negative ramifications on consumer and business spending," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm. He said he had upped the chances of a worse-than-expected recession to 40 percent, up from 25 percent odds before Bear Stearns.

David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.

The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.

By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output. The 2001 downturn lasted just eight months.

Wyss' baseline forecast calls for the 2008 downturn to trim GDP by just 0.5 percent and last for nine months, from last November until August.

Under that forecast, unemployment, which hit a low in this expansion of 4.4 percent and now stands at 4.8 percent, will rise to around 6 percent, meaning 1.5 million people will lose their jobs. Under the worst-case forecast, unemployment jumps to 7.5 percent, meaning 3 million people would be tossed out of work.

"There would be bigger drops in the stock market and in home prices than we are now anticipating and more people out of work," Wyss said. "There would be a lot of pain all the way around."

While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed.

Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.

"Historically, when policymakers have acted in a concerted and aggressive way, that signals that we are nearing the end of the crisis," said Zandi. "If that occurs this time and the financial markets stabilize in the next few months, then the economy will suffer but it won't a prolonged and severe recession."