Investing: A Whole New Era

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Raw materials remain the rage, and while a number of developed economies teeter on the cusp of recession, many commodities continue to trade around or close to record levels. Make no mistake: risk aversion is sliming its way back into markets; equities are trading lower, and the dollar remains entrenched in its longer term bear market, which set in during the latter parts of 2001. Investing will never be the same again.

...Since mid-February this year, at least six known hedge funds - among a highly secretive and lightly regulated global sector - with a paper value of $5.4bn, have been forced to liquidate or sell holdings because their lenders - pulverized by nearly $200bn of asset write-downs and credit losses caused by the collapse of the subprime mortgage market - raised borrowing rates as much as 10 times, with ever fresher claims for extra collateral. This week, Lehman Brothers, another Wall Street investment bank, liquidated three stricken investment funds. In filings with the US Securities and Exchange Commission, the bank blamed the liquidation on "market disruptions that occurred in the second half of the 2007 fiscal year and further deterioration in the 2008 quarter".

In Congressional testimony last week, Federal Reserve chairman Bernanke spent hours trying to articulate just what had happened in credit markets, and just why it was that the Federal Reserve had stepped in to bail out Bear Stearns. In talking his natural book, Bernanke explained that the worst for the US economy is "almost over", when just about every empirical factor points to a recession.

One of the biggest headaches is that credit markets continue to lampoon the multi-layered stimulus packages unloaded by the Federal Reserve. Where the Federal Funds Target Rate has been cut from nearly 6% in October 2007 to just 2% now, borrowing rates in the private sector have either risen or, at best, declined only modestly. Lending standards are now as tight as a piano wire, plus, financial entities of all kinds are terrified to lend, even to each other>

The good news - in a relative sense - is found on the other side of the world. This week, the Chinese Yuan has traded better than seven to the dollar for the first time in more than a decade, underlining China's growing economic muscle and its increasing use of currency as a policy tool. A stronger Yuan undermines the competitiveness of Chinese exports, but another phenomenon has come to the fore in the form of rising private investment across Asia, led by China, India, Vietnam, Malaysia and Singapore.

Raw materials remain the rage, and while a number of developed economies teeter on the cusp of recession, many commodities continue to trade around or close to record levels. Make no mistake: risk aversion is sliming its way back into markets; equities are trading lower, and the dollar remains entrenched in its longer term bear market, which set in during the latter parts of 2001. Investing will never be the same again.

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