2nd Follow-up to the Analysis of the Financial Crisis

Mr. Komal Sri-Kumar analyzed the Financial Crisis on October 31. It is his fourth webcast since October 3. Mr. Sri-Kumar is TCW Group’s Chief Global Strategist.

It is a meaningful, worthwhile analysis.

A summary of Mr. Sri-Kumar's views and forecasts:

1. The 4th quarter of 2008 will be the worst quarter with a 4% drop in GDP.

2. Is relatively optimistic in expecting the USA recession to end in the middle of 2009 because: “…the economy and stock market went down very fast…for the same reason the upturn will be equally rapid”.

The significant decline in consumer sentiment suggests a deep consumer recession. Does not see a depression risk. Expects unemployment to hit 8% or higher.

3. Federal Reserve should not have cut the interest rate by 50 basis points. It gave little stimulus to the economy. It was not the reason for the stock market increase. The stock market surged because the TED risk spreads have come down. The principal negative issue is the “liquidity trap” in that lenders are not willing to lend.

He suggests that direct to consumer stimulus is more important than interest rate reductions.

Does not see an inflation risk – including copper and oil. But he advises that the Federal Reserve will need to increase the interest rate in six months to avoid inflation.

Federal Reserve has ignored older people who largely rely on interest income for living expenses. An important factor to the economy.

4. As this webcast was prior to the Presidential election, he commented on both candidates and said the new President will not have much flexibility. Senator McCain cannot reduce taxes because of the sizeable budget deficit. President-elect Obama will not be able to increase taxes – particularly dividend and capital gains tax rates – because of the negative impact on economic growth.

5. Forecasts a $1 trillion budget deficit in 2009 which at 7% of GDP he views as manageable.

6. Continues to be bullish on equities. Is negative on Europe’s prospects. Expects equities to yield 9%-10% over the next 3 to 5 years. Forecasted 3% GDP growth and 2% inflation. Considers leverage dead.

7. Surge in the dollar has ended.

8. “What worries him most?” Policy maker errors. Not the economy. Not consumers. In September 2007 he predicted a recession. Federal Reserve and Treasury policy makers ignored the signs. “…will need to depend too much on policy makers”.

Click on this link for access Mr. Sri-Kumar’s October 31, 2008 webcast, approximate duration 60 minutes, expires January 31, 2009:

On October 15, 2008 a panel of economists at New York University gave a decidedly bleaker analysis of the financial crisis compared to the analyses Mr. Sri-Kumar has given.

Click on this link for a summary and access to NYU’s October 15 webcast:

Analysis of the Financial Crisis

Mr. Komal Sri-Kumar, TCW Group’s Chief Global Strategist, gives a thorough, almost calming, treatise of the financial crisis in his October 3rd teleconference call.

It is worthy of review.

A summary of Mr. Sri-Kumar's content and conclusions:

Believes the two major reasons crisis came about:
1. Low interest rates in force for a longer time than necessary which encouraged borrowing regardless of qualifications or the ability to repay the loan.
2. Ineffective regulation.

Not heading into a depression. Disinflation is major threat, not inflation.

His expectations include being bearish on oil and bullish on the dollar: oil $75, Euro $1.25, Gold $700. USA recession starts 4th quarter 2008, 1st quarter 2009 and ends March April 2009 with the stock market starting its recovery. Recession will be worldwide. Bullish on USA equities. The $700 billion rescue plan may result in a profit for the Federal government.

Europe will continue to decline and will decline much steeper than other areas. Particularly affected will be the United Kingdom since 20% of its economy relies on the financial sector versus the USA’s 5%.

China’s GDP growth will be reduced perhaps to 7%-8% in 2009 compared to 2008's expected 11% with the complication that China has stopped trying to curb inflation and is striving for growth.

His presentation explores: When will this crisis end? Are foreign investments safer than investing in the United States? What areas of the world offer attractive investment opportunities now? The origins of the ongoing financial crisis. An explanation of what the rescue plan is intended to achieve.

The recording of Mr. Sri- Kumar's Conference Call is available for free to the public domain.

For the Digital Playback call:
Primary Playback Number: (888) 843-8996
International Playback Number: (630) 652-3044
Passcode: 22866500
Call available: October 3, 2008 - November 3, 2008
Broadcast on October 3, 2008 – duration 45 minutes.

Click here to get a copy of the PDF of his presentation.
(* It is not necessary to register on the web site to listen to the conference call, just call the 888#).