President Barack Obama is sending Congress a $3.73-trillion spending blueprint that pledges $1.1-trillion in deficit savings over the next decade through spending cuts and tax increases.
Mr. Obama's new budget projects that the deficit for the current year will surge to an all-time high of $1.65-trillion. That reflects a sizable tax-cut agreement reached with Republicans in December. For 2012, the administration sees the imbalance declining to $1.1-trillion, giving the country a record four straight years of $1-trillion-plus deficits.
Senior administration officials say Mr. Obama would achieve two-thirds of his projected savings through spending cuts that include a five-year freeze on many domestic programs. The other one-third of the savings would come from tax increases, including limits on tax deductions for high-income taxpayers.
Even before Mr. Obama's new budget for 2012 was unveiled on Monday, Republicans were complaining that it did not go far enough. They branded Mr. Obama's budget solutions as far too timid for a country facing an unprecedented flood of red ink that has pushed annual deficits to all-time highs above $1-trillion.
“We're broke,” House Speaker John Boehner said Sunday on NBC's Meet the Press. He was defending a Republican effort not only to squeeze more savings out of Mr. Obama's 2012 budget but also to seek $61-billion in cuts for the current budget year.
House Republicans, many of whom were elected on an anti-deficit pledge, forced their own leaders to nearly double the savings they will seek in the seven months left in the 2011 budget year. Congress has been unable to pass a budget for the current year, and the government has been operating on a stopgap spending bill that expires on March 11.
Jacob Lew, the president's budget director, appearing on CNN's State of the Union, refused to say what size cuts for 2011 would be acceptable to the administration. He stressed a desire to find a compromise that would avoid a government shutdown, something that last occurred during a protracted budget battle between Congress and the Clinton administration.
Mr. Obama's new budget will put forward a plan to achieve $1.1-trillion in deficit reductions over the next decade, according to an administration official who spoke on condition of anonymity in advance of the formal release of the budget.
Two-thirds of those savings would come from spending reductions including $400-billion in savings from a five-year freeze on spending in many domestic government agencies.
The other one-third of savings would come from tax increases. The biggest tax hike would come from a proposal to trim the deductions the wealthiest Americans can claim for charitable contributions, mortgage interest and state and local tax payments. The administration proposed this tax hike last year but it never advanced because of widespread congressional opposition.
In addition to cutting deficits, Mr. Obama's new budget would increase spending in selected areas such as education, infrastructure spending and research and development – areas where the administration believes spending must be boosted for the country to remain competitive in the global economy.
Republicans have called these proposals nonstarters, saying the government can't afford spending increases and should only be debating how much to cut. They have also challenged Mr. Obama's five-year freeze on many domestic programs, saying that the president wants to freeze spending at 2010 levels, after two years of sizable spending gains. They are pushing to take spending back to 2008 levels, before spending ballooned in response to a deep recession.
“Americans don't want a spending freeze at unsustainable levels,” said Senate Republican Leader Mitch McConnell. “They want cuts, dramatic cuts.”
Mr. Boehner said that Mr. Obama's budget “will continue to destroy jobs by spending too much, borrowing too much and taxing too much.”
Mr. Lew rejected criticism that the $1.1-trillion deficit-cutting goal fell far short of the $4-trillion in deficit cuts outlined by the president's own deficit commission in a plan unveiled last December. The commission urged an attack on the biggest causes of the deficits – spending on the benefit programs Medicare, Medicaid and Social Security – and defence spending.
Mr. Obama's budget avoided painful choices in those areas although it does call for $78-billion in reductions to Pentagon spending over the next decade by trimming what it views as unnecessary weapons programs such as the C-17 aircraft, the alternative engine for the Joint Strike Fighter aircraft and the Marine expeditionary vehicle.
Administration officials said that the savings from limiting tax deductions for high income taxpayers would be used to pay for keeping the Alternative Minimum Tax from hitting more middle-class families over the next two years.
Another $62-billion in savings would be devoted to preventing cuts in payments to doctors in the Medicare program over the next two years. Congress has for several years blocked the cuts from taking effect, but the effort drove the deficits higher because lawmakers did not find offsetting savings.
While the administration's budget will propose freezing domestic programs that account for about one-tenth of the total budget, some programs in this category will also see sizable declines in spending.
Community development block grants would be trimmed by $300-million, the government's program to help low-income people pay their heating bills would be cut in half for a savings of $2.5-billion and a Great Lakes environmental restoration program would be cut by 25 per cent to save $125-million.
The budget will propose $1-billion in cuts in grants for large airports, almost $1-billion in reduced support to states for water treatment plants and other infrastructure programs and savings from consolidating public health programs run by the Center for Disease Control and various U.S. Forest Service programs.
The administration will also propose saving $100-billion over a decade from Pell Grants and other higher education programs through belt-tightening, with the savings used to keep the maximum college financial aid award at $5,550, according to an administration official who spoke on condition of anonymity in advance of the budget's Monday release.
The $1.1-trillion in savings would reduce the deficit as a percentage of the total economy to close to 3 per cent of GDP by the middle of this decade. The deficit is projected by the Congressional Budget Office to surge to an all-time high of $1.5-trillion this year, which would be 9.8 per cent of the economy and mark the third consecutive $1-trillion-plus budget gap.
The surging deficits reflect the deep 2007-2009 recession, which cut into government tax revenues as millions were thrown out of work and prompted massive government spending to jump-start economic growth and stabilize the banking system.
While Republicans scored significant victories in the November elections by attacking the soaring deficits, the administration has argued that the spending was needed to keep the country from falling into an even deeper economic slump.
2011년 2월 14일 월요일
2011년 2월 10일 목요일
Fed's Warsh Quits; Bernanke Adviser Questioned QE2
Federal Reserve Governor Kevin Warsh, who was one of Chairman Ben S. Bernanke’s closest financial-crisis advisers before becoming the only governor to question the expansion of record monetary stimulus in November, resigned after five years at the central bank.
Warsh, 40, a former investment banker who was the youngest- ever Fed governor when then-President George W. Bush appointed him in 2006, will leave “on or around March 31,” he said in a letter today to President Barack Obama that was released by the Fed in Washington.
His departure may give Bernanke a stronger hand to complete or potentially expand $600 billion in Treasury purchases through June. At the same time, Bernanke loses a link to Wall Street executives and Republican politicians as he carries out Congress’s overhaul of financial regulation and faces criticism from a political party that in the midterm election gained control of the U.S. House.
“You lose a forceful internal advocate for ending QE and trying to renormalize policy quicker,” said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007, referring to the stimulus program known as quantitative easing.
The move also “deepens the void” in financial-markets expertise at the Board of Governors after former Vice Chairman Donald Kohn, a 40-year central bank veteran, left in September, said Reinhart, a scholar at the American Enterprise Institute in Washington. That may leave Bernanke more dependent for market insight on New York Fed officials including William Dudley, president of the regional bank, Reinhart said.
Warsh’s term would have run through January 2018; most Fed governors don’t serve out their full terms. His resignation opens a second vacancy on the seven-member Board of Governors and leaves Elizabeth Duke, a former community banker, as the only governor not appointed or reappointed by Obama.
Duke’s term expires in January 2012, and she can stay after that until a replacement is appointed. Obama’s nomination of Peter Diamond, a Nobel Prize-winning economist from the Massachusetts Institute of Technology, is pending in the Senate again after failing last year.
“I am honored to have served at a time of great consequence,” Warsh, who never dissented from a Federal Open Market Committee decision, said in his resignation letter. Bernanke said in a statement that Warsh’s “intimate knowledge of financial markets and institutions proved invaluable during the recent crisis.”
Warsh is still on good terms with Bernanke and is leaving because he sees it as the right time with an improving economy and not because of a policy dispute, said another person familiar with the matter who spoke on condition of anonymity. He’s likely to return to the private sector.
On Nov. 8, he said in an op-ed and speech that the Fed’s Treasury buying “poses nontrivial risks” even after he voted to support the stimulus. He hasn’t publicly discussed his views on the purchases since November and backed the policy at the Fed’s subsequent meetings in December and January.
“When non-traditional tools are needed to loosen policy and markets are functioning more or less normally -- even with output and employment below trend -- the risk-reward ratio for policy action is decidedly less favorable,” Warsh said in the speech in New York. “As a result, we cannot and should not be as aggressive as conventional policy rules -- cultivated in more benign environments -- might judge appropriate.”
“The hurdle for dissenting for a governor is probably somewhat higher” than for a regional Fed president, Reinhart said. Last year, Kansas City Fed President Thomas Hoenig dissented in favor of tighter policy at all eight FOMC meetings.
Warsh’s ambitions go back to his high school days near Albany, New York, where he had a business buying and distributing neon novelties, according to a 1987 article in the Albany Times-Union.
“He was so persistent,” said Brady, who became his thesis adviser at Stanford. “He said he would get the best grade in the class, and he did.”
After graduating from Stanford, Warsh earned a law degree from Harvard University but never practiced, opting instead to join Morgan Stanley in New York, where he worked in the mergers and acquisitions department from 1995 to 2002. He then joined the White House, advising on policies including the government- chartered home-finance companies Fannie Mae and Freddie Mac.
Warsh was an architect of the terms the Treasury dictated to nine of the biggest U.S. banks in October 2008 in return for a $125 billion injection of government funds. He played a central role in negotiating the sale of the ailing Wachovia Corp., mediating a takeover fight that erupted between Citigroup Inc. and Wells Fargo & Co.
In January 2009, Warsh was passed over for the presidency of the New York Fed in favor of Dudley, a former Goldman Sachs Group Inc. economist and leading advocate of the Fed’s stimulus that’s been dubbed QE2 by investors for a second round of quantitative easing.
Warsh has served as the Fed’s representative to the Group of 20 and the Board of Governors’ emissary to emerging and advanced economies in Asia. He also managed Fed operations and personnel as the governor assigned to administration.
“He is an extraordinarily talented guy who made big contributions to the Federal Reserve,” Atlanta Fed President Dennis Lockhart said in an interview today. Warsh received a standing ovation after a December speech to former Atlanta Fed directors, Lockhart said. “I regret seeing him go.”
Warsh in 2002 married Jane Lauder, an heir to her grandmother Estee Lauder’s cosmetics fortune, making him wealthier than the rest of the Fed governors combined. His wife is the global president and general manager of Estee Lauder Cos.’ Origins and Ojon brands and is on the company’s board of directors.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Warsh, 40, a former investment banker who was the youngest- ever Fed governor when then-President George W. Bush appointed him in 2006, will leave “on or around March 31,” he said in a letter today to President Barack Obama that was released by the Fed in Washington.
His departure may give Bernanke a stronger hand to complete or potentially expand $600 billion in Treasury purchases through June. At the same time, Bernanke loses a link to Wall Street executives and Republican politicians as he carries out Congress’s overhaul of financial regulation and faces criticism from a political party that in the midterm election gained control of the U.S. House.
“You lose a forceful internal advocate for ending QE and trying to renormalize policy quicker,” said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007, referring to the stimulus program known as quantitative easing.
The move also “deepens the void” in financial-markets expertise at the Board of Governors after former Vice Chairman Donald Kohn, a 40-year central bank veteran, left in September, said Reinhart, a scholar at the American Enterprise Institute in Washington. That may leave Bernanke more dependent for market insight on New York Fed officials including William Dudley, president of the regional bank, Reinhart said.
Five-Year Term
Separately, Dudley will probably be reappointed to a five- year term starting March 1, a person familiar with the matter said today. He was named New York Fed chief in January 2009 to finish the term of Timothy F. Geithner, who became Treasury Secretary. The board of the regional bank appoints presidents to five-year terms, subject to approval by the Board of Governors in Washington.Warsh’s term would have run through January 2018; most Fed governors don’t serve out their full terms. His resignation opens a second vacancy on the seven-member Board of Governors and leaves Elizabeth Duke, a former community banker, as the only governor not appointed or reappointed by Obama.
Duke’s term expires in January 2012, and she can stay after that until a replacement is appointed. Obama’s nomination of Peter Diamond, a Nobel Prize-winning economist from the Massachusetts Institute of Technology, is pending in the Senate again after failing last year.
Second Vice Chairman
The White House also must designate a Fed governor to be a second vice chairman in charge of supervision, as required by last year’s Dodd-Frank Act overhauling financial regulation. It has two other regulatory vacancies in the chiefs of the Office of the Comptroller of the Currency and the agency overseeing Fannie Mae and Freddie Mac.“I am honored to have served at a time of great consequence,” Warsh, who never dissented from a Federal Open Market Committee decision, said in his resignation letter. Bernanke said in a statement that Warsh’s “intimate knowledge of financial markets and institutions proved invaluable during the recent crisis.”
Warsh is still on good terms with Bernanke and is leaving because he sees it as the right time with an improving economy and not because of a policy dispute, said another person familiar with the matter who spoke on condition of anonymity. He’s likely to return to the private sector.
‘Greater Force’
Warsh staked out an anti-inflation stance on monetary policy in September 2009, when he published a Wall Street Journal op-ed and gave a speech saying the Fed may need to raise interest rates with “greater force” than it has in the past. In June, he said any decision to expand the $2.3 trillion balance sheet must be subject to “strict scrutiny.”On Nov. 8, he said in an op-ed and speech that the Fed’s Treasury buying “poses nontrivial risks” even after he voted to support the stimulus. He hasn’t publicly discussed his views on the purchases since November and backed the policy at the Fed’s subsequent meetings in December and January.
“When non-traditional tools are needed to loosen policy and markets are functioning more or less normally -- even with output and employment below trend -- the risk-reward ratio for policy action is decidedly less favorable,” Warsh said in the speech in New York. “As a result, we cannot and should not be as aggressive as conventional policy rules -- cultivated in more benign environments -- might judge appropriate.”
‘Soft Dissent’
John Ryding, a former Fed researcher who’s now chief economist at RDQ Economics LLC in New York, said that day the speech was a “soft dissent” that expressed concern about the policy without a formal vote against it. Warsh “needs to ‘man up’ and put his vote where his mouth is,” Stephen Stanley, an economist who’s criticized the Fed stimulus, said in a Nov. 8 research note.“The hurdle for dissenting for a governor is probably somewhat higher” than for a regional Fed president, Reinhart said. Last year, Kansas City Fed President Thomas Hoenig dissented in favor of tighter policy at all eight FOMC meetings.
Warsh’s ambitions go back to his high school days near Albany, New York, where he had a business buying and distributing neon novelties, according to a 1987 article in the Albany Times-Union.
College Freshman
As a freshman at Stanford University in California, Warsh pestered political-science professor David Brady to attend a senior seminar that wasn’t open to first-year students, Brady said in 2009.“He was so persistent,” said Brady, who became his thesis adviser at Stanford. “He said he would get the best grade in the class, and he did.”
After graduating from Stanford, Warsh earned a law degree from Harvard University but never practiced, opting instead to join Morgan Stanley in New York, where he worked in the mergers and acquisitions department from 1995 to 2002. He then joined the White House, advising on policies including the government- chartered home-finance companies Fannie Mae and Freddie Mac.
Warsh was an architect of the terms the Treasury dictated to nine of the biggest U.S. banks in October 2008 in return for a $125 billion injection of government funds. He played a central role in negotiating the sale of the ailing Wachovia Corp., mediating a takeover fight that erupted between Citigroup Inc. and Wells Fargo & Co.
Intensified Crisis
Days before Lehman Brothers Holdings Inc.’s bankruptcy in 2008 intensified the crisis, a Fed staff member e-mailed Warsh to say she hoped “we don’t have to protect” some Lehman debt holders, according to documents released by the Financial Crisis Inquiry Commission. Warsh replied an e-mail 30 minutes later that “I hope we dont (sic) protect anything!”In January 2009, Warsh was passed over for the presidency of the New York Fed in favor of Dudley, a former Goldman Sachs Group Inc. economist and leading advocate of the Fed’s stimulus that’s been dubbed QE2 by investors for a second round of quantitative easing.
Warsh has served as the Fed’s representative to the Group of 20 and the Board of Governors’ emissary to emerging and advanced economies in Asia. He also managed Fed operations and personnel as the governor assigned to administration.
“He is an extraordinarily talented guy who made big contributions to the Federal Reserve,” Atlanta Fed President Dennis Lockhart said in an interview today. Warsh received a standing ovation after a December speech to former Atlanta Fed directors, Lockhart said. “I regret seeing him go.”
Warsh in 2002 married Jane Lauder, an heir to her grandmother Estee Lauder’s cosmetics fortune, making him wealthier than the rest of the Fed governors combined. His wife is the global president and general manager of Estee Lauder Cos.’ Origins and Ojon brands and is on the company’s board of directors.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
U.S. Wholesale Inventories Rise More Than Forecast
Inventories at U.S. wholesalers rose more than forecast in December as distributors tried to keep up with improving sales.
The 1 percent increase in stockpiles compared with a 0.7 percent gain median forecast in the Bloomberg News survey and followed an unchanged reading in November, Commerce Department figures showed today in Washington. Sales grew 0.4 percent to $371.5 billion, the highest level since August 2008.
Strengthening demand indicates orders to factories will keep climbing, which will keep manufacturing at the forefront of the economic expansion in coming months. The need to replenish stockpiles will probably contribute to growth in coming months.
“Demand is coming back and companies are seeing the need to keep their shelves well stocked,” said Sal Guatieri, a senior economist at BMO Capital Markets Inc. in Toronto. “Manufacturers are cranking up production to keep up with growing strength in exports and growing domestic demand.”
The median projection for wholesale inventories was based on a survey of 35 economists whose estimates ranged from an increase of 1.8 percent to a decline of 0.4 percent. The November reading was revised from a previously reported 0.2 percent decline.
Another report today showed the number of Americans filing first-time claims for unemployment insurance fell last week to the lowest level since July 2008, showing further strength in the labor market after the jobless rate declined to a 21-month low.
Stocks held earlier losses after the reports as profit forecasts at Cisco Systems Inc. and PepsiCo Inc. trailed analyst estimates and concern grew about accelerating global inflation. The Standard & Poor’s 500 Index fell 0.7 percent to 1,311.94 at 10:03 a.m. in New York.
The increase in stockpiles, which would normally lead to an upward revision to fourth-quarter growth, may reflect a surge in imports which would widen the trade gap and counter the positive contribution from inventories.
The Commerce Department will release trade balance figures tomorrow. The median forecast of economists surveyed by Bloomberg is for a $40.5 billion shortfall, up from the $38.3 billion recorded a month earlier.
Wholesalers make up about 30 percent of all business stockpiles. Factory inventories, which comprise about 38 percent of the total, rose 1.1 percent in December, the Commerce Department said Feb. 3. Retail stockpiles, which make up the rest, will be included in the Feb. 15 business inventories report.
Wholesalers’ stockpiles of durable goods, or those meant to last several years, increased 0.8 percent in December, led by automobiles and electrical equipment, today’s report showed.
The value of unsold non-durable goods inventories increased 1.2 percent as purchases dropped 0.3 percent.
“Prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies,” Federal Reserve Chairman Ben S. Bernanke told a congressional committee yesterday.
At the current sales pace, wholesalers had enough goods on hand to last 1.16 months in December, close to the record low of 1.13 months reached in April.
Holiday sales rose 5.5 percent, the best performance since 2005, according to MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms. Consumer spending rose at a 4.4 percent rate in the fourth quarter, the fastest since early 2006.
“We’ve managed our business prudently, keeping inventories in line and lowering our incentive costs while remaining competitive,” Don Johnson, vice president for U.S. sales at GM, said on a Jan. 4 conference call.
Coach Inc., a leading leather goods producer and marketer, saw North American same-store sales rise 13 percent in the quarter ended Jan. 1 from a year earlier, Chief Executive Officer Lew Frankfort said on a conference call from New York on Jan. 25.
“Our current inventories support the strong underlying business trends, and will allow us to maximize sales this spring,” Michael Devine, Coach’s chief financial officer, said on the call. “We’ve been right sizing our inventories this year, bringing them up to more appropriate levels to support our growing businesses.”
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
The 1 percent increase in stockpiles compared with a 0.7 percent gain median forecast in the Bloomberg News survey and followed an unchanged reading in November, Commerce Department figures showed today in Washington. Sales grew 0.4 percent to $371.5 billion, the highest level since August 2008.
Strengthening demand indicates orders to factories will keep climbing, which will keep manufacturing at the forefront of the economic expansion in coming months. The need to replenish stockpiles will probably contribute to growth in coming months.
“Demand is coming back and companies are seeing the need to keep their shelves well stocked,” said Sal Guatieri, a senior economist at BMO Capital Markets Inc. in Toronto. “Manufacturers are cranking up production to keep up with growing strength in exports and growing domestic demand.”
The median projection for wholesale inventories was based on a survey of 35 economists whose estimates ranged from an increase of 1.8 percent to a decline of 0.4 percent. The November reading was revised from a previously reported 0.2 percent decline.
Another report today showed the number of Americans filing first-time claims for unemployment insurance fell last week to the lowest level since July 2008, showing further strength in the labor market after the jobless rate declined to a 21-month low.
Jobless Claims
Applications for jobless benefits decreased by 36,000, more than forecast, to 383,000 in the week ended Feb. 4, Labor Department figures showed. Economists forecast claims would fall to 410,000, according to the median estimate in a Bloomberg survey.Stocks held earlier losses after the reports as profit forecasts at Cisco Systems Inc. and PepsiCo Inc. trailed analyst estimates and concern grew about accelerating global inflation. The Standard & Poor’s 500 Index fell 0.7 percent to 1,311.94 at 10:03 a.m. in New York.
The increase in stockpiles, which would normally lead to an upward revision to fourth-quarter growth, may reflect a surge in imports which would widen the trade gap and counter the positive contribution from inventories.
The Commerce Department will release trade balance figures tomorrow. The median forecast of economists surveyed by Bloomberg is for a $40.5 billion shortfall, up from the $38.3 billion recorded a month earlier.
Influence on Growth
Inventory rebuilding, a major driver of the early stages of the economic recovery, slowed in the fourth quarter as sales jumped, detracting 3.7 percentage points from gross domestic product, according to the Commerce Department data.Wholesalers make up about 30 percent of all business stockpiles. Factory inventories, which comprise about 38 percent of the total, rose 1.1 percent in December, the Commerce Department said Feb. 3. Retail stockpiles, which make up the rest, will be included in the Feb. 15 business inventories report.
Wholesalers’ stockpiles of durable goods, or those meant to last several years, increased 0.8 percent in December, led by automobiles and electrical equipment, today’s report showed.
The value of unsold non-durable goods inventories increased 1.2 percent as purchases dropped 0.3 percent.
Inventory Breakdown
The gain in non-durable goods stockpiles may have been influenced by higher commodity prices. The average price of a barrel of crude oil traded on the New York Mercantile Exchange was $89.23 in December, compared with $84.31 in November. Corn, wheat and soybean futures this week surged to the highest level since 2008.“Prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies,” Federal Reserve Chairman Ben S. Bernanke told a congressional committee yesterday.
At the current sales pace, wholesalers had enough goods on hand to last 1.16 months in December, close to the record low of 1.13 months reached in April.
Holiday sales rose 5.5 percent, the best performance since 2005, according to MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms. Consumer spending rose at a 4.4 percent rate in the fourth quarter, the fastest since early 2006.
Sales Climb
Car sales began the new year on a strong note. General Motors Co. posted a 22 percent gain in January from a year earlier, while Toyota Motor Corp. saw a 17 percent increase, the companies announced last week.“We’ve managed our business prudently, keeping inventories in line and lowering our incentive costs while remaining competitive,” Don Johnson, vice president for U.S. sales at GM, said on a Jan. 4 conference call.
Coach Inc., a leading leather goods producer and marketer, saw North American same-store sales rise 13 percent in the quarter ended Jan. 1 from a year earlier, Chief Executive Officer Lew Frankfort said on a conference call from New York on Jan. 25.
“Our current inventories support the strong underlying business trends, and will allow us to maximize sales this spring,” Michael Devine, Coach’s chief financial officer, said on the call. “We’ve been right sizing our inventories this year, bringing them up to more appropriate levels to support our growing businesses.”
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
China Alters Reserve Ratio Requirements for Some Banks, Securities Reports
China’s central bank imposed differentiated reserve requirement ratios on some of the nation’s small and medium-sized lenders after January loan growth surged, the official China Securities Journal reported today, citing an unidentified person.
The adjustment, which mainly affected city commercial banks, was made after the Chinese New Year holiday that ended Feb. 8, according to the newspaper, an affiliate of the state-run Xinhua news agency. New lending in January exceeded 1.2 trillion yuan ($182 billion) even after some banks slowed or suspended credit later in the month, according to the report, which didn’t specify whether the ratios were raised or lowered.
The People’s Bank of China this week raised benchmark interest rates for a third time since mid-October to rein in loan growth and as January inflation is estimated to have quickened to a 30-month high. Governor Zhou Xiaochuan on Jan. 4 pledged to use a so-called differentiated reserve ratio system to improve liquidity management this year in addition to tools including interest rates, official reserve ratios and bill sales.
The use of the differentiated ratio, which was probably an increase, “may be a prelude to the broader use of differentiated reserve ratios - this would be a useful tool to control lending by penalizing the most aggressive banks,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. The reported adjustment may suggest smaller lenders were “more active” in new lending last month, he said.
Small Lenders
Banks may have extended 1.1 trillion yuan of new loans last month, of which 70 percent were made by small lenders, Caixin Online reported today, citing unidentified analysts in financial institutions.
The differentiated reserve requirement system involves setting individual ratios for lenders according to the condition of their balance sheets. Based on the central bank’s formula, the lower a bank’s capital adequacy ratio, the more likely it is to face a different ratio, the Securities Journal said, citing an unidentified analyst. The paper didn’t identify which banks were affected by the adjustment.
After a universal reserve ratio increase last month, the requirement now stands at 19 percent for the biggest banks, excluding any additional restrictions imposed on individual lenders and not publicly announced. Ratios for smaller banks are about 2 percentage points lower.
There remains a “clear need” to mop up liquidity added to the economy from maturing central bank bills and continued foreign-exchange inflows, Kowalczyk said, estimating about 1.5 trillion yuan of notes will come due through April. To rein in liquidity, the central bank may boost reserve ratios universally again later this month or in early March because yields at bill sales, an alternative tool to soak up excess cash, remain too low to attract bids from banks, he added.
--Li Yanping. Editor: Nerys Avery, Sunil Jagtiani
To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net
The adjustment, which mainly affected city commercial banks, was made after the Chinese New Year holiday that ended Feb. 8, according to the newspaper, an affiliate of the state-run Xinhua news agency. New lending in January exceeded 1.2 trillion yuan ($182 billion) even after some banks slowed or suspended credit later in the month, according to the report, which didn’t specify whether the ratios were raised or lowered.
The People’s Bank of China this week raised benchmark interest rates for a third time since mid-October to rein in loan growth and as January inflation is estimated to have quickened to a 30-month high. Governor Zhou Xiaochuan on Jan. 4 pledged to use a so-called differentiated reserve ratio system to improve liquidity management this year in addition to tools including interest rates, official reserve ratios and bill sales.
The use of the differentiated ratio, which was probably an increase, “may be a prelude to the broader use of differentiated reserve ratios - this would be a useful tool to control lending by penalizing the most aggressive banks,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. The reported adjustment may suggest smaller lenders were “more active” in new lending last month, he said.
Small Lenders
Banks may have extended 1.1 trillion yuan of new loans last month, of which 70 percent were made by small lenders, Caixin Online reported today, citing unidentified analysts in financial institutions.
The differentiated reserve requirement system involves setting individual ratios for lenders according to the condition of their balance sheets. Based on the central bank’s formula, the lower a bank’s capital adequacy ratio, the more likely it is to face a different ratio, the Securities Journal said, citing an unidentified analyst. The paper didn’t identify which banks were affected by the adjustment.
After a universal reserve ratio increase last month, the requirement now stands at 19 percent for the biggest banks, excluding any additional restrictions imposed on individual lenders and not publicly announced. Ratios for smaller banks are about 2 percentage points lower.
There remains a “clear need” to mop up liquidity added to the economy from maturing central bank bills and continued foreign-exchange inflows, Kowalczyk said, estimating about 1.5 trillion yuan of notes will come due through April. To rein in liquidity, the central bank may boost reserve ratios universally again later this month or in early March because yields at bill sales, an alternative tool to soak up excess cash, remain too low to attract bids from banks, he added.
--Li Yanping. Editor: Nerys Avery, Sunil Jagtiani
To contact Bloomberg News staff for this story: Li Yanping in Beijing at +86-10-6649-7568 or yli16@bloomberg.net
Mr. 210% Sees M&A Boom as Best Deflation Slayer: William Pesek
Steel company mergers are a little below Timothy Geithner’s radar. Yet the U.S. Treasury secretary should think long and hard about a recent one in Japan.
On the surface, Nippon Steel Corp. and Sumitomo Metal Industries Ltd. joining forces to become the world’s second- largest producer isn’t wildly interesting. It’s the “why” below it that’s important: Such deals are now the official policy of a Japanese government desperate to boost its global standing.
Expect a 1980s-like overseas-buying binge amid a strong yen, a simplified takeover approval process and a sudden urgency for economic relevance at the highest levels of government.
This burst of acquisitiveness has China and the rest of developing Asia written all over it. Japan has been painfully slow to realize the world is passing it by and now is racing to again be relevant. No fruit hangs lower than mergers and acquisitions, and Japan’s focus there is music to the ears of bulls like hedge-fund manager Curtis Freeze. They see an M&A boom as Japan’s way out of deflation and the world’s biggest public debt.
Even when Geithner was a staffer in Bill Clinton’s Treasury Department in the 1990s, the U.S. was urging Japan to contribute more to world growth. Yet the U.S. may not be ecstatic about Japan’s new game plan. Instead of reflecting free-market principles, Japan’s M&A tear will have more of a Chinese flavor -- more “Beijing consensus” than “Washington consensus.”
You may think you’ve seen this movie before. That economic machine known as Japan Inc. with its incestuous ties between government and industry is what delivered the nation to today’s heights. The public-private partnership worked wonders until markets and banks crashed two decades ago.
There’s a crucial difference, though. Japan’s ‘80s-era shopping binge was about vanity. Ego was behind headline- generating purchases of Rockefeller Center and the Pebble Beach golf course. It wasn’t Japan’s government that had company presidents bidding on every Van Gogh, Picasso and Monet up for auction. It was hubris. Many of those investments ended badly, or were dumped at fire-sale prices as cash became scarce.
This time, the government will lead the charge, China- style, to ensure deals are strategic, logical and primed for long-term growth. Japan needs raw materials, and bigger is better when bidding for them overseas. The laissez-faire crowd won’t be happy to see Japan Inc. re-assert itself. What’s more important, though, is that the end justifies the means.
U.S. Brand
The collapse of Lehman Brothers Holdings Inc. irreparably damaged the U.S.-capitalism brand. When you are competing with a country that’s run like a company -- China -- the lines between government and the private sector are bound to disappear.
It may be too late for Japan, which for decades dragged its feet. The extent to which Japan is playing catch up was apparent recently when Korea Electric Power Corp. led a group that won a $18.6 billion order to build nuclear power plants for the United Arab Emirates. The size of the deal shocked Tokyo.
Freeze and his ilk believe inbound and outbound M&A is the shock Japan’s flat-lining economy needs. And Freeze, chairman of Honolulu-based Prospect Asset Management Inc., has done well by clients by putting his money where his mouth is: His firm’s Japan-focused hedge fund returned 210 percent last year.
Mr. 210 Percent
So how does Mr. 210 Percent, as Freeze is sometimes called in Tokyo, view the government’s M&A push?
“The best is yet to come,” he says, predicting management buyouts where companies are taken private and delisted and straightforward takeover bids will rapidly pick up pace.
Japan needs a bit of this drama. Every January opens with a barrage of predictions that this is Japan’s year, the one in which growth will return. Each time, hopes are thwarted.
Last year was a banner one for disappointment. Deflation deepened, Japan Airlines Corp. went bankrupt, Toyota Motor Corp. became a punch line, Sony Corp. slid further toward irrelevance and China became Asia’s biggest economy.
Yet here is a sign Japan gets it. The benefits of increased M&A activity might be profound and provide a much-needed growth engine to help Japan rely less on debt and zero interest rates.
Increased productivity, improved corporate governance and fresh economic growth rank near the top of any investor’s wish list for Japan. All of these concerns, and more, might be addressed by domestic companies eliminating inefficiencies and executives looking overseas for greater market share and growth opportunities.
It won’t fix all of Japan’s problems. The population still is aging too fast, the birthrate is too low, job growth is too anemic and entrepreneurship is too rare. Yet M&A has the power to shake up an economy that’s too rigid and insular for its own good. If giving Japan Inc. a new lifeline can do that, then so be it. Could Geithner really disagree?
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
On the surface, Nippon Steel Corp. and Sumitomo Metal Industries Ltd. joining forces to become the world’s second- largest producer isn’t wildly interesting. It’s the “why” below it that’s important: Such deals are now the official policy of a Japanese government desperate to boost its global standing.
Expect a 1980s-like overseas-buying binge amid a strong yen, a simplified takeover approval process and a sudden urgency for economic relevance at the highest levels of government.
This burst of acquisitiveness has China and the rest of developing Asia written all over it. Japan has been painfully slow to realize the world is passing it by and now is racing to again be relevant. No fruit hangs lower than mergers and acquisitions, and Japan’s focus there is music to the ears of bulls like hedge-fund manager Curtis Freeze. They see an M&A boom as Japan’s way out of deflation and the world’s biggest public debt.
Even when Geithner was a staffer in Bill Clinton’s Treasury Department in the 1990s, the U.S. was urging Japan to contribute more to world growth. Yet the U.S. may not be ecstatic about Japan’s new game plan. Instead of reflecting free-market principles, Japan’s M&A tear will have more of a Chinese flavor -- more “Beijing consensus” than “Washington consensus.”
China-Style Wave
This merger wave is, for better or worse, going to be government directed. China’s rise is beginning to catalyze Japan, as many economic observers long expected, though not exactly as they had hoped. This is more an attempt to emulate China’s state-capitalism than buyout legends like Henry Kravis.You may think you’ve seen this movie before. That economic machine known as Japan Inc. with its incestuous ties between government and industry is what delivered the nation to today’s heights. The public-private partnership worked wonders until markets and banks crashed two decades ago.
There’s a crucial difference, though. Japan’s ‘80s-era shopping binge was about vanity. Ego was behind headline- generating purchases of Rockefeller Center and the Pebble Beach golf course. It wasn’t Japan’s government that had company presidents bidding on every Van Gogh, Picasso and Monet up for auction. It was hubris. Many of those investments ended badly, or were dumped at fire-sale prices as cash became scarce.
This time, the government will lead the charge, China- style, to ensure deals are strategic, logical and primed for long-term growth. Japan needs raw materials, and bigger is better when bidding for them overseas. The laissez-faire crowd won’t be happy to see Japan Inc. re-assert itself. What’s more important, though, is that the end justifies the means.
U.S. Brand
The collapse of Lehman Brothers Holdings Inc. irreparably damaged the U.S.-capitalism brand. When you are competing with a country that’s run like a company -- China -- the lines between government and the private sector are bound to disappear.
It may be too late for Japan, which for decades dragged its feet. The extent to which Japan is playing catch up was apparent recently when Korea Electric Power Corp. led a group that won a $18.6 billion order to build nuclear power plants for the United Arab Emirates. The size of the deal shocked Tokyo.
Freeze and his ilk believe inbound and outbound M&A is the shock Japan’s flat-lining economy needs. And Freeze, chairman of Honolulu-based Prospect Asset Management Inc., has done well by clients by putting his money where his mouth is: His firm’s Japan-focused hedge fund returned 210 percent last year.
Mr. 210 Percent
So how does Mr. 210 Percent, as Freeze is sometimes called in Tokyo, view the government’s M&A push?
“The best is yet to come,” he says, predicting management buyouts where companies are taken private and delisted and straightforward takeover bids will rapidly pick up pace.
Japan needs a bit of this drama. Every January opens with a barrage of predictions that this is Japan’s year, the one in which growth will return. Each time, hopes are thwarted.
Last year was a banner one for disappointment. Deflation deepened, Japan Airlines Corp. went bankrupt, Toyota Motor Corp. became a punch line, Sony Corp. slid further toward irrelevance and China became Asia’s biggest economy.
Yet here is a sign Japan gets it. The benefits of increased M&A activity might be profound and provide a much-needed growth engine to help Japan rely less on debt and zero interest rates.
Increased productivity, improved corporate governance and fresh economic growth rank near the top of any investor’s wish list for Japan. All of these concerns, and more, might be addressed by domestic companies eliminating inefficiencies and executives looking overseas for greater market share and growth opportunities.
It won’t fix all of Japan’s problems. The population still is aging too fast, the birthrate is too low, job growth is too anemic and entrepreneurship is too rare. Yet M&A has the power to shake up an economy that’s too rigid and insular for its own good. If giving Japan Inc. a new lifeline can do that, then so be it. Could Geithner really disagree?
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
Merkel Coalition Set to Back Alternative ECB Candidates After Weber Exit
German Chancellor Angela Merkel’s coalition parties have turned their back on Bundesbank President Axel Weber, saying they are prepared to accept alternative candidates to head up the European Central Bank.
Two days after his withdrawal as the front-runner to succeed Jean-Claude Trichet, Weber was due in Berlin today as Merkel’s coalition partners pressed her to shift her focus to candidates who will push German goals of fiscal rectitude to boost the euro’s stability.
“It’s about content first and foremost, not the person,” Hans-Peter Friedrich, the parliamentary group leader of Merkel’s CSU Bavarian allies, said in an interview in Berlin yesterday. While the CSU supported Weber, “that doesn’t mean you can’t go for other candidates who have the same stringent policy views.”
Weber’s still-unexplained exit from the ECB race prompted a barrage of negative headlines for Merkel yesterday, 10 days before the start of elections in seven of Germany’s 16 states. The Financial Times Deutschland said Weber’s move was “an affront” to Merkel, while the best-selling Bild newspaper said it was “a blow to the chancellor, and to the euro.”
Weber canceled a planned meeting with French officials that includes German Finance Minister Wolfgang Schaeuble scheduled for today. Bundesbank board member Andreas Dombret will take his place at the talks with French Finance Minister Christine Lagarde and French central bank governor Christian Noyer, a Bundesbank spokesman said. The spokesman declined to comment on whether Weber will meet with Merkel.
“What a surprise,” Lagarde told journalists in Paris yesterday about the Weber situation. “I’m dumbfounded.”
Weber’s public criticism of the ECB’s bond-buying program to help stem the sovereign debt crisis may have stoked euro-area resistance to the German’s appointment to the ECB post.
“For the German position this is a day of bad news, but it will pass,” Schwarzer said in an interview. “This will go by as long as Germany keeps up its strong negotiating position on the more important things -- the governance mechanisms that have to be put in place in the euro zone.”
While there were “reservations” over Weber’s policy among fellow euro-area governments, “that’s exactly the kind of strict attitude that we see as the right one,” said Hermann Otto Solms, finance and economy spokesman for Merkel’s Free Democratic Party coalition partner.
For all that, the question of ECB succession “has to be separated somewhat from questions of content,” Solms said in an interview. “We don’t have to push through the person, so we can take an even tougher negotiating position on content.”
Trichet’s successor “doesn’t have to be a German,” said Michael Meister, senior finance and economy spokesman for Merkel’s Christian Democrats. “It has to be a good person.”
To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net
Two days after his withdrawal as the front-runner to succeed Jean-Claude Trichet, Weber was due in Berlin today as Merkel’s coalition partners pressed her to shift her focus to candidates who will push German goals of fiscal rectitude to boost the euro’s stability.
“It’s about content first and foremost, not the person,” Hans-Peter Friedrich, the parliamentary group leader of Merkel’s CSU Bavarian allies, said in an interview in Berlin yesterday. While the CSU supported Weber, “that doesn’t mean you can’t go for other candidates who have the same stringent policy views.”
Weber’s still-unexplained exit from the ECB race prompted a barrage of negative headlines for Merkel yesterday, 10 days before the start of elections in seven of Germany’s 16 states. The Financial Times Deutschland said Weber’s move was “an affront” to Merkel, while the best-selling Bild newspaper said it was “a blow to the chancellor, and to the euro.”
Weber canceled a planned meeting with French officials that includes German Finance Minister Wolfgang Schaeuble scheduled for today. Bundesbank board member Andreas Dombret will take his place at the talks with French Finance Minister Christine Lagarde and French central bank governor Christian Noyer, a Bundesbank spokesman said. The spokesman declined to comment on whether Weber will meet with Merkel.
“What a surprise,” Lagarde told journalists in Paris yesterday about the Weber situation. “I’m dumbfounded.”
Weber’s public criticism of the ECB’s bond-buying program to help stem the sovereign debt crisis may have stoked euro-area resistance to the German’s appointment to the ECB post.
‘It Will Pass’
Merkel, freed of the need to push a Weber candidacy, may be able to turn his departure to her advantage as she pursues her agenda on reshaping Europe to prevent future crises, according to Daniela Schwarzer, a European policy analyst at the Berlin- based German Institute for International and Security Affairs.“For the German position this is a day of bad news, but it will pass,” Schwarzer said in an interview. “This will go by as long as Germany keeps up its strong negotiating position on the more important things -- the governance mechanisms that have to be put in place in the euro zone.”
While there were “reservations” over Weber’s policy among fellow euro-area governments, “that’s exactly the kind of strict attitude that we see as the right one,” said Hermann Otto Solms, finance and economy spokesman for Merkel’s Free Democratic Party coalition partner.
For all that, the question of ECB succession “has to be separated somewhat from questions of content,” Solms said in an interview. “We don’t have to push through the person, so we can take an even tougher negotiating position on content.”
Trichet’s successor “doesn’t have to be a German,” said Michael Meister, senior finance and economy spokesman for Merkel’s Christian Democrats. “It has to be a good person.”
To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net
ECB Says Interest Rates Are `Still' Appropriate, Price Risks May Increase
The European Central Bank signaled there’s no immediate need to raise interest rates even with inflation seen holding above its limit for most of the year.
“The current key ECB interest rates still remain appropriate,” the Frankfurt-based central bank said in its monthly bulletin published today, echoing President Jean-Claude Trichet’s Feb. 3 policy statement. Inflation risks “could move to the upside” and warrant “very close monitoring.”
Euro-area inflation accelerated to 2.4 percent last month after energy and food costs surged. The ECB, which tries to keep annual price gains just below 2 percent, has signaled concern about faster inflation feeding into wage demands. Economists forecast the bank to start raising borrowing costs from the fourth quarter, a Bloomberg survey shows.
“We continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices,” the ECB said. “Inflation rates could temporarily increase further and are likely to stay slightly above 2 percent for most of 2011, before moderating again around the turn of the year.”
In its latest quarterly survey of professional forecasters included in today’s report, the ECB said economists predict inflation of 1.9 percent in 2011, compared with a previous projection of 1.5 percent. They predict 1.8 percent for 2012, compared with 1.6 percent before.
The bank in December forecast inflation will average about 1.8 percent this year and 1.5 percent in 2012. It will publish new projections next month.
Political tensions in Egypt are stoking oil prices just as German workers are demanding higher wages. Volkswagen AG, Germany’s biggest automotive employer, this week agreed to give 100,000 western German workers a 3.2 percent pay raise to avert strikes at times of record orders.
“We regard it as decisive, absolutely essential, that there are no second-round effects,” Trichet said last week. “We have no way of correcting the immediate increases in oil and commodity prices ourselves, but we have the responsibility of avoiding second-round effects.”
ECB Executive Board member Jose Manuel Gonzalez-Paramo told Spain’s ABC newspaper in an interview published on Feb. 6 that policy makers will have to increase interest rates if inflation doesn’t slow by the end of the year.
Risks to the economic outlook are “still slightly tilted to the downside, while uncertainty remains elevated,” the ECB said. Professional forecasters see growth of 1.6 percent in 2011, up from a previous prediction of 1.5 percent, and maintained their projection of 1.7 percent growth in 2012.
To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net
“The current key ECB interest rates still remain appropriate,” the Frankfurt-based central bank said in its monthly bulletin published today, echoing President Jean-Claude Trichet’s Feb. 3 policy statement. Inflation risks “could move to the upside” and warrant “very close monitoring.”
Euro-area inflation accelerated to 2.4 percent last month after energy and food costs surged. The ECB, which tries to keep annual price gains just below 2 percent, has signaled concern about faster inflation feeding into wage demands. Economists forecast the bank to start raising borrowing costs from the fourth quarter, a Bloomberg survey shows.
“We continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices,” the ECB said. “Inflation rates could temporarily increase further and are likely to stay slightly above 2 percent for most of 2011, before moderating again around the turn of the year.”
In its latest quarterly survey of professional forecasters included in today’s report, the ECB said economists predict inflation of 1.9 percent in 2011, compared with a previous projection of 1.5 percent. They predict 1.8 percent for 2012, compared with 1.6 percent before.
The bank in December forecast inflation will average about 1.8 percent this year and 1.5 percent in 2012. It will publish new projections next month.
Second-Round Effects
Trichet last week tempered investor expectations for higher ECB rates after his change in tone on inflation caused a five- cent surge in the euro at the beginning of the year. ECB Vice President Vitor Constancio said on Feb. 4 he’s “satisfied” with the market reaction to the policy statements.Political tensions in Egypt are stoking oil prices just as German workers are demanding higher wages. Volkswagen AG, Germany’s biggest automotive employer, this week agreed to give 100,000 western German workers a 3.2 percent pay raise to avert strikes at times of record orders.
“We regard it as decisive, absolutely essential, that there are no second-round effects,” Trichet said last week. “We have no way of correcting the immediate increases in oil and commodity prices ourselves, but we have the responsibility of avoiding second-round effects.”
ECB Executive Board member Jose Manuel Gonzalez-Paramo told Spain’s ABC newspaper in an interview published on Feb. 6 that policy makers will have to increase interest rates if inflation doesn’t slow by the end of the year.
Risks to the economic outlook are “still slightly tilted to the downside, while uncertainty remains elevated,” the ECB said. Professional forecasters see growth of 1.6 percent in 2011, up from a previous prediction of 1.5 percent, and maintained their projection of 1.7 percent growth in 2012.
To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net
Vietnam Devalues Dong by a Record 7%, Seeking to Curb Deficit
Vietnam devalued the dong by about 7 percent, the most since at least 1993, seeking to curb the nation’s trade deficit.
The dong slumped as low as 20,850 per dollar as of 9:14 a.m. in Hanoi, compared with 19,498 yesterday. The State Bank of Vietnam fixed the reference rate at 20,693 dong today, versus 18,932 yesterday, according to its Web site. The authority also narrowed the trading band, allowing the dong to rise or fall 1 percent either side of the rate, compared with 3 percent previously.
“I’m quite surprised by the size as it’s very steep,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong said in a telephone interview. “It seems the authorities are trying to support exports and to support growth, rather than to fight inflation. That’s very surprising because inflation in Vietnam is a major problem.”
The monetary authority devalued the dong in November 2009 and February and August last year, amid concern the nation may run short on foreign capital needed to fund a trade deficit, which reached $1 billion in January, according to the government’s figures. Currency reserves fell to $13.6 billion at the end of last year, down from $14.1 billion in September and $23.9 billion in 2008, according to Citigroup Inc.
“These measures will help to manage the exchange rate more flexibly, suiting foreign currency supply and demand,” the central bank said in the statement. It will “also help curb the trade deficit.”
Moody’s cut Vietnam’s sovereign credit rating in December, citing the risk of a balance-of-payments crisis and a drop in foreign reserves as inflation reached a two-year high and the currency weakens. Consumer prices increased 12.2 percent last month from a year earlier, compared with 11.8 percent in December, according to data from the General Statistics Office.
“One of our top priorities now is to stabilize the macro economy in order to maintain the pace of growth,” Nguyen Van Thao, deputy chief administrator of the ruling Vietnamese Communist Party’s Central Committee, said on Jan. 19. The government forecasts the economy will expand by up to 7.5 percent this year, compared with 6.7 percent in 2010.
To contact the reporter on this story: Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
The dong slumped as low as 20,850 per dollar as of 9:14 a.m. in Hanoi, compared with 19,498 yesterday. The State Bank of Vietnam fixed the reference rate at 20,693 dong today, versus 18,932 yesterday, according to its Web site. The authority also narrowed the trading band, allowing the dong to rise or fall 1 percent either side of the rate, compared with 3 percent previously.
“I’m quite surprised by the size as it’s very steep,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong said in a telephone interview. “It seems the authorities are trying to support exports and to support growth, rather than to fight inflation. That’s very surprising because inflation in Vietnam is a major problem.”
The monetary authority devalued the dong in November 2009 and February and August last year, amid concern the nation may run short on foreign capital needed to fund a trade deficit, which reached $1 billion in January, according to the government’s figures. Currency reserves fell to $13.6 billion at the end of last year, down from $14.1 billion in September and $23.9 billion in 2008, according to Citigroup Inc.
“These measures will help to manage the exchange rate more flexibly, suiting foreign currency supply and demand,” the central bank said in the statement. It will “also help curb the trade deficit.”
Moody’s cut Vietnam’s sovereign credit rating in December, citing the risk of a balance-of-payments crisis and a drop in foreign reserves as inflation reached a two-year high and the currency weakens. Consumer prices increased 12.2 percent last month from a year earlier, compared with 11.8 percent in December, according to data from the General Statistics Office.
“One of our top priorities now is to stabilize the macro economy in order to maintain the pace of growth,” Nguyen Van Thao, deputy chief administrator of the ruling Vietnamese Communist Party’s Central Committee, said on Jan. 19. The government forecasts the economy will expand by up to 7.5 percent this year, compared with 6.7 percent in 2010.
To contact the reporter on this story: Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
Bernanke Reminds Congress Deficit Is Bigger Than QE2
Federal Reserve Chairman Ben S. Bernanke is trying to make sure the U.S. central bank doesn’t become a scapegoat for fiscal profligacy.
Fed officials are warning that Congress needs to balance the nation’s budget, showing that policy makers are concerned about a loss of confidence in U.S. finances and want lawmakers to help prevent it, according to Dean Maki, chief U.S. economist at Barclays Capital Inc. Bernanke extended his campaign yesterday, telling the House Budget Committee “anything that can be done now to change that path” would have a “good impact on the current economy” and interest rates.
“There is this tremendous fiscal problem looming, and Congress has to do something about it,” said Mark Gertler, a professor of economics at New York University who has co- authored research with Bernanke. “If they have a fixed amount of time, spend it solving” that problem, rather than “grandstanding about the Fed.” The central bank’s plan to buy $600 billion in Treasury securities through June is “a relatively modest policy undertaking” compared with balancing the $3.7 trillion budget, he said.
The Fed sparked the harshest political backlash in three decades after announcing a second round of so-called quantitative easing on Nov. 3. Republicans, including House Speaker John Boehner of Ohio, said QE2 risks accelerating inflation, weakening the dollar and fueling asset bubbles.
“What is needed is very clear communication to the Congress at large and the American public,” that the program isn’t “crazy or highly unusual and that it made sense, but that it does involve some risk and that’s being managed,” said Alfred Broaddus, former president of the Federal Reserve Bank of Richmond. “You’ve got to be careful about turning this thing around.”
‘Can Be Overdone’
By acknowledging that buying government debt “can be overdone,” the Fed may bolster confidence that it will withdraw its record stimulus in time to avoid a surge in inflation, said Broaddus, who was president of the Richmond Fed from 1993 to 2004.
Bernanke defended the bond-purchase program yesterday in his first House testimony since Republicans took control of the lower chamber last month. He repeated that Congress should adopt a long-term plan to control a federal budget deficit that’s projected to reach a record $1.5 trillion this year.
The Fed isn’t monetizing the nation’s debt because “what we’re doing here is a temporary measure, which will be reversed,” Bernanke said. QE2 is “providing significant support to job creation and economic growth.”
Biggest Drop
The unemployment rate fell to 9 percent in January from 9.8 percent in November, the biggest two-month drop since 1958, and gross domestic product rose at a 3.2 percent annual rate in the fourth quarter, compared with 2.6 percent in the third and 1.7 percent in the second.
At the same time, “our nation’s fiscal position has deteriorated appreciably,” and adjustments “must occur at some point,” Bernanke said yesterday.
“The Fed wants to make clear it’s not going to underwrite large deficits in the medium term,” Maki said in a telephone interview from his New York office. The central bank is responding to critics who’ve said it “is allowing the Congress and the administration to run less-responsible fiscal policy,” he said.
One such critic is Sarah Palin, the 2008 Republican vice- presidential nominee, who says she’s considering a run for president in 2012.
“It’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems,” she wrote in a letter to the Wall Street Journal published Nov. 18.
Curb Spending
So far, buyers of Treasury securities haven’t forced Congress to curb its spending by making it expensive for the nation to borrow. The yield on the 10-year Treasury note was 3.65 percent late yesterday in New York, lower than its average of 5.25 percent during the last decade, according to data compiled by Bloomberg.
“Unfortunately, there’s no sense of urgency right now,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “Once you reach the point where concerns about the federal budget deficit render financial markets dysfunctional, then Congress will take action pronto.”
Representative Paul Ryan, the Wisconsin Republican who chairs the budget panel and offered his own plan last year for cutting spending, asked Bernanke during his testimony if Congress could aid short-term economic growth with a plan to control spending. “That’s correct,” Bernanke said.
Inflation Launched
Bernanke may not have won Ryan over on QE2, though. Ryan said during the hearing he’s concerned that “you’re going to see inflation after it’s already been launched.”
Representative Ron Paul, a Texas Republican who has advocated abolishing the central bank, said yesterday that the Fed’s policies aren’t working.
“They haven’t been very efficient in producing jobs,” and prices “really aren’t all that stable,” Paul said at a hearing he held titled “Can Monetary Policy Really Create Jobs?”
Since Bernanke fueled speculation about additional asset purchases during an Aug. 27 speech in Jackson Hole, Wyoming, inflation expectations have climbed. The breakeven rate for 10- year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable- maturity Treasuries, has risen to 2.33 percentage points from 1.63 percentage points, Bloomberg data show. The central bank prefers an inflation rate of about 2 percent.
Congressional Legacy
“Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress,” Dallas Fed President Richard Fisher said in a Feb. 8 speech. Fisher has expressed doubts about the efficacy of quantitative easing and said this week he’ll oppose further asset purchases after the planned $600 billion is completed.
The Fed “would be more comfortable running a very easy monetary policy if it could see firm evidence that a more- sustainable fiscal situation was being put in place on a long- term basis,” Maki said. Most Fed officials aren’t seeking “sharp, immediate” cutbacks, given that they want the economic recovery to gain traction, he said.
Quantitative easing is “hardly a panacea” and would benefit from fiscal support, Fed Vice Chairman Janet Yellen said in New York speech Dec. 1. “We would be wise to heed the abundant empirical evidence of the superiority of taking action before a fiscal crisis is upon us,” Richmond Fed President Jeffrey Lacker said Feb. 8 in a speech in Newark, Delaware.
$35 Billion in Cuts
House Republicans have started looking at reducing some expenditures, announcing last week that they will seek $35 billion in cuts.
Washington’s spending spree is over,” Ryan said in a Feb. 3 statement.
While Bernanke and other Fed officials have voiced concern that the nation’s financial situation is unsustainable, they have stopped short of prescribing how lawmakers should fix it.
“The composition of spending and taxes is a Congressional prerogative,” Bernanke said yesterday.
Policy makers must “be very careful about getting into” too much detail with fiscal recommendations because that also could politicize the Fed, Broaddus said. Bernanke’s predecessor, Alan Greenspan, was criticized for expressing his opinions on matters such as Social Security, he said.
‘Different Tone’
“Chairman Bernanke has set a different tone than Chairman Greenspan in that he has consistently avoided making near-term fiscal-policy recommendations,” Maki said. “He’s taking this approach in part to preserve the Fed’s independence and avoid an image of partisanship.”
Congress shouldn’t become too involved in monetary policy, either, because that could damage the credibility and effectiveness of the Fed, Lonski of Moody’s said.
“Their primary focus ought to be on fiscal policy, not on monetary policy,” Lonski said. “You have to worry about what you have direct control over.”
To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net Scott Lanman in Washington at slanman@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Fed officials are warning that Congress needs to balance the nation’s budget, showing that policy makers are concerned about a loss of confidence in U.S. finances and want lawmakers to help prevent it, according to Dean Maki, chief U.S. economist at Barclays Capital Inc. Bernanke extended his campaign yesterday, telling the House Budget Committee “anything that can be done now to change that path” would have a “good impact on the current economy” and interest rates.
“There is this tremendous fiscal problem looming, and Congress has to do something about it,” said Mark Gertler, a professor of economics at New York University who has co- authored research with Bernanke. “If they have a fixed amount of time, spend it solving” that problem, rather than “grandstanding about the Fed.” The central bank’s plan to buy $600 billion in Treasury securities through June is “a relatively modest policy undertaking” compared with balancing the $3.7 trillion budget, he said.
The Fed sparked the harshest political backlash in three decades after announcing a second round of so-called quantitative easing on Nov. 3. Republicans, including House Speaker John Boehner of Ohio, said QE2 risks accelerating inflation, weakening the dollar and fueling asset bubbles.
“What is needed is very clear communication to the Congress at large and the American public,” that the program isn’t “crazy or highly unusual and that it made sense, but that it does involve some risk and that’s being managed,” said Alfred Broaddus, former president of the Federal Reserve Bank of Richmond. “You’ve got to be careful about turning this thing around.”
‘Can Be Overdone’
By acknowledging that buying government debt “can be overdone,” the Fed may bolster confidence that it will withdraw its record stimulus in time to avoid a surge in inflation, said Broaddus, who was president of the Richmond Fed from 1993 to 2004.
Bernanke defended the bond-purchase program yesterday in his first House testimony since Republicans took control of the lower chamber last month. He repeated that Congress should adopt a long-term plan to control a federal budget deficit that’s projected to reach a record $1.5 trillion this year.
The Fed isn’t monetizing the nation’s debt because “what we’re doing here is a temporary measure, which will be reversed,” Bernanke said. QE2 is “providing significant support to job creation and economic growth.”
Biggest Drop
The unemployment rate fell to 9 percent in January from 9.8 percent in November, the biggest two-month drop since 1958, and gross domestic product rose at a 3.2 percent annual rate in the fourth quarter, compared with 2.6 percent in the third and 1.7 percent in the second.
At the same time, “our nation’s fiscal position has deteriorated appreciably,” and adjustments “must occur at some point,” Bernanke said yesterday.
“The Fed wants to make clear it’s not going to underwrite large deficits in the medium term,” Maki said in a telephone interview from his New York office. The central bank is responding to critics who’ve said it “is allowing the Congress and the administration to run less-responsible fiscal policy,” he said.
One such critic is Sarah Palin, the 2008 Republican vice- presidential nominee, who says she’s considering a run for president in 2012.
“It’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems,” she wrote in a letter to the Wall Street Journal published Nov. 18.
Curb Spending
So far, buyers of Treasury securities haven’t forced Congress to curb its spending by making it expensive for the nation to borrow. The yield on the 10-year Treasury note was 3.65 percent late yesterday in New York, lower than its average of 5.25 percent during the last decade, according to data compiled by Bloomberg.
“Unfortunately, there’s no sense of urgency right now,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “Once you reach the point where concerns about the federal budget deficit render financial markets dysfunctional, then Congress will take action pronto.”
Representative Paul Ryan, the Wisconsin Republican who chairs the budget panel and offered his own plan last year for cutting spending, asked Bernanke during his testimony if Congress could aid short-term economic growth with a plan to control spending. “That’s correct,” Bernanke said.
Inflation Launched
Bernanke may not have won Ryan over on QE2, though. Ryan said during the hearing he’s concerned that “you’re going to see inflation after it’s already been launched.”
Representative Ron Paul, a Texas Republican who has advocated abolishing the central bank, said yesterday that the Fed’s policies aren’t working.
“They haven’t been very efficient in producing jobs,” and prices “really aren’t all that stable,” Paul said at a hearing he held titled “Can Monetary Policy Really Create Jobs?”
Since Bernanke fueled speculation about additional asset purchases during an Aug. 27 speech in Jackson Hole, Wyoming, inflation expectations have climbed. The breakeven rate for 10- year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable- maturity Treasuries, has risen to 2.33 percentage points from 1.63 percentage points, Bloomberg data show. The central bank prefers an inflation rate of about 2 percent.
Congressional Legacy
“Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress,” Dallas Fed President Richard Fisher said in a Feb. 8 speech. Fisher has expressed doubts about the efficacy of quantitative easing and said this week he’ll oppose further asset purchases after the planned $600 billion is completed.
The Fed “would be more comfortable running a very easy monetary policy if it could see firm evidence that a more- sustainable fiscal situation was being put in place on a long- term basis,” Maki said. Most Fed officials aren’t seeking “sharp, immediate” cutbacks, given that they want the economic recovery to gain traction, he said.
Quantitative easing is “hardly a panacea” and would benefit from fiscal support, Fed Vice Chairman Janet Yellen said in New York speech Dec. 1. “We would be wise to heed the abundant empirical evidence of the superiority of taking action before a fiscal crisis is upon us,” Richmond Fed President Jeffrey Lacker said Feb. 8 in a speech in Newark, Delaware.
$35 Billion in Cuts
House Republicans have started looking at reducing some expenditures, announcing last week that they will seek $35 billion in cuts.
Washington’s spending spree is over,” Ryan said in a Feb. 3 statement.
While Bernanke and other Fed officials have voiced concern that the nation’s financial situation is unsustainable, they have stopped short of prescribing how lawmakers should fix it.
“The composition of spending and taxes is a Congressional prerogative,” Bernanke said yesterday.
Policy makers must “be very careful about getting into” too much detail with fiscal recommendations because that also could politicize the Fed, Broaddus said. Bernanke’s predecessor, Alan Greenspan, was criticized for expressing his opinions on matters such as Social Security, he said.
‘Different Tone’
“Chairman Bernanke has set a different tone than Chairman Greenspan in that he has consistently avoided making near-term fiscal-policy recommendations,” Maki said. “He’s taking this approach in part to preserve the Fed’s independence and avoid an image of partisanship.”
Congress shouldn’t become too involved in monetary policy, either, because that could damage the credibility and effectiveness of the Fed, Lonski of Moody’s said.
“Their primary focus ought to be on fiscal policy, not on monetary policy,” Lonski said. “You have to worry about what you have direct control over.”
To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net Scott Lanman in Washington at slanman@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
2011년 2월 8일 화요일
Fed’s illusion of prosperity bound to vanish
By David Rosenberg
U.S. Federal Reserve Board chairman Ben Bernanke recently congratulated himself on CNBC for helping boost the Russell 2000 stock index by 30 per cent.
U.S. Federal Reserve Board chairman Ben Bernanke recently congratulated himself on CNBC for helping boost the Russell 2000 stock index by 30 per cent.
The San Francisco Federal Reserve Bank just published a report that claims the second round of quantitative easing – so-called QE2 – is a success because the U.S. inflation rate is a percentage point higher than it would have been absent the Fed intervention.
Investors should realize how irrational this all is. The United States is in a radical money-easing environment, in which the Fed is keeping interest rates artificially low while pumping money into the economy. This type of policy breeds speculative rallies. It inevitably results in boom-bust cycles such as the ones we saw in 1999-2002, 2006-09 and today. This is no time for short memories.
At best, the Fed has managed to create an illusion of prosperity, but it won’t last. And that should surprise no one who has followed the Fed’s activities over the past couple of years.
The Fed initially tried to create wealth by reviving the housing market through the first quantitative easing program (QE1), which concentrated on buying mortgage loans. But the foreclosure crisis and the massive excess supply of homes are once again weighing on U.S. real estate values and the Fed has largely given up on reviving that market.
Instead, QE2 has all been about forcing investors to rebalance their portfolios in favour of the stock market. The Fed has no mandate to do this, but it’s managed to get away with it by stating that its actions are intended to boost an inflation rate that is too low and veering dangerously close, at times, to deflation.
The Fed’s easy-money policies have helped to create inflation in commodities, foodstuffs and stocks. But given the high level of U.S. unemployment, incomes are unlikely to keep up with rising prices, so Americans will be forced to draw down personal savings to maintain their living standards.
Home prices are beginning to fall again and soon we will see the household sector having to rebuild its savings without aid from the government. The view that Washington can take care of everything will disappear with looming austerity, as state and local governments cut back on spending this year, followed by the federal government next year.
Short-term rates at zero, combined with increasing food and energy prices, are bad news for savers. Given the intractable nature of the U.S. fiscal deficit, the Fed needs to encourage more domestic savings but it won’t do so, at least for now, because it fears that higher savings will remove demand from the system and exacerbate the trend to deflation.
The Fed is hoping that by boosting the stock market, it can make people feel wealthier and encourage them to spend. This wealth effect may buy time until the market for jobs and homes turns around on a sustained basis.
The offset, though, is that real wages will feel the pinch, not only from high unemployment, which Mr. Bernanke does not see ending for another five years, but from the Fed’s own policies that have encouraged the punishing runup in food prices.
I have little doubt this cyclical bull market and stimulus-led economic expansion has been built with straws and sticks as opposed to bricks. Sure, there could be more upside to stocks over the next few months but, at this point, we are probably closer to the peak than many believe.
Tom Hoenig, the president of the Federal Reserve Bank of Kansas City, has been a dissenting rogue on the Fed’s Open Market Committee over the past few years, and he has been right. The Fed needs to stop QE2 and raise short-term rates to around 0.5 to 1.0 per cent as soon as possible. Zero rates and asset purchases are fine in a crisis, but they hurt long-term savers and foster inefficient capital allocation.
We have all seen how Fed-induced speculative bull markets end. We either end up with another cycle of wealth destruction down the road or higher inflation. I see no other outcome. As a result, the most prudent strategy for an equity investor is to shift toward hedge funds that preserve capital and manage risk appropriately.
David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business.
2011년 2월 6일 일요일
Euro Buys Merkel Time as Bund-Treasury Spread Widens
The highest yields on German short- term bonds in two years relative to Treasuries are boosting the euro, easing pressure on Chancellor Angela Merkel as Europe’s leaders consider expanding a rescue program to end the region’s debt crisis.
Yields on German two-year notes rose last week to 87 basis points more than Treasuries of similar maturity, the most since January 2009, luring investors to higher returns on euro- denominated assets. Europe’s common currency is up 2.7 percent from an eight-year low reached on Jan. 10 against a basket of nine developed-nation peers, Bloomberg Correlation-Weighted Indexes show.
While a Bloomberg survey last month showed investors predict at least one nation will leave the currency within five years and that Greece and Ireland will default, traders are trimming bets the bloc will splinter. Speculators increased wagers the euro will rise to the highest since October as Merkel said Feb. 4 there was “broad consensus” on reaching an accord to boost competitiveness, including debt-limitation rules.
“Merkel is totally on top of this situation, she understands how much of a benefit the euro has been for Germany,” said Pierre Lequeux, London-based head of currency management at Aviva Investors, which oversees about $370 billion. “The only way they can fend off inflation is by engineering a stronger euro. As we’re going through the first quarter the euro will get stronger.”
Record Yields
The euro weakened 10.4 percent last year, the most since its 1999 start on a correlation-weighted basis, as Ireland and Greece were forced to seek bailouts. Bond yields show investors are speculating Portugal will be next, while Spain struggles to recover from a burst property bubble and trim its 20 percent unemployment rate.
Irish, Portuguese and Spanish yields rose to euro-era highs relative to German bunds in November even after the 440 billion- euro ($598 billion) European Financial Stability Facility, or EFSF, was created to ward off speculators betting on a break-up of the currency union.
The euro fell 0.2 percent last week versus the greenback to $1.3581, and was little changed at 111.62 yen.
The region’s growth has lagged behind the U.S., even as Germany’s economy grew 3.6 percent last year, the fastest pace since data for a reunified Germany began in 1992. Gross domestic product for the now 17-nation region expanded 1.7 percent in 2010, according to the median forecast of 20 economists surveyed by Bloomberg, compared with 2.9 percent for the U.S. Europe will expand 1.6 percent this year, versus 3.1 percent in America, separate surveys show.
March Deadline
The Bloomberg Global Poll of 1,000 investors, analysts and traders conducted Jan. 21-24 showed Bloomberg customers were almost evenly divided on whether the euro will eventually collapse. At the same time, 69 percent of the respondents said they had a favorable view of Merkel. The survey has a margin of error of plus or minus 3.1 percentage points.
European Union leaders meeting in Brussels Feb. 4 set a March 25 deadline to come up with what the German chancellor called a “comprehensive” package to address the crisis that may include stiffer sanctions against budget deficits higher than 3 percent of GDP, lower interest rates on loans and allowing the EFSF to buy debt directly from member states.
‘Failure Cataclysmic’
“These things are costly for the German taxpayer and highly unpopular,” said Ulrich Leuchtmann, head of foreign- exchange strategy in Frankfurt at Commerzbank AG, Germany’s second-biggest lender, behind Deutsche Bank AG. “It will only be politically feasible when everyone sees this is the only way out. The euro crisis will go on and on and this will limit the European Central Bank’s room for maneuver.”
Merkel and French President Nicolas Sarkozy said they have the political will to ensure that can’t happen.
“It is of such importance that we will be there whenever it needs to be defended,” Sarkozy said of the euro in a speech at the World Economic Forum in Davos, Switzerland, on Jan. 27. “The consequences of a euro failure would be so cataclysmic that we can’t even entertain the idea.”
Sarkozy and Merkel are seeking a summit of euro-region leaders for next month to address economic competitiveness as they stepped up efforts to boost sentiment in their currency.
“The year 2010 was a year of trials for the euro,” Merkel said at a joint briefing with Sarkozy Feb. 4. “Germany and France are firmly committed that 2011 will be the year of new confidence for the euro.”
Reversal of Fortunes
Demand from traders for contracts protecting against a drop in the euro against the dollar has fallen by more than 50 percent since June, indicating investors are less concerned the shared currency will weaken.
The euro-dollar three-month 25-delta risk reversal rate was minus 1.62 percentage points on Feb. 4, showing demand for puts that grant the right to sell the European currency outweigh demand for calls to buy it by less than half as much as they did on June 4, when the rate was minus 3.40 percentage points, and the euro tumbled to a four-year low of $1.1877 three days later.
Some bears are starting to bet that the euro’s rally will gain momentum.
FX Concepts LLC, the world’s biggest currency hedge fund, said on Jan. 27 that the euro may strengthen to the $1.4150, before weakening again. Three weeks earlier, the New York firm’s chairman, John Taylor, said it may fall below parity with the dollar this year.
Inflation Focus
The wider interest-rate gap between Europe and the U.S. led Bank of Tokyo-Mitsubishi UFJ Ltd. to predict on Feb. 1 that the euro may see a “temporary move” above $1.40. The bank said it remains bearish on the currency over a 12-month period.
More stability has allowed European Central Bank President Jean-Claude Trichet to shift his focus from containing the sovereign crisis to fighting inflation, while Federal Reserve Chairman Ben S. Bernanke keeps borrowing costs near zero and pumps $600 billion into the financial system by purchasing Treasuries. Unlike the ECB, whose main goal is keeping prices stable, the Fed is also charged with spurring employment.
“We continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices,” Trichet said at a press conference in Frankfurt after keeping ECB’s main refinancing rate at a record low 1 percent on Feb. 3.
Inflation in the euro region accelerated to a two-year high of 2.4 percent in January, data from the EU’s statistics office in Luxembourg showed Jan. 31. The annual rate in the U.S. rose to 1.5 percent in December from 1.1 percent a month earlier.
‘Genie Is Out’
German debt yields are higher than equivalent U.S. securities for all maturities through five years, according to data compiled by Bloomberg. Two-year German yields rose from a record low 0.427 percent on May 20, less than two weeks after the EFSF was created in the wake of the Greek bailout.
“The genie is out of the bottle and the ECB is on the path to hiking,” said Richard Benson, a London-based executive director at Millennium Asset Management, who oversees $14 billion of currency funds. “Interest-rate differentials are the overwhelming driver for currencies. There has been a very substantial repricing in the front end of Europe, a colossal move that supports the currency.”
Hedge funds and other large speculators increased bets that the euro will strengthen against the dollar for a third week, data from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 39,934 on Feb. 1, compared with 22,901 a week earlier and the most since 40,505 in the period ended Oct. 26.
“The underlying desire of the ECB to get on with normalizing policy is positive for euro-dollar,” said Kit Juckes, London-based head of foreign-exchange research at Societe Generale SA. “The Fed doesn’t want to raise rates unless it has to and the ECB would like to get a window of opportunity to hike. The U.S. wins the contest of who has got the weakest currency.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net
Yields on German two-year notes rose last week to 87 basis points more than Treasuries of similar maturity, the most since January 2009, luring investors to higher returns on euro- denominated assets. Europe’s common currency is up 2.7 percent from an eight-year low reached on Jan. 10 against a basket of nine developed-nation peers, Bloomberg Correlation-Weighted Indexes show.
While a Bloomberg survey last month showed investors predict at least one nation will leave the currency within five years and that Greece and Ireland will default, traders are trimming bets the bloc will splinter. Speculators increased wagers the euro will rise to the highest since October as Merkel said Feb. 4 there was “broad consensus” on reaching an accord to boost competitiveness, including debt-limitation rules.
“Merkel is totally on top of this situation, she understands how much of a benefit the euro has been for Germany,” said Pierre Lequeux, London-based head of currency management at Aviva Investors, which oversees about $370 billion. “The only way they can fend off inflation is by engineering a stronger euro. As we’re going through the first quarter the euro will get stronger.”
Record Yields
The euro weakened 10.4 percent last year, the most since its 1999 start on a correlation-weighted basis, as Ireland and Greece were forced to seek bailouts. Bond yields show investors are speculating Portugal will be next, while Spain struggles to recover from a burst property bubble and trim its 20 percent unemployment rate.
Irish, Portuguese and Spanish yields rose to euro-era highs relative to German bunds in November even after the 440 billion- euro ($598 billion) European Financial Stability Facility, or EFSF, was created to ward off speculators betting on a break-up of the currency union.
The euro fell 0.2 percent last week versus the greenback to $1.3581, and was little changed at 111.62 yen.
The region’s growth has lagged behind the U.S., even as Germany’s economy grew 3.6 percent last year, the fastest pace since data for a reunified Germany began in 1992. Gross domestic product for the now 17-nation region expanded 1.7 percent in 2010, according to the median forecast of 20 economists surveyed by Bloomberg, compared with 2.9 percent for the U.S. Europe will expand 1.6 percent this year, versus 3.1 percent in America, separate surveys show.
March Deadline
The Bloomberg Global Poll of 1,000 investors, analysts and traders conducted Jan. 21-24 showed Bloomberg customers were almost evenly divided on whether the euro will eventually collapse. At the same time, 69 percent of the respondents said they had a favorable view of Merkel. The survey has a margin of error of plus or minus 3.1 percentage points.
European Union leaders meeting in Brussels Feb. 4 set a March 25 deadline to come up with what the German chancellor called a “comprehensive” package to address the crisis that may include stiffer sanctions against budget deficits higher than 3 percent of GDP, lower interest rates on loans and allowing the EFSF to buy debt directly from member states.
‘Failure Cataclysmic’
“These things are costly for the German taxpayer and highly unpopular,” said Ulrich Leuchtmann, head of foreign- exchange strategy in Frankfurt at Commerzbank AG, Germany’s second-biggest lender, behind Deutsche Bank AG. “It will only be politically feasible when everyone sees this is the only way out. The euro crisis will go on and on and this will limit the European Central Bank’s room for maneuver.”
Merkel and French President Nicolas Sarkozy said they have the political will to ensure that can’t happen.
“It is of such importance that we will be there whenever it needs to be defended,” Sarkozy said of the euro in a speech at the World Economic Forum in Davos, Switzerland, on Jan. 27. “The consequences of a euro failure would be so cataclysmic that we can’t even entertain the idea.”
Sarkozy and Merkel are seeking a summit of euro-region leaders for next month to address economic competitiveness as they stepped up efforts to boost sentiment in their currency.
“The year 2010 was a year of trials for the euro,” Merkel said at a joint briefing with Sarkozy Feb. 4. “Germany and France are firmly committed that 2011 will be the year of new confidence for the euro.”
Reversal of Fortunes
Demand from traders for contracts protecting against a drop in the euro against the dollar has fallen by more than 50 percent since June, indicating investors are less concerned the shared currency will weaken.
The euro-dollar three-month 25-delta risk reversal rate was minus 1.62 percentage points on Feb. 4, showing demand for puts that grant the right to sell the European currency outweigh demand for calls to buy it by less than half as much as they did on June 4, when the rate was minus 3.40 percentage points, and the euro tumbled to a four-year low of $1.1877 three days later.
Some bears are starting to bet that the euro’s rally will gain momentum.
FX Concepts LLC, the world’s biggest currency hedge fund, said on Jan. 27 that the euro may strengthen to the $1.4150, before weakening again. Three weeks earlier, the New York firm’s chairman, John Taylor, said it may fall below parity with the dollar this year.
Inflation Focus
The wider interest-rate gap between Europe and the U.S. led Bank of Tokyo-Mitsubishi UFJ Ltd. to predict on Feb. 1 that the euro may see a “temporary move” above $1.40. The bank said it remains bearish on the currency over a 12-month period.
More stability has allowed European Central Bank President Jean-Claude Trichet to shift his focus from containing the sovereign crisis to fighting inflation, while Federal Reserve Chairman Ben S. Bernanke keeps borrowing costs near zero and pumps $600 billion into the financial system by purchasing Treasuries. Unlike the ECB, whose main goal is keeping prices stable, the Fed is also charged with spurring employment.
“We continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices,” Trichet said at a press conference in Frankfurt after keeping ECB’s main refinancing rate at a record low 1 percent on Feb. 3.
Inflation in the euro region accelerated to a two-year high of 2.4 percent in January, data from the EU’s statistics office in Luxembourg showed Jan. 31. The annual rate in the U.S. rose to 1.5 percent in December from 1.1 percent a month earlier.
‘Genie Is Out’
German debt yields are higher than equivalent U.S. securities for all maturities through five years, according to data compiled by Bloomberg. Two-year German yields rose from a record low 0.427 percent on May 20, less than two weeks after the EFSF was created in the wake of the Greek bailout.
“The genie is out of the bottle and the ECB is on the path to hiking,” said Richard Benson, a London-based executive director at Millennium Asset Management, who oversees $14 billion of currency funds. “Interest-rate differentials are the overwhelming driver for currencies. There has been a very substantial repricing in the front end of Europe, a colossal move that supports the currency.”
Hedge funds and other large speculators increased bets that the euro will strengthen against the dollar for a third week, data from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 39,934 on Feb. 1, compared with 22,901 a week earlier and the most since 40,505 in the period ended Oct. 26.
“The underlying desire of the ECB to get on with normalizing policy is positive for euro-dollar,” said Kit Juckes, London-based head of foreign-exchange research at Societe Generale SA. “The Fed doesn’t want to raise rates unless it has to and the ECB would like to get a window of opportunity to hike. The U.S. wins the contest of who has got the weakest currency.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net
Investors’ $102 Billion Metals Wager Showing Bull Market Intact
After the worst January for precious metals in two decades, investors still have a $102 billion bet on higher prices, hoarding more gold than all but four central banks and more silver than the U.S. can mine in almost 12 years.
The five analysts ranked by Bloomberg as the most accurate over two years expect silver to rise as much as 24 percent before the end of 2011 and gold 20 percent, the median of their estimates show. UBS AG predicts the strongest industrial demand for silver since at least 1990 and the second-highest sales of exchange-traded gold products on record.
The decade-long surge in gold attracted fund managers from John Paulson to George Soros and is now spurring central banks to add to their reserves for the first time in a generation. Once written off as demand for photographic film waned, silver found new uses in everything from solar panels to plasma screens, making it the precious metal most used in industry. As stocks rose 9 percent and Treasuries returned 67 percent since the end of 2000, gold surged fivefold and silver sixfold.
“I had to chuckle when I saw reports that it was over for gold,” said Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, and has about 20 percent of his assets in gold. “Some investors have taken money off the table after a significant run-up in 2010. If you look at the macro environment, the instability around the world, the worldwide currency devaluation, these factors all bode well.”
The Standard & Poor’s GSCI Precious Metals Index dropped 6.5 percent in January, the most for the month since 1991. Gold traded in London retreated 6.2 percent and silver 9.3 percent.
Monthly Slumps
Gold has had bigger monthly slumps four times in the last decade and plunged 34 percent from March to October 2008, before jumping 47 percent in the following four months. Silver posted larger monthly declines nine times over the same period and plummeted 57 percent over three months in 2008. It rallied 73 percent in the next four months.
Silver will climb as high as $36 an ounce this year, from $29.1375 now, and gold will reach $1,620 an ounce, from $1,348.85, according to the Bloomberg survey of analysts.
Investors in exchange-traded products backed by gold own 2,028 metric tons, worth $88 billion, even after cutting their holdings by 4.1 percent since December, data compiled by Bloomberg show. ETPs trade on exchanges, with each share representing metal held in a vault. They accounted for 21 percent of investment demand last year, according to GFMS Ltd., a London-based research firm. Silver-backed ETPs fell 4.4 percent to 14,511 tons worth about $14 billion since December.
CFTC Data
While hedge funds cut their bets on higher gold prices by 42 percent since October, they still hold a so-called net-long, or bullish, position of more than 151,000 futures contracts, almost three times the average over the last 18 years, according to data from the Commodity Futures Trading Commission.
Central banks, the biggest owners, will add to reserves for a third consecutive year in 2011, the first time that’s happened since the 1970s, Deutsche Bank AG predicts.
The risk now is that an improving economic outlook will cut the allure of precious metals as a wealth protector. The MSCI World Index of equities added 4 percent since the start of January, the best start to a year since 1998. The International Monetary Fund on Jan. 25 increased its forecast for 2011 global economic growth to 4.4 percent, from 4.2 percent.
“Gold is going quiet,” said Pete Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors in Cincinnati, Ohio. “It’s good and healthy and characteristic of gold’s stair-step rally. We’ll see a little more downward pressure and then begin to trade sideways for an indeterminate time.”
SEC Reports
Gold accounts for 5 percent of the company’s $98 million commodity fund, compared with 15 percent in mid-December.
Another risk is the biggest investors, whose holdings are scheduled to be reported by the U.S. Securities and Exchange Commission on Feb. 14, according to Credit Suisse Group AG. Prices will likely drop and volatility increase should quarterly data show any of them cut their position, the bank said in a report Jan. 28. Investors last disclosed their stakes as of Sept. 30 in filings in November.
Paulson & Co. is the largest investor in the SPDR Gold Trust, the biggest ETP backed by gold, according to data compiled by Bloomberg. The 7.8 percent stake was worth $4.03 billion on Sept. 30 and would be valued at $4.15 billion now. Armel Leslie, a spokesman for Paulson, 55, declined to comment.
Soros Fund
Soros Fund Management LLC, which manages about $27 billion, also listed the SPDR Gold Trust as its biggest holding in a Nov. 15 filing. Soros described gold at the World Economic Forum’s January meeting in Davos, Switzerland, last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80- year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum said the boom in commodities may last “a couple of years” longer.
Michael Vachon, a spokesman for Soros, declined to comment.
The precious metals most used in industry outpaced gold since the U.S. economy returned to growth in the third quarter of 2009. Palladium rose threefold, silver more than doubled and platinum jumped 57 percent, compared with gold’s 46 percent gain. Platinum and palladium are used in catalytic converters for cars and trucks. The London Metal Exchange index of industrial metals from aluminum to zinc jumped 86 percent.
Industrial demand for silver, excluding photography, will rise 18 percent to 478 million ounces this year, according to UBS, Switzerland’s biggest bank. Investors will buy 450 tons of gold through ETPs this year, the Zurich-based bank forecasts.
Mining Index
The 16-member Philadelphia Stock Exchange Gold and Silver Index, led by Freeport-McMoRan Copper & Gold Inc. and Barrick Gold Corp., fell 8.5 percent this year as metal prices dropped. All but one firm in the mining index is forecast to report an increase in annual earnings, according to the median of analyst estimates compiled by Bloomberg.
Higher silver prices hurt the profit of Rochester, New York-based Eastman Kodak Co. last year and are a “significant headwind” in 2011, Chairman Antonio M. Perez said on a conference call Jan. 26. Agfa-Gevaert NV, Europe’s biggest maker of healthcare imaging systems, said in a statement Nov. 15 that its Agfa HealthCare division was increasing prices for all imaging film products because of higher raw-material costs.
Bullion’s slide from a record is attracting buyers. “We struggle to recall a month when our total physical sales have been stronger,” led by Chinese gold demand, and turnover on the Shanghai Gold Exchange in January was a record, Edel Tully, an analyst at UBS, said in a report last week. “Elevated physical demand usually signals an impending bottom,” she said.
Silver Coins
Silver buying is also accelerating. One-ounce silver coin sales from the U.S. Mint jumped to a record last month. Ex Oriente Lux AG, based in Reutlingen, Germany, will start adding the metal to its U.S. ATMs that sell gold in banks, shopping centers and jewelry stores this month.
Investor demand for precious metals accelerated after the collapse of Lehman Brothers Holdings Inc. in September 2008 and as governments and central banks led by the Federal Reserve pumped more than $2 trillion into the world financial system. That stoked concern that inflation will accelerate. The Fed cut interest rates to near zero in December 2008 and have kept them there since and Greece and Ireland got bailouts.
“At the moment, people still have fear about inflation, about the debt crisis, and I don’t see any resolution to the debt crisis when the Fed is buying debt again and again,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart. “Most people will be loyal to their investment because the fear doesn’t evaporate.”
To contact the editors responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at sstroth@bloomberg.net.
The five analysts ranked by Bloomberg as the most accurate over two years expect silver to rise as much as 24 percent before the end of 2011 and gold 20 percent, the median of their estimates show. UBS AG predicts the strongest industrial demand for silver since at least 1990 and the second-highest sales of exchange-traded gold products on record.
The decade-long surge in gold attracted fund managers from John Paulson to George Soros and is now spurring central banks to add to their reserves for the first time in a generation. Once written off as demand for photographic film waned, silver found new uses in everything from solar panels to plasma screens, making it the precious metal most used in industry. As stocks rose 9 percent and Treasuries returned 67 percent since the end of 2000, gold surged fivefold and silver sixfold.
“I had to chuckle when I saw reports that it was over for gold,” said Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, and has about 20 percent of his assets in gold. “Some investors have taken money off the table after a significant run-up in 2010. If you look at the macro environment, the instability around the world, the worldwide currency devaluation, these factors all bode well.”
The Standard & Poor’s GSCI Precious Metals Index dropped 6.5 percent in January, the most for the month since 1991. Gold traded in London retreated 6.2 percent and silver 9.3 percent.
Monthly Slumps
Gold has had bigger monthly slumps four times in the last decade and plunged 34 percent from March to October 2008, before jumping 47 percent in the following four months. Silver posted larger monthly declines nine times over the same period and plummeted 57 percent over three months in 2008. It rallied 73 percent in the next four months.
Silver will climb as high as $36 an ounce this year, from $29.1375 now, and gold will reach $1,620 an ounce, from $1,348.85, according to the Bloomberg survey of analysts.
Investors in exchange-traded products backed by gold own 2,028 metric tons, worth $88 billion, even after cutting their holdings by 4.1 percent since December, data compiled by Bloomberg show. ETPs trade on exchanges, with each share representing metal held in a vault. They accounted for 21 percent of investment demand last year, according to GFMS Ltd., a London-based research firm. Silver-backed ETPs fell 4.4 percent to 14,511 tons worth about $14 billion since December.
CFTC Data
While hedge funds cut their bets on higher gold prices by 42 percent since October, they still hold a so-called net-long, or bullish, position of more than 151,000 futures contracts, almost three times the average over the last 18 years, according to data from the Commodity Futures Trading Commission.
Central banks, the biggest owners, will add to reserves for a third consecutive year in 2011, the first time that’s happened since the 1970s, Deutsche Bank AG predicts.
The risk now is that an improving economic outlook will cut the allure of precious metals as a wealth protector. The MSCI World Index of equities added 4 percent since the start of January, the best start to a year since 1998. The International Monetary Fund on Jan. 25 increased its forecast for 2011 global economic growth to 4.4 percent, from 4.2 percent.
“Gold is going quiet,” said Pete Sorrentino, who helps manage $13.8 billion at Huntington Asset Advisors in Cincinnati, Ohio. “It’s good and healthy and characteristic of gold’s stair-step rally. We’ll see a little more downward pressure and then begin to trade sideways for an indeterminate time.”
SEC Reports
Gold accounts for 5 percent of the company’s $98 million commodity fund, compared with 15 percent in mid-December.
Another risk is the biggest investors, whose holdings are scheduled to be reported by the U.S. Securities and Exchange Commission on Feb. 14, according to Credit Suisse Group AG. Prices will likely drop and volatility increase should quarterly data show any of them cut their position, the bank said in a report Jan. 28. Investors last disclosed their stakes as of Sept. 30 in filings in November.
Paulson & Co. is the largest investor in the SPDR Gold Trust, the biggest ETP backed by gold, according to data compiled by Bloomberg. The 7.8 percent stake was worth $4.03 billion on Sept. 30 and would be valued at $4.15 billion now. Armel Leslie, a spokesman for Paulson, 55, declined to comment.
Soros Fund
Soros Fund Management LLC, which manages about $27 billion, also listed the SPDR Gold Trust as its biggest holding in a Nov. 15 filing. Soros described gold at the World Economic Forum’s January meeting in Davos, Switzerland, last year as “the ultimate asset bubble.” In a Nov. 15 speech in Toronto the 80- year-old said conditions for the metal to keep rising were “pretty ideal” and at this year’s Davos forum said the boom in commodities may last “a couple of years” longer.
Michael Vachon, a spokesman for Soros, declined to comment.
The precious metals most used in industry outpaced gold since the U.S. economy returned to growth in the third quarter of 2009. Palladium rose threefold, silver more than doubled and platinum jumped 57 percent, compared with gold’s 46 percent gain. Platinum and palladium are used in catalytic converters for cars and trucks. The London Metal Exchange index of industrial metals from aluminum to zinc jumped 86 percent.
Industrial demand for silver, excluding photography, will rise 18 percent to 478 million ounces this year, according to UBS, Switzerland’s biggest bank. Investors will buy 450 tons of gold through ETPs this year, the Zurich-based bank forecasts.
Mining Index
The 16-member Philadelphia Stock Exchange Gold and Silver Index, led by Freeport-McMoRan Copper & Gold Inc. and Barrick Gold Corp., fell 8.5 percent this year as metal prices dropped. All but one firm in the mining index is forecast to report an increase in annual earnings, according to the median of analyst estimates compiled by Bloomberg.
Higher silver prices hurt the profit of Rochester, New York-based Eastman Kodak Co. last year and are a “significant headwind” in 2011, Chairman Antonio M. Perez said on a conference call Jan. 26. Agfa-Gevaert NV, Europe’s biggest maker of healthcare imaging systems, said in a statement Nov. 15 that its Agfa HealthCare division was increasing prices for all imaging film products because of higher raw-material costs.
Bullion’s slide from a record is attracting buyers. “We struggle to recall a month when our total physical sales have been stronger,” led by Chinese gold demand, and turnover on the Shanghai Gold Exchange in January was a record, Edel Tully, an analyst at UBS, said in a report last week. “Elevated physical demand usually signals an impending bottom,” she said.
Silver Coins
Silver buying is also accelerating. One-ounce silver coin sales from the U.S. Mint jumped to a record last month. Ex Oriente Lux AG, based in Reutlingen, Germany, will start adding the metal to its U.S. ATMs that sell gold in banks, shopping centers and jewelry stores this month.
Investor demand for precious metals accelerated after the collapse of Lehman Brothers Holdings Inc. in September 2008 and as governments and central banks led by the Federal Reserve pumped more than $2 trillion into the world financial system. That stoked concern that inflation will accelerate. The Fed cut interest rates to near zero in December 2008 and have kept them there since and Greece and Ireland got bailouts.
“At the moment, people still have fear about inflation, about the debt crisis, and I don’t see any resolution to the debt crisis when the Fed is buying debt again and again,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart. “Most people will be loyal to their investment because the fear doesn’t evaporate.”
Bloomberg Ranking’s top precious-metal forecasters:
Average Error
Jochen Hitzfeld UniCredit 8.1%
Thorsten Proettel LBBW 12.1%
Anne-Laure Tremblay BNP Paribas 12.6%
David Wilson Societe Generale 13.9%
Suki Cooper Barclays Capital 14.8%
To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net. To contact the editors responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at sstroth@bloomberg.net.
Regulatory overkill is killing America
Gwyn Morgan (The Globe and Mail)
President Barack Obama's recent announcement that he had signed an executive order to remove “outdated” U.S. regulations that “stifle job creation and make our economy less competitive”
Business leaders say this regulation explosion has been a major factor in their reluctance to invest in job-creating expansion, resulting in a corporate cash buildup of almost $2-trillion (U.S.), the largest in the country’s history.
Business Roundtable, an association of U.S. chief executives of major companies, has compiled a report providing a road map to eliminate what are, in Mr. Obama’s words, “regulations that conflict, that are not worth the cost, or that are just plain dumb.”
In the book Preparing CEOs For Success, Leslie Braksick
Many a U.S. regulator has gained career-boosting fame from vindictive efforts to bag big corporate game, even if the initial allegations aren't sustained after costly and protracted litigation. The explosion of new regulations under Mr. Obama's watch, combined with his frequent public attacks on business leaders, has encouraged already overzealous regulators to behave even more aggressively.
While the private sector struggles with demoralizing presidential rhetoric and regulatory dysfunction, the legal profession emerges as a huge winner. Armies of lawyers have been retained to draft the complex regulations required to administer new banking and health-care laws. And the flood of corporate bankruptcies has been a legal bonanza. Documents filed with the bankruptcy court in Manhattan show that payments to 35 professional firms, mainly lawyers, has reached more than $1-billion. Lehman Brothers’ bankruptcy law firm alone has racked up fees of well over $200-million. And these fees take priority ahead of beleaguered pensioners, creditors and bond holders, leaving them slim pickings from what's left of the corporate bones.
With one lawyer for every 265 citizens, the United States is the global litigation leader – and the cost to its society is staggering. Consider health care. Malpractice suits are a primary reason U.S. health care is the most expensive in the world. Outrageous “runaway jury” awards have driven malpractice insurance rates through the roof and forced physicians to spend countless hours in courtrooms rather than attending patients.
The American Medical Association, in a recent briefing to a congressional committee, said: “The medical liability system is in desperate need of reform.” In last month’s State of the Union address Mr. Obama conceded as much, saying he is “willing to look at … medical malpractice reform to rein in frivolous lawsuits.”
The medical lawsuit industry is just one of many litigation pathogens attacking the heart of U.S. economic competitiveness. The Bush administration was intensely disliked by trial lawyers for efforts to rein in “punitive” jury awards, which can be hundreds of times larger than actual damages. Those efforts have lain dormant under Mr. Obama.
Regulatory overkill, witch-hunting regulators, outrageous liability awards – how can any country’s economy sustain such debilitating dysfunctions? U.S. political rhetoric keeps on blaming China for the country’s downward slide, but the real culprits can be found by looking in the mirror.
More storms in store for debt-ridden nations
(The Globe and Mail)
To judge by the more upbeat tunes being whistled by investors and analysts, and the promising signals from Brussels that the politicians are closing in on a solution to the European debt crisis without forcing bondholders to choke down losses, it would seem we’ll soon have to remove the descriptive “beleaguered” from future mentions of the euro zone.
European bonds are in the midst of their largest rally since last summer, and money is even flowing back into stocks in the troubled periphery. Last week, for example, equity funds tied to the Spanish market lured more net new capital than at any time since the global equity upswing in the second quarter of 2009. No one is rushing to load up on Greek or Irish debt yet, but spreads against comparable German bonds have narrowed since the start of the year.
Adding to the bullish market tone was a report from Goldman Sachs extolling of the virtues of downtrodden European bank stocks. “For financials, the narrowing of sovereign spreads in peripheral euro zone, which our economists expect to continue, is a clear positive,” Goldman strategist Peter Oppenheimer opined in a note to clients.
It’s possible that German Chancellor Angela Merkel and her trusty sidekick, French President Nicolas Sarkozy, have somehow managed to convince the bond world that the euro club will emerge stronger than ever and more closely resembling the cherished (more in theory than in practice) German model featuring strong fiscal discipline, tight monetary policy and an abhorrence of inflation. Or maybe the bond vigilantes are so worried about the overheated emerging markets and those parts of the world submerged in strife that the euro doesn’t look so bad after all.
In any case, for those suffering from dangerous temporary euphoria about the state of the industrial world in general and the euro zone in particular, I have a surefire antidote: a quick chat with veteran German money manager Claus Vogt.
The euro, as we know it, will be gone in perhaps three years, Mr. Vogt, managing director of Aequitas Capital Partners and co-author of The Global Debt Trap, says from his office in Berlin. “The next crisis is already brewing. I may be too early. Maybe it lasts five years, but really no longer. I see no way to hold this sick contract together much longer.”
He sees only three ways out of the crisis: severe austerity; outright debt defaults; or cranking up the money-printing presses. Austerity isn’t going over too well with voters, and the European Central Bank’s policy is as loose as it can get. Since individual euro-zone members can’t devalue their way out of trouble, that makes future defaults the winner by, well, default.
And that would be just the first big step on the road to ruin. “These haircuts would hit the European banks the most [because of their large caches of sovereign bonds]. Immediately, we would be back to where we were in 2008, confronted with a huge systemic banking crisis.”
The same fate sooner or later will befall the U.S. and other debt-ridden countries, Mr. Vogt insists. “That’s why I call it a debt trap. There is no easy way out any more.”
He and co-author Ronald Leuschel caused quite a stir in 2005 with a German bestseller titled Das Greenspan Dossier, a full frontal assault on once-deified former Federal Reserve chief Alan Greenspan, his easy money policies and his culpability in the Great Real Estate Bubble. They predicted its destruction would cause a stock market crash, devastate the global economy and bring the financial system to its knees. Now they are back sifting through the rubble and warning that current Fed boss Ben Bernanke is fuelling new bubbles through the biggest monetary stimulus measures ever devised.
Although Mr. Vogt is convinced the world faces a massive inflationary surge and fervently wishes we were back on the gold standard, he is not one of those back-to-the-land types stocking up on canned goods to wait out the storms. But he does urge investors to remain cautious and flexible.
“You have to be ready for lightning-swift changes. We saw it in East Germany two decades ago, in the USSR and now in Egypt. Things can change dramatically and quickly. … But we all tend to live as if, at least in our lifetime, no major disruptions, no major systemic breaks will happen.”
His advice in a nutshell: Decide how much of your wealth should serve as insurance against such risks and put it into gold, silver and related stocks. As for the rest, essentially do what Mr. Bernanke and his brethren “want you to do. Which means from time to time, step in and speculate. You have to have stocks sometimes. Then you have to go out again. You have to short U.S. Treasury bonds [probably for another quarter]. But there will come a time when you have to grab your profits and step back again. And wait for the next opportunity.”
To judge by the more upbeat tunes being whistled by investors and analysts, and the promising signals from Brussels that the politicians are closing in on a solution to the European debt crisis without forcing bondholders to choke down losses, it would seem we’ll soon have to remove the descriptive “beleaguered” from future mentions of the euro zone.
European bonds are in the midst of their largest rally since last summer, and money is even flowing back into stocks in the troubled periphery. Last week, for example, equity funds tied to the Spanish market lured more net new capital than at any time since the global equity upswing in the second quarter of 2009. No one is rushing to load up on Greek or Irish debt yet, but spreads against comparable German bonds have narrowed since the start of the year.
Adding to the bullish market tone was a report from Goldman Sachs extolling of the virtues of downtrodden European bank stocks. “For financials, the narrowing of sovereign spreads in peripheral euro zone, which our economists expect to continue, is a clear positive,” Goldman strategist Peter Oppenheimer opined in a note to clients.
It’s possible that German Chancellor Angela Merkel and her trusty sidekick, French President Nicolas Sarkozy, have somehow managed to convince the bond world that the euro club will emerge stronger than ever and more closely resembling the cherished (more in theory than in practice) German model featuring strong fiscal discipline, tight monetary policy and an abhorrence of inflation. Or maybe the bond vigilantes are so worried about the overheated emerging markets and those parts of the world submerged in strife that the euro doesn’t look so bad after all.
In any case, for those suffering from dangerous temporary euphoria about the state of the industrial world in general and the euro zone in particular, I have a surefire antidote: a quick chat with veteran German money manager Claus Vogt.
The euro, as we know it, will be gone in perhaps three years, Mr. Vogt, managing director of Aequitas Capital Partners and co-author of The Global Debt Trap, says from his office in Berlin. “The next crisis is already brewing. I may be too early. Maybe it lasts five years, but really no longer. I see no way to hold this sick contract together much longer.”
He sees only three ways out of the crisis: severe austerity; outright debt defaults; or cranking up the money-printing presses. Austerity isn’t going over too well with voters, and the European Central Bank’s policy is as loose as it can get. Since individual euro-zone members can’t devalue their way out of trouble, that makes future defaults the winner by, well, default.
And that would be just the first big step on the road to ruin. “These haircuts would hit the European banks the most [because of their large caches of sovereign bonds]. Immediately, we would be back to where we were in 2008, confronted with a huge systemic banking crisis.”
The same fate sooner or later will befall the U.S. and other debt-ridden countries, Mr. Vogt insists. “That’s why I call it a debt trap. There is no easy way out any more.”
He and co-author Ronald Leuschel caused quite a stir in 2005 with a German bestseller titled Das Greenspan Dossier, a full frontal assault on once-deified former Federal Reserve chief Alan Greenspan, his easy money policies and his culpability in the Great Real Estate Bubble. They predicted its destruction would cause a stock market crash, devastate the global economy and bring the financial system to its knees. Now they are back sifting through the rubble and warning that current Fed boss Ben Bernanke is fuelling new bubbles through the biggest monetary stimulus measures ever devised.
Although Mr. Vogt is convinced the world faces a massive inflationary surge and fervently wishes we were back on the gold standard, he is not one of those back-to-the-land types stocking up on canned goods to wait out the storms. But he does urge investors to remain cautious and flexible.
“You have to be ready for lightning-swift changes. We saw it in East Germany two decades ago, in the USSR and now in Egypt. Things can change dramatically and quickly. … But we all tend to live as if, at least in our lifetime, no major disruptions, no major systemic breaks will happen.”
His advice in a nutshell: Decide how much of your wealth should serve as insurance against such risks and put it into gold, silver and related stocks. As for the rest, essentially do what Mr. Bernanke and his brethren “want you to do. Which means from time to time, step in and speculate. You have to have stocks sometimes. Then you have to go out again. You have to short U.S. Treasury bonds [probably for another quarter]. But there will come a time when you have to grab your profits and step back again. And wait for the next opportunity.”
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