Haynes roadster on 14th Street, Washington DC
OC: Today's intro comes from Ric who posts comments from time to time on TAE. I had the pleasure of meeting Ric last month while I was in California on business. We talked about TAE and finance, of course, but mainly we spoke of what we were doing to prepare for what we think is The Inevitable. I learned a lot from Ric that day - and from the Sharon Astyk book that he gave me - but mostly I saw, in person, someone who represents one possibility for a much better America.
Ric: Lately, when I’ve finished for the day and walk through rows of lettuce or radishes or corn on the farm where I work there comes a magic moment when my concerns about global economic collapse, peak fossil fuel, global warming, and the coming die-off fade as though they are unimportant. In this magic moment, I’ve no worries. My ever-present, low-level depression and rage about my own lack of useful skills, wasted years, and progressing age in a world gone insane are far from my mind. Instead, I’ve the sense that all my preparations over the last five years are finally coming to an end. I don’t mean I’ve “finished” or am “ready.” I desperately need as many years as I can get to continue to save, work, gather, and plan. Rather, in this magic moment there grows a sense of who I am as society collapses. I’ve found where I belong; where I’m meant to be. I know who I am as protector of my family.
A few months ago someone at TAE asked me in a post how I dealt with the notions of “survival” and I thought about the question a long time not knowing how to answer. What does “survival” mean when you’re a middle-aged writer and college professor? Should I be Mad Max? Should I wish I were twenty again? Several years ago I purchased a firearm, took an afternoon class in how to load it, and never looked at it again. I’ve zero interest in training to kill people; even now. I know all the Straw Dog arguments about how you never know what you will do to protect family—but I also know nothing inside me now is remotely interested in training to kill others. But today, in the magic moment, I know what “survival” means. I know who I am. I’m Mad Farmer.
The farm where I work is located in the same canyon where I played as a boy; it’s only a few minutes from my current home. It’s not my farm, but I work as though it were. I work with the same intensity with which I used to train for marathons a decade ago. Although I’m fifty and over-weight now, I work at a steady pace. Weekly, I cinch my belt tighter. I savor the feeling of working in the open air with a good shovel.
The farmers for whom I work are kind, intelligent, open-hearted people who sell their produce throughout Southern California . Their farm is economically self-supporting. They graciously show me their tools and methods. Best of all, they introduce me to the other farmers in the area, who now call my name as they drive up to talk. Because I’m a volunteer, I work harder than if I were paid. I don’t need to be paid. My house is paid for, I’ve no debt, my time is my own, and colleges still pay me to talk to their students. Instead, I work with the sense this is the first good work I’ve done as an adult. Over the years, I’ve published many useless books. As an artist, I’ve prided myself on never being understood. Never in my life have I known the satisfaction of planting, watering, weeding, and harvesting nutritious, fresh, robust carrots and potatoes for others.
It seems to me now that if there is anything good that comes from die-off, it’s from the opportunity to see value in depletion. As I’ve mentioned elsewhere in this blog, I sit evenings with my mother as she decays from dementia/alzheimers. The disease is cruel and she can no longer speak beyond a couple words and is frustrated by her own confusion. To help calm her, I hum silly tunes and we exchange hums as though having a conversation and then laugh at our silliness. The value for me, of course, is in our time together. But it also seems to me there is beauty in her increasing fragility and mental decay because I see her approaching infinity; as we hum together infinity is all around us. Now, as I walk through the rows at the end of the day, it seems appropriate that someday our society will die as I will die and my mother will die. In our decay each of us approaches and is transformed into infinity.
As I work on this farm, I’m aware I may never have the strength and resources to create such a beautiful, self-supporting farm as these lovely people have done. I may have started too late. But at least I know who I am. I’m the one who works in fields as though he’s running a marathon. I’m one who finds beauty in depletion. If I feed people around me, my family will be okay.
Food banks can't meet growing demand
Donations to many of the USA's food banks are not keeping pace with growing demand as the sour economy forces more people to seek help, charitable organizations say. "We have seen a 100% increase in demand in the last year … and food donations have dropped precipitously," says Dana Wilkie, CEO of the Community Food Bank in Fresno, Calif. The group, which distributes food to 200 food pantries and feeding centers, is supplying cheaper chickens instead of turkeys for Thanksgiving, she says.
Nationally, donations are up about 18%, but demand has grown 25%-40%, says Vicki Escarra of Feeding America, the USA's largest hunger-relief charity. Feeding America, formerly America's Second Harvest, has a network of 206 food banks. About 70% of new clients are making their first visit to a food bank, Escarra says.
•Denver: The Salvation Army food bank turned away 198 people last month, says Maj. Neal Hogan. Red kettle donations there are about the same as last year's so far, he says — not enough to offset growing needs.
•Knoxville, Tenn.: "What we're seeing now is very scary," says Elaine Streno of the Second Harvest Food Bank of East Tennessee, which supplies food to 300 agencies in 18 counties. "Our community is very generous, but when you don't have it, you can't give it," she says.
•Manchester, N.H.: The New Hampshire Food Bank has distributed 4.6 million pounds of food to 370 agencies statewide so far this year, up from 3.7 million pounds over the same period in 2007, says development director Anne Dalton.
•Toledo, Ohio: Demand is up 12%-15% and donations are not increasing, says Jim Caldwell, president of the Toledo Northwestern Ohio Food Bank, which serves 250 agencies in eight counties. Next year "promises to be even more arduous," he says.
•Peoria, Ill.: Demand is up 50% at many of the 125 agencies in eight counties served by the Peoria Area Food Bank, says director Barb Shreves.
•Visalia, Calif.: FoodLink for Tulare County asks the community to help provide holiday meals to 5,000 of the area's neediest families. This year, 9,200 families already have applied, says executive director Sandy Beals. Food supplies are down 45% from a year ago; demand is up 30%, and people are being turned away.
Americans' Food Stamp Use Nears All-Time High
Fueled by rising unemployment and food prices, the number of Americans on food stamps is poised to exceed 30 million for the first time this month, surpassing the historic high set in 2005 after Hurricane Katrina.
The figures will put the spotlight on hunger when Congress begins deliberations on a new economic stimulus package, said legislators and anti-hunger advocates, predicting that any stimulus bill will include a boost in food stamp benefits. Advocates are also optimistic that President-elect Barack Obama, who made campaign promises to end childhood hunger and whose mother once briefly received food stamps, will make the issue a priority next year.
"We soon will have the most food stamps recipients in the history of our country," said Jim Weill, president of the Food Research and Action Center, a D.C.-based anti-hunger policy organization. "If the economic forecasts come true, we're likely to see the most hunger that we've seen since the 1981 recession and maybe since the 1960s, when these programs were established."
The Agriculture Department is set to release the new numbers as early as this week. Agency officials declined to confirm the figures but outlined them in a briefing last month for advocates and administrators of state food stamp programs. Breaking the symbolically important 30 million mark comes on the heels of government data showing that 11.9 million people went hungry in the United States at some point last year. That included nearly 700,000 children, up more than 50 percent from the year before.
Food pantries and other charitable organizations are also reporting an increase in demand from those in need. Visits to local pantries are up by 20 to 100 percent over the past six months, and calls to the Capital Area Food Bank's hunger hotline have jumped 248 percent. Most are from people who have never used food stamps or a pantry before, said Lynn Brantley, the organization's president and chief executive.
Analysts attribute the jump primarily to rising unemployment, which hit 6.5 percent in October and is predicted to increase to 8 percent by the end of 2009, but rising food costs are also a factor. Although prices have fallen from the levels of this past spring, they remain high. In October, the consumer price index for food and beverages had jumped 6.1 percent over last year. Staples such as eggs and bread rose even faster.
For low-income families, who spend a higher percentage of their monthly budget on food, that rise has been particularly painful. Food stamp benefits are adjusted for inflation only once a year, and as of September, the maximum benefit fell $64 a month short of the cost of the thriftiest, USDA-established diet for a family of four. The annual adjustment in October of 8.5 percent largely brought the benefit in line with food costs again, but the Center on Budget and Policy Priorities, a nonpartisan policy group, estimates that if current inflation persists, by December benefits will again fail to match the cost of the thrifty food plan.
"At a time when we have more people turning to the food stamp program, it is less and less able to meet their basic food needs," said Stacy Dean, the research center's director of food assistance policy.
To qualify for the food stamp program, whose name was officially changed last month to the Simplified Nutrition Assistance Program, recipients must have an income below 130 percent of the federal poverty level, or less than $27,564 for a family of four. The benefits, which average $109.93 a month per person, are based on a plan set by the government to represent a low-cost but nutritionally adequate diet. Participants apply locally to receive an electronic card that is used like an ATM card to buy food at most grocery stores and some farmers markets. The maximum benefit for a household of four is $588 a month.
At the Department of Human Services on H Street NE yesterday, the benefits office was busy. D.C. resident Harry Washington, 54, had come to apply for food stamps after losing his job at a Dupont Circle restaurant that closed for renovations last month. Over the past three years, he has received food stamps several times to tide him over between jobs. "This all has been going on awhile. It just depends where you are on the totem pole whether or not you have felt it," Washington said.
Jaqueline Hawkins was also there to sign up. The 47-year-old broke her hip last November, forcing her to leave her job at a Whole Foods Market. Hawkins received short-term disability, then unemployment benefits. Both have run out. "I came for food stamps because my other options have expired," she said. Hawkins plans to begin looking for work after Jan. 1.
Benefit applications are up around the Washington area. In the District, the number of applicants in October was 7.5 percent higher than last year's. In Arlington County, the average number of food stamp applications in the past six months is up 17 percent over applications during the same period last year. At the Arlington Food Assistance Center, meanwhile, the number of clients has jumped by 25 to 35 percent over last year, said Executive Director Christine Lucas. Lines for food, sometimes with as many as 95 people, begin forming around 7:30 a.m., even though the food pantry does not open until 10.
On a recent morning, one of the early arrivers was Alvaro Ascencio. The 45-year-old, who lost his construction job after 12 years, was hopeful he would find work soon and had turned to the pantry as a stopgap. "If I didn't know about this, I wouldn't know what to do," Ascencio said through an interpreter. To tackle the problem, supportive lawmakers are pressing to include a temporary bump in food stamp benefits in the next stimulus package. Similar proposals failed to pass twice this year, but there appears to be broad support now for an increase of 10 to 20 percent, advocates and lawmakers said.
Economists say an increase in food stamp benefits would help the economy overall by concentrating relief on those most likely to spend the money quickly, pumping dollars into an economy desperate for demand. According to Mark Zandi, chief economist of the rating agency Moody's Economy.com, every $1 spent on food stamp benefits generates $1.73 of economic activity, more than extending unemployment benefits or offering state fiscal relief.
"Congress has been focusing on the impact on the financial markets," said Dean at the Center on Budget and Policy Priorities. "We want them to focus on the supermarkets and help 30 million people."
In 2009, the new Congress will also have to deal with renewing the Child Nutrition and WIC Reauthorization Act, which includes school breakfast and lunch programs and the Women, Infants and Children program that provides money for specific foods such as milk and infant formula. The act is due to expire in September 2009, and Sen. Tom Harkin (D-Iowa), who chairs the Agriculture Committee, has long been keen to expand eligibility and strengthen mandates for nutritious food in these government-funded programs.
Food Prices Expected to Keep Going Up
For more than a year, food manufacturers have been shaving package sizes and raising prices, declaring that they had little choice because of unprecedented increases in the cost of raw ingredients like corn, soybeans and wheat. Now, with the price of grains and other commodities plunging, it may seem logical that grocery prices will follow. But while some grocery items like milk and fresh produce are dropping, the prices of most packaged items and meat are holding firm or even increasing. Experts warn that consumers should not expect lower prices anytime soon on most items at the grocery story or in restaurants.
Government and industry economists project that the overall cost of food will continue to climb in 2009, led by increases for meat and poultry. A big reason, they say, is that food companies still have not caught up with the prolonged run-up in commodity prices, which remain above historical averages despite coming down from their highs early this year.
The Agriculture Department is forecasting that food prices will increase 3.5 to 4.5 percent in 2009, compared with an estimated 5 to 6 percent increase by the end of this year. Some economists project even steeper increases next year. For instance, Bill Lapp, principal at Advanced Economic Solutions in Omaha, said he expected food prices to jump 7 to 9 percent next year. "For the last 21 months, food manufacturers, restaurants and livestock producers have been absorbing significant costs that in my view are likely to be passed on to consumers in 2009 and beyond," said Mr. Lapp, a former chief economist at ConAgra Foods.
While predicting future food prices is an inexact science, data released by the Labor Department last week suggested the forecasters might be right. Overall consumer prices recorded the biggest drop in the history of the Consumer Price Index, but food prices continued to inch upward, albeit at a slower pace than in previous months. The C.P.I. showed that grocery prices rose 0.1 percent in October. Some of the more visible items on grocery shelves, including produce and dairy products, dropped sharply in recent weeks, but not enough to offset the general trend of rising prices. Restaurant prices rose 0.5 percent in October.
Commodity prices began climbing rapidly in the fall of 2007, and food companies were hit hard by the increases. They tried to slow eroding profit margins by cutting operating costs, making packages smaller and raising prices. Some companies, like Kellogg's and Heinz, have managed to offset the higher ingredient costs and post robust profits by using shrewd commodity hedges and by raising prices without losing many customers. They also benefited from a trend of consumers eating out less and buying more groceries. But other food companies have struggled. Hershey's, for instance, locked in high cocoa prices this year only to see prices drop this fall, analysts say. And meat and poultry companies have been hit by higher feed costs and a limited ability to charge higher prices, at least in the short term.
Now, even though ingredient costs like corn and wheat have dropped, meat and poultry providers say they still have not raised prices enough to cover their increased costs. And packaged food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins. Michael Mitchell, a spokesman for Kraft Foods, said the company's food ingredient costs this year were running $2 billion higher than in 2007, a 13 percent increase, but that the company had raised its overall prices by only 7 percent.
William P. Roenigk, senior vice president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand. "The time is coming when we're going to see a very significant increase in the retail price of chicken," he said.
The restaurant industry, which has been battered by a sharp drop in customers, also says it has not been able to raise prices enough to keep pace with the cost of ingredients. People in the restaurant business said they did not like raising prices during an economic downturn. "If anything in this environment, one would be looking at the ability to offer much greater emphasis on value pricing in restaurant menus," said Hudson Riehle, chief economist of the National Restaurant Association. "In contrast, exactly the opposite is happening. Our operators are being forced to raise menu prices at the highest rate since 1990."
Many economists acknowledge that predictions about food prices over the next couple of years are guesses, because commodity prices are unpredictable. Ephraim Leibtag, an economist for the Agriculture Department, said food inflation would slow by the middle of next year if commodity prices remained low. "Right now the forecast is about 4 percent, but that would be lowered if we do not see any surge in commodity costs over the next few months," he said.
A reason that overall food prices are expected to continue increasing is the lag between price increases for basic commodities and for finished food products in the grocery store, particularly for meat and processed foods. Consider the price of corn, an ingredient in things like cereal and breaded shrimp. It was not too long ago that corn hovered around $2 or $3 a bushel. But corn prices began climbing last fall and peaked around $8 a bushel in June. They have since dropped to about $3.50 a bushel, still above the historical norm. Some food manufacturers locked in prices for corn and other commodities in the spring and summer, fearing that prices could go even higher. But prices fell instead, and they are now stuck with the higher prices until their contracts expire.
When costs go up for livestock producers, they are often unable to immediately raise prices because those prices are set on the open market, which is dictated by supply and demand. Instead, they begin reducing the size of their herds or flocks, which eventually leads to less meat on the market and higher prices. But reducing livestock production can take months to years, and in the interim it can actually suppress prices as breeding animals are slaughtered to reduce production.
The prospect of more food inflation is inflaming a debate over its causes. Many food manufacturers and economists maintain that one culprit is government policies promoting the use of ethanol fuel made from corn. About a third of the corn crop is used for ethanol, putting ethanol producers in competition with livestock farmers and food manufacturers. The result, they contend, is that prices for corn are now higher and more volatile. "The connection of oil prices to agricultural commodities is new as of 2007, and it's a major game changer for those in the food production business," said Thomas E. Elam, president of FarmEcon, a consultancy.
But ethanol advocates counter that the food industry's arguments have been proved false, saying that corn prices have declined as ethanol production is increasing. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol industry group, said food companies were "very quick to tell the American public that they had to raise food prices because corn was so expensive, and that the reason corn was so expensive was corn-based ethanol."
Mr. Hartwig added: "Now, clearly, we know that relationship doesn't exist. If ethanol isn't the reason, what is the real reason for food prices going up?"
More Risk Being Returned to Farmers
A panel of ag lenders presented financial and credit outlooks at the National Press Club in Washington, D.C. on Nov. 18. The Farm Foundation’s president, Neil Conklin, opened the meeting by inviting the presenters to talk about “How the Financial/Credit Crisis May Impact the Agriculture and Food Industries.” The panelists were Joe Brasher of the First State Bank of Sharon (Tennessee); Cornelius “Corny” Gallagher of the Bank of America; Paul Marsh of Prudential Agricultural Investments; Bob Frazee of Mid-Atlantic Farm Credit and Paul Ellinger of University of Illinois, all on hand to discuss credit issues and answer questions from the audience.
The overall message from the lenders was that farm credit is strong and there is not a crisis within the farm credit industry. Gallagher, Bank of America’s senior vice president and agribusiness executive, described the strength of the bank’s diversified portfolio. When comparing today’s situation to the farm credit crisis of the 1980s, Gallagher said, “it is clear we are not in a farm credit crisis today.” However, the panelists agreed the global economic crisis is effecting certain aspects of credit availability and many of those risks are being passed on to farmers. Marsh said much of the farm credit strength is due to the low rate of delinquency on the part of farmers historically, as well as farm lenders not following the same predatory practices that caused the downfall of the mortgage market.
Ellinger, of the University of Illinois, said that the farm debt-to-asset ratio is on average low, currently at 10 percent, although he cautioned how this should be interpreted. Brasher, of Tennessee, said “agriculture is in its third year of excellent profits and is situated well to handle the economic crisis.” Over the past year lenders were able to put up large amounts of cash to cover any problem areas, and several of the panelists said farm lenders and banks will be able to do that again if necessary.
Brasher said that farmers have begun asking him about their local bank’s stability, wondering if they should change financing venues. He said although local and community banks are experiencing some ripple effects due to the overall economic crisis, they have been shown to be generally stable. Brasher said this is also because the smaller local banks did not made subprime loans and they acted very differently than the investment banks that have recently failed.
Many farmers were unable to lock into the beneficial high rates earlier in the season because they were unsure of crop yields, said Marsh. Gallagher pointed out that a stable environment is much easier to deal with than a volatile one, for both farmers and lenders. According to Ellinger, many Illinois farmers have experienced recent volatility in incomes, and he believes the overall credit crisis will mostly effect farmers’ profit margins. Brasher said farmers are having a hard time deciding what to plant in the upcoming season because of market volatility. He said the economic crisis causes fears and emotions, and it is difficult to make decisions living with this unpredictability.
Gallagher said that economic predictions for the lenders were difficult this past year and it created problems because lenders didn’t know how to prepare. At one time “the range for corn was from $2 to $10 a bushel, a very wide range that left a lot of uncertainty, he said. Gallagher believes that “improvements in forecasting ability will be very important for lending institutions in the coming months.” According to Brasher, market volatility affects ag businesses even more than farmers and called these businesses the “first line of defense” in the ag industry. For instance, he said grain elevators had made some contracts with farmers but then became caught by the market variations in grain prices. Now, elevators are no longer making forward contracts, leaving farmers with more risk and uncertainty.
Global credit problems are effecting agriculture, said Gallagher, referencing a Bloomberg report on trade letters of credit and shipping of grain. The Oct. 15 report states that “traders are finding it harder to get letters of credit that guarantee payments for goods” and that shipping and trading are slowing down because nobody wants to take the risk that they won’t get paid.
Lenders will be looking more closely at farmers in terms of cash flow and crop insurance, said panel members. Ellinger said that he is seeing evidence of lending institutions scaling back new loans to farmers, and believes that longer, fixed-rate loans are no longer available. At the end of the meeting, one questioner acknowledged that, in his experience, credit for farmers is still available, but said it is becoming much harder for farmers to get long-term loans. He sees farmers being offered only short-term, variable rate loans, sometimes at seven or eight percent, he said, while still being asked to put 50 percent down.
In response, a panelist said that in fact banks’ credit rules have not changed but that, “in this economy, it got to be harder to qualify to borrow.” “Long-term fixed rate loans are just not available right now due to the overall economy,” said the panelist. The Farm Credit Administration’s Nancy Pellett asked the panel if there was servicing available for new, young farmers. She said that this group is critical to agriculture and cannot be left behind during economic downturns, especially because the average age of American farmers today is in the late 50s. Loaning to new, beginning farmers is not a problem, one lender responded, because “typically young farmers come in with older family members to get loans.” The young farmers must still conform to underwriting standards, he said.
Another panelist said that one interesting recent development in successful new farmers seeking loans are third-generation farm laborers, especially in the western U.S. He said there is a young, minority farm council being put together to assist this group with business training and counsel. Some heated back-and-forth discussions between panelists and audience members attempted to place blame on oil speculation as a major cause of the volatile market. The panelists agreed that there was a direct relationship between the price of corn and the price of oil, and that on the same day that corn prices peaked in 2008, so did the price of oil.
Ellinger said that his main concerns for agribusiness financing are in the areas of ethanol, grain elevators, input supplies such as fertilizer, and trade letters of credit no longer being accepted. He would like to see more cooperation among ag lender groups and suggested that now might “be the time to stop competing with each other.” Ellinger said he is concerned about the financial, commodity and input price risk being pushed to the producer: “Risk that has typically been managed by other groups is now being pushed on the farmer.”
In Lean Times, Online Coupons Are Catching On
On the Internet, nothing travels faster than a tip on how to score a bargain. Especially in an economic downturn.With online retail sales falling this month for the first time, Internet merchants are offering steep discounts to anyone willing to punch in a secret coupon code or visit a rebate site for a “referral” before loading up their virtual cart.
Shoppers obsessed with finding these bargains share the latest intelligence on dozens of sites with quirky names like RetailMeNot.com, FatWallet.com and the Budget Fashionista. And more consumers than ever are scanning the listings before making a purchase at their favorite Web site. Some online shoppers are so good at this game that they almost never buy anything at full price, making them the digital era’s version of bargain hunters who used to spend hours clipping coupons to shrink their grocery bills.
Tavon Ferguson, a 25-year-old graduate student in Atlanta, became obsessed with finding online deals last spring, while planning her July wedding. She scoured the Web for coupons and got free save-the-date cards, $8 bracelets for her bridesmaids and free shipping on flash-frozen steaks for the rehearsal dinner. “I was able to do my wedding at a price that nobody would even guess” — $6,000, all included — “because everything down from invitations to the photo album, I got for ridiculously low prices with online coupon codes,” Mrs. Ferguson said.
Her favorite sites include RetailMeNot.com, which has one of the most comprehensive lists; CouponMom.com, which includes coupons for physical stores; and CouponCode.com, which is organized by category. Mrs. Ferguson may be more fanatical than most people, but surfing for online coupons is growing in popularity. In October, 27 million people visited a coupon site, according to comScore Media Metrix, up 33 percent from a year earlier.
“Coupons had never been a big factor online the way they are offline. This is something new,” said Gian Fulgoni, chairman of comScore. “It’s taken pricing power away from the retailers and given it to the consumers, because the consumer is totally up to speed on what the prices are.” Retailers have mixed feelings about this shift. Generally, companies prefer limited discounts, e-mailed to a select group of customers or sent inside packages with a purchase. When the coupons get wider exposure, retailers lose control, potentially costing them more money than they expected.
Two years ago, Sierra Trading Post, a site that sells overstock outdoor gear, sent a coupon code with 1,000 of its 50 million catalogs, expecting to generate $2,000 in sales. Instead, it led to $300,000 in sales after a customer posted it online. “We certainly appreciated the sales, but sales with that code were at a very low margin,” said David Giacomini, director of catalog operations for the company. Sierra Trading now sends some coupons directly to Web sites and limits catalog codes to three uses.
Some retailers try to battle the coupon sites. Harry & David, a seller of fruit baskets, threatened legal action against RetailMeNot.com this spring for publishing its discounts, prompting the coupon site to steer visitors to other gift-basket companies. William Ihle, a spokesman for Harry & David, said that all of its deals were available on its own site and the coupon sites “disingenuously mislead the consumer” by posting expired or unverified discounts.
Other retailers use the coupon sites as marketing tools. For example, when Scott Kluth founded CouponCabin in 2003, he had discounts for only 180 stores, and many of them did not like it. Today, 1,300 merchants, including Dell, Target, Home Depot and Victoria’s Secret, send him discount codes — totaling about a thousand a week. “They have seen the power of a coupon, in this economy especially, and they’re absolutely embracing us,” Mr. Kluth said.
Most of the sites list coupon codes submitted by readers and retailers. Shoppers can comment on whether the coupon worked and share tips in user forums. Some sites e-mail coupon lists to subscribers. RetailMeNot.com goes further with an add-on to the Firefox browser that alerts users when an e-commerce site they are visiting has a discount.
EbatesMany of the coupon sites are run by Web entrepreneurs who see a business opportunity in collecting online discount codes at one site. They earn a commission from the retailer when a customer makes a purchase. Sites like FatWallet.com and Ebates offer shoppers cash back on purchases if they sign in and then click through to the retailer.
But other discount aggregator sites were started by passionate shoppers eager to share their bargain-hunting wisdom. Kathryn Finney began Budget Fashionista in 2003, when she finished graduate school and found herself broke and newly interested in bargains. Now, “it’s in my blood,” she said. “I cannot physically pay full price.” Ms. Finney’s site was originally aimed at friends and family, but it quickly developed a following that has spiked 60 percent since August to 550,000 visitors a month. “We’re gaining a whole new level of fans, who maybe weren’t budget shoppers last year,” Ms. Finney said. Her site now makes money through advertising and referral fees.
Among her coupon-scouting tips: search the name of an online store and the word “coupon” and compare the promotions, because bigger sites are often able to negotiate better offers; if you find a coupon for an offline store, call the Web site and ask it to match the price; and insist upon free shipping, even if it means calling the manager and asking for a coupon code.
Deborah Dockendorf, a power Web shopper in Chicago, has another piece of advice: if you cannot immediately find a coupon code for a specific store, just wait. “It might be two weeks, but you will have a code for it,” she said. Even though Ms. Dockendorf lives near the department stores of Michigan Avenue and the boutiques of Oak Street, she says she does 98 percent of her shopping online — always with a discount. She recently bought six pairs of $45 Wolford opaque stockings from Saks Fifth Avenue with a 40 percent discount and free shipping. She also snagged a $400 feather bed at half off from Pacific Coast Feather Company.
“I used to feel a little embarrassed about using them, like I was one of those coupon queens at the grocery store,” she said. “But now there is not a day that goes by when a friend doesn’t e-mail me for codes, and if I don’t have one, I can find one for them soon.”
Sewing Up the Safety Net
Largely missing from the discussion about the faltering economy is the recession’s impact on the 37 million Americans who are already living at or below the poverty line — and the millions more who will inevitably join their ranks as the downturn worsens. Poverty and joblessness go hand in hand. If unemployment rises in the coming year from today’s 6.5 percent to 9 percent, as some analysts predict, another 7.5 million to 10.3 million people could become poor, according to a new study by the Center on Budget and Policy Priorities.
The prospect of nearly 50 million Americans in poverty is even more daunting when one considers the holes that have been punched in the safety net over the last quarter-century. Since the Reagan administration, the federal government has steadily reduced its role in curtailing poverty, or even in coordinating state and local efforts to help alleviate it.
Meanwhile, most states reduced or eliminated cash assistance for single poor adults and limited access to food stamps. Stricter eligibility requirements keep thousands of people from collecting jobless benefits. Facing budget deficits, cash-strapped states will be tempted to cut social programs even more. The experience of being poor in America, never easy, will soon become even more difficult for more people — unless Congress boosts food stamps, modernizes the unemployment compensation system and takes other steps to strengthen the ability of the federal and state governments to help the millions who will need assistance.
This is all the more important since the current poverty statistics significantly understate reality. The federal yardstick used to gauge poverty is severely outdated, giving too much weight to some factors in a typical family budget, like the cost of food, and not counting others, like the cost of child care and out-of-pocket medical costs. It also doesn’t consider regional differences in the cost of living and doesn’t include the cost of child care, taxes or the value of noncash benefits such as food stamps or tax credits.
The National Academy of Sciences years ago recommended a new measure of poverty that takes such variables into account. But the revised framework has never been adopted because, among other reasons, it would add several million more people to the ranks of the poor. If there was ever a time for more precise measurements, it is now. Better numbers will produce a better understanding of poverty, and will enhance Washington’s ability to respond in the difficult days ahead.
Obama to Boost Stimulus With Funds for Roads, Energy
President-elect Barack Obama, encouraged by congressional Democrats, will propose early next year an economic-stimulus package three times larger than one he was discussing only weeks ago, with the main focus on infrastructure, aides and lawmakers said. The package, aimed at ending the worst U.S. economic slump in at least a quarter-century, probably won’t be submitted until January, giving up any chance of passing a stimulus plan during a lame-duck session of Congress next month.
An infusion of as much as $700 billion is warranted, according to Senator Dick Durbin of Illinois, the No. 2 ranking Democrat in the Senate and Obama’s closest ally in Congress. The plan would create jobs and boost sales at companies including Caterpillar Inc., the largest maker of construction equipment, and engineering firm Fluor Corp.
“You better stimulate with a number that will create measurable economic growth,” Durbin said in an interview.
Obama, who said during a press conference yesterday that he had to deal with an “economic crisis of historic proportions,” declined to give a range for the new package he favors. Still, he made Durbin’s point that it will have to be big enough to restore confidence. The spending will be “of a size and scope that is necessary to get this economy back on track” and “significant enough that it really gives a jolt to the economy,” he said. Obama will hold another press conference today to discuss overhauling government spending, during which he will announce Peter Orszag, head of the Congressional Budget Office, as his budget director, according to a Democratic aide.
During the presidential campaign, Obama, 47, proposed a $175 billion plan with tax-rebate checks for consumers as well as spending on school repairs, roads and bridges, aid to states, and tax credits for job creation. Since the Nov. 4 election, the government reported the jobless rate climbed to 6.5 percent in October, the highest since 1994, with retail sales and consumer prices plunging the most on record. Federal Reserve policy makers now expect the economy to contract through the middle of 2009, with analysts forecasting the worst recession since at least the early 1980s.
Aides to Obama say Lawrence Summers, named yesterday as director of the National Economic Council, favors spending as much as possible to spark growth. Many Democrats say much of the money should be used to jumpstart federal infrastructure projects because that would create jobs and fuel economic growth.
Laura Tyson, an economic adviser to Obama, said a program may be used to finance highway projects, alternative-energy initiatives, tax cuts, education programs and aid to state governments struggling to balance their budgets. Tyson said the package could total as much as $600 billion over the next two years as the administration seeks to offset a decline in consumer spending. She said the size of the proposed stimulus has grown as the economic outlook has worsened.
“If the economy is faltering at a faster pace than expected, which does seem to be the case right now, then you want to go for the big number -- you want to go for the $600 billion range,” Tyson, who previously served as President Bill Clinton’s top economic adviser, said in an interview with Bloomberg Television. Caterpillar, based in Peoria, Illinois, has said the U.S. needs as much as $700 billion in new roads, bridges, airports and ports to remain competitive with countries such as China. Public projects account for about 30 percent of total construction spending in the U.S., and may help blunt declines in residential building, Ann Duignan, an analyst with JPMorgan Chase & Co. in New York, wrote in a note yesterday.
Terex Corp., the third-largest maker of construction machinery, also stands to benefit, while demand for raw materials may lift companies that manufacture the mining equipment such as Joy Global Inc. and Bucyrus International Inc. Fluor, the largest U.S. publicly-traded engineering company, and Jacobs Engineering Group may win contracts under the stimulus, analysts have said.
The plan’s components are likely to remain essentially the same as the $175 billion package Obama initially advocated, said a person familiar with the presidential-transition team. Spending focused on “shovel-ready” infrastructure would be ratcheted up because the Obama team believes it has great job-creating potential, the person said. A $168 billion package passed in February emphasized tax rebates. Democratic economists say that, because consumers tended to save a large chunk of that money, rebates aren’t as effective in stimulating economic activity and creating jobs as is direct spending on infrastructure projects.
The Obama plan, which the president-elect said will be his economic team’s first priority, will be focused on creating and preserving 2.5 million jobs. “If we do not act swiftly and act boldly, most experts now believe we could lose millions of jobs next year,” Obama said yesterday. He stressed the urgency of passing legislation quickly, adding that “we do not have a minute to waste.” Yet it is unlikely Congress will produce a stimulus bill in December, a person inside his camp said.
“Growing Washington with runaway spending is not change, it’s more of the same,” Senator Jim DeMint, a South Carolina Republican, said in a written statement. “If federal spending actually created economic growth, our economy would be booming right now. We are trillions of dollars in debt and Obama’s massive new spending program threatens to send our nation over a fiscal cliff, leading to higher taxes and fewer jobs.” DeMint, a member of the Joint Economic Committee, said “it’s time to stop the failed bailouts and end the wasteful spending” and called for more tax cuts.
President George W. Bush has expressed opposition to any stimulus bill heavy on government spending, preferring tax cuts and rebates. Obama voiced optimism over the prospects for a stimulus during yesterday’s press briefing, painting it as a measure with broad support. “We have a consensus, which is pretty rare, between conservative economists and liberal economists, that we need a big stimulus package,” he said. “Across the board, people believe that this stimulus is critical.” He said the plan would address both near-term concerns and far-reaching ones by investing in clean energy projects and education in addition to projects designed to create jobs immediately.
“Not only do I want this stimulus package to deal with the immediate crisis, I want it also to lay the groundwork for long- term, sustained economic growth,” Obama said.
Durbin said that in addition to more infrastructure spending, he would favor more money for the Amtrak train system as “a national priority.” That may not be a hard sell in an Obama administration. Vice President-elect Joe Biden commuted almost daily from Washington to Wilmington, Delaware, on Amtrak throughout his years in the Senate.
Most Dividends Cut Since 1950s as Banks Conserve Cash
Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash. Citigroup Inc., Genworth Financial Inc. and New York Times Co. are leading 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends, according to data compiled by Standard & Poor’s. The reductions in November exceeded the 81 dividend cuts in October and 60 in September.
“Until we start to see the economy turn around, you have to assume broadly that dividends could be at risk in many sectors of the economy, especially among financials,” said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim Advisors Inc., which manages about $358 billion. The recession and global credit crunch are reducing profits for the fifth straight quarter and leaving less spare cash for quarterly payments to shareholders. Curtailing dividends adds more injury to investors battered by this year’s 42 percent decline in the S&P 500 Index, the worst performance since 1931.
Financial companies accounted for six of the eight dividend cuts or suspensions in the S&P 500 this month through Nov. 24, based on data from S&P index analyst Howard Silverblatt. The industry has lost $972 billion worldwide from the subprime mortgage market collapse and raised $880 billion to replace it. U.S. stocks climbed today, driving the S&P 500 to the biggest four-day advance since 1933, as a rally in oil prices lifted energy shares and investors speculated President-elect Barack Obama’s economic team will bolster growth. The S&P 500 gained 3.5 percent to 887.68.
Tumbling stock prices are increasing the dividend yield for S&P 500 companies to the highest level in at least 15 years. The 3.8 percent yield, on a weekly basis, is greater than the 3.6 percent return from a 30-year U.S. Treasury. Options prices, earnings growth and industry trends suggest that 83 companies may boost their dividend, according to data compiled by Bloomberg. 3M Co., Eli Lilly & Co. and Coca-Cola Co., each yielding more than 3.1 percent, have increased their payout for the past 25 years and likely will do so again, data from S&P and Bloomberg show.
“We’re looking for companies that have the balance sheet and cash flow in this environment to maintain their dividend,” said Brad Evans, a fund manager at Milwaukee-based Heartland Advisors Inc., which manages $2.5 billion. “When things settle down, the wheat will be separated from the chaff.” Citigroup, which lost 69 percent of its market value in the past two months, said it would pay a quarterly dividend of no more than 1 cent a share over the next three years after receiving a $20 billion cash injection from the government this week. The New York-based lender, which paid 54 cents a share last year, has reduced its payment three times in 2008.
Genworth, the insurer spun off by General Electric Co., suspended its 10-cent quarterly payout earlier this month. Shares of the Richmond, Virginia-based company plunged 43 percent in New York Stock Exchange composite trading a day after it reported a $258 million third-quarter loss. New York Times cut its quarterly dividend by 74 percent to 6 cents on Nov. 20. The New York-based company called the decision “difficult but necessary” as revenue dropped 9.4 percent from the year-earlier period.
D.R. Horton Inc., the biggest U.S. homebuilder, yesterday cut its dividend for the quarter to 3.75 cents a share from 7.5 cents as record foreclosures deepened the housing slump. The reduction was the second for the Fort Worth, Texas-based company this year. “Companies feel like they have to conserve capital,” said Bill Stone, who oversees $56 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “If you’re out there raising a lot of capital, it doesn’t make a whole lot of sense to turn around and be paying it out.”
Credit crisis threatens gas markets-industry
The credit crisis may threaten the security of gas supplies and hinder new investments in the sector after hitting confidence in gas trading, according to participants at an international energy conference. "The effect of the credit crisis on new capital-intensive export projects will be material for security and diversification of supplies," Domenico Dispenza, chairman of the Eurogas association, told the European Autumn Gas Conference at the lakeside town of Cernobbio in northern Italy on Tuesday.
The knock-on effects of the crisis were affecting both the European Union and its gas suppliers, highlighting their interdependence, Dispenza said. Some energy companies, including Italian utility Enel SpA, have spoken about the possibility of cuts in capital spending to help address the effects of the credit crisis. However, Europe's major project to diversify supplies by bringing gas from the Caspian region, the Nabucco pipeline, was pushing ahead despite the economic gloom, Stefan Judisch, a senior supply executive at Nabucco's partner RWE, told Reuters.
Dispenza, who is head of the gas division at Italian oil company Eni SpA, said he saw a possible decrease in gas consumption in the next few years.
He said forecasting medium- and long-term gas demand would become increasingly difficult. "The common wisdom of its unstoppable growth (of demand for gas) is being challenged by two full years of decrease, the combined effects of mild weather, marginal fuel competition and efficiency measures," he said.
Gas traders at the conference lamented that the crisis had drained liquidity from the market, short-term credit conditions had deteriorated significantly and reliable trading partners had become hard to find. "All of a sudden, liquidity is the name of the game," said Stephen Asplin, managing director of NV NUON Energy and Trade Wholesale.
Energy traders have called for the need to restore the trust between market players and welcomed the launch of a gas bourse by France's energy exchange Powernext, due on Wednesday.
"We are convinced that it is the best way to restore some confidence in trading ... it's the best way to reduce a counterparty risk, a credit risk -- major issues for the next months and the next year in our community," said Philippe Vedrenne, managing director of Gaselys.
Gaselys, energy trading arm of France's GDF Suez, will be a market maker on the new gas exchange, he said. (Writing by Svetlana Kovalyova and Stephen Jewkes, editing by Anthony Barker)
LBO Boom’s Last Vestiges Would Disappear With BCE Deal’s Demise
The C$52 billion ($42 billion) purchase of BCE Inc. by private-equity firms may collapse, erasing the last vestiges of a leveraged-buyout boom that ground to a halt almost 18 months ago. BCE said yesterday that the takeover may unravel following auditor KPMG’s opinion that the parent of Bell Canada, the country’s largest phone company, would be insolvent once saddled with $39 billion of new and existing debt. The acquisition, announced in June 2007 and set to close Dec. 11, would have been the second-biggest LBO behind the 2007 purchase of energy producer TXU Corp. by KKR & Co. LP and TPG Inc.
The BCE deal, led by Ontario Teachers’ Pension Plan, Madison Dearborn Partners LLC and Providence Equity Partners Inc, is the biggest remnant of a record $1.42 trillion of LBOs in 2006 and 2007. Its demise would be more evidence of how private- equity firms have shifted from multibillion-dollar buyouts to shopping for distressed companies amid a dearth of financing and a deepening global recession.
“BCE is really an Old World transaction,” said Randy Schwimmer, senior managing director and head of capital markets of New York-based Churchill Financial LLC. “In the New World, private equity buyers are looking to tease out value wherever it can be found, whether that’s in smaller new issues, distressed paper or mining their own portfolios.”
Blackstone Group LP, the world’s largest private-equity firm by assets, is seeking to buy distressed debt through its GSO Capital LP arm, which it acquired earlier this year. Commitments to distressed funds rose 28 percent to $33 billion during the first half of the year, according to London-based researcher Preqin Ltd. “Everything is different now,” said Randal Stephenson, senior managing director at New York-based Pali Capital Inc., which advises companies on mergers and acquisitions. “Bell Canada was a full-value, premium-priced deal. No one’s willing to do the sorts of things they did six months or a year ago.”
Announced private-equity deals have dropped more than 70 percent to $202 billion so far this year, according to data compiled by Bloomberg. The biggest transaction this year was the $7 billion stake bought by investors led by TPG Inc. in Washington Mutual Inc. That investment evaporated five months later when the U.S. government seized Washington Mutual’s assets, wiping out the TPG-led group’s $2 billion in equity.
The lack of deals results from a dearth of Wall Street financing. Private-equity firms relied on banks including JPMorgan Chase & Co., Citigroup Inc. and Merrill Lynch & Co. for loans and bonds to fund transactions. Eager to reap the fees for arranging such financing, banks competed to provide buyout firms with the best terms, including the ability to pay off debt by issuing more debt, or so-called covenant-lite loans, that made defaults less likely.
Those banks stopped making new commitments in August as subprime-mortgage defaults triggered an aversion to other types of debt, including leveraged loans, a staple of LBO financing. Wall Street firms were left holding more than $350 billion in committed loans they’d expected to sell to investors, according to fixed-income research firm CreditSights Inc. in New York.
At least $55 billion of LBOs have fallen apart since last year. The botched transactions include J.C. Flowers & Co.‘s agreement to buy SLM Corp., the student lender known as Sallie Mae; casino operator Penn National Gaming Inc.‘s deal with Fortress Investment Group LLC; and KKR’s plan to buy Harman International Industries Inc. Citigroup, based in New York, and Frankfurt-based Deutsche Bank AG agreed to lead the financing for the BCE deal, which totaled $34 billion, according to government filings.
The lack of financing makes new deals difficult, and private-equity firms are struggling to put their record-setting buyout pools to work. Blackstone, manager of the world’s biggest buyout fund at $21.7 billion, teamed with Bain Capital LLC and NBC Universal to buy The Weather Channel for about $3.5 billion in July. Blackstone last year bought Hilton Hotels Corp. for $20 billion. Blackstone executives have acknowledged that financing for deals that size isn’t available as potential investors hold on to cash.
“You had a situation with a rising tide for a while,” said Paul Schaye, managing director of New York-based Chestnut Hill Partners, which helps private-equity firms find deals. “Now the water is completely gone. All the boats are sinking.” The remaking of Wall Street, with banks including Goldman Sachs Group Inc. and Morgan Stanley getting government money and converting to bank holding companies that are subject to stricter regulations, may further delay a return to dealmaking.
“It’s easy to imagine a scenario where we don’t have normalized markets again until 2011,” said Sean Ryan, an analyst at Sterne, Agee & Leach in New York. He pointed to the 1988 purchase by KKR of RJR Nabisco Inc., the $30 billion which stood as the biggest LBO on record until 2006. “After all, how many years did it take for RJR Nabisco to get eclipsed?” Ryan said.
Bluebay Closes Hedge Fund, Falls the Most Since IPO
Bluebay Asset Management Plc dropped the most since its initial public offering two years ago after the manager of fixed-income investments said it will shut down its Emerging Market Total Return Fund. The $1.2 billion hedge fund, which accounts for 6 percent of assets under management, had dropped 53 percent this year, Bluebay said today in a statement. Fund manager Simon Treacher resigned “following a breach of internal valuation policy,” it said. He couldn’t immediately be reached for comment.
“Marketing other funds may now become very difficult,” said Gurjit Kambo, a London-based analyst at Numis Securities Ltd. who tracks the industry. “People become more nervous about putting money into Bluebay.” Bluebay won’t retreat from credit-market investments despite “extremely challenging” conditions, Chief Executive Officer Hugh Willis said in the statement. Satellite Asset Management LP and Artemis Asset Management joined the list this week of more than 75 hedge funds that have liquidated or restricted investor redemptions since the beginning of the year.
Bluebay declined 30 percent to 70 pence at 9:32 a.m., valuing the London-based company at 135 million pounds. The shares, which peaked at 568.25 pence in June 2007, fell 80 percent this year. The Emerging Market Total Return Fund was hurt by “liquidity conditions” and is no longer viable on its own, Bluebay said. The closure means that revenue from funds that bet on both rising and falling share prices will probably be below analysts’ estimates, Bluebay said.
The fund was hurt by “a perfect storm” after two wrong bets on cash bonds and credit default swaps, Kambo said. The value of cash bonds failed to rise as Bluebay expected, and credit default swaps narrowed, meaning the perceived risk of default decreased, he said. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.
Why The Dollar Is Getting Stronger
Investors have every reason to hate the US dollar. The rising deficit. The deteriorating economy. The plunging stock and bond markets. But rather than getting hammered by the financial crisis, the greenback is soaring. Since July the dollar is up 19 percent against the euro and 24 percent against the British pound.
Whether it's a boon or a burden depends on perspective. US companies with huge exports aren't thrilled, since a strong dollar hurts sales. On Nov. 24 Campbell Soup, which derives up to 30 percent of its revenues from outside the US, said currency exchange rates would cut earnings growth by five percentage points this fiscal year. Meanwhile, US consumers traveling to Paris will find their cash buys more than before.
What's behind the dollar's surprising strength? First, there's the fear factor. During tough economic times, investors often flee foreign currencies and other risky assets for safe havens like the U.S. dollar. The demand drives up the price relative to other currencies. In four of the past five recessions since the 1970s, the greenback finished the downturn higher than where it started.
The euro, the pound, and emerging-market currencies may also have been inflated after a six-year runup. A basket of foreign currencies, including the Brazilian real and the Chinese yuan, rose 25 percent between 2002 and mid-2008 vs. the dollar. The euro jumped 45 percent. But earlier this year some investors started betting the bubbles would burst, driving down the price of the currencies and conversely benefiting the dollar. "Since March, we were aggressively short the euro," says Colin Hart, director of currencies at Baring Asset Management.
US-based hedge funds and mutual funds that own international stocks have played a part as well. Both groups are getting hit with a wave of redemptions. Investors yanked $39 billion out of international stock funds run by US firms through the first nine months of the year, according to trade group Investment Company Institute. Without enough cash on hand to cover withdrawals, managers have had to dump foreign assets and buy US dollars to pay back investors. Those purchases boost the greenback.
The question now is whether the trend will continue. After its recent strong performance, the dollar is currently trading at about $1.28 to the euro, what some figure is a fair price based on the current buying power of consumers. "When the [market] stresses start to abate, people will be forced to think about whether they want to invest in the US," says Thomas Stolper, an economist at Goldman Sachs.
But if the global economy continues to sour, the dollar may rise even more. The credit storm is just beginning to hit emerging markets, many of which thrived on exports. With US consumption shrinking, the economic prospects of countries including India, Brazil, and Turkey look shaky. Such fears are hurting the local currencies. The once-strong Indian rupee has dropped 17 percent over the past two months.
The European currency markets may also feel the stress from a continued global slowdown. The euro zone lacks a strong central government that can adjust rapidly to crisis. For example, the European Central Bank has been criticized for not recognizing the severity of the crisis early enough: It raised interest rates in July before cutting them in October and November. Says Stephen Jen, an economist at Morgan Stanley: "The dollar's rise is genuine and more deserving than many skeptics have in mind."
First time ever: 10-year yield is below 3%
Demand for U.S. Treasury bonds surged Wednesday, lowering the yield on the benchmark note to an all-time low, as investors responded to grim economic data and falling mortgage rates. The closely watched 10-year note rose 1-3/32 to 106-18/32, and its yield fell to 2.99% from late Tuesday's 3.10%. The yield on this note has never gone below 3% in its 46-year history.
Wednesday's advance comes amid dour reports on the nation's labor market, housing market, manufacturing sector and consumer spending. Investors often flock to the safety of government bonds when economic conditions deteriorate. At the same time, a recently announced government plan to buy mortgage-backed securities drove holders of those securities into the Treasury market, according to Kim Rupert, fixed income analyst, Action Economics.
The Federal Reserve said Tuesday it will purchase up to $500 billion in mortgage- backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
Mortgage rates fell sharply in response to Tuesday's announcement. Rates on 30-year fixed rate mortgages averaged 5.81% Tuesday, down from an average 6.06% on Monday, according to Bankrate.com. The government's plan is a "huge backstop" for the mortgage-backed securities market, and lower mortgage rates could lead to a "refinancing boom," Rupert said. "As mortgage holders refinance their loans, that restructures mortgage- backed portfolios." Treasurys are the preferred alternative to mortgage-backed securities because they are of comparable duration, Rupert said.
Prices for other government debt instruments also rose. The 30-year bond rose 1-31/32 to 117-28/32, and its yield fell to 3.52% from 3.62%. Before last week, the yield on the 30-year bond had only once before fallen below 4% and that was at the height of the credit crisis in October. The 2-year note rose 5/32 to 100 9/32, and it yielded 1.12%, down from 1.18%. The yield on the 3-month note fell to 0.08% from 0.12% late Tuesday. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence, with a lower yield indicating less optimism.
As Financial Crisis Grows, EU Emerges Stronger
Will 2008 be remembered as the year that killed the euro-skeptics? It certainly didn't begin that way. Back in June, the people of Ireland stunned the world by voting down the Treaty of Lisbon, bringing the project of ever-closer European integration to a screeching halt. The failure of the Irish vote -- the only popular referendum on the treaty anywhere in Europe -- seemed to ratify the verdict delivered by French and Dutch voters in 2005 as they torpedoed the European Constitution: no more power for Brussels.
Then, in August, the EU got another jolt when war broke out between Russia and Georgia. As conflict raged in the Caucasus, European officials struggled to come up with a unified response, underscoring tensions between member-states. The old-guard, led by France and Germany, sought to balance their affection for the newly-democratic Georgia with their dependence on Russian natural gas imports. At the same time, newer member states like Poland, for whom the experience of Russian intimidation was all too familiar, clamored for solidarity with Georgia. The EU looked weak and riven by internal conflict.
These days, though, such bickering seems like ancient history. Between summer's turbulence and today's reality, the New York investment bank Lehman Brothers failed in mid-September, sending the world into a financial tailspin from which it might take years to recover. But instead of sounding the death knell for what was an already flailing EU, the financial crisis has had the effect of breathing new life into a bloc that just a couple months ago looked deflated and defeated. Now, from Iceland to the Czech Republic, previously wary populations are warming to the EU, heaping praise on the very Brussels-based behemoth they had spent so many years deriding.
The most obvious way the financial crisis has strengthened the image of the EU among the less-than-faithful is by making the euro look like a safehaven. Denmark, one of the few countries that deliberately opted out of the euro, may now be regretting its decision. As Danish prime minister Anders Fogh Rasmussen told fellow party members at an annual conference in October, "the current financial turmoil makes it evident that Denmark has to join the euro," which he called a source of "political and economical stability."
Like its Scandinavian neighbors, Denmark has long taken pride in maintaining a degree of independence from Brussels. But now it seems that many are coming around to the view of the Prime Minister who argues that "not being a euro member has its costs."
For small countries like Denmark, those costs often come in the form of higher interest rates. Because Denmark keeps its currency pegged to the euro, in times of economic turbulence its central bank is forced to take drastic measures to prevent its local currency from depreciating. Right now, Danish interest rates stand at 5 percent, putting the country at a considerable competitive disadvantage to its neighbors in the euro zone countries, whose interest rates recently dropped half a point to 3.25 percent. Further cuts are expected.
As the Danish economy joins the rest of the continent in the march toward recession, those high interest rates will feel increasingly punishing. According to a report from Deutsche Bank AG, the Danish economy is set to shrink 0.2 percent in 2008 and 1.4 percent in 2009. Unemployment is on track to double in the next two years. High interest rates, which discourage the easy lending that helps to fuel growth, are salt in the wound.
A recent poll compiled by Statistics Denmark shows that a narrow 50.1 percent majority of Danes now favor adopting the euro. In a referendum in 2000, Danish voters rejected the euro by a seven point margin.
Still, Johannes Andersen, a political scientist at Denmark's University of Aalborg, cautions that we shouldn't attribute too large a role to the financial crisis in shaping Danish opinion. Although he says the prospects for a new Danish referendum on the euro in the next year are "quite good," Andersen says the rising stock of the euro in Denmark is more the result of a long-term trend than a sudden response to financial shock. On the left, in particular, Andersen sees a steady movement in Denmark toward a more EU-friendly position, particularly regarding the euro. In part, he explains the shift as a positive reaction to the EU's east-ward expansion. Now that the 27-member bloc contains many poorer states from the East, it's easier for left-wing politicians to frame affection for the EU as a progressive gesture.
But Andersen acknowledges that the financial crisis has affected the debate on the euro. "It used to be possible to be pro-EU and anti-euro," he told SPIEGEL ONLINE. Now, since interest rates started nosing upward, those already predisposed to be friendly to EU are likely to be pro-euro as well. Of all the countries on Europe's periphery, perhaps none has experienced as pronounced a shift in EU sentiment as Iceland, a nation which, not coincidentally, also serves as Ground Zero for the financial crisis. Since January, Iceland's currency has lost nearly half its value against the euro, plunging the country's economy into chaos.
At the same time, opinion polling has registered a large shift in public attitudes toward the EU. According to a poll published on Nov. 24 by the Icelandic newspaper Frettabladid, 68 percent of Icelanders now favor joining the euro. Somewhat fewer, 59.6 percent, think the country should join the European Union, but that's still an 11-point jump from September of 2007, when only 48.9 percent of Icelanders wanted EU membership.
According to Gunnar Harraldson, director of Iceland's Institute for Economic Studies, the surge in EU support suggests that Icelanders have lost faith in their own government. "The system here is very rigid," he told SPIEGEL ONLINE, "and a lot of people don't trust Icelandic politicians." This is particularly true in the more developed south-eastern portion of the island, in and around the capital city, Reykjavik. The big spike in EU support has come from the educated middle-class, Harraldson stresses, a large segment of whom "would rather give power to Brussels" than risk financial oblivion. Rural populations, especially those involved in the country's sprawling fishing industry, remain wary of surrendering national sovereignty.
Ironically, precisely because of the country's "political rigidity," Harraldson doesn't see EU membership on the horizon for Iceland anytime soon. Even though the idea now enjoys broad support among the populace -- as well as broad support in Brussels -- key politicians in Iceland's Independent Party, the senior partner in the country's governing coalition, remain hostile.
The Independent Party has announced it will meet at the end of January to reopen debate on the EU issue, though it is by no means certain to change its position. Two months is a political lifetime in any country, and polling has already recorded a slight drop off in EU enthusiasm. In a poll taken in October, when the financial crisis still seemed fresh and scary, support for joining the EU climbed as high as 68.8 percent. As the intial shock wears off, support for the EU could erode further.
Still, should the crisis worsen again, the "join now" chorus could get louder. In Harraldson's view, most countries have historically joined the EU because of "some kind of crisis." For Iceland, the economic storm of 2008 might be the one that pushes it over the edge. By rejecting the Lisbon treaty in a referendum in June, the people of Ireland brought the EU to its knees. Now, after a bruising ride on the financial crisis roller coaster, they might be the ones that get the EU back on its feet.
The Irish economy used to be envy of Europe. Now it holds the dubious honor of beating all its peers to the punch by becoming the first to fall into recession. With jobs disappearing, migrants leaving, and total debt standing at an eye-popping 265 percent of GDP, Ireland can ill-afford the added burden of frozen credit markets. According to a report released last week by Ireland's Economic and Social Research institute, unemployment is expected to rise from 6 to 8 percent next year, with double-digits remaining a significant possibility.
Somewhere in economic storm, Ireland lost its fiercely independent swagger. Many are now saying the country might hold a second referendum on the Lisbon Treaty, expecting that this time the "yes" camp would have an easier time cobbling together a majority. A poll published on Nov. 17 by the Irish times showed that the Lisbon Treaty would pass if given another chance, with 52.5 percent in favor and 47.5 percent opposed. That represents a 12-point swing from the vote in June, which saw the treaty defeated by a margin of nearly 7 points.
Why exactly the financial crisis would cause the Irish to reconsider isn't entirely clear. Unlike Denmark and Iceland, Ireland is already a member of the euro zone. But Steven Collins, political editor for the Irish Times, says the financial crisis has "clearly" been the main factor in moving the debate. Just like in Iceland, the biggest movement in Irish opinion has been with the urban, educated middle-class. "It's ironic, really," Collins told SPIEGEL ONLINE, "because the working class are the ones losing their jobs, but it's the middle class that is paying close attention to the crisis." Although the urban middle-class tended to support the Lisbon Treaty before, they now do so in overwhelming numbers.
That doesn't mean a new referendum is a sure thing. Although Collins believes a new vote would have "good prospects" for passing, the "no" camp could score another victory if it can capitalize on discontent with the current government, which is deeply unpopular. The government in Dublin recently indicated it was going to put off a new referendum till next autumn, but Collins figures that whenever it happens, it will require support from the opposition to get through. Although the government could theoretically avoid another vote by passing most of the treaty through parliamentary means, it probably lost its opportunity to take this route when it decided to hold the June referendum.
The EU might not be out of the woods yet, but it is in a considerably stronger position heading into 2009 than many feared would be the case six months ago. This uptick in institutional strength comes at an especially important time.
In January, the rotating EU-presidency will shift from France, one of the most loyally integrationist member states, to the Czech Republic, historically considered one of most independent. Czech President Vaclav Klaus, a committed EU opponent, has made headlines several times this year for likening the EU to "a communist state" and for urging skeptics across Europe to unite in opposing the Lisbon Treaty.
But even in the Czech Republic, a new day might be dawning. Klaus's position as president is mostly ceremonial, and on Wednesday the highest Czech court removed a significant obstacle for the Lisbon Treaty by declaring the agreement to be compatible with the Czech constitution. If the Czech parliament manages to push it through, the treaty would still need Klaus's signature for final approval.
Even the cantankerous Klaus has indicated in the past that he would sign the document if the Czech Republic were the only country left holding up the treaty's ratification. That would seem to throw the ball back into Ireland's court, but the Irish economy continuing to tank, the world may soon get to call Klaus's bluff. Europe's dream of ever-closer union might be happen sooner than we think.
Merkel 'Needs a Crisis Plan'
Germany's chancellor and finance minister are resisting calls to implement tax cuts as a means of boosting the slumping economy. Members of Merkel's own party have joined the chorus, and commentators seem to agree that special times call for special measures. With their economy now officially in recession and business confidence sagging, Germans of all political stripes are calling on Chancellor Angela Merkel to include tax cuts as part of the government's response. Merkel's resistance is splitting her ruling center-right Christian Democratic Party (CDU), but she is standing firm.
At issue is a philosophy of fiscal discipline. Speaking about Germany's stimulus programs in the 1960s and 1970s, Finance Minister Peer Steinbrück recently said: "Government debt rose, and the downturn came anyway." Chancellor Merkel seems to have the same reservations in this season of crisis. On Monday, she voiced her opposition to any lowering of the country's sales tax (VAT). Although she did approve a roughly €5 billion ($6.25 billion) stimulus package three weeks ago, she has steadfastly rejected calls from within her own party and its Bavarian Christian Social Union (CSU) sister party as well as from business leaders to cut taxes. In fact, she has said that she doesn’t even want to consider such proposals until after the general election in September 2009, a year which she has already said will be "a year of bad news."
The loudest calls for tax cuts have been coming from the CSU. The party's new leader, Horst Seehofer, has said that the economic downturn is too severe for Merkel's strategy of fiscal discipline. "In such a difficult situation, we cannot rescue the country by saving it to death and aggravating the crisis," Seehofer told the Bild am Sonntag newspaper last week. And Seehofer has been joined by a chorus of economic heavy hitters including: Ludwig Georg Braun, the president of the German Chambers of Commerce and Industry; Josef Schlarmann, who heads the small and medium-sized business alliance of the CDU/CSU; Laurenz Meyer, the CDU's former general secretary; and Michael Fuchs, a CDU economics expert.
Perhaps the loudest voice of dissent has come from Economics Minister Michael Glos -- also of the CDU party -- who has said that: "The economy would be helped were we to promptly sink taxes for those with low and medium incomes." Glos has even called on Germany to abandon its climate change goals lest they prevent the economy from quickly getting back on its feet.
Still, some voices of support have risen above the cacophony of protest, including those of Christian Wulff, the governor of Lower Saxony, Hamburg mayor Ole von Beust and Hesse Governor Roland Koch. Koch expressed his worry "that many people would prefer to run through the countryside again showering money around" and that tax policies should not be "dealt with in a panicky way." German commentators on Tuesday generally back tax cuts and argue that Merkel's lack of action can be equated with a lack of leadership.
The center-left Süddeutsche Zeitung writes: "The impression that the chancellor and the CDU give off can be easily summarized: The conservatives lack political authority...The party has no economic experts with an aura of uncontestable expertise. It is now becoming apparent what the pessimism in the union had already foretold: In this crisis, Merkel's strategy of relying on her abilities, her swiftness and her political instincts is quickly reaching its limits. (Merkel) has failed to maintain policy discipline within the CDU. With good reason, some like to accuse her of not being a good team player...
Then there is the CSU, which seems bent on revenge. Open attacks against climate protection policies closely followed by calls for tax cuts -- it looks like a strategy more fit for a war of attrition…. Angela Merkel is facing the biggest test of her term in office. In the debate on the budget and at the upcoming party congress, a couple of nebulous mottos will no longer suffice. There is already talk about her plans to announce a 'mission' for Germany. But things don't need to be so melodramatic. The chancellor just needs to have a plan for how she would like to lead the country out of the crisis. And she has to publicly fight for this plan. That's what you expect from a head of government."
The business daily Handelsblatt writes: "When we talk about private consumption in Germany, we are still talking about more than have of the country's annual economic output. But because we are in Germany, being stubborn is constantly confused with being true to your principles and, likewise, political calculation with regulatory policy. Yesterday, Chancellor Merkel repeated her opposition to lowering either the VAT tax or income taxes. Unfortunately, her position has less to do with fearing a debt economy than it does with party politics: Angela Merkel fears the wrath of the CSU.
Despite all the pressure, Merkel had refused requests from her economics minister, CSU member Michael Glos, to lower taxes. Having done so -- at least as far as the CSU sees it -- means that she shares in the responsibility for the CSU's losses in September's state elections. Merkel's reading of the situation now is that if she changes her mind and drops her resistance, the CSU will view it as an admission of guilt. The government should take its own words seriously. Just recently, the chancellor stood before parliament and said: 'In the past few weeks, the global economy has faced the hardest challenge since the 1920s.' Today, we must not repeat the mistakes that were made then by a government that was far too passive."
The right-leaning Die Welt writes: "The easiest way to (respond to the current economic crisis) would be to tinker with some elements of the tax system. Why not lower taxes on salaries and income in a perceptible but limited way and have a reduction in the VAT tax, like the one in Great Britain? The free-rider effects would be small, and tax payers would still be able to choose how to spend their money. But, instead of doing that, our national leaders are focusing on interventionism and renationalizing the banking industry. In this case, it would appear that all taboos have been broken. … The rhetoric coming from the government and its floundering murkiness is the opposite of leadership. Certainly they shouldn't be understating things, but neither should they be allowing confidence evaporate. The German economy is by no means as endangered as the speeches make it out to be. Deliberately spreading alarmism risks bringing about a self-fulfilling prophesy."
EU Proposes €200 Billion Stimulus Plan
The European Commission has called for an EU-wide stimulus package worth €200 billion, the equivalent of 1.5 percent of the bloc's GDP. Brussels has even pledged to be flexible on member states increasing their budget deficit. The European Union Commission has approved a huge stimulus package aimed at reviving the bloc's struggling economies. The €200 billion ($260 billion) plan will represent 1.5 percent of the EU gross domestic product (GDP), with around €170 billion coming from national governments and the rest from EU funds and the European Investment Bank.
The Commission backed the proposal for the two-year European Economic Recovery Plan made by Commission President Jose Manuel Barroso during a closed-door meeting. "Exceptional times call for exceptional measures," Barroso said in a statement. "The Recovery Plan is big and bold, yet strategic and sustainable," he said. Leaders from the 27 member states will study the plan at a Dec. 11-12 summit and Barroso stressed that national governments should regard the plan as offering them options rather than setting down diktats. "Our approach is to offer a toolbox," he told a news conference.
Brussels is attempting to get the different EU states to coordinate their individual stimulus packages, but the plan also envisages the Commission redirecting and accelerating EU funds to areas that need it the most, in particular the auto industry. The plan will bridge the gaps between the national governments already embarking on national growth plans -- such as Great Britain, Germany and France -- and others, particularly in Eastern Europe who saw they cannot afford such measures.
On Wednesday German Chancellor Angela Merkel warned that EU states should not engage in a competition to produce the biggest stimulus package. "We should not get into a race for billions," she told the Bundestag, Germany's parliament. Berlin recently approved a €32 billion rescue plan for the German economy. On Monday Merkel and French President Nicolas Sarkozy rejected a coordinated cut in sales taxes (VAT) after British Finance Minister Alistair Darling cut its VAT from 17.5 percent to 15 percent. Meeting in Paris, the French and German leaders said that they would not want to lose government revenue that way.
The stimulus packages, along with the fall in revenue and increase in spending that go hand in hand with economic slowdowns, is likely to lift deficits in many countries well above the EU ceiling of 3 percent of GDP. The Commission pledged on Wednesday to be "flexible" on these limits for the next two years. Economics Affairs Commissioner Joaquin Almunia said that temporary breaches would be acceptable as long as states remained close to the upper limit. "Close means a few decimals, and not decimals, and temporary," he warned.
European November Confidence Drops More Than Forecast
European confidence in the economic outlook fell to a 15-year low this month even after radical interest-rate cuts and government stimulus measures aimed at battling the impact of the financial crisis. An index of executive and consumer sentiment dropped to 74.9 from 80 in October, the European Commission in Brussels said today. The November decline was bigger than economists had forecast and takes the index to the lowest since August 1993. Separate figures showed European retail sales fell the most in at least five years in November.
Central-bank and government packages have so far failed to boost sentiment after the euro-area economy slipped into a recession that may last through 2009. The European Union yesterday announced plans to coordinate 200 billion euros ($258 billion) in measures for the economy, while the European Central Bank has signaled more rate cuts are possible even after lowering its benchmark rate by a full percentage point in a month.
“The economy took a marked turn for the worse in the fourth quarter,” said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. “This adds to the case for a bigger rate cut from the ECB next week than we have seen up until now.” The Frankfurt-based central bank already has reduced its key rate to 3.25 percent from 4.25 percent since early October. ECB President Jean-Claude Trichet yesterday said he sees “negative growth” in the euro area in 2009, a forecast echoed by EU Monetary Affairs Commissioner Joaquin Almunia today.
“Downside risks are materializing,” Almunia said in Brussels. “The crisis may not end next year.” The EU proposal is the latest in a series of measures to counter the impact of a worldwide financial turmoil that has roiled stock markets, shut down access to funding and curbed company investment and hiring. MAN AG, Europe’s third-largest truckmaker, may shorten the workweek at the commercial-vehicle division next year to cope with declining sales.
Ford Motor Co. plans to cut European production by about 10 percent next year, while Bayerische Motoren Werke AG and chemicals maker BASF SE are also scaling back output. Economists had forecast that the confidence index would decline to 78 this month, according to the median of 29 estimates in a Bloomberg News survey. The euro gained 0.5 percent to $1.2945 against the dollar today, having dropped 1.4 percent yesterday.
A measure of manufacturers’ confidence dropped to minus 25 this month, the lowest in 15 years, from minus 18 in October, according to the commission report. Sentiment in the services and construction industries also declined. Today’s commission report also showed that confidence among consumers dropped to the lowest since 1994 this month. The Bloomberg purchasing managers index for retail sales declined to 41 in November from 44 in October, remaining below the 50 limit that indicates contraction for a sixth month.
The decline in energy prices in the last four months has prompted companies and consumers to scale back their predictions for price growth, according to the commission. A gauge of company selling-price expectations fell for a fourth month in November. A gauge of consumers’ outlook for prices dropped to 11 from 19. Crude oil was at $53.83 a barrel today, down almost two-thirds from its July record of $147.27. The euro-area inflation rate probably eased to 2.4 percent this month from 3.2 percent in October, according to the median of 24 estimates in a Bloomberg News survey. That would be the lowest since September 2007 and makes it easier for the ECB to lower interest rates.
“They should cut by 100 basis points next month, I believe. Monetary policy is already behind the curve,” Marco Annunziata, chief economist at Unicredit Group in London, said in a Bloomberg Television interview. “You’re facing a very sharp decline in inflation by the middle of next year.”
The central bank is due to publish new forecasts for economic growth and inflation at the next meeting of its governing council on Dec. 4. It will likely cut its forecast for inflation in 2009 to about 1 percent from 2.6 percent in September, said Kenneth Wattret, an economist at BNP Paribas in London. For the economy, it may forecast a contraction of as much as 0.5 percent, he said. The EU statistics office will publish its inflation estimates for November tomorrow.
U.K. House Prices Fell in November, Nationwide Says
U.K. house prices fell for a 13th month in November as the financial crisis deterred homebuyers and banks rationed mortgages, Nationwide Building Society said. The average cost of a home slid 0.4 percent from October, when it fell 1.3 percent, the Swindon, England-based mortgage lender said in an e-mailed statement today. Prices dropped 13.9 percent on the year to 158,442 pounds ($241,180).
Consumer spending fell the most since 1995 in the third quarter as unemployment rose and house prices dropped, government data showed yesterday. Bank of England Governor Mervyn King said Nov. 25 that getting banks to lend again ``is more important than anything else at present. With the economy in recession, conditions do not appear very favorable for a swift recovery in the housing market,'' said Fionnuala Earley, chief economist at Nationwide. "With prices falling at their current rate there is also little incentive for new borrowers to hurry into the market.''
The decline in home values in November on the month was still the smallest since prices started falling a year ago. The British pound rose against the dollar for a third day, trading at 1.5410 at 9:12 a.m. in London, from $1.5326 yesterday. Consumer spending fell 0.2 percent and investment dropped 2.4 percent in the third quarter, the Office for National Statistics said yesterday. Gross domestic product slipped 0.5 percent, the first decline since 1992.
The government has pledged around 20 billion pounds of tax cuts and spending between now and April 2010 to counter Britain's first recession since 1991 and the end of the decade-long housing boom that saw house prices triple in a decade. A report by former HBOS Plc Chief Executive James Crosby published this week showed new mortgage lending may fall to zero next year as financial institutions nurse credit losses and writedowns stemming from the collapse of the U.S. subprime mortgage market.
King told lawmakers this week that the credit freeze is the ``most pressing'' challenge facing the economy, and refused to rule out full nationalization of banks if that were required to get them lending again. Central Bank Deputy Governor Charles Bean said the turmoil in credit markets may warrant ``aggressive'' moves in the key interest rate.
Policy makers lowered the benchmark by 1.5 percentage points to 3 percent last month, the lowest since 1955. They will announce their next decision on rates on Dec. 4.
UK house rents fall as unsold properties flood market
Rents fell for the first time in five years between July and October as home-movers flooded the rental market with properties that they could not sell. According to a new survey, 12 per cent more lettings agents said that rents had fallen rather than risen between August and October. That was a reversal from the previous three months, when nearly a third more agents said that rents were rising, figures from the Royal Institution of Chartered Surveyors (RICS) show. It is the first time since 2003 that the gauge of rental yields has turned negative. James Scott-Lee, of RICS, said: “Many vendors have been forced to become amateur landlords, creating an inevitable downward pressure on rents.”
This came as a report said that more than one in three landlords would be plunged into negative equity by the middle of next year as house prices continue to fall.
Standard & Poor’s, the credit ratings agency, said that those who had entered the buy-to-let market in 2006 and 2007 were especially vulnerable, as lenders offered loans to those with smaller deposits, giving them less of a cushion against falling prices. It forecasts that between 220,000 and 440,000 buy-to-let loans, or between 20 per cent and 40 per cent of the market, would be in negative equity if house prices fall by 25 to 30 per cent from their peak last year, as many economists have forecast. House prices have already fallen by 15 per cent, figures from Halifax show.
About 12 per cent more agents say that rents will continue to fall rather than rise in the coming months, a record, RICS said. Landlords in London were hit worst, with 53 per cent of agents saying that rents for houses fell rather than rose in the three months to October.
Hedge Funds Have Another $200 Billion to go to Complete Their “De-leveraging”
Hedge funds looking to slash their use of borrowed money may have to unload another $200 billion in assets to reach their objectives, a new study found, though a Money Morning expert believes the exit door could get pretty narrow should the holiday shopping season get off to a rocky start later this week. Investors yanked $40 billion from the $1.5 trillion hedge fund industry in October, a month in which market losses slashed industry assets by an additional $115 billion, Hedge Fund Research Inc., reported. A new survey of hedge fund managers conducted by Sanford C. Bernstein & Co. LLC found that 63% said the sale of assets to cut leverage was at least half completed. Another 23% said the process was three-quarters complete.
To end this process – known in industry parlance as “de-leveraging” – “we estimate that roughly $200 billion will be additionally unwound,” Sanford C. Bernstein analyst Adam Parker wrote in a Nov. 21 report to clients. Bernstein based its survey on interviews with managers of more than 65 hedge funds, with total assets of $100 billion. The interviews took place during the first two weeks of this month. But retired hedge fund manager Shah Gilani, an editor for both Money Morning and the Trigger Event Strategist, says surveys as this one are often of limited use. “Most hedge fund managers … are never going to tell you their positions,” Gilani says. “Never. It serves them no purpose whatsoever.”
Hedge funds are private investment funds that are open to a limited range of investors, largely because regulators allow them to pursue wider investment strategies and invest in a broader range of assets. In an effort to boost trading profits, they also use borrowed money, or leverage – a reality that more recently has forced them to dump assets to meet tighter lending requirements and to raise cash to fund client redemptions. The amount of gross leverage used by hedge funds fell to 142% of assets from 175% in 2006 and 2007, Bloomberg News reported. Hedge funds have raised their cash holdings to an average of 31% of assets now, up substantially from the average of 7% in the previous two years, according to the survey.
This de-leveraging has caused losses in the U.S. stock-and-bond markets to snowball: The Standard & Poor’s Index 500 Index fell 38% this year through October, while hedge funds lost an average of 16%, according to data compiled by Hedge Fund Research Inc. At the end of last week, the S&P 500 was down 46% so far this year. Some respondents said they expect this de-leveraging to continue as long as the Chicago Board Options Exchange Volatility Index, known as the VIX, remains elevated, Sanford C. Bernstein’s Parker said.
Of the hedge fund managers surveyed, 52% said the process of investor withdrawals is complete and that the transfers of money to clients will be done by the end of the first quarter, while 41% said they think half of redemptions are yet to come. Clients putting in 30-day notices to withdraw their money for the end of December may be a catalyst for further de-leveraging, “a possible explanation for the recent steep sell-off,” Parker said.
But Gilani counsels investors to watch for retail sales reports from this Friday, the day after the Thanksgiving holiday – better-known as “Black Friday,” the unofficial start of the holiday shopping season. Analysts are projecting a poor shopping season, though the actual numerical estimates range from poor to downright dismal. “If this traditional harbinger of the Christmas shopping season is, indeed, black, then the pummeling the markets will take from Monday morning’s sell-off will crystallize investors’ resolve to withdraw heavily in December,” Gilani says. “The potential implosion could be self-fulfilling as already-vulnerable retailers take it on the chin – with more than a few being forced seek bankruptcy protection.”
According to the survey, 42% of hedge funds use stock-market strategies, 25% use such “special-situation” events as mergers-and-acquisitions and spin-offs, 16% invest in emerging markets, 10% play fixed-income strategies, and 8% use a “macro” approach that invests in everything from commodities to stocks, the Bernstein survey found.
“It doesn’t matter where managers have been invested, the tide has taken all their holdings out to sea. The only players with sandcastles still standing in the Hamptons are those who have been massively short,” Gilani said. “Stocks … down; corporate bonds … down; oil …down; commodities…down; gold …down. [The markets have been so thoroughly pummeled that] it’s a bit like that old story about the fallen boxer, who’s down on the canvas and taking the 10-count. When his manager later asks him what happened, the boxer says: ‘You told me to wait ‘til the eight-count …[but] I looked up at the clock and it was only 7:30’.”
While the survey has focused on the important issue of de-leveraging, there’s another issue facing hedge funds that’s going to be a crucial issue for that industry to address in the not-too-distant future – source of funds, he said. “Longer-term, what is even more insidious that no-one’s really talking about is that the source of funds that hedge funds use for their leverage, emanating from their banks and prime brokers, isn’t there. Period. No more Lehman (LEHMQ), no more Bear Stearns [now part of JP Morgan Chase & Co. (JPM)], and Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) are still de-leveraging. Do you think they’re going to give the money to failing hedge funds?”
Irish Nationwide told to find a suitor as State piles on pressure for mergers
Irish Nationwide Building Society (INBS) has been told to find a suitor as part of the Government's drive to push through a raft of mergers and acquisitions in the banking sector. INBS had been positioning itself for a sale but took itself off the auction block last May as the financial climate worsened. The mutual society's chief executive Michael Fingleton and chairman Michael Walsh are understood to have told Finance Minister Brian Lenihan last week that the group could remain independent as it bolsters capital reserves by rapidly contracting its loan book.
INBS is expected to see its bad loan losses soar over the next few years, having transformed itself over the past decade from mortgage lender to being almost 80pc exposed to commercial property. Commercial books -- particularly loans to residential developers -- will bear the brunt of write-downs in the downturn. However, the group has hiked its core tier one capital ratio -- a key measure of a lender's ability to withstand unexpected losses -- from 8.6pc at the end of last December to 11.5pc as of June.
Observers say this exceptionally high figure is largely down to the group severely retrenching its loan book. The society told bond analysts in September that it expects to shrink its loan book by over 10pc this year to about €11bn by redeeming between €2bn and €3bn of loans. It plans to hand out less than €1bn of new loans during 2008.
Mr Fingleton's attempt last year to sell off the society attracted interest from Landsbanki of Iceland; a consortium of fellow Reykjavik-based lender Kaupthing and US private equity house JS Flowers; and a joint approach from Quinlan Private and HBOS. Industry observers suggest the Government would be keen to see a deal with Allied Irish Banks.
ANZ holds highest credit exposure
ANZ Banking Group has emerged as having the highest level of on-balance sheet credit exposure of any major Australian bank, as the sector prepares for a tougher credit cycle. ANZ and Macquarie Group on Wednesday reported their credit disclosures to September 30 under internationally accepted reporting standards - Pillar 3 of Basel II. Basel II is the capital adequacy framework for Australian deposit-taking institutions (ADIs) that adopt more advanced risk management approaches.
ANZ's submission to the Australian Prudential Regulation Authority (APRA) showed total credit exposures weighed in at $537.6 billion, $4.4 billion more than Commonwealth Bank of Australia (CBA). Macquarie Group's credit exposures stand at $40.5 billion, the group told APRA. ANZ's was the final retail bank to report its exposures. These directly affect each bank's mortgage book and other risk-weighted assets. APRA requires ADIs to hold a set ratio, called tier 1, of capital to their risk-weighted assets to ensure their capital levels are sufficient to absorb unanticipated losses and provide a capital buffer.
The ADIs are subject to a prudential capital ratio of eight per cent of total risk weighted assets, half of which - four per cent - must be held in tier 1 capital. The major banks will move to complete their full Basel II accreditation in coming months. At the end of September, the tier 1 ratios of the major ADIs were 7.35 per cent for National Australia Bank, 7.54 per cent for CBA, 7.7 per cent for ANZ, 7.8 per cent for Westpac and 11 per cent for Macquarie.
As the benign credit environment of the past six years subsides, there will be pressure on that ratio as the financial environment deteriorates with rising corporate exposures and loan impairments. On Citigroup numbers, this could lead to a drop in the tier 1 ratio of between 76 basis points and 179 basis points per bank by 2011 since each one per cent growth in risk-weighted assets creates an eight basis point drain on tier 1 capital.
Australia's big four banks and their lobby group, the Australian Bankers Association (ABA), have been at pains to point out that the rules for the local implementation of Basel II set by APRA distort international comparisons made between local banks and their offshore competitors on capital levels. They claim international investors should note their tier 1 ratios under the UK Financial Services Authority's rules for Basel II implementation, which add two per cent, on average, to each of the big four's ratios. But APRA maintains it has tailored its approach for Australian institutions, reflecting the different composition of their loan books.
Thai economy braces for fresh blow
Thailand's already faltering economy is bracing for a fresh blow as the shutdown of the country's main airport by protesters entered its third day, stranding thousands during the tourist high season, disrupting exports and spooking investors. Tourism losses alone in the remainder of this year could run to $4.2 billion, equal to 1.5% of gross domestic product, with "devastating repercussions" for the economy, CIMB economist Kasem Prunratanamala said Thursday.
Other vital pillars of the economy are also being hit with exports of fresh produce and electronic components hurt as dozens of airlines cancel flights, and foreign investors pulling funds from a stock market already stricken by the global financial turmoil. "If this crisis goes further, we will lose much more," said Thai Chamber of Commerce President Pramon Sutheewong. "The confidence in Thai exporters is deteriorating, foreign importers are in doubt about our ability in deliver products on time and there is a high tendency that they will divert their orders to some place else," Pramon said. "That's what we are concerned about the most."
Beyond deterring tourists, the airport shutdown also halts exports of perishable produce such as fruit and vegetables and shipments of electronics components to places like Japan, said Federation of Thai Industries Chairman Santi Vilassakdanont. "After one, two or three days there will be a production problem for electronics makers because their stockpiles of unsent goods will become too high," he said. Losses on outbound shipments of small car parts, fresh fruit and vegetables, live fish and orchids could run $57 million to $85 million, said Tanit Sorat, the federation's vice-chairman.
All flights in and out of Bangkok's Suvarnabhumi were cancelled after protesters took over terminals Tuesday in an attempt to unseat Prime Minister Somchai Wongsawat's government, which they claim is a puppet for ousted premier Thaksin Shinawatra. It was the latest escalation in a sometimes violent four-month campaign by protesters to bring down the government. On Wednesday night, protesters overran a second smaller airport that mainly serves domestic routes, cutting off all commercial flights to the capital of Southeast Asia's second biggest economy -- also an important manufacturing hub for automakers like Toyota Motor Corp. (TM) and General Motors Corp (GM, Fortune 500).
Thailand's economy is already in a fragile state, growing at 4% in the third quarter -- the slowest pace in more than three years -- because of the political unrest and the global financial crisis. Tourism, a vital industry that makes up 6% of the economy, will take the main hit from the airport shutdown. CIMB's Kasem Prunratanamala said about half of 4 million tourists expected between now and the end of the year could cancel their trips, with spillover affects outside tourism such as lower spending at shopping malls and other retailers. The effects will linger into 2009, he said. Up to 20% of the 1 million employed directly and indirectly by tourism could lose their jobs, said Tourism Council of Thailand boss Kongkrit Hiranyakit.
Jittery foreign investors pulled a net 1.5 billion baht from the market on Wednesday, the second highest selling by foreigners this month, adding to the 150 billion baht that they have withdrawn from the market this year. On Thursday, Thailand's benchmark stock index was down 1.3% -- even as most other Asian markets advanced. "It's a nightmare scenario. I can't tell clients to buy Thai shares if they can't even get into the country," said Andrew Yates, vice president of foreign institutional sales at Asia Plus Securities in Bangkok. "It seems like it's easier to get into North Korea than it is to Thailand."
Oil Drops as Recession Raises Concerns of Falling Fuel Demand
Crude prices fell after economic reports in the U.S. showed a deepening recession that may cut fuel demand in the world’s largest oil user. Consumer spending slumped the most in seven years and orders for durable goods including refrigerators and washing machines declined twice as much as forecast, the Commerce Department said yesterday. Gasoline demand dropped 1.3 percent from last week, the Energy Department said in its weekly report.
“Oil prices are very much influenced by fears of recession,” said Sintje Diek, an analyst with HSH Nordbank in Hamburg. “The picture is of falling oil demand. We see inventories of crude oil continuing to rise, also gasoline, as consumers will drive less.” Crude oil for January delivery retreated as much as $1.82, or 3.3 percent, to $52.62 a barrel in electronic trading on the New York Mercantile Exchange. It was at $53.96 a barrel as of 2:33 p.m. London time. Futures have dropped 63 percent since reaching a record $147.27 on July 11.
U.S. crude-oil supplies rose 7.28 million barrels to 320.8 million barrels last week, the Energy Department said. It was the ninth straight increase, the longest stretch since April 2005. Stockpiles were forecast to climb 1 million barrels, according to the median of 14 analyst estimates in a Bloomberg News survey. Gasoline inventories rose 1.84 million barrels, or 0.9 percent, to 200.5 million barrels, the department said. A 500,000-barrel gain was forecast, according to the survey.
Gasoline for January delivery rose as much as 0.8 cents, or 0.7 percent, to $1.2086 a gallon in New York, and last traded at $1.2072 a gallon. Crude oil demand may climb as refineries boost processing. U.S. refineries increased operating rates by 1.3 percentage points to 86.2 percent of capacity last week, the highest since September. A 0.1 percentage-point gain was forecast.
The Organization of Petroleum Exporting Countries, which controls more than 40 percent of the world’s crude supply, is due to meet in Cairo on Nov. 29. OPEC nations may cut output for the second time in as many months after recessions in the U.S. and Europe dragged oil below $50 a barrel last week. Last month, they agreed to reduce production by 1.5 million barrels a day.
“They need to convince the world that they will have removed at least 3 million barrels a day from the market by the beginning of next year from September levels,” David Hufton of London-based PVM Oil Associates Ltd. said in a note today. “They need a ringing endorsement from the Saudis and supportive cuts from Russia.” Russia will “coordinate” with members of OPEC to keep oil prices from being “too low or speculatively high,” President Dmitry Medvedev said yesterday in Caracas.
Citigroup says gold could rise above $2,000 next year as world unravels
Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of next year as central banks flood the world's monetary system with liquidity, according to an internal client note from the US bank Citigroup. The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before. This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop."
"We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said. "This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised." "What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.
Gold traders are playing close attention to reports from Beijing that China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said. Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.
Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency. Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.
Tough times make right stimulus tougher to find in Canada
Shopping vouchers in Taiwan. Prepaid credit cards for the poor in Italy. Grants for first-time home buyers in Australia. Oil subsidies in Malaysia. The world is suddenly awash in government efforts to kick-start stagnant economies, with Canada taking centre stage Thursday as Finance Minister Jim Flaherty delivers an economic update and is expected to give hints of what the Conservatives will do to stimulate Canadian spending and investment.
Trouble is, no one is sure any more what works. Mr. Flaherty is expected to cut his estimate for growth, and forecast the first deficit in a dozen years. The government is under pressure to mitigate the downturn in Canada with a stimulus package that ensures the slump doesn't drag on too long, while preserving the country's balance sheet. But unless the package is well designed, it might not even work, analysts say.
For Mr. Flaherty, the challenge is to choose a stimulus approach that is effective and will work quickly. Canada's economy is probably already at the beginning of a recessionary period that no amount of government help or interest-rate cutting can prevent. While some growth was evident in the third quarter of the year, it most likely faded away toward the end of the year as the United States and the global economy took major turns for the worse.
“There's nothing that's perfect, or even very pretty in this situation,” said Simon Johnson, former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics. His advice? “Don't go crazy on fiscal things. Look for places where you could sensibly spend money.” At a minimum, economists say, Canada needs lower interest rates and to roll out infrastructure spending faster. And Ottawa needs to offer the assurance that it will allow the so-called automatic stabilizers to work their magic, and then some.
Employment insurance, Canada's main such stabilizer, was designed to help people during tough times. Canada's progressive income-tax system, in which people in lower income brackets face lower income tax rates, is another stabilizer. Beyond those measures is where the debate begins. Canada's weakest front is drooping exports, and Ottawa can't help much there, except to make sure export financing flows steadily to Canada's exporters – something it has taken steps toward.
So the government is left targeting Canadian consumers, in the hopes that by giving them a boost, they'll make up for the lack of demand elsewhere in the world. Consumer confidence has plummeted in Canada in the past month. And although retail sales have held up recently, that won't last, said David Wolf, chief economist at Merrill Lynch Canada. That's because consumers who are worried about whether they'll have a job in six months, or see the value of their house starting to slide, will hold off on making major purchases.
But whether running a big deficit and introducing a stimulus package will bolster confidence is an open question. What Ottawa shouldn't do, economists say, is repeat the experience of the United States earlier this year, sending out cheques to households in the hopes that they'll spend them. Much of that money was saved, and at best, the U.S. economy saw a short-lived blip in consumer spending.
To prevent consumers from banking their cheques, some countries have experimented with measures such as vouchers or prepaid credit cards. Last week, the Taiwanese government issued the equivalent of about $3-billion (Canadian), or about $130 a person, in shopping vouchers, while the Italian government Wednesday launched a prepaid credit card of €40 (about $60) a month aimed at helping low-income citizens buy food and gas.
Writing cheques is tempting for governments because it's a quick way to get money into the hands of consumers, but there are better ways to spread it around, said Mark Zandi, chief economist of Moody's Economy.com. Enriching employment insurance, by making it more accessible or extending the term of eligibility, could be effective, he said. In the United States, he figures that every extra dollar spent on unemployment insurance generates $1.63 in the national economy.
Other funding for helping displaced workers – training and skills development – is also a good way to stimulate the economy, and benefits it in the long term, economists say. But it's more efficient for government to help people stay employed, rather than helping them out after they lose their jobs, economists say. Tax breaks such as a payroll tax holiday and write-offs for businesses could help, said Mr. Johnson of the Peterson Institute.
Beyond short-term measures to bolster domestic spending, governments should embrace longer-term plans such as increased funding for infrastructure, incentives for research and development, and money for technology and alternative energy, Mr. Johnson argues. Traditional infrastructure plans take a long time to roll out, but this downturn will probably drag on for a couple of years, allowing time for such programs to play an effective role, he said. And spending on research, technology and alternative energy would go beyond helping construction workers keep their jobs, with benefits spreading to white-collar workers and the services side of the economy, he said.
As for size, it matters. “It is best to come forward with a very big number, but then use it judiciously, to send a strong signal that there are a lot of resources dedicated to the problem,” Mr. Zandi said. How big is big enough? The IMF has suggested 2 per cent of a country's gross domestic product, which in Canada's case would be about $30-billion a year. U.S. policy makers are poised to go much larger than that, but the collapse of consumer demand in the United States is far deeper than in Canada.
So stimulus in the 1- to 2-per-cent range would probably be sufficient for Canada, as long as interest rates keep coming down and the financial system remains stable, Mr. Zandi said. Canada would have no problem financing its deficit, since the world is hungry for government-backed debt, and since Canada's fiscal situation is so strong.
India tries to ride out world crisis
"We must banish the thought of recession," thundered India's Harvard-educated Finance Minister Palaniappan Chidambaram on Monday before a gathering of economic journalists in Delhi.
He's technically correct. The world's largest democracy and second most-populous nation is unlikely to witness negative growth for two successive quarters in the foreseeable future. But by India's own recent standards, the situation is far from hunky-dory. Four years in a row, for the first time in the 61-year history of the country, gross domestic product grew by nearly 9% each year - an impressive jump from the annual 3.5% "Hindu rate of growth" (a phrase derogatorily used by the eminent Indian economist Raj Krishna) recorded during the 1950s, '60s and '70s.
During the current calendar year, the Indian economy is expected to grow by around 7%. The International Monetary Fund claims the country's growth rate during 2009 will be 6.3%. Between April and September, the index of industrial production grew by 4.5% against nearly 10% in the corresponding six months of the previous year.
India's stock market indices have collapsed by 60% since early January as foreign investors have hurriedly withdrawn funds.
The Indian currency has depreciated against the US dollar over the past four months by more than 15% and the country's hard currency reserves have come down from a record $300bn to around $250bn over a shorter period. The Reserve Bank of India, the central bank and apex monetary authority, after sucking out liquidity and hardening interest rates to control inflation through the first half of the year, has completely reversed its policies since September.
Still, Indian companies have realised that "cheap and easy money" is no longer there for the asking. Manufacturers of cars, commercial vehicles, steel and chemicals are curtailing output. The finance minister is urging cash-strapped real estate firms, hotels and airlines to reduce tariffs to spur demand. But they seem to be in no mood to listen to him.
Job losses are imminent. One major airline (Jet Airways) announced a major lay-off a few weeks ago and had to hastily backtrack following government pressure.
The government is talking of upping expenditure on infrastructure development, a strategy that was prescribed by the late British economist John Maynard Keynes to counter recession.
The pace at which India's GDP grew picked up from the early 1990s after the government relaxed its controls over the economy, described as a phase of economic liberalisation presided over by Manmohan Singh, then finance minister and now prime minister of a Congress-led coalition. Despite the market-friendly policies pursued by Mr Singh and Mr Chidambaram, there is a substantial section in Congress that remains wedded to the party's socialist past.
This section believes the government and government-owned enterprises have an important role in the country's economy. Further, it argues that growth has not been "inclusive" nor has it created enough new jobs. Last week, Congress President Sonia Gandhi praised her late mother-in-law, Indira Gandhi, for having nationalised much of India's banking system four decades ago.
The government is talking of upping expenditure on infrastructure development, a strategy that was prescribed by the late British economist John Maynard Keynes to counter recession. The pace at which India's GDP grew picked up from the early 1990s after the government relaxed its controls over the economy, described as a phase of economic liberalisation presided over by Manmohan Singh, then finance minister and now prime minister of a Congress-led coalition.
Despite the market-friendly policies pursued by Mr Singh and Mr Chidambaram, there is a substantial section in Congress that remains wedded to the party's socialist past. This section believes the government and government-owned enterprises have an important role in the country's economy. Further, it argues that growth has not been "inclusive" nor has it created enough new jobs.
Last week, Congress President Sonia Gandhi praised her late mother-in-law, Indira Gandhi, for having nationalised much of India's banking system four decades ago. The country's health-care and elementary education systems are badly hamstrung for resources. Agriculture, which provides more than half of India's population a precarious livelihood, has grown at a relatively tardy pace. Thousands of farmers committed suicide in recent years because of their inability to repay loans obtained from local moneylenders at usurious interest rates.
Whereas the services sector - led by fast-growing computer software and business-process outsourcing companies - are feeling the pinch on account of recession in the West, other labour-intensive export-oriented industries such as textiles, handicrafts, leather and processed foods face shrinking markets in North America, Europe and Japan.
The fact that India's economy is less integrated with the rest of the world is serving it in good stead as a financial tsunami sweeps the globe. At a time when capitalism is in deep crisis, many in India ague that the world would benefit from following India's "mixed" economy that seeks to assimilate the best of free-enterprise and socialist policies. Difficult times lies ahead. It is small consolation for India's underprivileged that the country is doing better than most others.
Toys: No Must-Haves This Holiday Season
Christmas shopping typically begins on Black Friday, the day after Thanksgiving, and nearly every year certain "must-have" toys emerge that spur parents to camp outside stores and then, at the crack of dawn, to stampede inside for a chance to snag the coveted plaything for the Christmas tree. Think Cabbage Patch Kids, Tickle Me Elmo, and Nintendo's Wii. This year, as many consumers watch their homes and 401(k) accounts shrink dramatically in value, the must-have toy may go the way of the dodo, say analysts such as Howard Davidowitz, chairman of retail consultancy Davidowitz & Associates. "The customer is so pressed for money, so scared, and so in debt," he says. "They are so focused on price that the huge must-have toys are gone."
Parents will still buy toys for their children, of course, but they may not muster the energy and funds spent in years past. "The toy industry is not recession-proof , but historically it is more recession-resistant," says Julie Livingston, a spokeswoman for the Toy Industry Assn. "This year parents might buy fewer of the special high-end toys, but they won't give up toys for their children." Market research firm TNS Retail Forward surveyed 4,000 shoppers in October around the U.S. and found that a third planned to buy toys this year, down from 38% in 2007. Those that plan to buy toys will spend 12% less than they did last year.
When retailers can't count on pent-up excitement and demand for the "hot" item, they turn to one-upping each other with promotions, says Mandy Putnam, a vice-president with TNS Retail Forward. "Retailers have anticipated that toys might not be as popular this year so they're going to have to promote the heck out of what they have to get shoppers through the door."
Trudy Lonegan, a mother of two boys in Chapel Hill, N.C., is one of the many parents scaling back on costlier items. In previous years, Santa brought her sons popular gifts like a Nintendo Wii or a Razor USA scooter. This year she's steering clear of high-end gifts. "We're planning a frugal Christmas," says Lonegan, 39, who works in sales for a human resources consulting company where her pay is variable because it is commission-based. To economize on her holiday gifts, she will go to Costco to get iPod Nanos for her sons or shop online where she can compare prices. Her husband, a woodworker, will also make gifts for their sons like hat racks and shelves for their sports trophies.
Certain classic toys such as Hot Wheels, Barbie, and Play-Doh will still be popular this year, but customers are likely to trade down within brands, predicts Eric Johnson, a management professor at Dartmouth and a toy industry analyst. Parents will go for the $10 Barbie instead of the Barbie Dream House or Jeep, he says. "We don't have anything like the Furbies that generated fistfights when the Wal-Mart opened on Black Friday a few years ago. There is nothing in that category."
One million more UK households need two breadwinners than a year ago
Almost one million more households now rely on both parents going to work in order to maintain their standard of living compared with a year ago, research claims. The survey of more than 6,000 Britons reveals that a total of 11.9 million households are dependant on more than on salary to cover their bills compared to 11.1 million a year ago. It is equivalent to 47 per cent of all British households, a rise from 44 per cent a year ago, according to the findings carried out by Scottish Widows.
The figures come on the back of rising household and mortgage bills, along with a sharp increase in the number of repossessions. A total of 11,300 people had their homes repossessed in the three months to the end of September, compared with 10,100 in the three previous months, according to the Council of Mortgage Lenders. Richard Jones, protection director at Scottish Widows, said: "The reliance on two incomes is the only way to maintain a decent standard of living for many families and with the rising cost of living this isn't likely to ease off any time soon.
Families just don't have the luxury anymore of being able to have one parent at home to take care of the children and the running of the household if they want to maintain the lifestyle that they have become accustomed to. "For many households, living with debt has become an acceptable situation. While the country was enjoying economic boom this was sustainable but now everyone has to tighten their belts more than ever." The figures increase among those households with children, with 61 per cent of homes reliant on two incomes. The reliance on debt is also increased in households with children, the average household with dependent children has £88,500 still outstanding on their mortgage compared to an average of £77,500 for those with no dependent children.
British car industry chiefs plead for government help
British car firms will warn Lord Mandelson that the industry faces lengthy plant closures and job losses unless the Government takes urgent action. The business secretary is due to meet chief executives from the nation's carmakers, suppliers and retailers to discuss ways to tackle the problems threatening the future of the industry. They are expected to tell the Labour peer that further closures and redundancies will follow in the next few months if quick measures to boost the market and pump liquidity into the system are not taken.
The news comes after several manufacturers announced temporary shutdowns amid the economic downturn. The chief executive of the Society of Motor Manufacturers and Traders (SMMT), Paul Everitt, said: "The eyes of the world will be looking at the UK Government and what it does after this meeting. The Government has established itself as a leader in tackling the global financial problems. It would strengthen itself further if it takes the right action with the car industry." The SMMT will not put a figure on the financial help needed, but it is expected to run into many billions.
Jaguar Land Rover, which employs about 15,000 workers in the West Midlands, has said it wants a £1billion loan to help it cope with "unprecedented trading conditions". Business chiefs have warned that the car industry is facing credit shortages at every level of the chain. Customers are unable to get loans to buy cars, small and medium-sized suppliers are struggling in the face borrowing shortages and expensive rates, while the big manufactures are blighted by cashflow problems. It is feared that shutdowns would cause further devastation on the component supply chain, which is already creaking under the pressure of the economic slump.
Several firms have already announced they will be temporarily halting production at UK plants and extending workers' holidays. Honda last week said it will stop production for all of February and March at its factory in Swindon. Land Rover announced it will close its Solihull plant for three weeks over Christmas. And BMW said it would close its manufacturing plants in Coleshill, Warwickshire, and Oxford and Swindon between 5 December and 5 January. In a statement, the SMMT said the motor industry faces "a set of unprecedented market conditions". Car production has fallen by 25 per cent in the past month across the UK and hit the lowest level since 1991, it said.
Doughnuts served up as City bonuses slump
A quarter of investment bankers working in the City of London will receive no 2008 bonus while pay-outs for all but the very top performers will slump by two-thirds as the impact of the financial crisis on compensation becomes clear. Forecasts of the scale of zero bonuses or 'doughnuts' will shock many in the City who headhunters warn have yet to "wake up and smell the coffee" over the effect of the credit crisis on remuneration. The top 1pc to 2pc of those working in investment banking will see their bonuses fall about 30pc, with close to three quarters of bankers suffering a drop of 50pc to 70pc, according to a survey from Armstrong International, the recruitment firm.
Matthew Osborne, a partner at Armstrong, said the slump in bonuses and the wave of job cuts to hit the City in recent weeks could serve to shift attitudes. "We have returned to the old adage that if you have a job, you should be happy," he said. "We expect bonuses to fall further next year." Mr Osborne said he expected "one or two more rounds of job cuts" as banks continue to reduce costs ahead of the bonus season. Goldman Sachs and Bank of America-Merrill Lynch are due to kick off the bonus round next month and will set the tone for the rest of the industry, headhunters said. "Every bank will be hit as the banks de-risk their businesses and make themselves leaner for what will be a tough year ahead," Mr Osborne said.
Bonuses will differ between departments, with those working in foreign exchange likely to be better rewarded than those in corporate finance or credit, but the disparities will be less pronounced than some bankers believe, headhunters warned. "There are a lot of bankers out there who just don't seem to realise that they are not going to be paid," said one headhunter. "This is going to be a real wake up and smell the coffee moment." In foreign exchange trading - where many banks have made record profits this year - top performers are likely to receive 60pc to 75pc of their 2007 bonuses, with mid to low performers down as much as 80pc, Armstrong forecast.
Banks are expected to downsize businesses in line with the decline in activity and revenues. "Rates and foreign exchange should be more resilient next year," Mr Osborne said. "Some areas, such as leveraged loans or securitisation will take longer to recover, if indeed they ever do." The forecasts come as investment banks are expected to unveil record falls in profits for 2008. Citigroup - which said this month that it was cutting 52,000 jobs globally - is expected to make a loss of $13.9bn (£9.1bn) this year, according to analyst predictions, against a profit of $3.6bn in 2007 and $21.5bn in 2006.
Gay retreat hit by recession seeks bookings, investor
The owner of the gay-oriented Saratoga Springs retreat in Lake County said the historic mineral spa resort is a victim of the nation's current credit crisis and is seeking investors and business to keep its doors open.
Dave Carroll, 56, who has owned the 260-acre resort and convention center since 1991, said Saratoga Springs is well-known as a retreat for LGBT groups like the Billy Club, the California Men's Gathering, Metropolitan Community Church-San Francisco, 15 Association, and Camp Redtails.
Carroll said the resort is an important asset to the LGBT community because of its openness to alternate lifestyle groups from Catholic SM motorcycle clubs and lesbian daughters of Holocaust survivors to a women's Vipassana Buddhist group. But because of the bad economy, bookings have slumped and because of the credit crisis, Carroll said he's had trouble securing a cash loan to keep the resort operating. "Bookings are down and the credit's dried up – we need an influx of money to keep it going," said Carroll.
The cash crunch caught Carroll by surprise. He believed he had secured a $200,000 loan to make some planned improvements to the property. "I had the papers notarized, but that was just about the time the housing crisis hit. Then I got the papers notarized for a $160,000 loan," but before the deal was finalized the investor group backed out, explained Carroll.
According to its Web site, http://www.saratogasprings.com, Saratoga Springs was established as a resort in 1871, featuring several cold mineral springs. In the late 19th century the resort catered largely to the German American community and included a stagecoach stop, post office, restaurant, and dance hall. An on-site bottling plant made it possible to drink the healing waters, as well as bathe in them. At an elevation of 1,400 feet, Saratoga Springs is located 22 miles east of Ukiah, six miles west of Upper Lake, or two miles south of Witter Springs. The Saratoga Springs are not only known for their beauty but also for the reported healing powers they possess.
Carroll purchased the property in 1991 specifically to cater to the California Men's Gathering and the Billy Club, a social group for rural gay men. "Back then, a lot of men were dying from AIDS, but because of the Billy Club, they didn't pass away alone," explained Carroll. The Billy Club meets at Saratoga Springs three to four times a year, with its July gathering drawing the largest annual crowd. Carroll said that his resort is available for group bookings, business conferences, weddings, and for daylong, weekend, and weeklong events. "We can accommodate from 40 to 250 guests," he said, with facilities that include the 2,400 square foot Heart Lodge, an 8,000 square foot two-story lodge, and seven cabins that contain 65 beds. Its hiking trails, quiet, isolated pristine valley, and proximity to Clear Lake make it "a perfect spiritual place," Carroll noted. According to Carroll, Saratoga Springs is approximately the same driving time from San Francisco as a trip to Guerneville or Monte Rio, along the Russian River.
Along with more bookings, Carroll is seeking an investor. "Ideally it would be great to find someone who wants to partner up with someone, a nonprofit or individual. Frankly, I'm getting tired of doing this by myself," he said. Carroll said that as a single gay man, he wants to find a way to keep Saratoga Springs "a healing center for the gay community and its friends," after he's gone. But for now, Carroll is trying to get the word out that Saratoga Springs needs LGBT community support."I'll do anything to keep this going," said Carroll. "As much as this is a news story about financial problems, it's also an effort to get the word out to any group planning a retreat to consider us."
Top of the Food Chain
Today comes the startling news of a British government report showing a drop in oceanic zooplankton of 73 percent since 1960. For many people, this may seem relatively inconsequential as compared to daily cataclysmic revelations about the state of the national and global economy. This reaction is understandable: we care first and foremost about our own immediate survival prospects, and a new and greater Depression will mean millions losing their homes, millions more their jobs. It's nothing to look forward to.
It takes some scientific literacy to appreciate the implications of the catastrophic loss of microscopic sea animals. We need to understand that these are food for crustaceans and fish, which are food for sea birds and mammals. We need to appreciate the importance of the oceanic food web in the planetary biosphere.
At the top of the global food chain sits a species that we really do care about—Homo sapiens. The ongoing disappearance of zooplankton, amphibians, butterflies, and bees is tied directly or indirectly to the continuing growth of our own species—both in population (there are nearly seven billion of us large-bodied omnivores, more than any other mammal) and in consumptive voracity (water, food, minerals, energy, forests—you name it). It's at this point in the discussion that some of us start feeling guilty for being human, and others of us tune the conversation out because there's apparently not much we can do to fundamentally change the demographic and economic growth trends our species has been pursuing for hundreds, if not thousands of years.
But the current economic Armageddon (that we care about) is related to human-induced biodiversity loss (that many of us don't notice) in systemic ways. Both result from pyramid schemes: borrowing and leveraging money on one hand; on the other, using temporary fossil energy to capture ever more biosphere services so as to grow human population and consumption to unsustainable levels. Our economic pyramid is built out of great hewn blocks of renewable and non-renewable resources that are being made unavailable to other organisms as well as to future generations of humans.
The financial meltdown tells us these trends can't go on forever. How the mighty have fallen!—Masters of the Universe reduced to begging for billion-dollar handouts in front of a television audience. Next will come a human demographic collapse (resulting from the economic crisis, with poor folks unable to afford food or shelter), as mortality begins to exceed fertility. In all of this it's important to remember that the species on the lower levels of the biodiversity pyramid have been paying the price for our exuberance all along. The pyramid appears to collapse from the top, while in fact its base has been crumbling for some time.