2nd and 3rd grade children being made up for their Negro song and dance
May Day-Health Day festivities , Ashwood Plantations, South Carolina.
Ilargi: 40 years after it assassinated a black man who was one of the bravest and most beautiful people ever to walk this earth, and 45 years after that same man spoke about a dream he had, America -and the entire world with it- has every reason to feel proud and elated: it has elected, as its next leader, a black man named Hussein.
I may be a white man, and as blond as they come to boot, but I hope you don't mind if I feel pride too. Still, I have to add that the rejection of gay marriage in several states yesterday feels like a hammer came down on my skull once again. How can you elect to liberate African Americans from 500 years of shackles, and at the same time refuse to free the 10-15% of the population that has no more choice in who they love than your new president had in the color of his skin?
Let's all hope that Obama has the strength to overrule these hateful papers, with the same conviction that has gotten him where he finds himself this morning. Congratulations, Mr. President, you have filled my eyes, too, with tears of joy. But please, as I do today, think about the bittersweetness that must run through the veins of all gay black people in California at this moment. Liberated, but still on the chain gang. Shoved into the far fringes of society for nothing they have ever chosen to do. That must hurt. And we still have to resort to dreams, even as Dr. King's dream is embodied in your reality.
I want to talk about the economy, Mr. President. I've seen who your economic advisers are, and that fills me not with pride but with a frozen chill. You know, Albert Einstein said that "The significant problems we have cannot be solved at the same level of thinking with which we created them." That is a very wise observation. Albert was as good a thinker as he was a physicist.
But then I see that your advisers include the likes of Robert Rubin, Larry Summers and Paul Volcker. These are all guys who created the problems. Which, if we follow Einstein, means they cannot solve them. Can we agree on that?
The economic issues we face today are profound, deep-seated and potentially debilitating for the entire country. They can't be solved overnight, and they can't be overcome with just a bunch of new laws or initiatives. You will need a complete overhaul, a 180 degree turn, and a very intense and sweeping clean-up of finance, banking, and yes, government policies.
Rubin under Clinton was one of the main architects of what has gone so awfully wrong today. Throw him out. Larry Summers is a doofus. Out with the bathwater. Paul Volcker’s primary claim to fame is that Alan Greenspan was far worse than him, but that doesn’t make him a valuable source of information.
If you, and the nation that so courageously elected you to be their leader, are to have a fighting chance at eventually beating the depression that can not be avoided, you will have to turn to people for advice who are not part of the banking in-crowd. Picking Jamie Dimon as Treasury Secretary, for example, is about the worst thing you could do. These are people who will always seek solutions in shifting things a little bit to the left or right, inside the existing paradigm.
It won't work, Mr President. Remember Einstein. Rubin and Summers are the kind of people who feel, like the whole Wall Street cabal, that they are indispensable, that the economy will grind to a halt if they are no longer allowed to do what they do. And what they do is betting, and has nothing to do with not solid finance.
You will have to call a stop to Wall Street, and all of the nation's finance policies, being a casino. That is as succinct as I can put it, and I can but hope that you understand how bitter and grave it all has become. You will need to throw out everybody who has had any dealings with it, while at the same time they will tell you that they are the only ones who know what goes on.
One reason why you need to distance yourself from them is that you’ll have to prosecute many of them. Bob Rubin will not drag his buddies before a court of law. Still, if that is not done, the economy will not regain the sense of decency and confidence that your election has brought to the country. There's no two ways about it. Crime either pays, or it does not.
You need to force all casino paper out into the light of day, that is not some optional item. Yes, it will mean the end for scores of powerful players, many of whom have financed your campaign. Nothing easy about it. But if you don't do it, you condemn the American economy to years more of downfall. US Treasury bonds are under extreme pressure, and as long as Paulson et al are allowed to continue to cover up toilet paper with what rightfully belongs to the American people, faith in the market can and will not be restored.
You need to withdraw all government support for Detroit, and let Ford and GM fail if they can't stand upright on their own. Same for all financial institutions. No more bail-outs, they just cut the trust level ever lower.
You must call Nouriel Roubini, now, and form a group of people around him, like Robert Oppenheimer at Los Alamos, and let them be your main advisory team. There are many able Americans who are not too far inside the asses of Lower Manhattan. Talk to Peter Schiff, to Paul Kasriel, to Marc Faber, George Soros, Bill Fleckenstein and Meredith Whitney. Give Doug Noland and Bill Bonner a call. Sit down with Ron Paul. And of course you are always welcome to contact me. I am not American, and I have no economics degree, but then again, that by now is a strong point, not a liability. I have called all this correctly for a long time, and i know what needs to be done.
You have proven yourself to be a very courageous man. There are equally brave Americans in the world of finance, just one phone call away. Please sir, believe me: You will need them. And you have not a second to lose. Your predecessor is handing out trillions of dollars and waves of pardons behind the wizard's curtain as we speak.
The winner must now take off the blindfold
The exhausted victor of the world's most gruelling presidential race now faces an even bigger battle, and it starts next week. The Washington summit on November 15, called to address the global financial and economic crisis, is probably the largest item ever to inhabit the in-tray of a US president-elect so soon after the election. While other winners of the race for the White House were at this stage picking the drapes for the Oval Office or deciding how much to charge for nights in the Lincoln Bedroom, George W Bush's successor must save the world from meltdown.
Next week will be awkward because the summit of 19 developed and developing nations, as well as the European Union, International Monetary Fund, World Bank and United Nations, is being hosted by the departing and terribly unpopular president. But the new president must resist the temptation to stay away for fear of bad press by association. There is no time, and his absence would look childish.
As Stephen Roach, former chief economist at Morgan Stanley, now Asia chairman for the bank, says: "We need a safer, sounder system in the US and round the world… The new president will have to demonstrate an understanding of the global dimensions of this crisis, that countries have to work collectively to organise solutions." The White House and others, including Gordon Brown, want to establish principles for reforming the world's financial structure. If they do their job the attendees will call for changes to the regulators that failed to act against asset bubbles and an extraordinary boom in leverage. We need a co-ordinated effort to help us through the next few months and years.
Millions of jobs are at stake. A great number of economies may be damaged for decades. Civil unrest and the rise of extremism are possibilities. But we don't know if the next US president is able to lead on these issues. During the election campaign, neither Barack Obama or John McCain presented either a proper analysis of the situation or an assessment of the utter devastation that the crisis has wreaked on their domestic spending plans. It was as if both candidates were in a parallel universe, happy to discuss clothing allowances and plumbing but absurdly ignoring the largest problem in the world.
Domestically, there really isn't much money in the pot. Not after the government has chucked $700 billion-plus at the problem and finds itself running a huge chunk of the country's banking industry and what was once the world's largest insurer. The money that is left will go, as it should, on helping people survive a deep and lasting recession. How bad is it? It was announced last week that the US economy contracted in the third quarter and that consumers had cut their spending for the first time since 1991. Things must be serious: none of the downturns since the early 1990s managed to curb consumption.
Americans have borrowed crazily to continue spending, maxing out their credit cards and remortgaging their houses in order to go on holiday and buy cars. Now the binge has to stop. The last pumpkin pie has finally been taken away from the all?you-can-eat buffet. The biggest worry for large economies in coming months will be deflation, according to Nouriel Roubini, the economist whose gloomy predictions a couple of years ago made Cassandra seem like a glass-half-full kinda gal. Alas, he has now been proved right.
Deflation is a terrifying scenario in which prices, and wages, embark on a spiral of decline. Central banks may cut interest rates, but in a deflationary world it would still make sense to try to reduce or pay off your mortgage, because the repayments will be taking up an ever-larger part of your shrinking disposable income. But asset sales to reduce debt make the problem worse as they encourage prices to fall further. Already, says Roubini, who is at New York University's Stern School of Business, there are deflationary forces in sectors where supply exceeds demand such as housing and cars. "There is a huge excess capacity for the production of manufactured goods in the global economy as the massive and excess [capital expenditure] spending in China and Asia… has created an excess supply of goods that will remain unsold as global aggregate demands falls."
To avert a deflation disaster, Congress is cooking up another multibillion-dollar economic stimulus plan after an earlier $170 billion package failed to encourage economic activity this year. But Roach cautions that the money should be directed at infrastructure, income support and extended insurance benefits rather than measures, such as certain tax cuts, that might allow the binge to be resumed. He is not optimistic, writing recently: "Far from heeding the tough lessons of an economy in crisis, Washington is doing little to break the daisy-chain of excesses that got America into this mess in the first place."
That is where the new president comes in. Somehow, deflation must be avoided while consumers are disabused of assumptions about their entitlement to expensive holidays, new cars and houses that increase in value at a rate higher than inflation every year. Neither candidate was willing to preach this lesson before the election. Now that no votes are at stake, maybe that will change.
Barack Obama victory: Dow Jones falls as Wall Street's focus turns to task ahead
American markets reversed course as the pre-election bounce ahead of President-elect Barack Obama's landslide victory failed to take hold. The Dow Jones Industrial index was off 148.07 points at 9477.21 in early trading, erasing roughly half of yesterday's 300-point gain - the largest election day rise in the Dow ever. Negative economic data was to blame, with the markets turning their focus to the task the incoming Democratic President now faces getting the largest economy in the world back on its feet.
A survey by consultancy ADP showed the private sector lost 157,000 jobs in October, considerably more than expected and an important pre-cursor to Friday's non-farm payroll figures which are likely to help cement the view of an increasing number of economists that the US has entered a deep recession. Bearish third-quarter results from media conglomerate Time Warner did not help matters, highlighting the impact the slowdown is having not only on the media industry but on company profits across the economy.
The mood was not confined to the 30 constituents of the Dow however, with the broader S&P500 and the Nasdaq both trading lower, down 1.8pc and 1.5pc respectively. Although some had been expecting a further rally on the back of the elections given the strength of the Democratic victory not just in the Presidential race but in the Senate as well, it appeared to have been priced in already. "The rally has already taken place as polls made it clear who would be elected," said Gilles Fleckenstein, chief executive officer of BNP Paribas Asset Management. "Now, people will wait to see what happens. We're in the heart of the recession now."
The bulk of commentators agree that President-elect Obama has a considerable job of work to do, with his first challenge being to right the economy. Fund manager Simon Laing at Newton Investment Management said: "The new President has an immense task ahead of him.broader policy reform will take a back seat to economic rejuvenation plans over the next two years." "President Obamas first task is to return confidence to the financial system and the economy. Expect the announcement of significant fiscal stimulus through 2009," he continued.
Other gloomy news came from the technology world, where Google announced on one of its corporate blogs that it is pulling its ten-year deal to manage Yahoo!'s search advertising business after failing to receive regulatory approvals. The deal is a blow to Yahoo! chief executive and co-founder Jerry Yang who used the Google deal as his main defence in rejecting a takeover bid from software giant Microsoft.
However Yahoo!'s shares responded warmly to the news up 3pc on speculation that it would force Mr Yang and his board to negotiate some form of full takeover by a third party, possibly Time Warners AOL division. In London, the FTSE was down about 60 points as falls for mining stocks weighed on the wider market.
World awaits Obama's response to economic woes
A potentially deep U.S. recession and the direst global financial crisis since the Great Depression will give Democrat Barack Obama little time to bask in the afterglow of his historic win in the U.S. presidential election. The decisive election victory "may help to instill a bit more confidence, but the problems have been well-documented," said Kenneth Broux, an economist at Lloyds TSB. "And I think we're facing probably a dreadful [U.S.] nonfarm-payrolls number on Friday, and that will make reality sink in once again. ... The economy is facing many, many difficulties."
World financial markets were mixed early Wednesday. Asian stocks jumped. European stocks slipped in early action as U.S. stock-index futures were pointing to a lower open on Wall Street. Strategists said there was little sign markets were reacting strongly to the presidential results. "The task for the new president is to first restore trust and confidence," said Jim Dunigan, managing executive for investments at PNC Wealth Management. "We saw a little bit of that ... [and] people are hopeful," Dunigan said. "He's got to deliver on that early."
President George W. Bush congratulated Obama and said he would work to ensure a smooth transition so the new president can tackle economic and other problems quickly. John McCain, the Republican senator Obama defeated, also pledged support to end the ongoing financial crisis. Obama, the first black elected president, captured 52% of the nationwide vote and Democrats extended their majority control in Congress. The 47-year-old senator from Illinois won traditionally Democratic states and made strong inroads in GOP-leaning areas amid intense dissatisfaction with the Bush administration.
"What he did in this campaign was to be all-inclusive," said Colin Powell, a Republican who served as secretary of state in the Bush administration but backed Obama in this race, told CNN. Yet Obama's party failed to win a so-called supermajority in the U.S. Senate that would have prevented minority Republicans from blocking Democratic initiatives via filibuster. Democrats gained five seats to 56, including two independents, with at least one seat still too close to call. Sixty seats are needed to prevent filibusters.
The reaction around the world was largely positive. "At a time when we must face huge challenges together, your election has raised enormous hope in France, in Europe and beyond," said French President Nicolas Sarkozy. "This is a moment that will live in history as long as history books are written," said U.K. Prime Minister Gordon Brown, who sent his "warmest congratulations" to Obama. Japanese Prime Minister Taro Aso said he would work with Obama to "strengthen the Japan-U.S. alliance further and work toward resolving global issues such as the world economy, terror and the environment." The Russian government, however, reacted cautiously and said it was up to Obama to improve deteriorating relations between the two countries.
The win wasn't a surprise, with all major U.S. pre-election polls signaling an Obama victory. The U.S. presidency is decided in the Electoral College, where Obama held a 338-163 edge, according to the latest tally, with a handful of states not yet formally called. The tally far exceeds the 270 needed for victory. Democrats were also on track to pad their majority in the 435-seat House of Representatives by 20 to 30 seats, reports indicated. In the 100-member Senate, where roughly a third of seats were up for election, Democrats held all their existing seats and picked off at least five Republican seats. The contest for one GOP-held seat in Oregon remained too close to call.
Obama swept to victory by promising change in a climate of unprecedented voter dissatisfaction with Washington in general and with the outgoing Bush White House in particular. "A historic change of leadership now comes to match the historic financial and economic challenge," said Marco Annunziata, chief global economist at UniCredit MIB. The outcome "will give Americans a powerful boost of confidence and optimism -- particularly important as lack of confidence has been a hallmark of the financial crisis from the very start," he said.
There remain plenty of unknowns, however. Annunziata noted Obama's criticism of free trade and said protectionist measures are always tempting at a time of economic crisis. Yet he saw encouraging signs in Obama's choice of advisers, most of whom are committed to free trade and international cooperation. Obama's economic advisers have included former U.S. Federal Reserve Chairman Paul Volcker, University of Chicago economist Austan Goolsbee, former Clinton White House aides Jason Furman and Gene Sperling, and Clinton-era Treasury Secretaries Robert Rubin and Larry Summers.
Speculation will now turn to the shape of Obama's Cabinet, with particularly keen attention focused on the selection of a Treasury secretary to replace Henry Paulson, economists said. Media speculation has centered on a range of potential nominees, including New York Federal Reserve Bank President Timothy Geithner and J.P. Morgan Chase CEO James Dimon. An upcoming summit of world leaders from the world's 20 largest industrialized and developing nations in Washington on Nov. 15 will also present a window into Obama's thinking on economic issues, although it's not clear how much of a role the president-elect will want to play.
Expanding Democratic majorities in the House and Senate, meanwhile, make it more likely an Obama administration will press for a large stimulus package, though it's unclear how that will be squared with a surging budget deficit. Paul Ashworth, an economist at Capital Economics, said the need for additional stimulus is "urgent." The last stimulus package, in the form of one-time tax rebates, provided only a temporary boost and quickly evaporated, Broux noted. Yet Obama could face a budget deficit wider than any seen since World War II, when measured as a proportion of the overall economy. The federal government has already approved a $700 billion bank-bailout package and additional aid may be required to keep financial institutions operating and avert a collapse in lending.
Bank worries overshadow Obama victory: Dollar mixed, yen mostly higher
Disappointing earnings outlooks from European banks Wednesday overshadowed the impact of Democrat Barack Obama's historic U.S. presidential victory, trimming risk appetite and lifting the Japanese yen and the U.S. dollar to modest gains. "Barack Obama has been elected new president of the U.S.A., but the reaction on currency markets was muted," said Marcus Hettinger, currency strategist at Credit Suisse in Zurich.
Obama, a senator from Illinois, swept to an overwhelming victory in the Electoral College and led Republican rival and Arizona Sen. John McCain in the popular vote. The euro fell to $1.2919 from $1.3002 in North American trade late Tuesday. European equities turned lower in early trading and remained on the defensive at midsession.
"Until it becomes clear whether there will be any material change of direction for policy [under Obama], which could take weeks if not months, markets will likely now go back to watching equity markets, central banks and economic data" for direction, said Adam Cole, global head of foreign exchange strategy at RBC Capital Markets. Economic data out of the euro zone continued to paint a gloomy picture. The Frankfurt-based European Central Bank is widely expected to cut its key lending rate by a half point to 3.25% when its Governing Council meets Thursday.
The October purchasing managers index for the 15-nation euro-zone services sector indicated activity shrank at its quickest pace in a decade. The services PMI tumbled to 45.8 from 48.4 in September, and was weaker than expected. Retail sales volume in the euro zone fell by a smaller-than-expected 0.2% in September, but declined 1.6% on an annual basis, according to the statistical agency Eurostat. The dollar index, a measure of the greenback against a trade-weighted basket of six currencies, paired earlier gains to stand at 84.816, up from 84.533.
The dollar retreated against the Japanese yen, slipping to 98.70 yen from 99.62 yen. Companies in the U.S. private sector shed 157,000 jobs in October, according to the ADP employment report, suggesting the job market in the U.S. is deteriorating further. The report comes two days before the Labor Department reports on nonfarm payroll growth for October. A warning by Allied Irish Banks on its earnings outlook and disappointing results from BNP Paribas contributed to the negative tone, said Kenneth Broux, a strategist at Lloyds TSB.
The yen has been the ultimate beneficiary of sharp spikes in risk aversion as traders have abandoned once-popular carry trades. Those strategies centered on borrowing in low-yielding currencies, such as the yen, and buying assets denominated in higher-yielding currencies. De-leveraging and liquidation have proved supportive to the dollar over the same period, as U.S. investors abandoned emerging markets and other foreign investments. Safe-haven buying also served to underpin the greenback as worries mounted recently over emerging markets, strategists said.
Barack Obama: who will be the key economic players?
One of the most important choices Barack Obama has to make in the next few days is who should be Treasury Secretary. Henry Paulson has held the office for two-and-a-half-years and overseen some of the most sweeping changes to the way the Treasury works. On his watch the department has become a stakeholder in a number of major US financial institutions and a direct shareholder in what could turn out to be hundreds of banks.
While noting his clear dedication and diligence to the task in hand, few insiders - either on Wall Street or in Washington DC - believe Mr Paulson will stay on, despite polite comments by the Obama camp that he will be needed to help with the transition. One senior Wall Street banker, who wished to remain anonymous, pointed to Mr Paulson's inability to look ahead during the crisis, instead simply appearing to react to events that had already taken place.
As a result, he took the $700bn (£420bn) Bill to the US Congress on the basis that it would be spent buying packages of distressed mortgages, argues the banker, when in fact it has been used to buy everything from stakes in banks to potential stakes in failing car manufacturers. Whoever becomes President, the most likely choice for the Treasury is one who has detailed policy experience but also understands the complex inner workings of modern finance.
One plausible candidate could be Tim Geithner, head of the New York Fed. Mr Geithner has been Ben Bernanke's right-hand man throughout the credit crisis, and has a strong relationship with the heads of many of the major banks. Some point to Paul Volcker, who chaired the Federal Reserve from 1979 to 1987 and has been Mr Obama's senior economic adviser in recent month, or Lawrence Summers, President Clinton's last Treasury Secretary.
Sheila Bair, the head of the Federal Deposit Insurance Corporation, is regarded by some as a sensible choice. She has transformed the FDIC into an organisation that really makes a difference for consumers. Other names mentioned in connection with the role include Jamie Dimon, JP Morgan Chase's chairman, or indeed New Jersey Governer Jon Corzine, who was Goldman Sachs' chairman and sat on the Treasury's borrowing committee during President Clinton's administration in the 1990s.
Obama May Not Wait for Inauguration to Put His Stamp on Economy
Barack Obama will transform a U.S. economy reeling from the worst financial crisis since the Great Depression -- and he may not wait until Inauguration Day to get started. He'll get his chance when Congress returns in less than two weeks for a lame-duck session with plans to pass another economic stimulus bill. Such a package would only be a down payment on Obama's economic recovery program if the Republican incumbent, George W. Bush, supports it. The rest will come when Obama, 47, is in the White House.
The Democratic president-elect has much more on his agenda, amounting to what may be the broadest overhaul of the U.S. economy since Franklin D. Roosevelt's New Deal. Beyond job creation and big investments in public works, Obama intends to shift the tax burden back toward the wealthy, roll back a quarter-century of deregulation, extend health-care coverage to all Americans and reassess the U.S. government's pursuit of free- trade deals.
"The changes will be far greater than many expect," said Andrew Laperriere, managing director at International Strategy & Investment Group, a money management and research firm in Washington. "From taxes to energy to health care, it's a pretty sweeping agenda." In the 2 1/2 months leading up to the Jan. 20 inauguration, the president-elect's challenge will be to work with the Bush administration on a transition that is collegial without being collaborative. Bush, partly at the behest of European leaders, will convene a summit Nov. 15 to discuss longer-term strategies to prevent another credit crisis. That could put the president-elect in an awkward position, because he'll be pressed to render his views on a meeting at which he has no official standing.
It "might not be such a good idea" for Obama and his team "to take a prominent role at the Nov. 15 summit," said Mickey Kantor, who worked on Bill Clinton's transition team in 1992 and later served as U.S. trade representative and Commerce secretary. "It's Bush's show, and you don't want any confusion about that." The Illinois senator won't be so reticent about putting his imprimatur on stimulus legislation that Democrats in Congress will attempt to pass before Bush leaves office.
One of Obama's first tasks in dealing with Congress will be to decide whether such a short-term stimulus should be tied to longer-term steps to bring the federal budget closer to balance. As it is, Obama will likely become the biggest deficit spender in U.S. history. Analysts forecast the budget shortfall may triple to $1 trillion in 2009 as costs mount for financial-industry bailouts started in Bush's final year in office.
Former Treasury Secretary Robert Rubin, an adviser to Obama, said the stimulus package "needs to be married to a commitment to long-term fiscal discipline." Otherwise, the U.S. risks "undermining our bond market and our currency market," Rubin, now senior counselor for Citigroup Inc. in New York, said in an Oct. 26 television interview on CNN. Obama has proposed a $175 billion package that includes checks for consumers, a tax credit for job creation and spending on public works such as school repairs, roads and bridges. "We face an immediate economic emergency that requires urgent action," he said in outlining the plan last month.
Political analysts say the package that emerges from the lame-duck Congress could be closer to $200 billion. "A big victory makes it more likely that a stimulus package that Obama likes passes in a lame-duck session," said Stan Collender, a former analyst for the House and Senate budget committee and now a managing director at Qorvis Communications in Washington. When the new Congress convenes in January, with a bigger Democratic majority and Obama in the White House, another even larger stimulus bill may pass and Obama's focus will shift to longer-term goals. He proposes investing $150 billion over 10 years in clean energy initiatives that he says would create 5 million new jobs. He'd also push automakers and consumers to get a million fuel- efficient hybrid vehicles on the road by 2015.
Other proposals include a fund to invest in manufacturing research, new job training programs and an infrastructure investment bank that he says will create up to 2 million jobs. He envisions a network of business incubators and a plan to deploy broadband Internet infrastructure to every community in the nation. To stem rising foreclosures, Obama's advisers say he's looking closely at ways to help homeowners renegotiate mortgages. He wants to overhaul the agencies that oversee the financial industry and give the Fed unprecedented ability to monitor institutions' books. As part of that, Obama would create a financial-market oversight commission responsible for identifying risks before they get out of control.
To deal with the credit crunch, Obama's advisers have called for the Treasury to hasten its recapitalization of banks with the $700 billion Troubled Asset Relief Program. One reason to expedite efforts to boost the economy and bring an end to the credit crunch is that other campaign promises the Democrat has made may work against the short-term rescue effort. For example, Obama has promised a departure from the Bush administration policy of pursuing any and all free trade agreements, vowing instead to seek protections for workers and the environment in existing and new pacts. He said he'll ask Mexico and Canada to renegotiate the North American Free Trade Agreement to include such provisions.
"We should use the hammer of a potential opt-out" from Nafta "as leverage to ensure that we actually get labor and environmental standards that are enforced," Obama said in February during the primary race for the nomination. Since winning the nomination, the Democrat has toned down his criticism of free trade, yet his hand may be forced on the issue by powerful groups within his party, said Claude Barfield, a trade policy expert at the American Enterprise Institute in Washington. "The labor unions and the environmental groups will pressure him," said Barfield. Obama's push for new conditions in trade deals "would invite retaliation," and could slow trade, says Barfield.
Obama also would raise taxes on at least some Americans. He plans an overhaul of the tax code, and he'll likely get one because of stronger Democratic control of Congress and the 2010 expiration of most of the tax cuts passed under Bush.
The Democrat would increase taxes on Americans earning more than $250,000 while expanding tax relief for those with incomes under $200,000 through tax cuts or credits.
The top marginal rate would return to the 1990s level of 39.6 percent from the current 35 percent. The rate on most capital gains would rise to 20 percent from the current 15 percent. The overall result, according to the nonpartisan Tax Policy Center, would be lower taxes for low and middle-income taxpayers while "taxpayers with the highest income would see their taxes rise significantly." Such policies could worsen the economic slump, critics say.
"History shows us if you raise taxes in a bad economy, you hurt the economy, and there was a president named Herbert Hoover, a Republican, they raised taxes, they practiced protectionism, and we went from a serious recession into a deep depression," Obama's Republican opponent John McCain said in an Oct. 28 interview with Fox News. Others are less worried. Mark Gertler, a New York University economist who has studied the Great Depression, points to Obama advisers Rubin and Larry Summers, both former Treasury secretaries, and Paul Volcker, a former chairman of the Federal Reserve. "The economists around him are too smart and too experienced to do something that would risk the recovery," he said.
Obama May Spend on Highways, Bridges to Stimulate U.S. Economy
President-elect Barack Obama may put spending on roads and bridges at the top of his agenda for stimulating U.S. economic growth. "He's identified infrastructure as one of the ways to strengthen the American economy," Janet Kavinoky, transportation infrastructure director for the U.S. Chamber of Commerce, said in an interview. "So we would expect it to be on his list of actions both for the stimulus and longer term."
Obama was elected yesterday amid a global credit crisis and with the U.S. in or heading into a recession that may be the deepest in more than 20 years. He promised during his campaign he would use infrastructure spending to create jobs. "We'll create 2 million jobs by rebuilding our crumbling roads, schools and bridges," Obama said in an Oct. 13 speech in Toledo, Ohio, where he outlined his plan for reviving the economy. Obama, 47, has urged Congress to pass an economic stimulus bill immediately after the election. House Speaker Nancy Pelosi, a California Democrat, has said she wants spending on highways and other transportation infrastructure included in the next stimulus package.
"Transportation's always something that everyone takes for granted, and then it gets a lot of attention as a result of a tragedy like 9/11 or I-35W in Minnesota," former Transportation Secretary Norman Mineta said in an interview. An Interstate 35W highway bridge collapsed in downtown Minneapolis last year, bringing attention to decaying infrastructure. Mineta, a Democrat, headed the Transportation Department at the beginning of the George W. Bush administration and said he discussed infrastructure needs with Obama during the campaign.
Bush increased highway and transit spending to a record $286.5 billion over six years in the highway bill he signed into law in 2005. That compared with $218 billion for the previous highway bill and was less than the $375 billion House leaders wanted to spend on the measure. Obama, a U.S. senator from Illinois, in February proposed a so-called infrastructure bank to invest $60 billion in roads, bridges and other projects over 10 years. The American Society of Civil Engineers says it would take $1.6 trillion over five years to bring U.S. infrastructure to "good" condition, excluding expansion costs.
"If you believe the country has a problem, or a crisis as I'd call it, in transportation infrastructure, you've got to continue to spend," James Young, chief executive officer of Union Pacific Corp., the biggest U.S. railroad company, said in an Oct. 23 interview. Young said the Omaha, Nebraska-based carrier will consider cutting capital spending next year depending on the economy, though it doesn't want to cut too much given nationwide transportation infrastructure needs. The economic slump may give Obama and lawmakers a reason to pursue infrastructure spending in the model of President Franklin Delano Roosevelt following the Great Depression, said Leslie Blakey, executive director of the Coalition for America's Gateways and Trade Corridors, which advocates for money for freight projects.
"We have serious infrastructure problems right now that we need to address immediately," Pete Ruane, chief executive officer of the American Road and Transportation Builders Association, said in an October speech at an American Trucking Association's conference in New Orleans. The Washington-based builders association includes Caterpillar Inc. and other transportation construction companies. The state of the economy "is incentive to do something, not incentive to sit here and do nothing," Ruane said. "We're not discouraged by that. We can generate the jobs." Aside from any special infrastructure program, Obama and the new Congress next year will set spending levels for roads and transit when the highway bill comes up for reauthorization.
The bill sets funding for the highway trust fund, the target of an $8 billion federal bailout in September before it ran out of money. A national commission looking into how to pay for the trust fund is to issue its report in January. Obama may shy away from public-private partnerships that infuse private capital into transportation infrastructure, said Bob Campbell, a Deloitte LLP vice chairman based in Austin, Texas. "Inevitably, an Obama administration would have to come back around to that model," Campbell said in an interview. "But I don't think it would be out front as far as part of the pronounced strategy."
The Obama administration also will be pushed by passenger rail advocates and freight railroads to fund expansion. Union Pacific and other carriers will renew their push for a federal tax credit they say would allow them to add freight rail infrastructure, rail executives have said. Vice President-Elect Joseph Biden is a commuter on Amtrak, the U.S. passenger railroad, and has pushed for more money for the Washington-based rail service during his Senate career.
Roubini: Next Stop On Global Train Wreck Is China
Nouriel Roubini has been quiet for a few days, but you didn't think he was getting bullish, did you? Of course not. In fact, now that a global systemic financial crisis appears to have been narrowly averted, he has turned his attention to the next land mine: China. China, says Nouriel, is at risk of a hard landing (which, for China, would mean a slowdown of growth to 5%-6%). The cause? The US consumer, of course. That recent uplift in global stock prices? A "sucker's rally." The recent economic news in the US? "Worse than awful." Read on...
[T]he risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 - just a notch above a 6% hard landing - is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth - the U.S. on the consumption side - has now already shut down. The second engine of global growth - China on the production side - is also on its way to stalling.
Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth - at market prices - will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.
For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.
For the last few months the first engine of global growth has effectively shut down as the latest batch of macro news from the U.S. are worse than awful: collapsing consumption and consumer confidence, plunging housing, collapsing auto sales, plunging durable goods spending (while also supply side indicators such as production, ISM and employment are also free falling).
The U.S. is entering its worst consumer recession in decades both supply and demand data look worse than in the severe recessions of 1974-75 and 1980-82. And in due time this tsunami of awful macro news, together with ugly downside surprises to earnings will take another toll on equity valuations that are now temporarily lifted by another bear market sucker’s rally. More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling.
The latest batch of macro data from China are mixed but all pointing towards a sharp deceleration of economic growth: official GDP data showing growth down to 9% from the 12% of a couple of years ago; sharply falling spending on consumer durables (autos); falling home sales and sharp fall in construction activity; leading indicators of the manufacturing sector (the Chinese PMI) showing a value of 44.6% (i.e. an outright contraction of manufacturing as a level below 50% indicates a contraction), its lowest level ever since its publication.
9 out of 11 PMI sub indices showed contraction - Output, New Orders, Input Prices, Purchases of Inputs, New Export Orders, Imports, Backlogs of Orders, Stocks of Major Inputs. Output index fell to 44.3 from 54.6 in September, while new orders dropped to 41.7 from 51.3, while the inventory index climbed to 51.4 from 50.5. The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand. And the decline in construction activity is without doubt a major contributor to the recent weakness in industrial activity in China.
MBIA, Ambac Losses Widen on Higher Claims Forecast
MBIA Inc. and Ambac Financial Group Inc., the bond insurers crippled by credit-rating downgrades, posted wider losses than analysts anticipated after slumping credit markets forced them to increase reserves for claims. MBIA posted an $806.5 million net loss after setting aside $961 million for guarantees on home-equity bonds, sending its shares down 18 percent. Ambac recorded a $2.43 billion net loss and reserved $3.1 billion. The stock dropped 26 percent.
The combined reserves are the largest taken to date and show the credit slump has chipped away at the companies' optimistic predictions that claims won't increase. The losses likely will prompt scrutiny from Moody's Investors Service, which is reviewing the insurance ratings of both companies after stripping them of their Aaa ranking this year. The companies are seeking to be involved in the U.S. government's financial rescue plan. "The big issue for bond insurers is their ratings," said Jim Ryan, an analyst with Morningstar Inc. in Chicago. "If the rating agencies pile on, that could create more problems."
Armonk, New York-based MBIA's operating loss, which excludes some debt price markdowns, was $2.22 a share, missing the $1.04 average loss estimate of six analysts surveyed by Bloomberg. Ambac had a loss of $7.81 a share, compared with an estimated loss of $1.09. Ambac fell 88 cents to $2.52 at 9:56 a.m. in New York Stock Exchange composite trading. MBIA dropped $1.91 to $8.55. The increased provisions "reflect our analysis of the impact of weakening economic conditions and a greater number of defaults on improperly originated and serviced mortgage loans," MBIA Chief Executive Officer Jay Brown said in the company's statement today.
MBIA decided against taking additional reserves in the second quarter. Brown said at the time that the company was "confident in our continuing analysis of our housing-related exposures."
"Housing related data continues to vacillate, having taken a turn for the worse over the past few months after showing positive signs earlier in the year," Ambac Chief Executive Officer David Wallis said in the company's earnings statement. Ambac took a $2.7 billion charge to reflect a decline in the value of securities it had guaranteed using credit-default swaps. That type of mark-to-market loss, which doesn't always indicate an expected cash payment, this time forced the bond insurer to set aside about $2.5 billion to make good on those contracts, according to the statement. Ambac also took a charge of $607.7 million for expected claims on bonds backed by home equity loans.
The company won't pay a dividend because the third-quarter loss caused negative shareholders' equity, Chief Financial Officer Sean Leonard said during a conference call today. Ambac may face significant liquidity issues if its bond insurance unit is downgraded because it will trigger payments by its asset management business, Chief Executive Officer David Wallis said during the call. Ambac is talking with its regulators about how it might address the issue, he said. MBIA said it provided $600 million of the cash raised earlier this year to its asset management business. MBIA also said it had received regulatory approval for the business to tap its bond insurance subsidiary for an additional $2 billion through a repurchase agreement.
The transactions "eliminate the need to sell assets to meet ratings triggered termination requirements or future liability maturities in the current highly stressed credit environment," MBIA said. Ambac, MBIA and the rest of the industry have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent. Ratings companies downgraded about $118 billion of prime-jumbo and Alt-A bonds in September following a record $200 billion of downgrades in August, according to an Oct. 3 report from JPMorgan Chase & Co. MBIA's insurance unit was cut to A2 by Moody's in June and AA by Standard & Poor's. Moody's is reviewing the rating for a possible downgrade. Ambac's insurance arm is rated Aa3 by Moody's, where it is also on review, and AA by S&P.
MBIA is down 44 percent in New York trading this year and Ambac dropped 87 percent. The stocks rose yesterday on optimism the government may broaden its financial rescue package to allow Ambac and MBIA to participate, helping reduce losses. "This may be the last, best hope, that the Feds come through," said Matt Fabian, an analyst and managing director at Concord, Massachusetts-based Municipal Market Advisors. "There just is no demand for their product."
MBIA has insured no new deals in the municipal bond market since early July after being stripped of its last Aaa credit rating by Moody's, according to Thomson Reuters data. Ambac insured no deals during the third quarter and the drought in business continued into October, according to data provided by Thomson Reuters. Assured Guaranty Ltd. and Warren Buffett's Berkshire Hathaway Assurance grabbed most of the market, with Berkshire backing 44 percent of all new bonds insured by cities and states, and Assured guaranteeing 45 percent.
Fed's balance sheet to expand to $3 trillion by year's end
A rising threat of inflation earlier this year "froze in its tracks" in recent months as the credit crisis worsened, Federal Reserve Bank of Dallas President Richard Fisher said. "The impetus for rising prices came to a grinding halt as the credit crisis took grip and confidence evaporated," Fisher said today to a meeting of the Texas Cattle Feeders Association in Grapevine, Texas. "As the credit market congealed, inflationary momentum froze in its tracks."
Fisher and other members of the Federal Open Market Committee cut the benchmark interest rate last week to 1 percent, trying to prevent a downturn in bank lending and consumer spending from triggering a global recession. He had dissented five times in prior meetings because of concern about inflation. Plunging commodity prices, including a 55 percent decline in the cost of oil since July, have eased inflation pressures. "I don't believe we are likely to have sustainable deflationary impulses," Fisher told reporters after his speech.
While cutting the main rate during the past 13 months from 5.25 percent, Fed Chairman Ben S. Bernanke has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22.
"There are limits to what the central bank can do," Fisher said. "Complementary action must now be undertaken by the fiscal authorities," including the new president to be elected today. The Fed's efforts to unlock short-term credit markets, including buying debt directly from companies, showed signs of working, as interest rates on U.S. commercial paper fell today to the lowest in four years.
The Fed's balance sheet may expand to $3 trillion by year's end, reflecting growth of various liquidity measures supporting banking institutions, Fisher said. As of Oct. 29, the Fed's balance sheet was $1.97 trillion. Still, the U.S. faces "an epic challenge," Fisher said. "We are navigating the mother of all financial storms." The U.S. economy shrank at a 0.3 percent annual rate last quarter, the most since the 2001 recession, the Commerce Department reported last week. Economists expect the slump to worsen in the fourth quarter.
A recovery in the U.S. economy "will take time," Fisher said in response to an audience question. "I don't see any economic growth in 2009. None."
During the current quarter the U.S. is "likely to have negative growth," he told reporters. Labor Department figures are expected to show a drop of 200,000 jobs in October, according to a Bloomberg News survey of economists. A report showed Oct. 3 that payrolls fell by 159,000 in September, the biggest drop in five years. The unemployment rate held at 6.1 percent, up from 5 percent as recently as April.
The central bank has "lowered interest rates dramatically" and "we are doing our best to try to instill a simple measure of confidence."
U.S. to Sell $55 Billion in Long-Term Debt Next Week
The U.S. Treasury said it plans to sell $55 billion in long-term government debt this quarter and bring back auctions of three-year notes, as a slowing economy balloons the budget deficit to a record level. The Treasury's quarterly refunding of longer-dated securities is the biggest in four years. Three-year notes, which had been suspended since May 2007, will now be issued on a monthly basis, the department said in Washington today.
The government will also increase the frequency of 10-year and 30- year debt auctions. Borrowing needs have surged in the wake of higher spending, a $700 billion financial rescue plan and plunge in tax receipts amid what economists estimate may be the worst recession since the early 1980s. Debt issuance may increase further after bond trading firms this week predicted the budget shortfall will more than double to $988 billion in 2009. "These are highly uncertain times," Karthik Ramanathan, head of the Treasury's debt management, said in a press briefing. He said private deficit estimates "vary greatly, and the marketable borrowing estimates are even broader," ranging from a projected shortfall this year of $1.1 trillion to $2.1 trillion.
The Treasury plans to auction $25 billion in three-year notes on Nov. 10, $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds Nov. 13, the department said. The total was in line with analysts' forecasts and was the largest quarterly figure since the first three months of 2004. The department last quarter said it was considering a second reopening of the 10-year note and a move to quarterly new issues of 30-year bonds. In a Bloomberg News survey of six analysts, the median estimate predicted $25 billion in three-year note sales, $20 billion in 10-year-note sales and $8 billion in bond sales.
Three months ago, the Treasury's announced quarterly sales of $17 billion in 10-year notes and $10 billion in reopened 30- year bonds.
"We will continue to monitor projected financing needs and make adjustments as necessary including, but not limited to, the reintroduction or establishment of other benchmark securities," Ramanathan said in a statement. The Bush administration's most recent budget forecast, issued in July, projected a $482 billion deficit for the 2009 fiscal year, which started Oct. 1. Since then, the government has taken over mortgage companies Fannie Mae and Freddie Mac, intervened to save insurance company American International Group Inc., and embarked on the bank rescue program.
As a result, borrowing needs are expected to rise to a record $550 billion in the three months to Dec. 31, the Treasury said Nov. 3. That follows a $530 billion record in the July to September quarter. "From a fiscal perspective, borrowing requirements have steadily increased," the Treasury said in charts prepared for its advisory committee meeting. "The economic outlook continues to present challenges." The borrowing announcement noted that upcoming auctions of 10-year and 20-year Treasury Inflation Protected Securities, also known as TIPS, will help meet financing needs. In the department's meeting this week with bond dealers, there was debate over whether five-year TIPS are an effective way for the government to borrow.
"Recent cost studies as well as investor participation statistics suggest that TIPS issuance, particularly for shorter- dated TIPS, has not reduced borrowing costs nor diversified the investor base, both of which were objectives at the start of the program," minutes of the meeting said. "Focusing on longer-dated TIPS may be an approach to reducing effective costs, capturing a higher inflation premium, and increasing liquidity among benchmark TIPS instruments while at the same time extending the duration of the portfolio," the Treasury said.
Ramanathan told reporters there were no immediate plans to change the TIPS borrowing calendar, which includes a prospective five-year note TIPS sale in April. He noted the cost studies and said the Treasury would consider their findings.
The government sells debt to finance the excess of spending over revenue. The Treasury also sells shorter-term debt on a monthly and weekly basis to manage the government's finances. In today's announcement, the Treasury said it expects to issue cash-management bills, "some longer dated," during the current quarter. The Treasury said unscheduled reopenings of government securities will be the "exception" in its debt management because the department has a policy of "transparency, regularity and predictability."
The Treasury also has borrowed money on behalf of the Federal Reserve, which has launched a slate of new lending programs to fight the credit crunch. Ramanathan said in the statement that the department "strongly encourages" financial firms to step up efforts to settle failed transactions in the secondary debt market. "Recent market turbulence and the low level of short-term interest rates resulted in a substantial and broad increase in persistent fails in U.S. Treasury securities," Ramanathan said. "Other regulatory measures may be considered if private sector efforts are not implemented."
Libor's Biggest Drop Fails to Match Fed, Spur Loans
Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars. The London interbank offered rate, or Libor, for three- month loans fell to 2.51 percent today, from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.
"Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon," said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm. Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove Libor, the benchmark for $360 trillion of securities worldwide, lower in the past month without convincing financial institutions to lend. About 85 percent of U.S. banks tightened lending standards on loans to large and mid-size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said yesterday conditions remain "highly challenging." Mike DiGiovanni, General Motors Corp.'s chief sales analyst, said a day earlier the scarcity of lending led to the automaker's worst month since World War II. The U.S. economy, which contracted 0.3 percent in the third quarter, may stay in a slump through 2009, Fed Bank of Dallas President Richard Fisher said Nov. 3. The credit-market seizure that began after BNP Paribas SA halted withdrawals on three hedge funds last year worsened when Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, driving dollar Libor up 200 basis points, or 2 percentage points, in the next 25 days to the highest level in 2008.
The difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 192 basis points today. That compares with 87 basis points on the last day before Lehman's collapse and an average 11 basis points in the five years before the crisis started. "We're not out of the woods yet," said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany's biggest state-owned lender. "Libor fixings are improving but it's too early to say that this pattern is being replicated in the actual money markets."
Libor, overseen by the British Bankers' Association, an unregulated trade group based in London, is the benchmark rate for financial contracts from derivatives to company loans and mortgages, equating to about $53,500 for every person in the world. It's set by a panel of as many as 16 banks in a daily survey where members estimate how much it would cost them to borrow in 10 currencies for terms from a day to a year. The Bank for International Settlements said in March some lenders may have "manipulated" rates to keep from appearing like they were in trouble.
Central banks have driven money-market rates lower by offering financial institutions as much dollar funding as they need and acting in concert to slash interest rates. The Reserve Bank of Australia cut its benchmark rate 75 basis points yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in reducing borrowing costs in the past week. The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg surveys of economists. While cutting the U.S. target rate during the past 13 months to 1 percent from 5.25 percent, Fed Chairman Ben S. Bernanke has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22.
"The Fed is trying to give Novocain to the markets," said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. "It's all about buying time." Central bank operations helped the MSCI World Index of stocks rise more than 20 percent since falling to a five-year low on Oct. 27. Company borrowing costs have declined, with yields on the highest-ranked 30-day commercial paper, or CP, falling yesterday to the lowest level since 2004. The market, used by companies to cover daily expenses, grew last week for the first time since Lehman's collapse.
Cash injections have had a limited impact because instead of lending the extra money received in auctions, some financial institutions are holding it on deposit with central banks. Banks lodged a record 296 billion euros ($381 billion) overnight with the ECB yesterday. The daily average in the first eight months of the year was 427 million euros. "The money-market players remain cautious but we're at least seeing an improvement and that's going to continue," said Vincent Chaigneau, head of foreign-exchange and interest rate strategy at Societe Generale SA in London. "Transactions remain limited and we still have a dislocated market, but we're seeing a significant pullback" in rates, he said.
In its quarterly Senior Loan Officer Survey, the Fed said about 95 percent of U.S. banks raised the costs on credit lines to large firms, and "nearly all banks" increased the spread on borrowing rates over the cost of funds on loans to firms from July. About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans. Banks may not pass all of the benefits of lower interest rates on to consumers and businesses. Banks around the world are re-evaluating the price they put on risk, raising the cost of loans when compared with levels of pervious years, said David Hodgkinson, chief operating officer of HSBC Holdings Plc, Europe's biggest bank.
"Credit has to be priced appropriately to reflect the risk," Hodgkinson said in a Nov. 3 interview in Abu Dhabi. "If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear because it depends on the particular transaction and the risk." In another sign that lending remains restricted, corporate bond sales in Europe dropped in October to the lowest level this year, with 25.4 billion euros ($32.3 billion) of notes sold, compared with 35.9 billion euros in September, according to data compiled by Bloomberg. U.S. investment-grade offerings fell to $21.6 billion, the least since July 2002.
"No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks," said Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London. "In effect, the measures taken by central banks are not providing incentives to go into the interbank market."
America's companies reconquer the world
America's corporate giants have regained their place as the world's most valuable companies, reflecting a profound shift in the global power structure as the deep strengths of the US economy reassert themselves. The oil group Exxon Mobil is once again the global leader with a market value of $390bn. PetroChina briefly had a theoretical paper value of over $1,000bn at the height of the Shanghai bubble but has since crashed to $299bn.
Wal-Mart ($222bn), Microsoft ($207bn). and General Electric ($206) have moved briskly up the ladder, claiming the third, fourth, and fifth slots, with Procter & Gamble, Johnson & Johnson, and Warren Buffett's Berkshire Hathaway close behind. The league table is a striking change from the picture just a year ago, when Chinese companies such as PetroChina, ICBC bank, China Mobile, and other rising stars seem poised to sweep away the Anglo-Saxon laggards.
Market veterans note the similarity with the late 1980s when eight of the world's 10 biggest companies were briefly Japanese, a distortion that was soon corrected as debt deflation engulfed the Nikkei. Most economists believe China will fare better, but it may nevertheless suffer a hard landing as exports slump. Manufacturing output contracted sharply last month, according to a CLSA survey.
Global bourses have fallen by half over the last year, losing $20 trillion in market value. The drops have been steepest in many of the BRIC states (Brazil, Russia, India, China) touted until recently as the dynamic new force that would soon challenge the hegemony of the Atlantic region. Moscow's RTS Index has dropped by 67pc. Russian corporations have to roll over almost a third of their $510bn of foreign loans by the end of next year. Some of the biggest names have been lining up for Kremlin bail-outs.
The energy giant Gazprom ($100bn) - which talked of becoming the world's biggest company last year - has crashed from third place to 37th, and has seen the credit default swaps (CDS) on its debt trade at 1,300, higher than Lehman Brothers before it went bankrupt. Brazil's energy group Petrobras has fallen from sixth to 38th place.
It is not that perceptions of the US economy have been upgraded, but rather that investors have sharply downgraded their view of the rest of the world, especially Europe, Russia, China, and emerging markers everywhere - especially those with current account deficits. The very aggressive policy response by the US Federal Reserve is now viewed as a big plus compared to slow and half-hearted moves by Europe's central banks.
The flight to safety in the US can been seen in the powerful dollar rally over recent months, and diminishing fears about the credit-worthiness of US Treasury debt. Like the reports of Mark Twain's death, talk of America's demise may have been exaggerated.
GMAC reports $2.52 billion loss; ResCap survival at risk
Finance company GMAC LLC lost $2.52 billion in the third quarter, hurt by the housing slump and vehicle lease writedowns, and said its mortgage unit, one of the nation's largest home loan providers, may not survive. The fifth straight quarterly loss brought GMAC's losses since the middle of 2007 to $7.9 billion. Its mortgage lending unit, Residential Capital LLC, lost $1.91 billion in the quarter, its eighth straight quarter in the red, bringing its losses over that two-year period to $9.1 billion.
GMAC has slashed lending after losses soared because of the U.S. housing slump, mounting customer defaults and falling vehicle sales. Its auto finance unit lost $294 million in the quarter, hurt by higher North American and Latin American credit losses, while insurance operations earned $97 million. "Economic and market conditions created an unrelenting environment for our business," GMAC Chief Executive Alvaro de Molina said in a statement. "In this climate, our primary objective is to make prudent use of our resources and take the steps needed to address the reduced access to liquidity."
The results will hurt General Motors Corp, which still owns 49 percent of Detroit-based GMAC after selling the rest in 2006 to private equity firm Cerberus Capital Management LP. GMAC's fate is also intertwined with a potential merger of GM with Chrysler LLC, also controlled by Cerberus. ResCap was the seventh-largest U.S. mortgage lender from January to June, according to the newsletter Inside Mortgage Finance. But the Minneapolis-based lender has since stopped making many riskier U.S. loans, and halted all non-U.S. mortgage lending apart from Canadian insured loans. GMAC has also closed 200 retail mortgage offices.
GMAC said it forgave $197 million of ResCap obligations in the third quarter, and an additional sum in October, to ensure ResCap had sufficient tangible net worth. But ResCap still struggles to maintain sufficient capital and liquidity, it said. "Absent economic support from GMAC, substantial doubt exists regarding ResCap's ability to continue as a going concern," it said. GMAC reported a loss of $1.6 billion in the year-earlier third quarter.
GMAC is seeking to become a bank holding company, and this week said it plans to restructure much of its debt, less than five months after completing a $60 billion refinancing. A restructuring would allow GMAC to raise capital needed to become a bank holding company, and enable it to participate in the U.S. government's plan to recapitalize banks and buy toxic assets. It is also participating in a Federal Reserve commercial paper program to help unlock credit markets.
Analysts at CreditSights Inc estimated that GMAC would need to raise at least $3.8 billion to achieve a Tier-1 capital ratio, which measures its ability to cover losses, of 8 percent. Regulators consider 6 percent sufficient. Cutbacks in GMAC's lending were responsible for about half of GM's 45 percent plunge in October vehicle sales, the automaker said. "It was like someone turned off the lights," GM North American sales chief Mark LaNeve said on Monday.
U.S. Service Industries Slump to Record Low
Service industries in the U.S. contracted in October at the fastest pace on record as a lack of credit and slowing sales caused companies to retrench. The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the economy, dropped to 44.4, weaker than forecast and the lowest level since records began in 1997, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction. Other reports showed job losses climbed.
Rising unemployment and slumping property values are forcing Americans to cut back on purchases of everything from home electronics to restaurant meals. Spending by consumers and businesses is likely to keep slumping heading into the holiday season as loss-riddled banks make it more difficult to borrow. "Consumers are pulling back and businesses are reacting accordingly," said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York. "This caution on the part of businesses will lead to bigger declines in employment and investment. The recession is getting deeper."
Illinois Senator Barack Obama, riding a wave of voter discontent over Republican rule, the direction of the economy and job losses, won the U.S. presidential election yesterday. He is the first Democrat to get a majority of the popular vote since Jimmy Carter in 1976. Economists forecast the ISM index would fall to 47 from a reading of 50.2 in September, according to the median of 69 projections in a Bloomberg News survey. Estimates ranged from 42 to 50.5. A report from the institute earlier this week showed manufacturing in the U.S. shrank in October at the fastest pace in 26 years as companies trimmed orders.
Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a report from ADP Employer Services today also showed. Firings spread from automakers, financial and housing-related companies to retailers and other services as the economic slump deepened. Even bigger declines in payrolls are in train. Employers announced 112,884 job cuts last month, up 79 percent from October 2007 and most in almost five years, a report from Chicago-based Challenger, Gray & Christmas Inc. said today.
Stocks maintained losses following the reports on concern the economic slump would worsen. The Standard & Poor's 500 index fell 0.9 percent to 997.01 at 10:26 a.m. in New York. Treasury securities rose.
The ISM's employment index dropped to 41.5 from 44.2 in September. The institute's business activity index fell to 44.2 from 52.1, while its new orders gauge decreased to 44 from 50.8. "Some of these companies are having difficulty making payroll based on this whole cash-flow situation," Anthony Nieves, chairman of ISM's non-manufacturing survey, told reporters on a conference call. "The biggest impact has been on available lines of credit. Everyone's trying to spend less and reduce expenses across the board." The group's measure of prices paid by non-manufacturing businesses fell to 53.4, the lowest since July 2003. Energy costs in October continued to recede from July's record highs. The average price for a barrel of crude oil last month was $76.72, compared with $103.76 a month earlier.
While factories have cut payrolls every month since July 2006, other businesses have joined in reducing employment this year. Service industries cut 82,000 workers from their payrolls in September, the fourth straight monthly decline, the Labor Department said last month.
The U.S. probably lost 200,000 jobs in October, bringing the total decline in payrolls so far this year to nearly 1 million, economists surveyed by Bloomberg forecast a Labor Department report Nov. 7 will show. The unemployment rate may jump to its highest level in more than five years, the survey showed. The reduced availability of credit, along with the loss of jobs is likely to hurt spending during the holiday shopping season, the largest source of revenue for most stores.
Circuit City Stores Inc., the second-biggest electronics retailer, said this week it will close 155 American stores, reducing the company's workforce by 17 percent in order to conserve cash. "Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply," James Marcum, chief executive officer of the Richmond, Virginia-based company, said in a Nov. 3 statement. "The weakened environment has resulted in a slowdown of consumer spending." Such spending, which comprises about 70 percent of the U.S. economy, dropped at a 3.1 percent annual pace in the third quarter, the first decline since 1991 and the biggest since 1980, the Commerce Department said Oct. 30. The slowdown caused the economy to contract last quarter at the fastest pace since the 2001 recession.
U.K. Factory Output Drops in Worst Streak Since 1980
U.K. factory production dropped, extending the worst streak since the early years of Margaret Thatcher's administration, and services contracted the most since 1996 as the economy approached a recession. Production fell 0.8 percent in September from August, the biggest drop in 19 months, the Office for National Statistics said in London. Output last fell for seven straight months in the recession of 1980. The Chartered Institute of Purchasing and Supply's index of services dropped to 42.4, the lowest in its 12-year history, from 46 in September.
Britain is headed for its first recession since 1991 as the global financial crisis spreads from banks to the rest of the economy. Bank of England policy makers will lower the benchmark interest rate by at least half a percentage point to 4.5 percent after tomorrow's decision, economists say. "Today's data were terrible," said George Buckley, an economist at Deutsche Bank AG in London. "This raises the risk the Bank of England moves by more than the 50 basis points we expect." The pound fell as much as 0.3 percent after the reports and traded at $1.5812 as of 10:09 a.m. in London. The U.K. currency has declined more than 20 percent against the dollar this year.
A CIPS sub-index for employment in services fell to the lowest since the survey began. A gauge of expectations declined to 50.8, also a record low, from 58.2 in September. Markit bases its finding on a survey of about 700 companies. Adecco SA, the world's largest supplier of temporary workers, yesterday pointed to the U.K. slump as it reported a 27 percent drop in third-quarter profit. The U.K. economy contracted for the first time since 1992 in the third quarter, shrinking 0.5 percent, and today's reports add to evidence that the outlook is worsening. The CIPS manufacturing index stayed near a 16-year low and construction industries shrank at the fastest pace in more than a decade.
"The slump in service sector business activity in October points to a more acute contraction in the economy in the fourth quarter," said Ross Walker, an economist at Royal Bank of Scotland Group Plc. The "collapse" in the index "increases the chances of the Monetary Policy Committee delivering a Bank Rate cut in excess of 50 basis points." Factory production dropped 2.3 percent from a year earlier, the statistics office said. In the third quarter, output fell 1.3 percent from the previous three months, the largest decline since the fourth quarter of 2001.
The Bank of England will probably respond by cutting its main rate, which is still the highest among the Group of Seven nations. The U.K. central bank will lower the benchmark interest rate to 4 percent from the current 4.5 percent tomorrow, according to the median of 60 economists' estimates in a Bloomberg News survey. More than 10 predict an even larger cut, which would be the biggest reduction in a single stroke since the Bank of England won the power to set interest rates independently in 1997.
Banks spurn pleas to cut rates by raising cost of mortgages
Mortgage lenders are ignoring pleas from the Government and consumer groups to honour the terms of recent emergency bailouts and pass on this week's expected Bank of England base rate cut – instead pre-empting the decision by increasing rates for new customers.
Despite a substantial base rate cut on the cards, Abbey has increased the rates on its tracker products by up to 0.5 percentage points. Nationwide has increased its tracker rates by up to 0.4 percentage points, Halifax has withdrawn its two- and three-year trackers and increased its five-year tracker by 0.5 percentage points, and Northern Rock has increased its two-year tracker by 0.15 percentage points. Meanwhile, HSBC has said that there would be some "stickiness" in passing on any cut.
A group of MPs is organising a motion in Parliament urging all UK banks to pass the benefits on to cash-strapped consumers, at the same time as urging the Monetary Policy Committee to significantly cut the base rate. The Business Secretary, Lord Mandelson, told the BBC's Today programme yesterday: "When official rates are being cut, it is not unreasonable for customers to see some benefit from that. When the Government bailed out some high street banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, by taking a £37bn stake in them, one of its conditions had been for these institutions to restore credit lines.
If it appeared that the banks were standing in the way between what the Government is doing and how the public wants to benefit, then many banking customers are going to be asking some difficult questions of the banks." But the days when a base rate cut almost guaranteed the same saving for homeowners seem long gone. Last month, only 24 of the UK's 88 lenders passed on the full half-point cut in the base rate, just 27 per cent of the market; 33 only managed a partial rate cut, and the remaining 31 lenders failed to make any cuts at all.
Doug Taylor, personal finance campaign manager for the consumer watchdog Which?, said lenders appear to be unreasonably exploiting their position: "Consumers will look aghast at lenders who, faced with a cut in base rate, actually increase their lending rates. It is hard to believe that the sector could devalue its reputation any more but it seems to have found a way to do that." The failure of lenders to follow the lead likely to be shown by the Bank's Monetary Policy Committee tomorrow is all the more surprising given the easing in interbank borrowing rates. The key three-month sterling Libor has declined to below 6 per cent over the past month, while the overnight rate dropped slightly yesterday. Observers expect more reductions to come, as central banks around the world aggressively cut rates.
The fall in sterling and euro rates, however, has been much less marked than the fall in the cost of borrowing dollars. The dollar three-month Libor is at its lowest in five months, at 2.70625 per cent, the 17th consecutive daily decline. The clamour for a cut in rates from the Bank of England tomorrow has reached a new pitch. The normally cautious CBI has called for a one percentage point reduction. John Cridland, the CBI's deputy director-general, said: "The recession into 2009 will be both longer and deeper than expected, and we need the strong medicine of a full percentage point cut."
The British Chambers of Commerce is urging a smaller initial cut of half a percentage point on Thursday to 4 per cent, with a further half-point cut to 3.5 per cent by Christmas. These and similar demands were reinforced by another set of weak economic data. October's Report on Jobs, from the Recruitment and Employment Confederation and KPMG, showed that permanent and temporary staff appointments fell at survey-record rates. Wages and salaries declined for the first time in over five years. Mike Stevens, a partner at KPMG, commented that "many employers won't have any choice than making large-scale redundancies".
No surprise, then, that consumer confidence, as measured by the Nationwide index, remains at thoroughly depressed levels. Although overall confidence readings rose for the first time since September, people are more worried about losing their jobs. Some 41 per cent of consumers think there are few jobs available now, up from 35 per cent last month: over half (56 per cent) think there will be few jobs available in six months, up from 48 per cent in September.
The dire state of the construction industry was also stressed by a new survey of purchasing managers in the sector by the Chartered Institute for Purchasing and Supply (CIPS). Roy Ayliffe, director of professional practice at the CIPS, said: "Concerned purchasing managers reported a new survey low in activity levels under the relentless onslaught of tightening credit conditions, plummeting confidence and high inflation. Firms axed staff at the survey's fastest recorded rate. With no recovery in sight, constructors gave their first ever pessimistic prognosis on future sector performance in the eleven-and-a-half-year history of the survey."
Such a gloomy backdrop may well impel the MPC to cut rates by even more than expected tomorrow. Howard Archer, economist at Global Insight, added: "We believe there is a very strong case for the MPC to slash interest rates from 4.50 per cent to 3.50 per cent on Thursday. Further out, we expect interest rates to come down to 2 per cent by mid-2009, and it is very possible that they could fall even further thereafter."
Yen Trades Near 2-Week Low Versus Dollar on Stock Market Rally
The yen traded near a two-week low against the dollar as a rally in global stocks encouraged investors to buy higher-yielding assets funded by low-cost loans in Japan's currency. The yen was also near the lowest in a week versus the euro as U.S. shares posted their biggest presidential Election Day rally in 24 years on gains in commodity prices and speculation the U.S. Treasury will bail out more companies. Japan's currency declined against the South African rand as a thaw in money markets encouraged so-called carry trades.
"Looking at stocks and credit markets, you can say that risk sentiment is improving," said Masanobu Ishikawa, Tokyo- based general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. "The yen is likely to weaken further." The yen traded at 99.88 per dollar as of 8:23 a.m. in Tokyo from 99.70 late yesterday in New York, when it reached 100.55, the lowest since Oct. 22. The yen was at 129.98 against the euro from 129.47 yesterday, when it touched a one-week low of 130.98. The euro was little changed at $1.3009.
The London interbank offered rate, or Libor, that banks charge each other for one-month loans in dollars slid for a 17th day yesterday as central-bank cash injections and interest-rate cuts worldwide helped revive lending. The rate dropped 0.18 percentage point to 2.18 percent, the lowest level since November 2004, according to the British Bankers' Association.
"It comes back to what's going on in money markets and credit markets," said Jens Nordvig, a currency strategist at Goldman Sachs Group Inc. in New York. "Risk premiums embedded in risky assets overall are very, very elevated. Any kind of stability is going to make those risk premiums come down." U.S. stocks gained yesterday in the biggest rally on a presidential Election Day since it stopped being a trading holiday in 1984. The Standard & Poor's 500 Index closed above 1,000 for the first time since Oct. 13, increasing 4.1 percent.
"The election so far is playing out as supportive of risk, supportive of some of the other variables that are giving out positive risk-appetite signals," said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. "The dollar has had a very consistent relationship of late where equity strength is associated with dollar weakness."
The yen fell 0.6 percent to 10.3125 against the South African rand and 0.3 percent to 60.59 versus the New Zealand dollar on speculation the stock rally will boost carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's target lending rate of 0.3 percent compares with 12 percent in South Africa and 6.5 percent in New Zealand. The pound fell to 81.57 pence per euro from 81.34 yesterday as a report showed Britain's construction industry contracted in October at the fastest pace in more than a decade. The Bank of England will cut its main interest rate by a half-percentage point to 4 percent tomorrow, according to the median forecast of 60 economists surveyed by Bloomberg News.
The European Central Bank will lower its main refinancing rate by a half-percentage point to 3.25 percent tomorrow, according to the median forecast of 54 economists. The Reserve Bank of Australia lowered its cash rate by 0.75 percentage point to 5.25 percent yesterday. The dollar may strengthen as President George W. Bush leaves office, according to Derek Halpenny, head of global currency strategy in London at Bank of Tokyo-Mitsubishi Ltd. "Given that the vast majority of his presidency was associated by the markets with a benign neglect of the U.S. dollar, his departure has been taken as dollar-positive," Halpenny wrote yesterday in a note to clients. The greenback has gained every year after a presidential election since 1985, Halpenny wrote. The U.S. currency has weakened 28 percent since Bush was inaugurated in 2001.
U.S. Commercial Paper Rates Fall as Issuers Slow Fed Borrowing
Interest rates on U.S. commercial paper dropped to the lowest in about four and a half years as companies issued less of the debt to the Federal Reserve. Interest rates on the highest-ranked 30-day commercial paper fell 0.52 percentage point to 1.22 percent, the lowest since June 2004, according to yields offered by companies and compiled by Bloomberg. Yields on 90-day paper fell 0.41 percentage point to 2.21 percent, 0.34 percentage point below the Fed's rate.
Companies on Nov. 3 sold $19.9 billion of commercial paper due in more than 80 days, down from a daily average of $52.7 billion last week, signaling dropping rates may be reducing borrowers' dependence on the Fed facility. Top-rated financial companies sold no commercial paper due in more than 80 days, compared with a daily average of $7.47 billion last week. The Fed today set the rate it's willing to accept for 90-day commercial paper at 2.55 percent, down 0.05 percentage point, including a 1 percentage-point unsecured credit surcharge. The 90-day secured asset-backed rate was set at 3.55 percent, according to Fed data compiled by Bloomberg.
The rates are set under the Fed's Commercial Paper Funding Facility and are available on CPFF. Commercial paper, which matures in 270 days or less, is used by companies to finance daily expenses such as payroll and rent. Rates on 30-day commercial paper backed by assets such as auto loans and credit cards fell 0.11 percentage point to 2.26 percent, the lowest since December 2004. Yields on 90-day asset- backed paper dropped 0.39 percentage point to 2.34 percent, 1.21 percentage points less than the Fed demands.
The following companies are among those that have registered with the CPFF: American Express Co.; American International Group Inc.; Chrysler Financial Corp.; Ford Motor Credit Corp.; GMAC LLC; General Electric Co.; General Electric Capital Corp.; Harley-Davidson Inc.; Kookmin Bank; Korea Development Bank; Morgan Stanley; Prudential Financial Inc. and Torchmark Corp.
New president’s challenge will be to restore traditional American values
Whoever wakes up as president this morning, the dream of heading for the White House will be matched by the nightmare of an imploding economy. As America went to the polls yesterday, USA Today, the country’s best-selling newspaper, devoted the first three pages of its business section to a single issue: Is this another Great Depression? The answer, of course, is No. Well, not yet.
Most pundits agree that an improved understanding of macro-economic management will prevent the US from suffering a repeat of the 1930s, when GDP fell by 19pc, 5,000 banks failed and unemployment hit 25pc. Faith in the financial authorities, however, is tempered by an unavoidable question: if they know so much, why was the sub-prime mortgages drama allowed to develop into a nationwide crisis? America is disinclined to wallow in pessimism. Its power and influence were built on a belief, woven into the nation’s DNA, that success is the natural order for those living under the stars and stripes.
Yet, even here in glitzy Miami, the foundations of confidence are being washed away by a wave of bad facts. Florida’s housing market is under water. Weekend property supplements contained several advertisements for new homes at “below builder’s cost”. Prices of some fancy apartments have been slashed from $500,000 to $299,000. In one North Miami condominium, 25pc of units are in foreclosure. Owners are throwing in the keys. In America’s 20 largest cities, average house prices are down by 16.6pc. Households have lost $5 trillion of wealth in the crash. In September, 4.6pc of all US mortgages were at least 90 days in arrears.
More than seven million Americans are expected to default on their payments by the end of 2010. About four million of these will be forced to give up their homes. When it comes to the economy, George Bush’s approval ratings are so low, support extends barely beyond blood relatives and staffers. His successor’s toughest job will be knowing where to start. The model of globalisation that depends on the American consumer as a shopper of last resort is finished. Household debt is now $13.9 trillion, equal almost exactly to the size of the US economy. Between 2000 and 2007, America’s trade deficit ballooned from $380bn to $700bn, as the country sucked in imports with borrowed money.
In the same period, inflation-adjusted median incomes of what pollsters call “prime working-age families” (35-44-year olds) fell from $69,000 to $67,000. The illusion of rising prosperity was maintained by stock market profits, bigger mortgages and a wild binge on credit cards. But as the cash flow from each of these stopped, and in some cases went into reverse, America ran into trouble. Consumer spending, which accounts for 70pc of the US economy, has dipped for the first time in 17 years. About 25m workers are employed in retail. Few can be certain their jobs are safe. One of the worst affected sectors is car dealerships, with 700 expected to close this year, destroying more than 35,000 jobs. Sales of motor vehicles have fallen every month in the past 12 and are down to the lowest level for more than 25 years. Analysts calculate that, after allowing for population growth, sales are where they were just after the war.
Motor manufacturing by domestic companies is close to collapse. General Motors is burning through $1bn of cash a month, and is lobbying furiously for state aid. Its October sales were down by 45.1pc on the same month last year. Chrysler’s were 34.9pc lower.
They have been discussing a merger that could close half of Chrysler’s 14 plants and eliminate all but seven of its 26 models. If a deal were forged, 30,000 jobs would be in jeopardy. Without an agreement, however, there will have to be 100,000-plus redundancies, according to Grant Thornton. Unemployment in Detroit is already 8.9pc, compared with a national average of 6.1pc. Motown is fast becoming Slowtown, an industrial disaster zone.
The crunch is triggering a surge in unpaid bills. In Pennsylvania, there has been a 20pc increase in “shut-offs” by the electricity supplier. Delinquent credit-card debt has risen to 4.9pc of balances. Banks, still reeling from the dodgy mortgage debacle, face the prospect of writing off many billions more. Who would have thought that Bill Clinton’s regime would be held up as a model of fiscal responsibility? Between 1998 and 2000, it accumulated a federal surplus of $431bn. The Bush term is ending with a post bail-out budget deficit approaching $1 trillion. As Time magazine concludes: “America is drowning in debt. Getting square again will be painful.”
Don’t be fooled by the dollar’s rise, in today’s troubled world it is seen merely as the best house in a bad neighbourhood. As for the recent upturn in US share prices, Harvard economics professor Kenneth Rogoff told me: “Don’t look at the stock market. Look at the credit market.” By any conventional measure, the US economy under Bush has been a fool’s paradise: a place where consumers believed they could spend more than they were earning, without a final day of reckoning. That game is over. Whether Democrat or Republican, the new president’s challenge will be to restore traditional American values, replacing speculation with enterprise, and profligacy with thrift.
Change is long overdue.
Credit-Default Swaps on Italy, Spain Are Most Traded
Credit-default swap traders wagered the most on debt of Italy, Spain and Deutsche Bank AG, according to a Depository Trust & Clearing Corp. report that gives the broadest data yet on the unregulated market. A total $33.6 trillion of transactions are outstanding on governments, companies and asset-backed securities worldwide, based on gross numbers, the DTCC said in the report released on its Web site yesterday. After canceling out overlapping trades, investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt, the report shows.
"The bigger the outstanding amount of debt, the bigger the volume of credit-default swaps," said Philip Gisdakis, a Munich- based credit analyst at UniCredit SpA. "Sovereigns have huge debt outstanding. Deutsche Bank has a huge balance sheet, so it's quite understandable it's at the top of the list." The DTCC, which operates a central registry of credit- default swap trades, released the data after U.S. authorities blamed the unregulated market for exacerbating the credit crisis that led to almost $690 billion in bank losses and writedowns. The level of credit-default swaps reported by DTCC is smaller than previous estimates. The Bank for International Settlements estimated contracts of $57.9 trillion outstanding in May. DTCC's data may calm concerns that investors and dealers have too much at risk, said Brian Yelvington, a New York-based strategist at fixed-income research firm CreditSights Inc.
"Far too much mistrust has been engendered by the lack of transparency," Yelvington said. "There's still a lot here that's not captured. But it's a step in the right direction." Trading in credit-default swaps, which pay the buyer face value in exchange for the underlying securities should a borrower fail to adhere to its debt agreements, exploded 100-fold during the past decade. The credit-default swaps market has moved beyond its origins of protecting banks from loan losses to a way for hedge funds, insurance companies and asset managers to speculate on the creditworthiness of companies, governments and other borrowers, including homeowners. Billionaire investor Warren Buffett has called credit-default swaps a "time bomb."
The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many credit-default swap contracts were outstanding on the securities firm, how many the company had written or who held them. They are private contracts between two parties, don't trade on an exchange and aren't processed through a central clearinghouse, making it virtually impossible for the public to asses the amount wagered on the debt. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said. After subtracting redundant trades, only $5.2 billion of trades actually changed hands, DTCC said last month, the first time it had released such information from its data warehouse.
Dealers have been trying to reduce the number of contracts outstanding by tearing up overlapping trades, helping reduce the net number of transactions and allaying concerns that the market was too large. The Federal Reserve and the European Central Bank are pushing dealers to create a clearinghouse to act as a counterparty on each trade, eliminating the risk of one side defaulting. The DTCC, which is controlled by a board of members including JPMorgan Chase & Co. and Goldman Sachs Group Inc., doesn't list contracts on all companies, governments and other securities beyond the top 1,000 in the registry, on which there are a net of $183.3 billion. And there's not a clear accounting of what may exist beyond the registry.
Investors have focused wagers on debt of industries and countries that may be most affected by a credit crisis entering its 15th month. The Spanish economy is headed toward its first recession in 15 years amid a slump in its housing market and banking and finance shares have dropped as the credit seizure caused some to collapse. Credit-default swaps on Italy were quoted at 107.5 basis points today, CMA Datavision prices on 10-year contracts show, after reaching a record 138 basis points on Oct. 24. The contracts have more than doubled since August. Today's price represents a cost of $107,500 a year to protect $10 million of debt for 10 years. Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 78.5 basis points.
The ECB met with regulators, lenders and investors this week to discuss ways of increasing transparency in the default swaps market on its side of the Atlantic. A central counterparty is an "appropriate solution" for reducing risk, the ECB said in a statement. Auctions this week are meantime settling default swaps on debt of Iceland's three biggest banks. In total, about $15.4 trillion of transactions were linked to individual corporate, sovereign and asset-backed bonds worldwide at the end of October, the DTCC data showed. About $14.8 trillion was tied to indexes. Among companies, GE Capital Corp., the finance arm of General Electric Co., New York-based Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. had the biggest dollar amount of contracts tied to their debt on a net basis, after Deutsche Bank, Germany's biggest lender, DTCC said. New York- based Merrill agreed in September to sell itself to Bank of America Corp. The net figures are the maximum that sellers would have to pay to buyers if the borrowers defaulted, DTCC said.
Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch & Co. had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross amount doesn't take into account offsetting trades. After netting the trades, there were $7.6 billion outstanding on Turkey. The industry should "get the word out about the small size of these risks compared to the notional amounts on which the contracts are based," said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of the International Swaps and Derivatives Association.
Criticism of the market intensified in September after the collapse of Lehman and the U.S. government's bailout of American International Group Inc., which faced bankruptcy after credit- rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value. U.S. Securities and Exchange Commission Chairman Christopher Cox called for authority to regulate the credit swaps market, saying the lack of disclosure and the web of connections between dealers in the market threatened the stability of the financial system. The Federal Reserve Bank of New York, which has spent the last three years pushing dealers to curb risks in the credit swaps market, last week said it welcomed the DTCC's disclosure.
"Publishing this data will provide greater transparency in a critical market," Tim Ryan, head of the Securities Industry and Financial Markets Association, said in a statement today. "This is an important initiative upon which the industry will continue to build."
Time to turn bullish and buy, buy, buy?
Even the worst economic slumps can engender powerful "bear rallies" from time time. Japan had a whole series of teasers during its Lost Decade, with a 55pc rise in 1995 and another in late 1998. Wall Street had some nice efforts in 1930, and again in both early 1931 (just after Bank of the United States failed) and in the late Spring of that year. Investors assumed that things could not get worse. They did. The central European banking collapsed over the summer of 1931 after Austria's Credit-Anstalt went down, and the British Empire was forced off the gold standard in September after Royal Navy ratings mutinied at Invergordon in Scotland over pay-cuts.
Bear market rallies happen, they can be violent, and we may well be on the cusp of one right now as falling Libor rates start to unclog the global credit system and the US elections usher in an FDR-style mood of optimism (which is not take a stand on Obama's policies, but rather on the anthropological and psychological aspects of this vote)
On cue, Morgan Stanley has just issued a "Full House Buy Signal" on equities, saying its four key indicators are all flashing green. This is a rare signal. Whatever you do -- says the bank's stock guru Teun Draaisma - do not short equities unless you are an expert. You risk being burned alive. Readers may remember that Mr Draaisma issued a full house sell signal in early June of 2007. It proved to be the exact top of the equity boom (he uses Morgan Stanley's MSCI Europe index, but US equities tend to move in tandem).
He said the buy alerts can be a little early but "our approach is to play the odds and never contradict the signal". Above all, he said the worst of this whole saga is now over (which is not preclude further falls, but rather that the key damage has already been done) His team are ultra bearish about profits, just so there is no misunderstanding. It expects a 43pc decline in earnings by the end of next year. This is far worse than the Pollyanna consensus, although analysts are frantically slashing their forecasts -- finally. But the mayhem is already "in the price". Morgan Stanley is betting on a 15pc rise in MSCI Europe over the next twelve months. "Our advice is for long-term investors to average in at these and lower levels," they said.
Mr Draaisma uses four indicators:
Composite Valuation .. which crunches bond yields, LIBOR, and inflation
Capitulation .. meaning panic among "retail investors, purchasing manager and sell-side analysts".. "When these three groups know about the bad news, equity prices are probably already reflecting it"
Risk Indicator These are based on a magic recipe of fund flow data, money supply, momentum, credit spreads, etc.
Morgan Stanley recommends shifting into Consumer Discretionary such as SES, Pearson, DMGT, DSGI, and Carnival, as well as "secure dividend" stocks such as the British motor insurer Admiral.
It likes Telecom stocks: Tele2, Telefonica, Vodafone, Deutsche Telekom, and France Telecom.
But is cutting back on defensive plays such as health care
It also likes Energy: BG, Acergy, Total, Tullow Oil, BP
(Personally, I own none of these stocks, and have no view on their merits. This blog does not give investment advice, it merely flags things being said)
Mr Draaisma clearly thinks this is more than a bear rally. I do not entirely share his optimism. The dramatic global slowdown will bring the US export boom to a shuddering halt, and knock away the last surviving pillar holding up US corporate profits. The dollar rally will compound the effect.
Nor am I convinced that Europe is out of the woods given the extreme leverage of the region's banks (meaning eurozone, UK, Switzerland, and Scandie banks), as well as their $3.5 trillion dollar exposure to emerging markets (they are five times more exposed than US banks to this bubble) and especially the $1.6 trillion chunk of it in the danger zones of Eastern Europe, the Balkans, Baltics, Turkey and Russia.
It would be nice to see some evidence that this boil has been well and truly lanced before piling into European/UK equities, and by extension US equities too.
So my bet: bear market rally, then we test the down-trend lines on the big indexes, and drop again until this slump really does its awful work. Enjoy, this bit of sunshine while it lasts. Then we can regroup, and think again.
Goldman Sachs: Has the Leader Become the Laggard?
Wall Street often is described in terms of bulls and bears, but really it is about sheep: the constant game of follow-the-leader by Wall Street firms faithfully copying their competitors’ moves. And the shepherd for a long time was Goldman Sachs Group. The investment bank’s ability to mine profits in many different markets was the envy of its rivals (just recall Stan O’Neal’s Goldman fixation), and its stock seemingly defied gravity for years (the 52-week high was set last November at $240.05).
But somewhere in the past two months, the gloss has faded. Analysts and investors who were comfortable with Goldman as an investment bank seem to have been knocked off stride by its conversion into a commercial bank. Goldman’s stock is down 45% since the beginning of September into the low 90s. While that compares favorably to the 53% drop of Morgan Stanley, it is far steeper than the 14% decline in the Dow Jones Industrial Average and the Financial Sector XLF, which is down about 22% in that time.
There is no single thing–or even two things–wrong with Goldman, and if there is, no one has really pinpointed it. For its part, Goldman management, including operating chief Gary Cohn and finance chief David Viniar, believes the bank’s business model won’t change much and that it has managed itself through the credit cycle capably, according to comments they made to Barclays Capital analyst Roger Freeman. Still, Cohn and Viniar have said Goldman “is more exposed than most to the equity market declines (particularly due to its large private equity and principal investments).”
Merrill Lynch’s Guy Moszkowski, who has a “neutral” rating on Goldman, predicts Goldman will post a fourth-quarter loss and will lag behind Morgan Stanley in terms of return on equity. Deutsche Bank’s Mike Mayo, who rates Goldman a “hold,” has cut his earnings estimates on Goldman citing the decline in the stock markets and how Goldman’s transition “from a broker to a bank in a very short period of time, [is] raising questions about its future earnings power.”
Mayo cited at least five worries, including whether Goldman’s risk appetite “gets ahead of its ability to manage it….Also from the firm’s nature as a leveraged play on global GDP growth; the resiliency of its fixed income business; its higher bar in terms of reputation and possible further high-profile ‘blow-ups’; and information risk (we are concerned about the ‘black box’ nature of Goldman’s business activities).”
Ladenburg Thalmann analyst Richard X. Bove slapped a sell rating on Goldman Monday, saying the short-term outlook is poor for the following reasons: mark-to-market accounting rules may require further write-downs in the value of Goldman’s purchases of distressed assets; the value of Goldman’s stake in Industrial & Commercial Bank of China may have fallen as much as 30%; and “core businesses such as credit derivatives, private equity, prime brokerage, and international are suffering. The bank must lower its leverage ratio and investment banking has suffered.”
So perhaps the bearishness is just Goldman being punished for its success. After years of spectacular returns, analysts expect still more, even in a downturn. Goldman doesn’t seem to have the option of behaving like other banks. From Moszkowski again: “We still think GS remains in many ways at the forefront of the capital markets industry, but if it can’t consistently produce a premium return on equity (ROE), it’s not going to be able to continue to have the premium valuation multiple that it has enjoyed.” Or, investors are waiting for a new leader to emerge on Wall Street. Bank of America (down just 29%), anyone?
Concern over shipping derivatives losses
Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships. Since short-term dry bulk charter rates fell 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall.
Traders in forward freight agreements – derivatives based on short-term charter rates – could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities. The sector’s Baltic Dry Index of charter rates started the month at 3,025 points and closed on Friday at 851. The 80 per cent of trades made through clearing houses were being settled on Monday, while traders who bought cash-settled products through private transactions, known as over-the-counter trades, have until Friday to settle.
The many shipowners participating in FFA markets could also face losses if their market positions went beyond simply covering the market exposure of their actual ships. London-based, New York-listed Britannia Bulk, which has been hit by its exposure to speculative FFA trading, put its British operating subsidiary into administration on Friday. It is the first quoted shipping company to suffer such a blow during the current downturn.
Duncan Dunn, senior director in the futures division of London’s Simpson, Spence & Young shipbrokers, said the market’s rapid fall would have left anyone betting on upward movements needing to make substantial payments. He said: “If they’re under strain, then that’s only going to increase their problems”. Market participants’ concerns have been heightened by the possibility of knock-on effects from failures of investors affected by FFA market losses.
If investors facing FFA market losses hand back ships they had chartered early to owners, the ships’ owners will earn considerably less than they expected. They could face problems servicing debt related to the ships. Michael Bodouroglou, chief executive of Paragon Shipping, a Nasdaq-listed dry bulk shipowner, said that, even if a company had not participated in FFA trading itself, counterparties such as ship charterers might have done so. He said: “Company failures may cause a domino effect,” .
The market uncertainty stems partly from the complex chains of transactions in the market and the lack of clarity about different companies’ FFA trading. It is widely expected that hedge funds could be particularly badly hit. However, Philippe van den Abeele, managing director of Castalia Fund Management, a hedge fund specialising in FFA trading, said he expected hedge funds to experience bigger problems over speculative charters of actual ships.
Regulators May Curb Currency Derivatives in Asia
Asian regulators may limit currency derivatives after losses helped push the South Korean won to a decade low, led to lawsuits in India and caused shares of China's Citic Pacific Ltd. to collapse. South Korea will announce measures by December to restrict company purchases of the contracts to a percentage of overseas earnings, Hyeon Jung Gun, head of Korea's Financial Supervisory Services derivatives market team, said in a Nov. 3 interview. China plans to improve monitoring of performance and compliance while Hong Kong is investigating improper sales of financial products by banks.
"There were companies that went over-hedging and banks that failed to remind options buyers of the embedded risk," Hyeon said. "Under new regulations, companies will have access to derivative products based only on real demand." Governments face demands for tougher rules after the collapse of Lehman Brothers Holdings Inc. in September caused credit markets to freeze and emerging-market currencies to plunge. Korean companies may lose as much as $2.4 billion on derivatives after the won dropped 26 percent this year, Standard & Poor's estimates. Citic Pacific, a unit of China's biggest state-owned investment company, predicted a $2 billion loss because of unauthorized bets on the Australian dollar, which plunged 21 percent against the U.S. dollar in 2008.
Restrictions may slow growth in the market for foreign- exchange over-the-counter derivatives, which swelled 78 percent in the two years ended 2007 to $56 trillion, according to the Bank for International Settlements in Basel, Switzerland. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates. OTC products aren't exchange-traded and can be customized. European Union regulators may seek to require greater disclosure of derivatives holdings as part of a review of securities laws amid the global financial crisis. U.S. Securities and Exchange Commission Chairman Christopher Cox wrote in the Washington post yesterday that existing regulation is "clearly not sufficient."
"Users of currency derivatives should face regulations regarding their qualifications and exposure," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., a Hong Kong-based brokerage focused on emerging markets. "Automakers are allowed to produce fast cars, but drivers must be license holders and required to observe speed limits." Some 100 South Korean exporters filed a group lawsuit against 13 banks, seeking to nullify contracts bought from lenders including Citigroup Inc., Standard Chartered Plc, Shinhan Bank and Korea Exchange Bank. Spokespeople at the banks had no immediate comment.
"We hope to prevent the recurrence of these incidents and urge regulators to address this issue and more thoroughly supervise on derivatives," said Kim Tae Hwan, a general manager at the Korea Federation of Small and Medium Business, which helped organize the action. "They are extremely speculative products that exposed exporters to unlimited losses." The so-called knock-in knock-out options pay companies a fixed exchange rate as long as the dollar trades within a set range against the won. The firms are required to pay twice the amount of the contract if the U.S. currency appreciates beyond the range.
Sundaram Multi Pap Ltd., which makes school note books, is one of 12 Indian companies that filed lawsuits related to KIKO options earlier this year. The won slumped to 1,495 per dollar on Oct. 28, the lowest in 10 years, from 902 last November. JPMorgan Chase & Co.'s Emerging Market Volatility Index soared to a record close of 32.96 on Oct. 23. It was at 23.48 as of 5 p.m. in Hong Kong, set for its lowest finish in more than two weeks. Citic Pacific dropped as much as 75 percent in Hong Kong after its trading blunder was announced last month. The company has contracts that require it to buy as much as A$9.44 billion ($6.5 billion) of Australian dollars, according to an Oct. 20 statement. The trades were supposed to hedge an iron-ore project in Australia that required A$1.6 billion.
The Australian dollar fell to 60.09 U.S. cents on Oct. 27, the weakest since April 2003, from a 25-year high of 98.50 on July 15.
"We want banks to sell appropriate products to clients," Li Fuan, head of the banking innovation department at the China Banking Regulatory Commission, said in an Oct. 30 interview. "Monitoring measures may include reviewing products' legal documents and tracking their performance in real time." Citic Pacific identified HSBC Holdings Plc, BNP Paribas SA and Citigroup as among the sellers of the derivatives. Spokespeople at the banks declined to comment yesterday.
The Hong Kong Monetary Authority is reviewing "whether the current `buyer beware' policy for the protection of investors remains appropriate," Chief Executive Joseph Yam wrote in an Oct. 9 note. An HKMA spokesman referred to that statement when asked about currency derivatives this week and said the review of rules will be completed this year. "The mantra of `buyer beware' has been taken to extremes, and it's likely regulators will seek to redress the balance," said Simon Grose-Hodge, a strategist in Singapore at LGT Group, the bank owned by Liechtenstein's royal family. "Any product that exposes a client to unlimited downside risk should never be described or sold as a hedge."
Edmund Phelps Raises Doubts About Keynesian Remedies
Edmund Phelps, a Nobel Prize winner, casts doubts on Keynesian remedies because Keynes himself came to question them. This Financial Times piece provides no answers but raises some interesting questions. But sadly, there may be no answer for the first question he asks:What theory can we use to get us out of the impending slump quickly and reliably? ... The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the “Keynesian” policy solutions are questionable at best. Banks spoke of the downturn in house prices as an effect of some sort of shock....The prime cause was forecasting with badly mistaken models. Speculators and home buyers, thinking that rentals or building costs would go up, bet on higher house prices in future, which also raised the price of existing houses. But over the years neither rentals nor costs (in real terms) budged. If they did not rise, (real) prices would sooner or later have to go back down.
This was Keynes’s world. At Cambridge, he showed how an investor might allow for unknown contingencies in his Treatise on Probability. In London, he ran a hedge fund with O. T. “Foxy” Falk and grew rich, only to get caught in a collapse of commodity prices in early 1929. He concluded that investors’ beliefs were “flimsy”. As one investor, then others, desert, the asset price, previously rising, may merely falter at first but finally collapses sharply along with the conventional belief. Keynes put asset prices at the centre of employment determination in his 1936 General Theory. If a change in sentiment causes steep declines in valuations of business assets (along with share prices and house prices), business investing is cut back and employment contracts – unemployment rises – mostly in capital goods industries.
Unfortunately nothing went well after that. Keynes made a huge mistake in not distinguishing between a drop in asset prices springing from monetary causes – an exogenous, or autonomous, increase in the demand for money – and one springing from causes having nothing to do with supply and demand for money – say, diminished expectations about future returns on business assets or houses. The former phenomenon could be solved by monetary means: the central bank could boost the money supply (by purchasing public debt, say), which would drive asset prices back up without driving up other prices and wages equally in a pointless spiral.
The recent collapse of speculation on houses, however, is a non-monetary phenomenon: there has to be a drop of the money price of (a basket of) houses relative to the money price of (a basket of) consumer goods. Keynes argued that a boost of the money supply would work here too: workers would be unaware that wages in competing jobs elsewhere had jumped as much as their own, so they would be afraid to require as high a real wage as before; thus hiring would be stimulated and employment would go back up. But sustaining that recovery would surely require endless wage inflation at a rate always a step ahead of expectations – an unappealing policy.
Increasingly, Keynes focused on non-monetary measures to change the new non-monetary equilibrium following a loss of investor confidence. Keynes always felt that consumer demand too drives employment. An increase in demand encourages companies to raise production and hire more workers – at first. But in an open economy with its own currency, the stimulus would mostly go abroad. In the global economy, increased consumer demand would ultimately do little more than raise interest rates, thus setting off declines in real asset prices, investment and real wages. Keynes emphasised investment demand as a lever to increase employment. By that theory, one might stimulate private investment through an investment tax credit or subsidies for new companies or new hires. Keynes favoured investment by the state or state enterprises.
Americans – their airports nightmarish and their bridges falling down – would welcome “infrastructure”. Yet it must be asked whether a massive shift from private to state investment would not damp the conception, development and adoption of new commercial ideas for innovation. Capitalism theory stresses diversity in sources of new commercial ideas, in the pool of entrepreneurs available for their development, in sources of finance – angel investors, venture capitalists and the rest – and in the array of end users. It also stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) – thus free to use their intuition – in contrast to the strict accountability rightly required of state employees. Thus a greatly increased presence of the central government in a country’s investment sector could constrict innovation and lower the quality of the innovations that are made. We would be left still in a slump.
At the end of his life Keynes wrote of “modernist stuff, gone wrong and turned sour and silly”. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes’s fabulous contributions should not sway us from moving on.
Notice how Keynes expected employment to fall in capital goods industries. We have no version 2.0 for an economy so heavily dependent on financial services. I also wonder, even though the US badly needs infrastructure, if any of these newfangled theories allow for how specialized labor has become. One of the reasons that employment didn't fall sooner is that even seemingly mundane jobs now require employer specific knowledge (computer systems, internal procedures) that make it more costly to bring a new person on board and deters firing.
Put more simply, how is creating jobs in repairing infrastructure going to help unemployed bank workers? Even if they were willing, many will prove not to be able, and will also be living at a remove from where the jobs would be. In an advanced economy, labor is not terribly fungible.