Woodward & Lothrop department store trucks, Washington DC
Ilargi: Yes, I will admit it. No, wait, I’ll admit two things. First, that I have to write this in record time. And second, that despite all the warnings I've given here about China in the past year, and there's been many, even I am soundly surprised to see the speed with which it unravels. I see 5% GDP growth numbers for the country now, even from "official" sources, and as I've said before, that means chaos, unrest and mother Mary knows what else is soon to come. I'm thinking Greece times 1000. China needs to grow at 8% or more, or the machine comes to a halt. From where I’m standing, I would venture there's a real chance China won't grow at all in 2009. And if I had had the time, I might have inserted the lyrics for the Stones' Street Fighting Men here.
Let's do some numbers first from yesterday's trade report. In November 2007, China had -according to its own report- a 19.2% rise in exports. November 2008 shows a 2.2% drop. The November 2008 imports are down 17.9%. Exports to the US fell 6.1% in the year, with predictions for 2009 indicating another drop of up to 20%. Exports to ASEAN countries, on the heels of a 21.5% rise in October, fell by 2.4%. Perspective: in the 1990s China’s exports grew at a yearly average of 12.9%; from 2000 to 2006 that rose to 21.1% per year. Once again: it shrank 2.2% in November. Perspective. And there's no-one, not even in the Beijing hierarchy itself, who will claim these numbers won't drop even more in 2009.
Ironically, the fact that imports are down more than exports means China's budget surplus is rising. But that's no reason to throw a party in the Forbidden City. China loses billions of dollars because of the multiple self-feeding crunches in sectors such as steel products, electrical machinery, electronics and shipping. We're not talking Wal-Mart trinkets here, these are core industries. And the plunge in imports can undoubtedly be found largely here, in commodities, pointing to a further export drop right around the corner.
The numbers might lead you to believe that China has simply focused its economic activity towards the domestic markets, with Chinese people buying the products that would otherwise have gone to the US and Europe, which might cause much less need for imports. But stories from the street don't exactly support that nice theory. They speak of millions of newly unemployed. And besides, China may have a lot of people, but not that many are rich enough to buy anything but basic necessities.
Since much of the production capacity is geared towards luxury articles that we westerners buy, there's little reason to presume all the bling and games are now ending up in Chinese hands. Today, over 40% of China’s GDP comes from exports. For the US, the number is 11%. Needless to say that falling worldwide demand -and trade- will hit China much harder than the US. China mostly still produces goods for foreign markets, and its own 1 billion remaining peasants have little use for $150 Nike’s or $1000 plasma screens.
So you have the huge surge towards cities, and towards increasing wealth. And that is going to stop, or you could say it already has. The image I see is that it’s like trying to stop a high-speed train, or an ocean-liner, on a dime. Mayhem guaranteed.
One of the biggest issues in the Chinese economy will be the bad loans that are on the books of all the banks. As long as growth continues, there'll be enough good loans to make up for the losses on the bad ones. But halt the growth, and you have panic and an insolvent domestic financial system. And let's be honest: anything that grows at a 10% or 20% rate is like a cancer, nothing healthy about it. Whether you look at US and UK home prices, or at the Chinese economy: whatever it is, healthy it ain't.
And I see reports on how great it is that the Chinese inflation rate is down, but I don't buy into that greatness: it simply means that the country has hit deflation, just like the rest of the world. And if you want to know what that means, think for a moment about China's place in global trade, and how much it resembles where the US was in 1930. Got it? Then take the next step: what happened in America in the 1930’s.
Some 150-200 million Chinese have moved to the cities to partake in the new-found riches, the largest mass-migration in the history of mankind. A similar number is -or should I say used to be- expected to follow their example. Now, many are moving back to the family "farm", only to find the countryside massively polluted, with black stinking water, not enough land to feed themselves, and heads full of broken promises.
How long will it take till the Army takes over? And who will the generals support? The Hu's and Wi's who have brought the country into this mess? I would not bet on that.
The US is about to lose the largest buyer bar none of its debt, its Treasuries, all of its toilet paper. The people in power in China will now have to turn their attention to staying in power. One more game over, one more wall to fall.
Ilargi: I felt a tad bad about not providing the music for the lyrics to Adam Green's brilliantastic Jessica I gave you yesterday. It's all about time. But the melody is as fine as the words. Here it is. Gotta love the strings.
Just how worrying are the figures, published on Wednesday December 10th, showing that China’s exports and imports plunged in November? Exports fell by 2.2% last month from a year ago; imports plummeted by an astonishing 17.9%. One analyst sums up the news as “a shock figure”. The gloom is spread all over the place. Exports dropped across all big traded goods and all parts of the world. Exports to America fell by 6.1%; those to the ASEAN countries, which had grown by 21.5% in October, fell by 2.4%. The faster decline in imports meant that China’s monthly trade surplus reached a record $40.1 billion. Exports last fell in 2001.
Such numbers would be nasty enough for any big economy, but they are particularly shocking because China’s racing trade has been an engine of world trade, and thus global growth. During the 1990s China’s exports grew at an annual average of 12.9%; from 2000 to 2006 that growth nearly doubled to 21.1% each year, according to the World Bank. China's rapidly rising imports have also driven growth elsewhere. The chief economist of a Chinese bank calls the latest figures “horrifying”. The rapidity of the decline is as striking as its extent. Trade growth in October was similar to preceeding months; exports grew by more than 19% from a year earlier. A sudden drop in just a month has surprised even the most pessimistic economists. Some analysts point out that a global shortage of trade finance in November may have exaggerated the decline, but the Chinese juggernaut is definitely stumbling.
The consequences for the Chinese economy, which has seen dizzying rates of growth since economic reforms began in 1978 (growth in the 1990s averaged 10.5%), could now be dire. Its growth is unusually driven by its exports, which have made it the world’s factory. According to the World Bank, 27% of world GDP in 2006 came from exports (up from 21% in 1990). The corresponding figures for China that year show it to be particularly dependent on exports: 40% of its GDP came from exports in 2006, compared with 11% for highly open America and 29% for Britain. Thus the potential for a drop in exports to drag down China’s growth is correspondingly greater.
The World Bank’s latest growth predictions were released on Tuesday. These predict that the Chinese economy will expand by 7.5% in 2009, well under its own calculation of 9.5% growth that it reckons China needs to keep unemployment stable. But even these calculations may prove to be overly optimistic. The Bank’s prediction rests in part on the expectation that China’s exports will rise by 4.2% next year. In fact many analysts expect the slump in trade to continue and possibly worsen; UBS, a Swiss bank, predicts that Chinese exports will not grow at all in 2009.
Chinese workers, who are already restive, may find the new year increasingly difficult. Labour disputes almost doubled in the first ten months of 2008 and sacked workers from closed toy factories rioted. If export growth ceases entirely, and jobs are threatened, social responses could be more severe. An estimated 130m people have moved from the countryside to the cities, many for jobs in factories that make goods for export. Zhang Ping, the country’s top planner, has given warning of the risk of social instability arising from massive unemployment. The latest trade figures also worsen the already gloomy outlook for the rest of the world. Some were counting on China to prop up the global economy, as much of the rich world falls into recession. Merrill Lynch had expected China to contribute 60% of global growth in 2009. But the dramatic fall in imports suggest that the Chinese can not be relied on to be the consumer of last resort.
Analysts at Goldman Sachs expect several more months of shrinking exports. Speculation that China will devalue its currency is rife, but this would have little effect if world demand is simply collapsing. The experience of South Korea is instructive: its currency has fallen by a third against the dollar this year, but this did not prevent its exports from dropping by 18.3% in November, compared with a year ago. Unfortunately, this may not be enough to deter the Chinese government from trying to push down the yuan, which has appreciated significantly on a trade-weighted basis. Fiscal stimulus is much more important; efforts to boost domestic demand would help both China and the world. Most analysts expect announcements about new measures on top of the $586 billion package already announced. Interest rates and taxes are likely to be cut further.
Slowdown In China Gets Worse, Increasing Global Woes
Sudden declines in China's imports and exports show the country's economic slowdown is entering a new and more serious phase, exacerbating the global slump while jolting Chinese companies and workers used to years of soaring sales and salaries. The surprising reversal adds to concerns over whether the Chinese economy -- on track to surpass Germany this year as the world's third-largest and the only one in the top tier still expanding -- can help support growth and stave off deeper financial pain elsewhere around the world. China's customs agency said Wednesday that November's exports fell 2.2% from a year earlier, the first decline since June 2001. That marked a major shift from a 19.2% gain in October and a nearly 26% rise in 2007.
Imports suffered an even steeper drop, down 17.9% in November from a year earlier. They had risen 15.6% in October and more than 20% last year. The import figure signals weakness in domestic consumption, bad news for companies that export to China, and also falling demand for manufacturing components -- which spells trouble for China's future exports as well. Chinese producers of low-end goods such as toys and textiles have been struggling all year. But now, sales of higher-end machinery and electronics are declining as the U.S. economy has deteriorated sharply. China is the third-largest export market for the U.S., and has been a major buyer of commodities. But its imports of iron ore fell 7.9% in November. Crude oil imports were down 1.8% to their lowest level this year, contributing to weakening global oil demand. "The most striking real economic fact of the past several months is not continued U.S. economic weakness, but that China's economy has slowed much more quickly than anyone had forecast," Australia's central bank Governor Glenn Stevens said this week.
China's leaders last month announced a 4 trillion yuan ($584 billion) stimulus package, and on Wednesday wrapped up an annual economic-policy conference by reaffirming their determination to support growth by any means available. But some economists think China could be entering a sustained period of falling export orders, with the U.S., European and Japanese economies all now contracting. The World Bank expects the volume of global trade to shrink in 2009 for the first time since 1982. That poses an especially difficult transition for Chinese firms and consumers. In the coastal city of Yuyao, Ningbo Wanglong Group says that years of rapid expansion have made it one of the world's largest producers of preservatives for food and feed. But export orders have declined rapidly since September. "We've never experienced this before. We don't know what happened," said Zhou Hong, a sales manager. He said shipments to overseas distributors have plunged by roughly 50% to 60% in recent months. The company hasn't yet laid off any of its 1,500 employees, but has had to halve production and offer clients discounts of around 50%. "So far we don't know what else we can do," Mr. Zhou said.
China's economy is slowing particularly sharply because the export decline is combining with slackening domestic demand. Housing sales have dropped and prices are declining in most major cities. New construction has dried up, which saps demand for steel, cement and copper. Consumers are holding off on other big purchases: Car sales dropped 10.3% from a year earlier in November, the third monthly decline this year. Many economists are forecasting China's economic growth to slow to around 7.5% next year, which is below the government's traditional 8% target and would be the lowest since 1999. Growth this year is likely to average just over 9%, ending five straight years of double-digit gains. Economists' worst-case scenarios for China involve a quarter or two of growth around 5% next year, far from the outright contractions typically associated with a recession in the U.S. and other advanced economies. But it does look like China is headed for what some economists call a "growth recession," a period of weak expansion and rising unemployment.
The slowdown is translating into fewer jobs, and increasing strains between workers and employers. China doesn't publish reliable data on unemployment; few economists take seriously the official jobless rate of 4%. But there have been growing numbers of layoffs and factory closures. Hundreds of thousands of migrant workers have returned to their hometowns to wait out the slowdown. Zhou Tianyong, an economist at the Central Party School, a Communist Party institute in Beijing, estimates that the actual unemployment rate this year is around 12% and could rise to 14% next year. For most of Geely Group's short history as an auto maker, its biggest challenge was figuring out ways to expand quickly enough to meet exploding demand from China's increasingly affluent middle class. Now Geely managers are negotiating an abrupt U-turn. Zhang Xiaodong, a company spokesman, said Geely has suspended plans to start mass production of a sports car and halted development of two large sedans. Geely's sales were down 6% in October and up 1% for the first ten months of the year, after growing more than 40% in 2005 and 2006 and 7% last year.
Yale Zhang, a Shanghai-based auto analyst with CSM Worldwide, said China's auto makers "are used to a high-growth environment. They don't know how to survive at a single-digit growth rate." Although the slowdown is taking the sharpest toll on low-paid manufacturing workers, it's also spreading concern among prosperous white-collar families. Well-educated urbanites have been able to hop from job to job in recent years, extracting steep raises once a year or more. Average urban incomes are up 14.7% so far in 2008, the seventh straight year of double-digit gains. Li Hua, a 31-year-old human-resources executive with a Shanghai sports retailer, says she used to get calls from headhunters almost weekly. She changed jobs twice in the last few years. But in October, the job market started to change. Her own company canceled its recruitment plans, and a friend got laid off from a new job with little severance. "Now what I'm thinking is to just work hard. No complaints, no asking for a raise," said Ms. Li. "We should all feel lucky we still have a job and are doing fine."
Slumping trade a sign of great fall for China
China's foreign trade took a tumble last month, as exports shrank for the first time in more than seven years and imports plunged. The 2.2% drop in exports from November 2007, reported by the government Wednesday, underscores the rapidly deteriorating conditions in China's economy. In October, the nation had posted a 19.2% jump in exports from a year earlier. "It basically reflects what you're seeing on the ground: Factories are closing," said Andy Xie, an independent economist in Shanghai. "It's very grim," he added. "You can bet the next few months are going to be worse."
China's exports to the U.S. fell especially hard, dropping 6.1% as Americans socked by the recession reined in their spending. Wessco International in Los Angeles is forecasting a 10% to 20% decline next year in the volume of toiletry kits, stationery, bags and other products that it makes largely in China for airlines, hotels and cruise lines, said Petros Sakkis, Wessco's manager based in Hangzhou. That could be mitigated by new business that Wessco is chasing in China, the Middle East and Europe, he said. Less than a year ago, U.S. companies with production operations in China were fretting about the appreciating Chinese currency, soaring raw material costs and pressure from local governments that seemed to want only high-end manufacturing. But all that's eased since the global financial crisis took hold and spread to China. "China needs us again," Sakkis said.
China's imports fell more dramatically than exports -- down 17.9% in November from a year earlier. The drop, partly reflecting the decline in commodity prices, boosted China's monthly trade surplus to about $40 billion, a record high, although it was hardly news to cheer about in Beijing. Some analysts said the wider gap could add to trade tensions between China and its major partners: the U.S. and Europe. The erosion of imports indicates weakening domestic demand. And the pullback in export orders from around the world has dealt a blow to China's industrial base and wiped out countless jobs, triggering labor unrest that poses a severe test to the Communist Party leadership.
"On the one hand, government doesn't want exports to drop dramatically and hurt social stability," said Zhang Bin, deputy director of international finance at the Institute of World Economics and Politics, a government think tank in Beijing. "But on the other hand, it is necessary for China to have a structural adjustment and industry upgrade . . . to decrease some exports and transfer resources from the manufacturing industry to the service industry." Zhang says he thinks the central government's recently announced $586-billion economic stimulus package, consisting mainly of infrastructure projects, will be enough to sustain adequate growth.
The government, though, is expected to continue loosening lending policies and pushing through measures to bolster the sagging property market and help export businesses. China's efforts may get a boost from new data today that showed the nation's inflation rate falling further in November as sharp jumps in food and energy costs eased. Consumer prices rose 2.4% over the year-earlier period, the government said. That was down from October's 4% increase, and could give Beijing added room to spur economic growth without provoking more price hikes.
November's trade report was released as top leaders in Beijing, concluding an annual economic planning meeting, pledged to maintain a "stable, healthy growth" next year by boosting domestic demand and restructuring the economy, according to the official New China News Agency. But Chinese leaders are facing powerful global head winds. Exports to the U.S. had been slipping for some months, but more recently, Europe, Japan and the Asia-Pacific region also have cut back on orders. Chinese-made steel products, electrical machinery, electronics and light manufacturing, such as apparel, all saw a sharp decline last month, analysts said. "Demand is simply disappearing," Tao Wang, a UBS Securities economist in Beijing, said in a research report.
Among the hardest-hit sectors has been China's shipbuilding industry, which is reeling from cancellations. That in turn has rippled down to suppliers such as Dalian Lushun Xinfei Ship Machinery Co. in northeastern China. "Many of the small manufacturers in our area are half-dead," said Li Jiyou, the company's general manager. He said his 20-year-old business would be lucky to break even this year, and he feared what lay ahead. "The aftershocks [of the global credit crisis] haven't yet spread completely to our industry. Next year is going to be a big challenge for us."
Global trade is shrinking, fast
It is hard to put lipstick on a pig. China’s November trade data (a 2.2% year over year fall in exports; a 17.9% year over year fall in imports — see Andrew Batson of the Wall Street Journal) suggests that global trade is contracting quite rapidly. And since trade accounts for a rising share of global activity, it suggests that the global economy has stalled — and perhaps is contracting.
The fall in China’s exports suggests global demand is falling. And the fall in China’s imports on first blush seems larger than can be explained just by the fall in demand for imported components for China’s exports and sliding commodity prices: it suggests that Chinese domestic demand is quite weak …
Sometimes the y/y change for China paints a misleading picture — as the timing of China’s New Year can have a big impact on the data. Not in this case. The 3 month moving average is heading down too — and it almost certainly has further to fall.
Up until now the widely reported difficulties in China’s traditional, labor-intensive export sectors (textiles, shoes) have been offset by strength in China’s more capital-intensive export sectors (electronics, machinery). See the World Bank Quarterly. But not anymore. November’s exports plunged well below China’s trend growth (using a linear trend, with monthly exports running roughly $20b over their level the previous year … ).
There isn’t much of a case for China to allow the yuan to depreciate against the dollar to help exports though. Not when Chinese exports are falling less than other countries exports, and China is gaining global market share. These are going to be hard times for everyone.
And China — with its large external surplus and strong fiscal position — should have more room to stimulate domestic demand than most. It certainly needs to do so.
China’s imports fell significantly faster than its exports in November, pushing China’s monthly trade surplus up to a record $40 billion. That is a lot of cash. Let’s see how large the US deficit is in November — it might not be all that much larger than China’s surplus.
China’s 2008 trade surplus looks set to exceed China’s 2007 trade surplus. Given that oil is going to average close to $100 a barrel in 2008 — more than $30 a barrel more than in 2007 — that is rather stunning. And right now there isn’t any much reason to think that China’s trade surplus will shrink in 2009. Exports will fall. But so will imports. And the fall in commodity prices implies that the terms of trade have shifted in China’s favor.
Watch how this chart evolves over the next few months …
The global flow of funds right now is actually quite simple: China runs a large surplus and the US runs a fairly large deficit — and, assuming hot money flows are (still) modest, China’s large surplus leads to rapid growth in China’s reserves and large Chinese purchases of US Treasuries. That is the dominant global flow right now — together with the “deleveraging” of the private sector.
One last point. China has released its November data before the US has released its October data. And I rather suspect China’s export data has already established the likely trajectory for US exports.
The seasonal dip in China’s exports (the data isn’t seasonally adjusted) usually comes after the US and European holidays — not before. The US trade data for the next two months is unlikely to paint a pretty picture of the health of the US or the global economy.
China: The Power Behind the $700 Billion Bailout
As Congress prepares to gift $15 billion to the three U.S. auto makers, there remains the mystery behind this year's $8.5 trillion bailout cycle: where is all the money coming from? The usual answer is “taxpayers,” but the real answer is a bit more complicated. Yes, taxes will pay part of the bill. But the rest will be piled onto the national debt, which will be financed by selling Treasury bonds to other countries. Primarily, these days, that means China and the countries of the Middle East. Chinese money, in fact, was one of the few things that kept Fannie Mae and Freddie Mac going as long as they did before a government takeover. It doesn’t take a geopolitical genius to figure out that situation will lead to awkward diplomacy.
China isn’t ignorant of this power. This month, veteran journalist James Fallows interviewed Gao Xiqing, the man who oversees $200 billion of China’s $2 trillion in dollar holdings for China Investment Corp., or CIC. CIC is China’s sovereign-wealth fund and owns stakes in Blackstone Group and Morgan Stanley. The interview in this month's edition of The Atlantic is forebodingly titled "Be Nice to the Countries That Lend You Money,” which is Mr. Gao’s primary advice. One of Mr. Gao’s thoughts illuminates his take on how we got into a mess that needed an $8.5 trillion cleanup. In his vision, Main Street and Wall Street share equal blame, and, like the chubby, infantilized citizens in “Wall-E,” are shunting off their problems on other countries and perhaps, soon, other planets. Here is what Mr. Gao tells Mr. Fallows:
Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking. People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners. We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]
Compare that to the take of New Yorker columnist James Surowiecki:
Last year, Asian countries invested almost four hundred billion dollars in the United States, mostly in government bonds. China is effectively taking most of its excess national savings and lending it to the United States. The Japanese, who despite their creaking economy remain flush with savings, bought a quarter trillion dollars of American debt last year, even though the interest is lousy and the assets themselves are losing value. More than any other nation in history, the United States depends, economically, on the kindness of strangers. Right now, Asian investors appear very kind.
Mr. Surowiecki wrote that, by the way, in April 2005. Other publications were sending up warning signals about the portion of national debt in foreign hands soon after. The problem, of course, is that depending on the kindness of strangers is not, by most accounts, sound economic policy. The bailout has revealed the ignorance of many Americans about the the financial food chain. Just like consumers who believe beef comes from shrink-wrapped packages in the supermarket rather than actual cows, many Americans have long acted as though money comes from ATM machines and plastic cards. The credit crisis, with its top-to-bottom ravaging of the financial system, made that naivete impossible to maintain: the average citizen’s borrowed money comes from banks, and those banks borrow from Wall Street investment banks, and Wall Street investment banks borrow from the government, and the government borrows from China, Japan and the Middle East. A flat-screen TV bought in Dubuque is financed with part of the life savings of a salaryman in Tokyo.
Mr. Gao’s comments also reveal a bailout paradox: the more America bails its companies out, the more they will need bailing out. That is because other countries–including, yes, China–don’t have any guidelines about how TARP is being deployed. That prohibits their investment. CIC said it doesn’t “have the courage” to invest in Western banks because the fund doesn’t know how bad things will get. The U.S. government’s bailout efforts may be, despite the best intentions, hindering the recovery. As the bailout inevitably heads into the second phase of its deployment–criticisms of misuse, and later, perhaps, villainy and indictments–the government surely will look to impose laws to ensure such a financial crisis isn’t repeated. But if Mr. Gao is right, it isn’t new laws that are needed, but a new appreciation of where our money comes from, and who we will owe in the end.
Trade Deficit in U.S. Widens as Exports Decrease
The U.S. trade deficit unexpectedly widened in October as faltering global demand led to a third consecutive drop in exports, signaling the American economy is sinking even faster than previously estimated. The gap expanded 1.1 percent to $57.2 billion from a revised $56.6 billion in September, the Commerce Department said today in Washington. Exports dropped to the lowest level in seven months as foreign purchases of U.S. aircraft, automobiles, chemicals and food waned.
The global credit crunch is slowing growth in Europe, Asia and Latin America, indicating the U.S. can no longer count on gains in trade to help offset the recessions in housing and manufacturing. American households and businesses are also retrenching, a sign that purchases of foreign oil, televisions and computers will keep softening. “Trade is going to be a significant drag on fourth-quarter growth,” said Dean Maki, co-head of U.S. economic research at Barclays Capital Inc. “The slowdown in foreign demand is hitting manufacturing.”
Another government report today showed the number of Americans filing first-time claims for unemployment benefits surged more than forecast last week to a 26-year high. Initial jobless claims increased 58,000 to 573,000 in the week ended Dec. 6 from 515,000 the previous week, the Labor Department said. The number of workers staying on benefit rolls gained to 4.429 million. The trade gap was projected to narrow to $53.5 billion from an initially reported $56.5 billion in September, according to the median forecast in a Bloomberg News survey of 70 economists. Estimates ranged from deficits of $47 billion to $57.5 billion.
After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the deficit surged to $46.4 billion from $42 billion in September. Another Labor Department report showed prices of goods imported into the U.S. plunged in November by the most on record. The 6.7 percent drop in the import price index followed a 5.4 percent decline the prior month. Prices excluding fuel fell 1.8 percent and the cost of imported petroleum plummeted a record 25.8 percent.
The jump signals trade may subtract from fourth-quarter growth after adding 1.1 percentage points in the previous three months when the economy shrank at a 0.5 percent rate. The already year-long U.S. recession is likely to be the longest in the postwar era, according to economists surveyed this month by Bloomberg News. Exports dropped 2.2 percent to $151.7 billion, reflecting a broad-based retreat in demand for American products.
Japan’s economy will shrink 0.2 percent in 2009, while the euro area will contract 0.5 percent, according to a revised forecast by the International Monetary Fund last month. Its global growth estimate for 2009 was scaled back to 2.2 percent from 3.7 percent this year. John Lipsky, the IMF’s first deputy managing director, yesterday said the lender will probably reduce its global growth forecasts again next month. A rebound in the value of the dollar, by making American- made products more expensive to overseas buyers, is contributing to the dimming outlook for U.S. exports. The dollar jumped 17 percent from mid-July to the end of November, reaching the highest level in three years on Nov. 21, according to figures from the Federal Reserve.
Cummins Inc., the maker of more than a third of North America’s heavy-duty truck engines, said this month it will eliminate at least 500 jobs by the end of the year because of “continued deterioration” in the U.S. economy and other key markets. Cummins said in October that sales growth will be about 12 percent this year, lower than it previously forecast, as the U.S. and European economies weakened. “Cummins already has taken a number of actions across the company to try to bring costs in line with our reduced current demand,” Chief Executive Officer Tim Solso said a Dec. 5 statement. “Despite those efforts, we have now reached a point where we will have to take more significant steps to reduce our professional workforce around the world.”
Reflecting the falling demand for machinery, the Standard & Poor’s Industrial Machinery Composite Index yesterday was down 42 percent so far this year, compared with a 39 percent decline for the S&P 500 Index A decline in airplane deliveries by Boeing Co., reflecting the effects of a two-month strike that was resolved Nov. 1, contributed to the softening in American exports. Boeing delivered 4 aircraft overseas in October, down from 6 in the prior month, according to company data. Imports declined 1.3 percent to $208.9 billion, the lowest level since March. Decreases in demand for foreign-produced automobiles, televisions, computers and fuel reflected the worsening slump in U.S. consumer and business spending.
Rather than helping shrink the trade gap last month, as most economists predicted, oil contributed to the deterioration. A record $15.56 drop in the price of imported crude in October was swamped by a 70.9 million-barrel jump in purchases that was also the biggest ever, the report showed. Excluding petroleum, the trade gap was little changed at $24.5 billion.
International trade next year may shrink 2.1 percent, the first contraction in more than a quarter century, the World Bank said in a report this week. The trade gap with China increased to a record $28 billion from $27.8 billion in the prior month. China surpassed Canada to become the largest source of imports into the U.S. last year. Since it joined the World Trade Organization in 2001, China has also been the fastest growing major export market for American- made products, according to U.S. government data.
Ilargi: For a good idea of how crazy -make that downright criminal with the US government -SEC- as full-blooded accomplice) the US financial world has become, and how much deeper the problems and losses are than what we are being told thus far, there's a Financial Times article today about how banks hide their losses.
Already, level-three assets are many times bigger than the market cap of the banksThat is soooo scary. What goes on here is that banks are more or less free to switch assets from level 1 or 2 to level 3, where valuation of assets is anyone's guess. The banks’s estimates of what their own assets are worth is, but of course, much higher than what they could get for the assets if they would sell them today. The excuse is that once the economy starts recovering, the values will rise. But that is questionable, and in the meantime, we have no realistic notion whatsoever of what banks are actually worth.
Which in turn of course means that all the bail-out and rescue billions are thrown at institutions that are, to a high degree of certainty, worth much less than they claim. And for that reason, we should demand that everything level 3 be transferred back to level 1 and 2, held against the daylight, and all resulting losses be accounted for. Level 3 should then be closed, forever. It invites criminal behaviour.
While we just don't know the value, we must realize that banks are very eager to take all good assets on their books, just to look better. What is not on the books is therefore by definition smelly. My guesstimate is that a realistic fair accounting value is not more than 15% of what the owners themselves claim, and possibly far less than that. Much of it is not worth anything. That would mean, when we take the Financial Times’ number of $610 billion in level 3 assets, that this number should be lowered to $91.5 billion or less, for total additional writedowns of $518.5 billion.
Yes, that will kill lots of financials, it'll be the end of Wall Street, but at least it will also keep taxpayers’ dollars from being wasted on already defunct companies. All the honcho's blabber about restoring trust in the markets; as long as level 3 exists, that will not happen. Simple as that. Y’Obama, are you paying attention?
First, here's Yves Smith's excellent comment, then the article itself:
Banks Increase "Mark to Make-Believe" Assets to $610 Billion
Banks are, if nothing else, entirely predictable. If there is a way to game the system, they will avail themselves of it. Readers may recall that the Financial Standards Accounting Board implemented Statement 157, which required financial firms to identify how they arrived at the "fair value" for their assets. Level 1 are ones where there is a market price. Level 2 are those where there may not be much of a market, but they can nevertheless be priced in reference to similar assets that have a market price.
Then we have Level 3. They are priced using "unobservable inputs." I have never understood this concept, because the use of sunspots, skirt lengths, the Mayan calendar, or a model using, say, a ratio of bullish versus bearish stories on Bloomberg would be an observable input. And fittingly, Level 3 is colloquially called "mark to make believe." And there are indeed signs that indicate that financial firms have played fast and loose with this rule:
However, it is now completely kosher to play games. While the three-level hierarchy became effective on January 1 of this year (some firms chose to comply early), the SEC largely gutted it in the wake of the Bear collapse. From its March press release:
- In the first quarter of 2007, Wells Fargo created $1.21 billion of Level 3 gains. Without them, it would have posted a loss.
- 2. Lehman added more assets to the Level 3 category at a time when better trading conditions said it should have been lowering themFair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale.We noted back then:But now the SEC has given banks and brokers a huge out. No matter how small or easily absorbed by the market a forced sale might be (think of a hedge fund hit by a margin call), a financial institution can ignore the price realized. In fact, they get to determine what trades constitute a forced sale.Fast forward to today. What do we see now? The financial services industry has a world-class bad quarter. So what does it do? increase the amount of assets it considers to be Level 3 so it can assign them more favorable prices. And there is possibly a second reason for this move. Year end financials are audited. Accountants have been much less accommodating of late. Moving a lot of assets into the Level 3 bucket right before your auditor walks in might not pass the smell test (although once you have done that, they really cannot question how they are marked). Better to do it at least a quarter in advance.
US financial groups’ problem assets hit $610 billion
The biggest US financial institutions reported a sharp increase to $610bn in so-called hard-to-value assets during the third quarter, raising concerns about the hidden dangers on balance sheets. So-called level-three assets, classified as hard to value and hard to sell, rose 15.5 per cent from the second quarter, according to analysis by the Market, Credit and Risk Strategies group of Standard & Poor’s.
Level-three assets have risen all year for most banks as they have found it virtually impossible to sell mortgage-backed securities and collateralised debt obligations. “A lot of banks are saying: ‘I am going to move securities to level-three assets because I have more control over, and confidence in, the model used for their valuations’,” said Gregg Berman, head of the risk management unit at Risk Metrics.
The study is based on regulatory filings by the biggest underwriters and traders of mortgage-backed securities and CDOs. These asset classes have plunged in value amid a wave of house price falls and foreclosures and are at the centre of the crisis. Next week, Goldman Sachs and Morgan Stanley will be the first banks to report fourth quarter results, which are likely to be scrutinised for information about their holdings of opaque assets.
Michael Thompson, managing director of MCRS, said he would be “surprised if we did not see writedowns of these level-three assets” in the fourth quarter. Already, level-three assets are many times bigger than the market cap of the banks. The US Treasury had planned to buy these using the $700bn troubled asset relief programme but changed tack and has used some funds for capital injections. Mr Thompson said it was hard to imagine banks would not have to take further writedowns.
AIG's Speculative CDS Bets
Did you know that AIG has a Blog Relations department? For real. They sent out a big email earlier today, which wound up in places as varied as Dealbreaker and Welt Online, taking issue with the WSJ's story about them this morning. Unfortunately, they seem incapable of writing in English, and even if you do try to decipher what they're saying, it seems to be little more than "this isn't news, it was on page 117 of our 10-Q".The notional amount attributable to the cash settlement portion of the AIG Financial Products multi-sector credit default swap portfolio has been consistently included in the total AIG Financial Products multi-sector credit default swap exposure in AIG's SEC filings and is explained on page 117 of AIG's Quarterly Report on Form 10-Q for the period ending September 30, 2008.I did end up talking to a human at AIG about this, since I wondered whether the company actually had any substantive issues with the WSJ story. It turns out that there is one big issue -- that the amount of money in question is not $10 billion, as the Journal would have it, but...
...and there AIG goes quiet. They're happy to tell you that the $10 billion is a notional amount, and not a mark-to-market loss: it's AIG's maximum possible loss, and the insurer does not at this point "owe Wall Street's biggest firms about $10 billion", as the Journal says. But AIG won't tell us how much it does owe on this book, so it's impossible to tell whether its actual mark-to-market loss is close to $10 billion or not.
AIG is not disputing the main thrust of the story, which is that AIG Financial Products was stepping far beyond its remit as part of an insurance company. Most of the credit default swaps written by AIG were real insurance: they were sold to banks who held the securities in question and wanted to hedge their exposure. But this $10 billion book wasn't insurance at all, it was outright speculation. And now the US government is having to put up billions of dollars in collateral against those bets -- bets which have gone very sour indeed.
I'm calling this one for the Journal. There might be a few minor errors when it comes to the specifics, I don't know. But the big picture is clear. AIG insured banks, and it was necessary to bail out AIG in order to prevent a much larger domino effect caused by those banks not being paid out by their insurer. At the same time, however, there's no reason to bail out the bits of AIG which were simply making speculative bets on the credit markets -- and indeed there's no reason why a triple-A insurer such as AIG should ever be making such speculative bets in the first place.
How much have those speculative bets cost? AIG won't say. This time last month, it held a quarterly conference call, and in the slides for that call, on page 15, it gave some numbers for its total CDS exposure -- both insurance and speculative. AIG wrote $71.6 billion of protection on multi-sector CDOs, and its mark-to-market loss, as of September 30, was $30.2 billion. That's all we know so far. In October, that loss surely went up substantially; the loss on the speculative CDS might be much greater, in percentage terms, than the loss on the insurance CDS. But it's probably safe to say that at a minimum, AIG's mark-to-market losses on its speculative bets -- losses for which the government has to provide collateral -- are at least $4 billion or so.
That's a lot of taxpayer money to put to use bailing out an insurance company's prop desk. And given AIG's recalcitrance in coming up with hard numbers which might contradict the Journal's reporting, I do wonder why the Blog Relations department was so keen to send us all this note. They might have been better off just keeping quiet, frankly -- especially when their formal statement is so incredibly stilted.
Fighting Foreclosures, F.D.I.C. Chief Draws Fire
On the weekend before Thanksgiving, Washington's top financial regulators were gathered on a conference call to discuss the rescue of the banking giant Citigroup when Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, interrupted with a concern. Speaking from her home, Mrs. Bair declared that the F.D.I.C. would contribute to a bailout only if Citigroup were forced to participate in a foreclosure prevention program she was championing on Capitol Hill. After a brief discussion, she got her way. That meeting of the minds was one of the rare agreements in an increasingly rancorous debate in Washington over how to help millions of at-risk borrowers stay in their homes as the economy deteriorates.
More than any administration official, Mrs. Bair has called publicly for using billions of taxpayer dollars to finance the modification of loans threatened by default. But her advocacy has contributed to a battle that is pitting White House and Treasury officials against the F.D.I.C. and lawmakers in Congress. The discord has influenced programs that have so far proved insufficient to stem a tide of foreclosures that Moody's Economy.com expects will affect 10 million homeowners over the next five years. And it is drawing personal conflicts and animosities into the policy-making process.
White House and Treasury officials argue that Mrs. Bair's high-profile campaigning is meant to promote herself while making them look heartless. As a result, they have begun excluding Mrs. Bair from some discussions, though she remains active in conversations where the F.D.I.C.'s support is needed, like the Citigroup rescue. A Treasury official involved in the discussions said that while Mrs. Bair was seen as a valuable part of the team, there was a sense of distrust and a concern that she always seemed to be pushing her own agenda.
Mrs. Bair, for her part, says she has always sought to work constructively with other officials and is one of the few voices within the administration pushing for a comprehensive program to help at-risk borrowers. "I've heard the stories of people who are suffering and can stay in their homes if there is just a small adjustment to their loans," said Mrs. Bair, a Republican who was appointed to her post by President Bush two years ago. "There are some people in the Republican Party who resent the idea of helping others," she added. "But the market is broken right now, and unless we intervene, these people and the economy won't be helped."
Yet behind the infighting, there is also the genuine difficulty of making a policy that can quickly aid millions of homeowners at a reasonable cost. Mrs. Bair unveiled a program to help the 65,000 borrowers who are more than two months delinquent on their mortgages at IndyMac, the giant failed bank taken over by her agency this summer. But so far, that program has benefited only 7,200 people. A representative of IndyMac said that many of the overdue loans turned out to be ineligible for the program, and that some borrowers had not yet responded to the bank's modification offers.
Other efforts have also stumbled. A $300 billion foreclosure prevention program passed by Congress this summer to help up to 400,000 homeowners wound up larded with requirements, like requiring background checks and restricting eligibility for mortgage relief to people at risk of foreclosure as of March 1. As a result, fewer than 200 people have applied for the program since it opened in October, according to officials from the Department of Housing and Urban Development, and no loans have been modified.
In the meantime, pressure is mounting on homeowners in need of relief. "We're hurting," said Aoah Middleton, 31, who began missing payments on her mortgage in 2006 when her 5-year-old daughter was found to have cancer. She says she knows of people who took out loans they knew they could not afford, and do not deserve help. But she spent a year trying to catch up, and could meet her obligations if her interest rate were reduced. Instead, her home is scheduled to be sold at a foreclosure auction this month. "We are doing everything we can to be responsible. Banks are getting helped. Rich people are getting helped. Why isn't there anyone to help me?"
In the running debate, Mrs. Bair was an early proponent of an aggressive and costly program aimed at helping millions of homeowners. Around the time that the F.D.I.C. took over IndyMac, Mrs. Bair began urging Treasury and White House officials to use taxpayer money to encourage other lenders and mortgage servicing companies to modify large numbers of at-risk loans, a plan she expected would help 1.5 million borrowers avoid foreclosure and reduce an oversupply of homes on the market. She estimated the program would cost taxpayers about $24 billion.
But critics, mainly within the Treasury Department and the White House, estimated the cost at nearly $70 billion. The F.D.I.C., they argued, was underestimating how many people would redefault after their loans were modified. This week, the Office of the Comptroller of the Currency reported that more than half of at-risk borrowers whose loan terms were changed this year by banks, including JPMorgan Chase, Citigroup and Bank of America, had already redefaulted on their payments. Mrs. Bair said those results most likely reflected sloppy loan modifications.
Critics also argue that Mrs. Bair's program, as well as others sought by Congressional Democrats, fail to adequately distinguish between homeowners who are genuinely at risk and those who might skip payments just to qualify for a modification. And they are skeptical of how much impact such plans will have on the national economy. "Every one of these programs seems like a great idea at first," said Tony Fratto, the White House deputy press secretary. "Our concerns are that many of them pay off people who knowingly made bad decisions and lenders who created the subprime crisis. It's unquestionable that rewarding those people lacks support among the American people."
F.D.I.C. officials, in response, said that that those concerns should not outweigh the benefits of a program that would help hurting homeowners and lift the economy. Mrs. Bair has said that data collected by the F.D.I.C. indicates that her plan would work, and that the agency has made the rationale behind its cost estimates publicly available. Still, when she failed to draw enthusiasm from the White House or Treasury, Mrs. Bair decided to go public with her idea, prompting quiet attacks from other administration officials.
"Our plan was being leaked and people were taking shots at us," she said in the interview, "so I decided we needed to go public to protect ourselves and to clarify what we were proposing." She said the F.D.I.C. has worked constructively with other agencies on numerous issues. "The F.D.I.C. has been working on loan modifications for 20 years," she added. "I'm frustrated that nobody gives us any deference for knowing how this stuff works. And at the end of the day, I'm happy if Treasury just picks a plan and does it. Even if it's not my plan, its better what we're doing right now."
Treasury and White House officials said they were reviewing plans, though they declined to discuss specifics, timelines or why they had not proposed a comprehensive alternative to Mrs. Bair's suggestion. In the meantime, Democratic lawmakers have latched onto Mrs. Bair's proposal as a political weapon, further muddying the debate. When Treasury Secretary Henry M. Paulson Jr. went to Capitol Hill last month, he was pummeled by Democratic lawmakers asking why he had ignored Mrs. Bair's plan and other proposals.
"Treasury has been disingenuous," said Senator Christopher J. Dodd, a Democrat of Connecticut and the chairman of the Senate banking committee. "A month ago Mr. Paulson gave me an assurance that the funds we allocated would be used for loan modifications. Now all you get is foot-dragging. There has been no real attempt to address this problem, and when they make any movements, it's very sluggish." A Treasury spokeswoman, Michele A. Davis, said that the department was not required to establish a loan modification program. But until Mr. Paulson promises to establish a widespread loan modification program, Congress is unlikely to give him the second half of a $700 billion rescue fund he is seeking to undergird the economy.
In the meantime, homeowners are unlikely to see any new policy unveiled soon. "It's become clear that if you stick your head up, it'll get cut off," said one White House official. "We're done in two months. The next administration can try to find a way out of that maze." That will probably come too late for Ms. Middleton, whose home is scheduled to be sold this month. Despite repeated attempts, she has been unable to work out a modification with the company managing her loan. "We wanted to own a home to have a place to raise our children," she said. "I work two jobs. My husband works full time. We just wanted to have something to call our own. I don't know what we'll do now."
Foreclosure Storm Will Hit U.S. in 2009 as Loan Changes Fail
U.S. foreclosure filings climbed 28 percent in November from a year earlier and a brewing "storm" of new defaults and job losses may force 1 million homeowners from their properties next year, RealtyTrac Inc. said. A total of 259,085 properties got a default notice, were warned of a pending auction or were foreclosed on last month, the seller of default data said in a report today. That’s the fewest since June. Filings fell 7 percent from October as state laws and lender programs designed to delay the foreclosure process allowed delinquent borrowers to stay in their homes.
"We’re going to see a pretty significant storm next year," Rick Sharga, executive vice president of marketing for Irvine, California-based RealtyTrac, said in an interview. "There are two or three clouds that suggest a pretty heavy downpour." Rising unemployment, expiring foreclosure moratoriums and state efforts that "run out of steam" will push monthly filings toward the record of more than 303,000 set in August, Sharga said. The number of homes that revert to lenders, the last stage of foreclosure and known as "real estate owned" or REO properties, will increase to 1 million from as many as 880,000 this year, he said. "The forces leading to foreclosure are hard to offset in most cases and impossible in many," Robert Hall, a Stanford University professor and chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions, wrote in an e-mail. "Job loss is a major source of defaults at all times, and job losses are running at extreme levels now."
U.S. companies slashed payrolls by 533,000 last month, the fastest pace in 34 years, for a total of 1.9 million job cuts so far this year. Home prices have fallen by about a fifth from the mid-2006 peak, according to the S&P/Case-Shiller home price index. "The decline in prices and its devastating consequences" will continue next year with no indication of when they will stabilize, Hall said. Programs that modify the terms of loans, including efforts by Fannie Mae, Freddie Mac, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. can’t help thousands of borrowers, he said. "Something like 70 percent of subprime foreclosures are beyond the reach of modification programs because the owners are investors, because the owner is in default for the second time on the property, or because the owner has disappeared," Hall said.
The share of mortgages delinquent by 30 days or more in the third quarter rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs, the Mortgage Bankers Association said in a Dec. 5 report. The gain in delinquencies was driven by an increase in loans with payments 90 days or more overdue. "Until we see a turnaround in the job situation, we’re not going to see these numbers improve," said Jay Brinkmann, chief economist of the Washington-based bankers group. In November, one in every 488 U.S. households received a foreclosure filing, RealtyTrac said. Nevada had the highest rate for the 23rd straight month with one in 76 households in some stage of foreclosure, more than six times the national average. Filings more than doubled from a year earlier to 13,962.
Florida had the second-highest rate, one in 173 households, and the second-most filings at 49,190, an increase of 68 percent. Arizona had the third-highest rate, one in 198 households, and ranked fifth in total filings with 13,136, up 128 percent. California, Michigan, Georgia, Ohio, Colorado, Utah and Idaho also ranked among the top 10 highest rates, RealtyTrac said. California had the most filings with 60,491, up 51 percent from a year earlier, and a rate of one filing for every 218 households, more than twice the national average. Michigan ranked third in filings with 14,594, up 27 percent, and had a rate of one for every 309 households, according to RealtyTrac. Nevada, Arizona, Ohio, Georgia, Illinois, Texas, and Virginia were among the top 10 states with the most filings.
New Jersey had the 15th highest rate, one in 622 households, and had 5,582 filings, up 32 percent from a year earlier. New York had the 39th highest rate, one in 3,040 households, and had 2,601 filings, a decrease of 55 percent, RealtyTrac said. Florida had three metropolitan areas among the top 10 highest rates, including Cape Coral-Fort Myers in first place with one in 59 households in a stage of foreclosure. Fort Lauderdale was seventh at one in 117 households, and Port Lucie- Fort Pierce was eighth at one in 118 households. Las Vegas ranked second at one in every 61 households in a stage of foreclosure. California had six metro areas in the top 10, led by Merced in third place with a rate of one in 76 households in a stage of foreclosure. Modesto, Stockton and Riverside-San Bernardino ranked fourth through sixth, Bakersfield was ninth and Vallejo- Fairfield was 10th, according to RealtyTrac.
U.S. Jobless Claims Soar 58,000 to a 26-Year High
The number of Americans filing first- time claims for unemployment benefits surged more than forecast last week to a 26-year high, a sign companies are stepping up firings as the recession deepens. Initial jobless claims increased 58,000 to 573,000 in the week ended Dec. 6, the highest level since November 1982, from a revised 515,000 the previous week, the Labor Department said today in Washington. The number of workers staying on benefit rolls reached 4.429 million, also the most since 1982.
Employers are slashing payrolls as consumers retrench and credit stays frozen. Mounting job losses and falling home prices increase the likelihood that the U.S. recession will extend well into 2009, adding impetus to President-elect Barack Obama’s call for an economic stimulus package of unprecedented size. “The labor market is facing its worst crisis since 1982, and it is certainly not over yet,” Harm Bandholz, a U.S. economist at UniCredit Markets and Investment Banking in New York, said before the report. “One of the most important tasks of the newly elected government is, therefore, to help distressed homeowners and to stimulate the labor market.”
Stock futures sank after the report, with contracts on the Standard & Poor’s 500 index dropping 1 percent to 887.20 at 8:37 a.m. in New York. Yields on benchmark 10-year Treasuries dipped to 2.68 percent, from 2.69 percent late yesterday. A separate government report showed the trade deficit widened last month as U.S. exports fell for a third straight month, posing an added threat to the economy after shipments abroad helped prevent a deeper downturn earlier in the year.
The Commerce Department said the shortfall in trade expanded 1.1 percent to $57.2 billion in October, with exports declining to the lowest level in seven months. Jobless claims were estimated to rise to 525,000 from the 509,000 initially reported the previous week, according to the median projection of 39 economists in a Bloomberg News survey. Estimates ranged from 485,000 to 555,000.
Continuing claims were projected to rise to 4.1 million, according to the survey. The four-week moving average of initial claims, a less volatile measure, rose to 540,500, the highest since December 1982, from 526,250, today’s report showed. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, increased to 3.2 percent, the highest since August 1992, from 3.1 percent. These data are reported with a one-week lag.
Eleven states and territories reported an increase in new claims, while 42 reported a decrease. The biggest increases were reported by Wisconsin and Iowa. Jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report - - slows. Last week’s gain in initial filings was the biggest one-week advance since September 2005, the report showed. The week after the Thanksgiving holiday tends to be the busiest of the year for first-time filings, a Labor spokesman said today.
The economy has lost 1.9 million jobs so far this year as payrolls dropped for 11 consecutive months. U.S. companies eliminated 533,000 jobs in November, the most since 1974, and the unemployment rate increased to a 15-year high of 6.7 percent, the government said last week. So far this year, weekly claims have averaged 412,000, compared with an average of 321,000 for all of 2007, when employers added a total of 1.1 million jobs.
Rising unemployment and the persistent credit crisis raise the likelihood the recession that began in December 2007 will turn into the longest slump in the postwar era. The U.S. economy contracted at a 0.5 percent annual pace in the third quarter. Companies are slashing jobs as demand weakens and the credit crisis deepens. Dow Chemical Co., the largest U.S. chemical maker, said this week it will cut 5,000 jobs and reduce the company’s contractor workforce by about 6,000.
“We are accelerating this move given the deterioration of the global economy and most of our markets,” Andrew Liveris, chief executive officer of the Midland, Michigan-based company, said on a Dec. 8 conference call with analysts. “The entire industrial supply chain all the way to whatever the consumer buys outside of food and health is in a recessionary mode.”
Is the Jobs Panic Justified?
BusinessWeek asked economists from Wall Street to academia. Their job forecasts all depend on when they think the credit markets start working again. It was bad enough when Iceland got into financial trouble and practically sank into the frigid North Atlantic. It was worse when your next-door neighbor lost his home to foreclosure. But now things are really getting scary: Your own job may be at risk. Unease turned to incipient panic on Dec. 5 after the government reported that the U.S. economy lost 533,000 jobs in November, making it the worst month for employment since the grim days of December 1974. The holiday party chatter is all about layoffs. Everyone wants to know how long the jobs hemorrhage will last and how bad it will get.
Forecasting job losses is incredibly difficult because a lot depends on when banks finally get back to the business of providing credit. The recent news on that score is not good. On Dec. 9 the Treasury Dept. auctioned one-month bills at 0.00%—evidence that risk aversion among potential financiers is more extreme than ever. "We've got so far to climb out of this [financial] hole that if we start today, then on any reasonable time path we might still be climbing out a year from now," says Robert V. DiClemente, chief U.S. economist of Citigroup in New York. Predicts the AFL-CIO's chief economist, Ron Blackwell: "Things will get worse, perhaps much worse, before they get better." That said, this job bust won't last forever. There are forces at play that will eventually pull the economy out of its free fall. The key is smart government policy that sets politics aside. It must provide a combination of short-term consumer stimulus and long-term investments without stepping over the line into wasteful and innovation-stifling industrial policy.
BusinessWeek asked top economists from Wall Street, academia, labor, and business, and got a wide range of predictions for what lies ahead. The optimists see job growth as soon as spring, with the economy losing only about 750,000 more jobs between now and then. The pessimists predict the economy will keep losing jobs until late next year or 2010, with additional losses of well over 2 million jobs, bringing the peak-to-trough decline to more than 4 million. All of the forecasts take into account President-elect Barack Obama's pledge to "save or create" 2.5 million jobs—implying that these predictions would be even more dire if no additional stimulus were planned. The quick-snapback scenario assumes a reasonably healthy financial sector. If the financial system keeps struggling, though, the spiral will continue: Cash-strapped companies will be forced to step up layoffs, causing cutbacks in consumer spending that will push employers to cut even more jobs. "I've been cautioning everybody that as long as financial conditions are as impaired as they are, questions about when the job market will hit bottom are premature," says Citigroup's DiClemente.
Much depends on Washington's effectiveness in sustaining demand as the credit crunch unwinds. Keynesian economics is back in fashion for the first time since the Kennedy Administration. Republicans as well as Democrats have glommed onto the idea that massive government outlays during a recession is a good thing because it props up spending for goods and services while the private sector catches its breath. Many economists believe the President-elect's plan for $500 billion or more in stimulus could dramatically shorten the recession and reduce job losses. But the Obama Administration has to balance the short term with the long term. It needs a plan that will produce a robust rebound in private-sector employment once the recession ends. Propping up zombie companies and household borrowers won't do it.
Remember, the recession isn't all bad: Unsupportable debts are being erased. Consumers are rebuilding their savings and lowering their living standards to match reality. Workers are exiting dying industries. And through distress sales, foreclosures, and bankruptcies, assets are being taken away from weak hands and given to strong ones, creating the conditions for future growth. The smart play for Obama's team is to use public works, bailouts, and such to break the feedback loop of falling employment to give the economy's natural stabilizing forces time to work. Yes, public investment is good. But restoring confidence to businesses about future prospects will trigger private investments in plant and equipment that are far larger than the government itself is ever likely to make.
What's indisputable is that things are really bad right now. The 1.9 million decrease in jobs since last December's peak is already close to the 2.2 million jobs lost in the 1973-75 downturn and again in the back-to-back recessions of 1980-1982. Today's overall unemployment rate, at 6.7%, is not quite as bad as in some past recessions. But some groups are already being pounded hard. Unemployment in construction and extraction occupations (such as mining) hit 12.1% in November, followed by 9.4% in production occupations. Unemployment rates in November ranged from 5% for white adult women to 32% for black teenagers. Lawrence Mishel, president of the progressive Economic Policy Institute, says black teen joblessness could hit 60% to 70%. Says Mishel: "We're talking about communities that live in a recession in the best of times going into a deep depression."
Where economists stand on the future of jobs seems to depend at least a little on where they sit. In BusinessWeek's unscientific sample, the forecasters who were most optimistic about the overall economy came from the relatively healthy small-business sector (the National Federation of Independent Business) or from outside New York (Wells Capital Management Chief Investment Strategist James W. Paulsen of Minneapolis, where the October unemployment rate was just 5.3%). Gloomiest were Citigroup and Goldman Sachs, which are at the epicenter of the financial crisis. Michael P. Niemira, chief economist of the International Council of Shopping Centers, a group that has been hit hard by consumer cutbacks, predicts 3.5 million in total job losses. History shows that the sectors that remain relatively strong during a recession tend to lead on the way back out. But it doesn't always happen quickly. Job growth was agonizingly slow after the recessions of 1990-91 and 2001. In fact, the U.S. lost jobs in August 2003, more than a year and a half after the end of the 2001 downturn. That bodes ill for a quick bounceback this time, especially if the economy is continuing to work off its leverage binge.
On the other hand, optimists say the fear seizing the markets could abruptly abate. Thanks to Federal Reserve intervention, the banking system is supercharged with excess reserves. If the banks' mood improves, consumers could quickly get access to loans to feed pent-up demand for cars, houses, and other goods, says Wells Capital Management's Paulsen. That would create jobs fast. "Right now companies, even if they're doing well, are saying, 'Hey, wait a minute. Let's not hire anybody for a while.' They could change their minds quickly," he says. Another reason for hope is that companies have been slashing jobs more aggressively than in past downturns to get out ahead of the problem, which means that if demand comes back they will need to rehire in a hurry. Corporate boards are asking managers: "Why aren't you downsizing in preparation for what's coming?" says Garry G. Mathiason, a senior partner at Littler Mendelson, a large employment law firm. On Dec. 8, 3M Chief Financial Officer Patrick D. Campbell said the company was cutting 2,300 jobs this quarter as part of "proactively reducing structure in a slower-growth world."
The fiscal stimulus being planned by the Obama team is so massive that, if it goes into effect as conceived, it could make things considerably better than some of the more pessimistic analysts are currently projecting. On Dec. 11, United Auto Workers President Ron Gettelfinger renewed his pitch for the auto industry to get a piece of the stimulus "to keep America's factories up and running." Whether or not Detroit deserves a bailout, it's clear that revving the economy can't be all about propping up failing industries. Policy also shouldn't over-rely on infrastructure investment. In the name of making the economy more productive, Obama plans to invest heavily in roads and bridges, energy efficiency, school buildings, broadband networks, and electronic medical record-keeping. The idea is to grow through investment rather than consumption. Some economists, though, are skeptical of the Obama team's emphasis on infrastructure, arguing that there aren't enough out-of-work construction workers to do all the jobs that are envisioned.
Here's the hitch: Employment in heavy and civil engineering construction is down by only 75,000 (or 7%) from November 2007—and 2007 was a record year for jobs in that sector. Unemployed ad salespeople are unlikely to start pouring concrete for a living. The more the government involves itself in how the money will be spent, the more the program resembles industrial policy rather than fiscal stimulus. In contrast, tax credits and rebates such as the program pushed through by the Bush Administration earlier this year tend to create the types of jobs that people already know how to do. For example, tax rebates that boost retail spending will create more jobs for unemployed sales clerks, drivers, and marketers. There's a good case for putting some of the stimulus money directly into consumers' pockets through measures such as extending unemployment benefits and perhaps temporarily cutting payroll taxes. No matter what government does, the bleeding in the labor market is far from over. But getting policy right can make an enormous difference in how soon the healing begins.
California, Battling Budget Woes, Faces Possible S&P Downgrade
California may have its debt rating cut by Standard & Poor’s on more than $56 billion in bonds. S&P lowered its rating on some of the state’s debt, the first downgrade for California in five years. Standard & Poor’s said it may lower the rating on California’s $46.6 billion of general obligation debt and $7.8 billion in bonds backed by lease payments. It also reduced its rating on $5 billion of short-term debt to ‘SP-2’ from ‘SP-1’ that the state had sold to cover its tax shortfalls.
"California is pressured by recent sharp declines in revenue as the result of an economic slowdown," S&P analyst David Hitchcock said in a statement yesterday. "The state should have sufficient resources to solve its projected cash shortfalls if the legislature can reach the necessary two-thirds supermajority required for budget adjustments." This is the first time California, the most populous U.S. state and the largest issuer of municipal bonds, has had its debt ranking lowered by a rating company since July 2003, just months before voters threw out former Governor Gray Davis over his handling of the state’s finances. California is now battered by the worst recession since the 1980s as job losses and cutbacks in consumer spending curb tax collections. Lawmakers meeting in emergency session have been unable to agree on how to close the budget deficit.
Illinois may join California in having its credit rating cut on general obligation bonds, Standard & Poor’s said in a separate statement last night. The state’s growing budget gap and the arrest of Governor Rod Blagojevich this week may hurt its ability to address the shortfall, S&P said. Nationwide, states are expected to collect about $100 billion less than they will need during the current and coming budget years, forcing spending cuts and higher taxes at a time when the federal government is trying to stoke the economy. Investors have begun demanding higher returns on California’s bonds since its financial strains have worsened. The state’s budget shortfall widened to $14.8 billion, more than the $11.2 billion forecast last month, Governor Arnold Schwarzenegger said yesterday. California may have to shut down as much as $5 billion in infrastructure spending because it may run out of money as soon as February, Treasurer Bill Lockyer told lawmakers Dec. 8.
The state’s general revenue fund, which pays for the government’s operations, fell short of forecasts by $1.3 billion, or 19 percent, in November, California Controller John Chiang said Dec. 9. Retail sales taxes were $630 million below estimates, while income tax collections trailed by $479 million. Schwarzenegger, a 61-year-old Republican, wants lawmakers to raise taxes and cut spending. His fellow Republicans have opposed seeking more money from residents to make up for the shortfall. On Dec. 1, the governor ordered lawmakers into an emergency session to deal with the budget, a step that will stop all other statehouse business by mid-January if a fix isn’t found. California’s general obligation bonds are currently rated A+ by S&P, the fifth highest of its 10 investment grade rankings.
California budget gap could reach $41.8 billion by 2010
California now faces an unprecedented $41.8-billion budget gap by July 2010, with the cascading economic crisis forcing state economists to increase the already dismal projections they made just a few weeks ago, according to documents obtained by The Times. The shortfall amounts to nearly half the $86 billion in revenues the state expects to generate in the upcoming fiscal year. Unless lawmakers can quickly rein things in, it will become the largest gap in modern California history, according to revenue forecasts by the state Department of Finance. The projections are relied on by the governor and legislative leaders in drafting state spending plans.
The dark estimates come a day after the state controller announced that the government could run out of cash as soon as February, a month earlier than previously forecast. Gov. Arnold Schwarzenegger faulted legislators -- particularly Republicans -- for continued inaction in addressing the situation. "When you have a crisis, the most important thing is to make a decision," Schwarzenegger told reporters at a Capitol news conference Wednesday. "The worst thing is not to make a decision. The most costly thing we can do is not to take any action." Over the last month, Democrats have reluctantly agreed to make some cuts in social service programs to deal with the deficit, which is now expected to reach $14.8 billion by June 30, the end of the current fiscal year -- one-third higher than forecast in November. But the Republicans, who control enough votes to block any budget plan, have refused Schwarzenegger's and the Democrats' insistence that spending cuts be matched by new taxes.
GOP leaders say they will not even discuss taxes unless Democrats first accede to a number of long-held goals. Those include establishing a strict spending limit for future years; giving businesses leeway in setting employee break times and work hours so employers can reduce overtime payments; and holding off on rules intended to force companies to emit lower amounts of greenhouse gases. "I have felt many times that Republicans did not come prepared and Republicans have not been specific of what they need," Schwarzenegger said. "They have been very vague." Republicans said they were planning to lay out their own plan to deal with the deficit next week. So far, none of the ideas that they have suggested publicly, including increased calls to reduce "waste, fraud and abuse" in state government, would come anywhere near erasing the budget hole, independent fiscal experts say.
At his news conference, Schwarzenegger displayed a clock that he said showed the cost of lawmakers' failure to act on the budget. It was ticking at a rate of $1.7 million an hour. The governor said he would place the clock -- which also includes a tally of how many days legislators have gone without action since he first called them into special session, 35 days ago as of Wednesday -- outside his Capitol office. "They met, they debated, they postured and they did nothing," Schwarzenegger said. " . . . And that was after being three months late already with the budget this year. If that isn't a shameful performance, I don't know what is."
The latest fiscal projections did not appear to have any immediate effect on the impasse. In a statement released by his office, Assembly minority leader Michael Villines (R-Clovis) disputed charges that Republicans were not negotiating. "Just this week, we urged lawmakers to review fast-growing areas of state government for savings," he said. But the Republicans did not recommend specific cuts in those programs, which include in-home supportive services for the ill and disabled, healthcare for those in poverty, the courts and programs for the developmentally disabled. "Bullying the Legislature to adopt tax hikes won't make the ticking clock the governor unveiled today go away -- in fact it will only make our budget problems worse," Senate minority leader Dave Cogdill (R-Modesto) said in a statement.
"Republicans have been working for years to stimulate the economy," he said. "Now we've been told that unless we support tax increases -- which would harm the economy -- the Legislature will not consider enacting these common sense reforms. We should all agree that economic stimulus will protect taxpayers' jobs and homes and we should have done it by now." Senate President pro tem Darrell Steinberg said in his own statement: "We need partners, not partisans, at the negotiating table." "Democrats have already shown," he also said, "that we are more than ready to meet Republicans halfway by voting for a fiscal plan of half cuts and half revenue increases in November." Ted Gibson, a retired chief economist for previous governors, said that even if legislators bridge their differences, they may run out of time. "Even if you could get agreement between these two ideological rigid sides," Gibson said, "the fact of the matter is this late in the fiscal year it's almost impossible to effect either tax increases or cuts that would solve a $15-billion problem."
Ilargi: Deflation is not a risk, deflation is what we are in.
Recession to worsen, deflation a risk: UCLA report
The "nasty" U.S. recession will tighten its grip next year as unemployment rises and weak home and stock prices imperil consumers, finance firms and debt-laden businesses, a UCLA Anderson Forecast report released on Thursday said. Additionally, a sustained retreat in prices for goods and services is a very real possibility that would further drag on the economy, according to the forecasting unit's report. "Where only last quarter we were worried about inflation, we are now worried about its very rare opposite: deflation," the report said. Falling prices would cut demand and discourage employers from hiring.
"The record collapse in oil prices has brought with it welcome relief to motorists throughout the country and an effective tax cut of $440 billion in the form of a lower oil import bill," the closely-watched report said. "Nevertheless the swift fall in oil prices is now lowering the absolute level of consumer prices and bringing with it likely declines in nominal GDP over the next three quarters." Where the forecasting unit in summer had projected a "subprime" outlook for the U.S. economy through the end of next year with growth at just above 1 percent, it now sees the economy facing a winter of discontent.
"The news from the economy is bad," the report said. "The recession that we had previously hoped to avoid is now with us in full gale force." The UCLA Anderson Forecast unit expects real GDP to shrink by 4.1 percent this quarter and by another 3.4 percent and 0.8 percent in the first and second quarters of next year, respectively, as consumer and business spending weaken and as the foreign trade that had propped up growth much of this year sags. "Because Europe and Japan are already in recession and China and India are suffering from a significant slowdown in growth, the export boom of the past few years will wane," the report said. "Make no mistake the global economy is in its first synchronized recession since the early 1990s."
By late 2009 the U.S. unemployment rate will hit 8.5 percent, compared with 6.7 percent in November, as employers shed an additional two million jobs over the next year. The historical long-term trend of 3 percent growth will not resume until 2010, the report said. The administration of President-elect Barack Obama and Congress should act quickly next year to pass an economic stimulus package, said David Shulman, the report's author. "They're talking a lot of infrastructure, which makes a lot of sense. They're talking a middle-class tax cut. I think when Congress gets through with this they'll be raining money on the economy," Shulman said.
Ilargi: A $1.4 billion deficit for 300.000 people. (OC: Multiply by 1000 to get a US population-sized deficit of $1.4 trillion) (Ilargi: Gee, that's looks almost normal. How about your town of 200.000 people with a $1 billion deficit?)
Iceland Forecasts Record $1.4 Billion Budget Deficit
Iceland’s economic contraction next year will push the budget into its biggest deficit on record, a government forecast showed, forcing the country to deplete emergency loans granted last month. Iceland will post a budget deficit of between 165 billion kronur ($1.43 billion) and 170 billion kronur, the government told reporters in Reykjavik today. The deficit implies the country will burn through much of a $2.1 billion loan from the International Monetary Fund granted last month. The economy may shrink 10 percent next year, the IMF estimates, the island’s deepest recession since at least 1945, following the collapse of its banking industry and currency. Aside from the IMF loan, Iceland has pledges from the Nordic countries and Poland for a further $2.7 billion in loans.
"It doesn’t look good," said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. "It’s clear that a substantial portion of the IMF loan will be used to finance the deficit and they may well need to seek additional funding." The deficit corresponds to about 15 percent of the economy, based on 2007 GDP data from Statistics Iceland adjusted for the IMF’s forecast of a 10 percent contraction. Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf all collapsed in October after the lenders were unable to secure enough short-term funding to operate their business.
The government will cut spending by 45 billion kronur next year to prevent an even bigger gap, it said today. "The income basis of the previous budget proposal has been greatly distorted in the wake of the collapsed banking system," Prime Minister Geir Haarde told reporters. "Whole revenue contributions are disappearing; we need to react." The failure of the banks crippled the krona, forcing Iceland to limit official trade in the currency to daily central bank auctions.
The krona was returned to a managed free float on Dec. 4 after the government passed a bill imposing capital restrictions lasting two years. "It’s a deeply tragic story," Christensen said. "One wants to be positive but the scope of the collapse has exceeded our worst-case scenario." The proposed spending cuts were presented to the parliament’s budget committee today.
Long European lending freeze predicted
The freeze in interbank lending in Europe, which is preventing normal financing activity, may not end before next summer, fears Andreas Treichl, chief executive of Austria’s Erste Bank. “The key problem in the crisis is that money is being made available by central banks to commercial banks but the banks are putting it back into central banks when it should be made available to the real economy,” says Mr Treichl, whose bank is the third largest in Austria and one of the biggest lenders in central and eastern Europe.
“If I knew how to restart interbank lending, I would talk to Mr [Jean-Claude] Trichet [governor of the European Central Bank] and to politicians in Europe. But I haven’t a clue.” Mr Treichl told the Financial Times on Wednesday that, while banks bore their share of blame, others were also responsible – including shareholders, analysts and rating agencies. "It doesn’t help that if analysts ask about exposure to other banks and if we say we have increased it by 40 per cent, they will sell or they will say that we are idiots.”
Like other banks active in the emerging markets of central and eastern Europe, Erste has seen its shares fall particularly heavily in the general sell-off of bank stocks. Its share price is down 66 per cent on the year. Erste is taking €2.7bn from a €100bn Austrian government bank recapitalisation scheme in an effort to raise its tier one capital ratio from 7.6 per cent to more than 10 per cent. This year it bolstered its balance sheet through selling its life assurance business for €1.4bn ($1.8bn). Mr Treichl said the publication of audited year-end results would make little difference to bankers’ concerns about each other’s stability. They would start differentiating between “winners and losers” in the first half of next year, as some banks “outperformed” and others “underperformed”.
Bankers would only resume lending after that, in the third quarter of next year. Mr Treichl added that much would depend on establishing the direction of the real economy. “We haven’t a clue what will happen in 2009 or 2010 and if we don’t gain confidence in the fact that we can manage ourselves out of the recession it will not be easy to restore confidence in the banking system.” Mr Treichl said he still expected the European Union’s new member states, where Erste has invested heavily, to perform better than either western Europe or less developed countries further east. Central Europe offered both growth markets and the security of EU membership.
“I would not want to be in Kazakhstan at the moment and I would not want to be in the Netherlands at the moment. “I want to be in the Czech Republic. I am glad I am in central and eastern Europe.” Mr Treichl predicted that Erste, which has its biggest businesses in the region in the Czech Republic, Slovakia and Hungary, would benefit from continuing economic growth which would support credit growth of around 10 per cent in 2009. This was lower than the 20 per cent seen this year and the 40 per cent recorded in 2007 but was still good during a global recession.
Berlin hits out at ‘crass’ UK strategy
Germany’s finance minister has launched a stinging attack on the “crass Keynesianism” pursued by Gordon Brown, the British prime minister, fuelling tensions on the eve of European economic crisis talks in Brussels. Peer Steinbrück accuses Mr Brown in a magazine interview of “tossing around billions” and saddling a whole generation with a bill for paying off British debt. His comments come as the European Union’s 27 leaders meet in Brussels to debate a proposed €200bn fiscal stimulus package, designed to stop a protracted economic slump.
Mr Steinbrück, a Social Democrat in chancellor Angela Merkel’s grand coalition, has previously accused other European leaders of acting like “lemmings”, borrowing billions to fund tax cuts or higher spending. His irritation has been heightened by efforts by Mr Brown to construct a coalition to put pressure on Germany to follow suit. On Monday the UK prime minister hosted an economic summit with Nicolas Sarkozy, French president, and José Manuel Barroso, European Commission president, at which all three called for a concerted fiscal stimulus. Mr Steinbrück’s comments were seen in London and Brussels as being intended partly for domestic consumption.
One British official said the German finance minister took a much harder line on fiscal stimulus than Ms Merkel, a Christian Democrat, who will represent her country at a two-day EU summit starting in Brussels on Thursday. Germany has insisted the summit communique, while endorsing a €200bn stimulus package, should include the need to maintain fiscal discipline. A draft statement says the goal of long-term budgetary sustainability “implies a swift return to the reduction of deficits which have been temporarily increased”. Mr Steinbrück, speaking to Newsweek, questions whether Mr Brown’s £12.5bn (€14.2bn) cut in value-added tax will work. “All this will do is raise Britain’s debt to a level that will take a whole generation to work off,” he said.
He added: “The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.” He said British policy would simply repeat mistakes of previous years in fuelling credit-financed growth. His comments were seized on by Britain’s opposition Conservatives who said it revealed Mr Brown’s claim to have worldwide support for his fiscal stimulus plan was “an illusion”. Mr Brown’s claim to be setting the global economic agenda was translated into what the Conservatives claimed was a Freudian slip on Wednesday, when Mr Brown told the House of Commons: “We not only saved the world. . . ” For a minute MPs were convulsed in laughter, before Mr Brown corrected himself and said the government had saved banks.
German officials said last week that Ms Merkel had discussed the VAT cut with Mr Brown and was convinced it was the right step to support the UK economy. But Ms Merkel continues to reject such a cut in Germany, where consumption has held up relatively well in recent months. Downing Street refused to comment on Mr Steinbrück’s comments. Mr Brown has argued that the stimulus was widely accepted, notably by Barack Obama, US president-elect.
Steinbrück row: An unfortunate sense of déjà vu
Britain and Germany have been here before. The precedent, as Gordon Brown knows all too well, is scarcely encouraging. The last time a senior German official publicly criticised Britain’s economic policy, the spat sent sterling tumbling and ruined the reputation of the then Conservative government. This week’s outspoken attack on Mr Brown’s strategy by Peer Steinbrück, the German finance minister, was as potentially damaging as it was undiplomatic. The pound, after all, has lately been sliding fast on foreign exchange markets. It is worth nearly a quarter less against the euro than a year or so ago. Some predict it is heading for parity.
Worse, even the truly dire forecasts for public borrowing produced by the Treasury only last month are beginning to seem over-optimistic. The recession looks to be deeper than predicted. The last thing Mr Brown’s government needs is a further weakening of confidence in sterling assets among international investors. It scarcely helps to have Germany’s finance minister declare that Britain’s strategy amounts to “crass Keynesianism”. As much as they have provoked anger in London (and, one imagines, a certain dismay in Angela Merkel’s office in Berlin) Mr Steinbrück’s caustic remarks have also stirred a chilling sense of déjà vu. Mr Brown, who was then Labour’s shadow chancellor, remembers well the previous Anglo-German spat. He was one of its principal beneficiaries.
David Cameron, the Tory leader, was less fortunate. The young Mr Cameron served as an aide to Norman Lamont, the chancellor whose economic policy and career was ruined by the other German official. It was the early autumn of 1992. John Major’s Tory government was struggling to hold the pound’s rate within the European exchange rate mechanism. Then, as now, economic boom had been followed by bust. And, though the economy was emerging from recession, public borrowing was heading for the stratosphere. The pound, along with some other European currencies, was under intense pressure. This was the moment that Helmut Schlesinger, then president of the Bundesbank, chose to seal sterling’s fate. Speaking to journalists, Mr Schlesinger suggested that Britain’s desperate efforts to prop up the pound were doomed. It was a self-fulfilling prophecy. Within 48 hours sterling had been forced out of the ERM by a wall of speculation.
The British government lost billions of dollars in the effort to support the currency. More importantly, the humiliation of what was called “Black Wednesday” left its reputation for economic competence in ruins. Mr Brown, jeering at the Conservatives’ failure, began preparing for government. The parallel, of course, is not exact. The present British government does not have a target for sterling’s value. Inflation is not the problem now as it was then. But the two episodes have enough in common to provoke serious concern in London. Mr Brown’s decision to abandon fiscal prudence in the cause of stimulating the economy is a gamble: better to have a faster recovery now at the expense of larger budget deficits than risk the recession turning to slump. The danger, though, has always been that international investors – in British government bonds, in particular, will take fright. Mr Steinbrück seems to be egging them on in that direction. Mr Brown is understandably furious.
For Mr Cameron, though, the boot is on the other foot. The Tory leader has been sharply critical of the government’s decision to cut value added tax in its efforts to stimulate the economy. Now he has the German finance minister on his side. He should be careful, though, not to be gleeful. Voters may not take too kindly to the idea that the Conservatives are siding with the Germans in predicting further doom and gloom. As for Mr Steinbrück, he is partly right and mostly wrong. Some of his criticism is, to borrow his description of Mr Brown, simply crass. It is perfectly true that Britain’s fiscal position is perilously weak. But that reflects previous profligacy. The temporary VAT cut is scarcely here nor there in the overall calculation.
More important, if every economy followed his advice and opted for fiscal retrenchment, then recession in Europe would quickly turn to slump. For all its devotion to economic rectitude, Germany would suffer grievously along with everyone else, In truth, Mr Steinbrück sounds rather like those politicians in the early 1930s who insisted that the only way to avoid the great depression was to balance national budgets. We know what followed from that, not least in Germany.
IMF sees prolonged period of stagnation for Spain
Spain's economy will shrink by at least 1.0 percent next year instead of the of 0.2 percent forecast in October, and it risks entering an extended period of stagnation unless sweeping structural reforms are carried out, the IMF said Wednesday. "The near term prospects are somber and uncertain," the International Monetary Fund said in a report posted on its web site, adding "the medium-term recovery also crucially depends on progress with implementing comprehensive structural reforms." "In their absence, Spain could get stuck in a low-competitiveness, slow-growth, extended-deleveraging, and high-unemployment equilibrium, from which returning to lower public debt would be difficult," it said.
Dismissal costs must be lower to boost hiring, collective bargaining agreements need to be more flexible and the practice of indexing wages to inflation must end, the Washington-based Fund said. Spain's public deficit will exceed 5.0 percent of gross domestic product (GDP) next year as a result of the economic stimulus measures adopted by the socialist government of Prime Minister Jose Luis Rodriguez Zapatero, it said. At the end of November Zapatero announced his government would spend an extra 11 billion euros (14 billion dollars) over two years, mainly on public works to boost the country's flagging economy and cut unemployment.
Spain's once-buoyant economy is on the verge of recession as the global financial crisis has hit the key construction sector, which was already weakened by oversupply and rising interest rates. The Spanish economy contracted for the first time since 1993 in the third quarter, shrinking 0.2 percent, and most economists expected it will shrink again during the fourth quarter. The Paris-based Organisation for Economic Co-operation and Development (OECD) predicted at the end of November that the Spanish economy would contract 0.9 percent next year.
The European Commission, the executive arm of the European Union, predicts Spanish GDP will fall by 0.2 percent next year, weighed down by lower private consumption and an ongoing contraction of housing and equipment investment. The Spanish economy expanded by 3.7 percent last year.
South Korea Cuts Interest Rate to Record 3 Percent
South Korea's central bank on Thursday announced the deepest cut in interest in its history in an attempt to cushion its economy from the global downturn. The announcement came as China's latest economic indicators for November revealed that the country's economy is slowing much more rapidly than expected, increasing expectations that Beijing will accelerate efforts to bolster growth.
The Bank of Korea's cut on Thursday was its fourth in two months, and took its key interest rate down a full percentage point to 3 percent, a much bigger cut than economists had predicted. The bank's governor, Lee Seong-tae, said South Korea was "on the verge of an emergency situation that may need more drastic policy," Reuters reported. Central banks around the world have delivered a cascade of cuts as the speed of the economic slowdown — and outright recession in the United States, Canada, Japan and much of Europe — becomes apparent.
In Taiwan, the central bank cut its main rate by 0.75 points to 2.0 percent Thursday, the fifth such move in two months. The rate cut, which was announced after the close of the market, was the biggest in 26 years. In China, data for November showed a sharp fall in consumer price inflation — to 2.4 percent from 4 percent the previous month — as demand fell in line with slowing growth. On Wednesday, trade data showed import growth dropping sharply and exports shrinking for the first time in years as domestic and overseas demand shrank.
The Chinese data added to the sense of worry about the extent to which Asia's economies are being affected by the economic downturn that was set off last year by the subprime mortgage crisis in the United States. It also dashed hopes that China's economy could act as a buffer by taking up the slack from the slumping United States, Europe and Japan. China's double-digit growth is expected to slow to around 8 percent next year, and growth across the region is also forecast to decline as demand in Europe and the United States and within the region shrinks.
The Asian Development Bank on Thursday said it expected growth in Asia's developing nations to slow to 5.8 percent next year, from 9 percent in 2007 and a projected 6.9 percent this year. The estimates echoed those issued by the World Bank earlier this week. Jong-Wha Lee, head of the Asian Development Bank's s office of regional economic integration, said that "2009 is likely to be a very difficult year for developing Asia,"
The bank called on governments to step up efforts to bolster their economies. "While the region's economies and financial systems are fundamentally sound and appear better cushioned to withstand the immediate effects of the crisis than in other parts of the world," the bank said it was concerned "that the global credit crunch is now spilling over into domestic banking systems, squeezing funding resources for corporate investment."
Pound in another record euro low
The British pound has continued its sharp decline against the euro, reaching a new record low of 1.1238 euros on Thursday. It is at the lowest level since the euro was launched in 1999. Meanwhile, the pound gained one cent against the US dollar, reaching $1.4924 in afternoon trading. The dollar also fell against other currencies, hitting the lowest level against the euro and the Japanese yen for the past six weeks.
Sterling was pushed lower after figures from the Confederation of British Industry confirmed a sharp downward trend in manufacturing. The UK currency is expected to remain under broad selling pressure amid a grim outlook for the British economy. However, some analysts have expressed doubts that the rise of the euro against the pound is a sustainable trend, particularly if European economies also continue to weaken.
"If the eurozone is being perceived to still have rates at substantially higher levels, then obviously there's a positive rate spread, but I'm not convinced that its ultimately going to be positive as the dynamics of the eurozone economy are pretty weak," Rabobank markets strategist Jeremy Stretch said. Interest rates have been cut both in the UK and in the eurozone, but they remain higher in the 15-member euro currency area.
The Bank of England has made two sharp cuts in rates, bringing them down to 2%, and many analysts expect more in the pipeline. Lower interest rates make it less attractive for foreigners to hold pounds. A weaker pound is better for the UK exporters but is bad news for British holidaymakers who plan to go abroad during the Christmas season, and also makes imported goods more expensive. Meanwhile, the dollar's weakness has been attributed to the growing difficulties of the auto industry, whose $34bn bail-out is being negotiated in Congress.
Russia allows further depreciation of rouble
Russia’s central bank allowed the rouble to weaken against its dollar/euro basket yesterday, the fifth time authorities have widened the tightly-controlled currency’s trading bank in a month. The rouble weakened 0.7 per cent to Rbs31.85 against its basket, which is made up of 55 per cent dollars and 45 per cent euros. The combined efforts at gradual depreciation since November 11 have driven the currency 4.7 per cent lower. Until August, the rouble appreciated steadily thanks to rising commodity prices boosting the mineral-rich country’s current account and fiscal surpluses. But the sudden reversal in sentiment in financial markets since then, has put the rouble under intense pressure. The rapid fall in oil prices threatened to wipe out the current account surplus, while the increasingly frantic flight from risk drove investors from emerging markets.
“Russia’s trying to offer some compensation to energy exporters, who are making significantly less money because of the collapse in energy prices,” said Charles Robertson, chief emerging markets economist at ING. He added: ”Depreciating the rouble gives the exporters a little more cash, and by doing it gradually, they’re hoping that the fragile local confidence in the currency doesn’t completely disappear.” The Central Bank of Russia’s preferrence to manage the rouble lower, rather than opt for a one-off devaluation, has so far succeeded in stopping the currency from coming under speculative attack. But this has come at a great cost to the country’s foreign exchange reserves. Since hitting their peak in early August, Russia’s FX reserves have dropped by $161.1bn to $437bn at the end of last week.
This has led to much criticism of the central bank’s stance on gradual depreciation. ”While Russia has greatly reduced its external debt vulnerabilities since the default in 1998, the pace of reserve loss suggests to us that Russia should abandon its defense of the ruble and hold onto its reserves, especially in the face of sharply lower oil prices,” said Marc Chandler at Brown Brothers Harriman. Lars Rasmussen at Danske Bank added: ”A further draining of reserves would jeopardise the creditworthiness of the Russian economy.” Indeed, Standard & Poor’s, the credit rating agency, on Monday lowered its foreign currency sovereign credit rating on Russia by one notch to reflect the sharp reversal of capital flows which increases the cost and reduces the chance of the country meeting its external financing needs.
German bond sale struggles to hit target
Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction came close to failing in a warning sign for governments attempting to raise record amounts of debt to boost their slowing economies. The auction of two-year bonds saw only just enough bids to meet the €7bn ($9bn) the government wanted to raise. This was almost unheard of before this year as investors typically clamour to buy these securities. Meyrick Chapman, a fixed income strategist at UBS, said: “When a German bond auction struggles, you know there are problems. “This is a sign that demand among investors is already waning for government bonds because of the huge supply.”
Other analysts noted the yield was 2.2 per cent, about 4.5 basis points less than existing comparable bonds, which suggests the market is still in reasonable shape because of low interest rates and deflation fears. It is also the end of the year when many banks and investors close their books and are reluctant to part with cash, which could explain the weaker demand. However, the prevailing view among analysts is that problems in raising debt so soon after many governments have announced fiscal stimulus programmes to revive their economies are a worrying sign with vast amounts of supply due in the coming months. Governments in Europe are expected to issue more than $1,000bn next year, while the US is expected to raise up to $2,000bn. With up to $2,000bn in government-backed bank bonds also expected next year, analysts say the market faces grave dangers of being “crowded out” as some governments struggle to raise debt or have to pay much higher yields.
There has already been much higher issuance of government-backed bank debt than expected, with $147bn raised since governments first announced they would guarantee bank bonds, according to Dealogic, the data provider. On Wednesday, Germany’s HSH Nordbank was forced to delay the launch of a government-backed bond until the new year because of a lack of appetite among investors. The euro-denominated bond issue will be launched in the week starting January 5. A banker said: “They couldn’t get the price they wanted. There is a lot of competition in this space, and they were having to offer big premiums to interest investors. The fact it was year-end didn’t help.” Crucially, many German investors, who would have been the main buyers of the bond, have closed their books for the year, another banker said. Bankers hope to price the deal, which is being managed by Commerzbank, Deutsche Bank, WestLB and HSH Nordbank at about 100bp over Bunds.
Ilargi: I have said before that Peak Oil is no longer anything but an afterthought. Resource extraction is undergoing a "Honey I shrunk the kids" nightmare. Yes, in realitive terms commodities will become very expensive, unaffordable even, as deflation grabs a deadly stranglehold on the world economy. But the key to the issue lies in finance, not resource depletion. Extraction will become simply too expensive, and it will never be restarted on the scale we know. At least we can say -provided we live- that we successfully avoided peak oil.
Commodity crash tests faith in supercycle
Rio Tinto gambled its future by contracting debt on a grand scale to fund its heady expansion near the top of the commodity bubble. The bill has now fallen due. Tom Albanese, the chief executive, is cutting 14,000 jobs and slashing investment by $5bn over the next year in a frantic effort to lower debt. " He cited the "unprecedented rapidity and severity of the global economic downturn." The last straw may have been a push by China to cut iron ore contracts for 2009 by 82pc, although almost every part of Rio's portfolio has been savaged by the metals crash. The trio of copper, lead, and zinc have now fallen by over 60pc since peaking in the summer. They have dropped further – and faster – than they did during the Great Depression from 1929 to 1933.
It has been an article of faith in the markets that the commodity bust would be over quickly, followed by a V-shaped recovery as the Malthusian dearth of oil, metals, and food, reasserts itself – and as the industrial revolutions of China and India trump falling demand in the Old World. But the "Supercycle" thesis itself is now being called into question. The World Bank's global outlook this week suggested that credit excess had pushed commodity prices far above their sustainable level in this cycle. "Over the longer run, the price of extracted commodities should fall," it said. The commodity booms of the industrial age have mostly lasted a decade and seen a rise in real prices of 60pc. This time the gains reached 109pc at the peak. "The magnitude of commodity price increases in the current boom is without precedent," it said.
Moreover, China appears to have hit a brick wall since the Olympics. Officials have begun to talk of 5pc growth next year, which is below the level needed absorb the flood of urban migrants. The manufacturing sector is highly-geared to demand in America and Europe. Far from escaping, China is now suffering the brunt of global trade contraction. There is no such thing as consensus in the commodity world, but most experts still think that the economic arrival of two billion people in Asia is a "game-changer" that will underpin prices for years to come. Oil fields are running down in the North Sea, Mexico, and Western Siberia. New sources – off-shore Brazil and Angola, Russia's 'High North' in the Arctic, Canada's oil sands – are hard to extract. Plans are being shelved because the capital markets are frozen.
A study by the US National Academy of Sciences found that 26pc of the copper that ever existed in the earth's crust has already lost through grinding or buried in landfills. The picture is bleaker for platinum. There is not enough to supply the world's motor industry with catalytic convertors for a decade. Francisco Blanch, head of commodities research at Merrill Lynch, says the supercycle is alive and well, though oil prices could fall to $25 a barrel as the global economic storms inflicts its damage. "It is going to be very difficult for a few months but we expect prices to bottom out in the first half of the year. The issue on everybody's mind is whether this is a recession or a depression. We don't think governments are going to allow debt deflation to occur because it would be too awful . There is too much debt out there. So the answer is going to involve inflation," he said.
Recovery may come too late to spare Rio Tinto the consequences of its debt-funded expansion blitz, capped by the takeover of Canada's Alcan for $38bn in 2007. Mr Albanese has admitted that Rio will have to divest "significant assets not previously highlighted for sale", which means forced sale in a illiquid market. The company will have to auction its "crown jewels" to raise money, says Shaun Giacomo, from SG Asset Management. Mining credit is now prohibitively expensive. It is far from clear whether Rio can raise money on tolerable terms given its BBB+ credit rating, barely above junk. Mr Albanese aims to cut its $39bn debt by $10bn next year. "Our imperative is to pay down debt," he said.
It is a race against time. Some $19bn of debt from the Alcan deal – currently at 30 to 35 basis points over Libor – matures over the next two years. The interest spread will be massively highly in this climate, if lenders can be found at all. "Rio has blown it," said Stephen Pope, chief equity strategist at Cantor Fitzgerald. "They are the most indebted of the big miners and it is now going to be a very tall order to refinance. It was all so easy during the boom when you could raise as much debt as you wanted, but that party is over. Goodness knows why they didn't take the money when BHP Billiton offered to buy them out for $66bn," he said. For BHP Billiton it was the a very lucky escape. The Australian rival can now bide its time and pick off Rio's prized mines and reserves around the world. Who knows, it may even swallow the whole company after all, at a fraction of the price.
Ilargi: This is the story of oil going forward: a demand collapse combined with a short-term huge rise in production, from all producers who need to make up for the losses caused by the plunging prices. Money invested in exploration will collapse as well, leading to much less available oil a few years hence. Luckily and/or ironically, few will be able to afford it by then.
A side effect will be a surge in the use of coal, wood, anything that burns. And that is how mankind will put the finishing touch to its destruction of the only place it has to live. Money may make the world go round, as the song says, it will also stop it from turning.
IEA: World Oil Demand to Contract
The International Energy Agency said Thursday world crude-oil demand this year is now expected to officially enter its own recession of sorts, with oil consumption contracting for the first time in 25 years because of the deterioration in global economic activity. Underscoring that bearish outlook, the Paris-based energy watchdog for the Organization for Economic Cooperation and Development said spare production capacity -- a key indicator of supply -- now stands at a six-year high among Organization of Petroleum Exporting Countries members.
The IEA, in its widely watched monthly oil-market report for December, forecast 2008 global oil demand to slide by 0.2%, or 200,000 barrels a day, to 85.8 million barrels a day on average. The outlook, a cut of over 300,000 barrels a day from November, would represent the first demand contraction since 1983. "The consumption numbers have just been coming in dramatically weaker, particularly in the U.S. It's very clear the weakness we are seeing," said David Fyfe, editor of the monthly report, adding that crude-oil demand forecasts may continue to be cut. The latest forecast wasn't unexpected as other oil industry analysts have been projecting a drop in oil demand this year amid the economic recession conditions in the U.S. and elsewhere. But the IEA remains more optimistic on demand next year than many other analysts, forecasting consumption to grow by 0.5%, or 400,000 barrels a day, from 2008.
By contrast, the U.S. Energy Information Administration earlier this week said it expects 2009 world crude demand to fall by 450,000 barrels a day. U.S. front-month oil futures traded more than $2 higher Thursday at $45 a barrel, but prices are still nearly 70% below their July peak of $147 a barrel. Demand weakness is most pronounced in the U.S., the world's biggest oil consumer, where consumption is expected to tumble by 6.3% this year and 1.4% in 2009, according to the IEA. Consumption in China, the world's second-largest oil consumer by volume, is seen growing by 5.3%, or 7.9 million barrels a day, this year but weakening to 3.5% in 2009. That outlook is basically unchanged from November.
Because of tepid demand, oil inventories are well above their five-year average in OECD nations, at 56.8 days of forward demand cover at the end of October, up from 55 days in September. Stocks are set to rise further, the IEA said. OPEC nations, which produce about four out of 10 barrels consumed globally every day, would like to see forward demand cover -- a measure of back-up oil supply -- at 52 days. OPEC is widely expected to cut production by at least one million barrels a day at its final meeting of the year on Dec. 17 in Algeria.
OPEC's effective spare production capacity stands at 3.3 million barrels a day, the highest since 2006, as the group cuts output to halt the fall in oil prices. The group has so far reduced production by just 825,000 barrels a day, or 55%, of the 1.5 million barrels a day members agreed to cut in October. One note of supply pessimism is that production from Russia, the U.S. and other non-OPEC nations is seen falling by 85,000 barrels a day this year due to increased drilling decline rates and project delays. The drop would represent the first since 2005 and is more than 1.5 million barrels below original IEA forecasts a year ago.
Fear triggers gold shortage, drives US treasury yields below zero
The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold. "It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year," said Marc Ostwald, a bond expert at Insinger de Beaufort. The rush for the safety of US Treasury debt is playing havoc with America's $7 trillion "repo" market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection. "You know the US Treasury will give you your money back, but your bank might not be there," said Paul Ashworth, US economist for Capital Economics.
The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into "backwardation" for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices. It appears that hedge funds in distress are being forced to cash in profits on gold futures to cover losses elsewhere or to meet redemptions by clients. But smaller retail investors – and perhaps some big players – are buying bullion in record volumes to store in vaults. The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.
Peter Hambro, head Peter Hambro Gold, said the data reflects a "remarkable" shift in the structure of the market. The rush to safety reflects a mix of fears about the fragility of world finance and concerns that the move towards zero interest rates could set off an inflationary surge further down the road, and possibly call into question the worth of some paper currencies. The near paralysis in the "repo" markets may prove to be no more than pre-Christmas jitters as banks square their books. However, there are some signs that extreme monetary stimulus by the US Federal Reserve and other banks is starting to have unintended consequences. The Bank of Japan is it is reluctant to cut its rates to zero again because of the damage this causes to the money markets, which serve as a key lubricant of the credit system. The US is now starting to face the same dilemma.
Hedge Funds Shrink by $64 Billion, Eurekahedge Says
The global hedge-fund industry lost $64 billion of assets in November, with an index tracking its performance declining for a sixth month as economies in Asia and Europe joined the U.S. in recession, Eurekahedge Pte said. “It's very clear that there is going to be significant consolidation in the hedge-fund industry,” said Duncan Smith, a partner in Hong Kong at Ogier, a firm that provides corporate and legal services to financial companies. “Conditions are quite difficult and that really goes without saying. Underlying liquidity is very hard for funds.”
Market declines contributed to $18 billion in net losses, while investor redemptions made up $46 billion, Singapore-based Eurekahedge said, based on preliminary figures taken from 41 percent of the funds it surveys. It said hedge-fund assets shrank by $110 billion to $1.65 trillion in October. The slump takes declines to 13 percent this year as hedge funds accelerate job cuts and brace for the biggest annual losses and investor withdrawals since at least 2000, according to Eurekahedge data. Funds including Chicago-based Citadel Investment Group LLC, run by Kenneth Griffin, have been forced to liquidate funds, limit withdrawals and eliminate jobs.
Hedge funds fell 0.4 percent on average in November, as measured by the Eurekahedge Hedge Fund Index, which tracks the performance of more than 2,000 funds that invest globally. The final figure for the month may be a 2 percent decline, said Eurekahedge, which typically receives data from poorer performing funds later. Hedge-fund industry assets peaked at $1.9 trillion in June, data compiled by Chicago-based Hedge Fund Research Inc. show. Investment losses and withdrawals may shrink that amount by 45 percent by the end of this month, according to estimates by analysts at Morgan Stanley.
Distressed selling and the rollback of debt-funded investments continued to pull down funds as the credit crisis sent the U.S., Europe and Japan into the first simultaneous recession since World War II. The MSCI World Index slumped 6.7 percent last month. Chicago-based Citadel will close its Tokyo office and cut other Asian operations, eliminating 37 jobs less than a year after adding people in the region.
Its two largest funds, Kensington and Wellington, are said to have lost 13 percent last month. The funds, which had a combined $10 billion in assets, received demands from investors to withdraw $1 billion by the end of the year, according to people familiar with the matter. Och-Ziff Capital Management Group LLC, the New York-based hedge-fund manager that went public last year, and New York-based Ramius LLC, founded in 1994 by former Shearson Lehman Brothers Chief Executive Officer Peter Cohen, are cutting jobs in Asia, people familiar with the plans have said.
In regional terms, the Eurekahedge Japan Hedge Fund Index was the best performer, gaining 0.8 percent last month, followed by an index measuring Latin America funds, which rose 0.7 percent. The measure tracking Asian hedge funds was little changed, gaining 0.1 percent. Among Japan funds, the Myojo Japan Long Short Fund, run by Myojo Asset Management Japan Co., gained 1.4 percent in November on U.S. dollar-basis, according to a letter sent to investors. The gain cut its year-to-date loss to 7.4 percent.
Wolver Hill Japan Multi-Strategy Fund rose 1.5 percent in November, based on preliminary figures, according to Rogers Investment Advisors Y.K., the Tokyo-based advisory firm for the fund of hedge funds focused on Japan. The gain brings the year- to-date advance to 2.5 percent. At least 11 of the 14 managers that make up the fund reported positive numbers last month, the highest ratio over the past two years, the firm said.
Sparx Japan Stocks Long Short Fund, also known as “Best Alpha” and ran by Sparx Group Co., Asia's biggest hedge-fund manager with $8.5 billion in assets, declined 1.2 percent in November, according to monthly data on the company's Web site. The Eurekahedge Eastern Europe & Russia Hedge Fund Index was the worst performer, dropping 3.7 percent, while the North American and European indexes declined 2.1 percent and 0.6 percent, respectively, Eurekahedge said. Managers that trade fixed income performed best in November, gaining 2.4 percent. Those trading futures, or CTAs, and so- called macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, advanced 2 percent and 1.1 percent.
Among the macro funds, PMA Harvester Fund, run by Hong Kong- based unit of Sparx, PMA Investment Advisors Ltd., gained 4.5 percent, bringing its year-to-date return to 27 percent, according to a company statement. The fund has grown to $245 million from $37 million this year. PMA's Temple Fund, which invests in credit markets, gained 0.9 percent, bringing its year- to-date advance to 10.6 percent, the statement said.
By contrast, the index measuring hedge funds investing in distressed debt was the worst performer, sliding 3.3 percent. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
GM’s Time Is Short as Senate Debates Rescue, Vendors Seek Cash
The debate over the automaker bailout in Congress has become a race against the clock and the companies’ dwindling cash. The U.S. House voted 237-170 late yesterday to approve emergency loans for General Motors Corp. and Chrysler LLC, shifting the focus to the Senate, where Republican opposition threatens to delay or kill the legislation.
Pressure is mounting on GM as a small number of partsmakers ask for payments in advance, people familiar with the matter said. GM, which typically pays vendors about 45 days after getting an invoice, has said it won’t have enough money to pay its bills by month’s end without federal aid. GM has rejected the requests for upfront payments, which so far have come from a fraction of its 3,600 suppliers, said the people, who asked not to be identified because the discussions are private.
Democratic leaders and the Bush administration are trying to beat a deadline to save the companies and the millions of jobs dependent on the industry before Detroit-based GM and Chrysler burn through their remaining cash. GM has said it needs $4 billion this month, the same amount in January and a total of $10 billion to keep going through March 31. “Without this bridge, we’re going to fall into the biggest calamity this country has known since the Great Depression,” said Representative John Dingell, a Democrat from Michigan, the carmakers’ home state. “A terrible disaster looms.”
Job losses would total 2.5 million to 3.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 report from the Center for Automotive Research, which does studies for government agencies and companies. Federal, state and local governments would lose $108.1 billion in taxes over three years in the event of a 50 percent reduction in U.S. automaker operations, representing the failure of one or more domestic automakers, the Ann Arbor, Michigan- based group said.
“We should not go home and do nothing,” Republican Senator David Vitter of Louisiana said today in a Bloomberg Television interview. “We should do the right thing, which is to put the plan together with taxpayer help, but that demands a restructuring plan now,” said Vitter, who had threatened to use procedural methods to halt a vote. House Speaker Nancy Pelosi tossed a challenge to senators, saying on Bloomberg Television that she wouldn’t bring her chamber back for further action if the Senate passed a different version of the plan.
The legislation would let GM and Chrysler draw on $14 billion of loans to keep operating while they develop restructuring plans required by March 31. Without the aid, the two companies would likely have to declare bankruptcy by year’s end. Ford Motor Co. has said it doesn’t need emergency aid. Suppliers’ payment requests to GM began in the last several weeks and haven’t disrupted vehicle production, one person familiar with the matter said.
The people wouldn’t say how many partsmakers had made the requests, nor would they identify the companies. No suppliers have announced that they’re requiring payment in advance. “Despite the current economic challenges, GM remains committed to maintaining a strong, open relationship with our suppliers,” said a spokesman, Dan Flores, who declined to give details on supplier discussions. “GM remains focused on maintaining payment terms and being a prompt payer.”
Paying monthly bills at GM requires a minimum of $11 billion, and there was $16.2 billion available at the end of September, GM has said. Chrysler had $6.1 billion in cash at the end of the third quarter, Chief Executive Officer Robert Nardelli told Congress on Nov. 18. The Auburn Hills, Michigan-based company needs at least $3 billion on hand to operate, he said.
The automakers could still be forced into bankruptcy under the legislation if the so-called car czar, an official to be appointed by President George W. Bush to oversee the loan program, decides their restructuring plans are insufficient. Republicans said yesterday the House measure wouldn’t give the czar enough authority to order cost cuts and other changes. They argued that only a restructuring under bankruptcy protection can make the companies more competitive.
“The car czar doesn’t have as much authority as he really needs,” said Senator Robert Bennett, a Utah Republican. “He needs the capacity of the master in bankruptcy to force things to happen.” The czar would have the power to veto automaker expenditures over $100 million. Car companies that take loans would have to limit pay and ban bonuses for their 25 most highly paid executives. They also would be barred from owning or leasing passenger aircraft or paying dividends to shareholders.
Taxpayers would receive stock warrants equal to 20 percent of the aid. The U.S. may end up holding a large stake in the automakers based on that provision. GM fell 35 cents, or 7.6 percent, to $4.25 at 9:49 a.m. in New York Stock Exchange composite trading, while Ford lost 15 cents, or 4.6 percent, to $3.10.
Senate Republicans emerged from a meeting yesterday with Vice President Dick Cheney and White House Chief of Staff Josh Bolten and said the measure doesn’t have enough support to clear a 60-vote legislative hurdle. Democrats control the chamber 50- 49. “It has minimal, very little support in our caucus,” Tennessee Republican Bob Corker said after the meeting. He said Cheney and Bolten gave a “non-compelling” presentation in favor of the plan.
Deputy White House Chief of Staff Joel Kaplan today said the Bush administration is “going to try like heck to get the votes” from rebellious Senate Republicans. Kaplan said he would be on the phone lobbying this morning. Senate Majority Leader Harry Reid, a Nevada Democrat, is trying to work with Republicans on an agreement that might allow Senate votes tomorrow related to the bailout, said his spokesman, Jim Manley.
Republicans who oppose the measure said Congress should stay in session next week to allow time for changes. Any revisions in the legislation by the Senate would require the House to reconvene. During the debate, Massachusetts Democrat Barney Frank warned colleagues that further House action is unlikely. “This is the last train out of the legislative station this year,” he said.
Pelosi said on Bloomberg Television, “You never say never, but the fact is, I think it’s important for the Senate to know that this is a strong bipartisan bill.”
Pressing Its Investors, GMAC Says It Lacks the Capital to Be a Bank
As lawmakers debated a bailout package for Detroit's big automobile companies, the future of an important piece of the industry was being negotiated on a parallel track in New York on Wednesday. Cerberus Capital Management, the private investment firm that controls GMAC and owns Chrysler, raised the specter of bankruptcy to apply pressure to GMAC's bondholders to go along with a bond-exchange plan that many of them have been resisting. Whether bondholders agree will not be known for at least a few days.
But whatever happens at GMAC will ripple through the auto industry. The financing company provides loans to consumers for cars and to dealers for their inventories. General Motors, which retains a large stake in the financing company, said in its latest turnaround plan to Congress that it was counting on GMAC's viability. Otherwise, G.M.'s financial problems, and its need for government assistance, could grow. In what some viewed as an act of brinksmanship, GMAC issued a statement Wednesday morning saying that it did not have adequate capital at the moment to qualify to become a bank holding company. Only by becoming a bank can it secure a financial lifeline from the government's $700 billion financial rescue plan.
Without that money, GMAC could indeed be forced to file for bankruptcy by year-end, industry experts said. The statement came just two days before a deadline for GMAC's bondholders to agree to the bond exchange, which would allow GMAC to satisfy the Federal Reserve's capital requirements, and just hours before advisers hired by GMAC held negotiations with representatives of bondholders.
GMAC's statement lit a fire among its bondholders, who are torn over whether Cerberus, a $28 billion firm in New York, would really throw in the towel on its investment. Long known as a shrewd investor, Cerberus bought a 51 percent stake in the company with a group of co-investors for $14 million; General Motors owns the rest. Cerberus had hoped to merge the financing arm of Chrysler with GMAC, but the sputter in the debt markets derailed that plan. The firm remains hopeful of receiving short-term loans from the government for Chrysler, but Chrysler is the smallest of Detroit's automakers and considered the weakest.
What's more, a key forecasting firm said Wednesday that while G.M. and Ford had viable plans, Chrysler did not, regardless of whether it got government aid. For G.M., any additional problems at the financing company would bring more pain for its dealers, who have long depended on GMAC to provide consumer financing and to carry its inventory. The automaker set up the unit in 1919 to help customers buy its cars. "How serious is this on a scale of one to 10?" asked Michael Martin, chairman of the G.M. Industry Relations Committee at the National Automobile Dealers Association. "It's a 10."
Already the problems at GMAC have taken a toll as auto sales slump to levels not seen in decades. To shore up its finances, the company has tightened its lending standards, so that consumers need top credit ratings — credit scores above 700 — to qualify for its financing. A year ago, the company provided financing for about half of all G.M. cars sold. Today, it accounts for about 6 percent, according to statistics compiled by Plante & Moran, an auto industry consulting firm in suburban Detroit.
"This is not good," said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. "GMAC collapses, and a large avenue to financing cars will not be there. People will have to pay more for auto credit. There will be less competition." G.M., which has largely written down its stake in the financing company, is focusing its efforts in Washington on getting a $15 billion bridge loan. Meanwhile, Cerberus and its auto financing company need to obtain cash fast to avoid the risk of breaking loan covenants on Dec. 31. GMAC plans to do that by becoming a bank holding company and gaining access to government assistance. Right now, the company has too much debt to qualify under the Fed's capital rules. That's where the bondholders come in.
Last month, the company began a bond swap, offering investors preferred shares in return for their accepting lower face amounts on their bonds. The company extended the deadline to this Friday to try to drum up enough interest and reduce its debt. Then it issued the statement on Wednesday warning of dire consequences if bondholders failed to come forward. Among other things, bondholders said GMAC and Cerberus had not responded to requests to negotiate in recent weeks on their demands, including an additional $2 billion investment by Cerberus or other investors.
"It's inexplicable to me that Cerberus and GMAC would not have engaged the bondholders weeks ago and have instead waited until the 11th hour," said David Bullock, managing director at Advent Capital Management, a large bondholder in GMAC. "It's not only coercive, it's irresponsible." GMAC needs the holders of 75 percent of the bonds subject to the exchange offer to accept it. Holders of less than 25 percent of the bonds initially agreed. Some bondholders see the bankruptcy threat as a bluff. Pimco, the giant money manager in California, is one bondholder that is unconvinced that Cerberus would actually push GMAC into bankruptcy, according to people close to the matter. Pimco officials did not return a call for comment. Neither did Cerberus officials.
GMAC has about $165 billion in auto loans outstanding. With its financing severely constricted, consumers and dealers have been turning to regional banks and any others willing to lend to the auto industry. To help pick up the slack, G.M. announced Wednesday a test program in the Midwest under which credit unions will make $10 billion in financing available for low-cost car loans to their members. Mr. McAlinden said that if GMAC withdrew its application to obtain money under the financial rescue program, the company would most likely have to file for bankruptcy, an opinion that echoes a statement by Standard & Poor's Rating Services last month.
BCE’s Buyout Collapses, Setting Up Battle Over Fees
BCE Inc.’s C$52 billion ($41 billion) takeover was terminated by Ontario Teachers’ Pension Plan and a group of U.S. private-equity firms, setting up a potential fight over breakup fees. The acquisition, set to close today, collapsed after auditor KPMG LLC said it would leave Canada’s largest phone company insolvent, the buyers said in a statement. The transaction, which would have been the second-largest leveraged buyout after the sale of TXU Corp., required KPMG to give the company a clean bill of financial health to close.
"Under these circumstances neither party owes a termination fee to the other," the buyers, who also include Madison Dearborn Partners LLC, Providence Equity Partners Inc. and Merrill Lynch & Co. said in today’s statement. BCE may disagree. The Montreal-based company may claim it is owed a C$1.2 billion breakup fee if the deal collapses, Mark Langton, a company spokesman, said yesterday before Ontario Teachers’ and its partners pulled out. BCE’s lawyers are preparing for all contingencies, he said. "I’d say the truck has gas in it, but hasn’t started up yet," Langton said. He declined to comment today on the buyers’ decision to terminate the deal.
Ontario Teachers’ and the buyout firms agreed 18 months ago to pay C$42.75 a share to take BCE private. The stock closed at C$23.02 yesterday in Toronto, 46 percent less than the offer price. BCE dropped 5 percent to C$21.85 in German trading today. The stock fell 34 percent on Nov. 26 on concern that KPMG was unlikely to bless the deal because of the C$34 billion of bonds and loans needed to finance the purchase. The company hired PricewaterhouseCoopers LLP to help persuade KPMG to change its opinion. "It turned out to be more a saga than a deal," said Paul Schaye, managing partner of New York-based Chestnut Hill Partners, which helps private-equity firms find companies to buy. Failure of the BCE purchase brings the value of canceled LBOs since credit markets began seizing up to almost $100 billion. Financing for transactions evaporated after record subprime-mortgage defaults triggered a flight from debt investments including leveraged loans used to fund buyouts.
Buyouts that have fallen through include J.C. Flowers & Co.’s agreement to buy SLM Corp., the student lender known as Sallie Mae; casino operator Penn National Gaming Inc.’s deal with Fortress Investment Group LLC; and KKR’s plan to acquire Harman International Industries Inc. The deal’s collapse may be a boon to Citigroup Inc. and other lenders, helping them avoid selling loans into a market where debt used to fund LBOs is trading below face value. Citigroup, Deutsche Bank AG, Toronto-Dominion Bank and Royal Bank of Scotland Group Plc agreed to provide about C$34 billion of financing for the transaction. Based on current prices for leveraged loans, the banks faced a potential loss of at least C$10 billion had they been forced to fund the takeover.
Teachers and the buyout firms agreed to buy BCE as the record LBO boom that spanned 2006 and the first part of 2007 was nearing its end. A year later, under pressure from the banks skittish about selling the debt they committed to fund, BCE and the buyers agreed to a reworked deal. The close of the transaction was pushed back until December, giving the banks more time to find investors to buy the debt. BCE also agreed not to pay a dividend, effectively cutting the price of the purchase by about C$900 million. BCE’s sales have stagnated for four straight quarters, contributing to falling profit. BCE, the parent of Bell Canada, is firing workers and selling property to compensate for declining landline customers, losing 72,000 in the last quarter. After announcing a record $1.4 trillion of leveraged buyouts in 2006 and 2007, private equity firms have struggled to finance acquisitions as banks refuse to arrange financing for takeovers. Announced private-equity deals this year have fallen more than 70 percent, according to data compiled by Bloomberg.
Wall Street banks, the main source of debt funding for private-equity deals, have pulled back on commitments as global losses by lenders reached almost $1 trillion since the credit crunch began last year. Financiers including Lehman Brothers Holdings Inc., Bear Stearns Cos. and Merrill Lynch & Co. were among the firms that went out of business or were swallowed up at discount prices, eliminating some funding sources. "BCE is the last gasp of an era," said Steven Kaplan, a professor at the University of Chicago Booth School of Business. "It was conceived at the height of the private equity wave, which has crashed." Other acquirers have used insolvency opinions to get out of deals. New York-based buyout firm Apollo Management LP’s Hexion Specialty Chemicals Inc. has traded lawsuits since June with Huntsman Corp., which it agreed to buy for $6.5 billion in 2007.
Ontario tells automakers to 'come clean'
Canada's three struggling automakers must come clean on plans to cut jobs if they hope to win taxpayer support for the $6 billion in aid they're seeking, Premier Dalton McGuinty says. General Motors, Ford and Chrysler submitted their restructuring plans to Queen's Park and Ottawa last Friday but have yet to publicly reveal what would happen to their Ontario factories.
McGuinty signalled his patience is wearing thin with the companies, which employ more than 30,000 workers. "We're on a two-way street here," the premier said yesterday. "Ontarians are people of goodwill and they do want to lend a hand ... but don't try to pull the wool over our eyes, be honest with us." American legislators battled yesterday over a proposed $14 billion (U.S.) emergency aid package that would increase pressure on Canada to respond in kind.
The House approved bailout legislation last night that forces U.S. automakers to restructure or fail. The 237-170 vote sends the measure to the Senate where a vote could come as early as today. But some Republicans have vowed to slow or even block the legislation. Ford and Chrysler did not respond to inquiries from the Star yesterday seeking comment on McGuinty's request, but GM pledged to release its 35-page plan by week's end after meetings with government officials, said vice-president David Paterson.
Overall, GM is seeking $800 million by year's end and $1.6 billion later, Ford wants a "standby" line of credit worth $2 billion and Chrysler $1.6 billion. GM, which is Canada's largest automaker, has signalled it may need another $1 billion if the rapid vehicle sales decline continues. Federal Industry Minister Tony Clement said officials were going to the "data centres" of the Detroit 3 to go over their most confidential financial information as part of the decision-making process.
"I haven't seen anything on timelines," said a spokesperson for Clement. McGuinty's push for details followed days of criticism from opposition parties worried that an aid deal could be cut with taxpayers knowing nothing about the fate of thousands of auto jobs and how their money will be spent. "Everything is done in secret," said NDP Leader Howard Hampton. "This is the wrong way to do it."
Ontario's economic development minister said time is running short for the automakers to go public with details of their plans. "If the industry won't do it, the government will do it," Michael Bryant said yesterday, noting the automakers have been worried that any leaks could jeopardize U.S. aid. McGuinty noted the automakers have made public far less information about their plans in Canada compared with their U.S. parent companies, leaving lawmakers here in a difficult position in trying to sell an aid plan to taxpayers already feeling the pinch of the economic downturn themselves.
"I think Ontarians ... are entitled to know," McGuinty said. Chrysler has already warned its car assembly plant in Brampton and minivan plant in Windsor may not be able to survive without financial help soon. Meanwhile, a top U.S. auto watcher said yesterday Chrysler Canada's U.S. parent likely won't survive the current financial crisis.
"A controlled wind down of Chrysler is in everybody's interest," said Michael Robinet, an analyst for CSM Worldwide, adding a probable scenario would be the sale of some assets. McGuinty also reiterated the Canadian Auto Workers union must step up to help if the public is to be sold on aid. CAW president Ken Lewenza said this week the union doesn't need to cut benefits and pay because it's already agreed to wage freezes.
Canadian new home prices fall, first drop in 10 years
New home prices in Canada fell by 0.4 per cent in October from September, the first monthly drop in a decade, Statistics Canada said Thursday. This was steeper than the 0.1 per cent decline forecast by economists. Year-over-year, prices were up 1.5 per cent, the agency said. Economists had expected the prices to moderate – reflecting the end of a long, sustained boom – but predictions were for an annual increase of 1.9 per cent. On a monthly basis, contractors' prices fell by 1.7 per cent in Edmonton between September and October.
The monthly decline in Vancouver was 1.1 per cent and new home prices in Calgary slipped by 0.6 per cent month over month. In all regions, builders are contending with "weaker home-buyer interest and rising inventories," the Bank of Nova Scotia said in a research note. "Builders have to keep an eye on price competitiveness and housing arbitrage as the resale market experiences price declines," the Bank of Nova Scotia said.
Toronto-Dominion Bank economics strategist Millan Mulraine said the report "underscores the weakness in the Canadian housing market, including the new homes market." Mr. Mulraine said the "correction" is nowhere near the magnitude of the market slump in the United States, "but clearly we're out of the boom period" in Canada. "We expect prices to continue moderating …so for November and December, we'll expect both existing and new home prices to continue falling," Mr. Mulraine said in an interview. As inventory levels build, contractors appear to be "easing up on prices" to get the homes sold, he said.
The Bank of Nova Scotia suggested the labour and material costs are also down, taking some pressure off prices. Year-over-year, Edmonton new-home prices fell by 7.7 per cent between October, 2007 and October, 2008, the largest annual decrease since May, 1985, Statistics Canada reported. Calgary recorded a year-over-year decrease of 1.6 per cent. The largest year-over-year increases were in Regina, with average prices for new homes up 22.8 per cent, and in St. John's, where prices were up by 22.3 per cent.
NPR to Cut Work Force by 7%
National Public Radio said it would reduce its work force by 7% and cut expenses because of the uncertain economy and "sharp decline" in corporate underwriting. In March, it will cancel "Day to Day" and "News and Notes," currently broadcast nationwide on member stations. The Washington, D.C.-based broadcaster said its projected deficit for its fiscal year ending Sept. 30, 2009, is $23 million. As recently as July, it had projected a deficit of just $2 million. NPR said corporate sponsorships, the second-largest source of funding after fees paid by its 880 member stations, have declined. Last year, grants, contributions and sponsorships totaled $58.6 million. "Day to Day" launched in 2003 as part of an effort to expand NPR's footprint on the West Coast. The push included the opening of a facility known as NPR West in Culver City, Calif.
NPR Senior Vice President for News, Ellen Weiss, came to Culver City to lay off staff members Wednesday. News & Notes, a show aimed at African-Americans, launched in 2005. The cutbacks come just a few years after McDonald's heiress Joan Kroc left NPR almost $230 million, most of which went to the organization's endowment. NPR's endowment has suffered amid the turmoil in financial markets. Last year, NPR's investments included $193 million in equities and $106.2 million in fixed income. This year, those same investments totalled $117.4 million in equities and $89.9 million in fixed income, based on unaudited reports. NPR, whose staff currently totals 889, hasn't laid off a large number of workers in more than a decade. Until recently, NPR frequently touted the fact it was hiring and adding bureaus as other news organizations cut back. About 26.4 million people listen to NPR programming each week.
Squeezed Restaurants Shed Jobs
Restaurant jobs, a reliable fallback for many unemployed and immigrant U.S. workers, are shrinking almost as fast as tips left on tables. The restaurant industry, one of the largest U.S. employers, is experiencing its longest period of job losses on record. Data released Friday by the Bureau of Labor Statistics show that food-service and drinking establishments shed jobs for five consecutive months through November. That's the biggest stretch since 1990, when the government began tracking such numbers. Major chains like Starbucks Corp. and Brinker International Inc., parent of Chili's, are shutting many locations as customers cut back on everything from lattes to Saturday night dinners out.
Weak consumer spending and high ingredient prices have pushed many independent restaurants out of business. "It is and will continue to be harder to find employment opportunities within the restaurant industry," says Hudson Riehle, top researcher for the National Restaurant Association, the industry's main trade group. The result is that even experienced servers say they can't get work, and restaurants are turning away an unprecedented number of applicants. Waiters and waitresses who do have jobs say they're taking home less money in tips, because patrons are economizing by ordering less food and leaving a lower-percentage gratuity on their checks.
Adding to the pressure is the fact that the minimum wage for servers who earn tips in 20 states has been stagnant at $2.13 an hour going as far back as 1991; the minimum wage paid to servers tops $8 an hour in some other states. Some restaurant chains, including Darden Restaurants Inc.'s LongHorn Steakhouse, are requiring servers in some states to share their tips with bartenders and with assistants who seat patrons and bus tables to minimize labor costs. The latest data showed that restaurants shed even more jobs this fall than preliminary figures had suggested. Since their employment peak in June, food-service and drinking establishments have lost 66,500 jobs, leaving the group with 9.76 million jobs, according to the Bureau of Labor Statistics. After years of growth interrupted by only short downturns, the extended decline is "definitely something different than what the food-service industry's used to," said George Prassas, a leisure and hospitality economist with the Labor Department.
Among the groups hurt by the weakening restaurant job market are Hispanic immigrants, who rely heavily on the industry for entry-level work. According to a survey by the Pew Hispanic Center earlier this year, eating, drinking and lodging establishments rated No. 2 for job losses among foreign-born Hispanics, behind the construction industry. These job losses can affect immigration patterns, said Rakesh Kochhar, associate director for research at the center. Restaurants ranging from high-end to casual eateries say they've cut staffing to save money. At the midprice Pedotti's Italian Restaurant in Sutherlin, Ore., co-owner Dave Pedotti laid off a dishwasher in October and is doing the dishes himself three nights a week. Lettuce Entertain You, a Chicago company with 75 dining establishments that range from quick-service to fancy restaurants, has eliminated some positions and is holding off on hiring managers in some locations, moving workers around to cover the openings. Job seekers who are accustomed to landing work quickly in the restaurant industry are finding a much tighter market.
Dawnmarie Capuano, with 14 years of experience as a waitress, hostess and restaurant manager, was earning as much as $200 a night in tips between two jobs at an Italian restaurant and a pub in Long Island, N.Y. In June, she noticed that fewer customers were coming in, and that parents were pushing children to order pizza instead of more expensive dishes like chicken parmesan. "Our regulars, who were leaving well over 20% [tips], they started going down to 15%," says the 41-year-old. With her tips dwindling, she quit those two jobs in August and took a temporary office job that finished about a month ago. Since then, she has given her résumé to more than 60 establishments and gone on 20 interviews. The handful of job offers she has received didn't pay enough to cover the bills for the single mother of two. "I'm starting to get a little nervous," says Ms. Capuano.
Restaurant trade groups and consultants say there is no current data available to measure whether customers are leaving smaller tips, but they have heard many anecdotal reports. The flip side of the tight labor market is that restaurants, which have long considered finding and retaining workers a top problem, are now being flooded with applicants. SnagAJob.com, a job-posting Web site geared toward hourly workers, says that as of last month, there were 36 applicants for every restaurant job posting. That's up from 22 applicants a posting in January. Art's Delicatessen & Restaurant in Studio City, Calif., got 70 applications in about a day when it posted an ad looking for help, and applicants included people who have worked as real-estate agents and mechanics. Typically, they get about 10 applicants during that time, said Harold Ginsburg, a co-owner.
"You're really getting some good choices now," said Rich Melman, founder of Lettuce Entertain You. Marcia Gornet, 50, an administrative worker at a Cheesecake Factory restaurant in suburban St. Louis, started looking for a new job in October after her employer consolidated positions and left her with more work than she could handle. After seven interviews, she settled last week for a lead cashier job that pays $12.50 an hour, $1 an hour less than her previous job.
The Mattress Stuffers
As the financial crisis swept across the nation these past few months, one of the first microtrend groups to emerge is the New Mattress Stuffers -- people who have lost their trust in the financial world, and are preparing for the next meltdown. Just as 9/11 created a vast industry in building security, so the recession could create a big industry in personal financial security -- a new kind of survival kit. New Mattress Stuffers don't care about the 10% interest rate on GE preferred stock that Warren Buffett snapped up; they care about making it through if hard times get even worse. As a result, firms which can offer ironclad guarantees of safety will appeal to this new group. These are people who have lost their faith in the housing market, the stock market, their bank, their big corporate employer, their auto company, and their last president. What is left but themselves?
In the old days, Mattress Stuffers literally hid all their assets in their homes -- construction crews today are still discovering tin cans of cash in walls hidden 75 years ago by people who died without having told anyone about their nest eggs. The New Mattress Stuffers aren't crotchety misers, though -- they're active Baby Boomers who, until just a few months ago, were heading happily into their 60s with inflated assets, unlimited second-job opportunities, and IRAs crammed full of stocks. Now, the shocks they are feeling are taking them into strange and uncharted territory. Most Americans are so far removed from holding physical assets that their first reaction is to stuff their money into Treasury Bills instead of into a tin can. But there are other ways they can calm themselves. The price of gold is down as hedge funds unwind their positions, but the sale of gold coins is up -- because New Mattress Stuffers are stockpiling them for themselves and their children. And this was happening even before the crisis hit in full force. Between May and September of this year alone, sales of U.S. Mint gold coins grew by more than 600 percent. Over one million coins have been sold so far this year.
While almost every company in America is seeing a downturn, sales of home safes and vaults are surging. Sales of guns this year are up 8 to 10 percent. And cash is the new plastic. Our own just-completed Holiday Spending Survey shows that most Americans are going to use more cash and charge less on their credit cards than in the past. Although most of us have lived in a plastic world so long we can barely remember people like my dad who carried around wads of bills, Americans are now seeing the first real dip in credit card sales in decades. Fear of credit and credit cards is a renewed emotion. To take advantage of these trends, some of the dying post offices might want to open spots for safe deposit boxes instead of P.O. boxes. Investment advisers may start talking about return of your money instead of return on your money. And jewelers may start to tell you to "don't forget to stash away a diamond or two."
If the post-war economic expansion brought us the baby boom, this crisis may bring us a baby squeeze -- a sharp reduction in births nine months from now, as refraining from having kids is the ultimate consumer pull-back. And instead of staying home, the evidence shows that more couples are going to the movies, with attendance up for this relatively low-cost evening. People don't talk much about their mattress-stuffing behavior. It kind of defeats the purpose if you tell people where your stash is. But there's a hunger out there for security hedges -- a gun, some cash, a little gold, a small safe in the bedroom -- in case all the ATMs suddenly shut down. The TV shopping channels could be hawking that "Safe Haven" combination right now, a complete home solution.
Ilargi: In depth Bloomberg on the World Bank. Look, whatever they say, The World Bank, like the IMF, is an institution whose sole purpose is, and always has been, to consolidate and increase the global power of the American empire. The appointments of über-neo-cons Paul Wolfowitz and Bob Zoellick as directors should be enough to understand that. The blood of millions of people is on the hands of this satanic institute. It needs to be closed. Immediately.
World Bank's 'Wrong Advice' Left Silos Empty in Poor Countries
Inside and out, the rusted towers of El Salvador’s biggest grain silo show how the World Bank helped push developing countries into the global food crisis. Inside, the silo, which once held thousands of tons of beans and cereals, is now empty. It was abandoned in 1991, after the bank told Salvadoran leaders to privatize grain storage, import staples such as corn and rice, and export crops including cocoa, coffee and palm oil. Outside, where Rosa Maria Chavez’s food stand is propped against a tower wall, price increases for basic grains this year whittled business down to 16 customers a day from 80. "It’s a monument to the mess we are in now," says Chavez, 63.
About 40 million people joined the ranks of the undernourished this year, bringing the estimate of the world’s hungry to 963 million of its 6.8 billion people, the Rome-based United Nations Food and Agriculture Organization said yesterday. The growth didn’t come just from natural causes. A manmade recipe for famine included corrupt governments and companies that profited on misery. Another ingredient: The World Bank’s free- market policies, which over almost three decades brought poor nations like El Salvador into global grain markets, where prices surged. "The World Bank made one basic blunder, which is to think that markets would solve problems of such severe circumstances," said Jeffrey Sachs, director of the Earth Institute at Columbia University and a special adviser to UN Secretary-General Ban Ki- moon. "But history has shown you need to help people to get above the survival threshold before the markets can start functioning."
Created in 1944, the Washington-based World Bank Group spent much of its first 35 years dispensing low-interest loans, grants and development advice to poor countries with an eye toward promoting self-reliance. In 1980, the bank’s executives began attaching conditions to loans that required "structural adjustments" in the recipients’ national economies. The mandates were designed to have poor countries cut import tariffs, reduce government’s role in enterprises such as agriculture and promote cultivation of export crops to attract foreign currency. The philosophy, which came to be known as "The Washington Consensus," was based in part on assumptions that importing basic grains would be inexpensive and that farmers in developing nations could earn more producing exports. Food prices had fallen for years and few economists thought that would change, said Mark Cackler, manager of the bank’s Agriculture and Rural Development Department in Washington.
In 2007 and the first half of 2008, an index of more than 60 food commodity prices compiled by the FAO rose 82 percent. While costs have since eased, they were 20 percent higher on Nov. 1 than at the end of 2006. The increases hit hard in countries such as El Salvador, which had adopted the principles of the Washington Consensus in return for loans. El Salvador’s Central Reserve Bank said the total amount of the lending was "not available." The Agriculture Ministry did provide this measure of their effects: The country was a net exporter of rice 20 years ago; now it imports 75 to 80 percent of what it consumes. The World Bank has "given consistently wrong advice," said Jose Ramos-Horta, the president of East Timor in Asia and the 1996 Nobel Peace Prize winner. "It is their advice -- that buying externally is cheaper than producing -- that has resulted in this," he said.
Current and former World Bank officials say small countries hurt their own agriculture industries by suppressing prices, taxing farms, inflating exchange rates and favoring urban development. They reject the assertion that structural adjustment loans hurt developing nations’ self-sufficiency. "The premise that this crisis was caused by these policies is something that we don’t agree with," said World Bank spokeswoman Geetanjali Chopra. "This crisis was caused by much more than underinvestment in agriculture." Still, in nations such as Honduras and Ghana, imports of basic grains climbed after governments eliminated agricultural subsidies, sold off grain stores or decreased tariffs to get World Bank loans in the 1990s, according to data from the UN’s FAO. In Honduras, 23,000 rice farmers went out of business, and employment from rice fell to 11,200 people from 150,000 after the government trimmed import duties, according to the human rights group Oxfam International. Honduran farms now supply 17 percent of the domestic demand for rice, down from 90 percent before the tariffs changed.
In Ghana, the World Bank required a tariff reduction on rice to 20 percent from 100 percent. Imports tripled, said Raj Patel, a scholar at the Center for African Studies at the University of California at Berkeley. The free-market policies were a sharp turn from the bank’s earlier efforts -- led by former bank President Robert McNamara - - to develop poor countries’ domestic agriculture and self- reliance, said Uma Lele, a World Bank economist from 1971 to 1991 and 1995 to 2005. McNamara, who oversaw the escalation of the U.S. war in Vietnam as defense secretary under presidents John F. Kennedy and Lyndon Johnson before joining the bank in 1968, shifted his views. He introduced the structural adjustment concept in 1979, in a speech in Manila urging rich nations to open their markets to imports from poor countries. "Developing countries will need to carry out structural adjustments favoring their export sector," he said in the speech. McNamara, 92, declined to comment for this story.
World Bank officials were frustrated that their investment in agriculture through the 1970s wasn’t paying off, especially in Africa, said Pierre Landell-Mills, a bank economist at the time. "There were state marketing organizations that were a complete nightmare of mismanagement and corruption," said Landell-Mills, 69, now a principal at the Policy Practice, a public policy consulting group in Brighton, England, in a June interview. "There were unsustainable subsidies." The "preferred solution," he said, was to dismantle the marketing boards, shrink governments and remove barriers to entrepreneurship. McNamara in 1980 approved the first three structural adjustment loans. By 1985, they made up more than 25 percent of the World Bank’s total lending, according to Kyle Peters, its country services director. Free-market principles were on the rise in the U.S. and the U.K., the bank’s major funders. Margaret Thatcher had become British prime minister in 1979 with promises of privatizing state-owned enterprises. Ronald Reagan was elected U.S. president in 1980, pledging to cut taxes and government programs.
Reagan appointed Alden "Tom" Clausen, a former chief executive officer of Bank America Corp., to succeed McNamara in 1981. The new bank president was convinced "that you could fight poverty better and more efficiently and more quickly if you get the policies of a country right," Clausen said in an interview. "I loved structural adjustment loans, and I made a lot of them," he said. As the bank’s philosophy evolved, so did its staff. Clausen hired Anne Krueger, an economist known for her advocacy of "getting prices right" by removing government controls, as vice president for economics and research in 1982. She "reshuffled the central economics staff," wrote Devesh Kapur, in the bank’s official history, "The World Bank: Its First Half Century." "Of course the direction of research had changed," Krueger, 74, said in an interview on Aug. 25. She acknowledged that some economists left because they didn’t agree with the bank’s focus. "Research moved away from big planning models with unreasonable incentives and swung toward things that were much more conducive to agriculture."
Krueger led a five-volume study that concluded developing countries were hurting their own agriculture with tax and exchange rate policies. She said the bank’s free-trade principles boosted output and growth. "These were largely dysfunctional systems," she said. "It made sense to reduce tariffs so that countries could produce the goods that they were most efficient at." After leaving the bank in 1986, Krueger became first deputy managing director of the International Monetary Fund, which makes loans to help countries correct balance of payment problems and promotes economic policies. As structural adjustment loans grew, the portion of the World Bank’s lending devoted to agriculture fell, to about 8 percent in 2000 from 30 percent in 1980. Last year, farm-related loans made up 12 percent of the bank’s $24.7 billion portfolio. "One of the reasons we have problems today is because of the cuts in agriculture," said Montague Yudelman, 86, who was director of the World Bank’s agriculture department under McNamara. "If they’d made a continuously high level of investment, we’d have been in much better shape."
By the late 1980s critics began saying the bank, along with the IMF, was fostering poverty and dependence. UNICEF, the United Nations Children’s Fund, in 1987 published a two-volume study titled, "Adjustment With a Human Face." It concluded that some of the bank’s programs led to increases in malnutrition and disease in poor nations and urged new strategies to protect the most vulnerable people. In 1995, just 30 days into his tenure as bank president, James Wolfensohn promised changes. During a meeting with representatives of 12 non-profit organizations, Wolfensohn heard their argument that 15 years of adjustment lending had wiped out small farmers in countries from Africa, Latin America and Asia, damaging their ability to feed people. Some called for the bank to be disbanded. "What I’m looking for is a different way of doing business in the future," Wolfensohn, a former Australian Olympic fencer and New York banker, told them. Wolfensohn, 75, who left the World Bank in 2005, declined to be interviewed for this story.
The bank’s commitment to free-market principles didn’t waver. In 2000, as a condition for a $6.8 million agriculture loan in East Timor, the bank demanded that publicly funded agricultural service centers be privatized and rejected money for a public grain silo and slaughterhouse, according to Tim Anderson, a political economy lecturer at the University of Sydney. He has written several papers on East Timor’s development. It also turned down proposals for the government to provide research and advice to farmers and to supply seeds and fertilizer because, "such public sector involvement has not proved successful elsewhere," according to a World Bank mission report that year. At the time, there was already evidence that private entrepreneurs weren’t serving so-called smallholders, who the bank says make up 60 percent of the world’s 2.5 billion farm households.
A 1998 study by Michael L. Morris, then a senior economist and project coordinator with the International Maize and Wheat Improvement Center in El Batan, Mexico, found that private seed companies in Africa focused on supplying large commercial operations and "often ignored small-scale, subsistence-oriented farmers located in remote areas." Morris, 53, is now the World Bank’s lead agriculture economist for the Africa region. In its 2008 World Development Report, the bank acknowledged that limiting governments’ participation in agriculture had hurt small farmers -- citing Morris’s 10-year-old study as part of the evidence. "The expectation was that removing the state would free the market for private actors to take over these functions -- reducing their costs, improving their quality, and eliminating their regressive bias. Too often, that didn’t happen," the bank said in the report. In 2000, Wolfensohn defended the bank to critics. During a meeting at Prague Castle that year, he told an invited crowd of 300 activists, bankers and government officials: "You should not regard us as a black and evil force. Maybe we’ve gotten things wrong. I’m sure we have in many cases."
The next year, several non-profit groups that had worked with the bank to study its loan conditions released a report saying that the policies "have undermined the viability of small farms, weakened food security and damaged the natural environment." In response to the criticism from the Structural Adjustment Participatory Review International Network, the bank issued its own analysis that listed successes as well as missteps. It concluded that the required changes in agriculture were too much, too soon. "The lessons for future policies are that agricultural adjustments are complex and require a sequence of modest steps," the bank said in the report. In August 2004, James Adams, the World Bank’s head of operations policy, declared the end of structural adjustments. "We have abandoned the prescriptive character of the old policy," Adams said in a statement. At the same time, he said, the underpinnings of the Washington Consensus "remain important themes of economic policy."
The next year, the bank demanded that Niger privatize its irrigation systems, according to a 2007 report by Eurodad, a Brussels-based coalition of 56 non-profit groups. The requirement "has seriously damaging effects on poor farmers’ access to a precious and scarce resource," said the report, based on an analysis of the bank’s databases. In all, the group found economic policy conditions were attached to 71 percent of loans and grants. The World Bank in May pledged $1.2 billion for a Global Food Response Program that’s designed to speed money to the neediest countries without the usual red tape. As of last month the Bank approved $364 million for 25 countries and $541 million more is designated for 10 others.
Current Bank President Robert Zoellick, a former U.S. trade representative, has promised to double agriculture spending while touting free trade as a solution to rising food prices. Zoellick, 55, declined to be interviewed. Poor countries remained skeptical of open markets during the latest round of World Trade talks in Geneva, in July. They insisted that they be allowed to raise tariffs to protect domestic agriculture, stalling the negotiations. El Salvador, meanwhile, has invested about $240 million in agriculture since 2004. It now gives farmers a $30 bag of the seed of their choice and a $30 sack of fertilizer. "The World Bank had a very short-term vision; it couldn’t have been more wrong," said Mario Salaverria, El Salvador’s agriculture minister, as he inspected corn in Sonsonate province, about 50 kilometers (31 miles) west of San Salvador. His country must regain self-sufficiency, he said. "We can stop using our cars because of price increases, but we can’t stop eating."