Negro life in Washington DC
Ilargi: Sometimes I see terms, like today's title, that look great outside of their context, in this case the economy. When I think of Contractionary Funk, I hear a low-down mean kicking in the gut snaredrum, cymbals so subdued they give off chills, horns cut off before they reach a -any- frequency, a bass that makes my intestines churn, a guitar or two that are very busy and hardly audible at the same time, and a producer who's taken his cues equally from Stockhausen and Allen Toussaint.
And then I'll wonder how to dance to Contractionary Funk, what that would look like. Pretty primal, I'd venture, slam dirt sex and sweat, clothes all torn, reflecting the spirits of the times, today and into ‘09, the way Dvorak and Mondriaan first provided the images of rising urban American society roughly a century ago.
A Russian professor forecasts the end of the US in its present shape by 2010. Interesting to read, but I would bet that there are many forces inside the country who have long prepared to prevent that end from materializing. And that's why I don’t see it happening. I do see a lot of mayhem and trouble up ahead, though. You can't run a country that has lost so much of its wealth, be it real or imaginary, on the same footing and according to the same ideas and legal principles as before all those riches vanished. It'll be either dissolve or clamp down. I’ll put my money, for now, on the latter, and a hard one at that.
In that vein: last week, Jim Kunstler ran an article named Legitimacy Dwindles. That is a subject I've often written about, the legal consequences for the position and stability of any government that cannot control its economy to the satisfaction of its citizens. I know Jim is a big fan and avid reader of The Automatic Earth, and I'm glad he picked up on that theme. I have for a long time felt quite lonely when writing about it.
Today, Jim follows up with the excellent Forecast For 2009. I don't agree with all he says, I think for instance his hyperinflation prediction for 2009 is too early -possibly by much-, but it is still an excellent read, since he is a great writer, and because he argues his points very well. Getting back to the legitimacy theme Jim and I now share, that will ring true and loud throughout the world, it's certainly not just a US issue. But it'll be one of the main points of the next year. Governments will be overthrown, likely in more places than even I would suspect. If you can't keep your voters and customers satisfied, you got to move on.
The world is still replete with voices, many of whom stand to gain from their words being taken for truth, who claim that somewhere in 2009, things will turn around, that a or even the bottom has been reached in one field or another. "Home prices here or there may fall another 10-15%", that sort of magical thinking. Well, home prices here and there will fall another 40-70%, before they reach a bottom. The difference is due to that fact that people can't seem to understand in which economy they should look for a bottom.
If everybody is so much poorer, if a million people every month in the US are poised to lose their jobs, and many their homes, you have to re-adjust your image of that bottom, or you'll completely miss the target. Three times income as a maximum mortgage amount sounds nice and all, and for all I know and care we'll just stick to that, but incomes, on average and median, will fall off a canyon. Everyone of those million per month jobs lost will drag it down further. And with them, so do your home prices. And then you still have to add the downward trend set by bad sentiment.
Which gets me back to today's theme music. Even poorer people are way more likely to buy if the economy goes up than when it does a Contractionary Funk. Many people tell me that a significant part of what's happening in the markets is due to a self-induced low down among people, like all would be much less bad if only we would all stop taking about the bad stuff.
My view is 180 degrees different. I think the danger lies in our propensity for deceit, which has made us believe -note the faith-based part- that we are much richer than we are in reality. The difference between the two approaches lies in our ability, Wile E-esque, to pull on the breaks before the abyss looms. You're more likely to come to a timely full stop if you know the landscape is about to disappear.. We have talked ourselves up a quadrillion times more than we are talking ourselves down. It’s what we do best, that and beating each other’s brains in.
Wall Street faces record losses in last week of 2008
Investors are preparing to close out the last three trading days of 2008 with Wall Street's worst performance since Herbert Hoover was president. The ongoing recession and global economic shock pummeled stocks this year, with the Dow Jones industrial average slumping 36.2 percent. That's the biggest drop since 1931 when the Great Depression sent stocks reeling 40.6 percent. The Standard & Poor's 500 index is set to record the biggest drop since its creation in 1957. The index of America's biggest companies is down 40.9 percent for the year. With these statistics ready to play out this week, it is little wonder why investors are all too happy to close the books on 2008.
Analysts are already looking toward January as a crucial period for the market as it tries to recover some of the $7.3 trillion wiped from the Dow Jones Wilshire 5000 index, the broadest measure of U.S. stocks. "It is hard to gauge a recovery because there's so many things out there that are interactive with each other," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. "Nothing is in a vacuum. Anybody who is managing money has to be on the cautious side for at least the first six months of 2009." He said many analysts are jumping past this week and focusing on next month, especially with Barack Obama set to be sworn in as president on Jan. 20. There is hope that the new administration will deliver another stimulus package, which along with December's interest rate cuts, might help quell the financial crisis.
Trading is expected to remain volatile with many market participants on the sidelines during the holiday-shortened week, but that doesn't mean investors won't be kept busy. With no Santa Claus rally last week, economic data slated for the coming days could sway the market's mood going into 2009. Investors will be awaiting details about how retailers fared in the post-Christmas sales period, especially since consumer spending drives more than two-thirds of the U.S. economy. The main question is if bargain prices at the malls will be enough to rescue retailers from a bleak holiday shopping season. Meanwhile, another gauge of how Americans feel about spending money will be released on Tuesday.
The Conference Board will issue its December index of consumer confidence, which is expected to rise to a reading of 45.2 for this month, up slightly from 44.9 in November. The Labor Department will report on weekly jobless claims Wednesday, after a 26-year high of 586,000 initial filings in the week ended Dec. 20. But the most anticipated economic data will be delivered Friday when investors get a fresh reading on the manufacturing sector. The Institute for Supply Management releases its December survey of purchasing managers. The index is expected to show a reading of 35.5, down from November's 36.2, according to economists polled by Thomson Reuters. A reading above 50 points to expansion, while a reading below 50 shows a contraction. There is little in the way of corporate news slated.
Though, the final week of the year -- when volume is slow and many money managers are on vacation -- is often a time when companies slip through lower quarterly forecasts. Investors were still waiting word if GMAC Financial Services, the financing arm of General Motors Corp., will be eligible for a government bailout. GMAC received the Federal Reserve's approval to become a bank holding company last week, but that was contingent on putting into place a complicated debt-for-equity exchange by 11:59 p.m. EST Friday. That deadline passed with no word from the company. Analysts have speculated that if GMAC doesn't obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to parent GM's own chances for survival.
Both General Motors and Chrysler LLC on Monday will receive the first part of the $13.4 billion in emergency loans from the government. Each will receive about $4 billion, then receive the second payment of $5.4 billion on Jan. 16. GM gets a third installment of $4 billion on Feb. 17. Ford Motor Co. did not participate in the government rescue plan. IndyMac Bank, one of the most high-profile financial institutions to fail because of the financial crisis, might be close to getting a new owner. The buyers include private equity firms J.C. Flowers & Co. and Dune Capital Management, according to The New York Times, which cited unidentified people close to the matter. The proposed sale could be announced by Monday morning, the report said.
Meanwhile, Kuwait's government on Sunday scrapped a $17.4 billion joint venture with U.S. petrochemical giant Dow Chemical Co. after criticism from lawmakers that could have led to a political crisis in this small oil-rich state. The Cabinet, in a statement carried by the state-owned Kuwait News Agency, said the venture, was "very risky" in light of the global financial crisis and low oil prices. Dow Chemical said it was "extremely disappointed" with the Kuwaiti government's decision and was evaluating its options under the joint-venture agreement.
UK banks face $100 billion property bombshell
New research shows the commercial slump could trigger nationalisation for some lenders. Britain's banks face up to £70bn of losses on commercial property loans, enough to force some of them into a further round of taxpayer bail-outs. Investment bank Close Brothers forecasts massive writedowns in light of its forecast 50pc-60pc slump in commercial property values by the end of 2009 compared to the market’s 2007 peak. Most property experts believe such values have already dropped 30pc this year. Such writedowns could again imperil banks’ capital ratios, potentially forcing them once more to go cap in hand to the Government.
UK banks are particularly exposed, having fuelled the commercial property sector boom by lending as much as 95pc of a property’s value to private investors. Close Brothers refers to a study by De Montfort University, which found that the country’s leading banks have a total £250bn exposure to commercial property loans - twice the amount they had before entering the recession in the early 1990s. Some £83bn of the total was orginated at the peak of the market. Arguing that commerical property values could more than halve, Close Brothers said: “The fall is higher than most observers estimate. No available debt finance and a limited number of investors with equity capital for acquisitions means that anything sold will only realise distressed valuations.” The slump in valuations could force banks, such as Royal Bank of Scotland and HBOS which have lent billions of pounds to commercial property investors into a fresh round of capital raisings.
“Commercial property is a major issue facing the banks during the next couple of years. We believe the scale of the problem has not been built into the recapitalisation programme developed by the UK Government.” said Gareth Davies, a managing director in Close Brothers’ restructuring division. Last week debt rating agency Moody’s warned that it may downgrade the credit ratings of RBS – which is 56pc owned by the taxpayer – over concerns about its huge exposures to commercial property in the UK, Ireland and the US as well as the rapidly slowing UK economy. Moody’s said it was reviewing RBS’ “B Bank Financial Strength Rating” and also its Aa1 senior long-term debt. “The £20bn capital recently raised by the bank from the Government provides a significant buffer against additional writedowns and provisions, however, the ongoing earnings volatility and expected decline in asset quality indicate that the bank’s ratings are less consistent with other B BFSR rated financial institutions,” Moody’s said.
Problems surrounding banks’ exposure to commercial property comes as City analysts warn that RBS is set for a New Year profit warning. If RBS takes an extremely aggressive attitude to the valuation of the assets it bought from Dutch bank ABN Amro last year, the Edinburgh-based bank may record losses of up to £28bn with its full-year figures, warned UBS analysts. The potential losses at RBS emerged as it struggles to sell its insurance division, which includes the Direct Line and Churchill brands, for £7bn. An RBS spokesman played down weekend reports that the bank is set to abandon the sale after receiving low-ball offers from private equity firms CVC Capital and BC Partners. The spokesman said the bank was “continuing discussions with a number of parties”.
Oil and gold prices sharply higher on Gaza fighting
Israeli air strikes on Gaza triggered sharp rises in the price of oil and gold this morning. The sudden flare-up in violence raised fears over crude oil supplies and pushed up the price of oil by $2 to nearly $40 a barrel. New York light crude rose by more than 5% to $39.82 a barrel while in London, Brent crude hit $39.47. Israeli warplanes pounded Gaza for a third day today and the country's cabinet has approved the call-up of thousands of reservists, suggesting a major ground invasion is being considered.
"It's a terrible situation and it just seems to be again causing major concerns for all the markets," said Peter McGuire at Commodity Warrants Australia. "But where it's going, nobody knows. Who can speculate on war?" Gold prices climbed more than 2% to the highest level since early October as traders piled into the safe-haven investment. Gold hit $889.55 an ounce. It last traded above $900 at the beginning of October and reached a record high of $1,030.80 in March. On the currency markets, sterling fell to a fresh record low against the euro of 96.65p, hit by the worsening outlook for the British economy and expectations that UK interest rates, already below eurozone rates, will be lowered close to zero.
Steel output set for historic drop
The steel business faces a fall in production in 2009 of at least 10 per cent, analysts say. This would be the biggest year-on-year fall for more than 60 years. According to the gloomiest projections, it could be at least four years before output returns to the levels of 2007. This would make the period of the expected downturn only the fifth occasion in the past century, leaving aside times of world war, when a slump in the steel industry has lasted four years or longer. The sector has been among those worst hit by this year’s financial storms, with share prices in many steel groups having fallen by more than two-thirds since the middle of 2008. Hit by a sudden reduction in orders in September and October from businesses such as construction, cars and white goods, many producers including Lakshmi Mittal’s ArcelorMittal, Severstal of Russia and Corus, owned by India’s Tata Steel , have sharply cut production.
Few companies have indicated that they are likely to see steel consumption coming back quickly to anything like the levels of earlier in 2008. Carol Cowan, a US-based analyst at Moody’s credit rating agency, said: “The reduction in demand we’ve seen in steel goes beyond typical cyclical downturns given the level of distress in global financial markets and tight credit conditions.” Steel companies’ share prices have been hit accordingly. Severstal’s shares fell nearly 90 per cent between July 1 and December 22; ArcelorMittal’s dropped more than 70 per cent; and US Steel, the US’s biggest steel company has had a 79 per cent drop in its share price over the same period. According to World Steel Dynamics, a US steel consultancy, steel production could fall next year by 13.9 per cent compared with this year. Michael Shillaker, an analyst at Credit Suisse, is slightly less gloomy, forecasting a year-on-year fall in 2009 of 10 per cent, with a pick-up only around the middle of the year.
The biggest fall in demand over one year for the steel industry since the end of the second world war was the 8.7 per cent drop in 1982, towards the end of a downturn in global industry. That was the third consecutive year in which steel industry output fell. There have been only three other occasions since 1900 when output has declined for three years in a row. Other similarly bleak periods for the industry were 1930-32, 1944-46 and 1990-92. In 1945, the final year of the second world war, steel output fell 27.3 per cent – the second biggest year-on-year fall since the industry started collecting comprehensive data at the start of the 20th century. The biggest year-on-year fall since 1900 was in 1921 when steel production plummeted 38 per cent.
Russian Professor Predicts End of U.S. in 2010
For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media. In recent weeks, he's been interviewed as much as twice a day about his predictions. "It's a record," says Prof. Panarin. "But I think the attention is going to grow even stronger." Prof. Panarin, 50 years old, is not a fringe figure. A former KGB analyst, he is dean of the Russian Foreign Ministry's academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books, and appears in the media as an expert on U.S.-Russia relations.
But it's his bleak forecast for the U.S. that is music to the ears of the Kremlin, which in recent years has blamed Washington for everything from instability in the Middle East to the global financial crisis. Mr. Panarin's views also fit neatly with the Kremlin's narrative that Russia is returning to its rightful place on the world stage after the weakness of the 1990s, when many feared that the country would go economically and politically bankrupt and break into separate territories. A polite and cheerful man with a buzz cut, Mr. Panarin insists he does not dislike Americans. But he warns that the outlook for them is dire. "There's a 55-45% chance right now that disintegration will occur," he says. "One could rejoice in that process," he adds, poker-faced. "But if we're talking reasonably, it's not the best scenario -- for Russia." Though Russia would become more powerful on the global stage, he says, its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.
Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces -- with Alaska reverting to Russian control. In addition to increasing coverage in state media, which are tightly controlled by the Kremlin, Mr. Panarin's ideas are now being widely discussed among local experts. He presented his theory at a recent roundtable discussion at the Foreign Ministry. The country's top international relations school has hosted him as a keynote speaker. During an appearance on the state TV channel Rossiya, the station cut between his comments and TV footage of lines at soup kitchens and crowds of homeless people in the U.S. The professor has also been featured on the Kremlin's English-language propaganda channel, Russia Today.
Mr. Panarin's apocalyptic vision "reflects a very pronounced degree of anti-Americanism in Russia today," says Vladimir Pozner, a prominent TV journalist in Russia. "It's much stronger than it was in the Soviet Union." Mr. Pozner and other Russian commentators and experts on the U.S. dismiss Mr. Panarin's predictions. "Crazy ideas are not usually discussed by serious people," says Sergei Rogov, director of the government-run Institute for U.S. and Canadian Studies, who thinks Mr. Panarin's theories don't hold water. Mr. Panarin's résumé includes many years in the Soviet KGB, an experience shared by other top Russian officials. His office, in downtown Moscow, shows his national pride, with pennants on the wall bearing the emblem of the FSB, the KGB's successor agency. It is also full of statuettes of eagles; a double-headed eagle was the symbol of czarist Russia.
The professor says he began his career in the KGB in 1976. In post-Soviet Russia, he got a doctorate in political science, studied U.S. economics, and worked for FAPSI, then the Russian equivalent of the U.S. National Security Agency. He says he did strategy forecasts for then-President Boris Yeltsin, adding that the details are "classified." In September 1998, he attended a conference in Linz, Austria, devoted to information warfare, the use of data to get an edge over a rival. It was there, in front of 400 fellow delegates, that he first presented his theory about the collapse of the U.S. in 2010. "When I pushed the button on my computer and the map of the United States disintegrated, hundreds of people cried out in surprise," he remembers. He says most in the audience were skeptical. "They didn't believe me." At the end of the presentation, he says many delegates asked him to autograph copies of the map showing a dismembered U.S.
He based the forecast on classified data supplied to him by FAPSI analysts, he says. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S. When the going gets tough, he says, wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines, and foreign powers will move in. California will form the nucleus of what he calls "The Californian Republic," and will be part of China or under Chinese influence. Texas will be the heart of "The Texas Republic," a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an "Atlantic America" that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls "The Central North American Republic." Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.
"It would be reasonable for Russia to lay claim to Alaska; it was part of the Russian Empire for a long time." A framed satellite image of the Bering Strait that separates Alaska from Russia like a thread hangs from his office wall. "It's not there for no reason," he says with a sly grin. Interest in his forecast revived this fall when he published an article in Izvestia, one of Russia's biggest national dailies. In it, he reiterated his theory, called U.S. foreign debt "a pyramid scheme," and predicted China and Russia would usurp Washington's role as a global financial regulator. Americans hope President-elect Barack Obama "can work miracles," he wrote. "But when spring comes, it will be clear that there are no miracles."
The article prompted a question about the White House's reaction to Prof. Panarin's forecast at a December news conference. "I'll have to decline to comment," spokeswoman Dana Perino said amid much laughter. For Prof. Panarin, Ms. Perino's response was significant. "The way the answer was phrased was an indication that my views are being listened to very carefully," he says. The professor says he's convinced that people are taking his theory more seriously. People like him have forecast similar cataclysms before, he says, and been right. He cites French political scientist Emmanuel Todd. Mr. Todd is famous for having rightly forecast the demise of the Soviet Union -- 15 years beforehand. "When he forecast the collapse of the Soviet Union in 1976, people laughed at him," says Prof. Panarin.
World Economy in 2009: Three priorities for recovery
It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this. The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010.
What I can predict with near certainty is that policy will matter a great deal next year. We know that the current driving force behind this downturn is "deleveraging". Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete. We are still some way from that point.
For example, on my calculations it will take a total peak-to-trough decline in real US house prices of some 40-50 per cent to get back towards long-term price trends and for price-rent ratios to return to more sustainable levels. We are about half-way through this process. The good news is that most of the nominal adjustment will have taken place by the end of 2009 or early 2010. I am a lot less optimistic about the financial sector. While it is also reducing its leverage, it will not achieve a sustainable position quickly without a lot more government capital. But this would require deep restructuring and would take time. On the basis of this admittedly brief sketch, I arrive at three policy priorities for 2009.
The first is for central banks to avoid deflation. If ever there has been a need for a central bank to target price stability, it is now. I mean this in the European sense of the term, meaning a small but distinctly positive rate of inflation, say 2 or 3 per cent annually. I assume that central banks will succeed in this endeavour, given the full power of policies deployed. I worry, though, that the US will try to raise inflation afterwards, which would reduce the real level of US debt but create massive distortions in exchange rates and financial flows and produce another global financial and economic crisis.
The second priority is to shrink the financial sector. A disorderly collapse would be catastrophic, but it is neither desirable, nor possible, to maintain the financial sector at its current excessive size. Take the market for credit default swaps, an unregulated $50,000-$60,000bn casino that serves no economic purpose except to enrich its participants at massive risk to global financial stability. I would be in favour, as a matter of principle, of regulating any financial activity on the basis of its economic purpose. Since a CDS constitutes insurance from an economic point of view, we should treat it as such and subject it to insurance regulation (which would kill it of course).
In particular, we should try to avoid the temptation to regulate too much in detail. This is a game regulators will lose. The financial sector is good at deploying existing instruments, and creating new ones, to circumvent any inflexible rule set. We should instead focus on breaking up too-large-to-fail banks and reducing the size of the financial sector in relation to a country’s GDP. In particular, we should not try to guarantee the obligations of a banking sector several times the size of our economies.
Third, and perhaps most important, we need to co-ordinate the policy response at global level, since this is a global crisis with many global spillovers. What I would like to hear from US President-elect Barack Obama’s economic team is not a narrow-minded discussion about whether the stimulus will be $700bn or $850bn, or which programmes it will be spent on. What I want to know is how they intend to co-opt the Europeans and the Chinese into a joint strategy. What national governments should not do is blow even more money on infrastructure investments and on education. Whatever problem this is supposed to solve, it is a different problem from the one we need to solve right now. Nor do I see any real policy co-ordination, in which governments commit to policies they would otherwise not have considered. At present, in Europe at least, the co-ordination process works the other way round. Each government decides unilaterally what it wants to do. And then, at European Union level, they dress it up as policy co-ordination.
It is not difficult to construct a plausible scenario of an economic catastrophe. Pick some of the following and you could end up with a depression that beats every modern record: a rise in global protectionism; competitive currency devaluations; a sterling crisis; social unrest in China, leading to political instability; a well-timed terrorist attack; continued refusal by eurozone leaders to co-ordinate; a payment default by a large sovereign in the eurozone; an acute emerging market crisis; continued lack of synchronisation of monetary policies, or a collapse of the CDS market. Obviously, the insolvency of a large global bank or the annihilation of the hedge fund industry would not go unnoticed either.
Alternatively, we can try to keep the lid on the 2009 recession and lay the foundations for a sustainable but unspectacular recovery. This would be the best outcome. But for that we would have to recognise that the global economy is more than the sum of its parts. It implies that policymakers will have to smarten up, work together and start thinking outside the box. The trouble is this is not what they usually do.
Is Social Security a Ponzi Scheme?
In the aftermath of the Madoff implosion, quite a few people have pointed out the parallels between a Ponzi scheme and Social Security. Arnold Kling, whom I respect, has written:"I’ve been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)—in other words, a Ponzi scheme."Other people have gone farther. Paul Mulshine of the New Jersey Star Ledger wrote a column entitled “The Ponzi scheme that Baby Boomers are waiting to cash in on." And Jim Cramer has called Social Security the biggest Ponzi scheme in history. Superficially, these critics have a point, and there is a parallel between Social Security and a Ponzi scheme. But on a fundamental level, they are very wrong, and it’s worth explaining why. First, the parallel. Social Security taxes current workers to pay Social Security benefits for current retirees. In other words, the new entrants into the Social Security system, the young workers, pay off the previous entrants, the older workers. And despite the fact you have a Social Security “account", there is no necessary link between what you paid into the system in taxes, and what you receive.
That’s very similar to the structure of a Ponzi scheme, where new investors pay off the original investors. As long as enough new ‘victims’ are brought into the scheme, it keeps growing and growing. But when the new investors runs out, the Ponzi collapses. Analogously, the slowdown in population growth puts pressure on Social Security finances. But there is one enormous difference between Social Security and a Ponzi scheme: Technological change. Over the past century, new technologies have enabled the output of the country to grow much faster than its population. To be more precise, the U.S. population has more than tripled since the early 1900s, while the U.S. economic output has gone up by more than 20 times.
This long track record of technology-powered growth has enabled the enormous rise in living standards in the U.S. and other developed countries. In fact, this increase in productivity—output per worker—is the key fact which gives us our way of life today. Assuming that technological progress continues over the next 70 years, and output productivity growth continues over the next 70 years, the finances of Social Security are relatively easy to fix. A fairly minor cut in benefits, combined with a relatively small increase in taxes, will bring the system back into balance again. (the latest Social Security report projects a 75-year deficit of $4.3 trillion. That sounds like a lot of money, but over 75 years it’s roughly $60 billion a year…not chicken feed, but not overwhelming).
But here’s the rub. Ultimately our ability to make good on the “Ponzi-like" nature of Social Security depends on the continued march of technological progress—and in particular, innovation which boosts output and living standards. If we leave the younger generation a good legacy—a sound scientific and technological base, combined with an innovative and flexible economy and an educated workforce—then Social Security is not a Ponzi scheme. The economy grows, and there’s more than enough resources for everyone. But if instead we—the current generation—invest in homes, flat-screen televisions and SUVs, then we don’t leave the next generation with the technological “seed corn" they need. If the technological progress slows, then Social Security does turn out to be Ponzi-like—with unfortunate consequences for everyone.
Paulson's Progress With China Evaporates as Recession Reopens Trade Rifts
The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over. Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities. "The American economic slump is running into the Chinese economic slump," says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. "It's creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship."
Paulson, 62, who visited China 70 times during his career on Wall Street, made improving ties a priority when he arrived at the Treasury in 2006. He advocated diplomacy instead of confrontation, establishing a twice-yearly "strategic economic dialogue" with officials in Beijing, aimed at cooling tensions and deterring Congress from taking up trade sanctions. The approach produced some results, including a pledge to share data on food safety and agreement to allow foreign mutual funds to invest in China's stock market. The value of China's currency, the yuan, rose 21 percent versus the dollar from 2005 levels to redress what U.S. officials saw as an unfair price advantage for Chinese products. Paulson refrained from labeling China a currency manipulator and hailed an end to tax rebates on Chinese exports as a sign of improving trade relations. Congressional leaders, though dissatisfied with the pace of progress, shelved sanctions legislation.
Paulson "achieved some success, but it was much more difficult to get the Chinese to restructure their economy," says Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington. Now, Brilliant says, the economic crisis has prompted China to turn back to "export-oriented policies that could lead to an increase in the trade imbalance" and new tensions with the U.S. China's exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to Royal Bank of Scotland Plc. That has prompted China's leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan's steady rise against the dollar stalled in July, and the currency has barely budged since. It was trading at 6.8462 a dollar at 1:33 p.m. in Shanghai today, from 6.8414 on Dec. 26.
In the U.S., business and labor groups, along with lawmakers, are pushing the new Obama administration to take a harder line with China than President George W. Bush did. Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, plans legislation that would raise tariffs on dumped imports from China and other nations. And newly elected Democratic congressmen such as Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China. Lawyers representing companies such as Nucor Corp., the second-largest U.S. steelmaker, NewPage Corp., a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. During the presidential campaign, Obama promised groups including the National Council of Textile Organizations and the Alliance for American Manufacturing that he would take a tougher stance on China's currency policies.
Officials in Beijing will push back, says James McGregor, chairman of Beijing-based research firm JL McGregor & Co. and author of the book "One Billion Customers," about doing business in China. Chinese leaders "will do whatever they need to protect their interests and to say to the U.S., 'Do not mess with us on this one,'" he says. Paulson, before leaving for talks in Beijing this month, told business representatives his biggest concern was that China was changing course and reversing moves it had made during the past year to cut aid to exporters and stimulate domestic consumption. China's five-year plan through 2010 seeks to rebalance growth away from exports -- so far, without significant result. Household consumption slumped to slightly more than 35 percent of China's gross domestic product last year from 45 percent in 1993. By contrast, consumer spending represents more than two-thirds of the U.S. economy.
"What separates China from the rest of the world is its incredibly low level of consumption relative to GDP," says Brad Setser, a fellow at the Council on Foreign Relations in Washington. "What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40 percent of GDP." Policies in both countries are shaped by the need to cope with steep declines in employment. More than 10 million migrant workers lost their jobs in China during the first 11 months of this year, Caijing Magazine reported Dec. 17, citing a Labor Ministry official. The total will likely grow in 2009. The World Bank forecasts that global trade, which grew 6.2 percent in 2008, will shrink by 2.1 percent next year, the first such contraction since 1982. The collapse in overseas demand is exposing China's years of overinvestment in industries such as automobiles and telecommunications.
China's steel industry, the world's largest, is sitting on a stockpile of 63 million metric tons, equivalent to about 13 percent of annual production, and Baosteel Group General Manager He Wenbo said in November that his company was facing the "most difficult" period since it was founded 30 years ago. The government is considering measures including buying unsold inventory and raising export rebates to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong said Dec. 12. In the U.S., factory payrolls have shrunk by 4 million during the eight years of the Bush administration, and total job losses this year may top 2 million. "China-bashing will only intensify in a softer economic climate," says Stephen Roach, chairman of Morgan Stanley's Asia division in Hong Kong. "Bipartisan congressional support for anti-China trade legislation has been gathering in intensity."
Obama made specific pledges on the campaign trail to take a tougher approach to China than the Bush administration did. He has said the failure by Bush and Paulson to label China a currency manipulator was "unacceptable," and he endorsed legislation to let U.S. companies seek import duties to compensate for the advantage an undervalued currency gives their Chinese competitors. Obama also pledged to reverse course from Bush and consider petitions seeking higher tariffs on specific Chinese products. American businesses, labor unions and lawmakers are already gearing up to force Obama's hand. Steelmakers, paper producers and textile companies are preparing trade complaints that could lead to increased tariffs. Unions and lawmakers plan to push measures to force China to raise the value of its currency.
McGregor says Obama's China policy will require a balancing act "fundamentally different" from what his predecessors faced: Obama's Treasury will need to fund a budget deficit heading for $1 trillion this year and "you don't scream at your banker." China's holdings of U.S. Treasury securities, at $653 billion, are the world's largest. That means an increase in trade tension "is very easy for China to handle," says Guan Anping, a managing partner of Beijing-based law firm Anjin & Partners and a legal adviser to former Vice Premier Wu Yi until 1993. "China can react by reducing its purchases of U.S. government bonds." Even so, the Obama administration may not need much prodding to take a harder line on the currency issue, says William Reinsch, president of the National Foreign Trade Council and a former Clinton administration trade official. "There will be consequences," he says. "But they will do it anyway, if only to distinguish themselves from Bush."
Holiday Sales Slump to Force U.S. Store Closings, Bankruptcies
U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years. Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations. More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales.
The holiday results indicate possible consolidation and further bankruptcy filings, according to Gilbert Harrison, chief executive officer of retail advisory firm Financo Inc. "You’re going to see deals that you never thought you were going to see before because of the necessity of both parties," Harrison said in a Bloomberg Television interview Dec. 26. Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the International Council of Shopping Centers said last week, more than the previously projected 1 percent decline. That would be largest drop since at least 1969, when the New York-based trade group started tracking data. Many retailers will report December results on Jan. 8. Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.
Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP. As of Dec. 10, announced store closings based on the ICSC’s tracking survey reached 6,387. For the year, the number of locations shut down will likely hit about 6,600, a number only surpassed by the 2001 tally of 7,031, according to ICSC chief economist Michael Niemira. The rate of stores being shut may continue at about the 2008 pace in early 2009, with the half- year total around 3,000 to 3,400 closures, Niemira wrote yesterday in an e-mail.
The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009. "Retail overall is going to have a tough, tough time," said Patti Freeman Evans, an analyst at Jupiter Research in New York. "It’s going to be a slow road because there is not a quick fix to this situation." The Standard & Poor’s 500 Retailing Index has shed 34 percent this year, with only two of its 27 companies gaining. The index doesn’t include Wal-Mart Stores Inc., the world’s largest retailer, which fell 9 cents to $55.35 on Dec. 26 in New York Stock Exchange composite trading. Wal-Mart shares gained 16 percent this year before today. The retailer may continue to gain share in 2009, according to Laura Champine, an analyst with Cowen & Co. in New York.
Discounts of 70 percent off or more by Macy’s Inc., AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Consumers are trained for sales, according to Evans. "The situation is not going to right itself in January, it’s going to be a long while that discounting’s going to be around," said Evans. "Consumers are going to get used to it and it’s going to very difficult for retailers to move forward in a full-price mode." Retail bankruptcies may give the industry "a much better future," according to Burt Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York. "As a result of the bankruptcies, America, which had twice as much retail space as demand called for at the end of the ‘90s and added 50 percent more this year, will be back to what shoppers need,’’ Flickinger said in a Bloomberg Television interview Dec. 26.
US recession may end up Dubya-shaped
President Bush's unfortunate economic legacy may be the current downturn's eponymous shape. November US durable goods orders showed strength, November real personal spending was up and mortgage re-financings soared in the week to December 19. Huge monetary and fiscal stimuli may be slowing the US economic decline and could reverse it. Their costs will appear later, and may cause a second slide into a recession that ends up Dubya-shaped. Even without the government's direct injections, there is currently new money in the economy. The collapse of oil and commodity prices since the summer caused November's consumer price index to fall 1.2pc, so the modest 0.2pc decline in November personal incomes represented a 1pc increase in real terms, of which 0.6pc was spent. The other 0.4pc pushed the personal savings rate up to 2.8pc, well above the 3-year nadir below 1pc of 2005-07.
Meanwhile mortgage re-financings spiked 48pc last week, while mortgage rates reached an all-time low. Consumers can thus again retire credit card debt and improve their cash flow by refinancing higher-cost mortgages. Positive consumer cash flow and very low interest rates appear to be slowing economic decline. November durable goods orders, excluding transportation, posted a modest increase for the first month in four. Thus president-elect Barack Obama's further burst of stimulus spending may well produce recovery in the New Year, making the initial recessionary dip both shallower and shorter than it might have been. However, the costs of stimulus must be paid some time. Soaring budget deficits will cause higher borrowing costs, ending the refinancing boom and depressing the housing market again.
The savings rate must rise further, probably to its long-term average of 6-8pc. Commodity prices will stop declining and may rebound as emerging markets' demand growth continues. Monetary profligacy will cause resurgent inflation, further raising interest rates as the Fed is forced to assume an anti-inflationary stance. The enormous size of the stimulus is likely to produce a commensurate cost, large enough to push the US economy back into recession, forming a double-dip W-shaped trajectory. Whether or not stimulus makes the double-dip recession shallower, it will cause its overall duration to be far longer. That's a highly questionable trade-off.
Ilargi: Yves at Naked Capitalism has some questions about this article that make a lot of sense. $75 Billion Needlessly Lost in Hasty Lehman Bankruptcy Filing?. Whatever the case is, whether Chapter 11 would have been better or even possible in the first place, or whether it would have allowed for higher prices on assets (which I think is a pipe dream), Lehman is a total mess, that will apparently take many years to unwind. Funny to see the Fed got its $63 billion back already. Strange to see the Wall Street Journal calls it the government.
Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value
As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers. A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says.
It is too early to say how much Lehman creditors will recover in the bankruptcy process. Unsecured creditors have asserted in court filings that they are owed about $200 billion. The bond market is projecting a recovery of about $20 billion, or about 10 cents on the dollar, for these creditors. Lehman's large unsecured creditors include the federal government's pension-insurance arm, the Pension Benefit Guaranty Corp. The group also includes the Bank of New York, as trustee for the bondholders, and the German government's depositor-insurance arm. "While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued. It was an unconscionable waste of value," said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer.
Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined. Much of the destruction of value came from the bankruptcy filing of the parent guarantor, Lehman Holdings. The filing triggered a cascade of defaults at subsidiaries that held trading contracts. That created what is known as an "event of default" for Lehman's derivatives. This resulted in a termination of more than 80% of the transactions with counterparties -- typically major European and U.S. banks such as J.P. Morgan Chase & Co., said Mr. Marsal. In all, the bankruptcy canceled 900,000 separate derivatives contracts. The problem for creditors is that this also terminated contracts in which Lehman was owed money. Mr. Marsal said a few extra weeks would have allowed Lehman to transfer or unwind most of its 1.1 million derivatives trades, preserving more cash for creditors.
Overall, the losses from derivatives trades and related claims cost Lehman's unsecured creditors at least $50 billion, according to the analysis. The findings, yet to be made public, eventually will be presented to the U.S. Bankruptcy Court and to Lehman's creditors. "This filing, which was pretty much dictated to the board of directors at Lehman that weekend, occurred with no planning," said Mr. Marsal, whose New York firm was hired by Lehman's board around 10:30 p.m. Sept. 14. That was just hours before Lehman filed for the largest bankruptcy in U.S. history, after the U.S. government declined to offer its backing. That decision has been widely debated since mid-September, as it touched off a stock-market panic and credit crisis from which markets have yet to recover.
"Had fundamental rules of crisis management been followed, much of the value that was lost by the unsecured creditors would have been prevented. This loss in value was a big hit to the public holders and could have been mitigated," Mr. Marsal said. Mr. Marsal also criticized the way Lehman sold off assets. The unplanned bankruptcy pushed down prices for Lehman assets in an already depressed market. An example is Lehman's trading and investment-banking businesses, which before the filing made about $4 billion in annual profits and were sold for less than $500 million. Experts say such businesses -- once separated from Lehman's real-estate portfolio -- could have garnered a higher price in a more orderly wind-down. About 150 Alvarez & Marsal employees are on site at Lehman offices in New York, London and Hong Kong, combing through creditor claims and managing operations. They are piecing together what happened at the moment of Lehman's collapse.
An additional 300 Lehman employees are still working at the firm, helping in a wind-down process that could take as many as three years. Among those working with Mr. Marsal are Lehman Chairman and CEO Richard Fuld Jr., who will be leaving at the end of this year, and Dave Goldfarb, the former Lehman chief financial officer who is now chief strategy officer. Mr. Marsal will succeed Mr. Fuld as CEO. While bondholders will lose as much as 90% of their investment, one entity got all of its money back -- the Federal Reserve. At one time it was owed about $63 billion by Lehman, according to Mr. Marsal. But a postbankruptcy sale of some Lehman assets to Barclays PLC meant that all of the debt to the government was repaid.
Biggest Bond Investors Look for European Rally in 2009 as ECB Follows Fed
The world’s biggest bond investors are betting European Central Bank President Jean-Claude Trichet will be forced to follow Federal Reserve Chairman Ben S. Bernanke and step up the pace of interest-rate cuts. BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer "unprecedented value" because the ECB will accelerate rate cuts as the economic slump deepens. "It still makes sense to be long selective markets and Europe is one of those," said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. "The ECB is behind the curve."
While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt-based ECB lagged behind. The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 15 economists’ forecasts compiled by Bloomberg. Even though Trichet said in a Dec. 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed’s, according to Gregor Macintosh, a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets. "The European economy will underperform the U.S. next year," Macintosh said. "On a relative basis, European bonds look more attractive than the U.S. market."
German bunds returned 12.1 percent this year, including price gains and reinvested interest, the most since gaining 16 percent in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5 percent, while Spanish bonds added 8.8 percent. Only Treasuries returned more than bunds among the Group of Seven industrialized nations, handing investors 14.6 percent. A rally in Treasuries in the fourth quarter pushed 10-year U.S. debt yields to 89 basis points below bunds of similar maturity, the lowest since 1993. As recently as last month they yielded 22 basis points, or 0.22 percentage point, more than bunds. The spread was 81 basis points as of 11:38 a.m. today in Tokyo.
Investors piled into the relative safety of government debt this year as credit losses and writedowns at the world’s largest financial companies surpassed $1 trillion and Europe, the U.S. and Japan entered their first simultaneous recessions since World War II. The rally drove yields on German two-year notes down by more than 200 basis points to 1.79 percent, the steepest drop since falling 268 basis points in 1995. "A reversal of the bullish trend is unlikely to take hold before the third quarter of next year," said Laurent Fransolet, head of European fixed-income strategy at Barclays in London. Fransolet recommends bonds due in five and 10 years, which he says offer "unprecedented value."
Yields on German 10-year notes will fall to 2.85 percent by the end of the second quarter from 2.93 percent last week before rising to 3.20 percent at year-end 2009, according to Barclays. The London-based bank buys more debt at German government-bonds auctions than any of the other 28 primary dealers, according to the Bundesbank. While analysts expect yields on 10-year bunds to rise to 3.4 percent by the end of 2009, investors will likely break even for the year, according to the median of 10 forecasts compiled by Bloomberg. An investor buying $1 million of 10-year bunds would lose about $5,000 by the end of next year if the yield rose to the level forecast in the survey. That compares with the $78,000 a buyer of the same amount of 10-year Treasuries would lose should the yield increase to the 3.4 percent predicted in a separate Bloomberg poll of 54 strategists. Bonds may fall in 2009 as governments prepare to sell a record amount of debt to finance bank bailouts amid falling tax revenue, according to Zurich-based UBS AG, Switzerland’s biggest bank.
Germany will issue a record 323 billion euros ($456 billion) of debt next year, including 149 billion euros of bonds maturing in more than one year, according to the Federal Finance Agency. France plans to sell a record 145 billion euros of securities. "The sheer amount of issuance due from European governments is likely to overwhelm potential demand," UBS strategists Meyrick Chapman and Andrew Rowan wrote in a report to clients Dec. 18. Investors will see "the bulk of the returns" in the first half and "barely break even" in the second, the London-based analysts said. Two-year German note yields will rise to 2.05 percent by the end of next year, according to the median of 10 economists’ forecasts compiled by Bloomberg, from 1.79 percent Dec. 26. The global credit seizure prompted the world’s biggest central banks to cut rates and offer record amounts of cash to prevent financial institutions from collapse following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
"A quicker-than-expected return to risk appetite is a risk for bonds and could lead to a sell-off, even though the European economy isn’t likely to recover in the next half or one year from now," said Michiel de Bruin, who manages about $18 billion as head of European government bonds at F&C Asset Management’s Dutch unit in Amsterdam. Trichet may have no choice but to lower borrowing costs again, according to David Scammell, a money manager in London at Schroder, a unit of the U.K.’s largest publicly traded fund company. The economy of the 15 nations sharing the euro will shrink 0.9 percent in 2009 after expanding 1 percent this year, based on the median of 21 forecasts compiled by Bloomberg. The U.S. is likely to contract 1 percent, a separate poll shows. "Poor economic numbers will bring them to their knees," said Scammell, whose parent firm oversees $19 billion of assets.
"The ECB will have to cut interest rates more aggressively. We are bullish on European bonds, as next year is not going to be any better than this year in terms of the economy." Growing pessimism over the economy and expectations of rate reductions drove the yield on two-year bunds to 114 basis points below 10-year bunds, creating the widest spread since 2004. As the ECB brings rates closer to zero, the gap may narrow because investors will seek higher yields offered by longer- dated securities, Scammell said. "The curve will flatten because there’s nowhere for the short end to go anymore, and not because of expectations of an economic recovery," he said. "The U.S. led this cycle and it’s moving into a curve-flattening mode. Europe is likely to follow."
S&P/Case-Shiller index Likely to Show Further Fallout From Burst Bubble
A report on home prices out Tuesday is likely to give the incoming Obama administration ammunition to push for additional relief for the housing sector. The S&P/Case-Shiller index of home prices is expected to reflect the continuing toll exacted by the deflating housing bubble. Plunging home prices and foreclosures were followed by tight credit, soaring unemployment and tumbling exports in contributing to the year-old U.S. recession. Sinking home values are straining the balance sheets of banks that hold mortgages or mortgage-related assets. Credit markets and the overall economy are unlikely to recover fully until home prices hit bottom.
In the most recent report, for September, the Case-Shiller 20-city composite home-price index fell 17.4% from a year earlier and 1.8% from the previous month. The index, which measures prices of single-family homes in 20 metropolitan areas, is based on a three-month moving average. "We've had to repeatedly move our price forecast down and down," said Abiel Reinhart of J.P. Morgan Chase. "There's no sign yet of home prices leveling off or even the rate of decline decelerating." J.P. Morgan estimates that the October year-over-year drop will be 18.2% and the monthly decline from September will be 2.2%.
A report last week on home prices by the Federal Housing Finance Agency cut a gloomy swath for the Case-Shiller data. The FHFA said October home prices nationwide were down 7.5% from a year earlier and 1.1% from September. The Case-Shiller index includes homes financed by a broader range of mortgages than the FHFA measure, which is based only on homes financed through government-backed mortgage giants Fannie Mae and Freddie Mac. Though recent steps by the Federal Reserve -- such as expanding lending and lowering its interest-rate target to near zero -- have spurred refinancing, those steps alone can't solve the housing crisis or turn around the economy, said Brian Bethune, an economist at IHS Global Insight. "The economy is in this contractionary funk and it really is going to take a strong fiscal stimulus to snap it out of that."
Dismal Outlook for Mall Owners
If you thought shopping malls were a nightmare in the run-up to the holidays, just try owning one now that there is nothing left to do but take down the tinsel. As retailers count their takings, it is becoming clear that consumers took a holiday away from retail land. And broad trends, such as free-falling house prices and rising unemployment, point to a dismal 2009 for anyone in the business of flogging stuff on shelves. The same goes for the companies that rent them floor space. Real-estate investment trusts operating U.S. malls are especially exposed. Tighter credit has turned the screws on a sector with almost $23 billion of debt maturing over the next two years, according to real-estate consultancy Green Street Advisors, and an aggregate market value of just $17 billion. No wonder that, on average, mall REIT stocks look set to close 2008 down almost 60%.
Yet, as so often with equities that have taken a drubbing, some have enjoyed spectacular bounces recently. Glimcher Realty Trust units have jumped by 250% since its November low, when it dipped below $1 a share. CBL & Associates' stock is up 150% since Dec. 1. There are three reasons this looks premature. First is the National Association of Realtors' gloomy outlook. It expects the vacancy rate for the retail property sector to hit 12.7% by the third quarter of 2009, up from 9.8% a year earlier. Average rents, having dropped 2% in 2008, are expected to fall 7.3% next year. No sign of a second-half bounce-back there. If the NAR's prognosis sets the weak overall tone, the retail sector itself could provide next year's nasty surprises. Some retailers, such as Circuit City Stores, have sought protection from creditors already. Credit markets are indicating severe distress at several others.
Green Street identifies three suffering firms -- Sears Holdings, Bon-Ton Stores and Dillard's -- that are also important "anchor" retailers for many malls. Bon-Ton's 10 1/4% bonds maturing in 2014, for example, offer an eye-watering spread of more than 93 percentage points over Treasurys. Even if these retailers do make it through the slump, they might have to restructure, perhaps closing some stores on the way, in order to do so. Losing an anchor store is bad news for any mall, particularly lower-quality ones, where the closure can touch off a spiral of attracting fewer shoppers, leading to more closures. Green Street identifies Glimcher as having the highest exposure of the mall REITs to Bon-Ton, while it says CBL takes the top spot for both Dillard's and Sears. The final issue is that mall transactions have dried up, meaning more guesswork than usual going into calculating the REITs' net asset valuations. Apart from economic headwinds, investors with mall REITs in their portfolios run up against the basic problem of having to manage what they can't adequately measure.
Democrats May End Minimum Tax on Municipal Bonds to Spur Market
Congressional Democrats are seeking to expand funding for airport runways, housing projects and sewage-treatment plants though a new tax break for municipal bondholders. The proposal is designed to make so-called private-activity bonds more attractive by exempting the interest on them from the alternative minimum tax. Richard Neal, chairman of the House Ways and Means subcommittee that drafts tax measures, wants to include the plan in economic recovery legislation that President-elect Barack Obama has made a top priority. "I am hopeful that my bill, which will increase demand and lower costs for state and local governments, will be a central feature of our stimulus bill next month," said Neal, a Massachusetts Democrat.
Neal’s proposal would reverse 23 years of policy. It aims to increase demand for private-activity bonds by mutual funds and individual investors who often avoid them because of the higher taxes and complicated paperwork under the alternative minimum tax. Neal’s bill is one of at least three proposals favoring the municipal bond market gaining steam as Democrats seek ways to fulfill Obama’s promise to steer federal funding to infrastructure projects as part of a stimulus package worth as much as $850 billion over two years. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, earlier this month said he is drafting a measure worth at least $500 billion that, among other things, would allow governments to issue additional private-activity bonds, also known as AMT bonds because of their tax implications.
Lawmakers also are considering proposals to exempt from the AMT other types of bonds, such as those issued by non-profit hospitals and colleges, and to allow banks to deduct more costs from purchasing and carrying tax-exempt bonds than they currently may write off. "The idea is, how can we stimulate activity?" said Charles Samuels, a lawyer at Mintz Levin Cohn Ferris Glovsky & Popeo PC in Washington, who advises the National Association of Health and Educational Facilities Finance Authorities. He is lobbying to expand Neal’s proposal to also repeal the AMT on bonds issued by non-profit organizations. While many of the ideas have been around for years, he said, the mix of the economic distress and changing political leadership is giving them new life. "It’s taking an extreme situation to allow the political system to get unclogged," he said. Private-activity bonds are part of a subset of municipal bonds that are an exception to the securities’ general tax- exempt status due to the AMT.
AMT bonds made up 8.8 percent of the overall municipal bond market in 2007, with a sales volume of $38 billion, according to data compiled by Thomson Financial. The AMT was created in 1969 to prevent 155 wealthy Americans from avoiding any tax by claiming excessive deductions, credits, and exemptions. When deductions for items such as medical expenses and state and local taxes become too large relative to income, the AMT imposes a flat exemption. Amounts over the exemption are taxed at 26 percent or 28 percent, depending on income. The AMT now affects about 4 million households a year. It is scheduled to affect 30.3 million households in 2009 unless Congress renews a measure to index the levy for inflation. Taxpayers who may owe AMT must calculate their liabilities using both methods and pay the higher amount. Interest from most municipal bonds isn’t counted toward income under either method, with the exception of private-activity bonds and those issued by certain non-profit groups.
Investors who pay in the middle-income tax brackets of 25 percent might end up owing AMT if they have large amounts of interest from private-activity bonds; those who pay in the top tax bracket of 35 percent typically avoid AMT because they end up paying more under the regular system. Repealing the AMT on individuals who buy the bonds would reduce borrowing costs, said Greg Principato, president of the Airports Council International-North America. "Eliminating the AMT on airport bonds would provide significant savings, while also attracting more buyers" for the bonds, he said. The largest AMT bond issued in 2007 was a $600 million student loan issue by Educational Funding of the South. Three other issues, all for airports in Miami, San Jose, California, and Washington, D.C., were between $530 million and $551 million.
Housing was the leading purpose for AMT financing in 2007, as it has been since the inception of AMT bonds in 1986. Minimum tax housing bonds rose 4 percent in 2007 to a record $21.7 billion. This year’s credit crunch has made it more expensive for local authorities to borrow money for projects using AMT bonds. Eleven governmental organizations such as the National League of Cities and U.S. Conference of Mayors, said in a letter to Neal this month that the premium AMT bonds pay over regular municipal bonds, usually about 25 basis points, has grown to as much as 100 basis points. Yields in some cases are even higher than commercial bonds, an expense that has coincided with increased costs for completing infrastructure projects. The groups urged Neal to expand his legislation to also repeal the AMT for corporations that buy the bonds.
Canada’s Harper Foes Who Laud Obama Might Spark Clashes With Him Over Trade, Energy
Canada’s opposition leaders portray themselves as soul-mates of U.S. President-elect Barack Obama. Should they succeed in ousting Prime Minister Stephen Harper next month, Obama might soon have cause to disagree. Victory for an alliance of the Liberal Party and the New Democratic Party, bolstered by the Bloc Quebecois, may mean fewer troops in Afghanistan and less investment in the U.S. It could also complicate U.S. access to energy from Canada, its biggest source of supply. "Obama’s interests won’t be well-served by this Canadian menage a trois," says John Kirton, a political science professor at the University of Toronto. If the coalition succeeds in forcing out the Conservative Harper, 49, a "pillar of financial, economic and trade security" will become a less reliable ally, he says.
At stake is the future course of the world’s largest bilateral trade relationship. Canada and the U.S. exchanged goods worth C$1.67 billion ($1.37 billion) a day in 2008, about as much two-way trade as Canada does with Brazil in six months. Canada’s exports to the U.S. have more than tripled since 1989, the first year the two countries implemented an accord that became the North American Free Trade Agreement, or Nafta, when Mexico joined in 1994. Canada, the world’s eighth-biggest economy, is in a recession as businesses struggle to find credit, auto and lumber shipments to the U.S. slump and oil and other commodity prices fall. Gross domestic product will shrink by 0.4 percent next year, producing the country’s first budget deficit in more than a decade, Finance Minister Jim Flaherty said this month.
Harper’s failure to win a majority in Oct. 14 elections, resulting in his second successive minority government, created the opening for Canada’s first multi-party government since World War I. Harper’s Conservatives have 143 seats in the 308- seat parliament; the Liberals, NDP and Bloc Quebecois combined have 163. The prime minister says a government formed by the alliance would bring in "socialist economics" and be beholden to Quebec separatists. On Dec. 4, he exercised his power to suspend Parliament for seven weeks to stave off the opposition bid to oust him. That means the coalition’s first chance to unseat him will come after Jan. 27, when he presents a budget. Defeat on the budget vote would leave Governor General Michaelle Jean, Queen Elizabeth’s representative in Canada, with two options: Ask a coalition member, probably Liberal leader Michael Ignatieff, to try to form a government, or plunge the nation into its fourth election campaign in five years.
Ignatieff, a 61-year-old former Harvard University professor who succeeded Stephane Dion on Dec. 10, has vowed to lead a coalition government "if asked to" by Jean; Dion, by contrast, asked Jean in writing for the chance to form a government. Coalition members say they take inspiration from Obama’s successful U.S. election. During Canada’s autumn campaign, NDP Leader Jack Layton invoked Obama’s name so often that Dion dubbed him "Jack Obama." The Liberals’ Scott Brison, chief opposition spokesman for financial policies, told reporters last month that Obama, who doesn’t take office until Jan. 20, has more advanced plans for an economic recovery than does Harper, "who’s been prime minister for almost three years." But Christopher Sands, a fellow at the Hudson Institute in Washington, says that for all the invocation of Obama, the reality of a coalition government would mean trouble for the new U.S. president. "Expectations are very low with regards to Canada in the Obama camp," Sands says. "It gets worse if you replace a shaky minority government, but still one that performed well, with a coalition, because a coalition has a built-in fracture."
Nafta might provide an early flashpoint. During the U.S. campaign, Obama called for reworking the trade accord to protect U.S. jobs. Since the election, he has repositioned himself, making an economic recovery his top priority and signaling he may want to put off dealing with the trade pact, says Tom Velk, an economics professor at McGill University in Montreal. The trouble is, Obama’s campaign rhetoric galvanized parties in Canada who also might welcome a renegotiation for different reasons -- primarily to loosen preferential U.S. access to Canada’s energy supplies. "Obama would have trouble if Canada was governed by the triumvirate," Velk says. Brooke Anderson, a spokeswoman for the Obama transition, declined to comment. The Nafta issue was a key plank of the NDP’s campaign in the last election; Layton even traveled to Washington this year to drum up support for changes to the agreement.
The New Democrats are calling for an end to the U.S. preferences for Canadian oil. Under Nafta, Canada, which sits on the largest oil reserves outside Saudi Arabia, can’t restrict exports to the U.S. unless the same limits or terms apply to Canadian companies. Nafta "locks us into an engagement of our energy to meet American needs, essentially putting in the back seat our own national needs," Layton said in an interview in June. All three opposition parties seek higher taxes on oil companies, which might raise costs for U.S. customers. Kirton says a coalition government might also be more likely to keep Canada’s relatively healthy banks from investing in the U.S. And the fact that a new government would depend for its survival on the Bloc Quebecois -- which has pledged to back the coalition on key votes but favors French-speaking Quebec’s secession from Canada -- might further rattle investors at a time when Canada’s Standard & Poor’s/TSX Composite Index has plunged 40 percent this year.
On foreign policy, a coalition government might be reluctant to support Obama’s push for more troops in Afghanistan. Harper earlier this year got the Liberals to vote with him to extend the Afghan mission until 2011, from a previous planned deadline of February 2009. The NDP and the Bloc voted against extending the mission. Canada has about 2,700 troops in Afghanistan, and more than 100 of the country’s soldiers have died there since 2002. The U.S. has 31,000 troops in Afghanistan, including 14,000 that are part of the 51,000-member North Atlantic Treaty Organization force there. With all the issues facing the new U.S. president, "what Obama is going to be looking for is partners," says the Hudson Institute’s Sands. Canada, he says, "could be on that list, but not first, simply because the monkey business going on in Parliament is going to make Canada look too weak."
Weaker Dollar Worries Japan, Germany
The dollar's sharp turn weaker into the end of the year is threatening to reshuffle winners and losers in global trade amid the toughest economic conditions in decades. For countries like Japan and Germany, it is a source of anxiety, since a stronger currency makes exports less competitive as global demand shrinks. For the U.S., it is a more welcome development and might also help counteract declining prices. In some emerging markets, a weaker dollar is a relief for companies that must pay debts denominated in dollars.
Still, in today's environment, few countries want to be the last one standing with a strong currency. Some economists worry that countries could actively seek to weaken their currencies in an effort to gain an advantage over their trading partners, setting off a round of devaluations that ultimately damage world trade. Until recently, the dollar was one of the most robust currencies around, surging against everything except the Japanese yen. But in recent weeks -- and particularly after the Federal Reserve slashed a key interest-rate target to near zero -- the dollar has abruptly changed course.
On Friday, the dollar slipped against the euro, with one euro buying $1.406 late in New York. The dollar has weakened about 10% versus the euro and 8% against the yen since the start of November. That is good news for U.S. exporters, but it is raising concerns in places like Japan and Germany, which are both gripped by recession. In Japan, officials are so concerned by the strengthening yen that they have sent signals they might intervene to stop it. Earlier this month, Honda Motor Co.'s president warned that the pumped-up yen could cause the "hollowing out of Japanese industry." "Both countries are very dependent on exports, with very little domestic growth," says Adam Posen, an economist at the Peterson Institute for International Economics. "Bad news is coming, and the dollar going down is additional bad news for them."
Of course, there are upsides to a having a stronger currency in some corners of the globe. The dollar's turn lower has brought a modicum of relief in emerging markets, where currencies have been battered in recent months. That is easing the burden on companies with debts to pay in foreign currencies. For the U.S. in particular, a weaker currency could be a welcome help on another front -- avoiding a cycle of declining prices. "There is a pretty compelling argument both in theory and in history that if your problem is deflation, then pushing down the exchange rate is an effective way of addressing that problem," says Barry Eichengreen, an economist at the University of California, Berkeley. Mr. Eichengreen notes that, during the Great Depression, it was difficult to use a weaker currency to export more because of protectionist policies in place around the globe. However, it was a useful way to change people's expectations about prices, since imports become more expensive. When the U.S. devalued the dollar in 1933, he said, the prices of some commodities, which had been spiraling lower, suddenly began to go up.
One fan of this line of thinking: Federal Reserve Chairman Ben Bernanke. In a 2002 speech, Mr. Bernanke noted that the devaluation of the dollar and the rapid increase in the money supply in 1933 and 1934 "ended the U.S. deflation remarkably quickly." He described the episode as an illustration of what can be achieved "even when the nominal interest rate is at or near zero." That, of course, describes where the Fed's key interest-rate target sits today. The fact that the Fed has been willing to embrace unconventional and aggressive lending measures carries an implicit message, says David Gilmore of Foreign Exchange Analytics, a Connecticut research firm, namely that "a weaker dollar in an orderly way is certainly a desired outcome." He adds that the Treasury Department has avoided its usual mantra in recent months in which it reiterates its support for a strong dollar. The current problem, he says, is that "every country on the planet needs a weak currency right now, and not everybody can have one."
In late November, China briefly pushed its currency, the yuan, sharply lower against the dollar, raising fears that it could be seeking a competitive leg-up. Since then, the yuan has recovered those losses. In Vietnam, where the local currency, the dong, is pegged to the dollar, the central bank devalued the currency on Wednesday for the second time this year. The move will help facilitate exports and control the trade deficit, the central bank said in a statement. In the late 1990s, a number of emerging markets from Asia to Russia faced financial crises and were forced to devalue their currencies. Eventually, that helped spur economic recoveries by touching off export booms at a time of buoyant demand elsewhere. Today, though, the whole world is reeling, making it difficult for a country to export its way out of trouble. "The world can't depreciate [its currency] against Mars and export to the rest of the solar system," says Simon Johnson, a former IMF chief economist.
Old danger threatens new Europe
Nationalism has long been a dirty word in Europe’s polite political circles. Many politicians still bristle at the term. Nationalism was the destructive fever that drove the continent mad in the first half of the 20th century and flared up again in the Balkans in the 1990s with murderous results. "Nationalism is war," said François Mitterrand, the late French president. Europe’s greatest postwar achievement has been to dilute that nationalist poison so as to make war unthinkable. Sovereignty was pooled in the European Union, the "most effective conflict-resolution mechanism ever devised," according to George Schöpflin, a historian of European nationalism and Hungarian MEP.
Paradoxically, the success of European integration has now helped decontaminate nationalism, making it "safe" to fly the flag again while national electorates have rejected the perceived over-centralisation of power in Brussels. French, Dutch and Irish voters voted against the EU’s reform treaties with no fear of negative consequences. The financial crisis has also highlighted the primacy of nation states. As they bail out banks and pump money into their economies, national governments have rarely seemed so necessary. Who said that the EU and globalisation had rendered them irrelevant?
But how will Europe react to the rise of national sentiment during this increasingly severe downturn? In Brussels, the belief is that the EU will simply evolve to reflect the new realities, leading to more pragmatic co-operation between member states. The fear is that escalating competition between national interests will encourage protectionist instincts, jeopardising the European ideal. Two significant developments this year have highlighted how fast Europe’s political landscape is changing: the French presidency of the EU, which some hail as a new model of running Europe; and the further "normalisation" of Germany. Nicolas Sarkozy, France’s president, has boasted of putting his country back at the head of the EU.
His active response to the Russia-Georgia conflict and the financial crisis certainly injected fresh dynamism into the EU leadership. Never mind the institutional niceties, just focus on results, has been the refrain of France’s six-month EU presidency. Mr Sarkozy, though, has a very Gaullist conception of Europe: a strong Europe run by the big national governments, with EU institutions playing only a supporting role. Charles de Gaulle argued that Europe could act as France’s Archimedes’ lever, multiplying the country’s influence in the world. Mr Sarkozy appears to share that view.
Partly in reaction to this approach, Germany has been rediscovering its own national voice within Europe. Dismayed by the EU’s failure to adopt institutional reform and irritated by Mr Sarkozy’s impulsive ways, Berlin has been drawing an increasing distinction between German and European interests, most notably over policy towards Russia. If European institutions no longer intermediate disputes effectively, then Germany must become more assertive in promoting its own state interests directly. Angela Merkel, Germany’s chancellor, has turned into Frau Nein.
Jan Techau, a Europe expert at the German Council on Foreign Relations, says that Germany’s postwar Bonn consensus that projected the country’s national dreams on to Europe has shattered during the past few years. "Germans have lost faith in their ersatz religion of Europe," he says. "Nobody would now automatically say that what is good for Europe is good for Germany. Europe is perceived in a more instrumentalist way." In this sense, Germany is simply behaving like other big member states, such as France and the UK, having largely abandoned hopes of European federalism. To some, this transformation of European politics is both welcome and healthy. The EU is becoming a community of nation states that co-operate solely on issues that they cannot address alone.
Yet there are limits and dangers in this approach. Can Mr Sarkozy’s EU leadership model outlast France’s presidency? Will the smaller EU member states revolt against the overweening bigger countries? Many of the EU’s most important policies – including monetary, trade and competition – depend on an integrated approach, not just a co-operative one. Mario Monti, the former EU commissioner, argues that inter-state integration is Europe’s main competitive advantage in a globalised world, perhaps its only one. There is also a danger that economic crisis will provoke far uglier forms of nationalism. It would be comforting to think that the good sense of voters will restrain these forces.
But any complacency should be shattered by reading Stefan Zweig’s chilling autobiography, The World of Yesterday, written in 1942. The Austrian author describes how the golden age of security that accompanied the first wave of globalisation rapidly descended into the barbarism of two world wars. "There was as little belief in the possibility of wars between the peoples of Europe as there was in witches and ghosts," Zweig wrote of pre-1914 Vienna. "Our fathers honestly believed that the divergences and boundaries between nations and sects would gradually melt away into a common humanity ... Now that the great storm has long since smashed it, we finally know that the world of security was naught but a castle of dreams; my parents lived in it as if it had been a house of stone."
ECB given bad marks over inflation
The euro may have established global credibility in the eyes of those that use it daily but continental Europeans are not yet ready to give the European Central Bank high marks for its control of inflation. They are also pessimistic about the economic outlook. The latest FT/Harris survey of European opinion, before the euro’s 10th birthday on January 1, revealed a widespread belief that the euro could overtake the dollar in global importance within five years, suggesting voters are confident in its credibility and stability. Although that will cheer Europe’s monetary guardians, the ECB still fares badly in the poll for its efforts to control inflation over the past decade. More than half of the Italians and Spanish polled, 47 per cent of the Germans and 44 per cent of the French said the ECB’s inflation-fighting performance was “bad” or “terrible”.
The results might appear surprising because, with the exception of a spike this year caused by soaring oil prices, eurozone inflation has rarely risen substantially higher than the ECB’s stated target of an annual rate “below but close” to 2 per cent. One explanation is that Europeans fear the euro has caused prices to increase – a claim believed to be at least partly true by about 90 per cent of those polled in France, Italy and Spain and 83 per cent in Germany. Across the eurozone, and beyond, those polled were universally gloomy about the economic outlook. A quarter or less of those polled in all countries believed that the recession would last a year or less. A quarter of the British expected it to last at least two years. Germans were the most pessimistic, with three out of 10 believing that their country would not return to growth “in the foreseeable future”. Support for the expansion of the eurozone was strongest in Italy, where 57 per cent of those polled agreed strongly or “somewhat” with more countries joining. The Germans were noticeably more sceptical, however, with 49 per cent opposing the idea, compared with 41 per cent in favour.
The eurozone will expand to 16 members on January 1, when Slovakia joins. With the financial market crisis increasing the attractiveness of being part of a large monetary union, countries such as Denmark, Poland and Hungary could move towards memberships. However, just 22 per cent of those polled in the UK liked the idea of the euro replacing sterling. A decade ago Germans were sceptical about giving up the D-mark, symbol of the country’s postwar economic miracle. However, the poll found majorities in all four of the eurozone’s biggest economies – France, Italy, Spain and Germany – were opposed, in light of the current economic situation, to returning to national currencies. Opposition was strongest in France. Asked whether their countries would stop using the euro within the next 10 years, 75 per cent of the French and 72 per cent of the Germans disagreed. For Spain and Italy, the figures were 69 and 61 per cent. The poll was conducted among 6,165 adults in France, Germany, Italy, the UK and US between November 26 and December 8.
Recession is a blow that hits all the harder when the experts fail to see it coming
There are some football matches so bad that everyone concerned is just relieved when the final whistle goes and they can go home and put the game out of their minds. Well, 2008 feels a bit like that, as far as the economy goes. It was a year most economists and policymakers will wish to forget. We end the year stuck deep in a recession that few of them saw coming and that will stay with us for some considerable time as up to a million people lose their jobs. We can consider the outlook for 2009 next week but for now it is worth looking back to see how bad things have got. In fact, the situation could scarcely look worse. And if anyone thinks the slowdown came out of the blue, it actually began in the fourth quarter of last year.
That is not surprising given that August 2007 saw the credit markets seize up and the simultaneous beginning of the house price downturn (of which more later). Given that Britain had for years depended on rising house prices and easy credit for its imagined success, the end of those conditions would obviously lead to trouble. The economy had been bowling along at 0.8% or 0.9% growth a quarter for the previous year - too fast, in fact - but then slowed to 0.6% in the fourth quarter, 0.4% in the first three months of this year, then zero in the second quarter and -0.6% in July to September. We have not yet had the figure for the fourth quarter - that will come at the end of January and is likely to be simply horrible at -1% or more. It could even surpass the 1.2% contraction of the third quarter of 1990, when the economy was slumping into recession.
The speed of the deterioration is such that we are going off the map in terms of what to expect - we have not seen a recession like this before and with Barclays chief John Varley warning it could be two years before banks start lending again in normal volumes, who knows how bad it could get But beware the revisionists out there. A lot of people in the City, at the Bank of England and elsewhere are saying that things only really got bad as a result of the turmoil in the banking system in September and October, because they did not see the slump coming. "There is a lot of rewriting of history going on," said a senior Treasury official recently. This is because the Bank of England's monetary policy committee slashed rates by three percentage points between October and this month, a huge monetary easing that saw rates tumble to a 57-year low of 2%, equalling the lowest on record.
But the MPC, with the notable exception of external member David Blanchflower, had been slow until the autumn to see how bad the economy was getting. So if anyone says it all turned rotten in autumn, ask them how it was that between June and August, before Lehman Brothers collapsed in mid-September, 164,000 people had lost their jobs? The slump had begun well before September and unemployment started rising at the beginning of the year. Indeed, if you use the definition of recession that the US National Bureau of Economic Research does, Britain went into recession in April. Months later, again in September, the MPC was still discussing putting interest rates up to prevent the inflationary effects of higher oil prices feeding through into wages. Given that tens of thousands of people were losing their jobs every month by then, the idea that workers would get a big pay rise and trigger a wage-price spiral was bizarre in the extreme.
It is good that the MPC has woken up to how bad things are but, as deputy governor Sir John Gieve admitted before Christmas, the committee did not understand how bad things were. The majority of City economists got it wrong too, as did the National Institute for Economic and Social Research and the CBI, even though its own surveys were screaming recession throughout the summer. No wonder they are trying to rewrite history. Many are trying to convince everyone that Blanchflower got it right through luck but that is just sour grapes and they are not doing themselves any favours. As for house prices - a key reason the economy is so weak - they are in freefall. Do you remember when people argued during the boom that it was not a bubble and if house prices were to fall they would do so slowly? Well, both arguments turned out to be nonsense.
On the Halifax measure, prices are off 18% from their peak in autumn 2007. Add in inflation of about 6% and we are down nearly a quarter in real terms in just over a year. The falls are likely to be bigger than that. Auction prices are off a third and sellers who really want to sell find they have to cut prices massively to get a sale. A house sold last week in a posh part of west London for £5.5m. In September it almost sold for £10m before a nervous buyer pulled out. That's a 45% drop in three months and blows away another myth - that prices in the best areas are more resistant to falls than in others.
All of this is fantastic news for people wanting to get on the housing ladder. It is also good news for those wishing to move up the ladder - you may get less for your house if you sell but the bigger one you want will be cheaper too - more so in money terms. The only losers are those at the end of the chain looking to get out of the housing market - usually pensioners going into a care home. But still prices are much higher than they were a decade ago so many people are still sitting on significant equity. The Treasury and Bank of England also spent the year trying to prevent the banking system falling apart. It may be too early to judge but it seems they have succeeded.
It has been far from easy but in the spring Bank governor Mervyn King came up with a cleverly designed "special liquidity scheme" that met all the bank bosses' demands for ready cash. But things continued to deteriorate into the autumn until the Treasury had to reach deep into taxpayers' pockets to finance a huge recapitalisation of the banks' battered balance sheets. That has made the word "banker" a term of abuse in a country that once lauded them. We will all be losers in the longer term, though, from the damage done to the public finances this year. The chancellor, Alistair Darling, has sanctioned such a huge increase in budget deficits and the public debt that paying it back will impose a heavy burden on us for many years to come.
The problem was that the government had allowed the public finances to drift ever deeper into the red in the past few years, instead of using a buoyant economy to swell Treasury coffers and build a war chest to spend in the event of a downturn. The budget deficit will hit a record £118bn in the next fiscal year, Darling said in last month's pre-budget report. In the budget in March, he had pencilled in a shortfall of £38bn. That is a breathtaking deterioration and could be storing up trouble. His immediate concern is preventing the economy tipping off a cliff - but he may well be too late
Britain plunges down world economic table
Britain is fast becoming the poor relation in the club of the world’s top economies because of the deepening recession and the plunging value of the pound. The Oxford Economics consultancy, which only a few months ago reported that Britain’s living standards had overtaken those in the United States, will disclose this week that the country has suffered a sudden and savage slide down the global rankings. This is the economic reality behind the pain that many travellers have been discovering over the holiday period. Even on the shortest trip across the Channel, Britons no longer have much purchasing power. The big spending days may be over. Last year, according to the Oxford calculations, Britain was better off on average than other G6 countries – the top world economies (United States, Germany, Japan, France and Italy).
National income (gross domestic product) per head last year, expressed in dollars, was $45,970 in Britain, $45,830 in America, $40,925 in France, $40,405 in Germany, $35,586 in Italy and $34,244 in Japan. This reflected not only the strength of the pound but also that Britain had enjoyed a run of growth stretching back to the early 1990s and which last year exceeded 3%. This year, however, Britain – with a GDP per head of $43,859 (the pound buys fewer dollars) – has been overhauled by the US ($46,993), France ($45,088) and Germany ($44,245). Only Italy, ($39,641) and Japan ($38,692) remain behind. Worse is to come, according to the Oxford Economics projections, because of the recession and the sliding pound. “UK GDP per capita in 2009 will be 24% lower than in America and will be over 15% lower than in Japan, Germany and France,” said Adrian Cooper, managing director of Oxford Economics.
“It will even be 7% lower than GDP per capita in Italy, where economic performance has been very poor over the past decade. “The UK was at the centre of the global financial boom and this led to a dramatic improvement in its apparent living standards relative to its peers. But the subsequent bust in financial markets has taken a heavy toll. Recession and falling sterling have relegated the UK to the bottom of the G6 league table.” Sterling, which during the summer was trading at above $2 to the pound, ended last week at just below $1.47. Against the euro it continued to trade close to parity at just under €1.05. Economists say the weakness of the pound and the economy are closely linked. HSBC, the banking group, predicts the economy will shrink by 2.5% next year, a deeper recession than in the United States or the eurozone. “The fall in UK relative living standards at market exchange rates will hit hard those holidaying abroad,” Cooper added. “Britons will no longer be among the richest people on the beach.”
Britain set to lose 1 million jobs
More than 1,600 people will lose their jobs every day during 2009 as the British economy sheds workers at the fastest pace for nearly 20 years, personnel managers say today. Many of the workers who keep their jobs will face pay freezes or even outright cuts in their wages, a report predicts. The Chartered Institute of Personnel and Development forecasts that 600,000 workers face redundancy during 2009. The first months of the New Year will see the heaviest losses, it says. Job cuts will continue into 2010, the institute says with more than a million people losing their jobs during the course of the current recession.
The latest official figures show unemployment was 1.86 million in October. But companies ranging from high street shops to City banks are sacking thousands of workers and some economists now expect the total to reach 3 million late next year. John Philpott, the CIPD's chief economist said early 2009 will be the worst period for redundancies since 1991. He said: "Assuming the economy bottoms out in the second half of 2009, job losses are likely to continue into 2010, in all probability taking the final toll of lost jobs to around one million. Our current expectation, based on available survey evidence and employer soundings, is that the number of redundancies will jump sharply in the early months of 2009, once employers take stock of the economic outlook."
Both the CIPD and the British Chambers of Commerce also raised the prospect of workers seeing their wages reduced during 2009 as companies try to cut costs and stay in business. Business leaders say pay cuts for serving workers are almost without precedent in the last two decades and illustrate the pressure on British companies today. A BCC poll of companies found that 43 per cent plan to freeze wages in 2009, and 9 per cent will cut workers' pay. At larger firms, trade union agreement is required to cut workers' pay. In a sign of concern about firms' survival, unions at companies including JCB have already accepted pay cuts. David Frost, the director-general of the BCC said: "In the last two weeks, directors have started talking to me about reducing pay next year. This shows how bad things have got."
A CIPD survey suggested that many workers are phlegmatic about pay freezes and cuts: more than a quarter of employees said they did not expect any pay rise in 2009. Charles Cotton, the CIPD's pay adviser, said: "With job cuts seemingly lurking around every corner and trading conditions tight, employees are realistic about their pay prospects for the year ahead." Employers are also putting pressure on the Government to freeze the minimum wage during 2009. The minimum pay rate normally rises broadly in line with inflation. The BCC has also written to the Low Pay Commission, which advises the Government on the minimum wage, saying it believed it should remain at the current levels of £5.73 an hour for adults. Mr Frost: "A rise in minimum wage would not help firms hold onto staff and would simply add to unemployment."
London Led 2008 U.K. House-Price Drop
London house prices fell more than in any other U.K. region this year and probably will decline further in 2009 as the economy sinks deeper into a recession, Hometrack Ltd. said. Residential property prices dropped 10.1 percent in the capital, more than the 8.7 percent average across the country, the property researcher said in a report today. London house prices fell 1 percent in December alone, compared with a 0.9 percent drop across Britain. "The onset of recession and the prospect of rising unemployment over 2009 will continue to damp confidence and in turn demand, which will inevitably lead to further house price falls over the next 12 months," Richard Donnell, Hometrack’s director of research, said in the statement.
Banks are rationing credit as they rebuild their balance sheets and brace for the recession, hurting the ability of consumers to afford moving. Prime Minister Gordon Brown’s government will announce new measures next month to revive lending after institutions failed to pass on the full impact of Bank of England interest-rate reductions. Hometrack, which surveyed 1,809 real estate agents and surveyors, said many homeowners are choosing not to move as unemployment rises and companies including Woolworths Group Plc and MFI Group Ltd. tip into bankruptcy. Consumer spending shrank in the third quarter, triggering the biggest contraction in economic growth since 1990.
British consumers stepped up repayments on loans made against their homes in the third quarter, retiring 5.7 billion pounds ($8.4 billion) of so-called housing equity withdrawal debt in the three months through September. That compares with 2 billion pounds in the quarter ending at the end of June, which was the first time in a decade that repayments exceeded new borrowing, the central bank said today in London. Bank of England policy makers have indicated they may cut the benchmark rate further after trimming it to the lowest level since 1951. The key rate, now at 2 percent, has declined by 3.75 percentage points in the past year. House prices in London fell more sharply than the 9.5 decline in East Anglia and 9.2 percent in the southeast, the report showed.
Hometrack expects prices to fall a further 10 percent next year and 3 percent more in 2010, the researcher said on Dec. 22. Rightmove Plc and the Royal Institution of Chartered Surveyors have also forecast a 10 percent decline for 2009. The number of home sales fell 45 percent this year and will probably drop another 12 percent in 2009, the Hometrack report said. On average, homeowners will move once every 31 years in 2009, double the rate during the last decade. Home-loan approvals plunged 61 percent to 17,773 in November from a year earlier, the British Bankers’ Association last week.
British home owners no longer cashing in on value of homes
Home owners are using spare cash to pay off their mortgages at a record level, reversing a trend of taking equity out of properties to fund spending, new figures have revealed. The Bank of England said that between July and September, instead of withdrawing money, borrowers increased the equity in their homes by £5.7 billion - the largest injection of cash since records began in 1970. Falling house prices have eroded much of the equity left in people's homes, while the lack of affordable mortgages has made it difficult for home owners to raise money from their homes to fund spending.
Andrew Montlake, of mortgage brokers Cobalt Capital, said: "Not so long ago, an Englishman's house wasn't just his castle, it was his cash machine, too. This, very clearly, is no longer the case. "People are scared stiff of recession and rising unemployment and are now paying down their debts rather than adding to them. In this market, it pays to travel light." Howard Archer, chief UK and European economist at IHS Global Insight, said: "Housing equity withdrawal has been used significantly to support consumer spending in recent years. We are in for an extended period of very serious consumer retrenchment."
Equity withdrawals have been falling from a peak in the last quarter of 2003, when in the three months between October and December home owners increased their borrowing by a massive £17.2 billion. However, the picture has changed significantly since then, and in the first three months of this year the withdrawal figure fell to £5.2 billion as mortgage costs increased and borrowers grew concerned about house prices. At that point, money from housing withdrawals represented 2.5 per cent of post-tax income, a figure which fell to -2.4 per cent in the third quarter.
Gordon Brown: Recession will test 'character' of the British people
The recession is a test of character that the British people must pass, Gordon Brown will say in next week's New Year message. The public needs to display the same spirit as during the second world war and "rise to the challenge" of the crisis, the Prime Minister is to insist. Mr Brown is expected to deliver the speech as part of a defiantly optimistic seasonal message. He will demand that people work together to "build a better tomorrow today", and hail US President-elect Barack Obama as a catalyst for tackling global issues.
Mr Brown is to say: "I am confident that we can steer Britain safely into the future. Today the issues may be different, more complex, more global. And yet the qualities we need to meet them the British people have demonstrated in abundance before. So that we will eventually look back on the winter of 2008 as another great challenge that was thrown Britain's way, and that Britain met. Because we had the right values, the right policies, the right character to meet it. That's why I don't believe Britain is broken - I believe it is the best country in the world. I believe the British people will show those who talk them down exactly what they are made of in 2009 - as we build tomorrow today."
The Prime Minister will also lash out at the Tories, referring to his oft-repeated criticism of David Cameron by insisting the British are "not a do-nothing people". He is to say that in past downturns governments blundered by cutting investment across the board. "This will not happen on my watch," Mr Brown will insist. "The threat that will come of doing too little is greater than the threat of attempting too much." The Prime Minister will highlight the danger of climate change, saying that President Obama will play a crucial role in tackling the problem.
"I believe we can do it - and because we can, we must," Mr Brown is to say. "The stakes are too great with our planet in peril for us to do anything less. I look forward to working with president elect Obama in creating a transatlantic, and then a global coalition for change." Shadow cabinet member Chris Grayling accused Mr Brown of aping Mr Obama's election campaign catchphrase "Yes we can". "Copying Barack Obama's slogans won't help Gordon Brown cover up his failings," he said. "His New Year resolution should be to tell the truth about his plans to double our national debt and about his failed policies that have left us facing a deeper recession than almost any other country in the world."
Bishops deliver damning verdict on Britain under Labour rule
Leading bishops in the Church of England have launched a withering attack on the Government questioning the morality of its policies. Five of the Church’s most senior figures said the Government now presided over a country suffering from family breakdown, an unhealthy reliance on debt and a growing divide between rich and poor. The Bishop of Manchester accused Labour of being "beguiled by money" and "morally corrupt". The Bishop of Hulme said they were "morally suspect" and the Bishop of Durham said they had reneged on their promises. They were joined by the bishops of Winchester and Carlisle who claimed ministers had squandered their opportunity to transform society and run out of steam.
The bishops said Labour sacrificed principled politics and long-term solutions for policies designed to win votes. One described the Government as "tired" and another said its policies were "scandalous". Meanwhile, in an article for The Sunday Telegraph, David Cameron accused Gordon Brown of leading Britain to the "brink of bankruptcy". The Conservative leader said the "debt crisis", which he claimed was the Government’s responsibility alone, would serve as the Prime Minister’s "political epitaph". Although they were speaking independently in a series of interviews with The Sunday Telegraph, the bishops’ common criticisms reflect the deepening rift between the Government and the Church on social and moral issues. Relations have become increasingly fractious following condemnation of Mr Brown’s spending plans by Dr Rowan Williams, the Archbishop of Canterbury, and the publication of a report that accused the Government of marginalising the Church.
In February, the General Synod, the Church’s parliament, will hold a debate on the implications of the financial crisis that is expected to lead to heavy criticism of the Government. The Rt Rev Tom Wright, the Bishop of Durham, said ministers had not done enough to help the poor. "Labour made a lot of promises, but a lot of them have vanished into thin air," he said. "We have not seen a raising of aspirations in the last 13 years, but instead there is a sense of hopelessness. "While the rich have got richer, the poor have got poorer. When a big bank or car company goes bankrupt, it gets bailed out, but no one seems to be bailing out the ordinary people who are losing their jobs and seeing their savings diminished." The Rt Rev Nigel McCulloch, the Bishop of Manchester, condemned Labour for encouraging people to get further into debt. "The Government has acted scandalously. This is not just an economic issue, but a moral one. It’s about what we value," he said.
"The Government believes that money can answer all of the problems and has encouraged greed and a love of money that the Bible says is the root of all evil. It is morally corrupt because it encourages people to get into a lifestyle of believing they can always get what they want." Bishop McCulloch said New Labour was guilty of pursuing the policies championed by Margaret Thatcher, which the Church condemned in its landmark 1985 report, Faith in the City. It blamed Thatcherite policies for the growth of spiritual and economic poverty in Britain’s inner cities. "Both administrations have been beguiled by money," said Bishop McCulloch. "It is ironic that under a Labour government we have the poor feeling they have been betrayed and the gap is getting ever greater. Any government of integrity would have exercised restraint, but this has been sadly lacking." The Rt Rev Stephen Lowe, the Church’s Bishop for Urban Life and Faith and also the Bishop of Hulme, said: "The Government isn’t telling people who are already deep in debt to stop overextending themselves, but instead is urging us to spend more. "That is morally suspect and morally feeble. It is unfair and irresponsible of the Government to put pressure on the public to spend in order to revive the economy."
Bishop Lowe suggested that it was a cynical ploy to improve the economy in time for the next general election. "They are trying to take the credit for this, but are playing with people’s livelihoods in the process." The bishop commissioned a Church report, Moral, But No Compass, published earlier this year, which said Labour had failed society and marginalised the Church. It revealed the level of unease felt among senior clerical figures over the direction being taken by the Government. The Rt Rev Graham Dow, the Bishop of Carlisle, and the Rt Rev Michael Scott-Joynt, the Bishop of Winchester, said Labour deserved credit for some past achievements but it was struggling to balance its conscience with the pressure to win the next election. "I agree with the Conservatives that the breakdown of the family is a crucial element in the difficulties of our present society," said Bishop Dow. "The Government hasn’t given sufficient support to that because it is scared of losing votes." He argued that Labour’s failure to back marriage and its "insistence on supporting every choice of lifestyle" had had a negative effect on society. "I think Labour has got tired," he said. Bishop Scott-Joynt said: "The Government hasn’t done anything like enough to help those less well off, particularly in terms of tax redistribution. There also has been the disaster of the 10p tax.
"It is imperative that this Government help the poorer people and hold the hard-hit communities in its sights, but it seems to have its eye on re-election instead." A senior ministerial source said: "The Government has a proud record on promoting fairness and opportunity for all, combating poverty and in tackling Third World debt and promoting international development. "We also believe it is morally right to provide real help and resources to people facing unemployment or worried about losing their homes." *Gordon Brown will use his New Year message to pledge to work with Barack Obama, the US President-Elect, to end the economic crisis and get to grips with climate change. The Prime Minister will say that the main challenge of 2009 will be to build a "better tomorrow, today".
Pound drops to fresh record low against euro
The pound dropped to a fresh record low against the euro on Monday, falling closer to parity against the single currency on expectations that UK interest rates are heading lower. The pound has suffered against the euro – dropping a record 17 per cent this month alone – as investors bet that the Bank of England will slash interest rates, which currently at 2 per cent, at its policy meeting next month. Bank officials have hinted that the UK could follow the US an adopt a quantitative easing approach to monetary policy – pumping money into the financial system once rates effectively hit zero. In contrast, the European Central Bank has adopted a more hawkish tone, indicating that it will keep eurozone interest rates on hold as it assesses the impact of the global economic slowdown.
The gloom surrounding the UK economy was heightened on Monday as figures revealed that UK house prices dropped 8.7 per cent in 2008. Reports over the weekend suggesting the UK economy could shed 600,000 jobs next year also weighed on sterling. Analysts said reports that the post-Christmas sales had started off strongly gave little support to sterling. Howard Archer. at IHS Global Insight, said the apparently strong start to the sales was not that surprising, given the beginning of the sales was when the best bargains generally occur. He said that once the best of the bargains were gone and consumers had got what they most wanted or needed, "we suspect that the interest in the sales will fall away quickly". "We strongly suspect that the sales effect will be temporary and that retailers will face a desperately difficult 2009," he said. "This will keep pressure on them to price competitively through next year, which will obviously impact on margins. As a result, many more retailers seem likely to go under in 2009."
The pound fell 1.9 per cent to a record low of £0.9776 against the euro, dropped 1.9 per cent to SFr1.5335 against the Swiss franc and lost 0.5 per cent to Y132.25 against the yen. On a trade weighted basis the pound fell to 74.7, the lowest on daily records kept by the Bank the England that date back to 1990. The pound’s losses were less acute against the dollar, however, easing just 0.1 per cent to $1.4644. Analysts said the dollar had lost its appeal since the onset of quantitative monetary easing in the US earlier this month. "In this new environment, disappointing US economic data are seen as building the case for even more aggressive quantitative easing, and therefore a greater supply of dollar and consequent dollar weakness," said Daragh Maher at Calyon.
He said there might be more chatter about the likely fiscal response to the economic downturn from Barack Obama, US president-elect, with the suggestions as to its likely scale growing by the day. "But here too, the market spin may be that it points to yet more dollars being pumped into the system," said Mr Maher. The dollar fell 0.8 per cent to $1.4646 against the euro, lost 2 per cent to SFr1.0461 against the Swiss franc and dropped 0.4 per cent to Y90.38 against the yen. Elsewhere, the Russian authorities took advantage of the weak dollar to continue their devaluation of the rouble. The Russian central bank let the rouble fall 1.5 per cent to 34.31 against its euro/dollar basket, its ninth mini-devaluation over the past month.
Pound Poised to Gain as BOE Slows Pace of Rate Cuts
The pound may rebound from its worst year on record against the euro as investors start betting on a recovery in the U.K. economy, according to the world’s biggest currency traders. The U.K. currency will strengthen 14 percent against Europe’s common currency next year, after depreciating about 24 percent in 2008, based on the median forecast of 42 analysts and strategists surveyed by Bloomberg. Deutsche Bank AG, the largest trader as measured by Euromoney Institutional Investor Plc, predicts a 20 percent gain. “We will see some signs of life in the U.K. economy sooner than we do in the eurozone," said Henrik Gullberg, a strategist with Deutsche Bank in London. “Even though we might be far away from a rate hike in the U.K., the focus for currency traders will shift to that sooner in the U.K. than in the eurozone."
The pound also weakened versus the dollar and yen, falling 26 percent against the greenback and 40 percent versus Japan’s currency, the biggest declines since at least 1972, as the Bank of England cut interest rates to the lowest level since Winston Churchill was in power. Prime Minister Gordon Brown was forced to bail out the nation’s biggest banks amid the fallout from the seizure in credit markets. The pound’s drop was so swift that less than three months after saying the currency was “overvalued," Newport Beach, California-based Pacific Investment Management Co., the manager of the world’s biggest bond fund, recommended on Dec. 5 that investors reduce bets on further declines. Traders reduced holdings this month of futures contracts betting on declines in the pound, according to the Commodity Futures Trading Commission in Washington, owning 30,400 contracts as of Dec. 16, down from 40,244 on Dec. 1.
Britain’s gross domestic product shrank at an annualized rate of 0.6 percent in the third quarter, the first drop in 16 years, the Office of National Statistics said Dec. 23. The economy, the fifth-biggest in the world, will contract 1.4 percent next year, the median estimate of 26 economists in a Bloomberg survey shows. “While the outlook for the U.K. economy is pretty terrible, we’re at a stage where that’s already in the price," said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the most accurate foreign-exchange forecaster in a 2008 Bloomberg survey. “The big shock next year is going to come from the eurozone as the economy contracts much more than currently expected. The ECB will eventually have to wake up and start cutting rates. That’s going to really damage the euro." The pound will advance to 84 pence per euro by the end of next year, Stannard said. The median of 45 analysts’ forecasts compiled by Bloomberg is for the currency to trade at 83 pence by the end of 2009.
While the ECB lowered the main refinancing rate to 2.5 percent this year, from a peak of 4.25 percent in July, the Bank of England, led by Governor Mervyn King, reduced its key rate five times, to 2 percent. The current level is the lowest since 1951, and down from 5.5 percent in January. Britain’s central bank will have to follow the Federal Reserve and Bank of Japan by cutting borrowing costs close to zero before the pound starts to recover, according to Neil Jones, head of European hedge-fund sales at Mizuho Capital Markets in London. The yield on short sterling futures contracts expiring in March declined 65 basis points, or 0.65 percentage point, to 1.74 percent since the most-recent interest-rate cut Dec. 4, indicating increased bets on further reductions. “The quicker the BOE bites the bullet and cuts to zero the quicker the pound can start to recover," Jones said. “They are just prolonging the inevitable." Sterling may trade at parity with the euro in the coming weeks, he said. While a weaker pound may buoy manufacturers by making British goods more competitive overseas, the drop hasn’t yet shown up in export data as helping companies.
The U.K. trade deficit widened to 7.75 billion pounds ($11.4 billion) in October from 7.36 billion pounds the previous month, the Office for National Statistics said Dec. 9. Imports fell 1.2 percent and exports dropped 3.4 percent. Auto output from British factories dropped 33 percent in November from a year earlier to 97,604 units, the Society of Motor Manufacturers and Traders said this month. Britain’s car industry usually produces about 1.7 million cars and trucks a year, accounting for 10 percent of the nation’s exports and earning 51 billion pounds in revenue. The industry employs 850,000 people and hundreds of supply firms. General Motors Corp., Ford Motor Co., Nissan Motor Co. Ltd. and Honda Motor Co. each maintain major factories in the U.K. Britain’s economy expanded every quarter since the period ended June 1992, when it contracted 0.4 percent. The contraction last quarter compares with negative 0.5 percent in the U.S. and growth of 0.6 percent in the euro-zone. There was no quick rebound the last time the pound weakened this much. In 1992, sterling fell 19 percent against the dollar as the Bank of England slashed its target rate to 6 percent from 10.5 percent between May 1992 and January 1993. The following year it depreciated another 2.18 percent, and took until 2007 for the currency to fully recover.
In addition to rate cuts, Brown proposed a reduction in value added taxation to 15 percent from 17.5 percent to boost the economy. The International Monetary Fund’s top economist said last week the plan probably won’t encourage consumers to increase spending. “The temporary cut in VAT, which was adopted in the U.K., doesn’t seem to me to be a good idea," the IMF’s Olivier Blanchard said in an interview with Le Monde newspaper. “A two- point reduction won’t be noticed by consumers as a real instigation to spend." Investors began turning less bearish on the pound last month, according to a Merrill Lynch & Co. survey of investors published Nov. 20. The New York-based firm’s index tracking short positions against the pound among global debt and currency managers was at 45 in November, compared with 43 in October and 35 in September. A reading below 50 indicates investors are more bearish than bullish on the currency. Even if the pound drops to parity with the euro, it’s unlikely to keep falling, Bank of Tokyo-Mitsubishi Ltd. said. “It is increasingly likely that the current value of the pound fully discounts negative fundamentals," Lee Hardman, a London-based currency strategist at Tokyo-Mitsubishi, wrote in a Dec. 23 note. “The pound will likely appreciate modestly on a trade-weighted basis through 2009."
France says debt jumps due to crisis
France's debt has jumped because poor market conditions are preventing asset sales and the rise is in line with new forecasts which take into account the cost of economic stimulus, the economy ministry said on Monday. Public sector debt at the end of the third quarter rose to around 66.1 percent of gross domestic product, the highest since the end of 2004, national statistics office INSEE said. Debt jumped 15.6 billion euros ($22.18 billion) from the second quarter to 1,284.8 billion euros, the highest on record.
The economy ministry cautioned against reading too much into the numbers, saying the rise was due to movements to ensure 'optimal State treasury management during the year' and that the numbers were volatile. But it said the financial crisis had added to the debt load. 'The state of the market conditions does not allow us currently to go ahead with sales of non-strategic assets in satisfactory conditions, which weighs on the gross debt ratio compared to previous years,' an economy ministry statement said.
Rouble in Trouble
As it devalues the rouble, the Bank of Russia is trying to prevent a soft landing from becoming a sudden fall. It has sought to have the currency slide gracefully in recent months by gradually broadening the rouble's reference trading band against the dollar and the euro. But the pace of devaluation is accelerating. Monday's decline means the rouble has now experienced twelve mini-devaluations since November 11. Russia's currency has fallen 20pc since August. Foreign currency reserves are down by about 25pc in the same period, to $450bn, partly because they were used to defend the rouble.
The Bank of Russia could have saved the money by allowing a sharp, one-off devaluation when oil prices went into a tailspin. Oil and oil-related products account for more than 70pc of Russian exports. The country seems to be heading towards its stated goal of having a free-floating currency - leaving the central bank focused solely on fighting inflation - more rapidly than planned. But getting there could still be painful, and a hard landing for the rouble is looking increasingly likely. It seems that the main argument within the Russian government against a sharp one-off devaluation is that it could open the way to a run on banks, as seen in 1998 when Moscow triggered panic by defaulting on its foreign debt.
But today, markets are already braced for further falls in the rouble, which according to most analysts probably needs another 20pc-odd devaluation before it can stabilize. And Russians care more about the dollar than the euro-dollar basket. Street-booth rates are what matters there, with the greenback down by a quarter since summer. So why is Bank of Russia holding back from a decisive devaluation? The answer may be that Vladimir Putin, the prime minister, is opposed to such a move, which his own finance officials seem to favour. Russia's boom years are fast turning into a major slump, with current account and budget surpluses giving way to deficits. By officially making Russia poorer, a devaluation would suggest to Russians that "Putin's prosperity" was based on booming oil prices, and nothing much else.
Where Is Madoff's $50 Billion?
Based on Bernard Madoff's own estimation, he lost approximately $50 billion of investor funds. Every since this disclosure, the biggest questions are where did the money go and how much of the $50 billion remains. Bloomberg is reporting that "Madoff To Reveal Assets" by year end. Investors looking to recoup some of the $50 billion they lost in Bernard Madoff's alleged Ponzi scheme may get a better idea what the New York financial adviser has left when he is forced to reveal his assets to regulators. Madoff, 70, must provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year's Eve, a federal judge ruled.
Madoff's foreign business units were given until Jan. 26 to provide a similar accounting. A catalog of Madoff's assets may reveal targets for angry investors including hedge funds and charities seeking the return of their funds. This is a curious report. Why would a federal judge ask Madoff to provide an accounting?The SEC states that his records are in disarray and in any event, totally unreliable. Is it to be expected that a man who lived by deception and lies for two decades is going to present an accurate report? Where is the SEC, are they still not interested in this man's operations? It would obviously make more sense for an outside regulatory agency to produce a report on Madoff's assets.
Nonetheless, regardless of who produces the report, I would not expect the Madoff funds to show very much in the way of assets due to the magic of compounded interest. Consider the following scenario. If Madoff had $2 billion in assets under management 20 years ago, the amount of this initial investment, compounded at 12% for 20 years would now be approximately $9.6 billion. If Madoff took in another half billion per year over the next 20 years, to date that amount compounded at 12% would now be worth around $40.4 billion. With other factors disregarded and a total principal investment of $11 billion, the investors' account statements would now show $50 billion of assets. We know that Madoff was not generating magical returns of 12% per year over 20 years, so the phantom gains of $39 billion in this example probably never existed. In addition, withdrawals, huge fee payments to feeder hedge funds and losses on investments probably consumed much of the original principal invested.
A classic Ponzi scheme collapses when the amounts needed to be paid out cannot be covered by new investment monies, which seems to be the case here. Madoff probably did not start his fund with the objective of becoming a Ponzi scheme. He was probably drawn into it slowly as his warped ego would not let him admit to the world that he was not an investment genius. Failure to cover previous losses or outperform the market going forward never allowed him to stop the deception once it started. Indifference by regulators allowed him to continue the deception. Madoff's $50 billion never really existed except on customer account statements. Defrauded investors will now find this out come December 31st.
How to hold money managers accountable
Who's holding your money? As the list of wealthy individuals, institutions, and charities that have lost millions, even billions of dollars in the Bernard Madoff fraud case continues to grow, other investors have been asking an important question: Why was there no independent custodian holding the securities and other assets Mr. Madoff's firm was said to be investing? In a legitimate arrangement between an individual investor and a money management firm or financial planner, the money manager may buy and sell stocks, bonds, mutual funds, and other investments on behalf of the client. These trades are often, but not always, made after consulting with the client.
But the money manager does not – in fact, experts say, should not – have access to the client's money. Rather, it is held in a separate "custodial account." Several large firms, including Charles Schwab, Fidelity Investments, and T.D. Waterhouse, provide custodial services. Checks from the client should be made out to one of these firms, not to the planner or adviser. Every month, both the client and the adviser receive a statement from the custodial firm showing the current value of the account, as well as a list of any trades. If the client wants, he can even go online every day to check his balance. This arrangement isn't much different from if an investor made trades through Schwab or Fidelity himself; he's just giving the adviser authority to use those firms to make trades on his behalf.
The importance of independent custodians is likely to grow as more investors turn to professionals to manage their money. Many recent retirees, for instance, may have several hundred thousand dollars or more in 401(k) or 403(b) plans that they want to roll over into IRAs, and they're looking for professional money management. In general, a planner's service costs about 1 to 1.5 percent of client assets per year. In the Madoff case, there was no independent custodian. All client statements and checks came from his office. But, as long as clients could take out money when they wanted to, they apparently didn't ask questions. Of, course, this meant they didn't know that the money they were getting was coming from new investors, which made Madoff's operation a classic Ponzi scheme, and at some $50 billion, the nation's largest.
Another red flag, experts say, should have been the consistently positive returns his firm provided, even in the face of severe market turbulence. For instance, Madoff claimed an average return of more than 10 percent a year, with very little price volatility, in both up and down markets. That may have been one reason investors didn't ask questions, says Michael Martin, a financial planner and president of Financial Advantage, a planning firm in Columbia, Md. "They may say 'I've got something here that other people don't know about, so I'll keep my mouth shut.' " In addition, he notes, the financial business is filled with many smart people with good social skills that they use to gain the trust of potential clients. That may be fine, Mr. Martin says, but, quoting former President Ronald Reagan, he adds: "Trust, but verify."
"Madoff ingratiated him?self to his community," agrees Jeanne Sullivan, a financial planner with Back Bay Financial Group in Boston. She points out that in addition to being a former chairman of Nasdaq, Madoff spent many years cultivating clients in Boston, New York, and Florida. "Many of them were people he had known for 20 or 30 years," Ms. Sullivan says. Also, she notes, Madoff would sometimes refuse to take on new clients the first time they asked, "so it increased their desire to be part of his operation." It's also been reported that if current clients asked Madoff too many questions about how he invested, he kicked them out. But experts stress that there was no financial or legal reason why even these wealthy people and large institutions could not have insisted on having their money held by an independent custodian – except that Madoff would not have let them into his "club."
As difficult as the Madoff case has been, avoiding this problem isn't difficult. Just ask the money manager or financial planner plenty of questions, Sullivan says. Of course, one of the first should be: Do you use an independent custodian, and do my statements and any checks come from you or the custodian? (They should come from the custodian.) "Make sure that the custodian is a well-known independent firm," such as Fidelity, Schwab, or T.D. Waterhouse, Sullivan adds. Several large banks also provide custodial services. Other important questions to ask any financial adviser:
• Are you registered with the Securities and Exchange Commission?
• Can I see the ADV (adviser) form that you filed with the SEC? This form is also used for state registration and includes information on the adviser's education, type of business, as well as any disciplinary actions within the past 10 years. It also covers the adviser's services, fees, and investment strategies. (It's not foolproof; Madoff was registered with the SEC and had an ADV form.)
• What kind of investment returns have you provided over the past several years? While many managers do "beat the market," their returns should not be wildly out of line. Some managers have legitimately been able to lose far less than the market this year by constructing portfolios that include a fair amount of bond and money-market investments, as well as stocks. But even some of these portfolios fell 20 percent this year, while the S&P 500 is down about 40 percent.
Cash-strapped states weigh selling roads, parks
Minnesota is deep in the hole financially, but the state still owns a premier golf resort, a sprawling amateur sports complex, a big airport, a major zoo and land holdings the size of the Central American country of Belize. Valuables like these are in for a closer look as 44 states cope with deficits. Like families pawning the silver to get through a tight spot, states such as Minnesota, New York, Massachusetts and Illinois are thinking of selling or leasing toll roads, parks, lotteries and other assets to raise desperately needed cash. Minnesota Gov. Tim Pawlenty has hinted that his January budget proposal will include proposals to privatize some of what the state owns or does. The Republican is looking for cash to help close a $5.27 billion deficit without raising taxes. GOP lawmakers are pushing to privatize the Minneapolis-St. Paul International Airport and the state lottery. Both steps require a higher authority — federal legislation in the case of the airport, a voter-approved constitutional amendment for the lottery. But one lawmaker estimated an airport deal could bring in at least $2.5 billion, and the lottery $500 million.
Massachusetts lawmakers are considering putting the Massachusetts Turnpike in private hands. That could bring in upfront money to help with a $1.4 billion deficit, while also saving on highway operating costs. In New York, Democratic Gov. David Paterson appointed a commission to look into leasing state assets, including the Tappan Zee Bridge north of New York City, the lottery, golf courses, toll roads, parks and beaches. Recommendations are expected next month. Such projects could be attractive to private investors and public pension funds looking for safe places to put their money in this scary economy, said Leonard Gilroy, a privatization expert with the market-oriented Reason Foundation in Los Angeles. "Infrastructure is more attractive today than ever," Gilroy said. "It's tangible. It's a road. It's water. It's an airport. It's something that is — you know, you hear the term recession-proof."
Unions don't like privatization deals out of fear that worker wages and benefits will be squeezed as private operators try to boost their profit by streamlining services. Taxpayers, too, can lose out if the arrangements don't work — and sometimes even if they do, said Mark Price, a labor economist with the Keystone Research Center in Harrisburg, Pa. Higher tolls on privatized roads can push drivers onto state-operated roads, wearing them down faster and raising public costs over time. "You're privatizing some profits in this process and socializing some losses," Price said. Selling or leasing public assets can produce an immediate infusion of cash for the state, while foisting the tough decisions, such as raising tolls, onto private operators instead of the politicians. "The downsides are often after they leave office," said Phineas Baxandall, a researcher with the consumer-oriented U.S. Public Interest Research Group in Boston.
Some states struck major privatization deals well before the economic crisis hit. Indiana, for example, brought in $3.8 billion in 2006 by leasing the Indiana Toll Road for 75 years. Chicago stands to collect $2.5 billion by leasing Midway Airport, if the federal government approves, and has raised an additional $3.5 billion since 2005 through deals for the Chicago Skyway toll road, parking ramps and parking meters. But in September, investors walked away from a $12.8 billion bid to lease the Pennsylvania Turnpike for 75 years after legislators failed to act on the deal. And Texas lawmakers uneasy over a proposed private toll road system approved a two-year moratorium on such contracts last year. David Fisher, who managed Minnesota's state-owned properties a few years ago under former Gov. Jesse Ventura, warned that the state has a hard time finding buyers for properties such as old mental institutions. Fisher said some public properties belong in private hands, such as Giants Ridge Golf & Ski Resort, a top-rated getaway in Biwabik, and Ironworld, a museum and library in Chisholm. Both are owned and subsidized by Iron Range Resources, a state agency. "Certainly those things could be privatized, I think without harm to the state, but I don't know that you could find the right buyer," Fisher said.
Tight Credit Threatens Pipeline Expansion
Steady expansion for pipeline companies is grinding to a halt as tight credit makes it harder to raise construction money, potentially limiting their ability to bring new supplies of natural gas to market. U.S. gas-pipeline construction boomed in recent years as demand for natural-gas grew and production shifted to new areas, such as north Texas and the Rocky Mountains. Pipeline demand has remained strong despite falling energy prices, but the financial crisis has made it harder and more expensive for companies such as El Paso Corp., Kinder Morgan Energy Partners LP and others to raise cash to build new conduits. Canceled and scaled-back pipeline projects are bad news for natural-gas consumers and producers, who now could face higher fees and limitations on how much gas they can move from new production areas.
In October, Enterprise Products Partners LP cited high capital costs in withdrawing from a project to build a 673-mile-long pipeline from Colorado to North Dakota. El Paso recently said it was cutting its 2008 capital budget to $3.5 billion from $3.8 billion and would spend just $3 billion on projects in 2009. The retrenchment also spells trouble for pipeline companies' growth, which depend on new projects. Analysts expect many of the smaller pipeline companies to become takeover targets next year. "It truly is survival of the fittest," said Dan Rogers, an energy attorney at King & Spalding in Houston. Some larger pipeline companies with less debt have been able to raise money in recent weeks, but at sharply higher costs than a few months ago. El Paso this month raised $500 million in 5-year notes paying 12%, interest after paying just 7.25% in May for $600 million in 10-year notes. Dallas-based Energy Transfer Partners LP said last week it had raised $600 million through the sale of 11-year notes paying 9.7% interest. In March, it sold 10-year notes for 6.7%.
The challenges for the pipeline industry are coming even though their profits have been holding up better than other parts of the energy sector, said Mark Easterbrook, an analyst with RBC Capital Markets. Pipeline companies make their money by charging fees to access their pipes. Those fees are generally based on the volume of gas moving through the pipeline and negotiated in advance, so pipeline revenue isn't directly tied to commodities prices. But while existing pipelines provide a steady source of revenue, new pipelines are the source of companies' growth. Future projects are getting postponed or scaled back. Last month, Regency Energy Partners LP said it would cut capacity 30% on a planned pipeline that would bring natural gas from a new field by using smaller-sized pipe.
Pipeline companies depend on outside capital because many of them are structured as master limited partnerships rather than corporations. Such partnerships carry tax advantages that help improve returns. But the structure also requires companies to return virtually all their cash flow to investors in the form of quarterly distributions. That means long-term projects must be funded by borrowing money or issuing equity. "The [partnership] model in terms of growth really only works when you have a healthy capital market," said Wachovia analyst Michael Blum. His firm anticipates capital spending will drop roughly 25% across the industry next year.
Stronger companies that have been able to raise new capital may turn to acquisitions for growth. "There's probably less competition, and there will be more acquisition opportunities," said Kinder Morgan President C. Park Shaper. The pipeline construction slowdown comes despite the fact that pipeline demand remains strong. Gas producers cut back on drilling as prices tumbled, but most of the cuts have been in older fields that have plenty of pipeline capacity. Newer fields in Louisiana, Arkansas and Pennsylvania are still growing rapidly and may quickly outgrow their existing pipelines. "The gas is now being produced in areas where no one contemplated production before. The pipeline infrastructure does not exist in many of those areas," Energy Transfer Partners LP Chief Executive Kelcy Warren said.
Boom in Australia goes bust as global slowdown hits
For Leigh Davies, the good times ended with a phone call.
Until that day in mid-September, he could hardly keep up with all the demand for his firm's mining equipment. Like just about everyone else in the mineral-rich state of Western Australia, he was riding a worldwide commodities boom, ignited by China's seemingly insatiable demand for the riches beneath the Australian soil — iron and copper ore, zinc, magnesium, coal. Then the phone rang, two days after the collapse of Wall Street investment bank Lehman Bros.: "We got a call from one of our better clients, saying, 'Most of our finances are tied up in Lehman bank, and we're suspending your contract until we get it sorted out.' " From there, things got worse. Other clients, caught up in a sudden credit crunch, delayed or canceled projects, idling all eight of Davies' drill rigs for the first time ever. "We've got no work," he says.
In a matter of weeks, Australia's boom has gone bust. Now economists at Citigroup and JPMorgan Chase, among others, are forecasting that Australia's economy will shrink this quarter and next, tipping the land down under into a recession for the first time since 1991. JPMorgan sees the jobless rate — a record low 4% just 10 months ago — rising to 9% by 2010. Davies is stunned by the speed with which it all unraveled. "The whole of Australia had been screaming for more drilling rigs and equipment. We had a severe shortage of manpower. It all stopped within two weeks." "It was very quick," says Ron Wyndow, whose firm in Karrinyup, Western Australia, provides equipment and services to mining and mineral exploration firms. "It hit about eight weeks ago. Just, bang!" The financial crisis is hitting debt-laden Australians hard. "We're headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble," says economist Steve Keen of the University of Western Sydney, one of the first forecasters to sound the alarm. Keen says Australian households have been adding debt — as a percentage of economic output — even faster than their U.S. counterparts over the past 18 years. Now they're feeling pinched and are cutting back. "We have a homegrown recession coming our way, regardless of what happens in the rest of the world," Keen says.
"Shoppers are on strike," Canberra-based consultants Access Economics reported recently. "Their confidence is shattered, and they are pulling back sharply on discretionary spending." Access expects retail sales to drop 0.1% in the fiscal year that ends in June and to grow an anemic 0.9% the year after that. Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. "We're likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks' solvency doesn't look so hot anymore." China, Australia's No. 1 trading partner, isn't providing as much shelter as expected from the global economic tempest. China itself has proved unexpectedly vulnerable to slowdowns in the United States and Europe. Its economic growth is decelerating rapidly from the double-digit annual pace of the past decade. Last month, Chinese exports fell for the first time in seven years.
"China's economy has slowed much more quickly than anyone had forecast," says Glenn Stevens, governor of Australia's central bank. Add in China's plummeting stock market and crumbling housing prices, and "There goes Australia's China blanket," economist Keen says. "We were living in a bubble in Australia, thinking that we'd manage because of China and because of our resources," says Nick Read of Drill Technics Australia, a Queensland maker of drill rigs. "The fact is, resources have hit rock bottom, and China is struggling also. It happened very fast." Australian policymakers have responded aggressively to the economic threat. Stevens' Reserve Bank of Australia has been chopping interest rates. And the government of Prime Minister Kevin Rudd is spending more than $10 billion to jump-start the economy. For now, businesses are hunkering down. Anglo-Australian mining giant Rio Tinto just announced plans to slash 14,000 of its 112,000 jobs. Drill Technics, its rigs running just half the time, has cut its drilling crew to 15 from 32. Davies has laid off 15 of his 27 workers. "If you want to be in business after Christmas, you have to cut costs," he says.
Kuwait scraps joint venture with Dow Chemical
Kuwait's government on Sunday scrapped a $17.4 billion joint venture with U.S. petrochemical giant Dow Chemical after criticism from lawmakers that could have led to a political crisis in this small oil-rich state.The Cabinet, in a statement carried by the state-owned Kuwait News Agency, said the venture, known as K-Dow Petrochemicals, was "very risky" in light of the global financial crisis and low oil prices. The move came just days before the Jan. 1 startup date for the joint venture. In its statement, the Cabinet said the "limits of the effects" of the meltdown on international companies cannot be forecast. KUNA said the contract was canceled by the Supreme Petroleum Council, the country's highest oil authority. Dow Chemical said it was "extremely disappointed" with the Kuwaiti government's decision and was evaluating its options under the joint-venture agreement. "While disappointed in this outcome, Dow remains committed to its Middle East strategy," the Midland, Michigan-based company said in a brief statement.
The project, in which Kuwait was to hold a $7.5 billion stake, had been criticized in the country as a waste of public funds, and lawmakers threatened to question the prime minister in parliament if it was launched. Such a move could have led to Sheik Nasser Al Mohammed Al Sabah's impeachment, sparking a new political row in the country just weeks after the Cabinet resigned in protest after an effort by a group of Islamist lawmakers to question the premier over corruption allegations within the government. Sheik Nasser was reappointed to his post though he has yet to form a new Cabinet. Dow, one of the world's largest chemical companies, and Kuwait's Petrochemical Industries Co., a subsidiary of the Kuwait Petroleum Corp., had hoped the joint venture would help them capture a larger share of the global chemicals market and boost profitability. The company was to be headquartered in the Detroit area.
But the sharp drop in crude oil prices -- from mid-July highs of nearly $150 per barrel to under $40 currently, has hit Kuwait and its oil-rich Gulf Arab neighbors, hard. The Kuwaiti stock exchange has fallen by about 35 percent since the beginning of the year, and some investors have criticized the government for what they said was a lack of action to stave off the impact of the global meltdown. Dow has also faced difficulties, and announced earlier this month that it was cutting about 11 percent of its work force, closing 20 plants and selling off several businesses to cut costs amid the financial downturn. As criticism over the deal mounted in Kuwait, Oil Minister Mohammed al-Eleim defended the venture as profitable, saying it was carefully studied by international consultants for over two years. The Cabinet said in its Sunday statement it "rejected" politicizing the issue which is harming the country by impeding development projects.
Asian airlines brace for recession blues in 2009
The year-end festive season usually heralds a busy period for Asia-Pacific airlines. But this year, a global economic slump has choked passenger and cargo traffic -- and 2009 looks even gloomier, corporate executives and industry experts say. "Last December I remember being in a very buoyant mood, telling you all that the airline was in excellent shape and the overall picture was very healthy," Hong Kong's Cathay Pacific Airways Chief Executive Tony Tyler said in a recent company newsletter. "Now, as 2008 draws to a close, we are facing very uncertain times and the mood has turned decidedly somber." While the drop in fuel prices has provided some reprieve, air traffic demand has fallen as companies and tourists cut back on travel. The International Air Transport Association has warned that the aviation industry faces its worst revenue environment in 50 years.
Asia-Pacific carriers, which account for nearly a third of global passenger traffic and 45 percent of the global cargo market, will be badly hit with losses to more than double from $500 million this year to $1.1 billion in 2009, the IATA predicts. Aviation experts say regional airlines should be able to weather the downturn better than their American and European peers because they have relatively strong balances sheets and more modern fleets. Also, a number of airlines, including Singapore Airlines, Malaysia Airlines and Chinese carriers, are state-run, meaning they could get government support if needed. Some analysts have said the region has less competition than the U.S. and Europe, where more airlines compete on the same routes. "Asia-Pacific airlines are generally better placed than their counterparts elsewhere amid difficult times but they will still feel the pain," said Nicholas Ionides, regional managing editor of Flight International magazine based in Singapore.
While Japanese carriers appear to be having a solid year-end, major carriers Japan Air Lines and All Nippon Airways have slashed their revenue forecasts, and the economy there is slowing. Airlines in Australia, China and South Korea are also struggling as their economies slow. India's carriers, which are grappling with high taxes and insufficient infrastructure, can also expect lower demand following November's terror attacks in Mumbai. Globally, air traffic will fall 3 percent next year, the IATA predicts -- the first drop since 2001, when the Sept. 11 terrorist attacks battered the industry. Many airlines have cut capacity and shed jobs to cope with high oil prices earlier this year. In recent weeks, nearly all carriers in the region also slashed fuel surcharges and offered fare deals in response to declining fuel prices, and this could lure more travelers. But signs of trouble are evident even among the region's top players. Korean Airlines Co., the world's largest international cargo carrier, posted its fourth straight quarterly loss for the third quarter due to a weak won, which raised the cost of purchasing fuel and servicing foreign debt.
Cathay Pacific reported its first half-year loss since 2003 and said its full-year results would be "disappointing" amid weakening revenue and losses from fuel hedging. Cathay has plans to park two freighters, offer unpaid leave to employees and possibly delay construction on a cargo terminal to cut costs. It will also scale back services to North America but add flights to Australia, the Middle East and Europe to keep passenger growth flat in 2009, but the airline won't cut any destinations. Singapore Airlines said its third quarter profit dipped 36 percent and warned of "weaknesses" in advance bookings for 2009. Japanese carriers' business has recovered recently as the yen's appreciation against the U.S. dollar and other currencies made traveling overseas cheaper for Japanese. Still, All Nippon Airlines has cut its net profit forecast for the full year by a third and deferred plans to order a new jumbo aircraft. Australia's Qantas Airways has cut 1,500 jobs and plans to reduce capacity to the equivalent of grounding 10 planes. It also trimmed its full-year pretax profit target by one-third. In China, the forecast boom in travel during Beijing's Olympics year never materialized.
The state-run airlines recorded combined losses of 4.2 billion yuan ($613 million) for January-October. Slammed by surging fuel costs earlier in the year, the airlines lost again in fuel hedging after recent drop in prices. "The overall airline sector appears to be in its worst mess ever, and it will be pretty hard to survive," said Song Weiya, a researcher with Great Wall Securities in Shenzhen. Authorities have urged state-run carriers to cancel or delay aircraft deliveries. It's two biggest airlines -- Shanghai-based China Eastern Airlines and China Southern Airlines in Guangzhou -- are in the midst of receiving 3 billion yuan ($440 million) capital injection from the government. China Eastern, which earlier failed to sell a stake to international investors, may now merge with rival Shanghai Airlines, an ally of flag carrier Air China. In New Delhi, state-run Air India is eyeing a government bailout to cope with a harsh downturn. Analyst said airlines will gravitate toward mergers and seek government support to fend off the downturn. Consolidation helps airlines by cutting costs as they share resources and feed more passengers through hubs. After merger talks between Qantas and British Airways collapsed recently, some analysts say Qantas may seek a deal now with Asian carriers.
Malaysia Airlines has expressed interest, saying recently it was in talks with a number of carriers including Qantas on possible partnerships. AirAsia, the region's biggest budget airline, is taking a contrarian approach by adding flights and expanding amid the slump. Chief Executive Tony Fernandes believes AirAsia will benefit as travelers downgrade to budget carriers. It became the first airline in the world to remove fuel surcharges on all its flights last month. AirAsia expects to fly 19 million passengers this year and 24 million in 2009, he said -- up from 15 million last year. The carrier plunged into the red for the first time in the third quarter, largely due to foreign exchange losses and unwinding of fuel hedging contracts. But Fernandes said AirAsia has no plans to cancel or defer its order for 175 Airbus aircraft, of which 55 have been delivered with nine more targeted for 2009. "We are confident," he said. "We are a beneficiary of the economic slump just like McDonald's and Wal-Mart as people are looking for more value."
Could the economic crisis save the environment?
It seems that for the last quarter of 2008, not a day went by when the word "bailout" didn't dominate the headlines. The now-ubiquitous term is often associated with the need for massive government help for banks, the financial sector, and auto industry. But more and more economists and commentators are linking the need for bailouts with the environment. They say the current economic crisis -- and the challenges the global community faces -- present a nearly-unprecedented opportunity. The New York Times's columnist Thomas Friedman was one of the first to link the crisis to the need for new environmentally centred economic policies. "You can't base a national economy on credit cards," he wrote, just days after U.S. President George Bush told the world about the emergency. "But you can base it on solar panels, wind turbines, smart biofuels and a massive program to weatherize every building and home in America."
Friedman isn't alone in trying to find a silver lining from the crisis. Politicians, environmentalists, academics, and bloggers around the world are pushing their governments to do exactly what Friedman suggested. Michael Renner, a senior researcher with the Washington-based Worldwatch Institute, says that as politicians try to steer the economy through 2009 and beyond, they should aim to achieve a paradigmatic shift, one where companies don't have to sacrifice their bottom lines for green initiatives. "If we think that the way to get out of the economic crisis is through the typical Keynesian (stimulus-oriented) route, then we might as well do it with the environment in mind," Renner told CTV.ca in a phone interview. He said as governments set out to help industries, they should use the public's money to emphasize environmental innovation that would save jobs -- and create millions of positions that don't yet exist.
The current crisis, Renner says, has pushed world leaders to rethink the nature of the global economy in a way that they've not done in decades. He said developing and industrialized countries can reshape the auto, energy, construction sectors, along with a host of other sectors in ways that will create jobs and profits while helping the environment in the long term. Renner admits there will be skeptics. But the economist offers an intriguing historical example to counter those who doubt nations can so easily shift the entire nature of their economies. In 1942, he says, the U.S. government directed its automakers to stop making cars and start making tanks, armored vehicles, airplane propellers. The shift was completed in a matter of months and, after the war, the companies reverted to auto manufacturing with equal ease and speed. Why can't the same thing happen now, wonders Renner. He says that with all the talk of an auto sector bailout, government leaders and the public should be pushing the auto companies to go green -- not just because it makes sense for the environment but also because it makes good business sense.
"If (the car companies) want to survive more than just the next quarter, (they) need to think long term," he told CTV.ca in a phone interview. For years, he said, North American automakers have kept on building "ridiculously large" vehicles because gas was cheap and consumer loans easily available. The strategy obviously didn't work. They then belatedly began to invest in hybrid technology, leaving them years behind Japanese and European competitors. The Detroit Three are now hoping billions of taxpayers' dollars in Canada and the U.S. will help them save their companies and tens-of-thousands of jobs. "There's a real strategic need to rethink these policies. If there's a bailout, then we should push it in that (greener) direction. Their (the car companies') feasibility depends on it," Renner says.
It's not just car companies and their employees who can benefit from an environmentally focused bailout, he says, noting Canada's housing sector is ripe for a new green revolution, one focusing on energy efficiency. That could help revive the construction industry, one of the leading indicators of a healthy economy, Renner says. It's a historic opportunity to create millions of jobs that don't even exist, he says.According to Worldwatch:
Canada can do the same, Renner says, noting that home retrofitting or purchasing green-friendly homes also allows individuals to reduce their own carbon footprint. One of Renner's most controversial suggestions for Canadians centres on Alberta's tar sands, one of the world's largest deposits of oil. "I would think it's best to leave it in the ground," he says bluntly. Renner says oil extraction is becoming less and less profitable and efficient because the process that turns the tar sand into a usable product wastes both water and energy. "If you look at it from a removed view, yes, there is an energy source. But it doesn't come to us for free. So, it takes enormous effort, it takes an enormous amount of energy to get to the point you can put it into your car. (If we) fully account for these things, the tar sands don't seem to be a good option," he said.
- The building and construction sector employs more than 111 million people worldwide.
- Retrofitting the European Union's residential building sector would lead to some 2.6 million new jobs by 2030.
And then he points out the direct effect on wildlife and Alberta. "The environmental impacts are horrendous," he said, adding countries such as Canada can become world leaders in the energy sector without oil extraction. (Worldwatch notes that renewable energy technologies employ about one million people in China alone who work in the wind, solar power and biomass industries.) Renner says worrying about job losses is perfectly natural. But he says that's what's makes a green bailout an almost perfect solution to the current economic crisis. "Look at this fairly broadly," he advises Canadians. "Don't assume a green stimulus would only help a few people."
Ilargi: Yes, newspapers are useful, and so are journalists. Or should we say they could be? Much as I symphatize with sad sentiments among reporters, the credit crisis has made one thing abundantly clear. The mass media have failed at every single step to recognize the real problems, or at least walked many months behind the best bloggers in the field. Whether that is because today’s reporters are simply not up to their task, or because their paymasters aim for the middle of the road, where they know the lowest common denominator walks, is not even that interesting anymore.
The mass media -papers, radio, TV- have had a million chances to do theri job of providing true information, but have forced those who got tired of being informed much later than the others who read blogs, to their computer screens. Newspapers, who have millions upon millions of dollars to allocate, staffed with hundreds or thousands of well-paid professionals, have had all the chances they deserve to get it right, and failed miserably. People want to feel that they get their information in an accurate, timely and truthful manner. Papers all too often have a political agenda, and all too often don’t publish those stories that their owners and editors don’t like to see, even if they are true.
All I Wanted for Christmas Was a Newspaper
Bloggers are no replacement for real journalists.
When my colleague at the Newark Star-Ledger John Farmer started off in journalism more than five decades ago, things were very different. After covering a political event, he'd hop on the campaign bus, pull out a typewriter, and start banging out copy. As the bus would pull into a town, he'd ball up a finished page and toss it out the window. There a runner would scoop it up and rush it off to a telegraph station where it would be blasted back to the home office. At the time, reporters thought this method was high-tech. Now, thanks to the Internet, a writer can file a story instantly from anywhere. It's incredibly convenient, but that same technology is killing old-fashioned newspapers. Some tell us that that's a good thing. I disagree and believe that the public will miss us once we're gone.
Mr. Farmer, who is now the Star-Ledger's editorial page editor, retold his experience of the old days a short while ago at a wake of sorts for departing colleagues. The paper has been losing money and might have had to shut its doors sometime early next year. So the drivers' and mailers' unions made contract concessions, and about 150 nonunion editorial staff took buyouts as part of an effort by the publisher to save the paper. The Star-Ledger is among the 15 largest newspapers in America, and it circulates in some of the most prosperous suburbs of New York City. We are perhaps alone among the major papers in devoting extensive coverage to small-town news and sports. We routinely get scoops on what the Steinbrenners are thinking about the Yankees. And in 2005, the paper won the Pulitzer Prize for its sober coverage of Democrat Gov. Jim McGreevey's resignation after his admission to an adulterous affair with another man.
The problem is that printing a hard copy of a publication packed with solid, interesting reporting isn't a guarantee of economic success in the age of instant news. Blogger Glenn Reynolds of "Instapundit" fame seems to be pleased at this. In his book, "An Army of Davids," Mr. Reynolds heralds an era in which "[m]illions of Americans who were in awe of the punditocracy now realize that anyone can do this stuff." No, they can't. Millions of American can't even pronounce "pundit," or spell it for that matter. On the Internet and on the other form of "alternative media," talk radio, a disliked pundit has roughly a 50-50 chance of being derided as a "pundint," if my eyes and ears are any indication. The type of person who can't even keep track of the number of times the letter "N" appears in a two-syllable word is not the type of person who is going to offer great insight into complex issues. But the democratic urge expressed by Mr. Reynolds is not new. Someone is always heralding the rise of "the intellectual declaration of independence of the American people," as H.L. Mencken once put it.
In his 1920 essay "The National Letters," Mencken traced this sentiment back to the early days of our democracy. He noted how first Ralph Waldo Emerson and then Walt Whitman prophesized the rise of what Whitman termed "a class of native authors, literatuses, far different, far higher in grade than any yet known." Mencken was pessimistic about this prospect thanks to what he termed "the democratic distrust of whatever strikes beneath the prevailing platitudes." I share that pessimism. Every time a new medium arises, a new group of avatars arises with it, assuring us of the wondrous effects it will produce for our democracy. I encountered this back in the early 1970s in my communications classes at Rutgers. Cheap, portable video cameras had just been invented, and I was assured by the bearded professors and grad students that these cameras would lead to a rebirth of democracy. The citizenry would start recording public meetings and the result would be a revolution.
Now we're hearing the same thing about the blogosphere. "When enough bloggers take the leap, and start reporting on the statehouse, city council, courts, etc. firsthand, full-time, then the Big Media will take notice and the avalanche will begin," Mr. Reynolds quotes another blogger as saying. If this avalanche ever occurs, a lot of bloggers will be found gasping for breath under piles of pure ennui. There is nothing more tedious than a public meeting. After I got out of Rutgers, I began as a reporter at a newspaper in Ocean County, N.J. If the Toms River Regional Board of Education had not offered free coffee, I fear that I might have been found the next day curled up on the floor in the back of the room like Rip Van Winkle. As it was, I only made it through the endless stream of resolutions and speeches by employing trance-inducing techniques learned in my youth during religion class at St. Joseph's school up the street.
The common thread here, whether the subject is foreign, national or local, is that the writer in question is performing a valuable task for the reader -- one that no sane man would perform for free. He is assembling what in the business world is termed the "executive summary." Anyone can duplicate a long and tedious report. And anyone can highlight one passage from that report and either praise or denounce it. But it takes both talent and willpower to analyze the report in its entirety and put it in a context comprehensible to the casual reader. This highlights the real flaw in the thinking of those who herald the era of citizen journalism. They assume newspapers are going out of business because we aren't doing what we in fact do amazingly well, which is to quickly analyze and report on complex public issues.
The real reason they're under pressure is much more mundane. The Internet can carry ads more cheaply, particularly help-wanted and automotive ads. So if you want a car or a job, go to the Internet. But don't expect that Web site to hire somebody to sit through town-council meetings and explain to you why your taxes will be going up. Soon, newspapers won't be able to do it either. Over the past few weeks, I've watched a parade of top-notch reporters leave the Star-Ledger for the last time. The old model for compensating journalists is as obsolete as the telegraph. If anyone out there in the blogosphere can tell me what the new model is, I will pronounce him the first genius I've ever encountered on the Internet.