"New York Stock Exchange, Wall Street, Lower Manhattan"
Ilargi: Max Keiser interviews Stoneleigh, and she's in great shape again here. Silencing Max, bless him, is no mean feat.
Max Keiser Interviews Stoneleigh
Ilargi: The currencies race to the bottom has taken off again, after a summer of relative quiet in which most parties were fine with what they had. But it was a relative quiet: behind the various curtains new plans have been concocted without pause, with everyone jockeying for positions come the fall. I personally really like the suggestion that China intentionally drove up the yen through Japanese debt purchases, for the simple reason that it allows me to wonder if they perhaps collaborate with the US, the EU, or both, on this. Even if it makes more sense to think that China's export, and overall economic, situation is a lot worse than Beijing lets on, and they simply need to hurt any competitor for foreign markets they can find.
Europe is slowly re-entering the ring with press coverage of Ireland and Greece, and I would expect this pattern to intensify. Earlier this year I wrote that in my view, the Germans would like to let the euro drop to between $1.10 and $1.15, a level they would see as a bottom. I think there's also a top they don’t want to breach, and that would be the $1.30 range the euro is at now. This week’s huge currency market intervention by Tokyo to bring down the yen will force Europe to bide its time a little, but in a week or two I’m seeing bad stories coming about the state of the EU, first the periphery, after that perhaps even a country like France.
That last bit may sound a bit far-fetched for some, but the way I see it it's imperative to realize the strong possibility of much fiercer currency wars in that race to the bottom. You may remember Obama's pledge to double US exports in 5 years, and that is going nowhere. Which was clear from the beginning, of course: as world trade decreases, the US would have to take a lot of exports away from other countries in order to double its own, and apart from one time deals like a $60 billion WMD for oil swap with the Saudis, this was never in the cards.
It’ll be interesting to watch the race, and the odds of the US getting its way, re: a sharply lower dollar, don't look good. Too much competition. And that would mean that America gets the worst of both worlds: a collapsing economy set against a relatively high currency, a volatile combination indeed.
An example of some of the dynamics at play: I’m currently spending some time in the Netherlands again. Unemployment here is almost extremely low: about 4.8% versus the US' official 9.6%, and it's even falling. Little pressure from that angle. Housing prices are so far hardly falling at all. Which is a bit odd, since everyone tells me homes are not selling at all: they can stay on the market for years at a stretch. A bad omen, indicative of strongly lower prices to come.
Two things I’ve seen in the press here that will repeat themselves worldwide are: 1) Pension funds that are announcing lower pay-outs due to insufficient coverage levels, and 2) Police forces that warn of mayhem in the streets due to budget cuts. Now, I've stopped keeping count of the number of times Stoneleigh and I have warned of the inherent Ponzi dynamics of any and all pension funds, suffice it to say the bursting of that particular bubble is starting to happen, and it will get a lot worse. Holland's largest fund, ABP, saw its coverage level drop from 103% to 94% in just one month....
We've also talked ad nauseam about the effects of both increasing debt levels and lower tax revenues on essential services. Cutting police services in a time when people overall get poorer, and a huge part of the younger population realizes that it’ll never be allowed anything near the level of -financial- well-being their parents' generation has enjoyed, it's like laying out the fuse to the powder keg for everyone to light.
Still, in the US these detrimental developments are far more advanced than in a country like the Netherlands, which is late to the game, even if denial plays a prominent role here too. 19-th century German writer Heinrich Heine once quipped that if he felt death standing on his doorstep, he'd move to Holland, because everything happens 50 years later there.
No such fictional grace time warp is granted the US.
Scott Cohn at CNBC reports:
Retirement on Hold: American Workers $6 Trillion ShortA new study obtained by CNBC says Americans are $6.6 trillion short of what they need to retire. [..] ... the study notes, if the rate of return matches the return on U.S. Treasury Inflation-Protected Securities (TIPS), currently 1.87 percent, the deficit balloons to $7.9 trillion.
Geoff Mulvihill and Susan Haigh of the Huffington Post have this:
States Slashing Pensions, Benefits For Public-Sector RetireesThe security guards at the headquarters of New Jersey's pension fund have never seen anything like it before: lines of public employees extending out the door and into the street. Day after day, workers come in droves to apply for retirement. They often line up before dawn.
The rush has been set off in part by Republican Gov. Chris Christie's campaign in this cash-strapped state to make government employment – and retirement – less lucrative. Since 2008, New Jersey and at least 19 other states from Wyoming to Rhode Island have rolled back pension benefits or seriously considered doing do – and not just for new hires, but for current employees and people already retired.
Christie has warned that New Jersey's pension fund will go belly up unless something is done to close the $46 billion gap between how much the state expects to bring into the system and how much it has promised to workers. Other states' pension funds are in shaky condition, too.
The Pew Center on the States reported this year that in eight states, at least one-third of the future pension obligations for all public employees, including teachers, are unfunded. As of 2008, Pew said, state and local governments had pension obligations totaling $3.35 trillion – $1 trillion of that not covered by the future stream of government and employee contributions specified under current law. Only four states – Florida, New York, Washington and Wisconsin – had fully funded pension systems as of 2008.
Part of the reason for the gap is that in tough times, states often skip paying their share into retirement funds. New Jersey, for instance, is skipping its $3.1 billion in payments this year. The problem is compounded when investments lose money, as many have in recent years. In 2008, for instance, the Pennsylvania State Employees' Retirement System fund had investment losses of nearly 29 percent – the worst in the country.
Michael Snyder at Economic Collapse lays out a few statistics:
15 Shocking Poverty Statistics That Are Skyrocketing As The American Middle Class Continues To Be Slowly Wiped Out
- Approximately 45 million Americans were living in poverty in 2009.
- According to the Associated Press, experts believe that 2009 saw the largest single year increase in the U.S. poverty rate since the U.S. government began calculating poverty figures back in 1959.
- The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.
- According to the U.S. Department of Agriculture, on a year-over-year basis, household participation in the food stamp program has increased 20.28%.
- The number of Americans on food stamps surpassed 41 million for the first time ever in June.
- As of June, the number of Americans on food stamps had set a new all-time record for 19 consecutive months.
- One out of every six Americans is now being served by at least one government anti-poverty program.
- More than 50 million Americans are now on Medicaid, the U.S. government health care program designed principally to help the poor.
- One out of every seven mortgages in the United States was either delinquent or in foreclosure during the first quarter of 2010.
- Nearly 10 million Americans now receive unemployment insurance, which is almost four times as many as were receiving it in 2007.
- The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.
- According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.
- Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.
- More than 25 percent of all Americans now have a credit score below 599.
- One out of every five children in the United States is now living in poverty.
Ilargi: We're looking at a society that's -seemingly- slowly and methodically being gutted to the bone. No matter what government and media pundits say, there's not one in s series of numbers like this that show any sign of improvement. If you think the stock markets represent the true state of American society, you got another one coming. With un-and underemployment hovering around 20% for most of 2010, and likely to stay there or get worse through 2011, there is not even the possibility of a recovery.
If some 20% of your work force is out of the loop, and don't forget most of them have dependents as well, with consumer spending making up 70% of your GDP, you're far more likely to be pulled further down in a swirling vicious feedback corkscrew loop than you are to receive a miracle U-turn from above.
Add to that the failure to significantly increase exports, and a currency that will come under increasing upward pressure, and Bob's your uncle.
Last but not least, there's the all important US housing market. Here's a little ditty from Bloomberg's John Gittelsohn and Kathleen M. Howley that should paint the picture loud and clear.
U.S. Home Prices Face 3-Year Drop as Inventory Surge LoomsThe slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.[..]
There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month’s sales pace, according to the Chicago- based Realtors group.
Ilargi: Well, my simpleton math says that if it takes 12.5 months to sell 4 million homes, it would take 50 months to sell the 4 million presently listed + the 12 million to be added. And there's no way to be sure the 12 million number is accurate: in all likelihood, the real number is much higher, and likely to grow fast, as ever more people walk away from their homes, lose their jobs, and/or are foreclosed upon.
Both here in Holland and in the US (as well as in many other countries - hello UK!-) there's enormous pressure to keep home prices high, from sellers -make that potential sellers-, from governments (property taxes) and from the banking system, which .
Home sales are at their lowest point since 1963, and the number of Americans working in manufacturing is the lowest since the 1950's(!), when the population was half of what it is today.
The government may refuse to let the financial system mark its assets to market, but it won't be able -forever- to prevent homes to be marked to market. Not with an over-4-year inventory wasting away out there. Desperate people, and desperate institutions, will at some point sell for basically whatever they can get, and that down the line will set the price for neighboring homes, and the ones around them, and those around these.
And when that happens, it’ll be the people who will count their losses, while the bankers, having been aided and abetted by governments worldwide, will count their loot and disappear behind gates patrolled by a bunch of poor sods who couldn't get any other job than guarding those who bankrupted their very families.
Retirement on Hold: American Workers $6 Trillion Short
by Scott Cohn - CNBC
A new study obtained by CNBC says Americans are $6.6 trillion short of what they need to retire. The study, conducted by Boston College's Center for Retirement Research, says savings have been squeezed by declines in stock and housing values. The study was commissioned by Retirement USA, a coalition of organized labor and pension rights advocates that hopes to use the study to push for a more stable retirement system. The group plans to unveil the study at a news conference in Washington on Wednesday.
The $6.6 trillion figure is based on projections of retirement and income for American workers ages 32-64. The study's authors say they arrived at the amount using conservative assumptions, including a 3 percent rate of return on assets and no further cuts in pension coverage or increases in the Social Security retirement age.
"Using other assumptions, it could be much higher," said Maria Freese, Director of Government Relations and Policy for the National Committee to Preserve Social Security and Medicare. For example, the study notes, if the rate of return matches the return on U.S. Treasury Inflation-Protected Securities (TIPS), currently 1.87 percent, the deficit balloons to $7.9 trillion.
This announcement comes on the heels of other sobering news: Milliman Inc., a Seattle-based actuarial and consulting firm, reported this week that the funded status of the 100 largest corporate defined benefit pension plans dropped by $108 billion during August 2010. This comes amid recent reports indicating that a White House-created panel is considering proposals to cut Social Security benefits and raise the retirement age. "The 'Retirement Income Deficit' should be a wake-up call to Americans everywhere," Freese said.
States Slashing Pensions, Benefits For Public-Sector Retirees
by Geoff Mulvihill and Susan Haigh - Huffington Post
The security guards at the headquarters of New Jersey's pension fund have never seen anything like it before: lines of public employees extending out the door and into the street. Day after day, workers come in droves to apply for retirement. They often line up before dawn.
The rush has been set off in part by Republican Gov. Chris Christie's campaign in this cash-strapped state to make government employment – and retirement – less lucrative. Since 2008, New Jersey and at least 19 other states from Wyoming to Rhode Island have rolled back pension benefits or seriously considered doing do – and not just for new hires, but for current employees and people already retired.
After telegraphing his intentions for months, Christie spelled out the details of his proposal Tuesday. They include: repealing an increase in benefits approved years ago; eliminating automatic cost-of-living adjustments; raising the retirement age to 65 from 60 in many cases; reducing pension payouts for many future retirees; and requiring some employees to contribute more to their pensions. "We must reverse the damage caused by fairy-tale promises that have fattened benefits and pensions to unsustainable levels," the governor said.
To be sure, the looming benefit changes are not the only reason many public employees in New Jersey are retiring. Some say they want out for the usual reasons – to spend time with the grandchildren or go fishing, for example – or complain that government layoffs and other cutbacks are making work unbearable. But other employees figure that by retiring now, they can lock in certain benefits before it is too late.
William Liberty started as a trash collector in Lindenwold 37 years ago and worked his way up to a job as public works supervisor. But his pay has been frozen for two years and he has to take an unpaid furlough day a month. And given Christie's pension cut proposals, "it's going to get worse," Liberty said. He hoped to keep the job until he turned 65. But at 62, he went last week to the state pension office to see about retiring soon. Christie has warned that New Jersey's pension fund will go belly up unless something is done to close the $46 billion gap between how much the state expects to bring into the system and how much it has promised to workers. Other states' pension funds are in shaky condition, too.
The Pew Center on the States reported this year that in eight states, at least one-third of the future pension obligations for all public employees, including teachers, are unfunded. As of 2008, Pew said, state and local governments had pension obligations totaling $3.35 trillion – $1 trillion of that not covered by the future stream of government and employee contributions specified under current law. Only four states – Florida, New York, Washington and Wisconsin – had fully funded pension systems as of 2008.
Part of the reason for the gap is that in tough times, states often skip paying their share into retirement funds. New Jersey, for instance, is skipping its $3.1 billion in payments this year. The problem is compounded when investments lose money, as many have in recent years. In 2008, for instance, the Pennsylvania State Employees' Retirement System fund had investment losses of nearly 29 percent – the worst in the country.
In the past, states have been more likely to reduce pensions for incoming employees, while generally leaving the benefits of current workers and retirees untouched. That strategy can be a way around objections from unions and lawsuits from those who say the government is reneging on promises. Keith Brainard, research director for the National Association of State Retirement Administrators, says it may be unprecedented that so many states at once are raising employees' pension contribution rates.
Among the developments around the country:
- In Mississippi, employees of state and local governments and school districts are now being required to put 9 percent of their pay into the state retirement system, up from 7.25 percent.
- Rhode Island in 2009 reduced cost-of-living increases and tightened eligibility requirements for retirement. Previously, employees could retire with 28 years of service. Now, those already employed by the state will have to meet a new standard that takes both age and years of service into account.
- In Wyoming, as of Sept. 1, employees will have to start paying 1.4 percent of their salaries into a pension fund – the first time in a decade the workers have had to contribute anything.
- Vermont earlier this year changed the retirement age for many current employees. They must be 65, or their age and years of service must add up to 90. Previously, retirees had to be 62 or have 30 years of service at any age.
- Lawmakers in Colorado, South Dakota and Minnesota rolled back cost-of-living increases this year for public employees who already have retired. In Colorado, retirees had gotten 3.5 percent annual increases. They are getting no increase at all this year, and future ones will be capped at 2 percent.
Legal challenges to the cuts have been filed in all three states. "Whether legislatures have the power to change benefits for people who are already in the system, that's a tough question," said Ronald Snell, an analyst for the National Conference of State Legislatures who monitors public pension issues across the country. "It's unresolved in a lot of places." Unions are on guard against the benefit cuts – and the implication that workers are to blame for states' financial messes. "What we don't need is more scapegoating of public service workers and their benefits," said Matt O'Connor, a spokesman for the Connecticut State Employees Association.
In some states – including South Dakota and Mississippi – public employee retirements are up by more than 20 percent, though it is not clear whether changes to pension programs there are a factor. The retirement rush is even more dramatic in New Jersey, where by the end of July nearly 18,000 employees in the three biggest public worker pension funds had retired or declared their intent to retire this year. That is up almost 50 percent over all of last year, and several union leaders and workers considering retirement said that possible pension changes were a factor.
The exodus could end up hurting the pension funds, because retired workers will be making withdrawals, not deposits into the system. Mike Ryer, a firefighter in Morris Township, was among employees in line at the New Jersey pension office around dawn one morning this summer, considering whether, at 59, he was in financial shape to retire after 32 years. He is afraid of changes in his benefits and also figures his retirement now might save a younger colleague from layoff. If he stays, he faces a smaller department and a bigger workload. He blames Christie for driving him out. "It's hard to understand why all of this had to come at once," he said.
15 Shocking Poverty Statistics That Are Skyrocketing As The American Middle Class Continues To Be Slowly Wiped Out
by Michael Snyder - Economic Collapse
The "America" that so many of us have taken for granted for so many decades is literally disintegrating right in front of our eyes. Most Americans are still operating under the delusion that the United States will always be "the wealthiest nation" in the world and that our economy will always produce large numbers of high paying jobs and that the U.S. will always have a very large middle class. But that is not what is happening.
The very foundations of the U.S. economy have rotted away and we now find ourselves on the verge of an economic collapse. Already, millions upon millions of Americans are slipping out of the middle class and into the devastating grip of poverty. Statistic after statistic proves that the middle class in the United States is shrinking month after month after month. Meanwhile, millions of Americans are starting to wake up and are beginning to realize that we have very serious problems on our hands, but they have no idea what is causing our economic distress and they are unaware that most of our politicians have absolutely no idea how to fix the economic disaster that we have created.
On the mainstream news, the American people are treated to endless footage of leaders from both political parties proclaiming that the primary reason that we are in the midst of such an economic mess is because of what the other political party has done.
Republicans proclaim that we are experiencing all of this economic chaos because of the Democrats.
Democrats proclaim that we are experiencing all of this economic chaos because of the Republicans.
Even many readers of this column (who are generally more educated and more informed than most average Americans) leave comment after comment blaming either the Democrats of the Republicans for our current economic mess.
But do you really want to know who is to blame for our economic problems?
Both of them.
This economic nightmare has taken literally decades to develop, and both Democrats and Republicans have contributed greatly to this disaster.
Both parties have absolutely refused to stand up to the Federal Reserve and the horrific economic policies that they have been shoving down our throats for decades.
Both parties have stood idly by as the U.S. trade deficit has absolutely exploded in size and the United States has become significantly poorer month after month after month.
Both parties have refused to do anything as month after month after month large numbers of factories and good paying jobs leave the United States.
Both parties have shoved the spending accelerator to the floor when they have been in power and now we have the largest national debt in the history of the world.
Both parties have done essentially nothing as the health care industry, which was once the envy of the world, has degenerated into a cesspool of corruption and greed and now seems designed to do little more than to provide pharmaceutical companies and health insurance crooks with obscene profits.
If factories keep leaving the United States and jobs keep leaving the United States and the federal government keeps going into more debt and state governments keep going into more debt and local governments keep going into more debt, then things are going to keep getting worse.
It does not take a genius to figure that out.
The United States is continually getting poorer and is continually going into more debt.
Can anyone out there explain how that is a formula for economic prosperity?
Can anyone explain how that would work?
Please leave a comment and explain that to all of us if you can.
The truth is that as wealth continues to leave the United States and as the U.S. gets even deeper into debt, more Americans are going to become poor.
It really is that simple.
The following are 15 shocking poverty statistics that are skyrocketing as the American middle class continues to be slowly wiped out....
#1 Approximately 45 million Americans were living in poverty in 2009.
#2 According to the Associated Press, experts believe that 2009 saw the largest single year increase in the U.S. poverty rate since the U.S. government began calculating poverty figures back in 1959.
#3 The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.
#4 According to the U.S. Department of Agriculture, on a year-over-year basis, household participation in the food stamp program has increased 20.28%.
#5 The number of Americans on food stamps surpassed 41 million for the first time ever in June.
#6 As of June, the number of Americans on food stamps had set a new all-time record for 19 consecutive months.
#7 One out of every six Americans is now being served by at least one government anti-poverty program.
#8 More than 50 million Americans are now on Medicaid, the U.S. government health care program designed principally to help the poor.
#9 One out of every seven mortgages in the United States was either delinquent or in foreclosure during the first quarter of 2010.
#10 Nearly 10 million Americans now receive unemployment insurance, which is almost four times as many as were receiving it in 2007.
#11 The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.
#12 According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.
#13 Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.
#14 More than 25 percent of all Americans now have a credit score below 599.
#15 One out of every five children in the United States is now living in poverty.
As millions more Americans continue to climb on to the "safety net", how long is it going to be before it breaks?
The reality is that the system can only support so many people. We are now at a point where our anti-poverty programs are clearly unsustainable in the long-term, but nobody has a solution for how we are going to get all of these people off of these programs or how we are going to provide good jobs for all of them.
The cost of every U.S. government anti-poverty program is absolutely soaring. Meanwhile, the U.S. government is already running a budget deficit that is approaching 1.5 trillion dollars every year. If you cannot understand that we have a very serious problem on our hands then you are probably not awake.
The U.S. economic system is dying. Blaming the other political party is not a solution. Running around the country offering "hope" and "change" and giving people a vague sense that things will get "better" soon is not going to cut it either.
The American people need very real economic solutions to very real economic problems.
But nearly all of our politicians are way too busy either trying to get elected or trying to stay in office to tackle the very serious problems which are destroying our economy.
Unfortunately, the American people love to watch our politicians play politics. They love to watch the little ping-pong ball of blame go back and forth. They love to pick sides and to cheer for their "team".
None of that is doing any good. Right now millions of Americans are getting sucked into poverty each year and neither major political party is doing anything real to address the very real economic problems that are causing that to happen.
But most Americans have become so "dumbed down" that they don't even understand what the real problems are anymore.
All most Americans seem to want these days is to watch a good show.
So send in the clowns.
There are certainly enough of them in Washington D.C. to keep Americans entertained for quite a long time.
Cuts will bring civil unrest, says UK police leader
by Tom Whitehead - Telegraph
Britain faces widespread civil unrest, strikes and more crime as a result of cuts in public spending, one of the country's leading police officers will warn. Derek Barnett, the president of the Police Superintendents' Association, will say that the harshest austerity drive since the Second World War is likely to lead to a period of rising "disaffection, social and industrial tensions". In a speech to his association's conference, he will suggest that history shows that widespread disorder is "inevitable" at some point. Chief Supt Barnett will also warn that crime will rise if front-line policing is cut too severely.
Fears of widespread civil disobedience are being voiced as unions threaten co-ordinated strikes and a "campaign of resistance not seen for decades" against spending cuts. Delegates at the Trades Union Congress yesterday voted almost unanimously in favour of a motion that called for a co-ordinated campaign against the cuts. One union leader branded the Government the "demolition Coalition" and said it had declared war on working people. Brendan Barber, the usually moderate general secretary of TUC, said the cuts would make Britain "a darker, brutish, more frightening place".
Mr Barnett will say that it is "disingenuous" to suggest that any warnings of rising crime under the cuts is scaremongering. Theresa May, the Home Secretary, will be at the superintendents' conference to hear him say that there was "surprise and disappointment" that the police service was not offered protection from cuts like some other public services, such as the NHS. "In an environment of cuts across the wider public sector, we face a period where disaffection, social and industrial tensions may well rise," Mr Barnett, of Cheshire Police, will say. "We will require a strong, confident, properly trained and equipped police service, one in which morale is high and one that believes it is valued by the government and public."
He will say that from the Peterloo massacre in 1819, where 15 people died in a cavalry charge on a demonstration for parliamentary reform, to current alcohol-linked disorder "history teaches us that there will always be widespread threats to the public peace". "It is a fundamental duty of government to ensure the security of the nation. When, as history shows us it is inevitable, not because of this particular government, but at some stage, there is widespread disorder on our streets, it will not be PCSOs or special constables or non-warranted police staff, journalists or politicians to restore order. "It will be police officers and we must be sufficiently resilient to enable us to respond properly, professionally and safely with the minimum of force."
There will be "an inevitable dilution of front-line services if police budgets are cut too severely", he warns, and that will result in "more criminals at large" and "fewer police officers on the streets". The Police Federation, which represents rank and file officers, warned last week that spending cuts could lead to the loss of up to 40,000 police officers, put the public at risk and make it "Christmas for criminals".
Philip Davies, the Tory MP, said the police had legitimate concerns but criticised Mr Barnett's comments. "To try to whip up some notion of civil unrest and some scaremongering of what may or may not happen when the Government takes the necessary steps to reduce the deficit is completely unacceptable," he said. "That’s not making a rational argument, it is completely irrational." Police forces have warned of the consequences of spending cuts. Cambridgeshire Police Authority said a 25 per cent cut would mean the force spending £33 million less over the next four years and equate to the cost of 470 officers and 550 staff.
Jim Barker-McCardle, the Chief Constable of Essex, said its policing budget could be cut by £45million by 2015 — about a sixth — and warned that hundreds of jobs might go. Ian Learmonth, the Chief Constable of Kent, said cuts were likely to reduce staff and officer numbers to levels not seen for a decade. In a separate debate, Mr Barnett will also make a thinly-veiled attack on Kenneth Clarke, the Justice Secretary, and his plans to send fewer people to prison.
"Contrary to what some people seem to think prison does work, does punish and does deter," he will say. "It does not guarantee to reform behaviour but that is another argument for another place. "What I do know is that, when a criminal is in prison, then the public can be confident that they cannot commit further crimes."
IMF warns of the 'human cost' of public spending cuts
by Phillip Inman - Guardian
The International Monetary Fund undermined the main thrust of the UK coalition's economic strategy today after it warned western governments that they risked holding back the recovery and creating a massive pool of disaffected labour if they pursued draconian cuts in spending. IMF director general, Dominique Strauss-Kahn, told a conference in Oslo that governments needed to identify ways to generate employment to prevent a generation of workers losing their skills and joining the long-term unemployed. He said cuts in public spending had a "human cost" and could result in "tragedy" for millions of young people.
His speech will add to pressure on the chancellor, George Osborne, after the Organisation for Economic Co-operation and Development (OECD), the rich nations' thinktank, said last week that cutting budget deficits this year risked derailing economic recovery. Analysis by the IMF and the OECD is expected to feature in campaigns by trade unions and rivals for the Labour leadership at the TUC conference this week.
Ed Balls, the Labour leadership candidate, said the government needed to scrap much of its programme of cuts in favour of projects that create jobs and generate growth. The shadow chancellor, Alistair Darling, said the reports from the OECD and IMF showed the prevailing economic analysis was firmly allied to Labour's argument for cuts to be delayed until the economic recovery was secure and unemployment falling.
Strauss-Kahn said: "The labour market is in dire straits. The Great Recession has left behind a wasteland of unemployment, and this devastation threatens the livelihood, security and dignity of millions of people across the world." He said the severity of the recession was in part to blame, but also how the fallout from the recession affected particular sectors.
In a reference to the UK, Ireland, Spain and the US, which suffered a banking crisis made worse by the after-effects of a housing bubble, he said: "Job loss was greatest in countries where housing and financial markets collapsed. Most of this came from manufacturing and construction, showing that ordinary workers have paid the price for mistakes made elsewhere."
The International Labour Organisation, which hosted the conference with the IMF and Norwegian government, has estimated that 34 million more people worldwide are unemployed as a result of the crisis. The latest data on unemployment showed the increase took the total unemployment figure to about 210 million, which is the highest level of official unemployment in history.
With 45 million new job seekers a year entering the labour force, Strauss-Kahn said the situation was likely to worsen. "And what about the human costs? This is the real tragedy," he said. "Unemployment leads to a loss of earnings that is both substantial and long-lasting, especially among younger people. The crisis hit them especially hard. "We must not underestimate the daunting prospect we face: a lost generation, disconnected from the labour market, with a progressive loss of skills and motivation.
"And the human costs do not end there," he added. "If you lose your job, you are more likely to suffer from health problems, or even die younger. If you lose your job, your children are likely to do worse in school. If you lose your job, you are less likely to have faith in public institutions and democracy."
Market Still Deluding Itself That It Can Escape The Inevitable Denouement
by Albert Edwards - Société Générale
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.
The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930's experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.
I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can't remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% - the steepest fall since Q3 2006.Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts' optimism confirms we are right on the cusp of falling forward earnings (see chart below).
I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August's 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS (link), why can't the market? Because it is bad news, that's why.
August's rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators - new orders, unfilled orders and vender deliveries - all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).
The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish (see chart above). These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.
I am often asked by investors with a similar view of the world to my own (yes, there are some),whether the equity market will ever reach my 450 S&P target because of the likelihood that further Quantitative Easing will prevent asset prices from falling back to cheap levels.
Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a "portfolio balance channel", but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes - (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? - link).
The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below). The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.
In the absence of a cyclical recovery I cannot see how QE is any different in its ability to revive asset prices than lower rates in anything other than a temporary fashion. (Interestingly many of our clients think QE2 might give a temporary fillip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.)
If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week "let them keep pressing their buttons." Ultimately they cannot fool all of the investors, all of the time.
Where are the jobs?
by Michael Snyder - Economic Collapse
Most Americans don't really care about the economic minutiae that many of us who study the U.S. economy love to pour over. When it comes to the economy, the typical American citizen just wants to be able to get a good job, make a decent living and put bread on the table for the family. For generations, this arrangement has worked out quite well. The U.S. economy has provided large numbers of middle class jobs and the American people have worked hard and have helped this nation prosper like no other. But now people are starting to notice that something has shifted.
Millions of people are looking around and are realizing that the jobs that are supposed to be there are not there anymore. The American people are still working hard (and in many cases harder than ever) but all of that hard work is producing fewer and fewer rewards. Often politicians will placate voters by telling them that they are working harder and harder for less and less. That tends to ring true with voters because that is a very accurate description of what so many of them are actually experiencing, but what the politicians don't tell us is that they are the ones to blame for the situation that we are in.
As millions of jobs become obsolete because of technology and millions of other jobs are shipped overseas, our politicians tell us over and over that we can "compete" with anyone and that if we will just go out and get some more education we can make it happen. But those of us who are extremely over-educated know what a fraud that line is. The truth is that there are not nearly enough jobs for all of us no matter how "educated" we are. This is creating a lot of anger and frustration, and now even the IMF is warning that we could see "an explosion of social unrest" if high unemployment persists.
But what can be done? You can't force large corporations to hire people. The reality is that there are a couple of huge factors that have brought us to this point. First of all, advanced technology means that big corporations need fewer people to do the same amount of work now. Secondly, the globalization of our economy means that U.S. workers have now been merged into a global labor pool where they are in direct competition with workers who are more than happy to make less than a dollar an hour on the other side of the world.
This all means that the labor of American workers is less valuable to global corporations than it ever has been before. Advanced technology and computers have enabled corporations to operate leaner and meaner. If they do need some old-fashioned muscle for certain tasks they can always run out and set up a facility in some third world nation where they can pay people close to slave labor wages and where they don't have to worry much about taxes, regulations, unions, health benefits or pension plans.
What did you think was going to happen when the United States entered into all of these "free trade" agreements with nations around the world that did not have minimum wage laws?
U.S. corporations are not in existence to provide the American people with jobs. They are in existence to make money. If they can make more money by shipping jobs overseas, then that is exactly what they are going to do.
According to Tax Notes, between 1999 and 2008 employment at the foreign affiliates of U.S. parent companies skyrocketed 30 percent to 10.1 million. During that same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.
Are you starting to see the picture?
Global corporations based in the U.S. have been creating lots of jobs - just not in the United States.
In fact, things only seem to be accelerating.
In 2008 alone, U.S. employment at American multinational corporations fell by 445,500.
In the old days, you could give tax breaks to U.S. firms and that would spur them to do more business and to hire more workers. But today, if U.S. multinationals decide they wish to expand they will just go hire more third world workers and pocket the rest of the profits for themselves.
The reality is that we are facing a very disturbing long-term trend in the United States. Today, over half of all unemployed workers in the United States have been out of work for over six months. In fact, the duration of unemployment in the United States has spiked up to the highest level it has been at since World War II....
This has created a growing subclass of people in the United States who feel that the system has failed them. The anger and the frustration in the country is rising every day. You can almost feel it.
In fact, the IMF is warning that we are at risk of "an explosion of social unrest" due to this unemployment crisis.
The head of the IMF, Dominique Strauss-Kahn, recently made the following statement at an Oslo jobs summit with the International Labour Federation....
"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment."
So exactly what is going to turn that around?
Are millions of jobs going to suddenly hop up and return home from overseas?
Is the U.S. government going to suddenly eliminate a whole raft of taxes and regulations and are U.S. workers going to suddenly become much cheaper?
Is the U.S. trade deficit crisis suddenly going to reverse and turn into huge trade surpluses for the United States?
Of course none of those things is going to happen.
America is going to continue to bleed jobs, wages inside the United States are going to continue to be forced down and the standard of living for most Americans is going to continue to deteriorate.
Plus, if the American people don't have good jobs, they can't buy homes. In fact, a growing number of Americans are finding out that they can't even afford the homes they are in right now. CNBC is reporting that the nation's banks repossessed a record number of homes in August.
But for many Americans, a foreclosure is just the beginning of their problems. People are falling out of the middle class at an alarming rate. Approximately 45 million Americans were living in poverty during 2009. That is an absolutely astounding figure.
The American people are getting mad and faith in the economy is plummeting. According to Gallup, confidence in the economy is way down compared to to the same period last year.
So what is going to happen when (not if) things get even worse?
Well, some investors are already anticipating rough times ahead and are flocking to commodities. The price of gold soared to a record intra-day high of $1,276.50 an ounce on Tuesday, and the price of gold and other commodities will probably continue to climb as economies around the world continue to destabilize.
These are very, very difficult times that we are moving into. There are not going to be nearly enough jobs for everyone. People you know are going to be unemployed. People you know are going to lose their homes. People you know might even end up living on the streets.
Just hope that you don't end up being one of them.
Blue-collar, unemployed and seeing red
by James B. Kelleher - Reuters
Scott Stevenson was only 10 years old when he first heard grown-ups voice the gloomy words that, in retrospect, predicted the disappointing arc his life has taken. "I remember them actually telling us that our generation would be the first not to be better off than our parents," said the 39-year-old Stevenson. "It was fifth grade and I remember thinking, 'How do you know?'" Three decades later, the pessimistic prognostication he was so quick to dismiss as a boy now seems, as he put it, "like a prophecy."
Stevenson is one of the 14.9 million U.S. workers who are officially jobless, according to the latest statistics from the U.S. Department of Labor. More depressingly, he is also among the 6.2 million unfortunate enough to have been that way for 27 weeks or more -- a beleaguered cohort that the government dubs the "long-term unemployed." Over the past four years, Stevenson has lost almost everything. His $38,000-a-year factory job as well as the three-bedroom home it helped him buy are gone. Two years ago, when his mortgage company finally foreclosed on him, he moved into the basement of his parents' home. "I hate it," he said. "It's driving me nuts. I'm almost 40 years old and I'm not able to take care of myself. But I don't have any other option."
In June, after 99 weeks on the dole, his unemployment benefits ran out. He hasn't had to sell his truck and work tools -- yet -- and he recently picked up some temporary contract work that put a little cash in his pocket. But he spends most of his days at his parents' home, trawling the Internet for jobs that don't pan out or playing computer games -- "anything," he said, "that doesn't cost money." On warm days, he takes his bike out for a ride around the neighborhood. It's an older subdivision than where he lived, filled with solid-looking but modestly sized brick homes.
It sits alongside I-696, a highway dedicated to Walter Reuther, the union organizer whose strikes against Ford Motor Co and General Motors in the early 1940s forced the U.S. car industry to recognize the United Auto Workers union. In the process, Reuther helped produce this country's blue-collar, middle class, a group whose prosperity helped shape the post-war U.S. economy and was, for decades, the envy of workers worldwide. Reuther died in 1970 and the dream he helped create began unraveling soon thereafter as employment in manufacturing -- the sector that, together with construction, reliably sustained the blue-collar middle class -- steadily shrank.
But the U.S. recession and the nearly simultaneous restructuring of the auto industry have delivered the most savage one-two punch that class has absorbed in a generation. Of the more than 8 million U.S. jobs lost in the downturn, nearly half were in either manufacturing or construction -- higher-wage sectors that traditionally provided entry-level jobs that turned into well-paying careers jobs for people like Stevenson, whose formal education stopped after high school.
In a midterm election year, where the economy is issue No. 1, his plight and that of millions of men and women like him helps explain the sagging support for President Barack Obama's Democratic party, which is expected to see its majorities in the House of Representatives and Senate eroded in the November 2 vote. One of the people voting Republican that day will be Stevenson's mom, 63-year-old Joan Stevenson. The daughter of a machinist and a self-described "Jack Kennedy Democrat," she voted for Obama in 2008 but has been disappointed by how little his administration's polices have helped unemployed workers like her son.
"The Democratic Party isn't what it used to be for us," she said. "The philosophy used to be if the Democratic Party was in power everybody got a piece of the pie, and if the Republicans were in power the rich got a piece of the pie. Now, nobody is getting a piece of the pie."
'Tough Time For Some Time To Come'
Unfortunately, economists, executives and other labor-market watchers say many of the jobs lost in the downturn, particularly in manufacturing, are never coming back. That's because in spite of the downturn, and in some cases because of it, companies have continued to invest in labor-saving, productivity-enhancing technology here in the United States as well as offshore high volume, low-margin and labor-intensive work abroad. "It's competitive forces and technology that (are) taking those jobs and reducing them in both quantity and complexity," said Jeff Joerres, the chief executive of global employment services company Manpower Inc.
And while the construction market will eventually rebound, employment in the sector is unlikely to ever return to the record levels seen at the height of the housing bubble. "What seems very likely," said Gary Burtless, an economist at the Brookings Institution in Washington, D.C., "is that those people who made their living in construction and in manufacturing are going to have a tough time for some time to come." Prospects for workers like Stevenson will be "much, much worse," according to Burtless. That's because the anemic labor market is forcing unemployed workers with college educations to settle for jobs that don't require their degrees.
Right now, those are just about the only kinds of jobs that seem to be out there, according to a recent analysis of Bureau of Labor Statistics data by the National Employment Law Project. The study, released just before Labor Day, found that while jobs paying $17.43 an hour or more accounted for nearly half the positions lost in the downturn, they have accounted for just 5 percent of those created in the recovery. Most of the new jobs are concentrated below $15 an hour and in service industries like retail sales, food preparation, waste removal, or health-care.
It's not that jobs aren't being created in manufacturing -- they are. But they are fewer in number and either pay far less than the jobs of old or require technical skills. Landing such work is often impossible without certifications from groups like the Manufacturing Skills Standards Council and the National Institute for Metalworking Skills, which can entail rigorous and lengthy course work.
The upshot, says Joerres, is that the relatively easy path blue-collar workers traveled for two generations to reach the middle class, a path that created millions of consumers with the purchasing power to buy the goods that U.S. companies produced, is narrowing if not altogether disappearing. The changes are affecting U.S. corporate culture, where Joerres said "we're seeing a bifurcation between entry-level jobs and management." But the implications extend well beyond the manufacturing industry and the Midwest states of Michigan, Ohio, Indiana, Iowa and Illinois where it is concentrated.
In a speech in Michigan in August, Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, drew attention to one of the great ironies of the current recovery: While the number of job openings has risen by about 20 percent over the past year, the U.S. unemployment rate has gone up, not down. "Workers want to find work," he said, "but can't find appropriate jobs."
The reason, Kocherlakota went on to explain, is that there is a fundamental mismatch between employer needs and worker skills. "It is hard to see how the Fed can do much to cure this problem," he said. "Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers." But even if the Fed could perform that magic, those manufacturers that are hiring again aren't creating anywhere near enough jobs to re-employ the more than 2 million workers they laid off during the downturn, never mind the 2 million construction workers who have lost their jobs.
Sherle Schwenninger, an economist at the New America Foundation, a progressive policy group in Washington, worries that the prolonged joblessness for blue-collar workers that mismatch implies will swell the country's permanent underclass, disconnecting millions more Americans from the mainstream and making them more prone to a litany of social ills. "That should be quite disturbing to Americans," he said. "They lose their social capital, they lose their skills, they lose their confidence and -- as we've seen with regard to black males in certain locales -- you have a coarsening of the social fabric, a breakdown of community and increasing resort to criminal and anomalous behavior simply because people aren't part of a healthy economic and social community."
Even workers lucky enough to have kept their jobs -- or found new ones -- are feeling the effects of these blue-collar blues in the form of suppressed wage growth, economists say. As a result, Lawrence Mishel, the president of the Economic Policy Institute, a liberal research group in Washington, D.C., predicts the coming years will be marked by what he calls "broad-based immiseration." "The story isn't who is being left behind," he said. "The story is everybody is being screwed."
'It Was All Here'
Stevenson was born in 1971 and grew up in the suburb of Ferndale, where I-75 and I-696 freeways cross just north of Detroit, a community that was chock-a-block with tool-and-die shops, iron works, coil makers and other small manufacturers tied to the region's all-powerful auto industry. "Up to 10 years ago, you could have had anything made within 45 minutes of the intersection of I-75 and I-696," Stevenson said. "It was all here. It was booming."
The buildings that housed them are still there along commercial streets with names like 9 Mile and John R, reminders of those good old days. But most now sit vacant with FOR LEASE and FOR SALE signs. Stevenson's father worked as a pipefitter at Ford; his mother was a clerk at the local office of the automobile club. Nearly every household in the neighborhood was connected to the car business. "I'm so Detroit I bleed motor oil," Stevenson said.
He attended high school in neighboring Hazel Park, where he worked on the yearbook and hung out in the school's new media lab, shooting short video sketches inspired by the TV program "Saturday Night Live" with friends. After high school, Stevenson went to a trade school hoping to become a broadcaster. But entry-level opportunities in a big media market like Detroit were few and he quickly fell into the trades. Since then, he's done it all, from digging ditches and running blueprints to welding heavy equipment and repairing hydraulic and pneumatic equipment.
"If I'd grown up in California, it probably would have been completely different because of Silicon Valley," he said. "If I'd grown up in Washington, I definitely would have been looking at Microsoft as opposed to Ford, GM or Chrysler. Location kind of dictated where you went." But instead of experiencing a rising standard of living over time like his dad, who worked at a number of smaller manufacturers before getting into Ford, Stevenson has suffered setback after setback in his career.
Gone was the security and stability his father knew. "When the work was there," Mike Stevenson, 66, remembered, "you could say, 'I don't want to work for you anymore,' walk out the door and have a job down the street." In its place was a more cut-throat environment -- "They had their boot on your neck and were yelling, 'Get it done, get it done, get it done. Now get out,'" Scott Stevenson said -- with no benefits, few breaks and frequent layoffs.
Still, he managed to buy his first new vehicle when he was 29 -- the 2000 Ford Ranger pickup truck he continues to drive today. Five years later, he bought a house about 40 miles away from Ferndale for $130,000. And in 2006, he had his best year ever, earning $38,000 a year at a plant that built material handlers for GM. But he accomplished that by clocking 15 to 20 hours of overtime almost every week, a schedule that left him little personal time. "One of the reasons I'm not married is I've always been working," he said. "Or not working. You're either 60 hours a week or not at all."
But beginning in 2007, "it went straight downhill." First the overtime disappeared. Then the job vanished, too. Stevenson was able to cobble together some temporary work but when the real estate bubble popped and pulled the world into a financial crisis, even that dried up. Two years ago, as Stevenson was falling further and further behind on his mortgage payments and the bank was beginning to foreclose oh him, a tornado touched down nearby. "I was half hoping the half-dead tree I had in the backyard would fall on the house so the insurance would pay for it and I'd get out," he said. "But it didn't happen. As far as I know, the tree's still there mocking me."
Stevenson insists he holds no grudge against the business community for its unwillingness to hire. "I understand they have to hoard the money because they don't know what's coming around the corner," he said. "They wonder what DC's going to do. ... They know healthcare reform is around the corner. Everybody's real tentative." And even though he's been forced to move back in with his parents and has virtually no income, he opposes Obama's proposal to let some tax cuts for the wealthy, dating back to George W. Bush's presidency, expire at year's end in order to raise revenue and reduce the deficit.
"How is more people, keeping more of the money they earn, bad for the economy?" he said. "The answer is -- it's not." Perhaps most surprisingly, Stevenson says he's worried Obama and the Democratic Congress may move to extend unemployment benefits past 99 weeks early this fall in an effort to curry popular support ahead of the midterm vote. "That could be the October surprise," he said, "to try to buy people's votes."
Doing More With Less
In the two years since he lost his job, millions of manufacturing workers have joined Stevenson on the unemployment line as companies in the sector responded to the downturn by slashing their payrolls with unprecedented speed. In 2009 alone, the sector laid off 11.4 percent of its total workforce -- the largest one-year percentage drop in manufacturing employment since the Great Depression, dwarfing even the 10.4 percent drop seen in 1945, when America's victorious industrial war machine throttled back production.
Over the past year, industrial America has rebounded. Leading manufacturers like General Electric Co, United Technologies Corp, Caterpillar Inc, Honeywell International Inc and Ingersoll Rand Plc have posted stronger-than-expected profits. And some, like Caterpillar, which laid off 30,000 workers worldwide in 2008 and 2009, have also begun hiring again. But a couple of things are happening simultaneously that dim the prospects even further for manufacturing workers like Stevenson idled in the slump.
First, the embrace of lean manufacturing techniques and investment in labor-saving technology -- both of which continued despite the slump -- means the industry does not need as many workers here as it did in the past. As Doug Oberhelman, the new chief executive of Caterpillar, told investors in New York this summer, "we will do more for less."
Second, when manufacturers decide they do need workers, they don't always need them here. Caterpillar, for instance, says it hopes to rehire a total of 9,000 workers before year's end. But only a third of the promised jobs will be inside the United States as the company continues to align its manufacturing footprint and headcount with its sales, 62 percent of which now come from overseas.
Third, the work that remains here in the United States often requires more technical skills than the manufacturing jobs of old. Consider, for instance, the job of a machinist. True, the basic job function hasn't changed: machinists produce precision metal parts. But the drills, lathes and mills and other tools they use on the modern factory floor are almost always computer numerically controlled -- CNC for short -- and only as precise as the instructions provided by their operators.
As a result, machinists today not only need to be able to write basic computer programs -- they're expected to be able to troubleshoot those programs, and rewrite them if necessary, if they encounter problems during production. "They're massively better educated, massively better trained and massively more productive today than they were back in the old days,' said Mike Montgomery, an economist at IHS Global Insight. Stevenson's mom puts it more bluntly. "You can't sweep the floor any more without a PhD," she said. "That's what he's up against."
Of course, some corners of U.S. manufacturing are doing worse than others. Companies that make the big, pricey products that the blue-collar middle class once purchased with their better-than-average wages and played with on the weekend -- the heavyweight motorcycles, the aluminum fishing boats, the campers and motorhomes -- continue to suffer. Two prominent companies in the space, Harley-Davidson Inc and Brunswick Corp, have spent the last few years radically resizing their manufacturing operations for what is likely be the new normal in the United States -- one that reflects the downward mobility of the blue-collar middle class. They are, in essence, hacking away at their traditional customer base. That's having a ripple effect on employment up and down their supply and distribution networks.
Judith Crocker, who works for an industry-supported group that helps retrain industrial workers in northeast Ohio, where manufacturing employment tumbled nearly 40 percent over the past 25 years, sums it up well. She talks about the effect the 2005 closure of Ford's Lorain Assembly Plant, outside Cleveland, had on local workers and the lifestyles they once considered their blue-collar birthright.
"If you knew somebody at 17, you could get in there and you could work for 30 years, work on the production line, make a good leaving, live the American dream," she said "In the Ford plant, thousands of the workers -- my guess is probably a third of them -- barely finished high school. And they didn't have to. They made a great living. They had an RV. They had a boat. They had this and that. Those jobs are gone."
Government Response Faulted
Manufacturing executives like Ron DeFeo, who runs Terex Corp, and labor union chiefs like Bob King, the new head of the UAW, rarely see eye to eye. But ask them to assess the federal government's response to the unemployment crisis, and their responses are remarkably consistent -- and not just in the critical tone they take. Both fault lawmakers, including President Obama, for failing to make job creation the No. 1 priority over the past two years and insist Washington, D.C. could have put millions of construction and manufacturing workers back to work by funneling more money into infrastructure improvements.
In early September, Obama belatedly signaled his support for some added infrastructure investment along the lines that DeFeo has urged and King has marched for. But his proposal, outlined in a Labor Day speech in Milwaukee, falls short of what even leading members of his own party have advocated. A year ago, the so-called transportation bill, the legislation used to pay for the country's bridges and highways and rail network that comes up for renewal every six years and typically wins bipartisan support, expired -- smack dab in the middle of the worst downturn since the Great Depression.
The chairman of the House Transportation and Infrastructure Committee, U.S. Rep. James Oberstar (D-Minn.), proposed increasing spending on roads, bridges and high-speed rail to $500 billion during the next six years, up from about $286 billion over the past six years and 10 times the $50 billion that Obama proposed in his Labor Day speech. Such an outlay would be welcome news for the construction industry, where one in five workers is jobless. But it would have also bolstered the fortunes of equipment manufacturers like Terex, Caterpillar and Deere & Co -- and the thousands of smaller manufacturers who supply them -- by showering money on the construction contractors who are their customers, and who have been reluctant to buy new earth-moving equipment ever since the housing bubble popped.
"It's in the American historical experience," said Schwenninger at the New America Foundation, referring to President Franklin Roosevelt's massive Works Progress Administration, a Depression-era effort that funneled $11.4 billion -- about $166 billion today -- into the economy and provided jobs and income to millions of unemployed by putting them to work building highways, bridges and other public projects.
"A major commitment to public infrastructure investment would have the benefit of reversing a lot of those employment trends," he said. "But it would also provide the foundation for a broader-based economy to work and function because whether it's the electrical grid or relieving traffic congestion or putting in new hydroelectric plants, they all make it easier for business to grow and create both profits and jobs." But because funding for Oberstar's bill would have come either by raising the federal fuel tax, which has been unchanged since 1993, or through some other tax, toll or fee, the Obama administration chose to play it safe, politically if not economically.
Already focused on reforming Wall Street and healthcare, the White House failed to line up behind the Oberstar bill and instead backed a temporary extension. Its thinking was that it could take Oberstar's bill up once the midterm elections were behind and its majorities in the House and Senate reseated. But with Republicans, who are focused on slashing the deficit and cutting taxes, now widely expected to gain ground in the November 2 vote, an ambitious highway bill along Oberstar's lines now looks dead in the water.
In the meantime, the agenda Obama has pursued has alienated many business groups, making it unlikely that he'll be able to build support for any second stimulus after the midterms. Schwenninger says Obama miscalculated, focusing on reform ahead of recovery. "They wanted to capitalize on what political capital they thought they had. And they virtually destroyed that and in the process created big obstacles to economic reform," he said.
'Doing Pretty Well'
No section of the country has been more buffeted by the changes sweeping U.S. manufacturing than the Midwest, home to the largest concentration of factories making everything from passenger cars and commercial trucks to construction equipment and food products. The irony is that as the sector's profit rebounds, employers here complain they can't find enough qualified workers -- despite the millions of former manufacturing workers desperate for a job. The problem, Crocker said, is the gap between the legacy skills most unemployed manufacturing workers have and the skills employers are looking for.
To help bridge that cap, groups like the National Association of Manufacturers are working with community colleges around the country to develop programs to give workers the skills and certifications employers want today. One of them is offered outside Cleveland at Lorain County Community College. Originally, the idea was to provide a vocational training path to new high school graduates who weren't interested in college. But in places like Lorain, where the closing of the Ford plant five years ago was just the latest in a series of layoffs, closures and retrenchments by industrial firms, that's been a hard sell.
"Manufacturing is still the big dog around here," said Greg Krizman, who works with Crocker and is helping the college on the program. "But one of the challenges we have here in northeast Ohio is how to get kids motivated into wanting to have careers in manufacturing given the fact that in every family there's probably been some brother, sister, uncle, father, mother who has experienced a job loss and doesn't speak kindly of the industry."
The program has been having more success with laid-off workers like Mark Lute, a 48-year-old electrician who lost his job at Republic Engineered Products, a maker of axles, drive shafts and suspension rods, after 22 years. Lute is now enrolled in a two-year program at Lorain, where he's learning wind turbine maintenance and automation robotics, a program that has forced him to brush off his math skills and put in as many hours at school as he once did the foundry. Halfway through the two-year program, Lute says he's discovered that people can be retooled, too.
"I didn't think I would be able to comprehend, absorb it and retain it," he said in late August, as classes began again after the summer break. "But I'm doing pretty well." Kelly Zelesnik, the dean of LCCC's engineering technologies department, which oversees the program, says the school also offers an intensive, four-month program called "Transformations" that gives laid-off workers "the core technology skills they need to find a job quickly." The program, which meets 40 hours a week for between 16 to 18 weeks, has been able to place 95 percent of its graduates with new jobs in the area within three months of graduation because it provides employers with exactly what they're looking for.
"When you spend millions of dollars on a machine that does four things, and improves your productivity and accuracy, you can't just hire somebody out of high school who can't even do the computations to do the setup," said Crocker. "You want someone highly skilled, very technical, very knowledgeable."
'Time To Move On'
Back in Detroit, Stevenson has despaired of finding full-time work in the manufacturing sector. With the car industry staggering through a second year of lackluster sales, and the bankruptcies of two of the city's Big Three automakers still fresh in his mind, he says he thinks it will be 10 years, at best, and probably more like 15 years, before the industry starts hiring again. Prosperity may eventually return to Detroit and the rest of the industrial Midwest, he said, but "it's going to skip over my generation."
He has always dreamed of starting his own company, making the BMX bikes he loved as a child and continues to ride today. "Lack of money and fear of the unknown," stopped him 20 years ago, he said. Now his circumstances make it impossible. So he's thinking about going back to the media trade school he attended two decades ago -- though he understands that industry is in as much flux as the car business. "It's time to move on," he said. "There comes a time, like with the house, when you just have to cut loose. It didn't work."
His dad tries to put the situation in perspective, pointing out that some of his friends have stories that are more tragic. "I know guys at Ford who had to adopt their grandchildren because their kids just couldn't cope," he said. But for his mom, Stevenson's predicament and the predicaments of the millions of U.S. workers just like him are that much harder to watch because of how much easier things seemed for workers not so long ago.
"Of course it's sad," she said. "We lived in the best of times. And you want your children to go on to bigger, better things. That's why you work hard all your life. But what can you do? You just have to stand by them."
Bankrupt, USA: Why our cities aren't too big to fail
by Kit R. Roane - Fortune
Harrisburg, Pennsylvania, has dodged a debt bullet. The only problem is that the gun is still loaded. The Keystone State's cash-strapped capital was scheduled to default on a $3.3 million bond payment on Wednesday. It avoided that debilitating fate when Pennsylvania's governor, Ed Rendell, pledged to resolve the problem with $4.4 million from the state's own challenged coffers.
This gives Harrisburg a chance to fight again another day. But its problems are far from over, and that's bad news for investors in the $2.8 trillion muni-bond market. States from California to Illinois have been in deep crisis since the recession began, hammered by drastic cuts in tax revenue and inflexible spending demands for things like health care, debt service and pension plans. Forty-eight states grappled with fiscal shortfalls in their 2010 fiscal budgets. Totaling $200 billion, or 30% of state budgets, this fiscal shortfall is the largest gap on record, according to the DC-based Center on Budget and Policy Priorities, which sees at least 46 states facing shortfalls this fiscal year.
Some cities are in even worse shape than Harrisburg. Central Falls, Rhode Island, recently went into receivership when it couldn't pay its bills. San Diego is said to be considering bankruptcy to get out from under its pension obligations. Miami's city council, hoping to avoid Harrisburg's fate, recently used emergency powers to slash city salaries and pensions and is now instituting hefty traffic fines and garbage fees. This year, ratings agencies have cut the debt in several cities -- including Littlefield, Tex., Detroit, Mich. and Bell, Calif. -- to junk.
Harrisburg's default on bond payments for its ill-fated $288 million incinerator project would have given it the dubious distinction of birthing the second-largest default on general-obligation municipal bonds this year. The largest default was on $227 in municipal warrants issued by Jefferson County, Alabama. Given that general obligation bonds are backed by the full faith -- and taxing power -- of the issuing government, and aren't supposed to default, even the hint of strain with such a bond is worrisome.
Buffett's prediction: Stiffing creditors
The growing perceived risk has sent a few municipal bond buyers in search of safer pastures. Warren Buffett's Berkshire Hathaway, which doubled its municipal bond holdings as investors fled the sector between June 2008 and March 2009, was more recently selling its municipal bond investments and moving to shorter maturities. The reversal followed Buffett's February 2009 investor's letter, where he noted that city councils were much more likely to skin bond insurers and bond investors than their own constituents.
He said the trend will begin when "a few communities stiff their creditors and get away with it." His municipal bond insurer, Berkshire Hathaway Assurance Corporation, also quickly pulled back from the market that year, insuring less than 8% of the $600 million in municipal bonds it guaranteed in 2008. The problem, he told the US Financial Crisis Inquiry Commission this June, is that nobody really knows what state and major city municipal bonds are worth. Calling the municipal debt market "troubled," he opined: "If the federal government will step into help them, they're triple-A. If the federal government won't step in to help them, who knows what they are?"
Many participants in the municipal bond market, which is made up of more than 50,000 different issuers and more than 1.5 million issues, see concerns like those voiced by Buffett as overblown. After all, most states are likely "too big to fail" in the federal government's eyes. And, no matter how you slice it, defaults have remained exceedingly rare over the last thirty years.
According to Moody's, the ten-year default rate for investment-grade municipal bonds in recent decades has hovered around six-tenths of a percent. Dominic Frederico, the CEO of Assured Guaranty (AGO), a bond insurer, told attendees at an investment conference last week he calculates there have been only 60 municipal bond defaults through August 2 and that most of these defaults were not investment grade. The numbers, he said, show no evidence of a crisis at hand.
Defaults on the rise
That's just the sort of data that has kept a multitude of yield-hungry and tax-averse investors flocking to the sector. In August, investors plowed more than $1.2 billion a week into municipal bond funds. They invested a record $69 billion in new money there in 2009, up from just $7.8 billion in 2008 according to the Investment Company Institute. High-yield --or "junk" -- bonds have been exceedingly popular too.
But defaults on municipal debt have been rising, according to the Distressed Debt Securities newsletter, which says defaults rose from $349 million in 2007 to $7.77 billion in 2008. They have breached $4 billion so far this year, according to Bloomberg, despite heavy stimulus injections and other dollops of federal aid. Also, while AAA-rated bonds rarely go down the drain, the more speculative grades don't always stand up so well, with bonds rated B to C having ten-year cumulative default rates of 11% to 13% even in good times.
Municipal bond defaults could continue to rise even if the economy gains a footing. According to the US Government Accountability Office, despite the federal help, state and local governments continue to operate in the red. Without massive austerity, the GAO predicts their fiscal positions will continue to worsen for the next fifty years. The problem is that the vast majority of municipal bond investors these days tend to be of the mom and pop variety and they are not generally being compensated much for risk. As Bond Buyer notes, heavy investor demand last month pushed "10-year tax-exempt yields below 2.20% and 30-year munis lower than 3.70% for the first time in history."
Despite the Pollyannaish view expressed by such a yield, critics fear that you don't need another Panic of 1873 -- when ten states, including Alabama, Arkansas, Tennessee, Michigan and Minnesota, defaulted on their municipal debts -- to seize up the system.
Perhaps not even something like the famed default of New York City during the Gerald Ford administration in 1975 would be needed to instigate a panic. Rapidly rising interest rates would be enough to wipe the smile off many retail investors in muni-bond funds. A few smaller but well-known municipalities threatening default could send them fleeing for crowded exits.
And crowded they would be. Despite the liquidity of municipal bond mutual funds and ETFs, their underlying bond holdings trade far less often. The "new normal" hasn't helped matters, noted bond giant Pimco this January, explaining that many of the major broker dealers in the municipal space -- Bear Sterns and Lehman Brothers for instance -- are no longer with us, while many of the major liquidity providers there, such as single strategy municipal hedge funds, "collapsed or were shut down."
Nor is a wave of defaults off the table just because they have not occurred in recent decades. Before the housing downturn, real-estate bulls saw housing prices laddering to the sky and often noted that real-estate prices had never declined nationwide -- until they finally did. As Richard Bookstaber, the senior policy advisor at the Securities and Exchange Commission wrote in a blog post this April, the municipal market is massive, leveraged and opaque, blessed by questionable analyst ratings and backed by revenues already mortgaged off to someone else. In other words, it bears all the hallmarks of a crisis in waiting.
Freddie Mac estimates home sales to fall another 23% in 3Q
by Jon Prior - Housing Wire
Freddie Mac expects 4 million new and existing home sales in the third quarter, a possible 20.7% decline from last year and 23% drop from the previous quarter. In its September economic outlook, Freddie said recent reports of plummeting home sales and near record-high delinquencies has shaken confidence in the "fragile" housing recovery. After the homebuyer tax credit expired in April, the National Association of Realtors (NAR) reported existing home sales fell 27% in July, and new home sales have fallen to the lowest point since 1963.
The news will further weigh on the market. JPMorgan Chase analysts lowered expectations of housing recovery in the next four years. Jon Daurio, chief executive at the distressed loan purchaser Kondaur Captial, warned that home prices could fall another 20% as well. "The main issue for the housing market outlook is how much of the recent weakness in home sales can be explained by transactions that were pulled forward by the credit – that is, 'borrowed' from sales in future months – versus signs that a more fundamental deterioration may be underway," according to Freddie Mac.
Freddie has considered two scenarios for how the market will respond to the missing government stimulus. The first is a "payback" of the "borrowed" sales over a gradual recovery. Under this scenario, home sales would drop another 10% in August from the low in July that start to climb out of the bottom. This assumes about 600,000 of the home sales were pulled forward in response to the tax credits.
The second scenario only half of these sales were pulled forward, and the rest were purchases that otherwise wouldn’t have been made without the credit. Under this scenario, sales would recovery faster, perhaps by the end of October. "Indeed, pending home sales rebounded 5 percent in July, which would be most consistent with the second scenario of a partial payback and faster recovery," according to Freddie. "Nevertheless, while the decline in sales to date appear smaller than what would likely occur in a 'double dip' housing and macroeconomic downturn, we remain vigilant for any further signs of weakening."
In its economic outlook, Freddie also predicted that the 30-year fixed-rate mortgage rate would head back up through the rest of this year and the next, passing 5% in the last quarter of 2011. Freddie also forecasts that the unemployment rate would start to fall, reaching 8.6% by the end of next year as well.
U.S. Home Prices Face 3-Year Drop as Inventory Surge Looms
by John Gittelsohn and Kathleen M. Howley - Bloomberg
The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.
"Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand," said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. "Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year." Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.
Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said.
Fannie Mae Forecast
Fannie Mae, the largest U.S. mortgage finance company, today lowered its forecast for home sales this year, projecting a 7 percent decline from 2009. A drop in demand after the April 30 tax credit expiration "suggests weakening home prices" in the third quarter, according to the report. There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month’s sales pace, according to the Chicago- based Realtors group.
"The best thing that could happen is for prices to get to a level that clears the market," said Shapiro, who predicts prices may fall another 10 percent to 15 percent. "Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines." About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody’s Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013.
After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said. "A long if not lost decade," Zandi said. Prices dropped in 36 states in July from a year earlier, CoreLogic Inc., a Santa Ana, California-based real estate and financial information company, reported today. Its housing index showed the biggest declines in Idaho, Alabama and Utah. Maine, South Dakota and California had the largest gains.
Working through the surplus inventory varies by markets and depends on issues such as local employment and the amount of homeowner debt, said Sam Khater, chief economist for CoreLogic. Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York state has the lowest, according to the company.
Douglas Duncan, chief economist for Washington-based Fannie Mae, said in a Bloomberg Radio interview last week that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley’s Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million. Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent -- to 2002 levels -- before beginning a recovery in 2014. "On a national level, you have never seen a decline of this sort," Deb said in a telephone interview. "I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006."
In addition to the as many as 8 million properties vacant or in foreclosure, owners of another 3.8 million homes -- 5 percent of U.S. households -- said they are "very likely" to put their properties on the market within six months if there is improvement, according to a July survey by Seattle-based Zillow. "This has the potential to create a sawtooth pattern along the bottom," Stan Humphries, Zillow’s chief economist, said in a telephone interview. "Homes begin to sell and a few sidelined sellers rush into the marketplace and flood the marketplace."
Gains Versus Inflation
If the market doesn’t fall to its natural bottom, price gains in the next five to 10 years won’t keep pace with inflation as the difference is made up "on the backend," said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.
The Obama administration’s effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department. "The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize," said Ritholtz, author of "Bailout Nation." "We’re just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom."
Government policy contributed to a recent stabilization in prices that may have been an "illusion," said Zach Pandl, an economist at Nomura Securities International Inc. The S&P/Case- Shiller index of home prices in 20 U.S. cities rose 4.2 percent in June from a year earlier. The measure is a three-month moving average, which means data in the month were still influenced by transactions that may have benefited from the tax incentive. Even if modifications fail, keeping foreclosures off the market is worth the risk of a delayed recovery, Pandl said. "It’s too painful and too damaging to let it happen all at once," Pandl said from New York.
Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25.
Nevada, New York
In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said. Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005. "I’m stuck," Miner said. "I thought it was a stepping stone to a house."
Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated. "I’m not $200,000 in the hole, thank God," she said. "But the quarter of the country that’s underwater -- that’s me."
Detroit, Las Vegas and Fort Myers, Florida, will take until at least 2020 to return homeowners to positive equity, CoreLogic said in a March report that compared prices in 10 metro areas. Atlanta, Dallas and California’s Riverside and San Bernardino counties will need until 2016. The Washington, D.C., area will take the least amount of time, with negative equity disappearing around 2015, CoreLogic said.
The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months. "It doesn’t take a tremendous number of people to turn the housing market, because only about 5 percent of the stock trades in a given year," Case said in a telephone interview. "There’s still a lot of people who are employed, many of whom have been looking for the opportunity to buy."
Case is an example of a homeowner waiting to sell because of low demand. He’s seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.
"I want to keep it if I can’t get what I want," he said. "It’s a terrific little getaway and I’m not going to give it away." Some indicators show the real estate market has begun to turn a corner. Pending sales of existing houses increased 5.2 percent from June to July, the National Association of Realtors reported Sept. 2. Economists had estimated a 1 percent decline, according to the median of 37 forecasts in a Bloomberg survey.
"The market is starting to show some signs of stabilization," Nicolas Retsinas, director emeritus of Harvard University’s Joint Center for Housing Studies, said during an Aug. 31 interview on Bloomberg Television’s "InsideTrack." "But a robust recovery is a long time away."
The number of U.S. homes in default or foreclosure fell to 7.04 million as of July 31 from a high of 8.12 million in January, Lender Processing Services Inc., a Jacksonville, Florida-based mortgage servicing company, reported Sept. 2. Defaulted mortgages as of July took an average 469 days to reach foreclosure, up from 319 days in January 2009. That’s an indication lenders -- with the help of the government loan modification programs -- are delaying resolutions and preventing the market from flooding with distressed properties, said Herb Blecher, senior vice president for analytics at LPS.
"The efforts to date have been worthwhile," Blecher said in a telephone interview from Denver. "They both helped borrowers stay in their homes and kept that supply of distressed properties on the market somewhat limited."
66%-67% Of Phoenix Homes Underwater?
by Twist - Housing Doom
We’ve often seen Jay Butler, head of Realty Studies at ASU, give overly optimistic reports on the state of Phoenix real estate. That’s why when Butler says that 66%-67% of Phoenix homeowners are underwater, you know it’s bad out there:
Will things be better any time soon? Watch what Fannie Mae is now doing to unload homes. Other lenders will have no choice but to aggressively reduce their inventory as well. What is that chance that Valley home prices are anywhere close to “stabilized”?
Japan Pushes Down Yen
by Takashi Nakamichi, Takashi Mochizuki and Yuka Hayashi - Wall Street Journal
The Japanese government said it jumped into currency markets for the first time in more than six years Wednesday morning, intervening to try to stem the yen's sharp rise. The announcement came as policy makers and Japanese business leaders have grown increasingly worried that the currency's ascent has endangered the fragile recovery of the export-led economy, risking pricing out of markets around the world. Yen worries have pushed the Nikkei Stock Average into bear market territory in recent weeks.
Tokyo stocks jumped nearly 2% Wednesday morning as traders started reporting the intervention, which was later confirmed at a press conference by Finance Minister Yoshihiko Noda. The rally was led by top exporters such as Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co., the stocks of which all rose 3% or more. The dollar rose to almost 85 yen on the news, after having slipped earlier in the day below the 83 yen level for the first time in 15 years.
"Deflation is continuing, and we are in severe economic conditions," Mr. Noda told reporters. "Under those circumstances, recent movements [in the yen] will have adverse effects on the stability of economic and financial conditions, and we can't overlook them." Mr. Noda made clear that more action could be coming, saying "we will continue to closely monitor movements in foreign-exchange markets and will take decisive steps, including intervention, when necessary."
Showing the move was coordinated with the central bank, Bank of Japan Gov. Masaaki Shirakawa issued a statement supporting the move and indicating monetary policy would move in concert with the finance ministry. "The bank will, while pursuing strong monetary easing, continue to provide ample liquidity to the financial markets," Mr. Shirakawa said. It was the second time in less than three weeks that Japanese policy makers have scrambled to try to curb the yen's rise. On Aug. 30, the BOJ held an emergency meeting to pump more liquidity into the economy.
But that move had a short-lived impact, and it's unclear how long-lasting Wednesday's action will be. While the Finance Ministry declined say how much it was spending, traders estimated the currency intervention was worth between 200 billion yen and 300 billion yen, or $2.4 billion to $3.5 billion, at current exchange rates, though the amount is increasing as Japan continues its operations. That is a drop in the bucket compared with the $586 billion in daily turnover in dollar-yen trading.
Effective intervention ultimately would likely require coordination with other countries, notably the U.S. Mr. Noda said Japan acted on its own this time, but added that "we've been in close cooperation with authorities concerned." Treasury and Federal Reserve officials reached in Washington declined to comment on Japan's move. The long-term impact of such market moves will ultimately be muted unless Japan finds a way to address the underlying economic and policy conditions that have fueled the yen's rise.
The yen's strength is attributed to expectations of more monetary easing in the U.S. and Europe, which would bring down interest rates in their local markets. That would shrink the gap in interest rates between these nations and Japan, where interest rates have already been at rock-bottom levels and can't go much lower. That boosts the relative appeal of keeping assets in the yen. Expectations of continued deflation in Japan are also aiding the yen. If prices go down further, that raises the relative value of yen-based holdings for foreigners.
Analysts say the yen's rise has been accelerated in recent weeks as big Japanese investors sold out of U.S. Treasurys and other overseas assets and brought the money home to be poured into Japanese government bonds. The Chinese government's diversification of its portfolio, and a sharp increase in purchase of Japanese government bonds, is also believed to be pushing up the yen.
Managing Borrowed Time: The Man Responsible for Saving the Euro
by Christian Reiermann - Der Spiegel
Klaus Regling has been tasked with saving Europe's common currency. At his disposal are a dozen employees and 440 billion euros. He has spent recent weeks preparing for the worst.
There is nothing in Klaus Regling's new office to indicate that this is the place where €440 billion ($560 billion) in bailout funds will be activated, if necessary. The furniture is used, the shelves are empty and the blue carpeting is worn. The walls could use a new coat of paint, and slightly darker rectangles reveal where the previous tenants' pictures were hanging. Regling has already brought his own piece of art, the only personal item in the 25-square-meter (270-square-foot) space. The picture of an idyllic village in Bali is leaning against the wall. Regling hasn't had any time to put it up yet. He's been far too busy preparing to save the euro.
"Everything went rather quickly," the 59-year-old says by way of apology for the makeshift impression of his office on the third floor of an inconspicuous office building on John F. Kennedy Avenue in Luxembourg. Regling has been the head of the bailout fund for the euro, officially known by the somewhat cumbersome name European Financial Stability Facility (EFSF), since early July.
The German economist has shouldered an enormous responsibility. The leaders of the 16 member states of the euro zone expect him to intervene with bailout money should the euro run into serious trouble in the next three years, the period for which the safety net will remain active.
Acute Fiscal Emergency?
The new organization is intended to assist countries in the event of an acute fiscal emergency. If the government of a euro-zone country is having trouble borrowing new money, Regling's EFSF will intervene. The regulated procedure is designed to eliminate the need for spontaneous collections among the member states, as was the case with the bailout of Greece.
The European governments, though not exactly known for speed and agility, established the fund in record time. In early May, when the financial system was on the brink of collapse as a result of the turbulence triggered by Greece's financial problems, German Chancellor Angela Merkel, French President Nicolas Sarkozy and the remaining euro-zone leaders agreed, in the presence of European Central Bank (ECB) President Jean-Claude Trichet, to establish a "special-purpose vehicle" to save the euro.
The euro-zone finance ministers inaugurated the EFSF at the beginning of June. Regling, whose name was quickly brought up as a possible head of the new organization, received a call one evening. He was told that if he were interested in the job, he should appear in Luxembourg the next day. Regling was interested and accepted the invitation. "I was interviewed by three finance ministers in the morning, I received the offer in the afternoon, and I accepted the job that evening," he recalls. The economist wants the monetary union to survive. He believes in its economic benefits and, in a sense, regards it as his baby. He has interacted with the euro in various capacities throughout his career. He seems perfectly suited for the new job.
'The World Isn't an Ideal Place'
As chief of the International Monetary Affairs Division in the German Finance Ministry, he played a key role in drafting the European Union's Stability and Growth Pact in the 1990s. Years later, as director-general for economic and financial affairs in the European Commission under then EU Commissioner for Economic and Monetary Affairs Joaquín Almunia, his job was to make sure that the member states adhered to the pact.
Regling has also worked at a hedge fund, taught at the University of Singapore and held two different posts at the International Monetary Fund (IMF). Most recently, he worked as an independent consultant. For Regling, it isn't a contradiction that he now heads an organization that probably wouldn't even exist if his stability pact had worked as intended. "The world isn't an ideal place," he says. Governments make mistakes, reforms are postponed, and then along comes an economic crisis to complicate things even further.
To prevent a worst-case scenario from becoming reality, he is now feverishly assembling his staff. He has already hired half a dozen employees and expects to add as many more. The streamlined structure is possible because Regling intends to use his team to take advantage of existing institutions. The European Investment Bank will provide the infrastructure and handle the accounting activities for the fund. Germany's Federal Debt Administration will issue the bonds if and when they are needed, and the ECB will manage the accounts.
Meeting Potential Investors
In addition to handling the tasks needed to set up the organization, Regling is already knee-deep in everyday business at the new fund. Representatives of major banks come to see him every day, all of them eager to secure the contract to help the EFSF issue its bonds. As is standard in the industry, Regling himself travels to meetings with potential investors. He was in Beijing recently, where he presented the EFSF to the sovereign wealth funds of China and Singapore. Officials from both funds were interested in the new European investment opportunities. Of course, it didn't hurt that Regling has known the key players for years.
Regling plans to meet with representatives of major US pension funds soon to familiarize them with his new organization. The would-be savior of the euro believes that these promotional tours, known as road shows in the financial industry, are absolutely necessary. "We're new, and if no one knows who we are, no one will buy our bonds." The success of those bonds in the marketplace will depend in large part on their credit ratings, which is why Regling is paying particular attention to the rating agencies. He has spent a full day with groups of experts from each of the three major agencies, Moody's, Standard & Poor's and Fitch, to explain the EFSF business model to them.
This is what the model looks like: If a member state encounters financial difficulties, Regling's team raises capital, which it then makes available to the country in question. Because the loans are guaranteed by the remaining member states, the EFSF is able to borrow the money at favorable rates. The country receiving a loan pays a markup interest rate, and the difference between the two rates is Regling's profit, which he can eventually distribute to the guarantor countries.
'The Most Likely Scenario'
The rating agencies are in the process of deciding whether to award the EFSF bonds the highest rating of AAA. The higher the rating the lower the interest rate Regling's fund will have to pay. The prospects of securing a triple-A rating are not bad, even though only six of the 16 euro-zone member states are rated AAA. To achieve a triple-A rating despite this handicap, each of the 16 euro-zone countries will guarantee 120 percent of its share of the €440 billion fund. Regling expects the rating agencies' decision within the next few weeks.
He is convinced that the beneficial effects of the new bailout mechanism can already be felt today. "The markets have settled down since we came into existence," he says, noting that the risk premiums for ailing countries like Portugal and Spain have not continued to rise, and that the markets have regained confidence in the monetary union. Regling describes the most important objective of the undertaking as follows: "We are buying time with the EFSF bailout measures." Crisis-stricken countries and the euro zone are expected to use the time provided by the bailout funds to clean up their national finances and develop a permanent mechanism to cope with future crises.
If Regling has his way, the measures will not even be needed in the next three years. "It would be preferable if we didn't even have to intervene," he says. "In fact, I believe that's the most likely scenario." He hopes that the very existence of his organization will bring calm to investors and deter speculators. "If that's the case, we'll close up shop here on June 30, 2013."
The Dirty Little Secret Of Basel III
by John Carney - CNBC.com
While the Basel III rules for bank capital significantly raise the amount of capital banks will be required to hold, the new rules do nothing to address a little known problem that was at the very heart of the financial crisis. To begin, the big banks and securities firms that failed during the financial crisis had capital buffers even higher than those that will be required by Basel III.
"The five largest US financial institutions subject to Basel capital rules that either failed or were forced into government-assisted mergers in 2008 — Bear Stearns, Washington Mutual, Lehman Brothers, Wachovia and Merrill Lynch — had regulatory capital ratios ranging from 12.3 per cent to 16.1 per cent as of their last quarterly disclosures before they were effectively shut down," Andrew Kuritzkes and Hal Scott have explained.
The heart of the crisis was not so much under-capitalization of a few risk taking financial institutions. It was over-correlation. So many of our banks fell into trouble all at once because their balance sheets were so heavily loaded with mortgage backed securities. In 2005, for example, banks owned 45 percent of all subprime mortgage backed securities. Prior to the crisis, bank exposure to mortgage backed securities was three times as high as the other, non-bank US investors, according to political scientist Jeffrey Friedman’s forthcoming book "Engineering The Perfect Storm."
Why did our banks own so many mortgage backed securities? The answer seems to be the relative risk weighting assigned to highly rated mortgage backed securities made it extremely costly to avoid the mortgage market.
In 2001, the US banking regulators jointly put forth an amendment to the Basel Accords that changed the way banks calculated capital set asides. Different types of investment were assigned different risk weights, requiring different amounts of capital reserves. The new rules said that for every $1 million of mortgage backed bonds, banks had to reserve $2,000. One million dollars of non-securitized mortgage loans required a $5,000 reserve. A million in commercial loans required a $10,000 reserve.
Since reserve capital is dead money for banks, they try to minimize the amount they need to set aside. Thanks to the risk weighting , banks were heavily incentivized to put money into mortgage-backed securities. They specifically sought highly rated subprime because that maximized the risk-weighted yield. Some 93% of the mortgage backed securities owned by commercial banks were rated AAA or issued by a GSE, Friedman estimates.
The problem is not just that the ratings and the risk weightings under-estimated the risk of these bonds. It’s that the unified measure of risk and centralized requirement for capital reserves result in banks with highly correlated business strategies—buy mortgage bonds!—and very similar balance sheets—lots of mortgage bonds!
This was why the housing downturn led to a banking crisis. The capital reserve rules had led to correlated risk throughout the banking sector. Instead of a diversity of banks following different strategies, they were crowded on one side of the trade. The new Basel rules do nothing to address the problem of correlated risk. From what we can tell, this source of systemic risk played no part at all in the negotiations in Switzerland. So our system is just as vulnerable as it was to correlation risk.
Basel: the mouse that did not roar
by Martin Wolf - Financial Times
To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored: withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former. The world needs a smaller and safer banking industry. The defect of the new rules is that they will fail to deliver this.
Am I being too harsh? "Global banking regulators ... sealed a deal to ... triple the size of the capital reserves that the world’s banks must hold against losses," says the FT. This sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much.
The new package sets a risk-weighted capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of 2.5 per cent. Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses. So the rule sets an effective floor of 7 per cent. But the new standards are also to be implemented fully by 2019, by when the world will probably have seen another financial crisis or two.<
This amount of equity is far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis, as historical experience shows (see chart). It would not take much of a disaster to bring such leveraged entities close enough to insolvency to panic uninsured creditors. These new ratios are also very much the children of Basel II, the previous regulatory regime: they rely on what should by now be discredited risk-weightings – one of the points Martin Hellwig of Germany’s Max Planck Institute makes in a superb recent paper on the intellectual bankruptcy of current approaches to regulation of capital. We might think of the new requirements as a "capital inadequacy ratio".
A number of analysts run the possible impact of regulation through standard economic models. The Bank for International Settlements and Financial Stability Board, most notably, have produced a paper which concludes that "a 1 percentage point increase in the target ratio of tangible common equity to risk-weighted assets is estimated to lead to a [median] decline in the level of gross domestic product by a maximum of about 0.19 per cent from the baseline path after four-and-a-half years" (see chart).
Surprise, surprise: representatives of the industry produce estimates that are roughly eight times greater. The official report responds tartly that: "The industry estimates assume that, absent any strengthening of regulation, banks will prefer to increase their leverage in the coming years, returning to levels that prevailed immediately preceding the crisis; that the financial firms’ required return on equity will rise as the government safety net is weakened; and that the link between aggregate credit growth and real GDP is roughly the average from the high-credit growth period preceding the crisis."
Any such modelling of the costs of regulation is Hamlet without the ghost: it ignores what drives the plot. We cannot assess the costs of regulation without recognising a few facts: first, both the economy and the financial system have just survived a near death experience; second, the costs of the crisis include millions of unemployed and tens of trillions of dollars in lost output, as the Bank of England’s Andy Haldane has argued; third, governments rescued the financial system by socialising its risks; finally, the financial industry is the only one with limitless access to the public purse and is, as a result, by far the most subsidised in the world.
It is necessary to go back to first principles in assessing the alleged costs of higher capital (and liquidity) requirements.
First, it is untrue that equity is expensive, as another excellent paper by Anat R. Admati of Stanford university and others argues, once we allow for the fact that more equity reduces the risk to creditors and to taxpayers, as we should. Less equity means higher returns, but also higher risk (see chart).
Second, to the extent that creditors bear the costs of failure, more equity means cheaper debt. Thus, if debt were truly unsubsidised, changing the ratio of equity to debt should not affect the costs of funding the balance sheet.
Third, to the extent that taxpayers bear the risk, more equity offsets this implicit subsidy. The public at large has zero interest – in fact, a negative interest – in subsidising risk-taking by banks, in general. For this reason, the subsidy it offers by providing free insurance must be offset by imposing higher capital requirements.
Fourth, the public has an interest in imposing higher equity requirements than any individual bank would, in its own interest, wish to bear. Banks create systemic risk endogenously. That cost must be internalised by the decision makers. More risk-bearing capacity is one way of doing so.
Finally, to the extent that the public wants a specific form of risk-taking subsidised – lending to small and medium-sized enterprise, for example – it should do so directly. To subsidise the banking system as a whole, to persuade it to undertake what is but a small part of its activity, is grotesquely inefficient.
The conclusion, then, is that equity requirements need to be very much higher, perhaps as high as 20 or 30 per cent, without the risk-weighting. It would then be possible to dispense with the various forms of contingent capital that are far more likely to exacerbate panic in a crisis than assuage it. It is only because we have become used to these extraordinarily fragile structures that this demand seems so outrageous.
This is not to deny two huge problems.
One is that any such transition will be like taking drugs from an addict. The simplest way to minimise the costs would be for governments to underwrite the additional capital and then, over time, sell what they take up into the market. Even so, the aggregate balance sheets of the banking system probably need to shrink. Such deleveraging almost certainly means a longer period of large fiscal deficits than almost anybody now imagines.
The other is that there is tremendous potential for regulatory arbitrage, with risks shifted elsewhere in the system. Such risks can easily collapse back on to the banking system. Thus higher capital requirements for banks will only work if regulators are able to identify the emergence of systemic risks elsewhere.
The regulators are trying to make the existing financial system less unsafe, incrementally. That is better than nothing. But it will not create a safe system. The world cannot afford another such crisis for at least a generation. By these standards what is emerging is simply insufficient. This mouse will never roar loudly enough.
Chinese think tank warns US it will emerge as loser in trade war
by Ambrose Evans-Pritchard - The Telegraph
A State Council think-tank in China has warned Washington that the US will come off worst in a trade war if it imposes sanctions against Beijing over the two nations' currency spat. Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates.
His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar. China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan. The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its $2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said.
However, the mood is hardening on both sides of the Pacific. The dispute risks escalating if China's trade surplus with the US climbs further and more US jobs are lost. US Treasury Secretary Tim Geithner, who has taken a softly-softly line in the past, said on Friday that China had done "very little" to correct the undervaluation of the yuan since ending the dollar peg in June.
Mr Ding reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China's rise as an exporter of goods and capital give it the upper hand. "They are utterly wrong," said Gabriel Stein from Lombard Street Research. "The lesson of the 1930s is that surplus countries with structurally weak domestic demand come off worst in a trade war." He described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side-effect of its yuan policy.
"Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed." "Some Chinese officials seem to believe that buying Treasuries underpins US public spending. In fact China's mercantilist policy is forcing the US to run large deficits against its own interest. China should be terrified of a trade war."
China Plans to Introduce Credit-Default Swaps by Year-End, Official Says
by Christine Richard and Shelley Smith - Bloomberg
The People’s Bank of China formed NAFMII in 2007 to help develop the country’s over-the-counter financial markets, which span bonds, loans, foreign exchange, commercial paper and gold. Photographer: Nelson Ching/Bloomberg China will introduce credit-default swaps by year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the U.S. credit markets experienced over the last several years, according to an official with a state-backed Chinese financial association.
China will limit the amount of leverage used in credit swaps and won’t permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors, told reporters at a briefing in New York. Investors in the derivatives will also be required to own the underlying security, Shi said.
"It’s too bad that we in America and in Europe did not have those kinds of limitations two or three years ago," Donald Straszheim, International Strategy & Investment Group’s head of China research, said in a telephone interview from Los Angeles. "All of us around the world might be in a lot better shape than we are now. What’s most important is that their plans are to not allow this whole process to get out of control."
Private swaps complicated efforts to solve the credit crisis in the U.S. when regulators and market users couldn’t easily determine how interconnected banks had become through trading contracts. American International Group Inc. needed a U.S. bailout that swelled to $182.3 billion after losses fueled by a unit that sold guarantees on mortgage-linked debt to banks including Goldman Sachs Group Inc.
‘Neither Evil Nor Good’
"We believe CDS is a neutral risk-management tool," said Shi, whose group monitors the country’s interbank market and promotes innovation in financial products. "It is neither evil nor good." China plans to introduce credit derivatives to help manage risk in the nation’s growing domestic bond market, he said at a June briefing in Beijing.
Sales of yuan-denominated corporate bonds in China jumped to 496 billion yuan ($74 billion) last year from 7.9 billion yuan in 2000, according to data compiled by Bloomberg. The global credit-default swap market is now $25 trillion after reaching $62 trillion in 2007 before the financial crisis. Credit-default swaps are derivatives that pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. "CDS in China is a management tool," Shi said. "There will be no repackaging or restructuring of risk."
"Development of a Chinese domestic credit-default swap market is positive in increasing the universe of credit risk management tools," Keith Noyes, the International Swaps and Derivatives Association’s Asia-Pacific director, said in response to e-mailed questions. "However, it is unclear how the introduction of CDS would fit in with the current draft China Banking Regulatory Commission regulations." The People’s Bank of China formed NAFMII in 2007 to help develop the country’s over-the-counter financial markets, which span bonds, loans, foreign exchange, commercial paper and gold.
China expects to further open its debt markets, with the prospects for foreign companies selling debt in China improving from "promising" to "extraordinarily great" in three to 10 years, Shi said. China pledged to treat foreign companies in the same way as its own when it was admitted to the World Trade Organization in 2001.
McDonald’s Yuan Bonds
In August, McDonald’s Corp. became the first foreign company to sell yuan-denominated bonds in Hong Kong with a 200 million yuan issue. Wal-Mart Stores Inc., based in Bentonville, Arkansas, said in March it was considering an offering. Overseas firms remain restricted from selling yuan- denominated notes in mainland China, five years after the Asian Development Bank and International Finance Corp., both supranational agencies, sold the first so-called Panda bonds.
NAFMII said in December that Asian companies may be allowed to start sales this year. Bank of Tokyo-Mitsubishi UFJ (China) Ltd. became the first foreign bank subsidiary to sell the bonds in China in May, issuing 1 billion yuan of two-year notes. The Chinese bond market also remains largely closed to foreign investors. Plans to open the market to overseas buyers, such as U.S. pension funds, will require further study, Shi said.
NAFMII officials are in New York meeting with firms including Citigroup Inc. and JPMorgan Chase & Co. about the asset-backed securities market, Shi said. The group also met with financial firms in Germany and Poland to discuss securitization, he said. Chinese officials began discussions with bankers several years ago to learn about securitization, he said. In 2007, AAA rated securities backed by home loans tumbled in value with the onset of the subprime mortgage crisis, leading to $1.8 trillion of losses worldwide. "We learned from the U.K., Europe and the U.S.," Shi said. "But we did find that there were problems with some of the teachers."
Goldman: Fed May Announce New Asset Purchases in November
by Luca Di Leo - Wall Street Journal
The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc. "We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced," Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.
To fight the financial crisis in 2008 and 2009, the Fed bought $1.7 trillion in mainly mortgage-backed securities, a move that helped to keep mortgage and other long-term borrowing rates low. That program ended in March. But with the recovery slowing, the Fed said Aug. 10 that it would reinvest the proceeds of mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking. The question now is whether the central bank will start a new program of asset purchases that would increase the size of its $2.0 trillion balance sheet further.
Goldman Sachs expects this to happen soon given the weakness in the U.S. economy as a result of lower business inventory accumulation and a fading fiscal stimulus. The bank expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year. U.S. inflation is predicted to continue slowing to 0.5% by the end of next year from around 1.0% currently. That would be well below the Fed’s informal target of between 1.5% and 2.0%. The upcoming meetings of the Fed’s policy-setting committee this year are Sept. 21, Nov. 2-3 and Dec. 14.
Banks bounce back, but can they handle next crisis?
by David J. Lynch - USA Today
Two years after Lehman Bros.' collapse caused a global credit panic, financial flows in the United States have returned to normal — or at least what passes for normal amid a still-wounded economy. Since the scary days that followed Lehman's sudden demise, major changes have swept the banking industry, with traditional investment banks disappearing like financial dinosaurs, and some of the industry's household names fading into mergers or oblivion. Merrill Lynch, home of Wall Street's iconic bull, was absorbed into Bank of America. Wells Fargo swallowed Wachovia. Citigroup found itself tethered to government life support.
Today, the nation's big banks are in much better shape than they were two years ago, but the issue of how to handle the collapse of another cross-border giant still shadows the global economy. Troubling weaknesses are visible in the smaller regional banks that attract less public attention. And plenty of additional change lies ahead for the industry as it battles regulators about implementing new domestic and global banking rules. "They have more capital. Much better management of their liquidity. In general, they're being more cautious," says Simon Johnson, an economist at the Massachusetts Institute of Technology. "But the overall culture remains the same, and the system is largely unreformed."
Last year's government-run stress tests led to the nation's 19 largest banks raising $205 billion in capital to buttress themselves against future losses. Another sharp decline in U.S. housing prices or in commercial real estate could yet hammer bank balance sheets. Likewise, if Europe's major banks suffer significant losses on their holdings of government debt from countries such as Greece or Ireland, U.S. banks could feel the aftershocks. If the economy sinks into a double-dip recession, U.S. banks would need to raise an additional $80 billion in capital, the International Monetary Fund concluded this summer.
"Stability is tenuous. ... Bank balance sheets remain fragile, and capital buffers may still be inadequate in the face of further increases in non-performing loans," said the 51-page IMF study.
Lehman's Sept. 15, 2008, bankruptcy filing marked the break between a challenging episode of financial weakness and the onset of the worst global panic since the Great Depression. The collapse of such a storied firm — Lehman had been a Wall Street fixture since before the Civil War— caused banks to regard each other with unalloyed suspicion. Unsure which institution might be the next to succumb to losses from complex mortgage-backed securities, routine bank-to-bank lending dried up.
Within a month, one measure of banks' willingness to make short-term loans to other banks registered the financial equivalent of a heart attack. The so-called TED spread, the difference between interbank loans and short-term government debt, jumped to 4.63 percentage points — almost 15 times its 2000-2007 average of 0.31. Today, the spread is just 0.16 percentage points, one reflection of the credit market's return to normalcy.
The late 2008 credit freeze sent the already wobbly economy into a nose dive. In the three months prior to Lehman's implosion, the economy lost an average of 246,000 jobs per month. In the next three months, labor market casualties averaged 652,000. By then, the last remaining major investment banks, Goldman Sachs and Morgan Stanley, had become plain-vanilla bank holding companies, submitting to Federal Reserve regulation of their activities in return for access to the Fed's financial lifeline.
Now, with memories of their near-death experiences fading, the nation's largest banks are once again booking profits as if the global financial crisis never occurred. In the second quarter, the industry posted earnings of $21.6 billion compared with a loss of $4.4 billion in the same period one year ago. It was the highest quarterly profit total since the third quarter of 2007, shortly before the recession began, according to the Federal Deposit Insurance Corp. Some individual bank performances were eye-popping: Bank of America reported $3.1 billion in second-quarter profits, as did Wells Fargo. Citigroup earned $2.7 billion.
The image of highflying bankers recovering nicely while 14.9 million Americans remain jobless — Goldman Sachs' payroll is up 9.3% the past year — has complicated the Obama administration's efforts to resuscitate the banks. Public ire has been further fueled by often-anemic bank lending. The volume of bank loans grew at an annual rate of 7.1% in the past decade, reaching a peak around $7.8 trillion in mid-2008. Since then, banks' total loans have steadily shrunk, though the pace of contraction has slowed in recent months, according to Capital Economics. Loan volume in August was 6.6% below that of one year earlier; in May, the decline was nearly 9%.
Still, banks continue to stockpile excess reserves at the Fed rather than lend it. Before the Lehman bankruptcy intensified the financial crisis, excess bank reserves were negligible. But as the panic spread, bank reserves soared to the current level of $1.03 trillion — up $171.7 billion in the past year. "Banks could actually expand enormously the amount of loans they're providing," says Paul Ashworth, senior U.S. economist at Capital Economics.
Ashworth estimates that using their excess reserves, banks could make new loans worth roughly $3.5 trillion — more than four times the size of the administration's controversial stimulus program. But after a decade of ludicrously easy credit — best illustrated by so-called NINJA loans, where customers with "no income, no job and no assets" were granted mortgages — the lending pendulum has swung sharply in the other direction. "Banks are very cautious about increasing the supply of their new loans. ... Banks will not be taking the crazy chances they were back then, and we don't want them to," said Ashworth.
The problem isn't limited to the banks. With existing factories operating far below capacity, there is little reason for many businesses to expand. Demand for new commercial and industrial loans was roughly unchanged in the most recent quarter, after having dropped during the three months that ended in April, the Fed said. The most recent Federal Reserve survey of senior loan officers showed some signs of easier loan availability.
For the second-consecutive quarterly survey, banks reported easier credit for large and midsize businesses. For the first time since 2006, banks said they were making more credit available to smaller businesses. Domestic banks also reported — for the first time since the Fed began asking in January 2009 — that they were no longer shrinking credit lines for existing business customers.
"Banks are lending again. But they're still very cautious about what they're willing to get involved in," said Russ Yates, an analyst at SNL Financial in Charlottesville, Va. Smaller banks are a particular worry. The IMF noted a rising gap between the number of home foreclosures and "seriously delinquent loans" at regional and community banks, suggesting additional loan losses for those institutions. Larger banks hold diversified portfolios that are able to absorb some losses. But the fortunes of smaller banks in areas that have been hardest hit by the housing crash, such as Las Vegas, South Florida and parts of California, rise and fall with those local economies, Yates said.
The FDIC's list of problem banks has grown to 829 mostly smaller lending institutions, up from 775 on March 31. Even some banks that received government aid under the Treasury Department's TARP program continue to struggle. In its latest report on the program, the department said 123 banks did not make their scheduled dividend payment to the government on Aug. 16.
New rules and more overseers
Preventing a repeat of the financial crisis was the focus of the Obama administration's overhaul of financial industry regulation. Critical decisions that will determine how far-reaching the actual changes are will be made by officials in agencies such as the new Consumer Financial Protection Bureau. "A lot depends upon how it's implemented," says Nicolas Véron of the Bruegel think tank in Brussels.
The IMF's study of the U.S. financial system endorsed the new regulatory approach, though it criticized the arrangement's hydra-headed nature. The number of agencies with responsibility for monitoring the financial sector increased under the new bill, potentially complicating existing inter-agency coordination problems. "We asked many times why bolder action could not be taken," Chris Towe, deputy director of the IMF's Monetary and Capital Markets Department, told reporters in July.
Global banking supervisors agreed Sunday on new rules that will require banks to maintain higher levels of capital reserves. The Basel III regulations, named for the Swiss town where the regulators meet, will boost a critical bank buffer from 2% of assets to 7%. Most U.S. banks already maintain capital cushions in excess of that figure. A few, including Bank of America, Capital One and M&T, may need to raise capital, according to CreditSights, a credit research firm.
"The last crisis would likely have been significantly less harsh if capital requirements had been higher," said Douglas Elliott, a former investment banker now with the Brookings Institution.
Bankers, especially in Europe, complained that higher capital requirements would crimp already struggling economies by curbing new loan issuance, so regulators provided an eight-year grace period for the new rules to be phased in. At November's G-20 summit in Seoul, President Obama and other world leaders are expected to give the new rules final approval.
Assuming no new crisis before 2019, the Basel III rewrite could make the global financial system safer. But MIT's Johnson, co-author of 13 Bankers, worries that neither the new U.S. nor global rules will be sufficient to forestall a crisis rerun. The largest banks still carry an implicit government guarantee, he says, and will again act recklessly once memories of the last crisis fade. "As the world economy gets going again, we'll find out if the big banks are better managed," Johnson says.
Outlook Clouds Fed Move
by Jon Hilsenrath And Sara Murray - Wall Street Journal
Federal Reserve officials differ on the question of how weak the economic outlook should get before they move to take major steps to boost growth, such as resuming purchases of long-term bonds. With no consensus on the threshold for action, officials are unlikely to launch any new bond-buying effort at their Sept. 21 meeting. The latest government report was mildly encouraging: Retail sales increased 0.4% in August from the prior month, after rising 0.3% in July, the Commerce Department said Tuesday, in a sign consumer spending is growing at a sustainable clip.
Weak consumer spending and high unemployment have hobbled the recovery and prompted fears in some quarters the U.S. could slip back into recession. The fears have eased recently with several better-than-expected economic reports. Fed Chairman Ben Bernanke is still weighing different views on what threshold of economic weakness should prompt further action, such as resuming a bond-purchasing program. The point of buying bonds is to drive down long-term interest rates and encourage more private borrowing, and thus economic growth.
The central bank has already pushed short-term interest rates to near zero, but growth remains slow, unemployment high and inflation lower than the Fed prefers. Although the Fed can't cut short-term rates below zero, it can push long-term rates lower by buying bonds, which tends to push their prices upward and their yields down. Among monetary-policy specialists, this is known as "quantitative easing."
The Fed undertook a big bond-buying program last year and early this year, through March 31. It now is considering whether to restart that program, in what some dub quantitative easing II, or QE II. Right now, the Fed is holding its bond portfolio at a constant level. Mr. Bernanke has avoided laying out specifically what would prompt the Fed to increase that portfolio by restarting the bond-buying program.
Members of the policy-setting Federal Open Market Committee are split. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, says, "If the growth numbers come in about where the consensus forecast is, and we continue to get inflation between 1% and 2%, I don't believe I would see a need for further stimulus." He is part of a vocal group who are reluctant to expand the Fed's current $2.3-trillion portfolio of securities and loans.
The group—including presidents of the Kansas City and Philadelphia Fed banks, Thomas Hoenig and Charles Plosser, among others—doubts new purchases would help growth and fears they could cause inflation later by expanding the money supply too much. That's because when the Fed buys bonds, it essentially creates the money to do so, expanding the number of dollars in existence. Mr. Lacker says it would take a real risk of broadly falling consumer prices, known as deflation, to justify more action.
Other Fed officials have much lower thresholds. One camp argues that with the 9.6% unemployment rate far above the Fed's long-run objective of 5% to 6%—and inflation at the low end of its preferred 1.5% to 2% range—there already is reason to act to spur recovery. Among presidents of the Fed banks, Janet Yellen of San Francisco and Eric Rosengren of Boston likely would support a decision to buy more bonds. Many officials are between the "avoid acting" and "act now" positions. One view gaining currency is that the Fed should restart the bond-buying program simply if the economy fails to improve soon.
Tuesday's retail-sales numbers suggested the consumer sector is holding up, although not growing briskly. Thanks in part to back-to-school shopping, sales at clothing stores climbed 1.2% in August from July. Spending at department stores, grocery stores and gas stations also rose. But shoppers have been made hesitant by high unemployment and soft home prices. This hit big-ticket items in August. Sales were down at auto dealers, furniture stores and appliance retailers.
Mr. Bernanke has laid out broad markers for his threshold for further Fed action. In an August speech, he said the Fed would be "proactive in addressing significant further disinflation," or a slowing of the rate of inflation, suggesting this could spur him to act. He added the Fed would act to avoid "a further significant weakening in the economic outlook," suggesting that continued subpar growth also could be a trigger.
The Fed has another meeting Nov. 2 and 3, which could be an important decision point. Fed officials are due to update their own economic forecasts then. An official downgrade to an already disappointing outlook for 2011 could create more pressure to act. The Fed in June projected the unemployment rate would fall to between 8.3% and 8.7% by the end of 2011. Private forecasters surveyed by The Wall Street Journal this month see the jobless rate at 8.9% then.
"A lack of progress toward lower levels of unemployment would be a reason to give serious consideration to additional action," said Donald Kohn, who retired this month as vice chairman of the Fed and now is at the Brookings Institution. He said he was speaking for himself, not the Fed. Fed officials next Tuesday could use their post-meeting statement to signal a willingness to restart bond-buying if conditions warrant. They also are considering how to structure a bond-buying program if needed. It could look different from the one the Fed announced in March 2009, when it set out to buy $1.7 trillion of Treasury bonds and mortgage debt.
Announcing a massive program is known by insiders as the "shock and awe" strategy. A new round could be smaller-scale at first and adjusted as the recovery unfolds, an approach advocated by St. Louis Fed President James Bullard. "I don't think you need the shock and awe," said Mr. Kohn. He envisions the Fed making smaller purchases and signaling it might do more, depending on growth and inflation. The expectation of more purchases if the economy fails to improve could help keep long-term interest rates low, he says. Conversely, the Fed then could stop buying or sell securities if the economy improves.
Dodd: Congress Could Defund Consumer Bureau Over Warren Interim Appointment
by Ryan Grim - Huffington Post
Outgoing Senator Chris Dodd (D-Conn.) warned Tuesday that an interim appointment of Elizabeth Warren to head the Consumer Financial Protection Bureau "jeopardizes the existence" of the nascent agency. The White House is considering naming Warren interim head, as the law establishing the CFPB allows, in order to get her into place immediately and head off a Senate filibuster of her nomination. Once she's in place, Obama could nominate her for the permanent position. "I'm not enthusiastic about that and I think it'll be met with a lot of opposition," Dodd told reporters after coming off the Senate floor.
Dodd said that an interim appointment would deprive the director of the legitimacy that comes with Senate confirmation. He added that such an appointment could create a backlash that would lead Congress to defund the bureau. "This is a big job, an important job, and it needs to be -- you've got to build the support for that institutionally or the next Congress - and none of us know what the outcome's going to be politically -- you could gut this before it even gets off the ground. If you don't have someone running it early on, it jeopardizes the existence of the consumer protection bureau," he said. Asked how Congress would gut it, he said: "Money. Take away the money. That's how you always do it."
The CFPB, however, is designed to get its funding stream from the Federal Reserve, not Congress. During the Wall Street reform debate, Dodd argued that funding from the Fed would protect the CFPB from Congressional efforts to defund it. On Tuesday, however, Dodd said that the funding stream could be altered and then killed. "They can change the funding source and kill it," said Dodd. "That can change with an amendment." Any attempt to alter and then extinguish the CFPB would need to pass both houses of Congress and could be vetoed by the president. Dodd's twin arguments -- that the CFPB needs a director quickly, and that the director should go through the confirmation process -- are in apparent contradiction.
Dodd, who is retiring in January, said that allowing Warren to be named as interim directory wasn't the intent of the law. "For someone to be kind of put in place -- I don't think we had quite this in mind," Dodd said. On his way on to the floor earlier, Dodd had said he was unfamiliar with the law allowing for an interim appointment. HuffPost asked if it was a House provision that created it. "I've forgotten. I'd have to go back and look," he said.
He denied the suggestion that he was opposed to Warren. "I'm not opposed to the nomination. I've just said, 'Look, send me somebody up who's confirmable'. That's not a radical thought," he
said. Dodd said that whatever the White House decides, it ought to act soon. "I think we're playing games and it's over with and they should decide what to do," he said. If they do pick Warren, he said, "I'll go to bat for them."
UPDATE: Sen. Bernie Sanders (I-Vt.) reached out to HuffPost to take issue with Dodd's position. "I think he is very wrong," Sanders said. "They would need 60 votes to [defeat a filibuster and confirm the nomination]. They would not get 60 votes to do that. The president has the power to make the appointment. We should not be beholden to a Republican filibuster and 60 votes, which is sure defeat. I have a lot of respect and affection for Senator Dodd, but I think he is dead wrong on this issue. What he is really saying is, 'Bring the name forth so she can be defeated.'"
Sanders said that the best move for Obama is to make the interim appointment and then fight for her confirmation later. "I think what the president can do is appoint her on an interim basis, bring forward her nomination for a permanent appointment, and if she doesn't get 60 votes, she stays on as an interim appointment. But what is most important right now at this very difficult moment, is that Elizabeth Warren get that position," he said.
"I don't have to tell you that many people who are strong supporters of the president have been disappointed by some of the folks that he has brought in on his financial team. I am very excited and pleased that the President seems to be leaning towards Elizabeth. I think that means a whole lot to millions of Americans who have a lot of respect for the work she has done, her intelligence, and her willingness to stand up to Wall Street greed.
Hedge-Fund Man Finds Inner Lion in Outer Space
by Michael Lewis - Bloomberg
• To: The Loyal Investors of The Fund
• From: The Manager
Like a lot of hedge-fund guys, I’ve recently endured what might be misconstrued as a nervous breakdown. Before CNBC or the New York Times or some other rag grabs the story and distorts it, I want to tell you about it myself -- and explain not only my disappointing returns but also my prolonged absence. Just so you get it straight. Anyone who runs several billion dollars of other people’s money, and one hundred million of his own, is likely to having moments of self-doubt. I don’t recall experiencing any myself, but I concede that others have.
My personal crisis was different: a single moment, earlier this year, when I doubted not myself, but the world we inhabit. If I was a different kind of guy or (God forbid) a chick, I might easily have gone all "Eat Pray Love" on you. Had I succumbed to the feelings of that moment I might have vanished in a puff like Andrew Lahde to devote my remaining days on Earth to the smoking of what is no doubt some very fine weed, or run off like Stanley Druckenmiller to feed the poor and cure some lepers. Like Guy Hands, I could have gone into hiding on a Channel Island; or, like dozens of hedge-fund guys in the past year, I could have just folded, without offering you any explanation.
My crisis struck one morning early this year, as I stared at my Bloomberg screens. Nothing had happened and that was the scary thing. For no reason in particular I was overcome by this eerie conviction that markets would never again be free. They’d become traps, run by politicians and bureaucrats, designed to ensnare the superior man.
Jungle Law What had happened, in a word, was socialism.
The law of the jungle, suspended since the fall of 2008, had been permanently revoked. Park rangers would forever more feed and protect all the animals, even the fat slow ones that deserved to die. In this new environment the apex predator --the lion with the gift for spotting the wounded antelope -- was doomed. My sixth sense for the kill was now irrelevant. It goes without saying that, to a lion, feelings of doom are especially painful. To my credit, I resisted hiring a shrink, or rethinking my priorities, or searching for any more meaning in my life. Instead, I shot you that note, reminding you that all of you have the same two-year lock-up, then I cut a check to the Russian government for a seat on its new Soyuz TMA- 19 rocket.
For those of you who have never had the experience, getting launched into outer space by the Russians sounds weirder and more offbeat than it actually is. It’s not expensive -- at least not in the context of my net worth -- or even complicated, unless they find out you’ve been shorting Russian stocks. Mainly, you show up wherever some Russian tells you to, and refrain from making unreasonable demands, or offering them too many of your own ideas how to improve their operation.
Anyway, orbit turned out to be the perfect place for a hedge-fund manager to reconsider his place in the universe. Floating around the capsule providing financial advice to my fellow astronauts and getting to know some of the ladies on board, the disturbing turn of events back on Earth came into sharper focus. Your constant demands that I explain my strategy to you; the systematic extermination of some truly badass hedge-fund guys; the rumors that Goldman Sachs might shut its prop-trading desk rather than simply evade the new laws; the drumbeat that Wall Street is no longer a land of opportunity; Craigslist shutting down its sex ads -- all news points in the same direction: big-time returns for me in the future.
Rising Lion Prices
The price of being a lion is rising; the weaker lions are slinking away from the jungle. The stronger lion, the lion who survives, will have the jungle to himself. Inside the space capsule I had an epiphany: I am that lion. Clawing my way along the wall to the capsule’s latrine, I passed a window. For the first time I really looked at the planet we live on -- the planet on which I still think I can generate returns in excess of 18 percent per annum.
In that moment I realized how small it is. No bigger than my wallet, when I held it up to the window. A lot of people, including some of you, have described me as "larger than life," but no one has ever called me "larger than Earth." Yet in comparison, from that distance, I was huge. Then it struck me: so long as I keep my distance from my planet, I will be able to keep myself in the proper perspective. So long as I remain able to visualize my relative size, it doesn’t matter if others seek to shrink me. The socialists thought they could force me to violate my own nature. I’d found the way to stay true to myself.
Take Me Back
Thus reassured, I told the guys up front to cut the engines and get us back down on the ground, preferably somewhere near midtown Manhattan. I was itching to trade; poised for a few quick kills. Alas, it took the better part of three months and some serious change to persuade the Russian government to ferry me back earlier than planned. When you are in space it’s sometimes hard to explain the value of your time. But in retrospect this was a lucky break, as it gave me the leisure to begin my memoir of the financial crisis, "Outer Space, Inner Lion."
Rumor has it that those of you who have given up on me assume you have heard the last of me. Trust me: you haven’t.
US Air looks at oil price hedging and says, "No thanks"
by John Kingston - Platts
Michael Baer is the managing director of fuel administration for US Airways, and he had a few interesting observations Monday about the question of hedging the company's exposure to the price of jet fuel. Baer was part of a panel I chaired at the Platts' Oil Trading and Risk Management forum held in Houston today, September 13. Most of the day was focused on the impact of the Dodd-Frank banking regulatory legislation; the term "we just don't know yet" was heard frequently. But for US Airways officials, they do know one thing: they haven't hedged for two years, and they have no plans to resume anytime soon.
US Airways' purchase of jet fuel each year totals more than 1.4 billion gallons. In the past, according to Baer, US Airways would start hedging 15 months in advance, and would use a combination of cost collars and options as part of its hedging. According to Baer, the high water mark of this strategy came in June 2008, with the price of oil soaring. The mark-to-market on the company's hedge position then was $347 million. Baer was a hero. Five months later, the mark-to-market position was in the hole for $391 million after the collapse in the oil price.
It made the company look over whether hedging made any sense. As Baer said in his presentation: "Trading 15 months forward forces US Air to pay today for 15 months worth of today's price move," and "We can only recover that cash on physical purchases over 15 months into the future, if prices remain where they are." So that was the end of hedging, for now, and the market's lack of volatility has certainly made that choice look wise. According to Baer, US Air is the only major airline that has taken that strategy.
And he questioned the idea that hedging is something that should always be pursued, noting that Southwest Airlines -- which he did not mention by name, only in thinly-disguised references -- was practically worshiped solely because of its hedging prowess during the runup in prices that peaked in mid-2008. Hedging is speculation, according to Baer; so is not hedging.
The company may switch away from that strategy, but Baer said a company that at its peak made only $427 million has to be careful about tying up too much cash in a hedging strategy. Options, in particular, can be expensive. The three final points in Baer's final slide pretty much said it all about the balancing that the company needs to calculate: Will we be smart enough to start hedging before its too late?; How much money will we save before then? And finally, does hedging really create or protect shareholder value?
The Impending World Energy Mess
by Steve Andrews - ASPO USA
Robert L. Hirsch, Roger Bezdek and Robert Wendling have coauthored a new publication, this time a book called “The Impending World Energy Mess: What It Is and What It Means to You,” a book to be released by publisher Apogee Prime late this month. Hirsch will present material from his upcoming book at the October 7-9 ASPO-USA conference. Please see the full agenda for details at aspousa.org. He has spent his entire career working in the energy realm, from the oil sector to numerous forms of electric power generation. In 2005, this team published “The Peaking of World Oil Production: Impacts, Mitigation & Risk Management.
Andrews: In your earlier work dating back at least five years, you resisted forecasting a time frame for peak oil. There seems to be a bit of a change on that front in your book. Care to comment on that?
Bob Hirsch: In years past, there was considerable uncertainty in my mind about when the decline of world oil production might begin. Recently it became clear to me that it’s going to be sooner rather than later. I believe that the onset of the decline of world oil production is likely in the next two to five years. And when I say “oil,” I mean all liquid fuels.
Andrews: You say that once declining oil supplies hits, we’re likely to experience deepening worldwide economic damage. How is that likely to unfold? What is your most likely scenario?
Hirsch: Our thinking is that what happened in the two sudden oil shocks of 1973 and 1979 is very likely to be repeated when oil decline sets in. Those were two real world examples of oil shocks surprising people and causing panic. We believe that the same kind of thing is going to happen again, except that the problem is going to last much, much longer because, unlike before, there will be very few unused oil supply valves to turn on this time.
While economies have changed since the 1970s, the dependence on and importance of liquid fuels has not. And human nature hasn’t changed. People panic when they get suddenly frightened. Even though -peak oil? is recognized by a number of people, it is yet to be realized on a wide scale.
In the book we avoided consideration of such things as anarchy, wars, and other catastrophes that are conceivable. We see very little chance that things will be any better than what we describe, but things could easily be worse.
By the same token, we have faith that humankind is not going to collapse because of the oil decline problem. The world is in for considerable pain for a long time. Nevertheless, we have great faith in human resilience. People will come around, get very pragmatic, dig in and do what’s necessary to meet the challenges. As a result, when we get through all of this-which is going to take longer than a decade-the societies that emerge are going to be much stronger and much more pragmatic than they are today.
Andrews: You note that there will be no quick fixes. What mix of crash programs are you currently recommending as the focus of any accelerated policy efforts today?
Hirsch: We sketch practical, physical mitigation options for the world. They are the ones we described in 2005, plus or minus a few changes due to our being a little smarter now in some areas. In the book, we added what we call “administrative mitigation,” such as forced carpooling, forced telecommuting, and rationing. There is benefit to be gained from those options, but their implementation will not be simple.
For instance, rationing seems like a relatively simple concept but after one considers the details, it is incredibly complicated due to decisions that have to be made, the bureaucracies that have to be built, and the enforcement that has to be implemented. Understanding the complexities is necessary for practical decision-making.
Andrews: You introduce a new acronym in your book. What does LFROI stand for?
Hirsch: It stands for Liquid Fuels Return on Investment. The point is simply that if we have to invest liquid fuels into a process that is going to produce liquid fuels, we had better get a large multiplier on our liquid fuels investment or it is not worth the effort. The concept is clearly of fundamental importance. Options where LFROI is of particular concern are biomass-to-liquids processes, like corn and cellulosic ethanol, where large liquid fuels investments are required for harvesting and transporting biomass to processing.
Andrews: Following up there-since 1978, the most consistent investment we’ve made in alternative fuels is in ethanol from corn. If you were to address the US President and Senate as Energy Czar, what would you tell them about the policy we pursued vis-a-vis ethanol from corn?
Hirsch: I would tell them to learn from past mistakes. Corn-ethanol was appealing in many ways, but it turned out to be a loser from energy, cost, and environmental standpoints. People were grasping at straws — pun intended, sorry. People in the federal government wanted to do something to impact oil imports and to help farmers. I want to protect farmers myself; part of my growing up was on my grandfather’s farm.
Instead of grasping at this or that option which sounds good, government needs to demand serious, unbiased energy analysis so that pragmatic decisions can be made, and the private sector can carry out intelligent, unimpeded implementation. Right now we’re messed up because governments are picking winners and losers and strangling our energy systems.
Among other things we discuss in the book are solar and wind electric generation systems which are losers because they don’t provide what the public demands-electric power on demand; and don’t forget the often ignored fact that electric power generation options will have little impact on our oil import and impending oil shortage problems for a very long time.
Andrews: You state that societal priorities will change dramatically. Can you expound on that?
Hirsch: One of the biggest issues on the table now is climate change-global warming. Related concerns are going to have to give way to the urgent needs of immediate human existence after world oil production begins to decline. Our economies cannot flourish with very high-priced liquid fuels that are in deepening shortage. Massive, rapid, serious mitigation will be required. We can’t do everything at once, which means that global warming efforts and the dreams of a renewable energy future are going to have to be secondary to the urgent, large need to regain some sort of reasonable economic equilibrium.
Andrews: How will some of those changing societal priorities role down to impact individuals?
Hirsch: Every one of us will be impacted by the decline of world oil production. Liquid fuel costs are going to escalate dramatically-that’s what happened in 1973 and 1979, and it will happen again. There will be shortages, which will cause all kinds of problems. There will be rising unemployment and dramatic declines in stock markets. And there will be inflation. It happened before, and it is logical that it will happen again, except this time the pain will last a lot longer.
The question then becomes what can each of us as individuals do to protect ourselves. In our second-to-last chapter, we discuss the issues and investments that people should avoid, places where you can look to protect your nest egg, and things that you can do to minimize your personal damage. For instance, if you have a house in the country, far from a grocery store and places where you might work, you’re likely to get hit very hard when the value of that property declines. Remember, the primary reason those places were viable was abundant, cheap gasoline, which allowed people to get to and from them.
Andrews: When it comes to making personal choices, you write that individuals need to understand the situation in order to make the most intelligent choices. What is the key to that understanding here? Why aren’t more people getting this?
Hirsch: The key to making intelligent choices is having 60-80% of the relevant information. Less than 50% is often insufficient, while waiting for over 90% means you probably waited too long. The subject of the decline of world oil production (”peak oil”) is distasteful and painful, so trying to hide from the substance may be understandable, but the problem will not go away. How many of us really like to hear bad news, and how many of us are pragmatic enough to act soberly on bad news?
The current and the previous U.S. administration tried hard to minimize discussion of “peak oil,” because it’s really bad news. When the public consciousness is raised on this subject, the public will be furious with governments: why didn’t you tell us about this and what are you doing about it? Educating yourself ahead of the problem gives you the best chance of effectively coping, rather than being swept along with the current.
Andrews: Going back a bit, what choices are you making in your personal and family life that anticipate our looming energy problems?
Hirsch: One of my slides for my forthcoming presentation at the ASPO-USA conference in Washington is titled “Some of What I’ve Done.” It lists six points. Years ago, I went through the mental and emotional adjustment associated with what’s likely to happen when world oil production declines, and I pondered when it might begin; I determined then that I didn’t know, but I wanted to be in front of the problem rather than behind it, so I “peak-oil-proofed” my investments and personal life to the degree I thought reasonable.
For reasons outlined in our book, I got out of almost all stocks and bonds. I invested in some three-year annuities, which paid good interest and which I could quickly exit, and I reasoned that gold was going to go up dramatically when oil-related inflation hit. We moved to a home closer to shopping and mass transit, and I traded my gas-guzzler for a Prius. The first four steps turned out to be fortuitous because they helped us to weather the “Great Recession.” Given that I now believe that world oil production is likely to begin declining within two to five years, I think I’ve done about as much as I can do to protect my household.
Andrews: In the book you state that you dig into “realities that others are reluctant to discuss.” How so?
Hirsch: We were referring to the impending decline of world oil production and what it means; the climate change issue, both the uncertainties and the deplorable games being played by many in the environmental community; the realities of other energy sources, including renewables-we use the term “people are intoxicated on renewables;” and finally, what actions people might take to minimize the damage that is likely when world oil production goes into decline.
Andrews: For people who are already familiar with your paradigm-shifting report of 2005, is your book primarily a logical building on that foundation or do you think you have diverged substantially from the findings of that study?
Hirsch: The findings of our 2005 study have held up remarkably well over the last five years. Nobody has strongly argued that our mitigation estimates were wrong. One could argue the details of our estimates, but the story remains basically the same. In the book, we’ve updated our earlier considerations and added some things.
One of the biggest differences between 2005 and today is that, back then, we tended to think in terms of “peak oil” as a relatively sharp peak-production rising and then suddenly turning around and going into decline. That was what happened in the US Lower-48 States. Now we don’t think in terms of a sharp peak because world oil production has been on a fluctuating plateau since the middle of 2004 - world oil production has been essentially flat. We see that plateau as very likely continuing for the next two to five years and then decline setting in. So when I say “peak oil,” what I’m really talking about is the impending decline of world oil production from the existing fluctuation. I sometime use the term “peak oil” because it’s widely used, but it’s not now a strictly accurate descriptor. By the way, can you think of anyone who predicted the current five-year world oil production plateau? I can’t.
Andrews: So, at the end of the day, why did you write the book?
Hirsch: Along with you and many others, I’ve been talking and writing about this subject for years. A number of books and articles have been written, but the issue is still “below the horizon” for the general public. My hope was the kind of book that we could write might make a useful difference, so we undertook the effort.
By laying the oil, energy, and climate issues out in writing and carefully selecting our words, we hoped to be able to better communicate with a wide audience of intelligent lay-level people and to conceivably make a difference. That’s why we wrote the book.
Andrews: Why should people buy the book?
Hirsch: People should buy the book because the issues are very important to them in their personal lives. They need to understand the problems, however distasteful. The chances of not getting burnt are essentially zero. Being forewarned is to be forearmed.
Goodbye High Fructose Corn Syrup, Hello Corn Sugar (Signed, Corn Industry)
by Emily Fredrix - AP
The makers of high fructose corn syrup want to sweeten its image with a new name: corn sugar. The Corn Refiners Association applied Tuesday to the federal government for permission to use the name on food labels. The group hopes a new name will ease confusion about the sweetener, which is used in soft drinks, bread, cereal and other products. Americans' consumption of corn syrup has fallen to a 20-year low on consumer concerns that it is more harmful or more likely to cause obesity than ordinary sugar, perceptions for which there is little scientific evidence.
However, some scientists have linked consumption of full-calorie soda – the vast majority of which is sweetened with high fructose corn syrup – to obesity. The Food and Drug Administration could take two years to decide on the name, but that's not stopping the industry from using the term now in advertising. There's a new online marketing campaign at and on television. Two new commercials try to alleviate shopper confusion, showing people who say they now understand that "whether it's corn sugar or cane sugar, your body can't tell the difference. Sugar is sugar."
Renaming products has succeeded before. For example, low eurcic acid rapeseed oil became much more popular after becoming "canola oil" in 1988. Prunes tried to shed a stodgy image by becoming "dried plums" in 2000. The new name would help people understand the sweetener, said Audrae Erickson, president of the Washington-based group. "It has been highly disparaged and highly misunderstood," she said. She declined to say how much the campaign costs.
Sugar and high fructose corn syrup are nutritionally the same, and there's no evidence that the sweetener is any worse for the body than sugar, said Michael Jacobson, executive director of the Center for Science in the Public Interest. The bottom line is people should consume less of all sugars, Jacobson said. "Soda pop sweetened with sugar is every bit as conducive to obesity as soda pop sweetened with high fructose corn syrup," he said.
The American Medical Association says there's not enough evidence yet to restrict the use of high fructose corn syrup, although it wants more research. Still, Americans increasingly are blaming high fructose corn syrup and avoiding it. First lady Michelle Obama has said she does not want her daughters eating it. Parents such as Joan Leib scan ingredient labels and will not buy anything with it. The mother of two in Somerville, Mass., has been avoiding the sweetener for about a year to reduce sweeteners in her family's diet.
"I found it in things that you would never think needed it, or should have it," said Leib, 36. "I found it in jars of pickles, in English muffins and bread. Why do we need extra sweeteners?" Many companies are responding by removing it from their products. Last month, Sara Lee switched to sugar in two of its breads. Gatorade, Snapple and Hunt's Ketchup very publicly switched to sugar in the past two years.
The average American ate 35.7 pounds of high fructose corn syrup last year, according to the U.S. Department of Agriculture. That's down 21 percent from 45.4 pounds 10 years before. Cane and beet sugar, meanwhile, have hovered around 44 pounds per person per year since the mid-1980s, after falling rapidly in the 1970s, when high fructose corn syrup – a cheaper alternative to sugar – gained favor with soft drink makers.
With sales falling in the U.S., the industry is growing in emerging markets like Mexico, and revenue has been steady at $3 billion to $4 billion a year, said Credit Suisse senior analyst Robert Moskow. There are five manufacturers in the U.S.: Archer Daniels Midland Inc., Corn Products International, Cargill, Roquette America, and Tate & Lyle. Corn refiners say their new name better describes the sweetener. "The name 'corn sugar' more accurately reflects the source of the food (corn), identifies the basic nature of the food (a sugar), and discloses the food's function (a sweetener)," the petition said.
Will shoppers swallow the new name? The public is skeptical, so the move will be met with criticism, said Tim Calkins, a marketing professor at Kellogg School of Management at Northwestern University. "This isn't all that much different from any of the negative brands trying to embrace new brand names," he said, adding the change is similar to what ValuJet – whose name was tarnished by a deadly crash in 1996 – did when it bought AirTran's fleet and took on its name. "They're not saying this is a healthy vitamin, or health product," he said. "They're just trying to move away from the negative associations."