Friday, November 7, 2008

BO Will Bring Step-Change To US Economic Policy

Barack Obama Will Bring Step-Change To US Economic Policy

By Ambrose Evans-Pritchard | 7 November 2008

The paralysing wait between the election of Franklin Roosevelt in 1932 and his inauguration four months later was the most dangerous point of the Great Depression. It saw policy drift in Washington and that era's last disastrous wave of bank failures. (And worries about the current economy still dominate post-election America as the Dow dropped 900 points in the first two post election days— worst since 1987.)

But the long delay after the U.S. election in 1932 will not happen again. The interegnum has been reduced to two months. The campaign machinery of Barack Obama is the most disciplined in US political history. The transition is being run by John Podesta, a former White House chief of staff who remembers how the Clinton team squandered weeks in Little Rock before starting to assemble a government.

Mr Obama knows he has no such luxury in this fast-moving crisis. He takes over a country that is now losing almost half a million jobs a month, and may soon lose much of its car industry.

The budget deficit is likely to reach $1.2 trillion (£750bn)— or 8% of GDP— when all the Bush bail-outs are totted up. So far foreigners are continuing to fund America's debt needs, although Taiwan has fired a warning shot by refusing to roll over holdings of Fannie Mae and Freddie Mac agency bonds. Any false step by Mr Obama that causes foreigners to withhold capital could quickly set off another round of this crisis.

As soon as next week the leaders of the G20 bloc gather in Washington to construct the new financial order, a revived Bretton Woods. The summit is a minefield, camouflaged with interegnum pieties. Bretton Woods means a fixed exchange-rate system, that is to say the antithesis of the floating currency regime that is so deeply linked, in so many subtle ways, to flourishing free markets.

Thankfully, Mr Obama is well advised— by Paul Volcker, Warren Buffett and George Soros— notwithstanding Rupert Murdoch's jibe that his economic plans are "rubbish". His likely pick to replace Hank Paulson at the Treasury is Tim Geithner, the head of the New York Fed, the crisis fireman of the last year and perhaps America's safest pair of hands. Whoever is chosen, we are about to see a strategic shift in US economic policy. Mr Obama's first stimulus package of $200bn will not be used to prop up middle-class spending. It will go on roads, bridges, ports, and the like, the start of a public works blitz to employ people and build things.

"Some 30% of the 570,000 bridges in the US are unsafe," said Felix Rohatyn, former Lazard chief and now a Democrat elder, epitomised by the Minneapolis bridge collapse in 2007. "We have a terrible infrastructure problem, which is unforgivable for the world's leading power. We have the potential for an economic relaunch similar to that of Roosevelt in the 1930s."

Companies will face tax penalties if they shun Mr Obama's scheme to extend health coverage to the 47m Americans without insurance. He means it: his mother spent the last months of her life dying from ovarian cancer struggling to pay for treatment. Moreover, the full might of a Democratic Congress stands behind him.

The president-elect is not a hard-core protectionist, although he tilted that way to survive the Democratic primaries against Hillary Clinton. He is a disciple of Professor Jagdish Baghwati, who thinks the Smoot-Hawley tariff act of 1930 caused the Wall Street crash to metastasize into a global slump. Even so, things are going to change for America's trading partners. Europe's EADS will have a tough time under this Congress winning a share of the Pentagon's $35bn military tanker contracts. Countries that repress trade unions or breach eco rules will face the risk of tariffs.

Mr Obama has debts to the labour movement. He backs the Employee Free Choice Act, which eliminates the free ballot in union elections. "If enacted, it will bring about the most revolutionary change in the law governing union organising in the past 50 years," said Maurice Baskin, chair of Venable's employment group. There are plans for a windfall tax on oil, stiff rises on fuel duty, and a $150bn fund to bring solar and wind power and green energy to the point of critical mass. He backs nuclear power, but new coal plants may not be viable under his [punitary] carbon trading charges. The aim is to vastly reduce America's reliance on oil imports.

Taxes will go up as the Bush cuts expire in 2011, or before, hitting the rich with a triple whammy of higher rates on capital gains and dividends, and a surtax on incomes over $200,000. Taken together, the Obama "manifesto" may prove as far-reaching as the Reagan revolution. The pendulum has swung back. At first glance it looks like a switch to European social democracy, but Washington's "permanent government" always finds a way of moderating change.

Mr Obama inherits an almighty mess. It is the result of pushing US domestic debt from 130% of GDP to over 220% in a half a century of rising leverage. This game has run its course. There will be a slow, painful purge over coming years.

By dint of lucky timing, however, he may take office just as the economy starts to carve a long bottom. The Fed's drastic rate cuts have greatly reduced the chance of calamity next year. There are glimmers of hope in US housing as the stock of unsold homes falls from 11 months' supply to 9.9. LIBOR lending rates have come down to a four-year low. The credit freeze is starting to thaw.

Nothing can prevent a deep recession, but Mr Obama will not be blamed. Indeed, he is perfectly placed to capture the political bonanza of recovery.


America's Companies Reconquer The World
Talk Of America's Corporate Demise May Have Been Greatly Exaggerated

By Ambrose Evans-Pritchard | 5 November 2008

America's corporate giants have regained their place as the world's most valuable companies, reflecting a profound shift in the global power structure as the deep strengths of the US economy reassert themselves.

The oil group Exxon Mobil is once again the global leader with a market value of $390bn. PetroChina briefly had a theoretical paper value of over $1,000bn at the height of the Shanghai bubble but has since crashed to $299bn. Wal-Mart ($222bn), Microsoft ($207bn) and General Electric ($206) have moved briskly up the ladder, claiming the third, fourth, and fifth slots, with Procter & Gamble, Johnson & Johnson, and Warren Buffett's Berkshire Hathaway close behind.

The league table is a striking change from the picture just a year ago, when Chinese companies such as PetroChina, ICBC bank, China Mobile, and other rising stars seem poised to sweep away the Anglo-Saxon laggards. Market veterans note the similarity with the late 1980s when eight of the world's 10 biggest companies were briefly Japanese, a distortion that was soon corrected as debt deflation engulfed the Nikkei. Most economists believe China will fare better, but it may nevertheless suffer a hard landing as exports slump. Manufacturing output contracted sharply last month, according to a CLSA survey.

Global bourses have fallen by half over the last year, losing $20 trillion in market value. The drops have been steepest in many of the BRIC states (Brazil, Russia, India, China) touted until recently as the dynamic new force that would soon challenge the hegemony of the Atlantic region. Moscow's RTS Index has dropped by 67%. Russian corporations have to roll over almost a third of their $510bn of foreign loans by the end of next year. Some of the biggest names have been lining up for Kremlin bail-outs.

The energy giant Gazprom ($100bn)— which talked of becoming the world's biggest company last year— has crashed from third place to 37th, and has seen the credit default swaps (CDS) on its debt trade at 1,300— higher than Lehman Brothers just before it went bankrupt. Brazil's energy group Petrobras has fallen from sixth to 38th place.

It is not that perceptions of the US economy have been upgraded, but rather that investors have sharply downgraded their view of the rest of the world, especially Europe, Russia, China, and emerging markers everywhere— especially those with current account deficits. The very aggressive policy response by the US Federal Reserve is now viewed as a big plus compared to slow and half-hearted moves by Europe's central banks. The flight to safety in the US can been seen in the powerful dollar rally over recent months, and diminishing fears about the credit-worthiness of US Treasury debt. Like the reports of Mark Twain's death, talk of America's demise may have been exaggerated.


Recession Hits Europe As Club Med Debt Worries Grow

By Ambrose Evans-Pritchard | 3 November 2008

The European Commission has slashed its economics forecasts, warning that the eurozone is now the grip of full recession for the first time since the launch of the euro and faces a deep slump for another two years.

"The economic horizon has significantly darkened," said Joaquim Almunia, the EU's economics commissioner. "The situation in the markets remains precarious and the crisis is not yet over. It is very hard to estimate how deep the financial crisis will be, how long it will last, and what negative effects it will ultimately have on the real economy," he said.

Mr Almunia said the eurozone began to shrink in the second quarter and has been contracting ever since. Growth next year will be just 0.1%, and 0.9% in 2010, with a "significant" risk of an even deeper downturn. Some budget deficits will balloon out of control if governments try resorting to fiscal stimulus to cushion the blow.

Brussels said the dramatic rise in the bond costs of Italy, Greece, and other heavily-endebted states suggests markets may be losing confidence in the state finances of these countries. The spreads between German Bunds and 10-year bonds in the Club Med bloc have rocketed to post-EMU highs, reaching 157 basis points for Greece, 126 for Italy, and 90 for Portugal,— as well as 74 for Belgium, which also has large debt. They have reached 109 for Ireland, reflecting concerns over Dublin's ability to guarantee its outsize banks.

"A glance at those figures indicates that governments have to keep in mind the sustainability of public funds. Countries that have problems cannot ignore this lack of sustainability," said Mr Almunia. Rising debt costs pose an immediate threat to Italy's finances. The country needs to roll over €198bn in state debt next year alone. Rising spreads risk setting off a compound effect that widens the budget deficit ever further, debt trajectory to spiral upwards.

The Commission said the imbalances that built up between North and South "may turn out to be particularly damaging". The grim warnings came as the eurozone's manufacturing index plunged to a record low of 41.3 in October, led by a shocking collapse in Italy and Spain. Brussels said Spain's unemployment rate would reach 15% by 2010 as the housing crash gathers pace.

The Spanish government said yesterday it would step in directly to pay half the mortgage costs for those who lose their jobs in order to pre-empt a self-feeding spiral of defaults. The package covers mortgages up to €170,000 for the next two years. It is also planning a rescue for the car industry after vehicle sales fell 40% last month (and 19% in Italy). There are mounting fears that Volkwagen may be mulling major cuts to plant in Spain.

The auto crunch has spread to Germany, where 40,000 BMW workers are staying home this week after 'temporary' factory closures in Munich and Regensburg to help the clear the inventory of unsold cars. Handelsblatt reports that the financing arms of the German car-makers are "burning money" at an alarming speed and may need a bail-out. Analysts say it is now certain that the European Central Bank will cut rates by a half point or more on Thursday. A string of ECB governors have said in recent days that inflation has receded as a serious threat.

Even Axel Weber, the Bundesbank's uber-hawk, warns that "central banks must be alert so as not to fall behind the curve". A top cast of private economists on the "shadow" ECB committee have called for a 100bp cut to 2.75%, including Jacques Cailloux from RBS, Julian Callow from Barclays Capital, Stephen King from HSBC, Erik Nielson from Goldman Sachs, and Thomas Mayer from Deutsche Bank. Mr Mayer said the Germany economy could contact by 1.5% next year.


Time To Catch Breath?

By R M Cutler | 7 November 2008

MONTREAL— Asian markets had a mixed and volatile week— perhaps not surprising with the International Monetary Fund forecasting simultaneous recessions for Japan, Europe, and North America for the first time since 1945. [[And China, Korea and India looking decidedly peaked.: normxxx]]

South Korea had the maximum high-low variation of the week, with the benchmark KOSPI swinging 16.1% from its Wednesday high to its Friday low. It eventually closed as the region's second-biggest gainer, although up only a modest 1.9% on the week following recent disastrous declines: this in response to the country's central bank slashing interest rates for the third time in a month in the struggle to avoid recession.

The other Asian bellwether, Japan's Nikkei 225, finished nearly unchanged, strongly up on Tuesday-Wednesday after being closed Monday but then strongly down on the last two days of the week. It thus tied with Hong Kong as the second most volatile exchange in the region for the week and finished the period almost unchanged, up 0.1% close to 8,600, after touching above 9,500 Wednesday afternoon and, paralleling Seoul's chart, plunging below 8,300 early Friday morning as major industrial companies such as Toyota slashed profit forecasts.

Thus Seoul and Tokyo were together two of the three most volatile in the region although the fiscal moves in South Korea account for the differences in weekly performance. Volume on both the Tokyo and Seoul exchanges varied significantly from one day to the next, suggesting that this new footing at lower levels was not as firm as might be hoped.

Hong Kong, the other most volatile exchange, confirms this in a different fashion. Its high for the week at 15,500 confirmed a resistance at that level, which is indicated by a trend line starting at the June 1989 low of 2,094 and passing through the April 2003 low of 8,331. Unfortunately that resistance will not disappear as the up-trend disappears into the higher reaches of the chart, because patterns from 15,000 to 16,550 in mid-1997 and especially throughout the whole of 2000 represent stable resistances.

The three Greater Chinese exchanges, of which Hong Kong is one, showed no common pattern this week. Like Hong Kong, Shanghai was mildly up to close at 1,747 without yet challenging once more its resistance at the 1,900-2,000 level. Yet Shanghai was the second least volatile Asian exchange, continuing its exhaustion from recent precipitous declines.

Taiwan, on the other hand, was middling in volatility but the weakest exchange this week, closing down 2.6% at 4,742, trying to get footing at that level from previous chartwork during the last quarter of 2002 and first half of 2003, but without any evident patterned or statistical reason why this level should be better than any other from which to recover in the medium term.

Other than the Japan-South Korea duo, which as I have previously indicated deserve to be treated together due to joint relative autonomy from other macro-regional dynamics, the only geographic homogeneity of performance shown this week was in the Australasian group, where Australia and New Zealand were two of three least volatile and two of the four worst performers. Of course, in the current environment it does not take much to be a good performer, but this week New Zealand succeeded in being second worst with a decline of only 2.6%; Australia was up 0.6%.

Singapore this week joined the Australasian group, as it sometimes does, as regards low volatility but was by contrast the region's best performer, up 3.2% to 1,863, where it might possibly find some support from local maxima established in March 2002 and March 2004, but will find strong resistance immediately above at the 2,000 level, in a band that stretches as high as 2,500. Here the key will be whether the Straits Times Index will confirm an ascending bottoms line that may be drawn from the August 1998 low at 856 through the March 2003 low at 1,205.

It is appropriate to close with a few word on India, where the BSE Sensex 30 in Mumbai has so far respected its early June 2006 low of 9,200, this week recovering from 9,600 on Thursday and Friday and looking to close out the week just above 10,000, resting on the early June 2006 local minimum. That will be up 2.2% from last Friday's close after failing on Wednesday morning to punch through the mid-July 2006 local maximum at 11,000. Like almost every other Asian exchange, Mumbai finds itself catching its breath after recent collapses, resting on a precarious ledge but with significantly more resistance to the upside than to the downside.

R M Cutler is a Canadian international affairs specialist.



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