Joined Feb 3, 2009
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Business Headlines For September 8, 2009
Dollar Hits 2009 Low Versus Euro As Stocks Look To Rally
9/8/2009 7:54 AM ET
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(RTTNews) – The dollar plunged versus most majors on increased risk appetite Tuesday morning in New York, dropping to its lowest level of the year versus the euro and nearing that mark against the surging loonie.
US stock futures soared in early dealing, helping to boost riskier and higher-yielding currencies. Friday’s relatively encouraging jobs reports convinced many bears that resistance to the summer’s bull run in equities may be futile.
Regarding Friday’s jobs report, traders focused on the shrinking job losses and ignored a rise in the jobless rate. Any positive tiding from the labor market, which typically lags a recovery, is definitely a market-positive.
Following the US Labor Day holiday, pent up selling interest drove the dollar to its lowest level since last December versus the euro. The buck dropped to 1.4497, heading back toward a record low near 1.6000, set in 2008.
Meanwhile, the dollar fell sharply versus the sterling, dropping to a 2-week low of 1.6586. On a longer term basis, the pair is little changed over the course of the summer.
The dollar remained under heavy pressure versus the loonie, and continued its trek toward parity with its petro-linked Canadian counterpart. The buck slipped to C$1.0695, within a hair of last month’s 2009 low of C$1.0630.
The buck also weakened versus the yen, dropping to 92.05 before finding support. A move below 91.73 would take the dollar to its lowest since February.
The global economy is probably out of free-fall and stabilizing faster than previously expected, European Central Bank President Jean-Claude Trichet said Monday.
“We are probably in large part of the global economy out of the period of free-fall,” he said at the end of a discussion held at the Bank for International Settlements, Basel, Switzerland.
by RTT Staff Writer
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Conference Board Forecasts A Flat Jobs Market For the Rest of The Year
NEW YORK (Reuters) – A gauge of the strength of the U.S. job market fell slightly in August and pointed to a flat employment market for the rest of the year, a research group said on Tuesday.
The Conference Board, a private research group, said its Employment Trends Index inched lower to 88.1 in August from a revised 88.2 in July, originally reported at 88.3.
The index is now down 18.5 percent from a year ago, the Conference Board added.
“The flatness of the Employment Trends Index in recent months suggests that we won’t see job growth until the end of the year,” said Gad Levanon, economist at the Conference Board.
“The fact that the index cannot get off the ground is another sign of a weak recovery, perhaps a jobless one.”
Government data on Friday showed U.S. job losses fell to their lowest level in a year last month, but the unemployment rate jumped to a 26-year high, painting a mixed picture of an economic recovery hindered by weakness in the labor market.
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Fed Kicks Off a Good Treasury Aution
By Cordell Eddings and Susanne Walker
Sept. 8 (Bloomberg) — Treasuries rose after a record $38 billion offering of three-year notes drew the strongest demand in almost a year in the first of this week’s three debt auctions totaling $70 billion.
The notes drew a yield of 1.487 percent, the lowest level since May, compared with a forecast of 1.50 percent in a Bloomberg News survey of 10 of the Federal Reserve’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.02, the most since November 2008, compared with an average of 2.58 at the last ten auctions.
“It was a very good auction,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc. “It’s a defensive measure of parking money up front with the idea that the Fed is on hold for a long period of time. People think it’s an attractive place to be.”
The yield on the current three-year note fell two basis points to 1.42 percent at 1:18 p.m. in New York, according to BGCantor Market Data. The 10-year note yield fell two basis points to 3.41 percent.
The sale is the largest-ever offering of the three-year security, which the U.S. began selling in November after an 18- month hiatus.
Foreign Demand
The Treasury last auctioned three-year notes on Aug. 11, setting a record with its $37 billion sale at a yield of 1.78 percent. The three- year notes being sold today yielded 1.80 percent in pre-auction trading.
Indirect bidders, a class of investors that includes foreign central banks bought 54.2 percent of the notes at today’s auction. They bought 62.5 percent of the securities in August, the most ever.
The government plans to sell $20 billion of 10-year notes tomorrow and $12 billion of 30-year bonds on Sept 10 as the U.S. tries to fund a record budget deficit.
“This auction does not necessarily mean the next two auctions will go well,” said Bulent Baygun, head of interest- rate strategy in New York at primary dealer BNP Paribas Securities Corp., one of the 18 primary dealers that are required to bid at Treasury auctions. “For the longer-dated Treasuries to come down at these levels there will have to be strong conviction on the direction of the market.”
Broader Debate
Three-year yields have fallen about 36 basis points since the previous sale of the securities on Aug. 11….
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David Rosenburg Thinks The Consumer is Dead
David Rosenberg lays out the bear case for U.S. consumers in his latest research note:
WAGE DEFLATION
There are so many headwinds confronting the U.S. consumer it’s not even funny. For a look at the new harsh reality of soaring usage of grocery vouchers, as well as other supplements to the household budget, have a look at the grim article on page 2 of the weekend FT (Families Take Up Food Stamps as Wages Shrink). On the very same page, there is an article on the latest trend in terms of 21st-century breadlines — Middle Classes Turn to Car Park Handouts. To think we still get asked why we aren’t more bullish over the outlook for spending. Truly amazing.
TREMENDOUS UNDEREMPLOYMENT
The U.S. economy is actually 9.4 million jobs short of being anywhere remotely close to being fully employed, which is why any inflation that can somehow be created by the Fed is simply going to be unsustainable noise along a fundamental downtrend in pricing power. After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.We will certainly take note that (i) the ECRI leading index is soaring to the moon and (ii) the August chain-store sales data came in better than expected. But when you look at the data and the constraints on pricing power, it does suggest that the outlook for profits is far less robust than the markets have discounted — looking at the August retail sales data, it is quite apparent that merchants were very aggressive in their price points and value-oriented chains were the big winners last month. Be that as it may, the year-over-year comps are likely looking better now that we are coming off the detonated figures of late 2008, and on top of that, the lengthening of the back-to-school season could artificially add about a quarter-point to the September chain-store sales numbers.
LEADING JOB MARKET INDICATORS … NOT LOOKING GOOD
• Jobless claims stuck at 570k — basically in line with a sustained 200k-300k payroll losses
• Temp agency job losses are continuing even if at a slower pace — this is not good news
• Downward revisions to the prior data — these tend to feed on themselves
• No change in the record-low workweek
• The Challenger and JOLTS data reveal an ongoing decline in hiring intentions
* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.
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Ratings Agencies Facing Tough Times Ahead For Potential Fraud Claims
A recent court ruling that forced two ratings companies to defend fraud claims is a “game-changer” for the industry, David Einhorn, head of Greenlight Capital, told CNBC.
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Einhorn, a longtime critic of ratings agencies and an investor famed for calling the implosion of Lehman Brothers last year, said in a live interview that the ruling could cripple ratings companies that may not have the capital to defend against future claims.
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Standard & Poor’s Ratings Services, a federal judge last week said the ratings of securities distributed to a limited number of investors do not have the same constitutional protections as ratings distributed more widely.
The ruling is significant, Einhorn said, in that it will help shed light on what he considered the reckless way in which ratings companies were evaluating securities and the role that played in bursting the subprime mortgage bubble. The ratings companies said their opinions were protected by the First Amendment.
“Because they violated the trust by loosening standards and concentrated on their fees and their shares, there were … securities that were created and sold that shouldn’t have been and the ratings agencies knew that at the time,” he said.
“The result was that people lent money that shouldn’t have lent and other people borrowed money that they couldn’t repay, and now the whole thing has collapsed and our government has had to pledge really trillions of dollars to bail out the financial system.”
Einhorn said he is short both Moody’s and Standard & Poor’s, meaning he expects both stocks to lose share price. The companies were both lower Tuesday, though some analysts immediately after the ruling said any dips in the shares could represent buying opportunities. Warren Buffett’s Berkshire Hathaway cnbc_comboQuoteMove(‘popup_BRKA_ID0EKBAE15839609’);[BRKA 98550.00 — UNCH (0) ]
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trimmed its position in Moody’s for the second time since July.
In an earlier CNBC interview, McGraw-Hill President Harold “Terry” McGraw rebutted criticisms of the ratings agencies, pointing out that the judge actually rejected 10 of the 11 claims in the suit. He said the company will defend itself against the lone remaining claim.
“We look forward to getting that one cleared up,” McGraw said on CNBC. “Fraud does not live in our house.”
He acknowledged that his firm missed the housing collapse but said changes in the business model and regulations will help avoid such mistakes in the future.
“We had the housing recession wrong. The fact that a lot of other people had it wrong doesn’t help, but we don’t like that,” McGraw said. “That’s where our problems began.”
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Banks To Earn Less in The Near Future
By Kevin Drawbaugh – Analysis
WASHINGTON (Reuters) – Banking is supposed to be boring.
That’s the quip that lobbyists and congressional aides use, only half-jokingly, to explain what’s in store for the banking industry as governments crack down with tighter regulation.
From higher capital standards and tighter oversight, to slimmer profits and smaller bonuses, global banking promises to be a duller and less lucrative business in years ahead.
That’s not to say change is imminent. The international banking regulation process moves very slowly. But some industry analysts are convinced major changes are coming.
Nor does this mean that investors should shrug off the sector. To the contrary, analysts see opportunity in innovative, mid-sized boutique firms, developing markets, and banks that can create exciting, new savings products.
But for old-school Big Banks — the mega-institutions saved by last year’s bailouts — the future looks constrained, with officials constantly hovering, pinched margins, risks of political change, and a lingering odor of toxic assets.
Giants like Citigroup Inc (C.N) or Bank of America Corp (BAC.N), for instance, might even respond by breaking up or spinning off units under intense scrutiny, analysts say.
Some see banks at the lower margin of the government’s unspoken “too big to fail” category purposely downsizing to attract less attention and gain freedom to operate.
One financial services lobbyist expects “DNA changing at some of the firms” as they adjust to a more restrictive world after the financial crisis of 2008-2009.
PricewaterhouseCoopers, the global accounting group, said in a recent report: “The banking industry and investors must accept an uncomfortable truth — lower returns on equity will become the norm.”
Bank research group Institutional Risk Analytics said in a recent report: “Last year people seemed primarily worried about the bank in which they kept their money.
“Now they are beginning to express an interest in redeploying their capital to reward best-of-breed banks … to find out who the healthy survivors will be.”
G20 ON CAPITAL
Finance ministers of the Group of 20 large industrial nations broadly agreed over the weekend that banks ought to hold more capital as a cushion against major losses.
The G20 ministers’ final statement from a London meeting said banks will “be required to hold more and better quality capital once recovery is assured.” Continued…
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U.S. Stocks Gain As commodities React to a Weak Dollar
By Jeff Kearns and Daniel Hauck
Sept. 8 (Bloomberg) — Stocks rose worldwide, driving the Standard & Poor’s 500 Index higher for a third day, as gains in metals boosted the profit outlook for raw-material companies. Gold climbed above $1,000 an ounce as the dollar fell.
Alcoa Inc. and Chevron Corp. advanced more than 2 percent as bullion reached an 18-month high, copper added 3.4 percent and oil surged 4.7 percent. General Electric Co. gained 4.7 percent after JPMorgan Chase & Co. recommended buying the shares, saying expectations for the company are too low.
The S&P 500 rose 0.9 percent to 1,025.43 at 11 a.m. in New York. The Dow Jones Industrial Average climbed 60 points, or 0.6 percent, to 9,501.27. The MSCI World Index of equities in 23 developed nations advanced 1.3 percent after Credit Suisse Group AG said investors should favor stocks over bonds and cash.
“The economy is growing again around the world, and that’s the big thing for stocks,” said Howard Ward, who helps oversee $21.3 billion as chief investment officer for growth equities at Gamco Investors Inc. in Rye, New York. “We’re looking at a global synchronized recovery right now. Industrial activity in most of the developed and developing world has turned up.”
Stocks also rallied after the International Monetary Fund’s Dominique Strauss-Kahn said the crisis phase that toppled Lehman Brothers Holdings Inc. in September 2008 is “almost certainly behind us.”
Metals jumped after Goldman Sachs Group Inc. raised its forecasts because of “increasing evidence of a stronger-than- anticipated recovery in global industrial activity.”
Nine-Year Rally
Gold futures rose to the highest price since March 2008, climbing 0.8 percent to $1,004.80 an ounce in New York. Bullion reached an intraday record of $1,033.90 18 months ago and is rallying for a ninth straight year.
Copper advanced 3.7 percent to $2.9715 a pound in New York, gaining for a fourth straight day. Lead rallied 6.6 percent to the highest price since May 2008 in London.
Copper for delivery in three months will surge 21 percent in London through the end of 2010, Goldman Sachs analyst Jeffrey Currie wrote in a report today. Prices of the metal have more than doubled this year.
“The fact copper is up so much says recovery is ongoing and on track,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Weakness in the dollar is helping to boost gold, copper, oil and other commodities because a weaker dollar means commodities, which are priced in dollars, become more expensive.”
Dollar Weakens
Oil futures rose 4.7 percent to $71.18 in New York as the weaker dollar increased demand for commodities as a currency hedge. The Dollar Index, which tracks the currency against those of six major U.S. trading partners, fell 1.1 percent to 77.151.
Ministers from the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to set production targets. Saudi Arabian Oil Minister Ali al-Naimi said the market is in “good shape,” with price between $68 and $73 a barrel satisfactory for both consumers and producers.
Alcoa rose 2.3 percent to $12.46, while Chevron added 1.9 percent to $70.24 as raw-material and energy stocks in the S&P 500 rallied 1.2 percent and 2.1 percent, respectively. Allegheny Technologies Inc. rose 5.7 percent to $31.48 for the third- biggest gain in the S&P 500 after the specialty-metals producer signed a 10-year supply agreement with Rolls-Royce Plc that may generate as much as $1 billion of revenue.
Credit Suisse forecast gains in equity indexes worldwide ranging from 12 percent for Europe to 23 percent for Japan through mid-2010 as the economy recovers.
‘Best Phase’…….
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U.N. Panel Calling For a New Currency Reserve Again
By Steve Goldstein
A United Nations panel weighed into the dollar reserve currency debate, arguing for a new system of soft pegs to correct severe deficits in debtor nations like the U.S. and surpluses in countries like China.
The report from the United Nations conference on Trade and Development, issued on Monday, said the world economy would be better off with a system where governments intervene when necessary to either defend or depress their own currencies.
“A viable solution to the exchange-rate problem would be a system of managed flexible exchange rates targeting a rate that is consistent with a sustainable current-account position, which is preferable to any ‘corner solution.’ But since the exchange rate is a variable that involves more than one currency, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management,” said the U.N. body.
The role of the dollar reserve’s status has been criticized of late, notably by Russia and China, which have called for the International Monetary Fund’s special drawing rights to be used instead, a proposal that many see as impractical given the lack of availability or purchase power outside of settling international obligations.
The U.N. sees the impracticalities of the SDRs but also highlighted problems with the current system.
“An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis,” the U.N. said.
But the report also took aim at countries like China and Germany with current account surpluses.
While debtor nations like the U.S. are compelled to reduce imports when their ability to obtain external financing reaches its limits, “surplus countries are under no systemic obligation to raise their imports in order to balance their payments.”
So the U.N. wants a system where countries would manage exchange rates within a band.
It would curb speculation, prevent currency crises, prevent long-lasting imbalances, avoid debt traps for developing countries, avoid procylical conditions and minimize the need to hold international reserves.
The U.N. acknowledged such a system won’t come overnight.
“Establishing such a system would take some time, not least because it requires international consensus and multilateral institution building,” the U.N. said.
The Group of 20 leading industrialized and developing countries meets later this month in Pittsburgh but the dollar’s reserve status isn’t expected to be on the agenda.
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By Patrick Rial and Ian C. Sayson
Sept. 8 (Bloomberg) — Asian stocks rose, lifting the MSCI Asia Pacific Index to the highest level in a year, as Australian business confidence jumped, computer-memory prices gained and gold rose above $1,000 an ounce.
National Australia Bank Ltd. climbed 3.8 percent in Sydney after the lender’s sentiment index jumped to a six-year high. Elpida Memory Inc., Japan’s largest maker of dynamic random access memory, gained 5.4 percent after the benchmark price for chips climbed to the highest level since August 2008. Newcrest Mining Ltd., Australia’s No. 1 gold producer, jumped 3.7 percent.
The MSCI Asia Pacific Index rose 1.5 percent to 115.91 as of 7:20 p.m. in Tokyo, the highest level since Sept. 24, 2008. The gauge has climbed 64 percent from a more than five-year low on March 9 on speculation stimulus measures worldwide will revive the global economy.
“The market hasn’t given up on the economic recovery story,” said Olan Caperina, who helps manage about $7.75 billion at BPI Asset Management Inc. in Manila. “There’s optimism that the market has bottomed out, but you need earnings and consistent economic data to push share prices higher.”
Japan’s Nikkei 225 Stock Average advanced 0.7 percent. JVC Kenwood Holdings Inc. surged 31 percent as the Nikkei newspaper said the company may beat profit forecasts. Limiting gains, Mitsubishi UFJ Financial Group Inc. sank 1.8 percent as central bank figures showed loan growth slowed.
Cabinet Reshuffle…..
By Daniela Silberstein
Sept. 8 (Bloomberg) — European and Asian stocks advanced for a fourth day and U.S. index futures gained as commodity producers rallied with metal prices and investors speculated that mergers will increase.
BHP Billiton Ltd., the world’s biggest mining company, and Randgold Resources Ltd. surged more than 3 percent as copper rose in London and gold rallied to an 18-month high. Cadbury Plc added 1.9 percent on speculation the maker of Dairy Milk chocolates may attract competing offers after rejecting Kraft Food Inc.’s bid yesterday. Deutsche Telekom AG and France Telecom SA climbed more than 2 percent after agreeing to merge their U.K. mobile-phone units.
Europe’s Dow Jones Stoxx 600 Index advanced 0.5 percent to 238.44 at 11:16 a.m. in London. A six-month, 51 percent rally has pushed the regional gauge’s valuation to 44.8 times profit, near the highest level since September 2003, according to weekly data compiled by Bloomberg.
“I’m feeling pretty optimistic,” Jane Coffey, who helps oversee $12 billion at Royal London Asset Management, said in a Bloomberg Television interview. “Economic data will continue to look good, corporate earnings are looking pretty good. My concern was that we’re going to have a lot equity issuance and that will weigh on the market. If we get the counter of M&A taking the stock away that will equal things out.”
The MSCI Asia Pacific Index climbed 1.5 percent as Australian business confidence jumped to the highest level in almost six years. Futures on the Standard & Poor’s 500 Index rose 1.1 percent, indicating the gauge may advance after U.S. markets were closed for the Labor Day holiday yesterday.
‘Best Phase’
By ALEX KENNEDY p {margin:12px 0px 0px 0px;}
SINGAPORE (AP) – Oil prices rose above $69 a barrel Tuesday in Asia, bouyed by rising regional stock markets as the U.S. summer driving season wound down.
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Benchmark crude for October delivery was up $1.04 to $69.06 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange.
Trading was closed Monday in the U.S. for the Labor Day holiday, so the contract last settled on Friday at $68.02 after rising 6 cents.
Oil traders often look to stocks for signs of overall investor confidence. All major Asian stock indexes rose Tuesday while the Dow Jones industrial average climbed 1 percent on Friday.
Some analysts expect prices to eventually fall this month as demand wanes. Labor Day is traditionally seen in the United States as the end of summer, and crude demand usually falls in the autumn before rebounding in the winter as heating oil consumption picks up.
“The seasonal demand is really coming to an end right now,” said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.
Leaders of the Organization of Petroleum Exporting Countries have signaled they plan to keep output levels unchanged at the group’s meeting Wednesday in Vienna. That could send oil prices lower as traders eye OPEC members producing more and more over official quotas.
“Compliance levels have been dropping every month because many of the members have been cheating,” Kornafel said. “So if they don’t cut quotas, more oil will be entering the market.”
In other Nymex trading, gasoline for October delivery rose 0.87 cent to $1.79 a gallon, and heating oil gained 2.23 cent to $1.74 a gallon. Natural gas dropped 3.3 cents to $2.70 per 1,000 cubic feet.
In London, Brent crude was up $1.12 to $67.65.
By Lukanyo MnyandaSept. 8 (Bloomberg) — The dollar declined against the euro and the pound as stock markets rose on speculation the global recession is easing, sapping demand for the currency as a haven.
The dollar fell the most against the pound before a report economists said will show consumer credit in the U.S. declined in July by the least in six months. U.S. stock futures jumped. The yen gained against the euro as a report showed Japanese corporate bankruptcies fell for the first time in three months, and on growing speculation the government will boost measures to revive the economy. The pound rose as manufacturing increased three times as much as economists forecast.
“Normal rules apply for the dollar and it’s not surprising to see it being sold, seeing we have big gains in stock markets,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “The yen is the anomaly. It’s holding up pretty well.”
The dollar depreciated 0.6 percent to $1.4423 as of 10:02 a.m. in London. The U.S. currency fell 1 percent to $1.6512 against the pound and slipped 0.9 percent to 92.33 yen. The Swedish krona strengthened to 7.0671 against the dollar, from 7.1253 yesterday. Australia’s dollar advanced to 86.19 U.S. cents, from 85.57.
A Federal Reserve report today will probably show U.S. consumer credit fell $4 billion in July, after declining by $10.3 billion a month earlier, according to a Bloomberg survey of economists. Japanese business failures dropped 1 percent from a year earlier, Tokyo Shoko Research Ltd. said in Tokyo today.
Stocks Advance
Europe’s Dow Jones Stoxx 600 Index added 0.5 percent, headed for its fourth day of gains. Futures on the Standard & Poor’s 500 Index rose 1.1 percent, indicating the gauge may advance today following the U.S. Labor Day holiday yesterday.
The yen may extend gains amid speculation Japan’s new government will refrain from acting to weaken it, according to BNP Paribas SA, the largest French lender.
The Democratic Party of Japan, which won a landslide victory in lower house elections on Aug. 30, will officially take over the government for the first time on Sept. 16. Hirohisa Fujii, a lawmaker for the party, said Sept. 3 “intervention shouldn’t be abused.”
“They have suggested they are going to be less interventionist, and that implies there’s room for more yen appreciation,” said Ian Stannard, a senior currency strategist in London at BNP Paribas SA. “They have also reiterated that their focus will be on the domestic side of the economy.”
Pound Jumps
The pound rose against its 16 most-actively traded counterparts after the Office for National Statistics in London said factory output rose 0.9 percent from the previous month, the most in 18 months. Sterling gained 0.3 percent to 87.42 pence per euro.8
The dollar also weakened before speeches by U.S. policy makers including Chicago Fed President Charles Evans and Dallas Fed President Richard Fisher this week.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, fell 0.6 percent to 77.489, after reaching o 77.398, the lowest level since September 2008.
What is Next For Japan’s New Government ?
By Keiko Ujikane and Thomas R. Keene
Sept. 8 (Bloomberg) — Japan’s incoming government is likely to favor spending and tax policies that may cause a surge in government borrowing and higher long-term bond yields, said international economist Carl B. Weinberg.
The election win by the Democratic Party of Japan “will set in motion spending plans and tax cuts that will destabilize Japan’s public finances,” Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said in an e-mailed response to questions.
Weinberg’s judgment reflects skepticism among private analysts that the DPJ, led by Yukio Hatoyama, will follow through on its pledge to avert an increase in government bond issuance. The incoming administration has said it will pay for its priorities — increased funds for child care, education and employment — partly through diverting as much as 5 trillion yen ($54 billion) of stimulus spending already approved.
“A catastrophic breakdown of Japan’s public-sector finances will be the biggest story ever to hit the world economy in our times, eclipsing the current financial crisis,” Weinberg said. “Coming in the midst of the yet-to-be-resolved global financial crunch, it will worsen and prolong that still- unfolding crisis.”
Japan’s bond market has shown little evidence that investors are concerned about the DPJ’s victory. The party unseated the Liberal Democratic Party that held power for most of the nation’s postwar history. Benchmark 10-year bonds yielded 1.355 percent today, compared with 1.31 percent before the Aug. 30 vote.
Election Promises…..
China’s C19 To Undercut BA & Airbus
By Bloomberg News
Sept. 8 (Bloomberg) — Commercial Aircraft Corp. of China, the government-controlled planemaker, said its first commercial jet will “surely be cheaper” than comparable Boeing Co. and Airbus SAS models, heightening competition in the world’s fastest-growing aviation market.
The 168-seater C919, due to enter service in 2016, will use as much as 15 percent less fuel than current Boeing 737s and Airbus A320s, Chen Jin, Comac’s sales head, said at the Hong Kong air show, where the company is showing a model of the plane for the first time.
Comac will initially target Chinese customers for the single-aisle C919 before seeking to challenge Boeing and Airbus overseas in the largest segment of the plane market. China’s carriers will likely need 3,710 new planes over 20 years, of which 70 percent will be single-aisle aircraft, Chicago-based Boeing said in October.
“In the medium- to long-term, Chinese aircraft manufacturers will be able to challenge the larger planemakers like Airbus and Boeing,” said Jack Xu, an analyst at Sinopec Securities Asia Ltd. in Shanghai. Price will be a “major advantage,” he added.
The plane is part of China’s push to develop its own technologies in a range of industries to move beyond being a low-cost assembler for overseas companies.
Aircraft Orders…..
Dollar Yen LIBOR Rates Drop to Their Lowest Level Since ’93
By Yumi Ikeda
Sept. 8 (Bloomberg) — Dollar-borrowing costs fell against those for Japan’s currency, widening the interest-rate gap between the currencies to the widest level since March 1993.
The London interbank offered rate, or Libor, for three- month dollar loans declined to a record low 0.30875 percent yesterday from 0.31438 percent on Sept. 4, according to the British Bankers’ Association. Libor for yen loans dropped to 0.37938 percent from 0.38125 percent, widening the difference between the rates to 7.1 basis points.
Dollar rates became cheaper than those on the yen on Aug. 24, leaving the Swiss franc as the only major currency that is cheaper to borrow than the dollar. Since then, the spread between the rates has widened for nine-straight days.
The Tokyo three-month interbank offered rate for yen deposits abroad was unchanged from yesterday at 0.53846 percent, the lowest since February 2007, according to the Japanese Bankers Association.
Tibor for euroyen has fallen almost 20 basis points this year as the Bank of Japan kept its key overnight call rate at 0.1 percent and maintained its supply of funds into the banking system under an emergency credit program.
Overnight interbank lending rates stayed around the central bank’s target in morning trade in Tokyo. Overnight unsecured call rates were at 0.09 to 0.105 percent, according to Japanese interdealer brokers. The weighted average rate for yesterday was 0.099 percent, falling below the target for the first time in a month, the Bank of Japan said.
Germany’s Output Drops Suddenly
By Gabi Thesing
Sept. 8 (Bloomberg) — German industrial output fell in July after rising in June, suggesting the recovery from recession may be gradual.
Production declined 0.9 percent from June, when it rose a revised 0.8 percent, the Economy Ministry in Berlin said today. It had initially reported a 0.1 percent decline in June output. Economists predicted an increase of 1.6 percent in July, the median of 39 forecasts in a Bloomberg survey showed. From a year earlier, production declined 17 percent when adjusted for the number of work days.
Germany unexpectedly pulled out of its worst recession since World War II in the second quarter and some data suggest the pace of expansion may accelerate. Exports and factory orders rose in July and business confidence increased for a fifth month in August. With unemployment rising and some government stimulus measures starting to expire, policy makers including European Central Bank President Jean-Claude Trichet have warned that the economic pickup may be uneven.
“The recovery is bumpy and strong order and confidence numbers don’t immediately translate into production,” said James Ashley, an economist at Barclays Capital in London. “Next month should be much better and we expect sound growth in the third and fourth quarters.”
July’s output decline was driven by a 3.2 percent drop in investment goods production and 3.9 percent slide in energy output, the ministry said. Construction fell 2.3 percent. Intermediate goods output gained 1.8 percent and production of durable goods such as household appliances rose 1.2 percent.
Exports, Orders…..
Kraft Will Still Pursue Cadbury
By Poppy Trowbridge
Sept. 8 (Bloomberg) — Kraft Foods Inc.’s 10.2 billion- pound ($16.7 billion) bid for Cadbury Plc may be a sign that Europe’s frozen takeover market is beginning to thaw after the slowest August in five years.
Kraft, the maker of Oreo cookies, said yesterday it would pursue the acquisition after the British maker of Dairy Milk chocolate rejected the offer. The 745 pence-a-share proposal may trigger a competing offer from Nestle SA and Hershey Co., forcing Kraft to increase its bid, according to Warren Ackerman, an analyst at Evolution Securities in London.
The acquisition would be the biggest cross-border deal this year and follows the $21 billion of European takeovers announced in August, according to data compiled by Bloomberg. Companies are revisiting plans for mergers that had been shelved during the credit crisis amid signs the recession may be easing. The MSCI World Index has gained 58 percent since hitting a 14-year-low in March, making it easier for firms to fund takeovers with stock.
“With equity prices higher, you have increased confidence in the corporate sector and intra-industry mergers are likely,” said Peter Hahn, a former managing director at Citigroup Inc. who now lectures on corporate finance at London’s Cass Business School.
Deutsche Telekom AG, the region’s biggest telephone company, and France Telecom SA plan to merge their U.K. mobile-phone units to create the country’s largest cellular operator, the companies said today. Investors in Zain, Kuwait’s biggest telephone company, are near to selling a 46 percent stake for almost $14 billion, according to National Investments Co., which is advising the sellers.
Marvel, Skype
Companies worldwide have led $36 billion of takeovers in the past 10 days,………
By Simon Thiel, Ragnhild Kjetland and Matthew Campbell
Sept. 8 (Bloomberg) — Deutsche Telekom AG, Europe’s biggest telephone company, and France Telecom SA plan to merge their U.K. mobile-phone units to create the country’s largest cellular operator.
The two companies entered exclusive talks to combine Deutsche Telekom’s T-Mobile UK unit and France Telecom’s Orange and plan to seal the deal at the end of October, they said in an e-mailed statement today. The 50-50 venture had combined revenue of 9.4 billion euros ($13.5 billion) and will result in savings of more than 4 billion euros in network maintenance, marketing and administrative costs, the companies said.
The joint venture will have 28.4 million subscribers, or 37 percent of the U.K. market, based on figures at the end of 2008, ousting Telefonica SA’s O2 service from the top spot. The deal shrinks the number of mobile-phone operators in the U.K. to four, with the others being Vodafone Group Plc and Hutchison Whampoa Ltd.
“They can extract cost savings, which is good for them,” said Michael Kovacocy, an analyst at Daiwa Securities in London.
France Telecom rose as much as 3.6 percent in Paris trading and was up 3.2 percent to 18.71 euros as of 10:09 a.m. Deutsche Telekom rose 1.1 percent to 9.55 euros in Frankfurt.
Phone companies are looking to reduce costs as clients are spending less amid the economic slowdown. Vodafone, Deutsche Telekom, Royal KPN NV and Mobistar SA said in May that the recession was eroding profit as consumers and businesses reduced mobile-phone use.
Cost Savings….
Saudi Oil Minister Says “Oil is in Good Shape”
VIENNA (AP) – Saudi Arabia’s oil minister said Tuesday that crude markets were “in good shape,” boosting expectations OPEC will use its meeting this week to stress compliance with output quotas instead of cutting production.
The comments by Saudi Arabia’s Ali Naimi, echoed by Kuwaiti Oil Minister Sheik Ahmed Al Abdullah Al Sabah, were the latest indications that the Organization of the Petroleum Exporting Countries is comfortable with the rebound in crude prices that came about after members announced in December a record 4.2 million barrel per day output cut from September 2008 levels.
Since that meeting, prices have roughly doubled, and are holding between $68 and $71. Analysts have said they expect the group to hold fast at its current production level, which is just under 25 million barrels per day.
“Everything is in good shape,” said Naimi, whose country is OPEC’s top producer and widely seen as the group’s kingpin. Crude’s current price “is good for everybody: consumers and producers,” he told reporters in Vienna on Tuesday, as ministers of the 12-member group began to arrive ahead of the Wednesday meeting.
Saudi Arabia has said a price of about $75 per barrel was fair for the market – a level that would encourage further investment in boosting global supplies while at the same time not straining a world economy struggling to come out from the worst global recession in decades.
Kuwait’s Al Sabah echoed the same sentiment. In an interview with Kuwait’s official KUNA news agency, Al Sabah said he was “comfortable” with current prices, describing them as “acceptable” for both producers and consumers.
The producer bloc that accounts for roughly 35 percent of the world’s oil supply has left output unchanged so far this year as prices have continued to climb. October crude oil futures were up slightly over $69 per barrel in Asia on Tuesday, supported by regional stock markets.
While prices have bounced back from earlier lows in the low-$30s, global crude inventories are still far higher than the 52 to 54 days of forward cover in the OECD nations that the group would like to see.
OPEC members have, nevertheless, resisted further cuts. “In principle, they always want to have higher prices – but taking into account the weak economic situation, they’re content,” said Johannes Benigni, chief analyst at Vienna’s JBC Energy.
Working in their favor is the narrowing of the discount between the first and second month’s light sweet U.S. crude oil futures contract on the New York Mercantile Exchange. That discount is down to about $0.50 per barrel, a difference that provides buyers with insufficient incentive to buy crude for storage. That discount had been far wider in months past, meaning that refiners would prefer to buy crude and store it instead of waiting and buying oil when they need it.
Compliance has traditionally been OPEC’s greatest challenge, with cheating by some members undercutting broader efforts to boost prices.
While the group for the first part of the year was generally successful in adhering to their quotas, it has increasingly been grumbling about overproduction by members looking to cash in on crude’s rebound. Crude revenues are key for most OPEC members, accounting for as much as 90 percent of government budgets
Analysts say compliance is down to about 70 percent group-wide, as some countries like Iran and Venezuela look to tap into crude’s rebound to bring in sorely needed cash amid the global economic downturn.
Kuwait’s Al Sabah told KUNA that the consensus within the group was to stick with current production levels and enforce compliance.
Al Sabah said while a quick rebound in demand for crude was unlikely, he expected a “noticeable improvement” in the first and second quarters of 2010.
OPEC President Jose Botelho de Vasconcelos, who is also Angola’s oil minister, suggested the cartel was watching prices closely and would intervene if crude swings too sharply one way or the other.
“Given the nature and costs of the investments, the crude price can and must be stabilized at $73-$75,” he said Tuesday in Rome en route to Vienna. “If it goes up, it is only financial speculation.”
Japan’s Current Account Surplus is Down 19.4%
TOKYO (AP) – Japan’s current account surplus in July fell 19.4 percent from a year earlier as exports tumbled amid a slow recovery in the global economy, the finance ministry said Tuesday.
The current account surplus, Japan’s broadest measure of trade with the rest of the world, was 1.27 trillion yen ($13.6 billion), the first year-on-year fall in two months, the ministry said.
Exports in July dropped 37.6 percent to 4.55 trillion yen, marking the 10th consecutive year-on-year decline.
“Sluggish exports dragged down the surplus. Exports were weak in every key region, underlining that a recovery in the global economy has yet to become solid,” said Hideki Matsumura, senior economist at think tank Japan Research Institute.
Japan’s exports to the United States dropped 39.5 percent, while Asia-bound shipments fell 29.9 percent. Exports to the European Union nose-dived 45.8 percent in the month.
Matsumura said exports, a key driver for Japan’s economy, will remain stagnant throughout the year due to sustained concern over a recovery in the U.S. economy.
“Unless the U.S. economy fully recovers, we will not see a turnaround in exports,” he said.
Among key products, auto exports were down by a staggering 52.3 percent. Steel exports also plunged 42.1 percent. Exports of semiconductor products fell 28.0 percent.
Imports plunged 41.2 percent to 4.11 trillion yen in the month.
Along with falling exports, the finance ministry said a drop in the income surplus, which includes revenue of Japanese companies operating overseas, pressured the current account surplus.
The income surplus plunged 24.2 percent from a year earlier to 1.25 trillion yen.
“Revenue of Japanese subsidiaries abroad fell amid a slumping global economy,” a ministry official said.
China To Sell Its First Yuan Bonds To Japan
BEIJING (AP) – Beijing will sell some $876 million of government bonds denominated in the mainland’s yuan for the first time in Hong Kong this month, the Finance Ministry said Tuesday, in a move to expand the international use of its tightly controlled currency.
The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad. Chinese officials are concerned about the stability of the dominant U.S. dollar and have called for the creation of a new global reserve currency.
The bond sale is “certainly a push to internationalize the renminbi,” said Zhang Bin, a specialist in international finance at the Chinese Academy of Social Sciences, a government think tank. “It will increase renminbi business overseas and be conducive to the development of renminbi markets.”
Beijing signed a currency swap deal with Argentina in March and has promised to lend yuan to the central banks of South Korea, Malaysia, Indonesia and Belarus in the event of a financial emergency. That could lead to the currency’s use in private transactions.
A few mainland institutions, including state-owned China Construction Bank Ltd. and Bank of China Ltd., have issued yuan-denominated bonds in Hong Kong.
Premier Wen Jiabao, the mainland’s top economic official, has promised to strengthen trade and finance links with Hong Kong. Other officials have said it might become the center for handling finance in yuan outside the mainland.
“This measure has significant impact on promoting the depth and breadth of the Hong Kong bond market and strengthening Hong Kong’s position as an international financial center,” the territory’s government said in a statement.
The Finance Ministry gave no details of who would handle the bond issue.
Two banks – London-based HSBC Holdings and Hong Kong-based Bank of East Asia – said in May they had become the first nonmainland companies approved to sell yuan bonds.
JP Morgan’s latest Global Markets Outlook provides some quick perspective on where the global economy stands.
What’s happening? Economic growth for the second half of the year is expected to be about 3% annualized, for the US, Europe, and Japan. Emerging Asia is expected to grow 7%. Overall, the world is expected to grow at an annualized 3.4% for the rest of the year.
On the US front in particular, they highlight that positive US economic surprises appear to be at a 2-year high.
In the US, where GDP is currently projected to rise at close to a 3%ar pace during 2H09, the trajectory of final demand, including consumption, housing, and business investment, is stronger than expected this quarter.
Global inflation remains in check since the 2008-2009 downturn cooled things down substantially.
The 2008-09 recession already has delivered a very big decline in core inflation across the developed world. From a peak of 1.9%oya in August of 2008, DM core inflation—defined here as the headline CPI excluding all categories of food and energy prices—fell to an estimated 1.1%oya as of July.
Retail sales have been picking up around the world.
And on the employment front, the global picture has begun improving, helped by the manufacturing rebound we wrote about previously, despite the continued challenges faced by many unemployed around the world.
Finally, and most important, unemployment rates have begun to level off. After having risen about 0.3%-pts per month from January to May, the global unemployment rate increased just 0.1%-pt in June and July. This is happening across much of the globe, including in the US, much of Western Europe, Canada, Australia, and a good number of EM economies.
Fair enough, JP is one of the more bullish houses right now, so you can discount some of their bullish view on the stock markets right now. Yet the data they refer to still holds. Overall the world has begun to look better. Now, whether this turns into a head fake…
Analysts Say Economists Are Dead Wrong
By Eric Martin and Michael Tsang
Sept. 8 (Bloomberg) — Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index.
Profits for companies in the S&P 500 will rise 25 percent next year, according to the average estimate of more than 1,500 equity analysts tracked by Bloomberg. That’s 10.9 times faster than the expansion in gross domestic product foreseen by 53 economists surveyed last month. The ratio of income to GDP growth is the highest on record and compares with an average of 6.1, based on data compiled by Bloomberg going back 60 years.
Concern that profits won’t measure up to estimates may limit returns after the S&P 500 rose 50 percent since March, the steepest rally in seven decades. While shares trade close to the cheapest levels relative to earnings since 1989, based on next year’s projections, forecasts for the economy by Goldman Sachs Group Inc.’s Jan Hatzius, Morgan Stanley’s Richard Berner and Bank of America Corp.’s Drew Matus show equities are no bargain.
“Earnings are going to be dependent on the overall economic growth,” said Barry James of Xenia, Ohio-based James Investment Research Inc., which oversees $2 billion and whose James Balanced Golden Rainbow Fund beat 98 percent of competitors over the past five years. “While things are not as bad as they have been, we don’t see next year as being one that will go gangbusters.”
Justifying the Rally
The S&P 500 retreated 1.2 percent last week after a report on factory orders and speculation that China would curb bank lending raised doubts about the speed of the economy’s recovery from the first global recession since World War II.
Futures on the S&P 500 added 0.9 percent at 8:36 a.m. in London today after U.S. markets were closed yesterday. Investors are returning from the Labor Day holiday after the benchmark index for American equities rose as much as 52 percent from a 12-year low on March 9 and the proportion of companies that beat analysts’ profit predictions matched a record.
The gains spurred the steepest rise in the S&P 500’s price- earnings ratio since at least the 1950s, pushing the index to 19 times operating earnings from the past 12 months, the most expensive level since 2004, according to data compiled by Bloomberg. Based on analysts’ forecasts for 2010, the S&P 500 trades for 13.5 times income, the lowest since 1989 when compared with the trailing P/E ratio before Lehman Brothers Holdings Inc.’s collapse a year ago.
Too Optimistic
The U.S. economy will expand at a 2.3 percent annual rate next year as the longest recession since the 1930s ends, according to the average estimate of economists surveyed by Bloomberg. U.S. companies are expected to halt a two-year slump in profits next quarter, the longest since the Great Depression, according to analyst projections compiled by Bloomberg.
While the individual forecasts may prove accurate, as a whole they are overoptimistic, based on economists’ expectations for U.S. growth.
Sal Tharani, Goldman Sachs’s analyst who covers metal producers, told investors to buy Phoenix-based Freeport-McMoRan Copper & Gold Inc. on Aug. 18, saying in a research note that higher metals prices will help 2010 per-share profits increase 48 percent at the largest publicly traded copper producer. Among the 14 companies he covers, Tharani’s stock picks during the past year have been more profitable than any other analyst’s, according to data compiled by Bloomberg.
Tharani was unavailable to comment, said Ed Canaday, a spokesman for the bank.
‘Conviction Buy’
Goldman Sachs, Wall Street’s most profitable investment bank, added Freeport to the “Conviction Buy List” of stocks it expects to rise the most. The firm predicts copper prices will climb 34 percent next year. Futures linked to the metal have doubled in New York trading so far in 2009.
Freeport will have to reach that profit target without the help of an economy expanding faster than about 2 percent next year, according to the growth forecast from Hatzius, Goldman’s New York-based chief U.S. economist.
Consumer spending will be weaker than at the end of previous recessions, Hatzius wrote in a Sept. 1 note. He doesn’t have a prediction for earnings growth and declined to comment on analyst estimates in a Sept. 4 interview.
Ken Hoexter, an analyst at Bank of America in New York, says Union Pacific Corp. should be able to raise prices in 2010, boosting annual earnings by 21 percent at the largest U.S. railroad by market value. Hoexter, the second-best stock picker in the past 12 months among the companies he covers, has rated Omaha, Nebraska-based Union Pacific a “buy” since March 16.
Freight Hauling
Union Pacific’s sales are stabilizing after falling 28 percent in the second quarter as the recession curbed freight hauling, Hoexter said.
Demand will have to rise while the U.S. expands at a 2.5 percent annual rate, according to Drew Matus, a New York-based senior U.S. economist for Bank of America. Hoexter and Matus were unavailable to comment, according to Susan McCabe Walley, a Bank of America spokeswoman.
Stephen Richardson, an energy analyst for Morgan Stanley in New York, projects 52 percent sales growth for Apache Corp., the biggest independent U.S. oil producer by market value, more than doubling the company’s profit.
Apache, based in Houston, will earn $11.56 a share next year as it raises production and reduces costs, according to Richardson. That’s the second-highest analyst estimate among 26 in a Bloomberg survey and 32 percent more than the average.
‘Shocking Number’
“It is a shocking number,” said Richardson, whose firm expects oil prices to average $85 a barrel next year, or more than 50 percent above its average so far in 2009. “Oil’s a global market. You don’t necessarily need very strong U.S. demand for oil prices to be above where they are.”
His estimate for Apache’s profit growth is 56 times greater than the 2.6 percent U.S. economic expansion foreseen by Berner, the co-head of global economics at Morgan Stanley in New York. Consumer spending may struggle as U.S. households save more amid declining employment levels and wages, Berner said on Aug. 7.
That will limit earnings growth for U.S. companies to about 12 percent, Berner said in a telephone interview last week. A 25 percent jump in overall profits “seems improbable,” he said.
Analysts who foresee earnings outstripping the U.S. economy are counting on growth in international markets to make up the difference, said Fritz Meyer, the Denver-based senior market strategist for Invesco Aim, which oversees $149 billion.
“You want to hear managements talking about demand across the world,” Meyer said. “Earnings forecasts as they’re currently stated are achievable. I wouldn’t be surprised to see upward revisions.”
Fewer Opportunities
Companies that boost earnings through expense reductions may find fewer opportunities to cut costs next year, according to Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. Firings and shorter hours reduced labor costs by the most in nine years in the second quarter, increasing productivity at the fastest pace in six years, according to government data.
It’s unlikely the combined sales of companies in the S&P 500 will rise as much as analysts estimate when U.S. consumer demand and corporate investment are shrinking, Naroff said.
“Consumers may be on an extended spending holiday and a lot more cautious in their use of credit,” said Naroff, the top forecaster last year in a survey by Bloomberg Markets magazine. “The recovery is going to be slower, and businesses had cut expenses very, very rapidly. Making big profit gains from here, which might seem logical coming out of a recession, is going to be extremely difficult.”
Earnings, GDP
Based on the historical relationship of earnings and GDP compiled by Bloomberg since 1949, the U.S. economy would have to expand by 4.1 percent for profit among S&P 500 companies to match analysts’ prediction for a 25 percent gain in earnings.
None of the 53 economists polled by Bloomberg expect growth to be that strong. The most optimistic forecast in a survey taken from Aug. 5 to Aug. 11 was for a gain of 4 percent, by Michael Darda of MKM Partners LP in Greenwich, Connecticut. The lowest was London-based First Global economist Nikhil Gupta’s call for a 0.5 percent expansion.
Firings boosted the U.S. unemployment rate to 9.7 percent last month, the highest in 26 years. That brought the number of Americans thrown out of work since the recession began in December 2007 to 6.9 million people, the most in any post-World War II contraction, data compiled by Bloomberg show.
Increasing joblessness means investors are relying too much on government spending to drive growth in corporate earnings, said Howard Silverblatt, S&P’s senior index analyst in New York.
“We don’t see a whole lot of believers that the economy is getting better or the rally is for real,” said Fred Dickson, who manages $17 billion as chief market strategist at D.A. Davidson in Lake Oswego, Oregon. Investors “are taking a glass- half-empty rather than glass-half-full approach to the world. They’re very, very nervous.”
Weekend Edition
Cheers To Penn & Teller For Making Us Laugh While Learning
[youtube:http://www.youtube.com/watch?v=jF2iX2VG6e4&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=C_VgC7O2xtg 450 300] [youtube:http://www.youtube.com/watch?v=cY77JAEv8tI&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=GEK52MWv3s4&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=2HCXBmeNeP4&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=YzcdMEYwXKg&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=AisPC6_7SIc&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=jqhB8kY_E8o&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=xPhje8wepyg&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=XfPAjUvvnIc&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=LN2EdlK16Xo&feature=related 450 300] [youtube:http://www.youtube.com/watch?v=8RV46fsmx6E 450 300] Comments »Business Headlines September 4, 2009
By Timothy R. Homan
Sept. 4 (Bloomberg) — The U.S. jobless rate in August jumped to 9.7 percent, the highest since 1983, and employers cut another 216,000 jobs, reinforcing concern that consumer spending will slow even as the economy stabilizes.
The increase in the unemployment rate from 9.4 percent exceeded forecasts. The smaller-than-anticipated drop in payrolls was the least in a year, and followed a decrease of 276,000 in July that was larger than previously reported, Labor Department data showed today in Washington.
Rising joblessness underscores Treasury Secretary Timothy Geithner’s judgment that it’s “too early” to start exiting from the unprecedented stimulus measures helping stabilize the economy. AMR Corp. and Whirlpool Corp. are among the companies continuing to cut staff to lower costs and revive profits in the aftermath of the deepest recession since the 1930s.
“The labor market’s healing process is agonizingly slow,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report. “We expect the improvement to remain a very slow one, and therefore for the household sector to be contending with a weak labor market for some time.”
Stock Futures
Stock-index futures erased gains immediately after the report, then climbed. Contracts on the Standard & Poor’s 500 Stock Index rose 0.7 percent to 1,008.30 at 8:38 a.m. in New York. Treasuries were down, with benchmark 10-year notes yielding 3.39 percent, from 3.35 percent late yesterday.
Revisions subtracted 49,000 from payroll figures previously reported for July and June.
The report comes hours before Geithner meets in London with finance ministers and central bankers from the Group of 20 emerging and developed nations.
While the G-20 gathering will discuss how policy makers plan to exit from their fiscal and monetary stimulus efforts, now isn’t the time to start pulling back, Geithner told reporters in Washington this week. “We’ve come a very long way but I think we have to be realistic, we’ve got a long way to go still.”
Federal Reserve policy makers waited at least a year after unemployment peaked before raising interest rates in the aftermath of the previous two recessions.
6.9 Million
The latest numbers brought total jobs lost since the recession began in December 2007 to 6.9 million, the biggest decline in any post-World War II economic slump.
Payrolls were forecast to drop 230,000 after a 247,000 decline initially reported for July, according to the median of 79 economists surveyed by Bloomberg News. Estimates ranged from decreases of 365,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949.
The jobless rate was projected to rise to 9.5 percent. Forecasts ranged from 9.3 percent to 9.8 percent. Economists surveyed by Bloomberg last month projected the jobless rate will reach 10 percent by early 2010 and average 9.8 percent for all of next year.
Adjusted for part-time employees that would rather have a full-time job and for discouraged workers that are no longer looking for a job but would take one if it were available, the jobless rate jumped to 16.8 percent in August from 16.3 percent.
A rising jobless rate, stagnant wages and falling home values signal a lack of consumer spending may curb an economic recovery.
Factory Jobs
Today’s report showed factory payrolls fell by 63,000 after decreasing 43,000 in the prior month. Economists forecast a drop of 60,000. The decrease included a loss of 15,000 jobs in auto manufacturing and parts industries.
Announcements of staff reductions continued last month. Whirlpool, the world’s largest appliance maker, said Aug. 28 that it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs, or 1.6 percent of the company’s workforce.
Payrolls at builders declined by 65,000 after decreasing 73,000. Financial firms decreased payrolls by 28,000, after a 17,000 loss the prior month.
Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 80,000 workers after falling 154,000. Retail payrolls decreased by 9,600 after a 43,200 drop.
American Airlines
Fort Worth, Texas-based American Airlines, a unit of AMR, said this week it will furlough 228 flight attendants and put 244 more on involuntary leave as part of the 1,600 job cuts it announced in June.
Government payrolls decreased by 18,000 after falling 28,000 the prior month.
Today’s report also showed the average work week held at 33.1 hours in August. Average weekly hours worked by production workers remained unchanged from the month before, at 39.8 hours, while overtime also held at 2.9 hours. That brought the average weekly earnings up to $617.32 from $615.33.
“We’re still going to see some months of job cuts,” Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “There is a whole range of options, like adding shifts or hours, that companies can put in place until it becomes necessary to hire people back.”
Workers’ average hourly wages rose 6 cents, or 0.3 percent, to $18.65 from the prior month. Hourly earnings were 2.6 percent higher than August 2008. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.2 percent gain for the 12-month period.
The U.S. recession “is bottoming out” and the economy is poised for “a slow return,” Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said in a Sept. 2 interview. The head of the largest U.S. aluminum producer said government stimulus in the U.S. and China will affect the New York-based company’s earnings “positively” this year.
By Shani Raja
Sept. 4 (Bloomberg) — Asian stocks fluctuated, with the MSCI Asia Pacific Index set for its third weekly drop in five, as brokerage downgrades of Seven & I Holdings Co. and Hynix Semiconductor Inc. countered a rally in metal prices.
Seven & I, the world’s largest convenience store operator, fell 2.3 percent in Tokyo and Hynix Semiconductor Inc., the world’s No. 2 maker of computer-memory chips, sank 5.7 percent in Seoul. Zijin Mining Group Co., China’s largest gold miner, climbed 2.2 percent after the metal jumped to a six-month high. Henan Yuguang Gold & Lead Co. surged 10 percent in Shanghai.
The MSCI Asia Pacific Index was little changed at 112.80 as of 7:23 p.m. in Tokyo, with about as many stocks rising as falling. The gauge has lost 1 percent this week, paring its advance from a five-year low on March 9 to 60 percent. The rally has taken the average price of stocks on the measure to 1.5 times book value, close to a 12-month high…..
By Daniela Silberstein
Sept. 4 (Bloomberg) — European stocks rose for a second day as metals gained and strategists increased their year-end forecasts for the region’s equity indexes. U.S. futures climbed before a report that may show the smallest decline in payrolls since August 2008.
Kazakhmys Plc jumped 4.6 percent as copper advanced and Morgan Stanley upgraded Kazakhstan’s biggest producer of the metal. Lonmin Plc, the world’s third-largest platinum producer, jumped 7.6 percent after Exane BNP Paribas recommended the shares. PSA Peugeot Citroen rallied 6.5 percent as the automaker signed an agreement with Mitsubishi Motors Corp. to develop electric cars.
Europe’s Dow Jones Stoxx 600 Index advanced 1.1 percent to 233.11 at 12:49 p.m. in London. The measure has fallen 1.9 percent this week on concern that a six-month surge has outpaced the prospects for earnings and economic growth. The regional gauge is valued at 44.6 times profit, near the highest level since September 2003, according to data compiled by Bloomberg.
The rally “does not mean that the market can make no further progress,” Peter Oppenheimer, a London-based strategist at Goldman Sachs Group Inc., wrote in a report, raising his year-end forecast for the Stoxx 600 to 260 from 235. “Investors may now generally require new information for the market to move higher, but we think the better news will come.”
The Stoxx 600 has surged 48 percent since March 9 as companies from L’Oreal SA to GlaxoSmithKline Plc reported higher-than-estimated profits and the German and French economies unexpectedly expanded. UBS AG strategist Nick Nelson increased his year-end target for the FTSEurofirst 300 Index to 1,100 from 1,000 today……
By Simon Kennedy
Sept. 4 (Bloomberg) — Economic policy makers are signaling they plan to leave emergency stimulus in place even as the global economy pulls out of recession, delivering what Credit Suisse Group AG and Bank of America Corp. call a “sweet spot” for financial markets.
U.S. Treasury Secretary Timothy Geithner and European Central Bank President Jean-Claude Trichet are among Group of 20 finance officials gathering in London today who say it’s too soon to declare victory over the deepest recession since World War II. While data this week confirmed the slump is easing, policy makers are unwilling to curb spending or start unwinding their record low interest rates and debt purchases.
That means stocks will benefit as growth picks up and bonds will be helped by central bankers’ reluctance to lift borrowing costs, say economists at Credit Suisse and Bank of America. The MSCI World Index of stocks has gained 55 percent since reaching a 14-year low on March 9. The Merrill Lynch & Co. Global Sovereign Broad Market Plus Index shows government debt yields are the lowest since April.
“Financial markets will probably remain in this sweet spot for some time,” said Riccardo Barbieri, London-based head of international economics at Banc of America Securities-Merrill Lynch. “While the economic data have almost uniformly surprised on the upside, the leading central banks have credibly signaled to the markets that monetary conditions are set to remain extremely accommodative.”
‘Bumpy Road’….
Japanese Companies Cut Back on Capital Expenditures
By Aki Ito and Keiko Ujikane
Sept. 4 (Bloomberg) — Japanese businesses cut spending for a ninth quarter as the global recession squeezed profits, underscoring the challenge for the incoming government to sustain a recovery from the country’s worst postwar slump.
Capital spending excluding software fell 22.2 percent in the three months ended June 30 from a year earlier, after dropping a record 25.4 percent in the previous quarter, the Finance Ministry said today in Tokyo. Profits slid 53 percent.
Sales fell 17 percent, the second-biggest drop on record, indicating global demand hasn’t recovered enough to encourage companies to buy more plant and equipment. Sanyo Electric Co. and Seven & I Holdings Co. are among businesses scaling back.
“Companies have too many resources, and until that situation changes, they won’t have to invest in more equipment and they won’t need to hire more people,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo.
The government will use today’s report to revise gross domestic product on Sept. 11. Preliminary figures showed the world’s second-largest economy grew an annualized 3.7 percent in the three months ended June, the first expansion in five quarters. Shiraishi said today’s numbers may result in a “slight upward revision” to the capital spending component.
The Nikkei 225 Stock Average fell 0.2 percent at the morning close in Tokyo. The yen traded at 92.63 per dollar from 92.70 before the report was published.
May Divert Stimulus…..
Lead Surges To New Highs on Panic Buying
By Glenys Sim
Sept. 4 (Bloomberg) — Lead, the best performer on the London Metal Exchange this year, surged to the highest price in almost 16 months as China vowed to shut substandard smelters after thousands of children were poisoned.
People in China are angry “that children are involved in poisoning cases, which is why the government must take harsh measures and show it is serious about punishing offenders,” said Liu Biyuan, an analyst at GF Futures Co. The country is the world’s biggest lead producer and consumer.
The metal, used in batteries, has more than doubled this year, partly on concern that production may not keep pace with rising Chinese demand. There was a “buying panic” in the London market for lead, according to Citigroup Inc. Excessive exposure may make children less intelligent, doctors say.
Lead for delivery in three months jumped as much as 4.7 percent to $2,387 a metric ton, the highest level since May 8, 2008, and traded at $2,355 at 2:38 p.m. in Singapore. The metal rose as much as 8.8 percent yesterday after the initial report of the planned environmental crackdown.
There was “an explosive move in the market,” Jiang Donglin, Shenzhen Zhongjin Lingnan Nonfemet Co.’s research department manager, wrote in an e-mail. At least 200,000 tons of lead capacity is at risk of closure, according to Jiang. China produced about 1.947 million tons in the first seven months.
Sickened Children…..
By ALEX KENNEDY p {margin:12px 0px 0px 0px;}
SINGAPORE (AP) – Oil prices peaked above $68 a barrel Friday in Asia as investors looked to a U.S. unemployment report later in the day for signs of economic recovery.
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Benchmark crude for October delivery was up 44 cents at $68.40 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. The contract Thursday slipped 9 cents to settle at $67.96.
Oil has traded near $68 a barrel for the last three days as traders look for clues on the strength of the U.S. economy.
The Labor Department later Friday is scheduled to announce the August jobs report, one of the most closely watched indicators by investors. Economists expect the unemployment rate to edge up to 9.5 percent from 9.4 percent, while the number of layoffs is expected to slow to 225,000 from 247,000.
“If we get a good jobs number, oil could be back up over $70,” said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. “But in the last week, the market has been ignoring a lot of the positive economic news.”
Trading will be closed in the U.S. on Monday for the Labor Day holiday.
In other Nymex trading, gasoline for October delivery was steady at $1.80 a gallon, and heating oil rose 0.55 cent to $1.74 a gallon. Natural gas fell 3.2 cents to $2.48 per 1,000 cubic feet.
In London, Brent crude was up 28 cents at $67.40.
FRANKFURT (AP) – The German services sector saw second quarter sales fall 11 percent compared with a year earlier as the economic downturn continued to hurt demand.The Wiesbaden-based Federal Statistical Office said Friday that strong declines were seen in the business services sector, which saw sales fall 13 percent, while the transport and warehousing sector saw a 12 percent drop compared to the April-June period of 2008.
The number of employed in the overall services sector decline by 2.3 percent, with business services jobs falling more than 6 percent and the transport and warehousing sector jobs dropping about 1 percent.
The office said the information and communication sector stood out with a 5.1 percent rise in sales and a 1 percent increase in the number of employed.
Compared to the first quarter of 2009, overall services sector sales were only down 1.6 percent.
By JOSEPH PEREIRA and KELLY EVANS
Retailers posted a 2.9% sales decline last month as consumers remained thrifty, but a growing number of shoppers turned up at midpriced stores.
The rising visits, said analysts, show the first hints of successful retail strategies emerging from the recession. Moderately-priced chains emphasizing value and quality are seeing an uptick as sales gains slow at discounters.
Getty Images
Teen-clothing retailers suffered the biggest decline in sales last month, while midpriced and other retailers reported signs that consumers are returning. A customer browses at Abercrombie & Fitch in New York in July.
Customers are responding to “high-quality products at compelling prices and not simply to just lower prices,” said Neal Black, chief executive of Jos. A. Bank Clothiers Inc.
Sales were aided by a shift among several states including California, Texas and Florida of their annual tax-free school shopping days to August from July. Even though overall retail sales came in slightly higher than expected, consumers were still looking for bargains.
For the second month in a row, Kohl’s Corp., an operator of mid-priced department stores, posted increased sales at stores open at least a year. It reported an increase of 0.2%, better than the 1.7% decline analysts had forecast…..
Fed’s Fisher Says Economy on the Mend
By Ros Krasny
SANTA BARBARA, California (Reuters) – Dallas Federal Reserve Bank President Richard Fisher on Thursday said the United States should have a “good snap-back” from recession in the final months of 2009, but that future growth could be a “slow crawl.”
“You could have a stout third-quarter (GDP) number,” Fisher told reporters after a speech at the University of California in Santa Barbara.
“It’s encouraging and helpful and hopeful that we have a good third quarter and fourth quarter. But what is the rate of growth after that? And how do we get back to creating jobs?”
Fisher said it was too early to guess at the timing or pace of interest rate moves once the Fed starts to reverse its extremely easy monetary policy — one that has left benchmark rates near zero since December 2008.
“You have to feel it. You have to walk through a river feeling the stones underneath your feet,” he said. “We have to be forceful, or we may have to be gradual. It depends on the circumstances.”
Still, with price pressures tilted more toward deflation because of high unemployment and low capacity utilization in the United States economy, inflation should not be a problem for now, Fisher said.
NO BIG INFLATION RISK…..
By Reiji Murai and Taiga Uranaka
TOKYO/PARIS (Reuters) – Japan’s Toshiba Corp plans to bid for French nuclear group Areva’s power transmission and distribution unit, four sources with direct knowledge of the situation said, in a deal that could top $5 billion.
Toshiba, which runs a far-flung electronics conglomerate, is banking on power generation for growth as it reins in investment in its recession-hit computer chip business.
“If it manages to buy it for the right price, it would be a positive development,” Deutsche Securities analyst Takeo Miyamoto said.
But the health of Toshiba’s balance sheet is uncertain following a $5 billion capital hike in May, and its presence as the first foreign suitor for the up-for-sale business might sit uneasily with French government efforts to promote national industrial champions.
Areva has put its transmission and distribution (T&D) business on the block and is seeking to sell 15 percent of the group’s capital to fuel its nuclear expansion plans. The government will play a major role in both decision for the 91-percent state-owned firm, already a global leader in nuclear technology.
The political argument against a sale of T&D to Toshiba would be weakened if reported plans for an influx of Chinese money into the group prove correct. A Chinese sovereign fund is in talks to take a stake in the Areva, French daily Les Echos reported on Thursday.
A French industry ministry spokesman did not immediately return calls for comment on how the state would view a foreign buyer for Areva’s T&D business.
Toshiba’s shares fell 2.3 percent after news that it might bid broke…..
Prime Mortgages defaults Pick Up Steam
America’s most credit-worthy borrowers are defaulting on their loans faster than those with poor financial records, according to a report in the Wall Street Journal.
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The rate of mortgage delinquency among prime borrowers is accelerating and could mean that banks will soon be suffering more losses from the usually safe customers than from their less-reliable ones, the report said.
The number of subprime borrowers falling down on their mortgage repayments reached 25 percent in the first quarter, but has now leveled off, with only slight increases in the second quarter, the Journal said.
Prime loans make up 80 percent of US banks’ exposure to mortgages and credit cards, and so could quickly overtake subprime borrowers in causing the biggest financial headache as the recession bites, the report added.
“The subprime pain is in the rearview mirror,” Sanjiv Das, head of Citigroup’s mortgage business, told the Journal.
Many of the customers with high credit scores have lost their jobs and are struggling to keep up with payments while the jobs market remains extremely weak, the report said. The total mortgage-delinquency rate, where borrowers were late for at least one payment, rose to a record high of 9.24 percent in the second quarter, according to the Mortgage Bankers Association.
The prime borrowers showed an increase of 5.8 percent in the quarter, compared to a 1.8 percent rise for subprime customers, the report said. However, the overall rate for delinquency still remains significantly lower for prime borrowers at 6.4 percent, compared to 24.4 percent for subprime borrowers, the Journal said. ….
s we reported previously, about 20 % of the 7.4 trillion Yuan in stimulus lending during H1 2009 is considered to have gone to inflate the property and stock market bubble.This was common knowledge, but apparently, despite the repeated assurances of the Chinese government that the money supply would be kept flowing as long as necessary to ensure a recovery of the economy, there are increasing signs that they are trying to deflate the stock bubble.
For starters, the suspicions of the auditors were awoken when they noticed that 23 % of the loans were given under the form of “discounted bills financing”, which is a loan given on receivable notes at a discount to their face value. This immediately available cash is thus theoretically not traceable anymore.
This news might explain some of the brutal pullbacks on the Shanghai these latter times, as the source quoted by Caijing says that “Some capital from unidentified sources fled the stock market as soon as word of the investigation spread”.
However, the companies that played in the stock market with their loans may have some worries ahead: the auditors announced that they wished to trace the larger accounts to find out who abused of these loans.
China’s National Audit Office is investigating recent lending by major commercial banks, in an effort to trace the flow of loans issued in support of the government’s economic stimulus funds, a senior executive at a major bank told Caijing.
The investigation focuses on loans that might have been diverted to stock markets.
In November, China unveiled a 4-trillion-yuan stimulus package to revive an economy badly shaken by the global downturn. The stimulus plan was facilitated by a moderately loose monetary policy, which resulted in the 7.4 trillion yuan record lending in the first half of 2009.
Concerns from regulators were aroused after about 23 percent of total first-half new lending was extended in discounted bills financing.
The authorities now suspect that much of the money was improperly diverted from the real economy to speculative investments in real estate and stocks.
Discounted bills financing is a short-term lending practice allowing companies to raise cash by surrendering receivables at a discount. But once the bills are cashed, banks can no longer monitor the capital flow, providing opportunities for the cash to be invested elsewhere.
“Some capital from unidentified sources fled the stock market as soon as word of the investigation spread,” a senior banker told Caijing.
Unlike loans issued for specific projects, capital from discounted bills is harder to trace. However, people familiar with the NAO investigation said the agency intended to trace large accounts with securities firms and track the funds back to their sources.
“The National Audit Office has the right to extend investigations to enterprises. They can possibly dig things out if they’re determined and make the effort,” said a banker from a large bank, adding that concern over the probe was one reason why capital has quickly fled the stock market.
1 yuan = 14 U.S. cents
Goldman Sachs is bullish on China. So bullish that they think the concerns regarding the recent 25% sell-off are far overdone. Following are the 8 reasons why Goldman says to buy the dip, particularly resource related names:
We see a mismatch between the recent 20% share price pullback and still robust underlying real demand. We see 8 stock-picking themes emerging:
(1) Our channel checks with a low-voltage copper transformer producer indicate demand is rising, with August shipments back to 2008 peaks.
(2) Along the value chain, we do not think the market has priced in the better-than-expected speed of economic recovery, positive for upstream commodities like coal; traders indicate positive surprise on coal demand.
(3) The magnitude of demand recovery may potentially lead to tightness in commodities (such as steel) long perceived as oversupplied; this offers potential upside in undervalued stocks. Steel traders see robust demand.
(4) Economic recovery in OECD countries (which account for about 40% of global consumption) could provide an additional boost to commodity prices, which are already buoyed by strong demand from China.
(5) China’s increasing percentage of global consumption structurally boosts the sustainability of this upcycle, reducing potential OECD “double dip” risk. Our new analysis shows a 10% increase in Chinese demand now offsets OECD weakness 2-3 times as much as it did in 2002 when China first joined the WTO.
(6) Sustainability of supply-side tightness to cushion rising raw material costs; we see copper/steel/coal as favorably positioned.
(7) Consolidation leaders such as Shenhua/Angang/Baosteel could see leverage increase for the upcycle via parent asset injection, in our view.
(8) Valuations are still around/below mid-cycle, such as steel/coal names.
Source: Goldman Sachs
* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.
Nonfarm Payrolls: Prior -247k / Mkt Expects -230k / Actual -216k… Unemployment: Prior 9.4% / Mkt Expects 9.5% / Actual 9.7%
Editorial: A Look @ Monetary Policy & Growth Stimulation
Mises Daily by Frank Shostak
At the Federal Reserve Bank of Kansas City’s annual economic symposium, held in Jackson Hole, Wyoming on August 21, 2009, Ben Bernanke expressed satisfaction with the action that his administration undertook to save the financial system. According to Bernanke,
History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation.
Furthermore, argues Bernanke,
Without these speedy and forceful actions, last October’s panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted. Although we have avoided the worst, difficult challenges still lie ahead.
As a result of all the swift actions argues the Fed Chairman,
Critically, fears of financial collapse have receded substantially. After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good. Notwithstanding this noteworthy progress, critical challenges remain: Strains persist in many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.
Most commentators are unanimous in their belief that Bernanke’s Fed has prevented another Great Depression through swift monetary pumping.
Since September of last year, the yearly rate of growth of the Fed’s balance sheet (the pace of money pumping) has accelerated, climbing to 152.8% by December 2008 from 3.9% in August of that year. The federal funds rate target was lowered almost to zero from 5.25% in August 2007.
Figure 1
Can Money Pumping Stimulate Economic Growth?
According to Bernanke — and most economic experts — when an economy falls into a recession, the central bank can pull it out of the slump by means of money pumping. This way of thinking implies that money pumping can somehow grow the economy.
Indeed, US historical evidence supposedly does show that loose money policy seems to work. For instance, between 1960 and 2008 it took on average about nine months before increases in money supply caused increases in the rate of growth of industrial production (See Figure 2.)
Figure 2
The question is, how is this possible? After all, if printing money can grow the economy, then why not to print plenty of it and cause massive economic growth? By doing that, central banks could have by now created an everlasting prosperity for every individual on the planet.
For most commentators, the arrival of a recession is due to unexpected events such as shocks that push the economy away from a trajectory of stable economic growth. It is held that shocks weaken the economy, i.e., lower economic growth. We suggest instead that, as a rule, a recession or an economic bust emerges in response to a decline in the rate of growth of money supply.
Typically, this takes place in response to a tighter stance of the central bank. As a result, various activities that sprang up on the back of the previously strong rate of monetary growth — usually these emerge on account of a loose monetary policy by the central bank — come under pressure.
Note that these activities cannot fund themselves independently. They survive on account of the support that the increase in the money supply provides. The increase in money diverts to them real savings from wealth-generating activities. Consequently, this weakens wealth-generating activities.
A tighter stance by the Fed and the consequent fall in the rate of growth of money undermines various false activities. This precisely is what recession is all about. Recession, then, is not a weakening in economic activity as such, but rather is the liquidation of various non-productive activities that sprang up on the back of an increase in the money supply.
Why the GDP Framework Presents a Misleading Picture
Government statisticians present economic growth in terms of monetary expenditure data, such as gross domestic product (GDP) and industrial production. These indicators are designed in line with Keynesian thinking that spending equates to income — hence, more spending leads to a higher national income and therefore to a higher economic growth.
On this logic, a tighter monetary stance by the Fed leads to slower economic growth, while increases in the money pumping produce higher economic growth. A stronger rate of growth in the money supply leads to a stronger pace of expenditure, and therefore an increase in national income. The increase in overall income in the economy leads to a higher rate of growth in terms of GDP.
We suggest that in reality the exact opposite actually takes place. Printing more money weakens the wealth generators’ ability to grow the economy, while a decline in the rate of growth of the money supply strengthens their ability to grow the economy.
Once the central bank raises the pace of money pumping in order to lift the economy from a recession, it arrests the demise of various false activities. It also gives rise to new false activities. An outcome of so-called economic “growth” here is thus nothing more than the strengthening of wealth consumers and a renewed pressure on wealth generators. All of this undermines the process of wealth generation and weakens the true economic growth.
Real Savings Fund Economic Activity
Irrespective of whether an activity is productive or nonproductive, it must be funded. At any point in time, the number and the size of activities that can be undertaken is determined by the available amount of real savings. From this we can infer that the overall rate of increase in productive and nonproductive activities as a whole is set by the rate of expansion in the pool of real savings.
Observe that this runs contrary to the GDP framework, where the pace of monetary expenditure — i.e., money pumping — sets the pace of so-called economic growth. This common line of thinking, however, doesn’t make much sense. After all, individuals (whether engaged in productive or nonproductive activities) must have access to real savings in order to sustain their life and well being.
Save $10 off the treatise
Money as such cannot sustain individuals; it can only fulfill the role of the medium of exchange. According to Rothbard,
Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.[1]
As long as wealth producers can generate enough real wealth to support productive and nonproductive activities, loose-money policies will appear to be successful. (Observe that loose fiscal policies are similar to money policy, since they also impoverish wealth generators.)
Over time, a situation may emerge where — as a result of persistent loose monetary and fiscal policies — there are not enough wealth generators left, as they have been badly damaged by loose policies. Consequently, generated real savings are not large enough to support an increase in economic activity. Once this happens, the illusion of loose monetary policy is shattered , and real economic growth must come under pressure.
(Under such conditions, it would be difficult to show economic growth even in terms of GDP. The only reason why GDP might “grow” in such an event would be through the employment of misleading price deflators.)
The government attempt to boost the rate of growth of GDP by raising its expenditure must also fail if the supply of real savings is dwindling. After all, government activities also require real savings. (Remember, every activity, irrespective of whether it is productive or nonproductive, must be funded).
If the government persists with its aggressive stance, it will only make things much worse, as it continues to deprive funding from wealth-generating activities. Likewise, if the Fed accelerates its monetary pumping while the pool of real savings is declining, it runs the risk of severely damaging the pool of real savings even further.
It is clear, then, that those commentators who subscribe to the view that the acceleration of money pumping can fix things hold that something can be created out of nothing.
From all of this, we can deduce that there is no such thing as stimulatory policies that can grow the economy. Neither the Fed nor the government can grow the economy. All that stimulatory policies can do is to redistribute real savings from wealth producers to nonproductive activities. And these policies encourage consumption that is not supported by useful production.
The Fed’s Loose Monetary Policies Have Weakened Wealth Producers
As a result of all the massive pumping by the Fed, the yearly rate of growth of our monetary measure AMS jumped from 0.7% in May 2007 to 14% by July.
Yet, despite all of this pumping, the growth momentum of industrial production remains in free fall. (Note the massive gap between the growth momentum of AMS and the growth momentum of industrial production in Figure 3.)
Figure 3
This very large gap raises the likelihood that the pool of real savings could be in trouble. If what we are saying is valid, then true, real economic growth is likely to struggle in the months ahead. (Remember, without a growing pool of real savings no economic growth is possible.)
As a rule, monetary pumping “works” through the commercial bank expansion of credit. The increase in commercial bank reserves on account of the Fed’s pumping gets amplified by means of credit expansion. At present, banks are finding it more attractive to sit on the massive pile of cash reserves rather than lend them out. So far in August, bank excess reserves stood at around $700 billion — against $1.9 billion in August last year.
The banks are still in the process of trying to fix their balance sheets. They are also having trouble finding viable borrowers — i.e., wealth generators. All of this raises the likelihood that the process of wealth formation is itself in trouble.
Figure 4
Observe that if the pace of wealth generation had been rising, banks would have been very active in securing for themselves a growing slice of the expanding real wealth.
Obviously, banks could become very active by pushing lending to non-wealth-generating activities. However, this is not likely to happen soon, given that banks have already accumulated a massive amount of bad-quality assets. The latest data indicates that banks are still very tight. Year-on-year commercial bank lending has fallen by 2.8% so far in August after declining by 2.7% in July. (See Figure 5.) This was the fourth consecutive monthly decline.
Figure 5
Conclusions
At the Kansas City Fed’s annual economic symposium, the chairman of the Federal Reserve expressed his satisfaction with the action that his administration undertook to save the financial system. Historical evidence supposedly supports the view that loose monetary policy can pull the US economy out of recession.
However, we suggest that so-called economic growth in response to loose policy, as reflected in terms of data such as GDP and industrial production, simply mirrors the monetary expenditure rate of growth — and not true, real economic growth. Since these indicators reflect monetary expenditure, the more that money is pumped by the Fed, the larger the so-called economic growth is going to be.
Over time, a situation can emerge where, as a result of persistent loose monetary and fiscal policies, there are not enough wealth generators left. Consequently, generated real savings are not large enough to support an increase in economic activity. In this situation, neither loose monetary policy nor loose fiscal policy can “work.” We suspect that such a situation may be developing now.
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