Business this week
After months of speculation and a failed merger effort, Microsoft and Yahoo! announced an agreement to integrate their internet-search and advertising businesses. Under the deal, Microsoft will incorporate Yahoo!’s search technologies into its existing web-search platforms while its Bing search engine will operate on Yahoo!’s websites. Microsoft will enter a revenue-sharing partnership with Yahoo!. Between them, the two account for 28% of internet searches in America, compared with Google’s 65%. See article
There was more evidence that housing markets may be turning a corner. Sales of new homes in America jumped by 11% in June compared with May, the biggest increase in nearly nine years. And the S&P/Case-Shiller home-price index for May rose by 0.5%, its first gain since mid-2006. The Land Registry’s survey of house prices in England and Wales recorded its first advance, 0.1%, in 17 months. See article
The head of the Obama administration’s task-force on the car industry assured a congressional panel that the reconstructed management boards at Chrysler and General Motors were in complete commercial control of their companies and that “there is no checking with the government”. Ron Bloom also warned lawmakers not to pass a measure reversing the cuts in car dealerships made by the companies because it would shake market confidence.
The freight depression
TUI, a German tourism group, agreed to provide the bulk of short-term financing requested by Hapag-Lloyd, which the container-shipping line needs to stay afloat. TUI has sold 57% of its stake in Hapag with a view to leaving the shipping industry. Meanwhile, Japan’s three biggest shipping companies all reported quarterly losses, which they blamed on the global slowdown. See article
It emerged that a provisional report prepared for France’s financial-market regulator into alleged insider share dealing at EADS had recommended fines for former and current executives at the aerospace company. Two of its biggest shareholders, Lagardère, a French media group, and Germany’s Daimler, were cleared of wrongdoing.
Two giant public offerings in China, including that of China State Construction Engineering, whose IPO was the world’s biggest so far this year, helped to propel the country’s stockmarkets upwards. The exuberance was halted by rumours that China’s biggest banks may curb lending.
Singapore’s state investment company, Temasek, said the value of its assets had fallen by a fifth, or S$40 billion ($28 billion), for the year to March 31st, and raised the possibility of allowing the public to “co-invest” in its operations. A recent report from Deutsche Bank drastically cut forecasts for growth at sovereign-wealth funds worldwide.
Rearranging the chairs
Lloyds Banking Group appointed Sir Win Bischoff as its new chairman. He replaces Sir Victor Blank, a leading proponent of Lloyds TSB’s acquisition of HBOS last year, which many shareholders consider a mistake. Sir Win stepped down as chairman of Citigroup in February.
Deutsche Bank reported a sizeable increase in net profit for the second quarter, to €1.1 billion ($1.5 billion). However, investors took fright at the German bank’s provisions for bad loans, which swelled to €1 billion. Meanwhile, Deutsche said that its management and supervisory boards had not authorised the investigation of managers and a major shareholder in Germany’s latest corporate-spying allegations. State prosecutors are reviewing the evidence.
The average daily volume in Britain’s foreign-exchange market, the world’s largest, fell to $1.36 trillion in April, a fifth lower than last October, as transactions slowed between banks and other financial companies. America’s foreign-exchange market shrank by 31% in the same period.
Verizon, America’s second-biggest telecoms company, announced a further 8,000 job cuts at its landline division.
The quarterly earnings season got under way for big oil companies, in which most are expected to report much reduced profits because of falling oil prices and weaker demand. Royal Dutch Shell’s net profit dropped by 67%, to $3.8 billion. ConocoPhillips’s profit fell by 76%, and BP’s by 53%.
To boldly go
Abu Dhabi’s Aabar Investments said it would pay $280m for a 32% stake in Virgin Galactic, Sir Richard Branson’s space-tourism venture. Aabar plans to build facilities for a regional “spaceport” in the emirate, which it hopes will attract scientific research. Virgin Galactic is offering flights to space for $200,000 from a spaceport in California’s Mojave desert, starting in 2011.
Politics this week
The Democratic Party of Japan, which is favourite to win an election on August 30th, produced its manifesto. It calls for a child allowance, higher unemployment benefits, lower road-tolls—and a radical shake-up of the system that gives civil servants huge influence over politicians. See article
Kyrgyzstan’s president, Kurmanbek Bakiev, easily won re-election. Opposition protests were broken up by the police. The Organisation for Security and Co-operation in Europe judged the conduct of the poll a disappointment. See article
The vice-president of China’s supreme court said the country would reduce death-penalty executions “to an extremely small number”. In 2008 China executed more than 1,700 people, or 72% of the world’s total.
At talks in Washington, DC, America and China promised to resist protectionism and to work together to slow climate change. But they failed to produce any detailed new agreements.
Marching for Manuel
Manuel Zelaya, the deposed president of Honduras, set up camp together with several hundred supporters just over the border in Nicaragua, to pressure the de facto government to accept a mediation plan that would restore him to power. The army said it would accept the plan; Roberto Micheletti, the de facto president, asked for more talks. The United States withdrew diplomatic visas from four members of his government. See article
Sweden’s government asked Venezuela to explain how anti-tank rocket launchers sold to the Venezuelan army had come into the hands of Colombia’s FARC guerrillas. The Colombian army found the weapons in a FARC camp. Venezuela’s president, Hugo Chávez, said there was no evidence to link the weapons to Venezuela, and recalled his ambassador from Colombia—not for the first time.
At least 15 people were drowned and some 70 more were missing after an overloaded sailing boat carrying Haitian migrants capsized off the Turks and Caicos Islands in the Caribbean. More than 100 people were rescued.
Active on all fronts
A flurry of visits by senior members of the Obama administration to Israel and the surrounding region, including George Mitchell, a special envoy, Robert Gates, the defence secretary, and Jim Jones, the national security adviser, highlighted Barack Obama’s apparent determination to get a Middle East peace process going again. See article
Iran’s beleaguered president, Mahmoud Ahmadinejad, came under fire from his hitherto stalwart conservative allies in the ruling establishment, when they prevented him from making his son’s father-in-law the country’s vice-president. But he made him his chief of staff instead, and fired the head of intelligence for criticising the initial appointment. See article
At least seven Iranian members of the People’s Mujahideen of Iran, a dissident group that took refuge in Iraq under the auspices of Saddam Hussein, who gave them their own camp north of Baghdad, were killed in a raid by Iraqi security forces. The Iraqi government wants to close Camp Ashraf, whose occupants are afraid they may be sent back to Iran.
In a presidential and general election in Iraq’s autonomous Kurdish region, a new party called Change shook the ruling duopoly of the Kurdish Democratic Party, run by the Barzani clan, and the Patriotic Union of Kurdistan, run by the Talabanis. The new party won about a third of the seats. See article
Islamist militants attacked government police and troops in several northern Nigerian states after some of their suspected leaders were arrested. Hundreds of people were killed and injured in the subsequent violence over the course of at least five days. See article
Deadly intent
ETA, a Basque separatist group, was blamed for two car-bomb attacks on police barracks in Spain. The first device, in Burgos, injured 65 people. The second blast, on the tourist island of Majorca, killed at least two people.
More worries were voiced about the struggling Baltic economies as data showed Lithuania’s GDP had shrunk by 22% year on year in the second quarter. After frantic negotiations, the parties in Latvia’s ruling coalition agreed to a package of austerity measures to secure IMF aid.
The European Union asked for a formal assessment of Iceland’s application to join the 27-nation block, putting the Nordic country on a fast-track to membership, possibly within three years’ time. Iceland reversed its cool attitude towards the EU last year, when its banking system collapsed.
A smattering of Labour MPs blamed Gordon Brown for the party’s defeat in a by-election for a seat in Norwich, which was won handily by the Conservatives. But no one openly ventured to push for a leadership challenge to the prime minister.
Toil and trouble
Amid increasing rancour among the various committees in Congress that have responsibility for health-care reform, Barack Obama went out to stump for his plan. But many Democrats said the president needed to offer clearer leadership. See article
Lawmakers in California approved the budget deal thrashed out between Arnold Schwarzenegger, the governor, and legislative leaders. The package plugs the state’s budget deficit gap, though last-minute negotiations removed some items that had been earlier agreed on, such as the first lease for 40 years to allow oil drilling off Santa Barbara.
The Senate Judiciary Committee endorsed Sonia Sotomayor’s appointment to the Supreme Court; she picked up the support of one Republican senator. A few other Republicans have said they will vote for her when the full Senate deliberates.
Mr Obama’s comments on the arrest of Henry Louis Gates, a professor of black studies at Harvard University, sparked a row. Mr Obama had said that although he didn’t know the facts about the arrest of Mr Gates for disorderly conduct at his home, the police had “acted stupidly”. After the Cambridge police association stoutly defended the arresting officer (left), Mr Obama admitted his comments had made the controversy worse, and invited both Mr Gates and the sergeant to the White House for a beer.
A difficult summer for the White House
Crunch time
The next few weeks could determine the fate of Barack Obama’s presidency
IF THE opinion polls are to be believed, Barack Obama is now, six months into his presidency, no more popular than George Bush or Richard Nixon were at the same stage in theirs. His ratings are sagging particularly badly with electorally vital independent voters: two-thirds of them think he wants to spend too much of their money. Two of the most specific pledges he made to the electorate—to reform health care and to produce a cap-and-trade system to curb greenhouse-gas emissions—are in trouble. And an impression is being formed in Washington of a presidency that is far too ready to hand over the direction of domestic policy to Congress; that is drifting either deliberately or lethargically leftwards; and that is more comfortable with lofty visions than details. On the campaign trail Mr Obama showed an impressive ability to change gears. He needs to do so again this summer.
His cause is by no means hopeless. Just as his initial Messianic polling numbers were misleadingly optimistic, his problems should now be put into context. Most obviously, nearly 200 days into office, he has avoided making any horrific mistakes, especially in the fraught business of economic policy. On the hardly insignificant matter of restoring America’s reputation in the world he has delivered a degree of what he promised (though even there the tough times are still ahead of him, as our next leader makes clear). He has had to cope with the worst recession for half a century. He has been curiously ill-served by a press short of useful criticism, with liberal America prepared only to debate what sort of water he walks on best, while conservative radio hosts argue over when exactly he became a communist. And of course, government is darned hard: even when you make the right decision—to close Guantánamo, for instance—it can take years to put into effect.
So Mr Obama’s underperformance is relative and partial; but it is serious, especially in domestic policy. And if his schemes at home come to naught, then his credibility abroad will wither. That is why the next few weeks are crucial.
Taking too much care of Hillarycare
In foreign policy an American president enjoys the most freedom of operation. At home the man in the Oval Office is mightily constrained by Congress. It is the artful combination of arm-twisting, compromise, rhetoric and gritty attention to detail that make the difference between an FDR and a Jimmy Carter. Back in his honeymoon days Mr Obama was constantly compared to Roosevelt. No longer.
The suspicion is that the president has taken the experience of Bill Clinton too much to heart. The previous Democratic presidency got off to a rocky start for many reasons, but his failed attempt to impose health-care reform on Congress in 1993-94 bulks largest. Putting Hillary Clinton in charge of an unwieldy, secretive task-force that attempted to present powerful senators with a masterplan backfired. Congress promptly shot it down—and Mr Clinton lost both the House and the Senate to the Republicans in 1994.
A president plainly should not ignore Congress. But Mr Obama has veered to the opposite extreme. Although he has a White House stuffed full of first-rate policy wonks, he has repeatedly subcontracted the big decisions—the $787 billion stimulus bill, cap-and-trade, health reform—to the Democratic leadership in Congress. At times Mr Obama’s role has seemed limited to deploying his teleprompter-driven oratory to sell whatever Congress proposes to the public, even before it is clear what exactly those proposals amount to.
Nobody voted for President Pelosi
Worse, the plans have usually ended up running away from tough decisions. With the stimulus bill the flaws were forgivable: there was an urgent need to give the economy a boost. But the House of Representatives has produced a cap-and-trade bill that is protectionist, riddled with exemptions and which gives away the permits that are supposed to force carbon-emitters to change their ways. There is a growing danger that this bill will not be passed through the Senate and reconciled with the House version in time for the Copenhagen summit on climate change in December.
With health care, Mr Obama’s preference for vague statements of principle rather than detailed specification has led to a House proposal that loads taxes onto the rich, sets up a state-run insurance scheme that many fear will put private-sector providers out of business and fails to contain, let alone reverse, the escalating costs of treatment while adding an expensive requirement that everyone have health insurance, with large subsidies where needed (see article). Barely any Republicans could support this proposal as it stands. Frantic efforts to save the reform effort are under way in the Senate, but it is distinctly odd to note that the president’s signature policy is now being devised for him by a gang of six senators. Financial regulation is also stuck (see article).
A policy of ramming bills through Congress on a party-line basis might suit Nancy Pelosi, the Democrats’ leftish leader in the House. But, from Mr Obama’s point of view, it is bad politics in two different ways. It is shifting the presidency to the left, annoying centrist voters who worry about the swelling government debt. And it may not even get the bills through. Conservative Democrats, many of whom represent right-leaning states and districts recently captured from the Republicans (see article), are nervous about backing bills without bipartisan support. Over 40 of them broke ranks in the House over the climate-change bill. Now there is the likelihood that health reform, like the climate-change bill, will be deferred until the autumn, when fears about the deficit will have grown and the two expensive bills could combine to spook voters.
What should Mr Obama do? He must come down from his cloud and start leading. The House Democrats could be usefully reminded that their present 78-seat margin owes everything to the president’s coat-tails; they are endangering his popularity. Mr Obama should also court centrist Republicans. That means getting into the nitty-gritty: Republicans can hardly be expected to save Mr Obama’s presidency unless they get something solid in return. For instance, one way to pay for bringing the uninsured into the health-care system (a noble Democratic priority) is to scrap a distorting tax-deduction that veils the true cost of health insurance, a policy espoused by John McCain last year. A real “post-partisan” president would be trying to bully through this compromise, not talking dreamily about wanting health care for all at no cost to anybody but the rich. And on the subject of detail, precise talk from the president about how he intends to grapple with government debt would reassure a lot of centrist waverers.
None of this is impossible. As The Economist went to press, hopes were rising that the Senate finance committee might soon produce a bipartisan version of the health bill. But then the final version of that bill will have to be reconciled with the much-worse House version. If the result is another lazy deficit-boosting, hard-decision-avoiding scheme (like George Bush’s rotten Medicare bill), what president would want to be remembered for that? Mr Obama remains an inspiring figure. But he needs to get his hands dirty this summer if he is to rescue a presidency that has started to slip.
Microsoft, Yahoo! and Google
Taking sides
Microsoft and Yahoo! strike a long-awaited deal
USERS will probably not notice all that much. But the deal may be seen one day as a significant event in the internet industry. Microsoft and Yahoo!, the world’s biggest software firm and its leading online portal respectively, have reached a deal for a ten-year web search and advertising partnership after years of speculation about a tie-up. The combination, which was announced on Wednesday July 29th, is not as far-reaching as originally envisaged. But it is likely to create a serious rival to Google, the online giant that dominates both of these markets.
The agreement is supposed to help both parties overcome their most pressing problems. Microsoft will increase significantly the use of its search service, called Bing, and its platform to serve online advertisements. Yahoo! will use both of them on its websites. The web portal, for its part, will be able to cut costs and increase revenues. Yahoo! will no longer have to invest millions in its search and advertising technology. It will also get more money for the ads placed next to its search results. Carol Bartz, Yahoo!'s boss, said that the tie-up “comes with boatloads of value” for her firm.
The deal is the result of a long mating dance which started in earnest early in 2008. In February last year Microsoft made a $44.6 billion takeover bid for Yahoo!, later raising its offer to $47.5 billion. But Yahoo!’s management then rebuffed Microsoft, regarding the offer as undervaluing the company. Instead Yahoo! entered into an advertising dalliance with Google, but this fell apart after antitrust authorities signalled that they would not approve such an agreement. Talks between Microsoft and Yahoo! were rekindled after Ms Bartz took the helm at Yahoo! in January. She is less emotionally attached to maintaining its independence than her predecessor, Jerry Yang, one of the company’s founders.
Yet even for Ms Bartz the results of the negotiations must be somewhat disappointing. Yahoo! is said to have pushed for a whopping upfront payment of billions of dollars for agreeing to a deal with Microsoft—but it has not succeeded. What is more, the deal apparently only covers the text ads displayed alongside search results and not other forms of online ads. And although Yahoo! will use Microsoft’s advertising platform, the firm will continue to sell the ads itself. This will allow it to maintain relationships with advertisers, making it easier to sell them other kinds of ads.
The big question is whether this combination will be able to threaten Google’s dominance in web search. The deal will mean that Microsoft handles nearly 30% of searches in America—compared with Google’s 65% of the market. Microsoft’s share may well rise. It will be able to offer better search results because it will have more search data to improve its technology. Bing, which the firm launched in June, has already got off to a good start, gaining a couple of percentage points of the search market since then.
At any rate, the battle lines between Google and Microsoft are now clearly drawn. Earlier this month, Google announced that it is developing a free operating system for personal computers called Chrome OS, thus mounting a direct attack on Microsoft and its dominant Windows operating system. With the Yahoo! deal, Microsoft is now pushing into Google’s heartland. So the grand alliance between Microsoft and Yahoo! is part of an even bigger battle between the technology titans that is likely to drag on for years.
Can Bubbles Also Be Made in China?
Despite all of the shimmering skyscrapers and industrial output, unless market forces are allowed to truly dictate economic exchanges, today's Chinese megacities and their residents will merely be facades and actors within a 21st-century Potemkin village, and growth will remain stagnant for years to come. This is due in large part to continual state intervention through centrally planned investment.
Roughly eight months ago, Premier Wen Jiabao announced a $586 billion stimulus package to combat a plunge in economic activity.
At the time, analysts such as James Pressler noted that the stimulus might simply be a rebranding of previously known spending packages rolled into a big fancy plan.[1]
Suffice to say, this is not the case. I was wrong.
Beginning in November, lending quotas have been scrapped and interest rates have been held at a four-year low: unsurprisingly, bank lending has surged.[2] According to the People's Bank of China, for the first six months of this year, new lending amounted to more than 7.3 trillion yuan (about $1.1 trillion) — which, according to the Royal Bank of Scotland, is equivalent to two years worth of credit.
Furthermore, Wei Jianing estimates that roughly 20% of the stimulus funds have ended up in the domestic stock bourses, creating a speculative bubble much akin to the previous dotcom and housing-heavy cousins. Another 30% of the funds are believed to have been shuffled into the ailing property markets.[3] [4]
In fact, residential property rates in places like Beijing are once again climbing at a spectacular rate — 6.5% in one week alone.[5] What was intended as a means to boost infrastructure improvements has been used instead to continue erecting villas and skyscrapers — with little productive value — in an already oversaturated market created by the previous boom.
For example, at the end of last year, roughly 91 million square meters of apartment space lay empty throughout China. This figure does not include the 587 million square meters of apartment space that has been sold but left vacant over the past five years or the millions more that are built but left off the depressed market.[6] More specifically, since 2006, roughly 152 million square meters of commercial office space has been built in Beijing — more than all of the office space in Manhattan — yet 30 million square meters is still vacant.[7] And in Shanghai, the vacancy rate for commercial space is estimated to have hit 25% at the end of last year.[8]
However, as an illustration of unintended consequences, during this new real estate boom, several investigations have discovered that real estate developers, desperate to offload nonperforming properties, have dumped mortgages onto state-run banks that are "facing enormous pressure from Beijing to rapidly increase lending to boost the economy."[9]
Thus, while market forces would have reallocated unused property, pushing prices down, the stimulus has catapulted markets such as Beijing and Shanghai into the top 50 most expensive globally, despite that the average resident earns a fraction of their industrialized peers.[10]
Raw Materials
Economist Andy Xie has arguably written the most concise case as to how the stimulus money has created extremely problematic unintended consequences for a developing China.
For instance, in its objective to jumpstart or simply smooth over the plunge in economic activity (primarily exports), Chinese state-owned industries have gone on a commodity buying binge that actually has worked against them:
But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term.
The failure of Chinalco's investment in Rio Tinto has been costly for China. After watching its share price triple, Rio Tinto saw it could raise money more cheaply by issuing new shares to pay down debt. The potential financial loss to Chinalco isn't the point. Rather, higher costs will stem from a further monopolization of the iron ore market because Rio Tinto, after scrapping the Chinalco deal, entered into an iron ore joint venture with BHP Billiton. Even though these two mining giants will keep separate marketing channels, joint production will allow them to collude on production levels, significantly impacting future ore prices.
While the rest of his research is worth reading in length, in a nutshell he suggests that the current commodities boom is entirely unsustainable and counterproductive. How big is this commodity boom?
The NY Times recently noted that among other imports to China, iron ore increased 33% from a year earlier, crude oil increased 14%, aluminum oxide increased 16% and refined copper increased 148%. These jumps have corresponded with similar price increases in the commodities. And as Xie, the Times and others have noted, like all artificial bubbles, it will eventually lead to an unpleasant pop.[11]
Over the past year, both Yasheng Huang and Mark DeWeaver have noted that these soon-to-be-seen ill aftereffects are directly attributed to an economy that is still heavily managed by government planners.[12] [13]
While huge swaths of state-owned enterprises have been privatized, many more are owned or operated by government officials. Still worse, many companies, while nominally private, operate in markets that are currently being politically right-sized. For instance, over the next decade Chinese policy makers aim to shrink domestic automobile manufactures by forced consolidation.[14]
Furnaces Aflame
As an economy develops and becomes more productive, DeWeaver notes that investment in fixed-capital formation typically decreases as a percentage of GDP. In China the opposite has occurred — increasing from 33% to 42% between 1981 and 2007 — creating what many commentators label as "overcapacity."
Regardless of the debate over identifying what the "proper" level should be, China makes a lot of steel. China has roughly 700 steel companies that produce at least 100 million more tons than the sum total of the United States. In fact, while steel producers in other countries like Germany and Japan have cut back 20–30% due to global stagnation, Chinese producers have turned the dial to the proverbial "eleven," increasing output by 1.2% in the first six months, and breaking the previous record, which was also held by China. Full smelting ahead![15]
This is not due to more efficient technology, creative entrepreneurship or economies of scale, in fact, it is just the opposite.
During the 1950s, as part of Mao's Great Leap Forward to out produce Western capitalists, many provinces and counties subsidized and encouraged the creation of iron smelters. According to Maharshi Patel, between 1958 and 1961, Mao oversaw a policy which encouraged "every commune and neighborhood" to build furnaces. Whereas Roman politicians promised a chicken in every pot, and modern-day American politicians promise suburban houses with white picket fences, political careers in China became intertwined with the construction of smelters and ancillary industries. As Patel noted,
Like the auto industry in North America, steel in China came to be considered an essential industry, too big to fail. It directly employs 3.58 million people. Millions more live off it in support roles. As of 2007, it contributed 4 per cent of China's gross domestic product and 9 per cent of industrial profits.
And realizing that something has to be done, as part of the never-ending crusade to right-size, Chinese planners finally announced in May that they would begin to try to shut down certain refiners and "actively guide" others into merging.
Back to the Future
While Yasheng Huang and others argue that the decentralizing reforms of mainland China in the '80s were reversed during the '90s, in the past decade Chinese policy makers have emulated many of the same export-centric programs of other "tiger" economies like Singapore, South Korea and even Japan.[16] Their neo-mercantilist, export-centered preferential policies involved three primary forces: an artificial devaluation of domestic currencies, large inflows of FDI, and most importantly, Western consumers with insatiable appetites.
Unfortunately for most of the East Asian economies, this model was unsustainable and, to paraphrase Mohd El-Erian of PIMCO, this current low is the new normalcy.[17]
Roughly 40% of China's GDP is accounted for by exports, which was not a problem during the boom years. However, in May alone, exports dropped more than 25% from the year before. This drop was not a statistical outlier, as each preceding month for nearly a year had had double-digit drops as well, including a 21% fall last month. And foreign direct investment has also dropped like a rock, nearly 18% alone in the first six months this year compared to last.[18]
Acknowledging that consumption levels in Western countries will not rebound to previously seen highs, China's policy makers have begun executing contingency plans aimed at boosting domestic demand.[19] However, these are unlikely to replace spendthrift Joneses anytime soon.
The War Chest
Surely there is a bright light on the horizon? After all, the government does sit on large holdings of foreign assets.
Nope.
Gordon Chang recently noted that unfortunately for policy makers in Beijing, the large foreign reserves that China holds cannot be used to any large degree to fend off the ill effects of the current financial order. Chinese agencies such as SAFE are at the complete mercy of the United States, because there is no exit plan with Treasuries.
Despite the recent flurry of eye-popping headlines, if the Chinese unloaded their foreign reserves, they would destroy their own currency, which is pegged to the US dollar. In the event they continue gobbling up commodities, they will simply "inflate" those asset prices too.[20] Furthermore, because their currency remains pegged to the dollar, any yuan appreciation will squeeze exporters that are already reeling from the large drop from overseas.
Thus in order for them to sell any substantial portion of the Treasuries, the Chinese will have to wait until real growth begins to take place in the United States.
Uncertainty and Unpredictability
Over the past 30 years, China has changed dramatically. Despite all of the interventions and misallocations, real, inflation-adjusted growth could still take place. [21] Areas like Yunnan and Guangxi will presumably benefit due to free-trade agreements with ASEAN participants. Previously isolated rural communities will benefit from modern infrastructure links as they can finally develop and participate in China's industrial revolution.
Low personal debt and high personal savings can also be a positive factor even if depositors receive very little in return.[22] Furthermore, if the policy makers allows land-owners to actually sell land or use it as collateral, there will be some huge dividends there as well.[23]
However it is the unseen details, the unseen consequences, the unseen opportunity costs that currently dictate and bedevil the economic growth of the world's most populous country. And despite the three decades of reforms, the effects of socialist planning, even the "lite" variety, will still generate business cycles — with prolonged corrections and purges.
How Now Shall We Behave?
[Faith & Freedom, March 1951]
With the advent of war, what means are available to those who wish to resist the progressive socialization of American society?
After every war, until the last one, the people took their liberty back. It was understood that they would; it was understood, in each case, that the government would surrender its extraordinary wartime powers and return to the form that was before. But during World War II, as we know, the planners at Washington were writing the enlarged design for a controlled world — enlarged, that is, from the New Deal design. They thought they had learned all they needed to know about controls, and they said, "You see that the economy has to be planned for war — prices, production, distribution and all. What is good for war is good also for peace. Unemployment can be planned away. Prosperity can be planned. The full life forever, with security and social justice — that can be planned."
And the people, remembering the unplanned depression, answered saying, "Why not?"
No Retreat
For the first time in our history, there was no intention on the part of government to return to the form that had been before, and from what followed we know that if a government is bent upon extending its power over the lives of the people, war is a wonderful occasion. During the war it can invoke the laws of necessity and appeal to the spirit of unity; and even while pretending to be tolerant of criticism, it can insist that criticism shall be constructive, not destructive, as if there could be any point in criticism that did not aim to destroy something. Then after the war it says, as it said the last time, that the problems of transition from war to peace are more than the people can solve for themselves; they need the aid and guidance of government much more than they need their liberty back.
These are not cynical reflections. They rest upon experience. One would have to be stupid, indeed, not to realize that with the political climate what it is, and has been for twenty years, you could almost as soon imagine putting the chicken back into the egg as to repack in a tight Constitutional box the powers of government that are released by total war.
A Question That May Fairly Tear You Apart
So it is war again, and the question comes, how now shall we behave?
We, of course, means those who have been fighting the rise of the Welfare State and, in its name, the progressive socialization of American society. Shall they go on with it? In war as in peace, shall they continue to say what they think of a government that tells the people socialism and liberty may dwell together amicably in the same house?
It is a question that may fairly tear you apart. Waiving the point as to whether they could if they would, some who are asking the question are not sure they would if they could. They know that the conditions of total war are so extreme and the perils so great that unity may be imperative. They know how easily going on with the fight could be construed as disaffection and how it might in fact implement disunity. Only in a war that calls for less than the utmost exertions of the whole people may disaffection be tolerated. In total war there arises almost at once a demand that disaffection shall be suppressed; and if it is too large to be suppressed, as for example in the case of powerful pressure groups like organized labor, it may have to be bribed, and public opinion will condone the bribing of it. This, of course, means nothing to those whose convictions might lead them to defy hostile public opinion and who could not at all be bribed. Nevertheless, under stress of common danger, herd compulsions are very strong. Divisive ideas may be forgotten. If the price of survival is solidarity, the feeling for solidarity will be almost irresistible.
To begin with, therefore, the degree of peril, according to each individual's estimate of it, must affect his decision about how to behave. He may say, "Of what avail are my private political principles if my country falls? Am I justified to insist upon them or to fight for them if thereby I tend to create disunity, which could be fatal?"
On the other hand lies the certainty that if the fight is broken off, the government, in default of opposition, will occupy new ground from which afterward perhaps it cannot be dislodged. So you have the terms of the dilemma.
An Ideological Truce
The decision would be easy to make if the government would say, "In all the fields of social controversy let there be truce for the duration of the war." It will not say that. On the contrary, it is already evident that totalitarian neo-liberalism is riding the war. Having promised that the government would practice extreme economy in nondefense spending, a staggering defense budget was brought on with, at the same time, further demands for the Welfare State; such as, increased unemployment compensation at a time when there are more jobs than men, greater subsidies to agriculture at a time when high farm prices are immunized by law from the effects of inflation, compulsory health insurance, federal aid to education, larger grants-in-aid to the states, and the distraction of a Fair Employment Practices Commission. A budget, said a responsible Senator, that was "the very height of fiscal irresponsibility."
The government, you see, cannot ever have thought to ask itself the question we discuss here; that is, whether for the duration of the war there should be a truce between, on the one hand, those who are resolved to extend much further the political regulation of our lives, and those, on the other hand, who very bitterly resist it.
The answer we seek must be found by each individual in himself alone. That also is freedom. A man must be free to surrender his freedom if he will, or to give it in hostage for any other value he may set above it — the survival of his country, for example. But for any whose minds may be in suspense it would certainly seem that the government's attitude should resolve the doubt.
Well then if you say, "Yes, the fight must go on," there is the next question: How?
Selective Targets
It is probably true that the fight cannot be continued in war as it was conducted in peace, if for no other reason than that the minds you want to reach are not the same. They will be inflamed by passion and slanted by propaganda, and above all they will be greatly distracted by many new cries of "Attention, people! Attention!"
The mind's capacity to give attention is very definitely limited, and as the demands upon it multiply in wartime it is bound in self-defense to become more selective and a little deaf. In this competition the normal disadvantage of the evangel for freedom is naturally worsened, since by its very nature it requires people to think attentively. Extremely few people like to do that. On first reflection this seems a discouraging fact, and yet it might turn out to be a gift if only it would cure the freedom-spokesmen of their principal weakness, which we may call the shotgun method. They sit in their towers writing many things in different ways, each on his own impulse, competing with one another for the people's attention — and they have no line. By contrast, look at the totalitarian neoliberals who are moving the Welfare State. They say the same things over and over, all as with one voice, and the cumulative effect of their reiterations is tremendous. They have a line. They got the idea from the Communists.
Is there not a lesson there?
To continue the fight successfully in wartime, it must be focused on relatively few points, such, for example, as to clarify the United Nations Covenant on Human Rights or the Genocide Convention, with intent to show the appalling danger of government by international treaty above the Constitution; or the fantastic nature of the federal budget; or the implications of any act of usurpation by the President, leading to government by executive discretion — and to do it in every case on level of ordinary understanding, in every man's language, even as the Daily Worker would do it.
An Ominous Sound
The scattered current literature of economic education, of free enterprise, of freedom's heritage, of Constitutional government, and so on, is in the aggregate enormous; but it is the work of many warriors discharging buckshot at many targets. If it could be organized and trained on a few selected targets — and targets in the news — its effect could be cannon-like. This would require collaboration, a liaison, a clearing intelligence somewhere, a board of strategy perhaps — but what of that? There now is a science of propaganda. The other side is using it. When will the conservatives learn it?
There will be something still for the individual to do. He cannot refuse to pay taxes, no matter how absurd the budget may be. He cannot attack the credit of the government — not in the wartime. He cannot conduct the war, nor can he refuse to risk his life for it if that is required of him. And though he may take to the soap box and lift his voice in the street, that will be only worse frustration.
But there are a few great voices left, and others not so great that are still telling the truth, and these the individual may amplify prodigiously. In his speech entitled, "Think It Over," and again in his startling speech calling for our own defense first, Mr. Hoover got several thousand letters and telegrams. Suppose he had got ten million, so that it had been in the news that the delivery of them blocked traffic in the neighborhood of Park Avenue and Forty-ninth Street. After a speech on the catastrophe to which the government's gaiety with billions is leading the country, Senator Byrd gets a few hundred letters, whereas if one-half of those who believe with him responded, the Senate Office Building would be swamped with them. Notable speeches by Senators and Representatives fighting against socialism are ill-reported in the news — often, in fact, omitted — yet it would be little enough for one who wished to do his part to find them in the Congressional Record and react in a manner to help boost their muzzle velocity. The running together of many voices, even yours and mine, makes a very ominous sound.
The Auto Industry’s Comeback
When new car sales hit 15 million in 2012, savvy companies will make a bundle.
FINBARR O’NEILL
All the righteous indignation, schadenfreude and wishful thinking about the automotive industry have obscured what is really happening. True, sales are in dire straits, but they’ve actually been in trouble for a long time. The claim that we had a 17 million unit market before the recession was an illusion: Manufacturers resorted to dumping cars with rental fleet companies to absorb underutilized capacity.
The true indicator of health in the automotive market is what is happening at retail. By that measure, the industry has been hurting for nearly a decade. Retail sales in the U.S. fell to 12.8 million units in 2007 from 14.8 million units in 2000. In a seven-year period before this recession we lost the sales equivalent of a large car company.
But the prospect of oblivion has a curious way of focusing the mind. The right steps are now being taken. For example, auto makers are paring down to become profitable in a 10 million unit market. So if the projected 15 million unit in 2012 becomes a reality, then the opportunity to return to profitability is there.
How will we know who is doing the right things? Belief in shibboleths such as the inevitable dominance of the Japanese manufacturers may be tempting, but it is not based on facts on the ground. Toyota is losing money and has encountered many of the same issues as its U.S. rivals: quality snafus, cost overruns and sales declines.
The future of any car company is built on the relative success of its new cars. A company only gets to launch a new vehicle once. Between now and 2014 there will be approximately 250 launches of either all-new or significantly redesigned new cars in the U.S.
What constitutes a successful launch? We need to look at five things.
First, we must focus on the true indicators of how well a launch is going. Sales reports are not enough. What are the cars actually selling for at retail? Do the vehicles require incentives? Are dealers earning a profit? How are the residual values holding?
Second, the company must deliver a high-quality product if sales are to be sustained. Getting things right from the start has become the price of admission. Even the most subtle mistakes—like user-unfriendly technology—can kill off an otherwise promising product.
Third, the vehicle must have appeal. Owner delight with the design, content, layout and performance can be objectively measured. Attributes such as drivability, instrument panel layout can make the buyer an advocate and give the launch momentum.
Fourth, the products must have durability and reliability. It takes about three years to get a good reading on how the consumer feels about these two qualities. But we do know there is a direct relationship between a brand’s reputation for reliability and durability and its performance. So part of the assessment should include a look at the reputation of the brand. Where the reputation is strong, the launch gets a boost.
Fifth, we should remember that while manufacturers launch cars, dealers sell them. The dealer’s willingness to put his best sales people on the new product, advertise vigorously, finance, carry and merchandise (a fancy word for trick out) the requisite inventory is all a reflection of the dealer’s confidence in the franchise. Brands that enjoy a high level of dealer confidence and exclusive dealership facilities have a more effective channel for launching a new vehicle.
Can the industry bounce back? J.D. Power believes it can and will. The demographics are favorable. American motorists are scrapping 10 million to 12 million vehicles each year. There are nearly six million buyers who have been kept out of the market because they owe more on their vehicles than they’re worth. There are millions of consumers who bought the “near new” cars that the daily rental fleets quickly turned over at auction. Now, daily rental companies are holding their inventory much longer (30,000 miles plus), so the “near new” customer will be back in the new car market.
If we are right that the market will be at 15 million units by 2012, the companies that have sized their expense structure anticipating a 10 million unit market should do very well. These companies have the potential for a new golden age. Those who don’t will likely wind up on the automotive rust heap.
Mr. O’Neill is president of J.D. Power and Associates.
The Blue Dogs’ Final Dilemma
Do they work for us, or do we work for them?
With the health-care bill faltering in Congress, the ritual weeping has begun over the death, once again, of “bipartisanship.”
The belief that the answer to any problem lies with “the center” may be the greatest superstition in the ever-magical world of American politics.
Mostly it is journalists and pundits who propagate the notion that crazies on the left and right have neutered the problem-solving center, the moderates, the pragmatists.
In fact, the bipartisan center has been dying every year since Congress passed the Medicare and Medicaid bill of 1965. The people who back then were staffers to the politicians and agencies of Lyndon Johnson’s Great Society graduated into the offices they now hold in Congress, the Beltway, many state capitals and academia, taking a second generation into their belief system. That included Barack Obama.
With President Obama’s health-care bill, the forces that across 40 years grew into unbridgeable opposition to each other could not be more plain to see. American politics has arrived at a crossroads.
This struggle over health-care legislation isn’t just another battle between the Democratic and Republican parties. It’s about which force is going to take the United States forward for the next generation: the public sector or the private sector. If by now you haven’t figured out which sector you are in, then you’re a Blue Dog Democrat.
The Blue Dogs and other moderates have been sliding to this final dilemma for years. The issue is not whether one is for or against “government.” The issue is: Do they work for us, or do we work for them?
Mr. Obama has defined the stakes succinctly. The centerpiece of his health-care proposal is the Public Option, a program of federally supplied and administered health insurance. As he has repeatedly stated, anyone is free to remain inside the private health-insurance system. He said yesterday, “Nobody is talking about some government takeover of health care” and to disagree is “scaring everybody.” He is underselling the power of his own idea. That public option is potent competition, a winner-sweep-the-table proposition between the public sector and the private sector.
The clarifying moment in the health-care debate arrived when the Congressional Budget Office said that the legislation lacked adequate financing. After this, the bill’s backers began a search for tax revenue that borders on parody—taxes on soda pop, surtaxes unto eternity on “millionaires,” as if this might actually command the tides to recede of another permanent Medicare/Medicaid-sized entitlement and its flotsam of advisers, measurers and lobbyists.
Washington and the states are now fighting each other to drain revenue out of the same private sector. Back in March, New York’s legislature, amid a deep recession, enacted its own income tax surcharge. These governments are becoming like people from dying planets in “Star Trek,” foraging the galaxy for new sources of whatever life force keeps them alive. A surtax is the ultimate act of public-sector panic.
I don’t think the White House or the Democratic leadership understands the level of despondency in the country now among people who add new wealth—business owners, entrepreneurs or those who invest in new ideas that don’t depend wholly on subsidized choices made by the public sector.
This is all many people in the most dynamic corners of the private sector talk about now. Their beef is not with recession but the feeling that this presidency and Congress have no interest in them. If we get another jobless recovery, we’ll need the job-creating impulses of these people. The do-good but not-for-profit mentality of the current government looks either hostile to or oblivious of these private-sector fast runners.
The Obama approval rating is falling toward 50% and below that for his handling of the economy and even lower on health care. He will be told, probably this weekend by pundits from planet public sector, that this is due to “lies” from the right. But I think this president needs to find a concrete way fast to show he has a real sense of the private sector’s importance. That promise of “green jobs” isn’t it. His line about “sacrifice” is a euphemism for high tax levels to the horizon. Where’s the upside for new, private entrants?
The problem is that in Washington and many states the public sector’s revenue needs have arrived at a point where space for the private economy is more or less beside the point. That is the clear message of the California and New York budget crises and the difficulties of financing the Obama health-care plan.
For centrists in both parties the moment has come to decide which side of the public-private divide they want the U.S. and its future workers to be on. Trying to live in both has brought us, inevitably, to that decision.
Can the Fed Identify Bubbles Before They Happen?
The New York Fed’s president says it can. If only it were that easy.
DONALD L. LUSKIN
President Barack Obama proposed last month that the Fed act as an overall “systemic risk” regulator, with consolidated supervisory responsibility over “large, interconnected firms whose failure could threaten the stability of the system.” Now William C. Dudley, the ex-Goldman Sachs economist just appointed president of the New York Federal Reserve, has upped the ante. He thinks the Fed should be responsible for identifying and preventing asset-price bubbles. Considering that the Fed’s track record reveals more skill at causing bubbles than preventing them, this is a very dangerous idea.
In a speech in late June in Switzerland, Mr. Dudley said, “I think that this crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high. That suggests we should explore how to respond earlier.” Mr. Dudley claims that “Asset bubbles may not be that hard to identify—especially large ones” and suggests “additional policy instruments”—that is, new regulatory powers for the Fed to “more directly influence risk premia.” Because risk premia are a key element in determining asset prices, Mr. Dudley is effectively asking for the power to control asset prices.
Fed Chairman Ben Bernanke and former Chairman Alan Greenspan both disagree. Mr. Greenspan once said that he doubted “that bubbles, even if identified early, could be pre-empted short of the central bank inducing a substantial contraction in economic activity—the very outcome we would be seeking to avoid.” According to Mr. Bernanke, even if the Fed “could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” For these experienced central bankers, policy is a matter of risk-management under uncertainty; they don’t imagine that they are wise enough to detect every problem and solve it.
Mr. Dudley seems surer of himself. He notes confidently, by way of example, that “the housing bubble in the United States had been identified by many by 2005.” Well, that’s true. But it is only true in retrospect. It offers no justification for a leap toward government control of asset prices.
If the housing bubble hadn’t burst, the “many” who identified it in 2005 would have been wrong. The reality is that at all times in markets there are multiple opinions. There can be no assurance that those who hold the correct ones about what is or is not a bubble will end up at the Fed, where they can make prescient policy decisions.
Consider Mr. Dudley himself. In a 2006 speech at a conference of the National Bureau of Economic Research, when he was still with Goldman Sachs, Mr. Dudley listed “five bubbles that one could reasonably have identified in real time.” He said that he’d “tried to speculate against three of the five bubbles” but confessed his speculations met only “with limited success.”
Second, Mr. Dudley’s claim that the housing bubble had been identified in 2005 is a red herring, because by then the bubble was already well advanced (the peak in home prices came in May 2006). To do any good, the Fed would have to identify bubbles before they even happen.
But by 2005, Alan Greenspan had already begun gradually raising interest rates a year earlier, referring to “signs of froth in some local markets.” Mr. Dudley is asking for new regulatory powers based on faulting the Fed for not having or acting on insights that it, in fact, did have and did act on. He has not adduced an example of a bubble that could have been identified and prevented before it happened.
More broadly, there’s little reason to expect the Fed can deal effectively even with a bubble identified well before the fact, or that it might not do more harm than good trying. While John Maynard Keynes and Milton Friedman didn’t agree on much, they did agree that the Great Depression was caused less by the stock market crash of 1929 than by the Fed’s tight-money policies aimed at curbing stock speculation (which those policies failed to do).
It seems unproductive, as we try to extract lessons from the present recession, to go back to the regulatory policies that caused the Great Depression—and to put them on steroids with “additional policy instruments.”
In the end all these concerns, however urgent, are merely pragmatic. The overarching philosophical concern is whether we ought to empower the Federal Reserve to determine asset prices. If so, then on what basis?
In the case of oil, many argue that its price is too high because of speculation. Yet many also say it’s too low, because markets aren’t pricing the negative externalities of carbon emissions.
Which bubble should the Fed prevent—with arbitrary leverage restrictions, position limits, transaction taxes, and who knows what else—the speculation bubble or the carbon bubble?
And if we don’t want the Fed controlling asset prices, then how do we tell the central bank where to stop once we’ve given it a new mandate (on top of the many it already has) to prevent asset bubbles? If the Fed is to determine the price of the overall housing market, or stock market, or oil market, how is that different in principle from having it determine the price of every individual item at Wal-Mart, or the salary of every individual who works there?
This brings us back to politics. The issues involved with bubbles are of more than merely philosophical concern.
Mr. Bernanke’s term as Fed chairman expires in January. Based on his track record, he’s likely a shoo-in for reappointment. But in politics, the winner is often the candidate who makes the biggest promises. So perhaps we’ll be hearing more about preventing bubbles from Mr. Dudley.
Mr. Luskin is chief investment officer at Trend Macrolytics LLC.
Revenge of the ‘Shoe Bomber’
By DEBRA BURLINGAME
Last May at the National Archives, President Barack Obama warned that “more mistakes would occur” if Congress continued to politicize terrorist detention policy and the closure of Guantanamo Bay. “[I]f we refuse to deal with those issues today,” he predicted, “then I guarantee you, they will be an albatross around our efforts to combat terrorism in the future.”
On June 17, at the Administrative Maximum (ADX) penitentiary in Florence, Colo., one of those albatrosses, inmate number 24079-038, began his day with a whole new range of possibilities. Eight days earlier, the U.S. Attorney’s office in Denver filed notice in federal court that the Special Administrative Measures (SAMs) which applied to that prisoner—Richard C. Reid, a.k.a. the “Shoe Bomber”—were being allowed to expire. SAMs are security directives, renewable yearly, issued by the attorney general when “there is a substantial risk that a prisoner’s communications, correspondence or contacts with persons could result in death or serious bodily injury” to others.
Reid was arrested in 2001 for attempting to blow up American Airlines Flight 63 from Paris to Miami with 197 passengers and crew on board. Why had Attorney General Eric Holder decided not to renew his security measures, kept in place since 2002?
According to court documents filed in a 2007 civil lawsuit against the government, Reid claimed that SAMs violated his First Amendment right of free speech and free exercise of religion. In a hand-written complaint, he asserted that he was being illegally prevented from performing daily “group prayers in a manner prescribed by my religion.” Yet the list of Reid’s potential fellow congregants at ADX Florence reads like a Who’s Who of al Qaeda’s most dangerous members: Ramzi Yousef and his three co-conspirators in the 1993 World Trade Center bombing; 9/11 conspirator Zacarias Moussaoui; “Millennium bomber” Ahmed Ressam; “Dirty bomber” Jose Padilla; Wadih el-Hage, Osama Bin Laden’s personal secretary, convicted in the 1998 U.S. Embassy bombing that killed 247 people.
In December 2008, the Department of Justice filed a motion to dismiss Reid’s lawsuit. It cited the example of ADX inmate Ahmed Ajaj as an illustration of “the dangers inherent in permitting a group of inmates, of like mind in their opposition to the United States, to congregate for a prayer service conducted in a language not understood by most correctional officers.”
While imprisoned for passport fraud in 1992, Ajaj assisted in the plans to destroy the World Trade Center on Feb. 26, 1993, making phone calls to Ramzi Yousef and speaking in code to elude law enforcement monitoring. Ajaj tried to get his “training kit” to Yousef, which included videotapes and notes he had taken on bomb-making while attending a terrorist camp on the Pakistan-Afghanistan border.
Reid’s own SAMs on correspondence had been tightened in 2006 after the shocking discovery that three of the 1993 World Trade Center bombers at ADX, not subject to security directives, had sent 90 letters to overseas terrorist networks, including those associated with the Madrid train bombing. The letters, exhorting jihad and praising Osama bin Laden as “my hero of this generation,” were printed in Arabic newspapers and brandished like trophies to recruit new members.
Richard Reid after his arrest on Dec. 21, 2001.
Stocks' Upbeat Tone Returns
Better-than-expected employment data and an analyst upgrade of General Electric jolted the recently languid stock market back to life Thursday morning.
The Dow Jones Industrial Average was recently up 157 points at about 9228, topping the 9200 mark for the first time since November. It was led by a 7.3% surge in GE after Goldman Sachs analysts upgraded the conglomerate's shares to a "buy" rating from "neutral," saying there appears to be less likelihood that GE will be forced to sever its GE Capital business.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
In economic news, the Labor Department said initial claims for jobless benefits climbed 25,000 to 584,000, less than the increase of 34,000 claims expected by economists. The tally of continuing claims drawn by workers for more than a week fell 54,000 in the week ended July 18 to 6,197,000, the lowest since April 11.
Thursday's developments cut to the heart of investors' key fears about the U.S. economy, including the possibility that credit will remain scarce and consumption weak because of a sagging job market in months to come.
Investors were also perhaps primed for some good news following a two-day decline in which the Dow shed 38 points. That soft patch was an exception to what has otherwise been a stellar month, with the blue-chip index up more than 7% due to investors' rising appetite to take on risk.
"We weren't sure that we could go back to seeing some of the gains that were present before," said Don Bright, partner at the proprietary firm Bright Trading in Chicago. "It was a little surprising when we got in this morning."
Mr. Bright said that the market's gains also seem to be feeding on themselves, with automated buy orders being triggered as indexes approach major round-number benchmarks.
The technology-focused Nasdaq Composite Index was recently up 1.9%, trading above 2000 for the first time since October. The S&P 500 was recently up 2%, above 990 for the first time since November. All the broad measure's sectors were up, led by gains of more than 3% each in financials and basic materials. Industrials were up nearly 3% as a group.
Commodity prices, which suffered during Wednesday's session, also roared back as investors bet on an improving economy that might bolster demand. Crude futures were recently up $2.36 at $65.71 a barrel in New York. The broad Dow Jones-UBS Commodity Index rose nearly 4%.
Investors also continued to sort through a flood of earnings reports. Dow Chemical shares rose 9.4% despite swinging to a second-quarter loss of $435 million. Exxon Mobil shares declined 1.2% after it reported a 66% slide in second-quarter profits. Motorola shares jumped almost 9% after it reported a $26 million profit when analysts were expecting a loss.
The dollar was stronger against the yen and weaker against the euro. The U.S. Dollar Index was recently down 0.4%.
Treasury prices were lower. The Treasury Department is expected to auction $28 billion in seven-year notes at 1 p.m. The 10-year note was recently off 13/32 to yield 3.715%.
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