Thursday, October 1, 2009
Some Signs of the Times
Victor Davis Hanson
How to distill the news? After watching it far too much the past nine months, I offer five random conclusions from what I think is going on in the age of Obama.
1. Disconnect. There is little semblance between how one lives and how one envisions others should live. We saw that with the cabinet nominees. Tom Daschle, cheating on the taxes on his free limousine service, was the obvious caricature of someone who likes the high life, has found a way through tribuneship to get it, and makes so much money that he easily has enough money to pay for the taxes he wants to raise on others—but would prefer, given his status, not to pay them at all. A Geithner, Dodd, or John Edwards typify a rather large influential class of such moralists who suffer on our behalf. The more influential the environmentalist, the more likely his house does not meet his own green requisites he wishes to impose on others, so that he might better think on our behalf. The more a Charles Rangel talks of affordable housing, the poor, and social justice, the more he suddenly finds hidden bank accounts, unreported income, and subsidized apartments in his name, so that he might better agitate on our behalf. Hypocrisy is a human, rather than a partisan sin (note the philandering evangelical or the capitalist who wants government money to rig the game), but the man on the barricades shouting about social equality is especially prone to it—since it pays so uniquely well both materially and psychologically.
2. Abroad. Foreign policy now starts with the assumption the world is not naturally chaotic, but tranquil—if not for the obtrusive presence of a largely ignorant and selfish United States. The past is selectively invoked—Native Americans, slavery, sexism, racism, imperialism—and always without consideration of the far greater sins of other comparable societies or the astounding achievements of American society that allow our present spokesmen their exalted status and influence. By reaching out to troublemakers, and airing our pathologies, we are supposed to calm the misunderstood and demonized, as we insidiously try to address their complaints. A Chavez or Ahmadinejad should be less hostile once they learn that we too are moving to socialized health care, income redistribution, high taxes, blanket entitlements and becoming more part of the statist solution rather than of the cowboy capitalist problem. To understand such a policy, shorn of its pretensions, as old-style appeasement is considered a smear. Or to think that a Syria, Venezuela, or Cuba hates individual freedom and exists for a professional cadre of elite autocrats is considered naïve and simplistic. The greatest defenders in America of a Castro or Chavez are precisely those whose lifestyles and income would be impossible under such regimes.
3. Top and bottom. Obama is the embodiment of the new Democratic Party that appeals to the very poor and the upscale, the one reliant on federal largess, the other making enough money not to care all that much about the taxes necessary to fund it. On almost every issue—environmentalism, social issues, larger government—there is a new alliance that simply downplays the ordeal of the larger middle class of all races and ethnicities, especially those who are self-employed and wedded to more traditional values. The hardware store owner, dentist, real estate salesperson, and farmer, are seen as the “boss” with capital to dispense to others, rather than the critical but harried entrepreneurs who get up each morning with no certainty of an income or benefits. The chief difference between the support for the new Obamism among those in the gated community (tastefully gated) and the barrio was the level of vehemence and near anger in which it was expressed—far greater the more upscale the neighborhood.
4. Getting Along. On matters racial, there remains just the old, fossilized thinking. The institutionalized slur of racism will offset needed discussion of the statistical evidence of higher rates of African-American illegitimacy, poverty, drug use, fatherless families, and incarceration; a quite large African-American elite, mostly in government service or federal employment, will be the self-appointed spokesperson for the problems of the black community, and negotiate with white upscale liberals over the conditions of federal redress. Obama’s intimate relationship with the racist Rev. Wright in his mansion, and the pass he was given by his supporters for such a creepy relationship, is emblematic of this nexus. In such a bargain, the affluent are granted exemption from white guilt and allowed to live their rather segregated lives of tony neighborhoods, college-prep schools for their kids, and apartheid private social lives—all with the sense of revolutionary progressive fervor, by reason of loud protestations of symbolic racial solidarity and a willingness to deem racist any who catch on. We can only hope that the African-American community can develop an entrepreneurial class on the model of many first-generation immigrant communities, since such activity frees the individual from government reliance and instills a sense of optimism in self-reliance.
5. The Mother Polis. It matters little that the public senses the emergency room, the DMV, the County Recorder’s office, and the district IRS center are all government-run bureaucracies that they seek to avoid, not due to illiberalism, and anti-government hysteria, but because in such places one can very easily lose an entire day, receive no instruction or help, and feel insulted in the process for daring to enter the front door. Most feel that they are not a model for anything, but may well end up being such for government-run health care or cap-and-trade auditors. The defense of larger government organizations in our lives is never that they are efficient, well run, or monitored, but simply that the greed and selfishness of Wall Street and the private sector are worse than the incompetence, waste, and petty corruption of government. In this “they do it too” argument, why worry about the DMV when there is Lehman Brothers? Rather than defend an ideology of statism, the retort is increasingly “Bush was worse.” End of discussion.
Ironies Corner.
Hillary—Obama felt putting Hillary at State would ice potential political challenges, punitively rein in Bill’s extravagant overseas income, and tie her to his policies even as she was roped down by regional czars. But she may well like hiding from the messes of health-care (remember Hillarycare?), apology tour, cap and trade, and other fiascos—until reemerging, after her chrysalis stage, unscathed if Obama hits 40% approval.
Europe—cf. Sarkozy’s exasperation—is getting what it dreamed of, and now finds Obama out-Europeanizing Europe. That cannot be, since they counted on our power and leadership to allow them to play their multilateral good cop to our unilateral bad one.
Taxes—the deficit is so large, that all sorts of taxes are coming. FICA tax caps will go, rates will climb on income tax, and still it will not be enough. Some sort of sales tax or value added tax, on top of rising state income taxes, is coming—at precisely the time the stimulus waste reminds us that thousands of taxpayers’ first five months of work this year were simply given away or squandered as part of a $2 trillion deficit. Many voted for Obama thinking they would either not be taxed but receive more largess, or that they would not be taxed too much; I think both groups will soon discover the truth.
The Manchurian President
Stephen Green
It’s a little early in his administration to draw any broad conclusions, but the evidence is clear: As a younger man, Barack Obama was kidnapped and brainwashed by evil Republican operatives, then sent deep undercover to destroy the Democratic Party and perhaps even the entire liberal worldview.
How else do you explain:
• Obama leaving his signature domestic reform — health care — in the hands of people least likely to come up with a plan palatable to a majority of Americans.
• Within six months of assuming office, the Democrats’ left and center wings are at each other’s throats.
• A cap and trade bill so horrendously corrupt and mismanaged that its passage in the House marked the first time in years that Republicans out-polled Democrats on the generic congressional ballot.
• A candidate who called Afghanistan “the necessary war,” is now on his second major review, just since March, of how to fight it.
• Never meeting once face-to-face with the general in charge of commanding that “necessary war.”
• Telling the world Gitmo was evil, then leaving it open for business.
• Sitting on intelligence, until just this Friday, showing that Iran’s WMD program is more advanced than feared.
• Selling out Eastern Europe to the Russians. We haven’t had a Democrat do that since Roosevelt.
• A foreign policy initiative for Iran which relies on the idea of both China and Russia not selling stuff to somebody with cash to spend?
• Bailing out banks with hundreds of billions of dollars, yet still without removing a single toxic asset.
• Signing a non-stimulating stimulus so massive that Americans are afraid of deficits for the first time since Ross Perot went around screaming about his crazy aunt.
• A Democrat under threat of scaring off the AARP vote? I mean, what the hell?
• Jebus, the Republicans are starting to look good. (Oops — I couldn’t find a link for this one.)
• Most anything involving Joe Biden.
The only detail I can’t figure out is, why didn’t Karl Rove send me the memo on this back in ‘07?
Money Management: The Holy Grail of Trading
Pylesville, Maryland
The holy grail of trading is money management.
Good money management will make you money, even in tough times. And it will save you tens of thousands, perhaps even hundreds of thousands, of dollars, if you reach the rank of successful trader.
And it all boils down to this. You must take trades that have at least a 1-to-2 risk-to reward ratio. Of course, 1-to-3 (or higher) is even better.
In options trading, that is easy to ascertain. If I stand to make 100% but limit myself to a 50% loss, then even if I am only 50/50 on my trade selection, I’m going to come out ahead. Think of it this way: If my risk capital is $500 and I double that once, I have $1,000. If I risk $500 on my next trade and it is a loser, I still have $750 left at the end of that trade.
Keep risking only $500 until your account is up 300%. Once you have reached $2,000, you can double your risk capital to $1,000. If you ever fall below $2,000, just go back to risking $500 until you reach $2,000 again…
By only seeking to grow incrementally, always managing your risk, you can even go on a bad streak of 66% losing trades and still break even. Nobody wants to do that. But you better plan on it happening, because it will.
Bill Jenkins
Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people’s crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the U.S. dollar. Now you have a chance to benefit from his “lifetime” of hard-earned experience. As Agora Financial’s resident currency specialist, Bill’s advice has led readers to gains of 33% in a week… 70% in four days… and 100% practically overnight. And we’ve broadened the service to include the euro, yen and other currencies in these volatile trading markets. When Bill is not helping people enjoy big wins with simple currency plays, he’s a church minister and owns his own contracting business.
Spending Soars, Savings Suffer
Baltimore, Maryland
Personal spending soared 1.3% in August, the biggest monthly leap since 2001, the Commerce Department announced today. Of course, this $129 billion jump in consumption “shows strength in August, indicating some economic improvement,” as CNN writes. A quick look at the chart reveals that the once sober American consumer is starting to fall off the wagon yet again.
As always, the drama’s in the details. “Cash for clunkers” was by far the biggest driver of new spending, almost single-handedly pumping up durable goods orders 5.8%. Interestingly, August’s rise was the biggest since October 2001 — right after Sept. 11, when retailers slashed prices and President Bush urged us to go shopping and “Get down to Disney World.” Heh… looks like only government decree can whip us into such consumption frenzies.
And for our 1.3% leap in spending, American incomes rose just 0.2%. In fact, when adjusted for inflation and taxes, what the government calls “real disposable income” actually fell 0.2%. What’s more, we as the collective “consumer” spent over $129 billion more in August, but chose to save $112 billion less. Savings as a percentage of personal income is now down to 3%, from 4% in July.
This “indicates economic improvement”? Must be reading the wrong release…
Ian Mathias
This is One Funny Looking Bull
London, England
The longer the rally persists, the more dangerous it becomes.
The S&P 500 is up almost 60% since March. The Dow just had its best quarter since ’98.
Yesterday, the Dow slipped 29 points. Is the rally finally rolling over? Or is this a genuine bull market, just taking a pause?
If it is a real bull market, then it’s a funny looking bull – one that’s missing parts!
For example, corporate earnings are missing. P/E ratios are rising far above the corporate earnings that support them. This puts the market 35% overvalued, on a cyclically adjusted P/E basis, says Smithers & Co. And if you look at it in terms of its “q” ratio – a comparison of capitalization to replacement costs – the S&P is even more overvalued. As for emerging markets – “they’re off the charts,” says The Financial Times.
Another missing part is the consumer. This from David Rosenberg:
“Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Before we go any further on the details, let’s recall the following:
- Historically, by the time the S&P 500 rebounds 60% from the trough, the confidence index is sitting at 92.0;
- The month recession ends, the index is, on both an average and median basis, sitting at 72.0;
- During an economic expansion, the consumer confidence averages 102.0; in a recession, it averages 72.4.
“Just to put a 53.0 reading into proper perspective. It’s still recessionary… The only categories [that] actually saw their confidence level rise in September were the ones in the lowest income strata – less than $25,000 (their confidence rose two points). After all, they’re the only ones really benefiting from all the government intervention into the economy and the markets.”
It’s not hard to figure out why consumers lack confidence; this bull is lacking in jobs, too. A worse-than-forecast report came in from ADP Employer Services yesterday. It said US companies cut 254,000 more jobs in September. And Reuters reports that jobless rate rose in August in all US cities.
The bull is also missing production. Another report told us that manufacturing activity in the Chicago area is still in recession. In the United States as a whole, the latest numbers tell us that GDP fell in the 2nd quarter – but by less than forecast. “Less than forecast” might be good news if stocks were at an epic low. Instead, at current levels, it is much like a doctor who tells the family: “Thank God he got medical attention. He’s dead, but not as dead as he would have been without it.”
Another important part this bull market is missing is the retail stock market investor. Hey, this rally has no legs at all!
We have insisted – with no proof, up until now – that the mom and pop investor is no longer counting on the stock market for his retirement. He’s seen what can happen. At the low in March, adjusted for inflation, he was back to where he was 40 years ago. That is, in real terms, he had not made a dime from the stock market (aside from dividends) during his entire adult lifetime.
We guessed that he was not buying stocks.
Now, here’s the evidence: according to TrimTabs, only $2.5 billion has gone into equity mutual funds in the last six months. Bond funds have attracted 13 times as much money as equity funds, says a Morningstar report.
“US retail investors…have watched this rally from the sidelines,” the FT concludes.
Wait a minute. Someone is pushing up stock prices. If not the retail trade, who? We don’t know. Maybe hedge funds. Maybe institutional speculators. The pros have a different outlook. If this rally turns out to be real, and they miss it, their jobs and reputations are in danger. If it turns out to be phony, on the other hand, they risk clients’ money. On balance…they are better off getting in than staying out.
But just as the pros jump like lemmings into equities…they could all scramble out fast. Give them a fright…and this rally is over.
Where might the fright come from? We can think of several possibilities. One is the housing sector. If foreclosures begin to increase…and prices fall…even the pros may put two and two together.
Likewise, a shocking unemployment number could cause them to connect the dots.
Then, look out below…
Another thing that might trigger a sell-off in the stock market: a sudden setback in China…
Today is a big day in China…it marks the 60th anniversary of the communist victory. “The Chinese people have stood up,” said Mao, announcing the victory in 1949.
Then, over the next two decades, whenever the Chinese stood up…Mao shot them down himself. Mao’s long march to power was a huge setback for human political progress – if there is any. The man was a thorough scoundrel and a complete incompetent at everything, except getting power and holding onto it. Every program was a disaster. When he set out to ‘liberate’ the masses, they ended up as slaves. When he set out to feed them, they starved. When he proposed to empower them with his “democratic dictatorship,” they ended up with bullets in the back of the head.
But 60 years later, the commies are still in power. China is still red.
And yet, thanks to the curious way the world turns, China’s economy is now freer and more competitive in many ways than the United States. Go figure.
As economies age, more and more people become ‘rentiers.’ That is, they get some special privilege…some inside angle…some conniving advantage. The latest numbers, for example, tell us that almost half of all households pay no federal taxes. They collect benefits – jobless benefits, food stamps, education, day care, Medicare, Social Security – without contributing to the system that provides them. Add to this number the millions of households that pay taxes but receive a large part of their money from the government itself – employees, contractors, lobbyists, etc. – and you have enough to win any election in the country.
But the welfare chiselers and food stamp cheats are small time crooks. The big crooks go for billions. John Crudele in The New York Post:
“…Sept. 18, 2008 [US Secretary of the Treasury...Henry] Paulson placed his first call of the day at 6:55 a.m., to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It’s unclear whether the two connected because Blankfein called Paulson minutes later.
“And then Blankfein placed another call to Paulson at 7:05 a.m. for what looks like a 10-minute conversation.
“After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman twice; British Chancellor Alistair Darling and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.
“Then Paulson took another call from Goldman’s Blankfein.
“It wasn’t even 9 a.m. yet – 30 minutes before the stock market was to open – and Paulson and Blankfein had already exchanged three phone calls.”
It pays to have friends in high places. That was the day the market learned of Paulson’s bailout proposals. Could Goldman have gotten word before others? Hey, we’re not accusing anyone…
Until tomorrow,
Bill Bonner
Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder
Commentary by Alice Schroeder
Oct. 1 (Bloomberg) -- If you owned stocks and gold and had to sell one, which would it be?
The Standard & Poor’s 500 Index has gained almost 60 percent since its low on March 9. Gold is near a record price. I know a fair number of people who would keep the gold.
I’ve never been a gold bug myself. They get no respect. They are associated with survivalists, conspiracy theorists and nutcases. They are always looking for the hyperinflation that never comes. Gold bugs pay a premium over the metal price for gold and silver coins on the notion that they will need the currency, come the Apocalypse.
On the other hand, the relationship between gold and financial crises goes back centuries. In the aftermath of the credit-bubble bust, we confront a Moby Dick-size pile of leverage and the question of whether this is inflationary or deflationary. So it’s worth considering what the price of gold may be telling us.
Leverage is a broad term that covers the complete history of finance, which all boils down essentially to the same structure: debt secured by assets. You give me a cow, I give you a piece of paper. Later innovations are simply variations of obligations secured by assets.
So a simple explanation of bubbles is that they form whenever someone creates a rationale to increase obligations too far beyond the level justified by the assets, regardless of the form of the asset or obligation.
Dutch Tulips
Consider tulip mania, which like all bubbles featured leverage; it was fueled not just by ordinary debt, but by leveraged tulip options. When the end came, the government of Holland declined to bail out those who had mortgaged their houses and businesses to buy tulip bulbs, and the multiyear depression that followed ruined an otherwise sound economy.
Our recent real-estate bubble wasn’t like tulip mania, in which the inflated asset had only a tenuous connection to the economy it came to dominate. The real-estate bubble swelled on the genuine beliefs among consumers about their future prospects and earnings. To be sure, some of those prospects and earnings were exaggerated to the point of fraud.
Thus the bubble burst when credit-card junkies had spent the last dollars they could justify, and the final peanut brain had been unearthed who could be persuaded to sign up for a negative-amortizing mortgage.
Because this link, however slim, remained between people’s prospects and earnings and the debt they could carry, real- estate prices even in hard-hit cities such as Las Vegas declined only by half. Stock-market losses were similar. These numbers are reported as if they were staggering, but they are less so compared with many bubbles.
Free Lunches
Some now blame consumers’ disinclination to spend and get the economy going again on banks’ newfound reluctance to lend. To the contrary, we are in the midst of a deflationary trend that is temporarily being masked by inventory restocking and free lunches like “cash for clunkers.” Consumers are done with borrowing. They will keep fueling the deflation by going through their attics and garages to find stuff they can sell on EBay to raise cash.
That’s because consumers have figured out that it was all a big head-fake from the Federal Reserve. Real incomes haven’t grown in years. Manufacturing and, increasingly, service jobs are still moving overseas. The Treasury is trying to pump the economy back to a high-water mark that was phony to begin with, and doing so in the face of a savings rate that is going up.
Trade Gap
The Treasury will succeed in printing enough money to forestall severe deflation. Even so, dollars will keep flowing out of the U.S. to other countries as the trade gap widens. Only when we start creating more jobs and higher earnings can this dynamic reverse. The question is, when will that be?
Enter the gold bugs. They aren’t just betting on inflation, as is the conventional wisdom. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation.
In all the talk of inflation because the Treasury is printing so much money versus deflation because it may not print enough, there is one type of inflation that is rarely discussed. This is the mega-inflation caused by a sudden currency devaluation. Currency is like any financial innovation, an obligation secured by assets. When the obligation is perceived to have increased far beyond the level justifiable by the assets, which in this case make up a country’s economy, a bubble has formed.
As in any bubble, those who recognize this need to act well in advance. Historically, governments have taken action to prevent currency flight when the owners of a severely overvalued medium of exchange start selling so much that it adds to the pressure on its price. They make private purchases of gold illegal, or tax the exchange of currency.
Right now, the American economy is worth less than the value implied by the market value of its obligations. How much less, no one knows. But gold bugs will tell you, privately, that this is why they are buyers. Might as well stock up, they say, before gold becomes a controlled substance.
I haven’t, so far, but the temptation is rising by the day.
Banks Have Us Flying Blind on Depth of Losses: Jonathan Weil
Commentary by Jonathan Weil
Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.
It failed last week.
Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.
How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic. It also helps explain why the FDIC, led by Chairman Sheila Bair, is resorting to extraordinary measures to replenish its battered insurance fund.
Georgian, which had five branches catering to local businesses and wealthy individuals, was chartered in 2001. By 2003, the closely held bank had raised $50 million from an investor group led by a longtime local banker, Gordon Teel, who remained chief executive officer until last July. It grew at a breathtaking pace, fueled by the real-estate bubble.
Triple Play
From 2004 to 2007, total assets almost tripled to $2 billion from $737 million. Annual net income rose seven-fold to $18.3 million. The bank touted its philanthropy, including a $1 million pledge to a local children’s hospital, and boasted of a growing art collection showcasing Georgia painters.
As recently as its March 31 report to regulators, Georgian said it met the FDIC’s requirements to be deemed “well capitalized.” By June 30, that had dropped to “adequately capitalized,” after a $45 million second-quarter net loss.
Georgian also reported a 12-fold jump in nonperforming loans to $306.4 million from $24.7 million three months earlier, mostly construction loans. Georgian’s numbers made it seem as if the surge arose from nowhere. On its March 31 report, the bank said just $79.1 million of its loans were 30 days or more past due. That included the loans it had classified as nonperforming.
Survival Mode
Georgian’s new CEO, John Poelker, downplayed any concerns. “Whether there is enough capital for the bank to be a survivor isn’t an issue,” he told Bloomberg News for an Aug. 5 article.
What wasn’t made public until Sept. 25, the day it closed, was that Georgian Bank had agreed to a cease-and-desist order with the FDIC on Aug. 31 after flunking an agency examination. The 19-page order described various “unsafe or unsound banking practices and violations of law and/or regulations,” including failing to record loan losses in a timely manner. Georgian neither admitted nor denied the allegations.
The FDIC updates the public about the number of banks on its problem list once a quarter. An FDIC spokesman, David Barr, said Georgian was added to the FDIC’s internal list in July. He said the agency adds banks to the list based on exam ratings, not the data in their financial reports.
As for the 416 banks on the list as of June 30, up from 305 a quarter earlier, the FDIC said their combined assets were $299.8 billion. (The FDIC didn’t name the banks, per its usual practice.) If Georgian’s experience is any guide, the real-world value of those assets probably is much less.
Rising Losses
That might help explain why the FDIC keeps increasing its estimates for the losses it’s anticipating from future bank failures. In May, the agency said it was expecting $70 billion of losses through 2013. This week, it bumped that to $100 billion. The agency also said its insurance fund would finish the third quarter with a deficit, meaning liabilities exceed assets.
The FDIC, backed by the full faith and credit of the U.S. government, will get whatever money it needs to protect depositors. For now, it plans to raise $45 billion by collecting advance payments from the banking industry. Those payments will cover the next three years of premiums that the banks owe.
In effect, the FDIC is taking out a massive, no-interest loan to cover its bills. Borrowing from the future won’t improve its insurance fund’s capital, however, only its liquidity.
The big question is what the FDIC will do next time, should its loss estimates keep rising -- and there’s no reason to believe they won’t. By statute, the insurance fund is supposed to be funded solely by the banking industry. The FDIC could keep borrowing from the banks, directly or through more advances.
The agency could tap its $500 billion credit line with the U.S. Treasury. It still would have to pay back the money with fees from the industry, assuming the banks can’t persuade their minions in Congress to change the law. As it stands, the only way to boost the fund’s capital immediately is by charging the banks a lot more money for their insurance premiums.
Given the odds that other surprises like Georgian Bank are lurking, the FDIC will have to bite this bullet eventually.
U.S. Economy: Factories' Growth Slows, Claims Rise (Update1)
By Courtney Schlisserman and Bob Willis
Oct. 1 (Bloomberg) -- Manufacturing in the U.S. expanded less than anticipated by economists and more Americans filed claims for unemployment benefits, pointing to a recovery that will be slow to generate jobs.
The Institute for Supply Management’s factory gauge decreased to 52.6 in September from 52.9 in August, the Tempe, Arizona-based group said today. Fifty is the dividing line between expansion and contraction. The number of jobless claims climbed to 551,000 last week, more than economists forecast, figures from the Labor Department showed.
Coming a day before the September jobs report, the figures caused stocks to slump on growing concern the seven-month rally has outpaced prospects for economic growth. Consumer spending, boosted last quarter by government programs such as “cash for clunkers,” may not be able to keep rising as quickly once the stimulus expires and unemployment keeps climbing.
“The balance of data is still pointing to the economy getting better,” said Conrad DeQuadros, a senior economist at RDQ Economics in New York. “The consumer is still facing significant headwinds in the labor market. I wouldn’t look for the consumer to significantly boost growth over the next couple of months.”
The Standard & Poor’s 500 Index closed down 2.6 percent at 1,029.85 today in New York, a day after completing its biggest back-to-back quarterly rally since 1975. Treasury securities jumped, sending the yield on the 10-year note down to 3.18 percent from 3.31 percent late yesterday.
Unexpected Drop
The ISM index, which dropped for the first time this year, was forecast to rise to 54, according to the median of 80 estimates in a Bloomberg survey of economists. Projections ranged from 51.5 to 56. Manufacturing accounts for about 12 percent of the world’s largest economy.
“We’re still in positive territory but we’re just not advancing at quite the same rate,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “Retailers are anticipating a weak sales season and they’re playing it conservative on orders and hiring.”
The ISM report showed orders and production advanced at a slower pace last month, while the magnitude of reductions in inventories also cooled.
“The inventory correction, with the exception of a few industries,” has played out, Norbert Ore, chairman of the ISM’s factory survey, said in a press conference. “Overall, September was a good month. For the balance of the year, we should expect to see manufacturing holding this level, possibly improving from this level.”
More Claims
Last week’s jobless claims figures overshot the median estimate of economists surveyed by Bloomberg News which projected an increase to 535,000, raising concern tomorrow’s jobs report will also disappoint expectations that payroll decreases are slowing.
The Labor Department may say tomorrow that job losses in September totaled 175,000, according to the survey median, while the unemployment rate rose to 9.8 percent, the highest since 1983.
The economy has lost 6.9 million jobs since the recession started in December 2007, the most of any downturn since the Great Depression. The 216,000 drop in payrolls reported for August, meanwhile, was the smallest in a year.
Autos, Houses
So far, the Obama administration’s $787 billion stimulus plan, which included the auto incentives and an $8,000 tax credit for first-time home buyers, is giving consumers reason to buy cars and houses.
Household purchases jumped 1.3 percent in August, the largest gain since October 2001, data from the Commerce Department also showed today. Incomes climbed 0.2 percent for a second month and inflation decelerated, the report also showed.
Inflation-adjusted spending on durable goods, including autos, furniture, and other long-lasting items, jumped 5.8 percent in August, also the most since the month after the 2001 terrorist attacks. Then, the introduction of zero-percent financing to revive sales boosted spending on durable goods by 14 percent.
Auto sales fell 35 percent in September from the previous month to a 9.2 million annual rate, after the clunkers plan expired, according to Bloomberg data.
Pending Sales
Lower home prices and mortgage rates combined with the first-time buyer credit have helped end the housing-market meltdown that sparked the financial crisis. The index of signed purchase agreements, or pending home sales, jumped 6.4 percent in August, a seventh consecutive increase, the National Association of Realtors said today in Washington.
The tax credit is due to expire at the end of November, raising concern sales will again slow.
Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, last month said second-quarter profit rose 14 percent, fueled by rebounding home sales. The Union, New Jersey-based chain also increased its annual profit forecast.
Even so, “looking ahead to the remainder of our fiscal year 2009, we have assumed that the overall business climate will remain challenging,” Chief Financial Officer Eugene Castagna said on a conference call on Sept. 23.
Economists surveyed by Bloomberg earlier this month projected the economy will expand at an average 2.6 percent annual rate and grow 2.4 percent in 2010.
Chinese 103-Year-Old Wall Street Emigrant Sees End of Communism
(Bloomberg) -- Zhou Youguang was a child of 6 when a revolution toppled China’s last emperor in 1912. He was 43 when he says he left a Wall Street banker’s job to help Mao Zedong’s Communists create what he thought would be a democracy after decades of warlord rule, occupation and civil war.
Now 103, he has seen China transformed from a country of 368 million being carved up by foreign powers to a nation of 1.3 billion and the world’s fastest-growing major economy, expanding at an average annual rate of 9.9 percent from 1978 to 2008. He says he still believes China will eventually become a democracy -- in spite of communism, not because of it.
“China will follow the mainstream of the world, sooner or later,” the pajama-clad Zhou said during an interview in the book-lined study of his third-floor walk-up apartment in central Beijing.
His experiences encapsulate the complicated legacy of the Communist Party, which celebrates 60 years in power this week with a military parade past Tiananmen -- the Gate of Heavenly Peace -- where Mao proclaimed the founding of the People’s Republic on Oct. 1, 1949.
While Zhou endured three years of forced separation from his family during the 1966-76 Cultural Revolution, he survived a purge of intellectuals that led many of his colleagues to commit suicide. He was also given the opportunity to devise a new system of spelling out Chinese characters with the Roman alphabet that helped hundreds of millions of Chinese peasants learn to read.
‘Lucky Ones’
“There were very few who returned from America who escaped the catastrophe,” Zhou said. “I was one of the very lucky ones.”
Like China’s leaders, Zhou divides Communist rule into two periods: the first three decades dominated by Mao, who died in 1976, and the second characterized by the opening of China to the world by paramount leader Deng Xiaoping, who died in 1997. While Deng’s era sparked rapid growth, Zhou, an economist by training, considers it a mixed success.
Deng “reformed the economy but didn’t reform politics,” Zhou said. “In the political scene, there was absolutely no change; it was an autocracy.”
That wasn’t the outcome Zhou Enlai promised Zhou in the late 1930s. The two, who aren’t related, met in Chongqing when the Yangzi River city became the wartime capital following Japan’s occupation of Nanjing in 1937.
Meetings of Intellectuals
Zhou Enlai -- who would become China’s premier in 1949 -- held monthly get-togethers with intellectuals, including Zhou, who worked for Sin Hua Trust & Savings Bank, which was founded in 1914 and became part of the Bank of China Ltd. in 2001.
“Zhou Enlai told me at those meetings that the Communist Party was a democratic party,” Zhou said.
Zhou left China for New York at the end of 1946, where he represented Sin Hua at Irving Trust Co., the bank’s U.S. agent, at its Art Deco headquarters on 1 Wall Street. He and his wife, Zhang Yunhe, returned to Shanghai in June 1949, as the Communists neared victory.
“We thought that with China liberated, there was hope; everyone wanted to come back home and do something,” Zhou wrote in a 2008 autobiography.
When he arrived, Shanghai -- occupied by the People’s Liberation Army the previous month -- straddled the communist- capitalist divide. Zhou lived in both worlds: working at Sin Hua and at what is now the Shanghai University of Finance and Economics as a professor. There he and his colleagues, most of them scholars who returned from the U.S., watched as textbooks were jettisoned for new ones reflecting Marxist theories of class struggle.
Common Language
In 1955, Zhou, whose hobby was linguistics, was asked during a Beijing conference to lead a group creating a standardized system of writing Chinese phonetically with Roman letters. The project would supersede a hodgepodge of Romanization systems and was part of a drive that included simplifying the way thousands of characters were written and teaching a common language, Mandarin, in schools throughout the country.
“I said no way, I’m an amateur,” Zhou said. It was too late; the premier, who remembered his avocation from their days in Chongqing, had already called Zhou’s colleagues in Shanghai and told them he wouldn’t be coming home.
Zhou’s pinyin system, which turned “Peking” into “Beijing,” uses markers to identify which of Mandarin’s four tones to use. It became the national standard in 1958 and has helped reduce China’s illiteracy rate to 10 percent today from about 80 percent in the 1950s.
Mao’s Purge
His new career also kept him relatively safe when economics professors, especially those who had lived in the U.S., became targets of Mao’s Anti-Rightist Campaign in 1957 to purge anyone he thought opposed his revolution.
“Every day there were people killing themselves,” Zhou wrote in his autobiography.
Zhou didn’t completely escape persecution. He was branded a “reactionary academic authority” in 1969 during the Cultural Revolution and sent to northwestern China’s Ningxia region, where, already well into his 60s, he spent a year toiling in rice paddies. He was allowed to return to his family in 1972. Since then he’s helped make pinyin a global standard and published books on linguistics.
Zhou never expressed regret in the interview for giving up his New York lifestyle. In 1949, the “common people trusted the Communist Party,” he said. Looking back over 60 years, he now believes the party, which he never joined, “cheated the Chinese people. They destroyed everything, especially the intellectuals.”
That doesn’t stop Zhou from saying that China’s economic boom will someday be accompanied by the democracy he had hoped to help create.
“I’m always optimistic,” he said.
China Celebrates 60 Years of Communist Rule With Beijing Parade
By Bloomberg News
Oct. 1 (Bloomberg) -- The People’s Republic of China marked its 60th anniversary today with a parade through the heart of Beijing aimed at showcasing the country’s rising power and shoring up the Communist Party’s prestige at home.
About 200,000 people took part in the celebration, including President Hu Jintao, former President Jiang Zemin and members of the ruling Politburo Standing Committee who watched from the rostrum of Tiananmen -- the Gate of Heavenly Peace. It was there, on Oct. 1, 1949, that Mao Zedong declared the communists’ victory in a civil war.
China was “able and confident in playing its global role,” Hu said in a speech, in which he vowed that the country would seek “peaceful reunification” with Taiwan. The island has been ruled for much of the past 60 years by the Nationalists, who fled there following their defeat at Mao’s hands.
Hundreds of missiles and tanks and thousands of soldiers from the world’s largest standing army paraded down Chang’an Avenue through Tiananmen Square following Hu’s speech.
Hu, 66, wearing a black high-collared suit similar to one worn by Mao, had earlier reviewed the troops from an open-topped Red Flag limousine, yelling out “Hello comrades” and “Comrades it’s been hard on you.” Overhead, 151 military aircraft, including J-10fighter jets, flew past in 12 formations.
Hu and his fellow leaders are celebrating China’s newfound prominence on the global stage. China now produces in a day the equivalent of a year’s output five decades ago, and is poised to surpass Japan as the world’s second-largest economy by 2010. The Communists, who lifted 300 million citizens from abject poverty and raised the country’s international influence, must now meet increasing demands for domestic freedom and accountability.
‘Show-Off’
The celebration “is a show-off to beef up confidence in, and support to, the regime,” said Huang Jing, visiting professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy. “Serious questions need to be asked how such a show of strength can translate into” transparency and tolerance for “ethnic, cultural and religious diversity.”
About 80,000 children in Tiananmen Square spelled out the Chinese characters for “national celebration” with red and gold placards to begin the celebration. Later, the placards read “obey the Party’s command” and “serve the people.”
The People’s Liberation Army displayed 52 types of new weapons, including unmanned aerial vehicles and aircraft with advance-warning radar. Five thousand soldiers marched through the square, past portraits of Mao and Sun Yat-Sen, Republican China’s first president after the fall of the Qing Dynasty in 1912.
Nuclear Strike
Among the new weapons, according to China Central Television, was a cruise missile called the Long Sword. As a battery of Dongfeng (East Wind) intercontinental ballistic missiles on mobile carriers drove by, the CCTV commentator reminded viewers that China abided by a pledge never to make a first nuclear strike.
The parade also included a flotilla of 60 parade floats bedecked with flowers and digital displays showcasing six decades of China’s political, scientific, technological and economic achievements.
Among those were floats with portraits of Mao, Deng Xiaoping, a leader who died in 1997, as well as Jiang and Hu. Each were accompanied by recordings of their famous speeches, and thousands of marchers surrounding the floats carried banners trumpeting catchphrases such as “implement and carry out scientific development.”
‘Three Represents’
Liang Xiaopeng, 20, was among the students escorting Jiang’s float touting the 83-year-old former leader’s “Three Represents” doctrine, which helped legitimize members of the business class in Chinese socialist theory.
“Today China showed its might, and that makes me very proud,” said Liang, a student at Beijing Printing College who wants to stay in Beijing and work for a publisher.
The celebration was an opportunity for the government to showcase its achievements to the country’s 1.3 billion people. CCTV’s broadcast of the event telecast preparations of the parade, complete with marching soldiers, jets and tanks, with the theme of Disney Co.’s “
Police kept most of Beijing’s 3.8 million private cars off of the roads today, and restricted access to the city center. South of Di’anmen Street, which bisects the inner city from east to west, police armed with machine guns blocked cars from heading toward Tiananmen Square this morning.
14th Parade
The PLA parade is the 14th since the army emerged victorious in the 1949 civil war against the Kuomintang, or Nationalist Party, which now governs Taiwan.
Economic growth and rising global influence have come at the cost of domestic expression. Opposition to Communist Party rule is banned while dissent, including the 1989 student demonstrations in Beijing’s Tiananmen Square, is crushed.
As many as 800 million Chinese, 60 percent of the population, still live in the countryside, and rapid development has left millions of them behind. Still socialist in name, China has a wider income gap than Taiwan and South Korea have now, or had during their export-led industrializations.
The gaps are made wider by the spread of corruption. Graft has reached into the senior ranks of officials, with those convicted including the former parliamentary vice chairman Cheng Kejie and Shanghai party chief Chen Liangyu.
Ethnic Tensions
Even as Tiananmen Square is festooned today with 56 columns representing the country’s biggest ethnic groups, many Uighurs and Tibetans say they see China as an empire diluting their indigenous cultures.
The worst riots in six decades broke out in the past two years in Tibet and the Uighur’s homeland of Xinjiang, two provinces on China’s western fringe, spurred by income gaps along ethnic and religious fissures.
The world’s most populous nation has also become the largest consumer of commodities and one of the biggest energy users. China last year passed the U.S. as the biggest emitter of greenhouse gasses, and widespread pollution of its atmosphere and waterways is rarely checked by public opposition.
The smog that enveloped Beijing for three days before today’s parade lifted overnight and the parade took place under clear blue skies.
Goldman Sachs Changes U.S. Jobs Forecast to Show Larger Cuts
By Bob Willis
Oct. 1 (Bloomberg) -- Goldman Sachs Group Inc. today said the economy probably lost more jobs in September than it previously anticipated, citing “disappointing” economic data including the number of people receiving jobless benefits.
Payrolls probably fell by 250,000 workers last month rather than the 200,000 Goldman had previously estimated, chief U.S. economist Jan Hatzius said in a note to clients.
Hatzius said declines in the Monster Worldwide Inc.’s index of online help-wanted ads, the Institute for Supply Management’s factory employment gauge and consumers’ assessments of the labor market from the Conference Board’s confidence survey prompted the change. Additionally, the total number of people receiving jobless benefits, including those getting extended benefits, remains elevated, he said.
The median estimate of economists surveyed by Bloomberg News projects the economy lost 175,000 jobs last month, compared with 216,000 in August. The economy has lost about 6.9 million jobs since the recession began in December 2007.
Last month, Goldman projected a 250,000 drop in payrolls for August, exceeding figure reported by the Labor Department. On Aug. 6, Goldman lowered its forecast for July payroll losses to 250,000 from a prior 300,000 projection, putting it in line with the government’s initial estimate of 247,000.
U.S. Markets Wrap: Stocks Tumble as Treasuries, Dollar Rally
By Matt Townsend
Oct. 1 (Bloomberg) -- U.S. stocks fell the most in three months as Treasuries and the dollar rallied after a decline in a gauge of manufacturing and an increase in jobless claims spurred concern over the strength of a recovery from the recession.
JPMorgan Chase & Co., DuPont Co. and American Express Co. fell at least 4.2 percent to lead all 30 stocks in the Dow Jones Industrial Average lower. Treasury 30-year bond yields fell below 4 percent for the first time since April as a report showed inflation remains subdued. The dollar rallied against most of its major counterparts. Crude oil was little changed.
“The market had gotten a little ahead of the economy,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages $1.3 billion. “For the month of October we are on alert for a correction driven by the acknowledgment of a weak economic recovery.”
The Standard & Poor’s 500 Index slid 2.6 percent to 1,029.85 at 5:22 p.m. in New York a day after capping its biggest back-to-back quarterly rally since 1975. The Dow sank 203 points, or 2.1 percent, to 9,509.28. Both gauges lost the most since July 2. About 18 stocks fell for each that rose on the New York Stock Exchange, the broadest sell-off since April.
Benchmark indexes opened lower after the number of Americans filing first-time claims for unemployment benefits climbed by 17,000 to 551,000 last week. Stocks extended losses after the Institute for Supply Management said its manufacturing index dropped to 52.6 in September, lower than the reading of 54 projected by economists in a Bloomberg survey.
Not Double-Dip
Bonds rallied as signs recovery from the worst slump since the Great Depression will be slow prompted traders to reverse bets that yields would increase before tomorrow’s monthly employment report. The Labor Department may say that job losses last month totaled 175,000, according to a Bloomberg survey. The Treasury announced plans to sell $78 billion of notes and bonds over four consecutive days next week.
“We are not in the double-dip camp, but there are still headwinds for the economy,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “There is a ton of money on the sidelines. Investors are feeling more comfortable with interest-rate risk and are moving out on the curve.”
The yield on the 30-year bond fell nine basis points, or 0.09 percentage point, to 3.97 percent, according to BGCantor Market Data. The yield touched 3.93 percent, the lowest level since April 29. The 4.50 percent security due in August 2039 rose 1 18/32, or $15.63 per $1,000 face amount, to 109 1/4.
The 10-year note yield touched 3.17 percent, the lowest level since May 21.
Prices Rise
The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent from the previous month and was up 1.3 percent from a year earlier, the smallest year-over-year gain since September 2001. Spending by U.S. consumers climbed 1.3 percent in August, Commerce Department figures showed in Washington.
The dollar gained much as 0.8 percent to $1.4517 versus the euro as Federal Reserve Chairman Ben S. Bernanke said he doesn’t see an “immediate risk” to the dollar’s status as the world’s main reserve currency.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency versus six counterparts including the euro and yen, rose as much as 0.8 percent to 77.231 today.
“We’ve seen hiccups in consistent improvement to data,” said Todd Elmer, currency strategist at Citigroup Inc. in New York. “The underlying uptick in risk aversion lent the dollar some support ahead of the payroll report.”
Gold prices fell for the first time this week as the dollar’s rebound eroded the precious metal’s appeal as an alternative investment. Silver also dropped.
‘Problem For Gold’
“It’s all dollar-related,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “If we do see a significant rally in the dollar, that’s a problem for gold.”
Gold futures for December delivery fell $9.50, or 0.9 percent, to $999.80 an ounce on the Comex division of the New York Mercantile Exchange.
Oil for November delivery rose 12 cents to $70.73 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures are up 59 percent this year.
Unrepentant bears
The end is nigh (again)
Pessimistic commentators remain anything but convinced by the stockmarket rally
ALBERT EDWARDS first made a bearish call on the American stockmarket at the end of 1996. As an investment-bank strategist (then at Dresdner Kleinwort, now at Société Générale), he was subjected to a fair degree of ridicule over the next decade, particularly during the dotcom boom. But in the long run Mr Edwards turned out to be right, with last year’s financial calamities his apparent vindication. Had investors sold the S&P 500 index on his recommendation, bought Treasury bonds and held them for the past 13 years, they would have received a higher return.
But in recent months stockmarkets have staged a remarkable rally: the MSCI world index has climbed by 64% since March (see chart 1). Some forecasters say cheerily that the world economy is likely to make a sprightly recovery. Mr Edwards, though, remains bearish. He is one of a stubborn bunch of pessimists who believe that share prices are overvalued and the economic recovery is built on sand. These unrepentant bears are used to betting against the consensus and are not put off by the rally. “I am willing to be patient,” says another notable pessimist, David Rosenberg of Gluskin Sheff, a Canadian asset-management firm. Lately the bears have been encouraged by disappointing American data, for example on durable-goods orders and new-home sales.
The best-known sceptic is Nouriel Roubini, an economics professor at New York University’s Stern School of Business, unimaginatively dubbed Dr Doom (the moniker was first assigned in the financial world to Henry Kaufman, a bond strategist at Salomon Brothers in the 1970s and 1980s). Back in 2005 and 2006, Mr Roubini sounded warnings about the property bubble and the dangers of the American current-account deficit. When the credit crunch hit in 2007, he was treated as a prophet and quickly became a fixture on the conference circuit, delivering jeremiads in heavily accented English (he was born in Turkey and grew up in Iran and Italy).
Mr Roubini’s latest pronouncement, made in early September, was to warn of a slow, U-shaped economic recovery, with below-trend growth for two to three years. (Optimists predict a V-shape, with recovery as rapid as the slide into recession.) He fears that surplus economies like China and Japan will not boost consumption enough to make up for the downturn in American consumer spending.
Shock therapy
In general, the bears take the line that the unprecedented actions of governments and central banks (enormous fiscal deficits, near-zero interest rates and “quantitative easing”) may have jolted the global economy temporarily into life, but they have not resolved the underlying causes of the mess. In particular, they worry that consumers and companies remain excessively indebted, and that deleveraging will quickly stamp out any recovery.
Their usual template is Japan. Its example inspired Mr Edwards to come up with the “Ice Age” thesis in the 1990s as he mused on how assets should be priced in a world of low nominal GDP growth. He thought that the dividend yield on American and European equities would eventually exceed the yield on government bonds. This had come to pass in Japan in the late 1990s and again in the early 2000s, but had not occurred in most Western countries since the late 1950s. It implied a huge derating of shares.
“The bulls’ view of the world was that low bond yields and low inflation should cause high price/earnings ratios,” explains Mr Edwards. But in his view the bulls were ignoring the corollary; that low inflation would lead to low earnings growth. When investors cottoned on to the subdued outlook for profits, as they did in Japan, the effect on share prices was dramatic.
Mr Edwards admits that he consistently underestimated the determination of the authorities to prevent a bear market. As they cut interest rates in response to each market wobble, the result was a series of bubbles, first in technology shares and then in housing.
The other bears agree, and see the recent market rally as simply the authorities’ latest attempt to prop up asset prices. George Magnus, an economic adviser at UBS, a big Swiss bank, says: “This recovery is entirely dependent on the unprecedented largesse of governments and central banks. Things may be better than last autumn when there was an imminent threat of a financial collapse but the recovery is built on very short-term foundations.” In particular, businesses emptied their inventories last year; manufacturing has enjoyed a rebound in recent months as companies have stopped slashing stocks, but Mr Magnus argues it is not self-sustaining.
Mr Rosenberg says government incentive schemes have been behind the housing-market rally and the jump in car sales. Activity was similarly boosted in the fourth quarter of 2001 after the Federal Reserve slashed interest rates in response to the terrorist attacks on New York and Washington. But he points to the sharp slowing of American car sales in September after the cash-for-clunkers programme ended and thinks the same may occur in housing when a subsidy to first-time buyers expires at the end of November.
Because the recovery is so dependent on government support, the bears think it will soon peter out. Mr Edwards worries that the economy will start to turn down in the first half of next year. Mr Magnus thinks the global economy might be able to eke out a meagre growth rate but “if you don’t have credit growth operating, it is hard to sustain spending while unemployment is still rising.”
The bears argue that although governments may have stabilised the banking system, they have not been able to restart private-sector lending. In America bank lending has been falling rapidly over the past three months while in the euro zone broad-money growth has slipped to just 2.5% year-on-year (see the left panel of chart 2). In recent months consumers in Britain and America, two of the most heavily leveraged economies, have been repaying debt (see the right panel).
The problem, according to Mr Magnus, is that household balance-sheet problems tend to last. “They are often linked to property and property busts which take years to play out,” he says. Mr Edwards thinks the outcome will be a reverse of the 1990s boom, when rising asset prices boosted consumer confidence, spending and the economy. Now that share and house prices have dropped, consumers will increase their savings and reduce consumption, weighing the economy down.
The debt problem will act as a permanent drag on the hopes for recovery. Japan had lots of economic rebounds and stockmarket rallies in the course of the 1990s. Over the entire decade, however, the economy was sluggish and investors lost a large proportion of their money. The Nikkei 225 average, Tokyo’s best-known stockmarket measure, is still only a quarter of its peak, reached at the end of 1989.
The bears think many Western economies will face a similar period in the doldrums. “My forecast is not a V-shaped recovery or a W [a second dip, then recovery] but a long series of Us with periods of expansion followed by contraction,” says Mr Magnus. “There is a lot of volatility but the economy doesn’t really go anywhere.”
Just as monetary easing has not resulted in any surge in lending, the bears also think the fiscal element will run out of steam. “The fiscal stimulus has to end, because we can’t keep expanding the deficit,” says Mr Edwards. Either voters will be unwilling to sanction higher deficits, or the markets will take fright and push up bond yields, killing the recovery by a different method. British political debate is already dominated by the need to cut spending and raise taxes.
A rally too far
Given this outlook, the bears believe stockmarkets have got far ahead of themselves: the S&P 500, having sunk below 680 in early March, stood at 1,057 at the end of September. “If the S&P 500 was at 840-860, I would say this is a natural market reaction to the end of a recession, but let’s get a grip,” says Mr Rosenberg. “The market is up 60% from the lows, not 20%. Normally, it takes three years of recovery before the market is up 60%. The rally has occurred while the American economy has shed 2.5m jobs. This market is pricing in 4% economic growth, but what if there’s only 1-2% growth next year?” he asks.
In addition, Mr Rosenberg says investors should be suspicious that the recovery is so dependent on low interest rates and government action. “What is the appropriate multiple that investors should place on earnings that are being propped up by the government? All asset prices are going up together, from gold to Treasury bonds. People say the rally is driven by liquidity. But when every analyst is talking about liquidity you know the top is near,” he argues.
Conventional analysts tend to argue that on the basis of profit forecasts for 2010, stockmarkets are reasonably valued. But bears doubt that profits will rebound so dramatically. They tend to prefer longer-term measures. Andrew Smithers of Smithers & Co, a consultancy, produced a timely book in 2000 arguing that Wall Street was in bubble territory. On his two favourite measures, the q ratio (which compares share prices with the replacement cost of net assets) and the cyclically adjusted price/earnings ratio (which averages profits over ten years), the American market is still overvalued, by 41% and 37% respectively. As chart 3 shows, Wall Street got back to an average valuation by the March lows, but never looked particularly cheap by historical standards.
The bears quoted above are all academics or strategists who can afford to take a detached view when the markets move against them. Mr Magnus is a veteran observer who has seen a few market cycles. Mr Rosenberg has escaped from the optimistic consensus at Wall Street (he worked until last year at Merrill Lynch, which used a bull as a corporate symbol). Mr Edwards has the security of regularly finishing top of polls of London’s favourite strategists, despite (or perhaps because of) his bearish views. Mr Smithers runs his own firm.
Things are rather different for Bill Fleckenstein, who runs a hedge fund at his firm, Fleckenstein Capital. A noted sceptic on the dotcom and housing booms, he closed his short-only fund (which bet on falling prices) in 2008. “I always knew the response to the recession would be printing money and didn’t want to be short any more,” he says. “If they print enough money, stocks can go anywhere they want to.” Crispin Odey, a London hedge-fund manager, has expressed similar views. But this is tactical, rather than strategic, bullishness. Mr Fleckenstein thinks the authorities’ tactics are eventually doomed to failure. “You cannot print your way to prosperity,” he says. In that sentence, he sums up the bearish case.
Charlemagne
The Atlantic gap
The honeymoon between Europe and Barack Obama's America is over
A “FLASHING yellow light”. That is how one American official describes warning signs of trouble between his administration and Europe. Less than a year after Barack Obama’s election, European euphoria over the end of the Bush era is fading. Relations are still far better than in the dark days before the Iraq war. But as the official puts it, there is “a lot of sniping” going back and forth across the Atlantic. And, he adds, there is a recognition at the “highest levels” that such snippiness is becoming unhelpful.
European Union politicians and officials are dismayed that, with a poisonous debate over health reform chewing up his political capital in Congress, Mr Obama may not secure legislation fixing binding emissions targets for America before the climate-change summit in Copenhagen in December. They also think the health-care impasse explains the lack of progress on the Doha world-trade talks. Nor did Europeans enjoy the G20 meeting that Mr Obama hosted in Pittsburgh. Despite hogging a ludicrous number of seats at the table, the EU came away with only one big Europe-specific agreement: alas, for them, it was a plan to cut their voting power at the IMF.
From the American side, there is frustration that the Obama administration’s multilateral humility has not been matched with more European help in Afghanistan, or a promise in every European capital to back tougher sanctions on Iran. (Yes, it looks as if they are building a bomb, goes the line in some places that do business in Iran, but if we stop selling things, the Chinese will just take our place.)
The sense of a honeymoon ended is widespread, at least at official level. In a revealing coincidence, 24 hours before the American official talked of a “flashing yellow light”, an EU official used the same metaphor to describe east European alarm at the clumsy way in which the Obama administration cancelled plans for a missile-defence system in Poland and the Czech Republic.
Doubts about the Obama administration have been a dirty secret in European policy circles for months, even as polls like the latest German Marshall Fund’s “Transatlantic Trends” survey continued to find Obamamania in western Europe. But the grumbling is slowly becoming public. In Brussels on September 30th America’s assistant secretary of state for European affairs, Philip Gordon, warned the Europeans that the Obama administration needed something in return for its punt on multilateralism. If “in a year from now”, Europeans have not decided to offer more help in Afghanistan and tougher sanctions on Iran, he said, “plenty of Americans will say, you know what, let’s do it our way.”
Can a transatlantic bust-up be averted? It would help if some misunderstandings were cleared up. The EU is an elite, supranational project, and only indirectly democratic. This creates a structural problem whenever it talks to the Americans. Eurocrats often get on well with administration officials (another secret is that European bigwigs found the second-term Bush lot congenial to deal with). The bigger problem is usually Congress, which acts as a lightning rod for American popular opinion. In Europe no such partisan democratic body exists (the European Parliament is more remote from voters and less powerful than Congress, and MEPs live in a warm bath of mushy conventional wisdom). Euro-types boast that the EU stands for stirring values like leadership on climate change or opposition to the death penalty. It is less clear that you could win a mandate for such things from European voters, which may be why they are not directly asked.
If people in Brussels struggle to understand how troublesome Congress can be to an American administration, they should try this mental aid. Congress is a bit like France: prickly, status-obsessed, ruthless in defending national interests and addicted to subsidies for special interests such as farmers or industrial champions. Both are ambivalent about free trade: as the Copenhagen climate talks near, it is France and certain American senators who want to talk up “green tariffs” in case China and India duck binding limits on carbon.
Look east not west
Many Europeans may also be labouring under a second misapprehension. Because they believed that George Bush was wicked and Mr Obama seemed to agree, they assumed that they and America’s new president occupied the same moral high ground. You can overstress biography, but a Kenyan-American raised in Hawaii and Asia could be forgiven for remembering that Europe was a continent of colonial powers before it proclaimed itself a beacon of moral values, and for considering the Pacific to be just as strategic as the Atlantic.
There are misunderstandings on the American side, too. American diplomats insist that Europeans see a failed Afghan state as a direct threat to their security. That is not true. “A very small number” of European governments believe Afghanistan is on the front-line of the war on terror, says one senior Brussels man. Most sent troops just to maintain good relations with America. Europe’s governments fear there is no strategy for winning the war but “some are afraid to tell the Americans the truth.”
Finally, Americans may not realise how horrible their health-care debate looks to outsiders. It is not just that it is blocking other legislation. The partisan nature of today’s Congress looks mad to Europeans brought up to value consensus. Europeans also know that “European-style” health care does not include death panels prescribing euthanasia for grannies and are offended by the way such tosh is alleged in America.
The end of the transatlantic relationship has been predicted many times. In truth, lots binds the rich democracies on both sides. But disillusion is a dangerous emotion. Both sides must keep talking, before the warning lights turn red.
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