Hedge fund manager Lee Ainslie swapped a bet on one big bank for another in the second quarter, selling off all his shares of Bank of America and investing in Citigroup instead.
Ainslie's Maverick Capital was joined by a number of other top hedge funds that shifted dollars away from BofA [BAC 12.32 -0.32 (-2.53%) ] and toward Citi [C 3.67 -0.09 (-2.39%) ] in the quarter, potentially signaling a shift in fortunes for the two financial service giants.
Shares of BofA have so far recovered far better from the 2008 market crash. But the Charlotte, North Carolina-based lender's greater reliance on U.S.-based customers may now be a disadvantage in light of the weaker U.S. economic picture and tighter financial regulations, some analysts and investors said.
"Globally, there's far greater opportunity for Citigroup than for Bank of America," said Bill Fitzpatrick, analyst at Optique Capital Management.
The shifting sentiment was clear in the second quarter "Smart Money" survey compiled by Thomson Reuters from securities filings of the portfolios of 30 of the biggest fundamentally-oriented hedge funds.
Larry Robbins' Glenview Capital sold down some of its BofA position while adding to its Citi stake. Andreas Halvorsen's Viking Global Investors, Chris Shumway's Shumway Capital and Steve Mandel's Lone Pine Capital all exited BofA. Bill Ackman's Pershing Square Capital and Thomas Claugus's GMT Capital took up new stakes in Citi.
BofA share movements reflect investor worries about the U.S. economy, analysts said, as unemployment hovers near 10 percent and GDP growth is weak. One of every two U.S. households does business with BofA, whether through loans or deposits.
Citigroup, in contrast, is much less exposed to U.S. consumers and regulations. It has only about 1,000 North American retail branches, compared to BofA's 6,000-plus U.S.branches.
"Economic data is weak, joblessness is high, and we're all uncertain of the rules of the road going forward," said Adrian Cronje, chief investment officer at Atlanta-based wealth management firm Balentine. "Financial regulation itself is an incredible bill with impact that is not properly understood."
Citigroup almost matches the overall number of loans and deposits at BofA, yet depends on North America for only about 37 percent of its deposits and 69 percent of its loans. But roughly 80 percent of BofA's loans and deposits come from U.S. consumers, analysts said.
BofA's consumer business could change dramatically under the new banking rules, including a provision that restricts the fees banks receive from processing debit cards.
The provision will affect both companies, but BofA's U.S. debit business is more than 10 times bigger than Citigroup's.
In July, BofA warned that it could lose $1.8 billion to $2.3 billion of its $2.9 billion annual debit processing revenues under the law.
"From a regulatory perspective, Bank of America's much more impacted...than Citigroup," said Michael Nix, portfolio manager with Greenwood Capital Associates.
The hedge funds' sales stand in contrast to the first quarter, when broader optimism about the U.S. economy and the banking sector's recovery pushed top investors to increase their holdings of BofA stock.
Since then, "Citigroup's had a little more of a positive trajectory," said Anton Schutz, president of Mendon Capital Advisors.
To be sure, both BofA and Citi are still top bets among many of the largest hedge funds.
David Tepper's Appaloosa Management reduced positions in both BofA and Citi in the second quarter but still holds large stakes, as does John Paulson, who stood pat with his multibillion-dollar positions.
BofA shares were still the No. 1 most-owned in the portfolios of the "Smart Money" 30 hedge funds for the quarter and remain attractive in the long-term, investors and analysts said. Citi was the second-largest position.
Another factor aiding Citi shares in the short-term will likely be the winding down of the U.S. government's role as a major shareholder.
The U.S. Treasury has whittled down its stake since April but still holds almost 18 percent. Its rolling share sales are due to end by mid-December, giving investors hope that Citi shares will bounce above today's low price levels.
"Citi's stock will move out materially when the news comes out that the government is done," Schutz said.
Copyright 2010 Reuters.
Monday, August 30, 2010
Why Even Central Bankers Are Unsure What to Do Now - CNBC
The 50-million-year-old Grand Tetons, which formed the majestic backdrop for last week's annual meeting of central bankers in Jackson Hole, Wy., are still rising.
But the bedrock of monetary policy for the past decade, the so-called Jackson Hole Consensus, is crumbling.
What was obvious at this year’s meeting was that monetary policy experts are not certain how to conduct policy now that interest rates are near zero.
What was less obvious is that there are big differences among them in how to run the world’s central banks once things return to “normal” —whatever and whenever that may be.
In his much-anticipated speech on Friday, Federal Reserve Chairman Ben Bernanke made entirely clear the uncertainty surrounding current policy. After saying in no uncertain terms that the Fed stood ready to “strongly resist” deflation by, among other things, purchasing more Treasurys, he acknowledged that the Fed itself “has not agreed on specific criteria or triggers” for further action.
Why? The reason, Bernanke said, is because the Fed hasn’t figured out how to calibrate those actions. “Uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.”
Translation: The Fed has not agreed how much of a decline in the economy is sufficient to bring the central bank into play, and it does not know how much of an effect a given quantity of purchases will have.
Markets and Fed observers had an intuitive feel for this calibration mechanism when interest rates were positive. A given increase in the unemployment rate would suggest a decrease in the Fed’s overnight lending rate of a quarter or a half a point.
That is anything but clear as we head into Friday’s jobs report. The consensus calls for a decline of 100,000 jobs, with the the private sector expected to create 42,000 jobs. What if, for example, private-sector job levels instead fall by 100,000? Is that enough to cause the Fed to increase the size of its balance sheet (the trigger)?
Let’s say it is. By how much should the Fed increase its balance sheet for that amount of decline (the calibration)? Are the increments of treasury purchases in $50 billion units, or $100 billion units?
Having given the market the promise that the Fed would act, Bernanke has yet to detail a framework for policy. The confusion showed up Monday when Michelle Girard, senior economist from RBS [RBS 13.33 -0.35 (-2.56%) ], said on CNBC that she believed the current 9.5 percent unemployment rate is already unacceptable to the Fed and could prompt additional quantitative easing (QE), or printing money. (For the record, she echoed one side of the Jackson Hole debate that held additional QE won’t do any good. The counter that was that if the Fed came in and bought a whole lot more Treasuries it would definitely bring down yields.)
In the same segment, Bob Doll, chief equity strategist for Blackrock [BLK 142.6099 1.4599 (+1.03%) ], said he thought conditions would have to deteriorate significantly to prompt the Fed to act. Neither Girard nor Doll had much of a clue over the possible increments for action.
Bernanke’s speech doesn’t help much in this regard, offering only that the Fed would ease further to halt deflation and that it “will do all that it can to ensure continuation of the economic recovery.”
There is equal uncertainty about future Fed policy once the economy recovers. A paper prepared for the conference, titled Monetary Policy and Stock Market Booms, by economists from the U.S. and Europe said central banks should lean against the disinflation and credit growth that accompany sharp rises in the stock market.
In general, the consensus had held that a central bank should lower rates amid the lower inflation that comes, for example, with a positive technology shock to the economy. In contract, the paper concluded, “A sharp rise in the interest rate is the efficient way to resist the desire for households” to increase spending during a boom and to control credit growth.
Compare that with what Charles Bean, deputy governor of the Bank of England, describes as one of the seven tenets of the Jackson Hole Consensus: “While asset prices might be subject to bouts of ‘exuberance’ on the part of investors, there was little that monetary policy could do about them. The best monetary policy could do was limit the fallout when sentiment turned.”
Now, he says, “In the absence of other instruments, the case of ‘leaning against the wind’ by setting policy rates higher during the boom phase seems stronger than before.”
One reason for this case, argued some in the coffee klatches of the conference, is that the very idea of only limiting the fallout of the boom can make the bubble worse, increasing moral hazard. Why shouldn’t investors play fast and loose if the Fed is saying it has an express policy to limit the effects of the crash? Would we all drink more if there was a proven cure for hangover?
Another of Bean’s ingredients of the Jackson Hole Consensus is under fire: is the central bank the best institution to manage the macroeconomy? Fiscal policy, left for dead by the Jackson Hole Consensus, has returned in force to help combat the financial crisis. Bernanke in his speech acknowledged, “Central bankers alone cannot solve the worlds’ economic problems.” In addition to efforts by central bankers, he said, “Fiscal policy… also helped to arrest the global decline.”
But one of Bean’s tenets of the Jackson Hole Consensus was that “fiscal policy was unsuitable” to manage the economy.
Time again, economists and central brought up the work of David Ricardo, the noted 19th-century economist who argued that government spending now doesn’t cause any additional household spending because people know they will have to pay taxes later.
Jean-Claude Trichet, president of the European Central Bank, tried to reclaim the Ricardian high ground in a luncheon speech on Friday, where he argued that cutting deficits now would actually help economies improve now. He said it would bring forward future spending because people would no longer expect future tax increases to pay for the government deficits. But Bean had to acknowledge the other side of the debate: When the central bank has lowered its rate to zero, there is precious little left but fiscal policy.
If there was any consolation, it was the paper by Eric Leeper, professor of economics at Indiana University, who wrote that it was time for fiscal policy to make the leap from pure politics to science. In other words, however unclear monetary policy might be, the current state of thinking around fiscal policy was far worse.
Another of the building blocks of the consensus—and here, central bankers were shamefully wrong—is that if you took care of price stability, the economy and the markets would take care of themselves. In other words, central banks needed only to be headed by macroeconomists.
If they got it right, regulation could be minimized and regulators pushed to the background. As Bean put it, the consensus held that, “asset markets were thought to be efficient at distributing and pricing risk and financial innovations were normally welfare enhancing.”
Now, all we hear about is how essential bank regulation is and how vital it is to the conduct of monetary policy.
Many more elements of the Jackson Hole Consensus are crumbling, including the idea that stability begets stability. The late economist Hyman Minsky came more and more into the discussions for his theories that every boom period has within it the seeds of its own destruction because it breeds complacency and excess. This leads to the fabled Minsky moment, when investors are forced to sell even good assets during a crash.
Former Fed Vice Chairman Alan Blinder suggested that the current trendy economic models should begin trying to capture the effects described by Minsky to better guide central bank policy. That is, central banks need to be mindful of the effects on investors and on the economy of being successful.
It would be wrong to leave the summation of the proceeding at Jackson Hole without mentioning the ever-present insistence by Stanford University economist John Taylor that there is no reason to change policies. Taylor, author of the famous Taylor rule for guiding central bankers to the right interest rate policy, has maintained since the crisis began that the key to the errors in policy were the deviations from his rule. That is, interest rates were too low for too long and caused the bubble. Bean argued that low-interest-rate policies were only a small reason for the overleverage.
From debate over the economic models to questions over the right policies in good times and in crises, it is hard to remember a time when central bankers were both so divided and so uncertain. For monetary policy, the financial crisis has been the geologic equivalent of the faults that uplifted the Grand Tetons.
Perhaps from these fissures in policy will come a new consensus that can guide central bankers toward better outcomes when they meet in the next decade beneath the towering Tetons.
But the bedrock of monetary policy for the past decade, the so-called Jackson Hole Consensus, is crumbling.
What was obvious at this year’s meeting was that monetary policy experts are not certain how to conduct policy now that interest rates are near zero.
What was less obvious is that there are big differences among them in how to run the world’s central banks once things return to “normal” —whatever and whenever that may be.
In his much-anticipated speech on Friday, Federal Reserve Chairman Ben Bernanke made entirely clear the uncertainty surrounding current policy. After saying in no uncertain terms that the Fed stood ready to “strongly resist” deflation by, among other things, purchasing more Treasurys, he acknowledged that the Fed itself “has not agreed on specific criteria or triggers” for further action.
Why? The reason, Bernanke said, is because the Fed hasn’t figured out how to calibrate those actions. “Uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.”
Translation: The Fed has not agreed how much of a decline in the economy is sufficient to bring the central bank into play, and it does not know how much of an effect a given quantity of purchases will have.
Markets and Fed observers had an intuitive feel for this calibration mechanism when interest rates were positive. A given increase in the unemployment rate would suggest a decrease in the Fed’s overnight lending rate of a quarter or a half a point.
That is anything but clear as we head into Friday’s jobs report. The consensus calls for a decline of 100,000 jobs, with the the private sector expected to create 42,000 jobs. What if, for example, private-sector job levels instead fall by 100,000? Is that enough to cause the Fed to increase the size of its balance sheet (the trigger)?
Let’s say it is. By how much should the Fed increase its balance sheet for that amount of decline (the calibration)? Are the increments of treasury purchases in $50 billion units, or $100 billion units?
Having given the market the promise that the Fed would act, Bernanke has yet to detail a framework for policy. The confusion showed up Monday when Michelle Girard, senior economist from RBS [RBS 13.33 -0.35 (-2.56%) ], said on CNBC that she believed the current 9.5 percent unemployment rate is already unacceptable to the Fed and could prompt additional quantitative easing (QE), or printing money. (For the record, she echoed one side of the Jackson Hole debate that held additional QE won’t do any good. The counter that was that if the Fed came in and bought a whole lot more Treasuries it would definitely bring down yields.)
In the same segment, Bob Doll, chief equity strategist for Blackrock [BLK 142.6099 1.4599 (+1.03%) ], said he thought conditions would have to deteriorate significantly to prompt the Fed to act. Neither Girard nor Doll had much of a clue over the possible increments for action.
Bernanke’s speech doesn’t help much in this regard, offering only that the Fed would ease further to halt deflation and that it “will do all that it can to ensure continuation of the economic recovery.”
There is equal uncertainty about future Fed policy once the economy recovers. A paper prepared for the conference, titled Monetary Policy and Stock Market Booms, by economists from the U.S. and Europe said central banks should lean against the disinflation and credit growth that accompany sharp rises in the stock market.
In general, the consensus had held that a central bank should lower rates amid the lower inflation that comes, for example, with a positive technology shock to the economy. In contract, the paper concluded, “A sharp rise in the interest rate is the efficient way to resist the desire for households” to increase spending during a boom and to control credit growth.
Compare that with what Charles Bean, deputy governor of the Bank of England, describes as one of the seven tenets of the Jackson Hole Consensus: “While asset prices might be subject to bouts of ‘exuberance’ on the part of investors, there was little that monetary policy could do about them. The best monetary policy could do was limit the fallout when sentiment turned.”
Now, he says, “In the absence of other instruments, the case of ‘leaning against the wind’ by setting policy rates higher during the boom phase seems stronger than before.”
One reason for this case, argued some in the coffee klatches of the conference, is that the very idea of only limiting the fallout of the boom can make the bubble worse, increasing moral hazard. Why shouldn’t investors play fast and loose if the Fed is saying it has an express policy to limit the effects of the crash? Would we all drink more if there was a proven cure for hangover?
Another of Bean’s ingredients of the Jackson Hole Consensus is under fire: is the central bank the best institution to manage the macroeconomy? Fiscal policy, left for dead by the Jackson Hole Consensus, has returned in force to help combat the financial crisis. Bernanke in his speech acknowledged, “Central bankers alone cannot solve the worlds’ economic problems.” In addition to efforts by central bankers, he said, “Fiscal policy… also helped to arrest the global decline.”
But one of Bean’s tenets of the Jackson Hole Consensus was that “fiscal policy was unsuitable” to manage the economy.
Time again, economists and central brought up the work of David Ricardo, the noted 19th-century economist who argued that government spending now doesn’t cause any additional household spending because people know they will have to pay taxes later.
Jean-Claude Trichet, president of the European Central Bank, tried to reclaim the Ricardian high ground in a luncheon speech on Friday, where he argued that cutting deficits now would actually help economies improve now. He said it would bring forward future spending because people would no longer expect future tax increases to pay for the government deficits. But Bean had to acknowledge the other side of the debate: When the central bank has lowered its rate to zero, there is precious little left but fiscal policy.
If there was any consolation, it was the paper by Eric Leeper, professor of economics at Indiana University, who wrote that it was time for fiscal policy to make the leap from pure politics to science. In other words, however unclear monetary policy might be, the current state of thinking around fiscal policy was far worse.
Another of the building blocks of the consensus—and here, central bankers were shamefully wrong—is that if you took care of price stability, the economy and the markets would take care of themselves. In other words, central banks needed only to be headed by macroeconomists.
If they got it right, regulation could be minimized and regulators pushed to the background. As Bean put it, the consensus held that, “asset markets were thought to be efficient at distributing and pricing risk and financial innovations were normally welfare enhancing.”
Now, all we hear about is how essential bank regulation is and how vital it is to the conduct of monetary policy.
Many more elements of the Jackson Hole Consensus are crumbling, including the idea that stability begets stability. The late economist Hyman Minsky came more and more into the discussions for his theories that every boom period has within it the seeds of its own destruction because it breeds complacency and excess. This leads to the fabled Minsky moment, when investors are forced to sell even good assets during a crash.
Former Fed Vice Chairman Alan Blinder suggested that the current trendy economic models should begin trying to capture the effects described by Minsky to better guide central bank policy. That is, central banks need to be mindful of the effects on investors and on the economy of being successful.
It would be wrong to leave the summation of the proceeding at Jackson Hole without mentioning the ever-present insistence by Stanford University economist John Taylor that there is no reason to change policies. Taylor, author of the famous Taylor rule for guiding central bankers to the right interest rate policy, has maintained since the crisis began that the key to the errors in policy were the deviations from his rule. That is, interest rates were too low for too long and caused the bubble. Bean argued that low-interest-rate policies were only a small reason for the overleverage.
From debate over the economic models to questions over the right policies in good times and in crises, it is hard to remember a time when central bankers were both so divided and so uncertain. For monetary policy, the financial crisis has been the geologic equivalent of the faults that uplifted the Grand Tetons.
Perhaps from these fissures in policy will come a new consensus that can guide central bankers toward better outcomes when they meet in the next decade beneath the towering Tetons.
Another Home Buyer Tax Credit? - CNBC
Just when I thought the housing market was finally being left to correct on its own, I'm starting to hear talk regarding yet another home buyer tax credit. From HUD to the hedge funds, it sounds as if it is gaining steam yet again. This one could involve not just first time/move-up buyers, but a credit for buyers purchasing foreclosed properties or short sales (when the bank allows you to buy a home for less than the value of the outstanding mortgage).
HUD Secretary Shaun Donovan, appearing on CNN's State of the Union this weekend, didn't rule out another tax credit. He did say it's "too early to say," but then added that "we're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."
After that several Congressional candidates in Florida threw their voices behind the possibility, and Florida Gov. Charlie Crist then chimed in on the same show, saying that another tax credit, "would stimulate the economy. It would increase home sales in Florida." He finished with: "I would absolutely encourage the president to support that because it would certainly help my fellow Floridians."
So of course then I went the official route and followed up with a HUD spokesperson who responded: "No news here...there are no discussions underway to revive the credit."
Is it all political? And is another tax credit the answer? "I don't think it's all political," says housing consultant Howard Glaser. "I think they are panicked that the economy/housing got away from them." Glaser doesn't sound convinced the tax credit is really on the table. "They can do a lot off budget with the GSE's and FHA with no Congress."
I know a lot of you out there would argue that a housing market correction, as painful as it is, is necessary for housing to truly find its footing again and recover for the long term. Another artificial stimulus could just prolong the agony and set us up for the same drop off in sales and prices that we're seeing right now.
But it could also move some inventory quickly. With inventories of new and existing homes dangerously high, and the shadow supply of foreclosures pushing that volume even higher, more stimulus could be a necessary evil. I liken it to what I'm doing with my lawn this week. All summer I fought the weeds, pulling them, using the organic sprays and repellents, spreading mulch to deprive them of any air. And then I gave up. I called the lawn service and told them to bring every chemical in their arsenal. Shock the overgrown mess into submission once and for all, so that I can start fresh again and reseed this fall.
HUD Secretary Shaun Donovan, appearing on CNN's State of the Union this weekend, didn't rule out another tax credit. He did say it's "too early to say," but then added that "we're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."
After that several Congressional candidates in Florida threw their voices behind the possibility, and Florida Gov. Charlie Crist then chimed in on the same show, saying that another tax credit, "would stimulate the economy. It would increase home sales in Florida." He finished with: "I would absolutely encourage the president to support that because it would certainly help my fellow Floridians."
So of course then I went the official route and followed up with a HUD spokesperson who responded: "No news here...there are no discussions underway to revive the credit."
Is it all political? And is another tax credit the answer? "I don't think it's all political," says housing consultant Howard Glaser. "I think they are panicked that the economy/housing got away from them." Glaser doesn't sound convinced the tax credit is really on the table. "They can do a lot off budget with the GSE's and FHA with no Congress."
I know a lot of you out there would argue that a housing market correction, as painful as it is, is necessary for housing to truly find its footing again and recover for the long term. Another artificial stimulus could just prolong the agony and set us up for the same drop off in sales and prices that we're seeing right now.
But it could also move some inventory quickly. With inventories of new and existing homes dangerously high, and the shadow supply of foreclosures pushing that volume even higher, more stimulus could be a necessary evil. I liken it to what I'm doing with my lawn this week. All summer I fought the weeds, pulling them, using the organic sprays and repellents, spreading mulch to deprive them of any air. And then I gave up. I called the lawn service and told them to bring every chemical in their arsenal. Shock the overgrown mess into submission once and for all, so that I can start fresh again and reseed this fall.
US Must Stop Printing Money, Copy Europe: Rogers - CNBC
The United States needs to stop printing money and take on austerity measures like the Europeans did, in order for the economy to recover, said billionaire investor Jim Rogers, chairman of Rogers Holdings.
"I'd rather have the Europeans running the U.S. Central Bank than the people running the U.S. central bank, least they know how to try to build for the future," Rogers told CNBC Monday.
“In America, Bernanke just says we'll print more money, we'll spend more money, even though the United States is now the largest debtor nation in the history of the world."
Rogers reiterated that economies in trouble should be allowed to go under, like bad companies.
"The things that have worked in the past... will be you go bankrupt then you re-organize and you start over. You have a painful period for awhile, and then you start over. This has been done in the past 3 or 4 thousand years, and that's the way you do it," said Rogers.
"Trying to push the problem out to the future, and printing money, we just had another example here in the U.S., it didn't work and it's not going to work."
Rogers said that with central banks "flooding the world with money", the only place to invest right now is in real assets, whether it's in "silver, or rice or natural gas".
"Paper money is not going to do it for you," he added.
No Bubble in Gold, Currencies are ‘Difficult”
He disagrees that that there's a bubble brewing in the gold market right now, although he doesn't rule that out in the future.
"I expect there to be hysteria in the precious metals markets in 5 to 10 years. Right now, very few people own gold, and I can hardly call something a bubble when very few people own it," he said.
Rogers also revealed that he is bullish on the agricultural commodity space.
"There are 3 billion people in Asia, and most of them had not had a very good standard of living in the past 100 or 200 years. That's changing and changing very rapidly. They're going to eat more, they're going to wear more clothes…so agriculture is going to do very well."
He pointed out that cocoa stands to do very well.
On currencies, he said it's a difficult asset class to invest in right now, as he expects "a lot more currency turmoil over the next 2- 3 years because of the huge imbalances that exist in the world."
"I would prefer the euro, perhaps with the yen second. Because there are many technical reasons that I'm optimistic about the yen," he concluded.
© 2010 CNBC.com
"I'd rather have the Europeans running the U.S. Central Bank than the people running the U.S. central bank, least they know how to try to build for the future," Rogers told CNBC Monday.
“In America, Bernanke just says we'll print more money, we'll spend more money, even though the United States is now the largest debtor nation in the history of the world."
Rogers reiterated that economies in trouble should be allowed to go under, like bad companies.
"The things that have worked in the past... will be you go bankrupt then you re-organize and you start over. You have a painful period for awhile, and then you start over. This has been done in the past 3 or 4 thousand years, and that's the way you do it," said Rogers.
"Trying to push the problem out to the future, and printing money, we just had another example here in the U.S., it didn't work and it's not going to work."
Rogers said that with central banks "flooding the world with money", the only place to invest right now is in real assets, whether it's in "silver, or rice or natural gas".
"Paper money is not going to do it for you," he added.
No Bubble in Gold, Currencies are ‘Difficult”
He disagrees that that there's a bubble brewing in the gold market right now, although he doesn't rule that out in the future.
"I expect there to be hysteria in the precious metals markets in 5 to 10 years. Right now, very few people own gold, and I can hardly call something a bubble when very few people own it," he said.
Rogers also revealed that he is bullish on the agricultural commodity space.
"There are 3 billion people in Asia, and most of them had not had a very good standard of living in the past 100 or 200 years. That's changing and changing very rapidly. They're going to eat more, they're going to wear more clothes…so agriculture is going to do very well."
He pointed out that cocoa stands to do very well.
On currencies, he said it's a difficult asset class to invest in right now, as he expects "a lot more currency turmoil over the next 2- 3 years because of the huge imbalances that exist in the world."
"I would prefer the euro, perhaps with the yen second. Because there are many technical reasons that I'm optimistic about the yen," he concluded.
© 2010 CNBC.com
BOJ Eases Policy to Fight Yen Rise, Impact Seen Slim - CNBC
The Bank of Japan expanded its cheap loan scheme on Monday, heeding government calls for action to curb a rise in the yen that threatens a fragile economic recovery and leaving the door open to more policy easing.
The yen surged more than 1 percent against the dollar after the central bank beefed up the supply of fixed-rate loans to banks, a move investors saw as a symbolic gesture that will do little to halt a climb in the currency that hurts exports and may prolong deflation.
"Today's move is not a bold move," said Simon Wong, regional economist at Standard Chartered Bank in Hong Kong.
"If the yen continues to appreciate, say it appreciates beyond the 80 level, that could trigger more direct intervention at some point."
The decision at an emergency meeting called a week ahead of a scheduled policy review follows weeks of efforts by Tokyo's policymakers to talk down the yen, which intensified after the yen hit a 15-year high of 83.58 yen against the dollar last week.
Aware of slim chances of a coordinated market intervention and risks of taking on markets alone, the government stepped up its pressure on the central bank to curb the yen with some form of monetary easing.
Now, however, the ball was back in the government's court, analysts said.
"They don't really have any other policy tools they are prepared to use, so that might make it more necessary to have intervention if the yen goes," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.
Market players were disappointed the BOJ had stopped short of more aggressive moves such as increasing Japanese government bond purchases or cutting its overnight rate call target from 0.1 percent to zero.
BOJ Governor Masaaki Shirakawa said told a news conference the current level of bond buying was appropriate.
He also said, however, the central bank could not rule out downgrading its forecast of a moderate economic recovery — a hint that it might act again if clearer evidence of a slowdown emerged.
PM Kan Keen to Look Active
The yen's rebound pulled the Nikkei share average off its peaks and helped Japanese government bond futures bounce back from an early plunge.
Prime Minister Naoto Kan, whose Democratic Party swept to power a year ago but was thrashed in a July upper house poll, is keen to show that he is doing something about the economy ahead of a challenge from powerbroker Ichiro Ozawa in a Sept. 14 party leadership vote that could split the party.
Kan was to meet Shirakawa after the policy board meeting, and his cabinet was to decide the basic thrust of additional measures to help the slowing economy at a meeting later in the day.
"The government's fiscal policy and the BOJ's monetary policy should be in sync to send a strong message," Trade Minister Masayuki Naoshima told reporters.
But Japan's huge public debt, now twice the size of the economy, limits Tokyo's options, and the government is expected to propose shifting funds around rather than announce new substantial spending.
Flying Solo?
Japan will probably have to intervene alone if it were to step in to curb yen gains, as its Group of Seven counterparts, happy with the benefits to exports from their weak currencies, are in no mood for coordinated intervention.
Solo currency intervention, however, will not have much effect in weakening the yen unless backed by aggressive monetary easing, traders say.
In Monday's move, the central bank increased the volume of money available to banks under its fixed-rate fund supply operation to 30 trillion yen ($351 billion) from 20 trillion yen. It also put in place a six-month fund operation in addition to the three-month loan program already in place.
Of the 30 trillion yen, 10 trillion yen will be the six-month fund operation, BOJ said. The decision was by an 8-1 vote, with board member Miyako Suda dissenting.
The central bank, as widely expected, maintained its overnight core rate target at 0.1 percent by a unanimous vote.
The BOJ launched the funding scheme, which offers loans at 0.1 percent, in December.
That failed to boost bank lending but helped to push the yen further away from a November high.
The BOJ last eased monetary policy in March, when it doubled the size of the fixed-rate fund supply tool to 20 trillion yen.
Copyright 2010 Reuters.
The yen surged more than 1 percent against the dollar after the central bank beefed up the supply of fixed-rate loans to banks, a move investors saw as a symbolic gesture that will do little to halt a climb in the currency that hurts exports and may prolong deflation.
"Today's move is not a bold move," said Simon Wong, regional economist at Standard Chartered Bank in Hong Kong.
"If the yen continues to appreciate, say it appreciates beyond the 80 level, that could trigger more direct intervention at some point."
The decision at an emergency meeting called a week ahead of a scheduled policy review follows weeks of efforts by Tokyo's policymakers to talk down the yen, which intensified after the yen hit a 15-year high of 83.58 yen against the dollar last week.
Aware of slim chances of a coordinated market intervention and risks of taking on markets alone, the government stepped up its pressure on the central bank to curb the yen with some form of monetary easing.
Now, however, the ball was back in the government's court, analysts said.
"They don't really have any other policy tools they are prepared to use, so that might make it more necessary to have intervention if the yen goes," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.
Market players were disappointed the BOJ had stopped short of more aggressive moves such as increasing Japanese government bond purchases or cutting its overnight rate call target from 0.1 percent to zero.
BOJ Governor Masaaki Shirakawa said told a news conference the current level of bond buying was appropriate.
He also said, however, the central bank could not rule out downgrading its forecast of a moderate economic recovery — a hint that it might act again if clearer evidence of a slowdown emerged.
PM Kan Keen to Look Active
The yen's rebound pulled the Nikkei share average off its peaks and helped Japanese government bond futures bounce back from an early plunge.
Prime Minister Naoto Kan, whose Democratic Party swept to power a year ago but was thrashed in a July upper house poll, is keen to show that he is doing something about the economy ahead of a challenge from powerbroker Ichiro Ozawa in a Sept. 14 party leadership vote that could split the party.
Kan was to meet Shirakawa after the policy board meeting, and his cabinet was to decide the basic thrust of additional measures to help the slowing economy at a meeting later in the day.
"The government's fiscal policy and the BOJ's monetary policy should be in sync to send a strong message," Trade Minister Masayuki Naoshima told reporters.
But Japan's huge public debt, now twice the size of the economy, limits Tokyo's options, and the government is expected to propose shifting funds around rather than announce new substantial spending.
Flying Solo?
Japan will probably have to intervene alone if it were to step in to curb yen gains, as its Group of Seven counterparts, happy with the benefits to exports from their weak currencies, are in no mood for coordinated intervention.
Solo currency intervention, however, will not have much effect in weakening the yen unless backed by aggressive monetary easing, traders say.
In Monday's move, the central bank increased the volume of money available to banks under its fixed-rate fund supply operation to 30 trillion yen ($351 billion) from 20 trillion yen. It also put in place a six-month fund operation in addition to the three-month loan program already in place.
Of the 30 trillion yen, 10 trillion yen will be the six-month fund operation, BOJ said. The decision was by an 8-1 vote, with board member Miyako Suda dissenting.
The central bank, as widely expected, maintained its overnight core rate target at 0.1 percent by a unanimous vote.
The BOJ launched the funding scheme, which offers loans at 0.1 percent, in December.
That failed to boost bank lending but helped to push the yen further away from a November high.
The BOJ last eased monetary policy in March, when it doubled the size of the fixed-rate fund supply tool to 20 trillion yen.
Copyright 2010 Reuters.
Sunday, August 29, 2010
Markets—As September Comes, Investors Begin a Rough Month - CNBC
Beaten-up investors go into September, historically a weak month for stocks, facing key reports on jobs, manufacturing and services.
If those disappoint, the S&P 500 could breach technical support levels, pushing stocks yet lower. The S&P 500 index has fallen nearly 13 percent since April as investors fret about the chance of a double-dip recession.
But the index has found solid support around the 1,040 level, with a sustained move below that proving tough.
Federal Reserve Chairman Ben Bernanke boosted stocks Friday by signaling the Fed is ready to act if the economy worsens.
But more weakness in upcoming indicators like non-farm payrolls and Institute for Supply Management surveys would intensify fears the economy is sliding back into recession.
"There is this continual trend toward numbers falling short of expectations," said Nick Kalivas, equity analyst at MF Global in Chicago.
"My guess is you'll see some selling come in again this week on these numbers." The non-farm payroll report coming on Friday is expected to show 99,000 jobs were lost in August, swollen by redundancies among temporary census workers, while private sector hires grew by only 42,000.
Both the manufacturing and services sectors are expected to have experienced another slowdown in growth in August.
The ISM manufacturing report is released on Wednesday, followed by the services sector report on Friday.
Attracting Buyers
The S&P 500 tested the 1,040 level twice during the past week, both times ending the day with gains.
The level has consistently attracted buyers over the past 10 months and was significantly breached only once during a brief stint in July.
"Here we are sitting at this important support level, having pulled back 8 percent (on an intraday basis) in three weeks, you potentially set up for a reversal," said Richard Ross, global technical strategist at Auerbach Grayson in New York.
The benchmark Standard & Poor's 500 index finished last week at 1,064 on Friday. If the 1,040 level is breached, the S&P 500 could fall into a lower range around 1,020 to 1,010.
However, the index runs into resistance at its 14-day moving average at 1,076.65, providing only limited scope on the upside. Investor sentiment remains negative.
In the options market, investors bought S&P 500 puts, giving them the right to sell S&P futures at a fixed price, although the most actively traded option on the S&P 500ETF was the $107 call, suggesting some bullish trades ahead of next week.
"Overall investor sentiment in the option market has become very skeptical, with put buying widely exceeding call purchases," said Ryan Detrick, technical senior analyst at Schaeffer's Investment Research in Cincinnati.
The put-to-call ratio, a measure of investor sentiment, was at 0.61 as of Thursday's close compared to a 21-day ratio of 0.59.
Investors will be closely following comments from executives at big industrial companies like General Electric [GE 14.71 0.21 (+1.45%) ] and Boeing [BA 63.16 1.84 (+3%) ] at Morgan Stanley's Global Industrials Unplugged Conference this week.
Major Revenue Estimates
Intel [INTC 18.37 0.19 (+1.05%) ] cut its third-quarter revenue estimates in a surprise on Friday. Although investors shook off the news after an initial fall, bleak outlooks from large corporations at the heart of the economy could rattle investors.
As usual there will be a series of secondary labor market data playing second fiddle ahead of the Friday's jobs number.
ADP's jobs report on Wednesday is expected to show the private sector added 18,000 jobs in August, down from 42,000 in July.
Weekly claims for jobless benefits are tipped to remain solidly elevated on Thursday, edging up to 475,000 compared to 473,000 the week before.
With significant risks on the horizon, many investors may think twice about getting into the market at the start of September, historically the worst performing month for all three major indexes.
That may be especially true given the three-day break next week when U.S. markets shut to observe Labor Day on Monday, Sept. 6.
Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors in St. Louis, said he found it hard to envision a rally in the current environment. "Right now the market is locked into short-term thinking," he said.
Copyright 2010 Reuters.
If those disappoint, the S&P 500 could breach technical support levels, pushing stocks yet lower. The S&P 500 index has fallen nearly 13 percent since April as investors fret about the chance of a double-dip recession.
But the index has found solid support around the 1,040 level, with a sustained move below that proving tough.
Federal Reserve Chairman Ben Bernanke boosted stocks Friday by signaling the Fed is ready to act if the economy worsens.
But more weakness in upcoming indicators like non-farm payrolls and Institute for Supply Management surveys would intensify fears the economy is sliding back into recession.
"There is this continual trend toward numbers falling short of expectations," said Nick Kalivas, equity analyst at MF Global in Chicago.
"My guess is you'll see some selling come in again this week on these numbers." The non-farm payroll report coming on Friday is expected to show 99,000 jobs were lost in August, swollen by redundancies among temporary census workers, while private sector hires grew by only 42,000.
Both the manufacturing and services sectors are expected to have experienced another slowdown in growth in August.
The ISM manufacturing report is released on Wednesday, followed by the services sector report on Friday.
Attracting Buyers
The S&P 500 tested the 1,040 level twice during the past week, both times ending the day with gains.
The level has consistently attracted buyers over the past 10 months and was significantly breached only once during a brief stint in July.
"Here we are sitting at this important support level, having pulled back 8 percent (on an intraday basis) in three weeks, you potentially set up for a reversal," said Richard Ross, global technical strategist at Auerbach Grayson in New York.
The benchmark Standard & Poor's 500 index finished last week at 1,064 on Friday. If the 1,040 level is breached, the S&P 500 could fall into a lower range around 1,020 to 1,010.
However, the index runs into resistance at its 14-day moving average at 1,076.65, providing only limited scope on the upside. Investor sentiment remains negative.
In the options market, investors bought S&P 500 puts, giving them the right to sell S&P futures at a fixed price, although the most actively traded option on the S&P 500ETF was the $107 call, suggesting some bullish trades ahead of next week.
"Overall investor sentiment in the option market has become very skeptical, with put buying widely exceeding call purchases," said Ryan Detrick, technical senior analyst at Schaeffer's Investment Research in Cincinnati.
The put-to-call ratio, a measure of investor sentiment, was at 0.61 as of Thursday's close compared to a 21-day ratio of 0.59.
Investors will be closely following comments from executives at big industrial companies like General Electric [GE 14.71 0.21 (+1.45%) ] and Boeing [BA 63.16 1.84 (+3%) ] at Morgan Stanley's Global Industrials Unplugged Conference this week.
Major Revenue Estimates
Intel [INTC 18.37 0.19 (+1.05%) ] cut its third-quarter revenue estimates in a surprise on Friday. Although investors shook off the news after an initial fall, bleak outlooks from large corporations at the heart of the economy could rattle investors.
As usual there will be a series of secondary labor market data playing second fiddle ahead of the Friday's jobs number.
ADP's jobs report on Wednesday is expected to show the private sector added 18,000 jobs in August, down from 42,000 in July.
Weekly claims for jobless benefits are tipped to remain solidly elevated on Thursday, edging up to 475,000 compared to 473,000 the week before.
With significant risks on the horizon, many investors may think twice about getting into the market at the start of September, historically the worst performing month for all three major indexes.
That may be especially true given the three-day break next week when U.S. markets shut to observe Labor Day on Monday, Sept. 6.
Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors in St. Louis, said he found it hard to envision a rally in the current environment. "Right now the market is locked into short-term thinking," he said.
Copyright 2010 Reuters.
Can Anything Cure the Ailing American Economy? - CNBC
The American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic — more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing, along with worries that Recession-themed newsprint cuttings
the country may face several more years of lean prospects.
On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.
Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.
It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects.
The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.
This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now.
Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.
The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s.
Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten). The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning — boosting exports, tinkering with accounting standards.
“There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. “It’s just really hard to see what will bring us out.”
Japan’s years of pain were made worse by deflation — falling prices — an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing — a downward spiral.
Deflation is both symptom and cause of an economy whose basic functioning has stalled. It reflects too many goods and services in the marketplace with not enough people able to buy them.
For more than a decade, the global economy was fueled by monumental spending power underwritten by a pair of investment booms in America — the Internet explosion in the 1990s, then the exuberance over real estate. As housing prices soared, homeowners borrowed against rising values, distributing their dollars to furniture dealers in suburban malls, and furniture factories in coastal China.
But the collapse of American housing prices severed that artery of finance. Homeowners could not borrow, and they cut spending, shrinking sales for businesses and prompting layoffs.
Early this year, some economists declared that the cycle was finally righting itself. Businesses were restocking inventories, yielding modest job growth in factories. Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle.
But the hopes failed to account for how extensively spending power had dropped in the American economy, and how uneasy people were made by every snippet of data showing that houses were not selling, employers were not hiring, and stock prices were foundering.
Now, a new cause for concern is growing: the flat trajectory of prices, which might metastasize into a full-blown case of deflation.
The primary way to attack deflation is to inject credit into the economy, giving reluctant consumers the wherewithal to spend. The chief deflation fighter is the Federal Reserve, which traditionally adjusts a benchmark overnight rate for banks that influences rates on car loans, mortgages and other forms of credit. The Fed pulled this lever long ago, and has kept its target rate near zero since late 2008.
The Fed has also been more creative. During the worst of the financial crisis, the Fed relieved American banks of troubled investments, many linked to mortgages, to give the banks room to make new loans.
This engendered the sort of debate likely to fill doctoral dissertations for generations. Most economists praise the Fed for confronting the possibility of another depression. But the Fed added to the nation’s debts, provoking talk that it was testing global faith in the dollar.
The dramatic expansion of the national debt — which began in the Bush administration, via hefty tax cuts and two wars — has ratcheted up fears that, one day, creditors like China and Japan might demand sharply higher interest rates to finance American spending. Those rates would spread through the economy and inflict the reverse of deflation: inflation, or rising prices, as merchants lose faith in the sanctity of the dollar and demand more dollars in exchange for oil, electronics and other items.
So far, the reverse has happened. As investors lose faith in real estate and stocks, they are flooding into government savings bonds, keeping interest rates exceedingly low. Still, inflation worries occupy the people who control money, not least the governors of the Fed. The Fed has been seeking a graceful exit from its interventions, aiming to unload its cache of mortgage-linked investments and — likely in the far future — lift interest rates.
But the recent disturbing economic news has delayed those plans. This month, the Fed said it would take the proceeds from its mortgage-linked investments and buy Treasury bills to keep longer-term interest rates down. The Wall Street Journal reported that this decision came amid substantial disagreement among the Fed’s governors, suggesting that future action will be constrained by fears of inflation.
Republicans in Congress have embraced further tax cuts and less spending as the answer to the weak economy, while accusing the administration of squandering stimulus spending on efforts that brought little gain. Some conservative analysts liken the government’s reliance on spending and credit to imbibing another cocktail to take the edge off a hangover. In this view, the weak economy should be welcomed for the discipline it imposes, forcing a paring back of unsustainable spending, while building up savings that can finance investment and later feed healthy economic growth.
“The recession is the cure for the disease that affects the economy, but the politicians don’t have the stomach for it,” says Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house. “They’re going to keep stimulating the economy until they kill it with an overdose. The hyper-inflation that results is going to be far worse than the cure.”
Germany, which has long harbored particularly powerful fears of inflation, has done relatively well in the current downturn without large stimulus spending, and that experience is now cited by adherents of austerity. But it can be argued that the Germans had two advantages over Americans: A more extensive social safety net to give consumers more money and the confidence to spend it, and a vibrant manufacturing base to churn out more goods for export.
Most economists who are close to the policy making arena for both parties take the position that austerity is the wrong medicine for what ails the American economy, and they dismiss warnings about inflation as akin to focusing on the side effects of chemotherapy in the face of cancer. First, they argue, take the medicine and stave off the lethal threat; then deal with the collateral problems.
Regardless, inflation fears persist, constraining what limited prescriptions might otherwise be thrown at a weakening economy.
The impending elections in November — with control of Congress hanging in the balance — has further narrowed the contours of political possibility
Six months ago, Alan Blinder, a former vice chairman of the Federal Reserve, and now an economist at Princeton, dismissed the idea that America’s political system would ever allow the country to sink into a Japan-style quagmire. “Now I’m looking at the political system turning itself into a paralyzed beast,” he says, adding that a lost decade now looms as “a much bigger risk.” Congress and the Obama administration have ruled out further stimulus spending. The Fed appears to be running out of powder. “Its really powerful ammunition has been expended,” Mr. Blinder says.
Even after the November election, few expect a different dynamic. “We’re already in a gridlock situation, and nothing substantive is going to change,” says Bruce Bartlett, who was a Treasury economist in the first Bush administration. “Clearly, a weak economy in 2012 will be very good for whoever the Republican presidential candidate is. It’s hard to see how the Republicans lose by blocking stimulus.”
On the other hand, if deflation emerges as a verifiable menace, many economists expect Mr. Bernanke — an expert on the Great Depression — to again champion aggressive measures, perhaps expanding the Fed’s balance sheet to buy pools of auto loans or credit card debt.
“It’s very likely the Fed will bend in that direction if the economy stays soft, especially if they are starting to see deflation,” says Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, and now a professor at Harvard. “That’s really starting to loom.”
On Friday, Mr. Bernanke, whose board can operate independent of politics and the government, offered assurance that he still had powerful therapies to use should conditions worsen. Yet he also expressed concern about the potential side effects, underscoring a reluctance for more action.
“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation,” he said. “We do.” Then he added: “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”
Right now, many homeowners owe the bank more than their homes are worth, prompting some to abandon properties, adding inventory to a market choked with vacant addresses. An Obama administration program aimed at slowing foreclosures has prolonged trouble, say some economists, by failing to relieve borrowers of unsustainable debt burdens or making transparent the extent of losses yet to be confronted by the financial system.
“The big question is, who’s going to swallow the losses,” says Mr. Stiglitz. “It should be the banks, but they don’t want to. We’re likely to be in paralysis for years if they prevail.”
The Treasury sits in the middle, concerned by the continued weakness of housing, yet unwilling to pressure banks to write down mortgage balances.
Like their Japanese counterparts a decade ago, Treasury officials worry that forcing the banks to take losses could weaken them and risk another crisis.
By default, muddling through has emerged as the prescription of the moment.
This story originally appeared in the The New York Times
the country may face several more years of lean prospects.
On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.
Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.
It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects.
The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.
This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now.
Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.
The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s.
Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten). The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning — boosting exports, tinkering with accounting standards.
“There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. “It’s just really hard to see what will bring us out.”
Japan’s years of pain were made worse by deflation — falling prices — an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing — a downward spiral.
Deflation is both symptom and cause of an economy whose basic functioning has stalled. It reflects too many goods and services in the marketplace with not enough people able to buy them.
For more than a decade, the global economy was fueled by monumental spending power underwritten by a pair of investment booms in America — the Internet explosion in the 1990s, then the exuberance over real estate. As housing prices soared, homeowners borrowed against rising values, distributing their dollars to furniture dealers in suburban malls, and furniture factories in coastal China.
But the collapse of American housing prices severed that artery of finance. Homeowners could not borrow, and they cut spending, shrinking sales for businesses and prompting layoffs.
Early this year, some economists declared that the cycle was finally righting itself. Businesses were restocking inventories, yielding modest job growth in factories. Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle.
But the hopes failed to account for how extensively spending power had dropped in the American economy, and how uneasy people were made by every snippet of data showing that houses were not selling, employers were not hiring, and stock prices were foundering.
Now, a new cause for concern is growing: the flat trajectory of prices, which might metastasize into a full-blown case of deflation.
The primary way to attack deflation is to inject credit into the economy, giving reluctant consumers the wherewithal to spend. The chief deflation fighter is the Federal Reserve, which traditionally adjusts a benchmark overnight rate for banks that influences rates on car loans, mortgages and other forms of credit. The Fed pulled this lever long ago, and has kept its target rate near zero since late 2008.
The Fed has also been more creative. During the worst of the financial crisis, the Fed relieved American banks of troubled investments, many linked to mortgages, to give the banks room to make new loans.
This engendered the sort of debate likely to fill doctoral dissertations for generations. Most economists praise the Fed for confronting the possibility of another depression. But the Fed added to the nation’s debts, provoking talk that it was testing global faith in the dollar.
The dramatic expansion of the national debt — which began in the Bush administration, via hefty tax cuts and two wars — has ratcheted up fears that, one day, creditors like China and Japan might demand sharply higher interest rates to finance American spending. Those rates would spread through the economy and inflict the reverse of deflation: inflation, or rising prices, as merchants lose faith in the sanctity of the dollar and demand more dollars in exchange for oil, electronics and other items.
So far, the reverse has happened. As investors lose faith in real estate and stocks, they are flooding into government savings bonds, keeping interest rates exceedingly low. Still, inflation worries occupy the people who control money, not least the governors of the Fed. The Fed has been seeking a graceful exit from its interventions, aiming to unload its cache of mortgage-linked investments and — likely in the far future — lift interest rates.
But the recent disturbing economic news has delayed those plans. This month, the Fed said it would take the proceeds from its mortgage-linked investments and buy Treasury bills to keep longer-term interest rates down. The Wall Street Journal reported that this decision came amid substantial disagreement among the Fed’s governors, suggesting that future action will be constrained by fears of inflation.
Republicans in Congress have embraced further tax cuts and less spending as the answer to the weak economy, while accusing the administration of squandering stimulus spending on efforts that brought little gain. Some conservative analysts liken the government’s reliance on spending and credit to imbibing another cocktail to take the edge off a hangover. In this view, the weak economy should be welcomed for the discipline it imposes, forcing a paring back of unsustainable spending, while building up savings that can finance investment and later feed healthy economic growth.
“The recession is the cure for the disease that affects the economy, but the politicians don’t have the stomach for it,” says Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house. “They’re going to keep stimulating the economy until they kill it with an overdose. The hyper-inflation that results is going to be far worse than the cure.”
Germany, which has long harbored particularly powerful fears of inflation, has done relatively well in the current downturn without large stimulus spending, and that experience is now cited by adherents of austerity. But it can be argued that the Germans had two advantages over Americans: A more extensive social safety net to give consumers more money and the confidence to spend it, and a vibrant manufacturing base to churn out more goods for export.
Most economists who are close to the policy making arena for both parties take the position that austerity is the wrong medicine for what ails the American economy, and they dismiss warnings about inflation as akin to focusing on the side effects of chemotherapy in the face of cancer. First, they argue, take the medicine and stave off the lethal threat; then deal with the collateral problems.
Regardless, inflation fears persist, constraining what limited prescriptions might otherwise be thrown at a weakening economy.
The impending elections in November — with control of Congress hanging in the balance — has further narrowed the contours of political possibility
Six months ago, Alan Blinder, a former vice chairman of the Federal Reserve, and now an economist at Princeton, dismissed the idea that America’s political system would ever allow the country to sink into a Japan-style quagmire. “Now I’m looking at the political system turning itself into a paralyzed beast,” he says, adding that a lost decade now looms as “a much bigger risk.” Congress and the Obama administration have ruled out further stimulus spending. The Fed appears to be running out of powder. “Its really powerful ammunition has been expended,” Mr. Blinder says.
Even after the November election, few expect a different dynamic. “We’re already in a gridlock situation, and nothing substantive is going to change,” says Bruce Bartlett, who was a Treasury economist in the first Bush administration. “Clearly, a weak economy in 2012 will be very good for whoever the Republican presidential candidate is. It’s hard to see how the Republicans lose by blocking stimulus.”
On the other hand, if deflation emerges as a verifiable menace, many economists expect Mr. Bernanke — an expert on the Great Depression — to again champion aggressive measures, perhaps expanding the Fed’s balance sheet to buy pools of auto loans or credit card debt.
“It’s very likely the Fed will bend in that direction if the economy stays soft, especially if they are starting to see deflation,” says Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, and now a professor at Harvard. “That’s really starting to loom.”
On Friday, Mr. Bernanke, whose board can operate independent of politics and the government, offered assurance that he still had powerful therapies to use should conditions worsen. Yet he also expressed concern about the potential side effects, underscoring a reluctance for more action.
“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation,” he said. “We do.” Then he added: “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”
Right now, many homeowners owe the bank more than their homes are worth, prompting some to abandon properties, adding inventory to a market choked with vacant addresses. An Obama administration program aimed at slowing foreclosures has prolonged trouble, say some economists, by failing to relieve borrowers of unsustainable debt burdens or making transparent the extent of losses yet to be confronted by the financial system.
“The big question is, who’s going to swallow the losses,” says Mr. Stiglitz. “It should be the banks, but they don’t want to. We’re likely to be in paralysis for years if they prevail.”
The Treasury sits in the middle, concerned by the continued weakness of housing, yet unwilling to pressure banks to write down mortgage balances.
Like their Japanese counterparts a decade ago, Treasury officials worry that forcing the banks to take losses could weaken them and risk another crisis.
By default, muddling through has emerged as the prescription of the moment.
This story originally appeared in the The New York Times
Friday, August 27, 2010
Economic Growth at 1.6%; Bad, But Not as Bad as Expected - CNBC
U.S. economic growth slowed more sharply than initially thought in the second quarter, held back by the largest increase in imports in 26 years, a government report showed on Friday.
Gross domestic product expanded at a 1.6 percent annual rate, the Commerce Department said, instead of the 2.4 percent pace it had estimated last month.
However, the reading was a touch better than market expectations. Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, revised down to a 1.4 percent growth rate. The economy grew at a 3.7 percent pace in the first three months of the year.
The slackening economic recovery is a major political challenge for the Obama administration and the Democratic Party two months away from crucial mid-term elections that could shift the balance of power in Congress in favor of Republicans.
A Reuters/Ipsos poll this week found Obama's approval rating at 45 percent overtaken for the first time by a 52 percent disapproval rating.
The revised GDP data will likely fuel analysts' concern that slowing growth is putting the economy at growing risk of slipping back into recession. Federal Reserve policymakers were meeting on Friday at their annual retreat in Wyoming to ponder the economy's direction and hear from Fed Chairman Ben Bernanke.
"There is no doubt we are losing momentum in the economic recovery," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh. "But if we define recession as two or more consecutive declining quarters of GDP, I think we are not going to go there.
"We are going to see a pattern where we may have declining GDP in one quarter followed by smaller gains in the next quarter, bouncing along the bottom as it were," Dye said.
The recovery from the worst economic downturn since the Great Depression had been largely fueled by a $862 billion government stimulus package and businesses rebuilding inventories from record low levels.
Imports Choking Growth
Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.
A smaller contribution from business inventories than initially estimated also restrained output. Business inventories increased only $63.2 billion, rather than $75.7 billion, adding a slim 0.63 percentage points to GDP.
Inventories, which had been a major driver of the recovery that started in the second half of 2009, increased $44.1 billion in the first three months of the year.
Excluding inventories, the economy expanded at a 1.0 percent rate, instead of the 1.3 percent pace reported last month.
There were some bright spots in the report, with growth in consumer spending revised up to a 2.0 percent rates from 1.6 percent. Consumer spending grew at a 1.9 percent rate in the first quarter.
Stubbornly high unemployment has dampened consumer spending, which normally accounts for 70 percent of U.S. economic activity. Spending added 1.38 percentage points to GDP last quarter.
Although businesses have been reluctant to hire new workers, they have been splurging on equipment and software, which also contributed to the surge in imports. Business investment was revised up to a 17.6 percent rate, the largest increase since the first quarter of 2006, from the previously estimated 17 percent pace.
Investment in equipment and software was the strongest since the fourth quarter of 1983. Spending on structures was revised to show a far smaller increase than previously estimated but still posted the first rise in spending on structures since the second quarter of 2008.
Growth in new home construction was revised down slightly to 27.2 percent from 27.9 percent. The sector, which was a drag on growth in the first quarter, was lifted by a spurt in building activity spurred by a popular home-buyer tax credit that has since expired. The rate of increase was still the biggest since the third quarter of 1983.
Residential investment had contracted at a 12.3 percent rate in the first quarter.
The GDP also showed corporate profits rose 2.9 percent in the second quarter after increasing 5.8 percent in the first three months of the year.
Copyright 2010 Reuters.
Gross domestic product expanded at a 1.6 percent annual rate, the Commerce Department said, instead of the 2.4 percent pace it had estimated last month.
However, the reading was a touch better than market expectations. Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, revised down to a 1.4 percent growth rate. The economy grew at a 3.7 percent pace in the first three months of the year.
The slackening economic recovery is a major political challenge for the Obama administration and the Democratic Party two months away from crucial mid-term elections that could shift the balance of power in Congress in favor of Republicans.
A Reuters/Ipsos poll this week found Obama's approval rating at 45 percent overtaken for the first time by a 52 percent disapproval rating.
The revised GDP data will likely fuel analysts' concern that slowing growth is putting the economy at growing risk of slipping back into recession. Federal Reserve policymakers were meeting on Friday at their annual retreat in Wyoming to ponder the economy's direction and hear from Fed Chairman Ben Bernanke.
"There is no doubt we are losing momentum in the economic recovery," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh. "But if we define recession as two or more consecutive declining quarters of GDP, I think we are not going to go there.
"We are going to see a pattern where we may have declining GDP in one quarter followed by smaller gains in the next quarter, bouncing along the bottom as it were," Dye said.
The recovery from the worst economic downturn since the Great Depression had been largely fueled by a $862 billion government stimulus package and businesses rebuilding inventories from record low levels.
Imports Choking Growth
Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.
A smaller contribution from business inventories than initially estimated also restrained output. Business inventories increased only $63.2 billion, rather than $75.7 billion, adding a slim 0.63 percentage points to GDP.
Inventories, which had been a major driver of the recovery that started in the second half of 2009, increased $44.1 billion in the first three months of the year.
Excluding inventories, the economy expanded at a 1.0 percent rate, instead of the 1.3 percent pace reported last month.
There were some bright spots in the report, with growth in consumer spending revised up to a 2.0 percent rates from 1.6 percent. Consumer spending grew at a 1.9 percent rate in the first quarter.
Stubbornly high unemployment has dampened consumer spending, which normally accounts for 70 percent of U.S. economic activity. Spending added 1.38 percentage points to GDP last quarter.
Although businesses have been reluctant to hire new workers, they have been splurging on equipment and software, which also contributed to the surge in imports. Business investment was revised up to a 17.6 percent rate, the largest increase since the first quarter of 2006, from the previously estimated 17 percent pace.
Investment in equipment and software was the strongest since the fourth quarter of 1983. Spending on structures was revised to show a far smaller increase than previously estimated but still posted the first rise in spending on structures since the second quarter of 2008.
Growth in new home construction was revised down slightly to 27.2 percent from 27.9 percent. The sector, which was a drag on growth in the first quarter, was lifted by a spurt in building activity spurred by a popular home-buyer tax credit that has since expired. The rate of increase was still the biggest since the third quarter of 1983.
Residential investment had contracted at a 12.3 percent rate in the first quarter.
The GDP also showed corporate profits rose 2.9 percent in the second quarter after increasing 5.8 percent in the first three months of the year.
Copyright 2010 Reuters.
Thursday, August 26, 2010
Bernanke to Offer Outlook as Fed Weighs Bolder Steps - CNBC
With fresh signs that the housing market is weakening, the Federal Reserve chairman, Ben S. Bernanke, on Friday will offer his outlook on the economy, explain the Fed’s recent modest move to halt the slide and possibly outline other actions.
Mr. Bernanke’s speech, at an annual Fed symposium in Jackson Hole, Wyo., will be his first public comments since the Fed announced it would invest proceeds from its holdings of mortgage bonds to buy more long-term Treasury securities to prop up the recovery.
It is not known what Mr. Bernanke will say, but some insight may come from an episode in his past: his concern, soon after he became a Fed governor, that the economy was at risk of deflation as the nation gradually recovered from the dot-com bust a decade ago.
Mr. Bernanke’s worry then is similar to what troubles the Fed now, and his views will have no small bearing on the Fed’s course of action. These days the Fed confronts the combination of persistently high unemployment and an inflation rate so low that it worries economists.
Whether policy makers should take big steps to tackle the economic doldrums — by printing even more money and buying even more assets — will be the dominant question at the symposium and at the Fed’s next meeting on Sept. 21.
Within the central bank, several officials are alarmed at the threat of the economy falling into a dangerous cycle of declining demand, wages and prices not experienced since the Depression. They say that a deflationary, double-dip recession is unlikely, but want to formulate concrete steps to ward it off.
Other officials contend the economic indicators, while dismaying, do not represent an immediate threat, and worry that additional monetary stimulus by the Fed could erode the already shaky confidence of the markets, or even backfire by eventually spurring uncontrolled inflation.
The Fed has not confronted the risk of deflation since 2003. An examination of transcripts from the deliberations of the Fed’s policy-making group, the Federal Open Market Committee, during that spring sheds some light on the challenges Mr. Bernanke faces in maintaining a consensus in the committee as it approaches the problem today.
In a confidential briefing before the committee’s meeting on May 6, 2003, Fed economists estimated that there was a 35 percent chance that the fragile economy, still recovering from the 2001 recession, would face deflation by the end of 2004.
Mr. Bernanke, who had joined the Fed’s board of governors just nine months earlier, warned about the potential danger of deflation, according to the 2003 transcripts, which were made public last year. He said that “for the first time in many decades” the Fed faced greater danger from the risk of its inflation estimates being too high, rather than too low.
He wanted the Fed to draft “a plan for how we might proceed seamlessly from standard rate-cutting to more nonstandard operations should such operations become necessary.”
It would be five more years — and one boom-and-bust cycle later — before the Fed would have to apply that advice.
In the meantime, Mr. Bernanke’s perspective appeared to influence that of Alan Greenspan, then the Fed chairman.
“In my view we cannot avoid the fact, as Governor Bernanke pointed out, that we face an asymmetry,” Mr. Greenspan said at the May 2003 meeting. “We know what to do with inflation when it rises. The committee has taken action to counter it many times and has succeeded in doing so many times. We haven’t confronted the problem of potential deflation in a very long time.”
That view was echoed by several other committee members, even among those who pointed out that disinflation, a slowing of the rate of inflation, was not the same as deflation.
Robert T. Parry, then president of the San Francisco Fed, said, “It’s best to move sooner rather than later when the economy is within range of deflation and the zero bound.” He was referring to the challenge the Fed would face if it had to reduce short-term rates to nearly zero and could no longer cut them any further — a situation the Fed has faced since 2008.
Others were skeptical. George C. Guynn, then president of the Atlanta Fed, said the situation was not comparable to the Depression. “We clearly have experienced significant external shocks,” he said. “But the real economy is recovering, albeit slowly. It is not contracting.”
To prop up the economy after the dot-com boom’s collapse, the Fed lowered its benchmark short-term rate — the federal funds rate, at which banks lend to each other overnight — to 1.25 percent in November 2002, from 6.5 percent in January 2001.
On June 25, 2003, it reduced the rate even further, to 1 percent, the lowest level in decades. In the meeting where that decision was reached, Mr. Bernanke wondered “whether or not it would make sense tactically to say publicly that we are willing to lower the federal funds rate to zero if necessary.” He said it would help expectations because “there would no longer be a feeling in the market that we had reached the end of our rope.”
The threat of deflation did not come to pass, and a year later, the Fed began to raise interest rates and tighten monetary policy, a process that would continue until 2006 as housing prices soared across most of the country. Some critics have said the Greenspan Fed helped abet the housing bubble by leaving rates too low for too long, an interpretation Mr. Bernanke has rejected.
Mark W. Olson, who was a Fed governor from 2001 to 2006, said the Fed’s worry about deflation in 2003 was appropriate in hindsight. The committee had only two historical episodes to look to — the Depression of the 1930s and the Japanese deflation that began in the 1990s — and was determined to avoid either outcome, he said.
“It would have been irresponsible for us not to take it into consideration,” Mr. Olson said. “It wasn’t much ado about nothing.”
Of the Fed committee members who weighed the threat of inflation in 2003, four are still on the committee today: Mr. Bernanke; Donald L. Kohn, a Fed governor; Thomas M. Hoenig of the Kansas City Fed; and Sandra Pianalto of the Cleveland Fed. There is little doubt that the Fed’s last deflation debate has been on their minds as they confront an even more perilous economic outlook today.
This story originally appeared in the The New York Times
Mr. Bernanke’s speech, at an annual Fed symposium in Jackson Hole, Wyo., will be his first public comments since the Fed announced it would invest proceeds from its holdings of mortgage bonds to buy more long-term Treasury securities to prop up the recovery.
It is not known what Mr. Bernanke will say, but some insight may come from an episode in his past: his concern, soon after he became a Fed governor, that the economy was at risk of deflation as the nation gradually recovered from the dot-com bust a decade ago.
Mr. Bernanke’s worry then is similar to what troubles the Fed now, and his views will have no small bearing on the Fed’s course of action. These days the Fed confronts the combination of persistently high unemployment and an inflation rate so low that it worries economists.
Whether policy makers should take big steps to tackle the economic doldrums — by printing even more money and buying even more assets — will be the dominant question at the symposium and at the Fed’s next meeting on Sept. 21.
Within the central bank, several officials are alarmed at the threat of the economy falling into a dangerous cycle of declining demand, wages and prices not experienced since the Depression. They say that a deflationary, double-dip recession is unlikely, but want to formulate concrete steps to ward it off.
Other officials contend the economic indicators, while dismaying, do not represent an immediate threat, and worry that additional monetary stimulus by the Fed could erode the already shaky confidence of the markets, or even backfire by eventually spurring uncontrolled inflation.
The Fed has not confronted the risk of deflation since 2003. An examination of transcripts from the deliberations of the Fed’s policy-making group, the Federal Open Market Committee, during that spring sheds some light on the challenges Mr. Bernanke faces in maintaining a consensus in the committee as it approaches the problem today.
In a confidential briefing before the committee’s meeting on May 6, 2003, Fed economists estimated that there was a 35 percent chance that the fragile economy, still recovering from the 2001 recession, would face deflation by the end of 2004.
Mr. Bernanke, who had joined the Fed’s board of governors just nine months earlier, warned about the potential danger of deflation, according to the 2003 transcripts, which were made public last year. He said that “for the first time in many decades” the Fed faced greater danger from the risk of its inflation estimates being too high, rather than too low.
He wanted the Fed to draft “a plan for how we might proceed seamlessly from standard rate-cutting to more nonstandard operations should such operations become necessary.”
It would be five more years — and one boom-and-bust cycle later — before the Fed would have to apply that advice.
In the meantime, Mr. Bernanke’s perspective appeared to influence that of Alan Greenspan, then the Fed chairman.
“In my view we cannot avoid the fact, as Governor Bernanke pointed out, that we face an asymmetry,” Mr. Greenspan said at the May 2003 meeting. “We know what to do with inflation when it rises. The committee has taken action to counter it many times and has succeeded in doing so many times. We haven’t confronted the problem of potential deflation in a very long time.”
That view was echoed by several other committee members, even among those who pointed out that disinflation, a slowing of the rate of inflation, was not the same as deflation.
Robert T. Parry, then president of the San Francisco Fed, said, “It’s best to move sooner rather than later when the economy is within range of deflation and the zero bound.” He was referring to the challenge the Fed would face if it had to reduce short-term rates to nearly zero and could no longer cut them any further — a situation the Fed has faced since 2008.
Others were skeptical. George C. Guynn, then president of the Atlanta Fed, said the situation was not comparable to the Depression. “We clearly have experienced significant external shocks,” he said. “But the real economy is recovering, albeit slowly. It is not contracting.”
To prop up the economy after the dot-com boom’s collapse, the Fed lowered its benchmark short-term rate — the federal funds rate, at which banks lend to each other overnight — to 1.25 percent in November 2002, from 6.5 percent in January 2001.
On June 25, 2003, it reduced the rate even further, to 1 percent, the lowest level in decades. In the meeting where that decision was reached, Mr. Bernanke wondered “whether or not it would make sense tactically to say publicly that we are willing to lower the federal funds rate to zero if necessary.” He said it would help expectations because “there would no longer be a feeling in the market that we had reached the end of our rope.”
The threat of deflation did not come to pass, and a year later, the Fed began to raise interest rates and tighten monetary policy, a process that would continue until 2006 as housing prices soared across most of the country. Some critics have said the Greenspan Fed helped abet the housing bubble by leaving rates too low for too long, an interpretation Mr. Bernanke has rejected.
Mark W. Olson, who was a Fed governor from 2001 to 2006, said the Fed’s worry about deflation in 2003 was appropriate in hindsight. The committee had only two historical episodes to look to — the Depression of the 1930s and the Japanese deflation that began in the 1990s — and was determined to avoid either outcome, he said.
“It would have been irresponsible for us not to take it into consideration,” Mr. Olson said. “It wasn’t much ado about nothing.”
Of the Fed committee members who weighed the threat of inflation in 2003, four are still on the committee today: Mr. Bernanke; Donald L. Kohn, a Fed governor; Thomas M. Hoenig of the Kansas City Fed; and Sandra Pianalto of the Cleveland Fed. There is little doubt that the Fed’s last deflation debate has been on their minds as they confront an even more perilous economic outlook today.
This story originally appeared in the The New York Times
Jobless Claims: US Jobless Claims Fall 31,000 Last Week - CNBC
New U.S. claims for unemployment benefits fell more that expected last week but a measure of underlying labor market trends rose to a nine-month high, government data showed Thursday.
Initial claims for state unemployment benefits fell 31,000 to a seasonally adjusted 473,000 in the week ended August 21, the Labor Department said.
The four-week average of new claims, considered a better measure of underlying labor market trends as it irons out week-to-week volatility, rose 3,250 to 486,750, the highest since late November.
Analysts polled by Reuters had forecast initial weekly jobless claims slipping to 490,000 from the previously reported 500,000 the prior week, which was revised up to 504,000 in Thursday's report.
A Labor Department official said there were no special factors influencing the report.
Initial claims for state unemployment benefits fell 31,000 to a seasonally adjusted 473,000 in the week ended August 21, the Labor Department said.
The four-week average of new claims, considered a better measure of underlying labor market trends as it irons out week-to-week volatility, rose 3,250 to 486,750, the highest since late November.
Analysts polled by Reuters had forecast initial weekly jobless claims slipping to 490,000 from the previously reported 500,000 the prior week, which was revised up to 504,000 in Thursday's report.
A Labor Department official said there were no special factors influencing the report.
BP Ruled Out Bid for Drilling Off Greenland - CNBC
BP said Thursday that it decided not to bid for a drilling license near Greenland, a move government officials there say may be due to its tarnished safety image after the disastrous blowout of a deepwater well in the Gulf of Mexico.
"We were aware of the licensing round," said BP spokesman Robert Wine. "We did get involved in it in the preliminary stages, and decided not to proceed with a bid."
Wine declined to discuss the reasons for the decision, or to say whether it was made before or after the Deepwater Horizon explosion on April 20. Greenland's premier, however, made it clear that the Gulf disaster had affected his government's approach to drilling and that a company's safety record was key.
"Of course we are influenced by what happened in the Gulf right now. And we know that we are taking on a huge responsibility on our shoulders," Kuupik Kleist told a news conference on Wednesday.
Wine indicated that BP had not ruled out bidding for future licenses around the world.
"We would obviously be interested in any (licensing) rounds coming up," he said.
Britain's Cairn Energy [CNE-LN 456.90 7.50 (+1.67%)] said on Tuesday that it had found gas off the west coast of Greenland, but no oil yet.
The announcement put the North Atlantic territory in the spotlight of global concerns about the risks of drilling at sea. Greenpeace's ship Esperanza was circling the oil rig in protest over what spokesman Ben Steart called "the reckless push toward an Arctic oil run."
Ove Karl Berthelsen, Greenland's minister in charge of mineral resources, said Thursday that he did not know whether there had been direct or indirect contacts with BP, but said the Gulf disaster could have been a factor in BP's decision not to bid.
"We are looking very thoroughly at the tenders we get," Berthelsen said. "We look at their history and how they have built up their reputation on safety policy. We look very thoroughly at that."
"Our administrative office knows very well that the government focuses very, very much on safety. And it wouldn't surprise me if those considerations (about BP) have been part of their thinking."
Berthelsen said no decision has yet been made on the next licensing round.
Kleist, the premier, said Greenland would try to follow Norway's example.
"We don't claim that there's no risk but we're trying to do our best. We're looking at best practices, wherever there might be. We're learning from the Norwegian experience and we stick to Norwegian standards that are known as the world's most protective standards," he said.
Shares of BP [BP-LN 384.65 9.50 (+2.53%)] were higher in London trading and closed higher in New York [BP 35.25 0.33 (+0.95%) ] trading Wednesday.
© 2010 The Associated Press. All rights reserved.
"We were aware of the licensing round," said BP spokesman Robert Wine. "We did get involved in it in the preliminary stages, and decided not to proceed with a bid."
Wine declined to discuss the reasons for the decision, or to say whether it was made before or after the Deepwater Horizon explosion on April 20. Greenland's premier, however, made it clear that the Gulf disaster had affected his government's approach to drilling and that a company's safety record was key.
"Of course we are influenced by what happened in the Gulf right now. And we know that we are taking on a huge responsibility on our shoulders," Kuupik Kleist told a news conference on Wednesday.
Wine indicated that BP had not ruled out bidding for future licenses around the world.
"We would obviously be interested in any (licensing) rounds coming up," he said.
Britain's Cairn Energy [CNE-LN 456.90 7.50 (+1.67%)] said on Tuesday that it had found gas off the west coast of Greenland, but no oil yet.
The announcement put the North Atlantic territory in the spotlight of global concerns about the risks of drilling at sea. Greenpeace's ship Esperanza was circling the oil rig in protest over what spokesman Ben Steart called "the reckless push toward an Arctic oil run."
Ove Karl Berthelsen, Greenland's minister in charge of mineral resources, said Thursday that he did not know whether there had been direct or indirect contacts with BP, but said the Gulf disaster could have been a factor in BP's decision not to bid.
"We are looking very thoroughly at the tenders we get," Berthelsen said. "We look at their history and how they have built up their reputation on safety policy. We look very thoroughly at that."
"Our administrative office knows very well that the government focuses very, very much on safety. And it wouldn't surprise me if those considerations (about BP) have been part of their thinking."
Berthelsen said no decision has yet been made on the next licensing round.
Kleist, the premier, said Greenland would try to follow Norway's example.
"We don't claim that there's no risk but we're trying to do our best. We're looking at best practices, wherever there might be. We're learning from the Norwegian experience and we stick to Norwegian standards that are known as the world's most protective standards," he said.
Shares of BP [BP-LN 384.65 9.50 (+2.53%)] were higher in London trading and closed higher in New York [BP 35.25 0.33 (+0.95%) ] trading Wednesday.
© 2010 The Associated Press. All rights reserved.
Wednesday, August 25, 2010
Markets—Buckle Up Investors, September Could Be a Bumpy Ride - CNBC
Investors hoping for clarity within financial markets next month after a summer of risk-on, risk-off drift may get more than they are bargaining for—September is as much about major losses as it is gentle gains.
Data from Thomson Reuters Datastream, furthermore, shows that within this volatility, September is on average the worst month of the year for developed market equities.
With movements among assets highly correlated at the moment, this has even greater implications than normal for currencies, government bonds and corporate debt, as well as for stocks.
The correlation between developed market stocks and the Japanese yen/Australian dollar, for example, has been above 0.8 during the latest three months, roughly meaning that every time stocks rise or fall so does the Aussie against the yen and vice-versa.
Over the past 30 years, the MSCI World index of developed stocks has lost an average of 0.9 percent in September, compared with a loss of 0.2 percent in June and gains in every other month.
April is the best, up 2.5 percent. Burrowing further down into the data shows that September has actually been an up month slightly more than half the time, or in 17 out of 30 years.
But its average has been dragged down by at least seven black Septembers, with losses ranging from 4 percent to 12 percent.
Some of these have been specifically event-driven—9/11, the collapse of Lehman Brothers and so on. Analysts note, however, that September is also the month when investors reassess their portfolios after the northern hemisphere summer break.
"People do come back and realise that things are worse than when they went away in the summer, or have not improved," said Andrew Clare, professor of asset management at Cass Business School in London.
With the U.S. economy struggling more than it was a few months ago—a condition corroborated by the Federal Reserve itself—this does not bode well for risk in the coming month.
Back to Work
The significance of September over other months is that it is supposed to be the time that investors get back to work after the summer break and volumes pick up.
The old British market adage "Sell in May and go away. Stay away till St Legers Day" hints at this, given that the St Leger horse race, first run the year the U.S. Declaration of Independence was signed, is run this year on Sept. 11.
There are mixed reviews of how good a market guide the adage is, but there is little doubt that September does see the return of volume to markets.
Again looking at the last 30 years, Thomson Reuters data shows an average jump of 13.6 percent in trading volume on Datastream's combined U.S. and European stock indexes between August and September.
Volume itself, however, does not tell investors anything about direction -- December is one of the best for returns, for example, but volume typically falls from the previous month.
It does mean, however, that the sharp movements sometimes seen in lower-volume July and August are not as exaggerated.
"In thin markets the slightest bit of activity can push them one way or another," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin. "All of this comes to an end (in September)."
Signalling ...
So history suggests that September is volatile and can see major losses on stock markets that in current conditions would be likely to hit other riskier assets as well.
It also suggests that some volume will return, easing the exaggerated moves that can occur in summer. But does the month tell us anything about what to expect in the following quarter? The answer to that is not clear cut.
Comparing developed stock market gains and losses in September with those in the fourth quarter over the past 30 years comes up with a small, positive correlation of 0.2.
This means that more often than not what happens in September also occurs in Q4, but not in a way that provides any certainty.
Interestingly, however, the correlation over the past 10 years is twice as strong, at 0.4. So, buckle up for September, it could be a meaningful ride.
Data from Thomson Reuters Datastream, furthermore, shows that within this volatility, September is on average the worst month of the year for developed market equities.
With movements among assets highly correlated at the moment, this has even greater implications than normal for currencies, government bonds and corporate debt, as well as for stocks.
The correlation between developed market stocks and the Japanese yen/Australian dollar, for example, has been above 0.8 during the latest three months, roughly meaning that every time stocks rise or fall so does the Aussie against the yen and vice-versa.
Over the past 30 years, the MSCI World index of developed stocks has lost an average of 0.9 percent in September, compared with a loss of 0.2 percent in June and gains in every other month.
April is the best, up 2.5 percent. Burrowing further down into the data shows that September has actually been an up month slightly more than half the time, or in 17 out of 30 years.
But its average has been dragged down by at least seven black Septembers, with losses ranging from 4 percent to 12 percent.
Some of these have been specifically event-driven—9/11, the collapse of Lehman Brothers and so on. Analysts note, however, that September is also the month when investors reassess their portfolios after the northern hemisphere summer break.
"People do come back and realise that things are worse than when they went away in the summer, or have not improved," said Andrew Clare, professor of asset management at Cass Business School in London.
With the U.S. economy struggling more than it was a few months ago—a condition corroborated by the Federal Reserve itself—this does not bode well for risk in the coming month.
Back to Work
The significance of September over other months is that it is supposed to be the time that investors get back to work after the summer break and volumes pick up.
The old British market adage "Sell in May and go away. Stay away till St Legers Day" hints at this, given that the St Leger horse race, first run the year the U.S. Declaration of Independence was signed, is run this year on Sept. 11.
There are mixed reviews of how good a market guide the adage is, but there is little doubt that September does see the return of volume to markets.
Again looking at the last 30 years, Thomson Reuters data shows an average jump of 13.6 percent in trading volume on Datastream's combined U.S. and European stock indexes between August and September.
Volume itself, however, does not tell investors anything about direction -- December is one of the best for returns, for example, but volume typically falls from the previous month.
It does mean, however, that the sharp movements sometimes seen in lower-volume July and August are not as exaggerated.
"In thin markets the slightest bit of activity can push them one way or another," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin. "All of this comes to an end (in September)."
Signalling ...
So history suggests that September is volatile and can see major losses on stock markets that in current conditions would be likely to hit other riskier assets as well.
It also suggests that some volume will return, easing the exaggerated moves that can occur in summer. But does the month tell us anything about what to expect in the following quarter? The answer to that is not clear cut.
Comparing developed stock market gains and losses in September with those in the fourth quarter over the past 30 years comes up with a small, positive correlation of 0.2.
This means that more often than not what happens in September also occurs in Q4, but not in a way that provides any certainty.
Interestingly, however, the correlation over the past 10 years is twice as strong, at 0.4. So, buckle up for September, it could be a meaningful ride.
Economy: Durable Goods Orders Rose Far Less Than Expected - CNBC
New orders for long-lasting U.S. manufactured goods rose far less than expected in July and, excluding transportation equipment, posted their largest decline in 1-1/2 years, according to a government report on Wednesday that pointed to a slowdown in manufacturing.
The Commerce Department said durable goods orders rose 0.3 percent after a revised 0.1 percent fall in June. Excluding transportation, orders dropped 3.8 percent—the biggest fall since January 2009—after rising 0.2 percent in June.
Analysts polled by Reuters had forecast orders increasing 2.8 percent last month from June's previously reported 1.2 percent fall. Orders excluding transportation had been forecast to increase 0.5 percent from a previously reported 0.9 percent fall.
The Commerce Department said durable goods orders rose 0.3 percent after a revised 0.1 percent fall in June. Excluding transportation, orders dropped 3.8 percent—the biggest fall since January 2009—after rising 0.2 percent in June.
Analysts polled by Reuters had forecast orders increasing 2.8 percent last month from June's previously reported 1.2 percent fall. Orders excluding transportation had been forecast to increase 0.5 percent from a previously reported 0.9 percent fall.
Economic Growth - US Stimulus Boosted Growth by Up to 4.5% - CNBC
The $814 billion stimulus program enacted by the Obama administration at the start of 2009 boosted the US economy by as much as 4.5 percent in the second quarter of this year, keeping unemployment below 10 percent, congressional analysts said on Tuesday.
The report by the Congressional Budget Office, a non-partisan agency that studies the budgetary impact of legislation for members of Congress, will come as a boost to congressional Democrats and Obama administration officials, who have been arguing the recession would have been much deeper in the absence of the stimulus.
But it will raise further concerns about the sustainability of the already sputtering recovery in the absence of government support. If the economy had been 4.5 percent smaller in the second quarter of 2010, then real output would have been below even its lowest point during the recession.
Republicans have fiercely attacked the stimulus as ineffective government spending that added to the country’s budget deficit without meaningfully helping the economy.
The CBO analysis is much more sanguine, however. In its latest report, the agency said real gross domestic product was lifted in the second quarter by between 1.7 percent and 4.5 percent. Last month, the Commerce Department said the US grew at an annualized rate of 2.4 percent in the second quarter, but that is likely to be revised lower – closer to 1 percent, given the weaker economic data that have surfaced since.
This would mean the stimulus, whose impact will gradually fade away during the rest of the year, provided crucial support to the recovery between April and June. According to the CBO, the stimulus also reduced the unemployment rate – now at 9.5 percent – by between 0.7 and 1.8 percentage points during the quarter, as it increased the number of employed Americans by 1.4 million to 3.3 million people.
The CBO uses models from companies such as Macroeconomic Advisers and IHS Global Insight. But some skeptics question the assumptions of these models, saying they do not take enough account of people’s expectations of the future, when they will have to pay back the stimulus with higher taxes.
"All this stimulus spending has gotten us nowhere . . . We are now borrowing 41 cents of every dollar we spend from our kids and grandkids," said John Boehner, Republican leader of the House.
Copyright 2010 The Financial Times Limited
The report by the Congressional Budget Office, a non-partisan agency that studies the budgetary impact of legislation for members of Congress, will come as a boost to congressional Democrats and Obama administration officials, who have been arguing the recession would have been much deeper in the absence of the stimulus.
But it will raise further concerns about the sustainability of the already sputtering recovery in the absence of government support. If the economy had been 4.5 percent smaller in the second quarter of 2010, then real output would have been below even its lowest point during the recession.
Republicans have fiercely attacked the stimulus as ineffective government spending that added to the country’s budget deficit without meaningfully helping the economy.
The CBO analysis is much more sanguine, however. In its latest report, the agency said real gross domestic product was lifted in the second quarter by between 1.7 percent and 4.5 percent. Last month, the Commerce Department said the US grew at an annualized rate of 2.4 percent in the second quarter, but that is likely to be revised lower – closer to 1 percent, given the weaker economic data that have surfaced since.
This would mean the stimulus, whose impact will gradually fade away during the rest of the year, provided crucial support to the recovery between April and June. According to the CBO, the stimulus also reduced the unemployment rate – now at 9.5 percent – by between 0.7 and 1.8 percentage points during the quarter, as it increased the number of employed Americans by 1.4 million to 3.3 million people.
The CBO uses models from companies such as Macroeconomic Advisers and IHS Global Insight. But some skeptics question the assumptions of these models, saying they do not take enough account of people’s expectations of the future, when they will have to pay back the stimulus with higher taxes.
"All this stimulus spending has gotten us nowhere . . . We are now borrowing 41 cents of every dollar we spend from our kids and grandkids," said John Boehner, Republican leader of the House.
Copyright 2010 The Financial Times Limited
Tuesday, August 24, 2010
S&P Cuts Ireland's Rating on Cost of Bank Support - CNBC
Standard & Poor's on Tuesday cut its ratings on Ireland and gave the country a negative outlook, saying the cost of supporting the country's ailing financial sector will further weaken its financial flexibility.
S&P cut Ireland's long term rating one notch to AA-minus, the fourth highest investment grade. A negative outlook indicates another downgrade is more likely over the next one-to-two years.
"The projected fiscal cost to the Irish government of supporting the Irish financial sector has increased significantly above our prior estimates," S&P said in a statement.
S&P said it now expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimates of 80 billion euros, including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.
Jitters over Ireland's finances have increased since Anglo Irish Bankearlier this month won clearance for a fresh bailout of up to 10 billion euros ($12.7 billion) from the Irish government, which was more than expected.
Ireland's central bank governor said last week that Anglo would end up costing taxpayers up to 25 billion euros.
The new capital injections in Anglo will help push Ireland's net government debt to 113 percent of gross domestic product in 2012, S&P said. That is more than 1.5 times the median for the average of other countries in the euro zone, and well above the debt burdens of similarly rated countries, including Belgium and Spain, S&P said.
"We believe that the government's support of the banking sector represents a substantial and increasing fiscal burden, which in our view will be slow to unwind," S&P said.
The euro fell against the dollar following the rating cut.
S&P cut Ireland's long term rating one notch to AA-minus, the fourth highest investment grade. A negative outlook indicates another downgrade is more likely over the next one-to-two years.
"The projected fiscal cost to the Irish government of supporting the Irish financial sector has increased significantly above our prior estimates," S&P said in a statement.
S&P said it now expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimates of 80 billion euros, including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.
Jitters over Ireland's finances have increased since Anglo Irish Bankearlier this month won clearance for a fresh bailout of up to 10 billion euros ($12.7 billion) from the Irish government, which was more than expected.
Ireland's central bank governor said last week that Anglo would end up costing taxpayers up to 25 billion euros.
The new capital injections in Anglo will help push Ireland's net government debt to 113 percent of gross domestic product in 2012, S&P said. That is more than 1.5 times the median for the average of other countries in the euro zone, and well above the debt burdens of similarly rated countries, including Belgium and Spain, S&P said.
"We believe that the government's support of the banking sector represents a substantial and increasing fiscal burden, which in our view will be slow to unwind," S&P said.
The euro fell against the dollar following the rating cut.
Existing Home Sales Hit 15-Year Low; Housing Market Weakens - CNBC
Sales of previously owned U.S. homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said Tuesday, implying further loss of momentum in the economic recovery.
The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace.
Analysts polled by Reuters expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June.
One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out.
"It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers -- and home prices will come down."
The housing market is also being hampered by the weakening economic recovery. Unemployment remains stuck at 9.5 percent and many potential buyers worry they might not have a job to pay the mortgage.
Prices have fallen in part because foreclosures are running about 10 times higher than before the housing bust. Though the average rate for a 30-year fixed mortgage has sunk to 4.42 percent, many people can't qualify because banks have tightened their lending standards.
Home sales picked up in the spring when the government was offering tax credits. But the tax credits expired on April 30 and the market has been hobbled since.
The drop in July's sales was led by 35 percent plunge in the Midwest. Sales were down 30 percent in the Northeast, 25 percent in the West and 23 percent in the South.
The median sale price was $182,600, up 0.7 percent from a year ago, but down 0.2 percent from June.
The disappointing housing news drove shares of big U.S. homebuilders down Tuesday.
Shares of D.R. Horton [DHI 10.10 0.12 (+1.2%) ] the largest U.S. builder, were down 1.5 percent at $9.83 per share while shares of the No. 3 builder, Lennar [LEN 12.47 -0.25 (-1.97%) ]
were down 4.0 percent at $12.21 per share.
Luxury homebuilder Toll Brothers [TOL 16.04 -0.16 (-0.99%) ] shares were down 2.8 percent at $15.74 per share.
Toll reports its fiscal third-quarter results on Wednesday amid Wall Street expectations that it will post a loss of 14 cents per share.
"You could argue we don't need a single home built in this country because we have tons of vacant homes," said Jody Kahn, of John Burns Real Estate Consulting, which is based in Irvine, California and advises homebuilders.
"We don't have enough demand right now to be sustaining a dozen public builders."
The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace.
Analysts polled by Reuters expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June.
One reason the market is hurting is that buyers and sellers are in a standoff over prices. Many sellers are reluctant to lower their prices. And buyers are hesitating because they think home prices haven't bottomed out.
"It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers -- and home prices will come down."
The housing market is also being hampered by the weakening economic recovery. Unemployment remains stuck at 9.5 percent and many potential buyers worry they might not have a job to pay the mortgage.
Prices have fallen in part because foreclosures are running about 10 times higher than before the housing bust. Though the average rate for a 30-year fixed mortgage has sunk to 4.42 percent, many people can't qualify because banks have tightened their lending standards.
Home sales picked up in the spring when the government was offering tax credits. But the tax credits expired on April 30 and the market has been hobbled since.
The drop in July's sales was led by 35 percent plunge in the Midwest. Sales were down 30 percent in the Northeast, 25 percent in the West and 23 percent in the South.
The median sale price was $182,600, up 0.7 percent from a year ago, but down 0.2 percent from June.
The disappointing housing news drove shares of big U.S. homebuilders down Tuesday.
Shares of D.R. Horton [DHI 10.10 0.12 (+1.2%) ] the largest U.S. builder, were down 1.5 percent at $9.83 per share while shares of the No. 3 builder, Lennar [LEN 12.47 -0.25 (-1.97%) ]
were down 4.0 percent at $12.21 per share.
Luxury homebuilder Toll Brothers [TOL 16.04 -0.16 (-0.99%) ] shares were down 2.8 percent at $15.74 per share.
Toll reports its fiscal third-quarter results on Wednesday amid Wall Street expectations that it will post a loss of 14 cents per share.
"You could argue we don't need a single home built in this country because we have tons of vacant homes," said Jody Kahn, of John Burns Real Estate Consulting, which is based in Irvine, California and advises homebuilders.
"We don't have enough demand right now to be sustaining a dozen public builders."
Existing Home Sales Hit 15-Year Low; Housing Market Weakens - CNBC
Sales of previously owned U.S. homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said Tuesday, implying further loss of momentum in the economic recovery.
The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace.
Analysts polled by Reuters expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June.
The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace.
Analysts polled by Reuters expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June.
European Economy: Euro Zone Austerity Takes Toll on Growth - CNBC
The euro zone’s growth spurt lost momentum this month, as an expansion in output in Germany and France failed to make up for a near standstill elsewhere in the 16-country region.
A closely followed barometer of business activity on Monday pointed to a slower but still solid expansion in private sector activity, with the region’s prospects hanging largely on Germany and France, its two largest economies.
“Growth in the rest of the euro area slowed to near stagnation and services even contracted again as austerity measures bit,” said Chris Williamson, chief economist at Markit, which produces the survey.
The purchasing managers’ indices are regarded as an early indicator of business trends, and the latest readings contained some hope of growth continuing at a brisk pace, even if the US economy slows.
But they intensified worries that the region will be marred increasingly by weaker growth in the peripheral eurozone countries such as Spain and Greece, where fears remain over the stability of public finances.
“If the US is sort of treading water and surviving, as it seems to be doing now, then Europe can decouple,” said Marco Annunziata, chief economist at UniCredit. “The question is whether growth in Germany and France will be enough to pull the peripherals out of the slump . . . My hunch is that it is not and that we will see divergences widening.”
The European Central Bank reported on Monday it had stepped up purchases of euro zone government bonds last week. The €338 million ($426 million) it spent compared with just €10 million in the previous week. That revived speculation the ECB had intervened in Irish bond markets.
However, the total was still small compared with the €60.5 billion it has spent since the emergency program was launched at the height of the euro zone debt crisis in May.
The composite eurozone purchasing managers’ index, covering manufacturing and services, fell from 56.7 in July to 56.1 in August, a two-month low. Markit said August’s figure was consistent with gross domestic product expanding at a quarterly rate of 0.7 percent.
Excluding Germany and France, the indices showed growth was extremely modest in August and weaker than in July. Germany’s composite index rose to a four-month high of 59.3, up from 59.0 in July, a result of a rapid pick-up in the service sector. In contrast, France’s composite index dipped from 59.7 in July to 59.0 in August, the lowest for five months. But Markit argued that the survey still pointed to a robust recovery continuing.
Copyright 2010 The Financial Times Limited
A closely followed barometer of business activity on Monday pointed to a slower but still solid expansion in private sector activity, with the region’s prospects hanging largely on Germany and France, its two largest economies.
“Growth in the rest of the euro area slowed to near stagnation and services even contracted again as austerity measures bit,” said Chris Williamson, chief economist at Markit, which produces the survey.
The purchasing managers’ indices are regarded as an early indicator of business trends, and the latest readings contained some hope of growth continuing at a brisk pace, even if the US economy slows.
But they intensified worries that the region will be marred increasingly by weaker growth in the peripheral eurozone countries such as Spain and Greece, where fears remain over the stability of public finances.
“If the US is sort of treading water and surviving, as it seems to be doing now, then Europe can decouple,” said Marco Annunziata, chief economist at UniCredit. “The question is whether growth in Germany and France will be enough to pull the peripherals out of the slump . . . My hunch is that it is not and that we will see divergences widening.”
The European Central Bank reported on Monday it had stepped up purchases of euro zone government bonds last week. The €338 million ($426 million) it spent compared with just €10 million in the previous week. That revived speculation the ECB had intervened in Irish bond markets.
However, the total was still small compared with the €60.5 billion it has spent since the emergency program was launched at the height of the euro zone debt crisis in May.
The composite eurozone purchasing managers’ index, covering manufacturing and services, fell from 56.7 in July to 56.1 in August, a two-month low. Markit said August’s figure was consistent with gross domestic product expanding at a quarterly rate of 0.7 percent.
Excluding Germany and France, the indices showed growth was extremely modest in August and weaker than in July. Germany’s composite index rose to a four-month high of 59.3, up from 59.0 in July, a result of a rapid pick-up in the service sector. In contrast, France’s composite index dipped from 59.7 in July to 59.0 in August, the lowest for five months. But Markit argued that the survey still pointed to a robust recovery continuing.
Copyright 2010 The Financial Times Limited
Monday, August 23, 2010
With Blow-Away August, Are Mergers Back? Well, Sort Of - CNBC
On Wall Street, it is called the “black car indicator” — a reference to the limousines lined up around investment banks to ferry home young analysts who have pulled near-all-nighters while working on deals.
Based on the surprising number of mergers and acquisitions this month, those black town cars must be double-parked.
August is shaping up to be the busiest month for M.& A. in recent memory.
On Monday, we drew near the threshold of $200 billion worth of deals worldwide for the year, including a $1.6 billion “deal jump” by Hewlett-Packard for the data storage company 3Par, pitting H.P. against Dell.
The animal spirits of corporate America appear to have awakened, with business leaders feeling bold again even as the economy remains sluggish.
Yet a chorus of senior deal makers, who ordinarily would be eager cheerleaders for a mergers revival, are saying: Not so fast.
If you ask them, they will suggest that all the recent merger hoopla may be a positive sign, but it is overdone.
“I’m as befuddled as anyone,” said Mark G. Shafir, head of global mergers and acquisitions at Citigroup. “This is a blow-away August. Yet I can’t call it a trend.”
As Roger C. Altman, chairman of Evercore Partners and a former deputy secretary of the Treasury, put it, “We’re not on the space shuttle.” Using another analogy, he added, “Has the dam just broken? No.”
Paul G. Parker, head of global mergers and acquisitions at Barclays Capital, concurred, saying, “I don’t expect a cork-popping explosion of M.& A.”
So while stock investors may take the recent spate of deals as a sign of confidence in the economy, they shouldn’t get too excited.
With unemployment hovering near 10 percent, the latest wave of deals is unlikely to bolster the job market any time soon.
Indeed, expect quite the opposite: Some of these deals are being driven by “savings,” an overused euphemism for layoffs.
Moreover, many of the deals are being driven by a slowing of organic growth as companies with cash look to pump up their bottom lines.
“If you can’t grow, how do you support your multiple?” Robert A. Profusek, head of mergers and acquisitions at the law firm Jones Day, asked rhetorically before answering his own question. “You do a deal.”
That’s not to say the recent spate of big deals — with BHP Billiton’s $38.6 billion unsolicited offer for the Potash Corporation last week being the largest — is a freakish storm.
Coupled with the cheap cost of capital, the enormous amount of cash on corporate balance sheets estimated at $2 trillion to $3 trillion, is a heady cocktail that may augur more deals.
“Shareholders are telling companies, either do something with all the cash or give it back to us,” Mr. Profusek said.
But the question remains: How can there be so much confidence in boardrooms at a time of so much uncertainty in the stock market and the larger economy?
“If you believe that M.& A. is a lagging indicator of economic confidence, it may make sense,” said Mr. Shafir, of Citigroup.
A confluence of issues has helped spur deals in technology and natural resources in the last several weeks, but the timing was most likely serendipity. “That’s just the vagaries of a schedule,” Mr. Altman said.
Yet the emergence of China and “its insatiable need for resources,” Mr. Altman added, should mean “we’ll see a gradual improvement.”
And Mr. Parker, of Barclays Capital, suggested that cross-border deals, which represented 35 percent of mergers this year, point to a shifting dynamic in the marketplace that might be less dependent on the health of the United States economy.
Still, it will take a broad pickup in the nation’s economic growth before merger mania can really take hold.
“It’s a business-led recovery, not a consumer recovery,” Mr. Parker said. “If consumers don’t ultimately kick in, it’s not sustainable.”
At least for now, however, businesses are not waiting for consumers to jump back into the fray. And deal-making may be as much about psychology as anything else.
“It’s momentum-building, and it builds on itself,” Mr. Parker said.
Mr. Altman estimates that we are in the second year of a five- to seven-year merger expansion. He says that he often shows clients a 40-year chart of M.& A. activity, which reflects cycles of five- to seven-year periods of expansion followed by a two- to three-year downturn.
Mr. Profusek of Jones Day, who is known as Bob and believes he “invented” the black car indicator, said that if August was any guide, it would be a busy rest of the year.
“I’m an avid golfer, and I have yet to play in August,” he said. “That’s the Bob indicator.”
This story originally appeared in the The New York Times
Based on the surprising number of mergers and acquisitions this month, those black town cars must be double-parked.
August is shaping up to be the busiest month for M.& A. in recent memory.
On Monday, we drew near the threshold of $200 billion worth of deals worldwide for the year, including a $1.6 billion “deal jump” by Hewlett-Packard for the data storage company 3Par, pitting H.P. against Dell.
The animal spirits of corporate America appear to have awakened, with business leaders feeling bold again even as the economy remains sluggish.
Yet a chorus of senior deal makers, who ordinarily would be eager cheerleaders for a mergers revival, are saying: Not so fast.
If you ask them, they will suggest that all the recent merger hoopla may be a positive sign, but it is overdone.
“I’m as befuddled as anyone,” said Mark G. Shafir, head of global mergers and acquisitions at Citigroup. “This is a blow-away August. Yet I can’t call it a trend.”
As Roger C. Altman, chairman of Evercore Partners and a former deputy secretary of the Treasury, put it, “We’re not on the space shuttle.” Using another analogy, he added, “Has the dam just broken? No.”
Paul G. Parker, head of global mergers and acquisitions at Barclays Capital, concurred, saying, “I don’t expect a cork-popping explosion of M.& A.”
So while stock investors may take the recent spate of deals as a sign of confidence in the economy, they shouldn’t get too excited.
With unemployment hovering near 10 percent, the latest wave of deals is unlikely to bolster the job market any time soon.
Indeed, expect quite the opposite: Some of these deals are being driven by “savings,” an overused euphemism for layoffs.
Moreover, many of the deals are being driven by a slowing of organic growth as companies with cash look to pump up their bottom lines.
“If you can’t grow, how do you support your multiple?” Robert A. Profusek, head of mergers and acquisitions at the law firm Jones Day, asked rhetorically before answering his own question. “You do a deal.”
That’s not to say the recent spate of big deals — with BHP Billiton’s $38.6 billion unsolicited offer for the Potash Corporation last week being the largest — is a freakish storm.
Coupled with the cheap cost of capital, the enormous amount of cash on corporate balance sheets estimated at $2 trillion to $3 trillion, is a heady cocktail that may augur more deals.
“Shareholders are telling companies, either do something with all the cash or give it back to us,” Mr. Profusek said.
But the question remains: How can there be so much confidence in boardrooms at a time of so much uncertainty in the stock market and the larger economy?
“If you believe that M.& A. is a lagging indicator of economic confidence, it may make sense,” said Mr. Shafir, of Citigroup.
A confluence of issues has helped spur deals in technology and natural resources in the last several weeks, but the timing was most likely serendipity. “That’s just the vagaries of a schedule,” Mr. Altman said.
Yet the emergence of China and “its insatiable need for resources,” Mr. Altman added, should mean “we’ll see a gradual improvement.”
And Mr. Parker, of Barclays Capital, suggested that cross-border deals, which represented 35 percent of mergers this year, point to a shifting dynamic in the marketplace that might be less dependent on the health of the United States economy.
Still, it will take a broad pickup in the nation’s economic growth before merger mania can really take hold.
“It’s a business-led recovery, not a consumer recovery,” Mr. Parker said. “If consumers don’t ultimately kick in, it’s not sustainable.”
At least for now, however, businesses are not waiting for consumers to jump back into the fray. And deal-making may be as much about psychology as anything else.
“It’s momentum-building, and it builds on itself,” Mr. Parker said.
Mr. Altman estimates that we are in the second year of a five- to seven-year merger expansion. He says that he often shows clients a 40-year chart of M.& A. activity, which reflects cycles of five- to seven-year periods of expansion followed by a two- to three-year downturn.
Mr. Profusek of Jones Day, who is known as Bob and believes he “invented” the black car indicator, said that if August was any guide, it would be a busy rest of the year.
“I’m an avid golfer, and I have yet to play in August,” he said. “That’s the Bob indicator.”
This story originally appeared in the The New York Times
Hewlett-Packard Trumps Dell's Offer for 3Par - CNBC
Hewlett-Packard launched a $1.6 billion bid for data storage company 3PAR Monday, topping an offer by technology rival Dell.
HP bid $24 a share for 3PAR, about 33 percent more than Dell planned to pay in a deal announced a week ago. At the time, Dell's bid for 3PAR, which makes storage products that use virtualization technology to allow companies to boost efficiency, marked an 87 percent premium to its share price.
Representatives from 3PAR [PAR 18.04 --- UNCH (0) ] and Dell [DELL 12.07 --- UNCH (0) ] were not immediately available for comment on the HP [HPQ 39.85 --- UNCH (0) ] move.
HP, faced with turmoil in its top ranks after the resignation of Chief Executive Officer Mark Hurd, said its board had approved the bid.
Shares of 3PAR, which was founded in 1999 and posted revenue of $194 million in its last fiscal year, jumped 37 percent in premarket trading after the HP announcement. Shares of HP slipped 1 percent.
The competing bids for 3PAR come as technology heavyweights like International Business Machines [IBM 127.50 --- UNCH (0) ] and Oracle [ORCL 23.02 --- UNCH (0) ] have been boosting investment in cloud computing and virtualization technology, hoping to take advantage of corporate demand for services that manage the flow of data and information.
Cloud computing is technology that allows users to access data and software over the Internet and corporate networks.
Because Dell offered such a steep premium for 3PAR, industry analysts had doubted a competing offer would emerge. The boards of Dell and 3PAR had approved terms of the deal.
HP said 3PAR would be an "ideal fit" and offered terms that it said would be similar to those proposed by Dell but would not include a termination fee.
HP said its proposed deal would close by the end of the year.
Copyright 2010 Reuters.
HP bid $24 a share for 3PAR, about 33 percent more than Dell planned to pay in a deal announced a week ago. At the time, Dell's bid for 3PAR, which makes storage products that use virtualization technology to allow companies to boost efficiency, marked an 87 percent premium to its share price.
Representatives from 3PAR [PAR 18.04 --- UNCH (0) ] and Dell [DELL 12.07 --- UNCH (0) ] were not immediately available for comment on the HP [HPQ 39.85 --- UNCH (0) ] move.
HP, faced with turmoil in its top ranks after the resignation of Chief Executive Officer Mark Hurd, said its board had approved the bid.
Shares of 3PAR, which was founded in 1999 and posted revenue of $194 million in its last fiscal year, jumped 37 percent in premarket trading after the HP announcement. Shares of HP slipped 1 percent.
The competing bids for 3PAR come as technology heavyweights like International Business Machines [IBM 127.50 --- UNCH (0) ] and Oracle [ORCL 23.02 --- UNCH (0) ] have been boosting investment in cloud computing and virtualization technology, hoping to take advantage of corporate demand for services that manage the flow of data and information.
Cloud computing is technology that allows users to access data and software over the Internet and corporate networks.
Because Dell offered such a steep premium for 3PAR, industry analysts had doubted a competing offer would emerge. The boards of Dell and 3PAR had approved terms of the deal.
HP said 3PAR would be an "ideal fit" and offered terms that it said would be similar to those proposed by Dell but would not include a termination fee.
HP said its proposed deal would close by the end of the year.
Copyright 2010 Reuters.
Australia Election: Australian Mining Stocks Rise on Poll Uncertainty - CNBC
Stocks in Australia's biggest mining companies rose Monday as the government's plans for a new tax on their profits were thrown into doubt after the nation's closest election in almost 50 years delivered no clear mandate.
Trading in the rest of the market was flat, however, and Australia's chamber of commerce urged companies to continue investing despite what will likely be two or three weeks of uncertainty about who will govern the country for the coming three years.
The center-left Labor Party — which has ruled for the past three years and remains in control of the caretaker government — and the conservative Liberal Party are negotiating with independent and minor party lawmakers to decide which side can command 76 seats in the 150-seat House of Representatives.
"The continuation of the caretaker period of the Australian government, together with the prospect of a minority Australian government is not the ideal scenario for the Australian economy or business community," the chamber's chief executive Peter Anderson told reporters.
"The business community ... needs to ensure that the Australian economy is well respected nationally and internationally and we can do that by getting on with the doing of business, not putting investment decisions on hold and not adding to any uncertainty," he added.
On the first trading day since the election Saturday, Julia Gillard, the caretaker prime minister, said on Monday that the flat market showed "the market understands that stable government is continuing."
"Obviously there is uncertainty over the election result, but there is no uncertainty over the fact that stable and effective government is continuing in this period of time," she added, without indicating when the next government would be sworn in.
Gillard and Liberal leader Tony Abbott arrived in Canberra on Monday where confidential negotiations will take place with three key independents: Rob Oakeshott, Tony Windsor and Bob Katter.
The three independents planned to hold kingmaker strategy meetings in Canberra starting Tuesday at the earliest, Oakeshott's spokesman Garth Norris said.
Mining stocks were buoyed by the voter backlash against Labor which had promised to impose a 30 percent tax on iron ore and coal miners profit to raise an additional 10.5 billion ($9.4 billion) in government revenue in two years.
But if Labor can form a government in the lower chamber, the environmentally oriented Greens party promised that the tax will be carried through the senate, where the Greens' nine senators will ensure a majority in the 76-seat upper chamber.
Gillard said Monday she remained committed to introducing the tax if she can form a minority government, despite the tax being blamed for Labor losses in the mining states of Queensland and Western Australia.
Stocks in Anglo-Australian mining giant BHP Billiton [BLT-LN 1849.50 28.50 (+1.57%)] rose 21 AU cents to AU$38.11, while rival Rio Tinto [RIO-LN 3333.00 46.00 (+1.4%)] climbed 62 AU cents to AU$72.20 by the end of Monday after both lost some morning gains. Both companies were higher in London trading.
Iron ore specialist Fortescue, whose chief executive Andrew Forrest was a vocal critic of the tax plan, rose 6 AU cents to AU$4.70 early but ended the day steady at AU$4.64.
Adrian Leppinus, a client adviser for brokerage Cameron Securities, said that BHP and Rio "have been very strong" in morning trade.
"There is commentary this morning that because Labor doesn't have a stranglehold, it is probably a positive for the iron ore and coal stocks," he added.
By close, the benchmark S&P/ASX200 index edged down 0.04 percent to 4,429 points, while the broader All Ordinaries index had dropped 0.04 percent to 4,460.4 points.
While minority governments rule in many countries, an Australian election has never failed to deliver a majority government since 1940. Two independents then helped form a conservative government, but brought it down within a year by switching their allegiances to Labor.
Legal experts from the Australian National University said election rules allowed Gillard to carry on in her caretaker role for up to three months while she struggled to enlist a majority.
With more than 78 percent of the vote counted, revised figures on the Australian Electoral Commission website said that Labor appeared to have won 72 seats and the Liberal-led coalition 70. The commission had earlier predicted the coalition held 72. Most analysts agree the coalition was likely to finish with 73, one seat ahead of Labor, or tie at 73.
By convention, Gillard as prime minister should have the first chance to form government. She bases her claim to rule on the election outcome showing that more voters supported Labor than the coalition, despite that support failing to translate to a majority of seats.
Abbott argues that the unprecedented swing of votes away from Labor after only a single three-year term showed that voters wanted a change of government.
Trading in the rest of the market was flat, however, and Australia's chamber of commerce urged companies to continue investing despite what will likely be two or three weeks of uncertainty about who will govern the country for the coming three years.
The center-left Labor Party — which has ruled for the past three years and remains in control of the caretaker government — and the conservative Liberal Party are negotiating with independent and minor party lawmakers to decide which side can command 76 seats in the 150-seat House of Representatives.
"The continuation of the caretaker period of the Australian government, together with the prospect of a minority Australian government is not the ideal scenario for the Australian economy or business community," the chamber's chief executive Peter Anderson told reporters.
"The business community ... needs to ensure that the Australian economy is well respected nationally and internationally and we can do that by getting on with the doing of business, not putting investment decisions on hold and not adding to any uncertainty," he added.
On the first trading day since the election Saturday, Julia Gillard, the caretaker prime minister, said on Monday that the flat market showed "the market understands that stable government is continuing."
"Obviously there is uncertainty over the election result, but there is no uncertainty over the fact that stable and effective government is continuing in this period of time," she added, without indicating when the next government would be sworn in.
Gillard and Liberal leader Tony Abbott arrived in Canberra on Monday where confidential negotiations will take place with three key independents: Rob Oakeshott, Tony Windsor and Bob Katter.
The three independents planned to hold kingmaker strategy meetings in Canberra starting Tuesday at the earliest, Oakeshott's spokesman Garth Norris said.
Mining stocks were buoyed by the voter backlash against Labor which had promised to impose a 30 percent tax on iron ore and coal miners profit to raise an additional 10.5 billion ($9.4 billion) in government revenue in two years.
But if Labor can form a government in the lower chamber, the environmentally oriented Greens party promised that the tax will be carried through the senate, where the Greens' nine senators will ensure a majority in the 76-seat upper chamber.
Gillard said Monday she remained committed to introducing the tax if she can form a minority government, despite the tax being blamed for Labor losses in the mining states of Queensland and Western Australia.
Stocks in Anglo-Australian mining giant BHP Billiton [BLT-LN 1849.50 28.50 (+1.57%)] rose 21 AU cents to AU$38.11, while rival Rio Tinto [RIO-LN 3333.00 46.00 (+1.4%)] climbed 62 AU cents to AU$72.20 by the end of Monday after both lost some morning gains. Both companies were higher in London trading.
Iron ore specialist Fortescue, whose chief executive Andrew Forrest was a vocal critic of the tax plan, rose 6 AU cents to AU$4.70 early but ended the day steady at AU$4.64.
Adrian Leppinus, a client adviser for brokerage Cameron Securities, said that BHP and Rio "have been very strong" in morning trade.
"There is commentary this morning that because Labor doesn't have a stranglehold, it is probably a positive for the iron ore and coal stocks," he added.
By close, the benchmark S&P/ASX200 index edged down 0.04 percent to 4,429 points, while the broader All Ordinaries index had dropped 0.04 percent to 4,460.4 points.
While minority governments rule in many countries, an Australian election has never failed to deliver a majority government since 1940. Two independents then helped form a conservative government, but brought it down within a year by switching their allegiances to Labor.
Legal experts from the Australian National University said election rules allowed Gillard to carry on in her caretaker role for up to three months while she struggled to enlist a majority.
With more than 78 percent of the vote counted, revised figures on the Australian Electoral Commission website said that Labor appeared to have won 72 seats and the Liberal-led coalition 70. The commission had earlier predicted the coalition held 72. Most analysts agree the coalition was likely to finish with 73, one seat ahead of Labor, or tie at 73.
By convention, Gillard as prime minister should have the first chance to form government. She bases her claim to rule on the election outcome showing that more voters supported Labor than the coalition, despite that support failing to translate to a majority of seats.
Abbott argues that the unprecedented swing of votes away from Labor after only a single three-year term showed that voters wanted a change of government.
Housing Fades as a Means to Build Wealth, Analysts Say - CNBC
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
This story originally appeared in the The New York Times
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
This story originally appeared in the The New York Times
Sunday, August 22, 2010
15 Weeks On, Flash Crash Still Baffles, Ominously - CNBC
It sounds like “Wall Street” meets “The X-Files.”
The stock market mysteriously plunges 600 points — and then, more mysteriously, recovers within minutes. Over the next few weeks, analysts at Nanex, an obscure data company in the suburbs of Chicago, examine trading charts from the day and are stunned to find some oddly compelling shapes and patterns in the data.
To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.
The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.
To some people, like Eric Scott Hunsader, the founder of Nanex, they suggest that the specialized computers responsible for so much of today’s stock trading simply overloaded the exchanges.
He and others are tempted to go further, hypothesizing that the bizarre patterns might have been the result of a Wall Street version of cyberwarfare. They say high-speed traders could have been trying to outwit one another’s computers with blizzards of buy and sell orders that were never meant to be filled. These superfast traders might even have been trying to clog exchanges to outflank other investors.
Jeffrey Donovan, a Nanex developer, first noticed the apparent anomalies. “Something is not right,” he said as he reviewed the charts.
Mr. Donovan, a man with a runaway chuckle who works alone out of the company’s office in Santa Barbara, Calif., poses a theory that a small group of high-frequency traders was trying to introduce delays into the nation’s fractured stock-market trading system to profit at the expense of others. Clogging exchanges or otherwise disrupting markets to gain an advantage may be illegal.
Mr. Donovan indulges Wall Street’s increasing fascination with the charts by christening more of them each day, with names like Continental Crust, Broken Highway and Twilight.
There is also the Bandsaw, a zigzag pattern of prices that appear and then abruptly vanish. There is the Knife, a sharp, narrowing price sequence. There is the Crystal Triangle, the Bar Code, the Mountain Range, each one stranger than the last.
The truth of what happened on May 6 could be hiding somewhere in those mysterious configurations. Or it may lie somewhere else entirely. But 15 weeks later, the authorities are still looking for it. The Securities and Exchange Commission and the Commodity Futures Trading Commission plan to issue a final report on their findings in September.
A preliminary report in May blamed a confluence of factors, including worries over rising sovereign debt and a lack of marketwide circuit breakers, but the new report is expected to go further.
For now, this much is known: The markets were already down and on edge that morning as Europe’s debt crisis seemed to be spiraling out of control.
As markets fell, a mutual fund manager in Kansas made a big sale of stock futures. The rout, some say, was worsened by a lack of coordination among the dozens of exchanges that make up the modern-day stock market. As the New York Stock Exchange slowed trading, rival exchanges that were more automated allowed the selling to continue.
“It’s just madness to say we don’t know what caused it. We do,” said Steve Wunsch, a market structure consultant. “The crash was an inevitable consequence of creating multiple market centers.”
That is one explanation. Others have pointed to the high-frequency traders, who use powerful computers to transmit millions of orders at lightning speed. Some of these traders, who now dominate the stock market, appear to have fled the market as prices went haywire.
Then their computer programs might have dragged down exchange-traded funds, popular investment vehicles that fell sharply during the crash, said Thomas Peterffy, chief executive of Interactive Brokers.
“Computerized arbitrage kicked in,” he said.
But if Nanex’s theory is to be believed, computer algorithms might have been at work as well, knowingly or unknowingly wreaking havoc and creating data crop circles.
“There is a credible allegation that there is seriously abusive practices going on,” said James J. Angel, a financial market analyst specialist at Georgetown University, “to the extent that somebody is firing in a very high frequency of orders for no good economic reason, basically because they are trying to slow everybody else down.”
At a Washington hearing on the flash crash last week, Kevin Cronin, director of global equity trading at Invesco, a big fund manager, warned about “improper or manipulative activity” in the stock market.
Traders at BMO Capital Markets in Toronto said they had also identified a “data deluge” a few minutes before the crash. They said people in the markets were poring over Nanex’s colorful charts.
“Whether they are intentional or not, the regulators should be looking into it closely,” said Doug Clark, managing director of BMO Capital Markets.
In an Aug. 5 letter to the Securities and Exchange Commission, Senator Edward E. Kaufman, Democrat of Delaware, warned about a “micro-arms race that is being waged in our public marketplace by high-frequency traders and others.” He said that the traders were moving so fast that regulators could not keep up.
The idea that shadowy computer masterminds were trying to disrupt the nation’s stock trading struck many people as ridiculous. Wall Street experts generally characterize it as a conspiracy theory with little basis in fact.
But some of the patterns suggested that traders might have been testing their high-speed computers, perhaps to see how rivals would react.
Or it may just be that the computers produced so much data so quickly that exchanges simply could not cope with the onslaught.
“We live in a day when things are measured in milliseconds,” said Sang Lee of the Aite Group, a financial services consulting company. “It is meant to be a level playing field, but if you have better technology you will have the edge.”
Back in Chicago, Mr. Hunsader of Nanex is still not sure what his crop circles mean. But that does not stop him from admiring them.
“The patterns are quite beautiful,” he said. “We can’t see any economic reasons for what they are doing.”
This story originally appeared in the The New York Times
The stock market mysteriously plunges 600 points — and then, more mysteriously, recovers within minutes. Over the next few weeks, analysts at Nanex, an obscure data company in the suburbs of Chicago, examine trading charts from the day and are stunned to find some oddly compelling shapes and patterns in the data.
To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.
The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.
To some people, like Eric Scott Hunsader, the founder of Nanex, they suggest that the specialized computers responsible for so much of today’s stock trading simply overloaded the exchanges.
He and others are tempted to go further, hypothesizing that the bizarre patterns might have been the result of a Wall Street version of cyberwarfare. They say high-speed traders could have been trying to outwit one another’s computers with blizzards of buy and sell orders that were never meant to be filled. These superfast traders might even have been trying to clog exchanges to outflank other investors.
Jeffrey Donovan, a Nanex developer, first noticed the apparent anomalies. “Something is not right,” he said as he reviewed the charts.
Mr. Donovan, a man with a runaway chuckle who works alone out of the company’s office in Santa Barbara, Calif., poses a theory that a small group of high-frequency traders was trying to introduce delays into the nation’s fractured stock-market trading system to profit at the expense of others. Clogging exchanges or otherwise disrupting markets to gain an advantage may be illegal.
Mr. Donovan indulges Wall Street’s increasing fascination with the charts by christening more of them each day, with names like Continental Crust, Broken Highway and Twilight.
There is also the Bandsaw, a zigzag pattern of prices that appear and then abruptly vanish. There is the Knife, a sharp, narrowing price sequence. There is the Crystal Triangle, the Bar Code, the Mountain Range, each one stranger than the last.
The truth of what happened on May 6 could be hiding somewhere in those mysterious configurations. Or it may lie somewhere else entirely. But 15 weeks later, the authorities are still looking for it. The Securities and Exchange Commission and the Commodity Futures Trading Commission plan to issue a final report on their findings in September.
A preliminary report in May blamed a confluence of factors, including worries over rising sovereign debt and a lack of marketwide circuit breakers, but the new report is expected to go further.
For now, this much is known: The markets were already down and on edge that morning as Europe’s debt crisis seemed to be spiraling out of control.
As markets fell, a mutual fund manager in Kansas made a big sale of stock futures. The rout, some say, was worsened by a lack of coordination among the dozens of exchanges that make up the modern-day stock market. As the New York Stock Exchange slowed trading, rival exchanges that were more automated allowed the selling to continue.
“It’s just madness to say we don’t know what caused it. We do,” said Steve Wunsch, a market structure consultant. “The crash was an inevitable consequence of creating multiple market centers.”
That is one explanation. Others have pointed to the high-frequency traders, who use powerful computers to transmit millions of orders at lightning speed. Some of these traders, who now dominate the stock market, appear to have fled the market as prices went haywire.
Then their computer programs might have dragged down exchange-traded funds, popular investment vehicles that fell sharply during the crash, said Thomas Peterffy, chief executive of Interactive Brokers.
“Computerized arbitrage kicked in,” he said.
But if Nanex’s theory is to be believed, computer algorithms might have been at work as well, knowingly or unknowingly wreaking havoc and creating data crop circles.
“There is a credible allegation that there is seriously abusive practices going on,” said James J. Angel, a financial market analyst specialist at Georgetown University, “to the extent that somebody is firing in a very high frequency of orders for no good economic reason, basically because they are trying to slow everybody else down.”
At a Washington hearing on the flash crash last week, Kevin Cronin, director of global equity trading at Invesco, a big fund manager, warned about “improper or manipulative activity” in the stock market.
Traders at BMO Capital Markets in Toronto said they had also identified a “data deluge” a few minutes before the crash. They said people in the markets were poring over Nanex’s colorful charts.
“Whether they are intentional or not, the regulators should be looking into it closely,” said Doug Clark, managing director of BMO Capital Markets.
In an Aug. 5 letter to the Securities and Exchange Commission, Senator Edward E. Kaufman, Democrat of Delaware, warned about a “micro-arms race that is being waged in our public marketplace by high-frequency traders and others.” He said that the traders were moving so fast that regulators could not keep up.
The idea that shadowy computer masterminds were trying to disrupt the nation’s stock trading struck many people as ridiculous. Wall Street experts generally characterize it as a conspiracy theory with little basis in fact.
But some of the patterns suggested that traders might have been testing their high-speed computers, perhaps to see how rivals would react.
Or it may just be that the computers produced so much data so quickly that exchanges simply could not cope with the onslaught.
“We live in a day when things are measured in milliseconds,” said Sang Lee of the Aite Group, a financial services consulting company. “It is meant to be a level playing field, but if you have better technology you will have the edge.”
Back in Chicago, Mr. Hunsader of Nanex is still not sure what his crop circles mean. But that does not stop him from admiring them.
“The patterns are quite beautiful,” he said. “We can’t see any economic reasons for what they are doing.”
This story originally appeared in the The New York Times
Small Investors Flee Stocks as 'Appetite for Risk' Wanes - CNBC
Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.
So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.
“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”
The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.
It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.
For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.
“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”
One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced.
He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.
“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”
To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.
Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.
And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.
On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.
According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.
For a few months at the start of this year, things were looking up for stock market investing. Optimistic about growth, investors were again putting their money into stocks. In March and April, when the stock market rose 8 percent, $8.1 billion flowed into domestic stock mutual funds.
But then came a grim reassessment of America’s economic prospects as unemployment remained stubbornly high and private sector job growth refused to take off.
Investors’ nerves were also frayed by the “flash crash” on May 6, when the Dow Jones industrial index fell 600 points in a matter of minutes. The authorities still do not know why.
Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.
Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.
The stock market rose 7 percent last month as corporate profits began rebounding, but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals.
A big beneficiary has been bond funds, which offer regular fixed interest payments.
As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009.
Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. “People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds,” he said. “In the financial markets, there is one truism: flow follows performance.”
Ross Williams, 59, a community consultant from Grand Rapids, Minn., began to take profits from his stock funds when the market started to recover last year and invested the money in short-term bonds, afraid that stocks would again drop.
“We have a very volatile market, so we should be in bonds in case it goes down again,” he said. “If the market is moving up, I realized we should be taking this money and putting it into something more safe rather than leaving it at risk.”
This story originally appeared in the The New York Times
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.
So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.
“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”
The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.
It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.
For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.
“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”
One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced.
He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.
“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”
To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.
Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.
And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.
On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.
According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.
For a few months at the start of this year, things were looking up for stock market investing. Optimistic about growth, investors were again putting their money into stocks. In March and April, when the stock market rose 8 percent, $8.1 billion flowed into domestic stock mutual funds.
But then came a grim reassessment of America’s economic prospects as unemployment remained stubbornly high and private sector job growth refused to take off.
Investors’ nerves were also frayed by the “flash crash” on May 6, when the Dow Jones industrial index fell 600 points in a matter of minutes. The authorities still do not know why.
Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.
Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.
The stock market rose 7 percent last month as corporate profits began rebounding, but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals.
A big beneficiary has been bond funds, which offer regular fixed interest payments.
As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009.
Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. “People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds,” he said. “In the financial markets, there is one truism: flow follows performance.”
Ross Williams, 59, a community consultant from Grand Rapids, Minn., began to take profits from his stock funds when the market started to recover last year and invested the money in short-term bonds, afraid that stocks would again drop.
“We have a very volatile market, so we should be in bonds in case it goes down again,” he said. “If the market is moving up, I realized we should be taking this money and putting it into something more safe rather than leaving it at risk.”
This story originally appeared in the The New York Times
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