fdl

Aug. 21, 2005. 01:00 AM

Is U.S. economy headed for a crash?
With the average American $145,000 U.S. in debt, many experts are starting to think so

ROBERT TANNER
ASSOCIATED PRESS NATIONAL WRITER

The average American owes $145,000 (U.S.) — and the bill is rising every day.

That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.

And it's not even taking into account credit card bills, mortgages — all the debt individuals have racked up personally. Savings? The average American puts away barely $1 of every $100 earned.

Those profligate ways at home are mirrored in Washington and in the global marketplace, where as a society Americans spend $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.

A new Associated Press/Ipsos poll finds that barely a third of Americans would cut spending to reduce the federal deficit and even fewer would raise taxes.

A chorus of economists, government officials and elected leaders both conservative and liberal are warning that nonstop borrowing could bring fiscal disaster — one that could unleash plummeting home values, rocketing interest rates, lost jobs and threats to government services ranging from health care to law enforcement.

David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly in an AP interview:

"I believe the country faces a critical crossroad and that the decisions that are made — or not made — within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day.''

An epidemic of American indebtedness runs from home to government to global marketplace.

To examine it, let's start at home.

Americans used to save, but no longer. The savings rate rose and fell in the post-World War II era, up to 11 per cent, down to 7 per cent. But in the past few years, savings have plummeted: to just 1.8 per cent last year, nearly to zero in the last few months.

The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed.

In lieu of savings, Americans have been taking comfort in the soaring value of their homes. But there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.

"I see people younger than me with comparable jobs that drive new vehicles and have a boat and mortgage and things," says Jo Canelon, a 46-year-old social worker in Statenville, Ga. "And I just wonder about their debt.''

Canelon sees echoes in the rise of obesity: a pervasive I-want-it-now attitude no matter what the consequences. The people seem to want the best of both worlds — tax cuts and government services — while they hope the dollars sort themselves out.

An Associated Press/Ipsos poll of 1,000 adults taken July 5-7 found that a sweeping majority — 70 per cent — worried about the size of the federal deficit either "some" or "a lot.''

But only about a third, 35 per cent, were willing to cut government spending and deal with a drop in services to balance the budget. Even fewer — 18 per cent — were willing to raise taxes to keep current services. Just 1 per cent wanted to both raise taxes and cut spending. The poll has a margin of error of 3 per centage points.

A few years ago, government finances were the strongest they had been in a generation. But it didn't last. The budget surplus of $236 billion in 2000, the year George W. Bush became president, turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.

Blame the bust of the dot-com boom, the ensuing recession, Bush's federal tax cuts, the Sept. 11 terrorist attacks and the subsequent wars in Afghanistan and Iraq.

Some note things are getting better: The latest reports project a deficit of $331 billion for 2005, nearly $100 billion less than expected. Outstanding debt — the amount of securities and bonds that must be repaid — is far below what it was in the early 1990s.

But bigger worries lie ahead.

The nation's three biggest entitlement programs — Social Security, Medicare and Medicaid — make promises for retirement and health care that carry a huge price tag that balloons as the population grows and ages.

Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American comes from.

Some people, however — including economists — think the picture isn't so gloomy.

Ben Bernanke, who recently left the U.S. Federal Reserve Board to serve as Bush's top economic adviser, has argued that the problem is not with the United States. The trouble lies overseas, where people want to save rather than invest or spend their money. While the federal budget needs to be balanced, the key is to encourage other countries to create more economic activity, he says.

The trade deficit — the difference between what America imports and exports — is the highest it's ever been, both in absolute numbers and in comparison to the size the economy.

As a society, Americans are on track this year to spend $680 billion more on foreign goods like Chinese-made clothes and Scandinavian cellphones than overseas buyers do on American products. The crush of arriving, Asian-made goods recently spurred the Port of Los Angeles to switch to 24-hour operations.

Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1 per cent of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5 per cent.

Here's how economists, from former Federal Reserve Chairman Paul Volcker to analysts at the International Monetary Fund, explain the danger that creates:

Americans go into debt to live a life beyond their means, spending borrowed money to buy goods, many from overseas.

Government provides more services than it can afford to, and goes into debt to cover the gap.

Foreign banks increasingly cover that debt by buying it, in the form of U.S. Treasuries, which helps keep interest rates low and keeps American consumers buying.

Experts say the relationship is unsustainable. It could all come crashing down if foreign banks reduced their investment in the dollar, says Nouriel Roubini, an economics professor at New York University.

Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies.

The move could make the dollar's position less exposed to a quick shift by international investors — or it could spur those investors to look elsewhere and leave the United States' position more precarious.

So could any of a number of possible economic shocks — greater hikes in oil prices, a major terrorist attack, another war.

In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and its leaders to clean financial house — to reduce the federal deficit and the trade deficit.

"We're living beyond our means," Roubini says, "and we have to get our act together.''

ccannizz11

The lowest interests rates in decades could explain the dynamic between personal savings and debt. But the amount is a concern for the government and for the people.

But when all is said and done t's just educated guesses.... I mean, everyone still has various theories on what caused the economy to crash in '29.

matelot

if it is going to put a dent in the RE craze then I hope it happens SOON and BIG !

Fibonacci

In my line of business, we get paid to have opinions. And I'm on record here with most of my thread/posts that I believe there are more net negatives than postitives. Having said that, I'm a cautious optimist.

1. Despite the threat of higher interest rates, they will probably not move drastically higher in the near term. For example 10 year German bunds yield around 3.30 while 10 year Japan Bonds yield 1.30ish compared to 10 year treasures yeilding 4.20. In other words, barring a collapse of the dollar, real yields still remain attractive to foreign buyers.

2. Because we consume more than we save and because we import than we export - China and other foreign central banks MUST continue to buy our debt.


How China Delays a Plunge in U.S. Treasuries: William Pesek Jr.
2005-08-21 12:53 (New York)


(Commentary. William Pesek Jr. is a columnist for Bloomberg
News. The opinions expressed are his own.)

By William Pesek Jr.
Aug. 22 (Bloomberg) -- Call it the China Bond Mystery.
A Chinese currency revaluation of the kind engineered last
month was expected to slam the U.S. bond market. Letting the yuan
rise means China may buy fewer Treasuries to hold it down. That,
it was thought, would send yields skyrocketing and shoulder check
the world's biggest economy.
That hasn't happened. The 10-year Treasury note yielded 4.16
percent on July 20, the day before China let the yuan rise 2.1
percent. It's now 4.22, a negligible rise compared with what many
investors anticipated.
Is Asia's hold over U.S. bonds waning? Hardly. China is still
the second-biggest holder of Treasuries with more than $243
billion at the end of June, up from $165 billion a year earlier.
Japan is the largest with $680 billion. Add in Asia's other
central banks and this region's Treasury holdings are about $1.2
trillion.
Any broad move by Asia to trim those holdings would certainly
hurt the U.S. economy by driving up borrowing costs. The U.S.,
it's often said, has built a huge and productive economy, but Asia
holds the mortgage.
There are three reasons Asia hasn't yet pulled the plug on
U.S. debt, and each provides a degree of comfort it won't happen
soon.

Cautious Yuan Moves

First, Asian central banks are loath to accept big losses on
currency-reserve holdings. Word that even one of Asia's less
influential monetary authorities is dumping Treasuries could
prompt investors to do the same, boosting yields and making it
more costly to continue selling.
Second, Asia's leaders are not ready to let currencies rise,
even in the face of surging oil prices. There was speculation that
China's move to de-peg the yuan and Malaysia's decision to scrap
its dollar peg would encourage Asians to let currencies rise. To
no avail. Most remain wary of seeing their exports become less
competitively priced.
Third, and most important, China is making it clear that any
further yuan increases may come more slowly and be smaller than
investors expected. Perhaps realizing its financial system is too
fragile -- or that its need to create jobs is too great -- China
is warning speculators not to wait for bold currency moves.

Meltdown Delayed

Foreign investors haven't been deterred by these concerns.
Last week, a group of investors, led by Royal Bank of Scotland
Group Plc and Merrill Lynch & Co., agreed to pay $3.1 billion for
10 percent of Bank of China, the second-largest lender in the
world's most-populous nation. Investors are rolling the dice that
China's financial system isn't as rickety as many observers fear.
The upshot is that China may be delaying the meltdown in the
U.S. dollar anticipated by investors such as billionaires George
Soros and Warren Buffett. China is doing this by, (a) resisting
pressure to let the yuan soar, and (b) inspiring little urgency in
Asia to reduce the region's massive Treasury holdings.
It doesn't mean it won't happen. While the U.S., with its
huge current-account and budget deficits, has defied the laws of
economics, can it do so indefinitely? With U.S. imbalances
unnerving investors and crude oil above $60 a barrel, it may be
wishful thinking to expect the U.S. to avert a decline in the
dollar.
Asia's reluctance to slow purchases of Treasuries is proving
to be a vital shock absorber for the U.S. debt market. Playing
that role has its pros and cons for this region.

Pumping Up GDP

Following the 1997-1998 financial crisis, Asian nations have
been pumping up gross domestic product with weak currencies that
made their exports cheap. Now that Asia is growing and stock
markets are healthy, it's time to get out of the trap of export
dependency.
So far, policymakers are letting the desire to hold down
currencies distract them from figuring out how to generate growth
from within, or to use the money they park in U.S. Treasuries more
productively.
It's about focusing on the long run. Asia spends an
inordinate amount of time and money weakening currencies to
support growth a quarter or two out. That's counterproductive.
It's always easier to devalue your way to growth than fix
financial systems, improve corporate governance and promote
entrepreneurship.

Attracting Capital

Capital flows brought in by a firm currency can be more
important than the increased trade afforded by a softer one.
Countries require capital to support stock markets that are
playing bigger roles in economies. And foreign capital is needed
to hold down interest rates.
Not all dollar purchases are about manipulating currencies.
U.S. bonds surged last week on optimism foreign demand may be
rising after a Japanese government report showed that the
country's investors doubled their purchases of overseas bonds. One
attraction: U.S. inflation remains tame.
China's reluctance to move rapidly to free the yuan has
helped calm investors and central bankers in Asia. And for that,
owners of U.S. Treasuries have much for which to be thankful.

Ken1997TL

Its a major concern of mine. I am personally debt free as I fear the day when it'll all come crashing down.

Silver™

Fibonacci

Greenspan Successor Needs Crisis Skills, Rubin Says (Update2)
2005-08-26 15:53 (New York)


(Adds comment in 15th paragraph.)

By John Fraher and Andrew Ward
Aug. 26 (Bloomberg) -- Alan Greenspan's successor as chairman
of the Federal Reserve will have to match his skills for tackling
financial market crises if risks to the U.S. economy persist,
former Treasury Secretary Robert Rubin said.
``The next Fed Chairman could face -- at some point in the
future -- an even greater need for the understanding and
experience to deal with serious market difficulties,'' said Rubin
in the text of a speech delivered at the Kansas City Fed's Jackson
Hole, Wyoming, symposium on the Greenspan era. Greenspan is due to
retire in January.
Rubin, who served under President Bill Clinton between 1995
and 1999, said the current-account deficit, rising public
spending, and a low consumer savings rate are among the biggest
risks facing the world's largest economy.
The current-account deficit is the broadest measure of U.S.
financial transactions with the world, and includes the trade
balance.
In an earlier interview today, Rubin said U.S. presidents and
lawmakers have sought Greenspan's advice over the last two decades
on issues ranging from tax cuts to welfare reform. Rubin said
Greenspan's successor may want to avoid such contentious issues to
protect the central bank's independence in its core area, setting
interest rates.
``The large role that Alan played, in terms of the breadth of
the issues he commented on, raises an interesting substantive
question about exactly how broad the ambit of discussion should
be,'' Rubin, now chairman of the executive committee at Citigroup
Inc. in New York, said.

Dollar

The U.S. dollar has lost more than a third of its value
against the euro since 2002, partly because of concern the current-
account deficit will damp foreigners' appetite for U.S. assets.
The shortfall reached a record $665.9 billion last year, or 5.7
percent of gross domestic product.
Greenspan said in March the deficit may narrow ``without
substantial disruption'' and there is ``high probability'' it
won't cause problems for the U.S. economy.
Rubin and Greenspan together tackled a range of crises during
the 1990s, including the Asian financial collapse of 1997, the
Russian debt default in 1998 and the failure of the Long-Term
Capital Management hedge fund in the same year.
Greenspan, like all Fed chairmen, has had to guard the Fed's
independence throughout his tenure. For most Fed chairman, that's
meant trying to stay out of political battles. For Greenspan, it's
meant toeing a delicate line between the political parties.

No Criticism

Rubin, as President Bill Clinton's top economic adviser,
pushed the administration to refrain from criticizing the Fed,
leaving the Fed to follow the monetary policy it thought best.
George W. Bush's administration has followed the same strategy.
``The decision the Clinton administration made to not comment
on the Fed and to support the independence of the Fed was
exceedingly important and useful,'' Rubin said.
Greenspan supported Bill Clinton's tax increases in 1993 and
then supported George Bush's tax cuts in his first term. He's
spoken out in support of private accounts for Social Security and
urged Congress to rein in mounting deficits in 2005.
That's earned him criticism from Democrats including Sen.
Hillary Clinton from New York now that the budget deficit has
risen to a record.
Senate Minority Leader Harry M. Reid called Greenspan ``one
of the biggest political hacks we have here in Washington'' in a
CNN interview in March after Greenspan testified on Social
Security.
Some economists said he should have kept his opinions to
himself.

Blinder

``It is not the place of an unelected central banker to tell
elected politicians which taxes to raise or reduce or which
spending programs to expand or contract,'' Alan Blinder, former
Fed vice chairman, said in a paper at the symposium. ``When a
central banker crosses the line into the political arena, he not
only imperils central bank independence but runs the risk of
appearing (or, worse, of being) partisan.''
Rubin said he doesn't fault Greenspan for talking taxes,
though he doesn't recommend it either. Rubin was considered a
potential candidate to replace Greenspan if Democrat John Kerry
had won the 2004 presidential election.
``He's handled himself quite well, but you certainly could
envision circumstances with a less-skilled chairman -- or in a
situation where you had a chairman and an administration at odds -
- where this could become more difficult,'' Rubin said.

Fibonacci

Greenspan Chides Investors
By EDMUND L. ANDREWS
JACKSON HOLE, Wyo., Aug. 26 - Even as he was being praised for fostering two decades of rising prosperity, Alan Greenspan, the chairman of the Federal Reserve, warned on Friday that people have been unrealistic in believing that the economy has become permanently less risky.

In the first of two speeches at a Fed symposium about the "Greenspan legacy," the Fed chairman implicitly took aim at both the torrid run-up in housing prices and at the broader willingness of investors to bid up the prices of stocks and bonds and accept relatively low rates of return.

Both trends reflect what Mr. Greenspan said was the increased willingness of investors to accept low "risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent."

"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices," he said. "This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

Mr. Greenspan also noted that consumers were more willing to spend money based on an apparent increase in wealth, rather than increases in their earnings, when part of that wealth was based on gains from stocks or real estate that could readily disappear.

The Fed chairman, who is set to step down after 18 years when his term ends at the end of January, made his remarks as economists and central bankers from around the world gathered to debate the hallmarks of his tenure and the transition to his successor.

Many Fed officials are expecting President Bush to decide on a successor this fall to give financial markets time to prepare and to allow the confirmation process to be completed in the Senate by the time Mr. Greenspan's term expires.

The anxiety about a new Fed chairman reflects worries about Mr. Greenspan's nearly mythic reputation as the most powerful and effective central banker of modern times. But it also reflects the challenges that he will be leaving behind, among them issues being much discussed here like the United States' large current-account deficit and rapidly rising foreign indebtedness; the possibility of a major plunge in the dollar; and the prospect of today's big deficits swelling in the absence of fiscal discipline by either the White House or Congress.

President Bush has given no hint of his intentions. Almost all of the most widely rumored candidates were in Jackson Hole: Martin Feldstein, an economist at Harvard; R. Glenn Hubbard, a top former economic adviser to President Bush; and Ben S. Bernanke, a former Fed governor and the chairman of the Council of Economic Advisers. Another possible candidate, Lawrence B. Lindsey, a former director of Mr. Bush's National Economic Council, did not attend.

In his comments on Friday, Mr. Greenspan did not appear to be signaling a new desire by the Fed to pop a potential bubble in housing prices or to curb other forms of risk-taking. But he and a growing number of Fed officials do appear more intent on talking investors down from what they see as a potentially dangerous level of optimism and complacency.

Housing prices have climbed far faster than overall inflation and far faster than household incomes for the last five years, partly in response to the Fed's policy of keeping interest rates low but also because of speculative behavior that is increasingly reminiscent of the frenzy over technology stocks just before the market bubble collapsed in 2000.

But Mr. Greenspan was also alluding to a much broader pattern of economic behavior, an increased hunger among investors to look for higher profits wherever they might be and to pay higher prices for everything from bonds of Latin American nations to shares in risky hedge funds.

Mr. Greenspan's remarks also hark back to what he has called the "conundrum" of long-term interest rates declining even as the Federal Reserve has been systematically raising the overnight federal funds rate on loans between banks.

The conundrum has been somewhat less in evidence lately, as interest rates on long-term 10-year Treasury bonds have edged higher. Still, long-term rates are no higher now than they were just before the Fed began raising overnight lending rates in June 2004.

Mr. Greenspan has adamantly insisted, despite criticism from some economists, that the Fed's job is not to pop speculative bubbles because bubbles are extremely difficult to define and because the Fed's tools - like a sharp increase in interest rates - could cause more damage to the economy than they might prevent.

But his comments nevertheless did suggest that the central bank wants to preach a new gospel of caution that might damp what Mr. Greenspan once called the "irrational exuberance" of investors.

As he has many times in the past, but with somewhat more urgency in this speech, Mr. Greenspan pleaded for policy makers to resist the temptation to set trade and financial barriers to protect jobs from foreign competition.

The openness and flexibility of the United States, he said, had allowed it to weather the shocks of terrorist attacks in 2001 with only a mild recession and had thus far allowed the country to endure the escalation of oil prices with little disruption.

"The more flexible an economy, the greater its ability to self-correct in response to the inevitable, often unanticipated disturbances," he said.

The symposium here this weekend, a select gathering of about 100 economists and central bank officials, attracted an unusually stellar crowd, in part because it is the last such gathering before Mr. Greenspan steps down.

Xiaochuan Zhou, governor of China's central bank, spent much of the day huddled in meetings with American and European officials. Jean-Claude Trichet, president of the European Central Bank, and Mervyn A. King, governor of the Bank of England, were here as well. Robert E. Rubin, Treasury secretary under President Bill Clinton, sang Mr. Greenspan's praises at lunch.


http://www.nytimes.com/2005/08/27/bu...gewanted=print

Fibonacci

Hope you've stockpiled some cash folks....get ready for the ugly "R" word.


Bond Strategists: BNP Says U.S. Yield Curve to Invert (Update1)
2005-08-31 06:33 (New York)


By Michael Shari
Aug. 31 (Bloomberg) -- Yields on short-term U.S. government
notes may rise above those on longer-maturity debt within six
weeks, said BNP Paribas Securities Corp. interest-rate strategist
Jose Mazas.
The combination of Federal Reserve rate increases and tame
inflation has caused yields on two-year Treasuries to rise and
yields on 10-year notes to fall, a phenomenon known as a
flattening yield curve. When two-year Treasuries yield more than
10-year notes, the curve is said to invert, which hasn't happened
since December 2000.
The gap, or spread, between the two yields shrank to 11.5
basis points on Aug. 29, the narrowest since January 2001,
according to data compiled by Bloomberg. The spread was 1.87
percentage points on June 29, the day before the central bank
began a series of 10 interest-rate increases. A basis point is
0.01 percentage point.
``Our estimates are that if the trend continues in its
present form, the curve should flatten in about six weeks,''
Mazas said in an interview in New York. ``Given the relentless
flattening trade, the question now is not necessarily if, but
when inversion will occur.''
Mazas said that the yield curve is flattening by an average
of 2.05 basis points per week.
The 4 percent note due in August 2007 yesterday rallied the
most this year, sending down the note's yield 12 basis points to
3.94 percent. The 4 1/4 percent Treasury maturing in August 2015
also gained, pushing its yield 8 basis points lower to 4.09
percent. As a result, the yield curve steepened by about 4 basis
points to 15 basis points. The gap was 14 basis points today.
To bet on an inverted yield curve, investors buy 10-year
Treasuries and sell two-year notes. Bond yields move inversely to
prices.

Inflation vs Rates

Two-year Treasuries are typically more sensitive to changes
in interest-rate expectations, while 10-year notes tend to move
on the outlook for inflation.
On Aug. 2 the Commerce Department said its personal
consumption expenditures index excluding food and energy costs,
which the Fed uses in its economic forecasts, was unchanged in
June from May and was up 1.9 percent from June 2004. Economists
forecast core prices would rise 0.1 percent in June. Tame
inflation preserves the value of fixed coupon payments.
Mazas that day said the report wouldn't change the Fed's
``path at all'' for higher interest rates. The central bank
raised its benchmark rate to 3.5 percent on Aug. 9. BNP Paribas
is one of the 22 primary dealers of U.S. government securities
that trade with the Fed's New York branch.

`Days or Weeks'

Traders are betting the Fed will raise rates at least twice
more this year to 4 percent. The yield on federal funds futures
for December was 4.02 percent yesterday, showing traders predict
a 20 percent chance the central bank's rate will be 4.25 percent
at year-end, down from a 50 percent chance on Aug. 29.
Other strategists share Mazas's view. ``The yield curve is
likely to begin to invert in a matter of days or weeks,'' Tony
Crescenzi, chief bond market strategist at Miller Tabak & Co. in
New York, wrote in a research report on Aug. 26.
Crescenzi, who wrote a book called ``The Strategic Bond
Investor'' and has taught classes about the bond market for the
executive MBA program at Baruch College in New York, said
``economic reports are likely to reflect continued strength in
the economy, reinforcing the notion that the Federal Reserve will
continue to raise interest rates.''

`Resistance'

Timing of an inversion varies. Mazas's estimate is longer
than others because, he said, the speed at which the curve
flattens in any given week has been slowing.
The yield curve flattened in 12 of the past 16 weeks
Bloomberg data show. As the yield-curve spread narrowed, the pace
of the flattening slowed, Mazas said. Consequently, more weeks
will have to elapse before the curve inverts, he said.
``As we flatten, there appears to be more resistance to
flattening,'' Mazas said.
Lehman Brothers Inc. senior economist Drew Matus predicted
the Fed will continue to raise interest rates.
``The Fed will not be dissuaded from the rate-hike cycle by
a curve inversion,'' Matus wrote in a research note on Aug. 26,
after Fed Chairman Alan Greenspan in a speech in Jackson Hole,
Wyoming, said the central bank is paying closer attention to
asset prices. Lehman is another primary dealer.

`Inverting a Lot'

An inverted yield curve has preceded each of the past four
economic recessions in the U.S.
Greenspan in Congressional testimony last month dismissed
concerns an inverted curve is a recessionary omen, because the
curve's ``efficacy as a forecasting tool has diminished very
dramatically.''
The Fed chairman's testimony may have laid the groundwork
for an inverted yield curve, and the central bank's policy is
likely to make that happen, Paul McCulley, a managing director at
Pacific Investment Management Co. in Newport Beach, California,
wrote in a research note yesterday.
``If the Fed does attempt to bearishly invert the curve a
little, the market will subsequently respond by bullishly
inverting it a lot,'' he said. Pimco manages more than $400
billion in assets, including the world's largest bond fund.

Source: Bloomberg.com

Fibonacci

"Lunch" Time

Bill Gross
09/01/2005


Man, I’m hungry. Here I sit at home, having fasted for the last 24 hours for this afternoon’s “it’s more than you want to know” medical test, and all I can think about is a good old-fashioned peanut butter sandwich. Slab that Skippy real thick on two pieces of “nutritious” white bread and scarf it down with a cold glass of milk—now that’s livin’. Up until this very instant, though, food for me has been purely a functional necessity. Fine dining? Nah, just shove it in the front-end, get my daily caloric quota and get back into the pool—to hell with waiting an hour. My idea of fine dining with my infinitely understanding wife, Sue, is a 45-minute sit-down between 5:30pm and 6:15pm then home for some weekend TV. What a guy! What a date! Somehow, Sue says I’m lots of fun. Go figure. But back to this food thing and how much I miss it at this very moment. I went through this same fasting procedure accompanied by “internally cleansing” castor oil almost seven years ago when I was 10 pounds heavier and had more fat cells to sustain me. Now I’m so weak it’s all I can do to lift this little ol’ pencil off this humongous pad of paper. I’m skinnier these days because I decided to kick the sugar habit six months ago. No more red licorice after Investment Committee meetings at work. No more pigging out on cookies at home. But all of that has left me weak and frail and terribly unprepared for this fast. I’m HUNGRY! I’d sneak out to the kitchen right now for some of those cookies, but the doctor would find out and make me swallow the castor oil all over again. Oh man, now I love food—and not that awful green Jell-O that I’ve been swallowing since I got up this morning. J-E-L-L-O sucks. Just give me a peanut butter sandwich, will ya please.



I suppose I’ve prejudiced my case for what’s about to follow in the ensuing paragraphs. You’ll assume I’m so weak that I’ve sort of lost it, but then that may not be front-page news. What has been front-page recently is talk of a housing bubble and the effect that a bubble “popping” would have on the economy and interest rates. Even Greenspan has now jumped into the debate with his Jackson Hole monologue on lowered risk premiums, rising asset prices (homes) and their stimulative effect on consumer purchasing power. In the same breath he mentions that “history has not dealt kindly with the aftermath of protracted periods of low risk premiums,” the implication being of course that the economy’s future may not resemble its stellar past, and that investment returns may take on the same trajectory. The Chairman’s parting warning shot reminded me of Eisenhower’s farewell admonition on the industrial/military complex. Somehow, standing behind the rostrum for the last time might have then and might now have provided the audience with their first smog-free glimpse into what a leader’s really worried about instead of having to hide behind the rah-rah of productivity gains and hedonically adjusted “core” inflation rates.



I have a few more rostrums and nostrums in my future, but I’ll be glad to tell you what I’m worried about nonetheless. Yes, history will prove that both Eisenhower and Greenspan were right to sound the alarm, although with securities, as opposed to a military/industrial complex feeding and being fed by modern day capitalism, timing is a critical issue. Portfolio managers hired for their performance guns cannot afford to wait for the validation of historians. Having said that, I have a strong sense that most of our risk asset markets (and therefore our domestic and global economies as well since they are so asset-appreciation dependent) are substantially past high noon. Oh, I know I’m paid and paid well to shroud the Outlook with pessimism whereas equity, hedge fund, and, these days, private equity managers are paid and paid well to cast a perpetual glow of hope on tomorrow’s dawning. But in determining whether or not the sun is rising or beginning to set on our economy and its markets, perhaps it is best to return to the maestro himself for a hint on the timing of this affair. “Any onset of increased investor caution,” he wrote at Jackson Hole, “elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.” The secret for successful future strategies, therefore, may be to decipher what precipitates that increased investor caution and when.



To state that the level of prices themselves and therefore the skimpiness of risk premiums should at some level induce investor caution seems axiomatic. It seems most logical to an experienced old hand such as yours truly, and it is enough to induce caution, but it is not always a great timing tool. The NASDAQ was bubbly at 2-, but it went to 5-thousand and it took the failing and in some cases fraudulent results of the dotcoms to caution investors that the end of the road was in sight. Perhaps an increase or two in the cost of money played a part as well and, if so, its parallel to today’s environment is compelling. With the Fed on the march from 1% to perhaps 4% Fed Funds, the price of borrowing to finance our asset-based economy has increased substantially. If Greenspan is targeting the housing bubble—and I believe he is—then he holds investor caution in the palm of his hands, at least for six more months. Is 4% enough, especially with the yield curve flattening and bending down? An early answer is that today’s 3½% short-term rate already seems to be having an effect on housing; so 50 basis points more would be “cautionary” still. We have recent examples from Australian and U.K. housing markets as well where even smaller absolute increases of 150 basis points in short rates were enough to stop prices going up. Of course, their mortgage markets are not rife with what I call “funny money” paper that has provided an additional boost in the U.S. Imagine lending money at 100%, 110%, 120% of estimated market value and on terms with borrower’s options to pay or not to pay. No caution there, that’s for sure. Still the Fed and other regulatory agencies have for the past few months been exerting increasing scrutiny on lending standards that when combined with higher short rates, may be just enough to “caution” prospective home buyers. The increase in home equity loans has been dropping rapidly as shown in Chart I, which may be a telltale sign of the froth coming off the top of this bier stein.






Additionally, because prospective homebuyers become increasingly optimistic, as employment and real wages turn higher, it stands to reason that they should become cautious if their income gains falter instead. The fact is that job growth is almost anemic in comparison to prior business cycles, as is wage growth for the important first-buyer segment of the population. Granted, this cycle’s employment and wage anemia hasn’t seemed to have had much of an effect up to now, but the housing market’s own momentum has been responsible for a goodly portion of job growth and income generation in the past few years. Take a gander at the remarkable Chart II displayed below. It shows that real estate, not manufacturing, has been the economic impetus in recent years in terms of net growth. Once price momentum slows or ceases for home prices, job growth will slow or disappear in the sector as well. How many more mortgage brokers or real estate agents do we really need or can we legitimately support? At least one more than our total of portfolio managers and investment bankers you might say, and to that I’d say “touche,” but it only reinforces my point! Once the cautionary momentum begins, job and wage growth will not support a continuing housing boom, leading to further caution and an economic slowdown at the minimum.




If the home asset bubble stops expanding, deflates, or pops any time soon (and I suspect we are only a few short months from at least the first of these three) then the potential for Greenspan’s “debt liquidation” follow-on is something that investors must begin to prepare for. Debt liquidation, as opposed to loan growth, slows an economy or sinks it into recession, generating the higher risk premiums that the Chairman warns us lie ahead. What should an anticipatory bond manager do with the possibility of such circumstances drawing closer by the day? Cut the fat from his portfolio that’s what. Swallow the castor oil, go on a temporary fast and prepare for the system to eliminate its waste. (Sorry folks, but I had to tie it in somewhere.) That means a focus on high-quality investments with anticipation for an eventual Fed easing at some point in 2006. I believe that 4% will cap this Fed Chairman’s last bear market tightening and that his successor will quickly be confronted with the necessity to lower rates once again. A bullish orientation towards the front-end of the curve therefore should begin to dominate bond strategies, combined with an avoidance of anything that carries those low-risk premiums that Greenspan finally diagnosed. Those assets include real estate, equities, high yield, corporate, and some areas of emerging market debt. They also include, by the way, long-term Treasuries or any longer-dated government paper that has been lowered in yield in the past by Greenspan’s own “measured” transparency over the past 16 months. That is not to say that long government bonds won’t go up in price if the “system” suffers some elimination, slower growth, or to be frank, a recession in 2006. It’s just to acknowledge that the better duration-weighted paper lies at the front-end of the curve, especially now that it provides similar yields to longer maturities. Get ready for Greenspan’s “lunch” time and--



Bon appetit!



P.S. This Outlook was written pre-Katrina. Katrina’s aftermath only adds to the potential for "caution" mentioned above and reinforces the strategies underlined on this page. More details in a few weeks.


http://www.allianzinvestors.com/comm...ource=hpbanner

ChicagoSteel

In a short answer, yes.

I have been building my cash reserves, as has Warren Buffett!

I plan on buying and buying when something goes plunge.

yunginTL

i wonder how its gonna be after im done with college....

M TYPE X

A few years down the road? Hope it's better.

Quality, full-time employment is overrated anyway.

Fibonacci

Does this remind anyone of the housing bubble?



http://www.shambhala.org/business/go...n/causdep.html

zamo

The horizon looks like:

Gas prices up
Interest rates up
Overall inflation rate up
Savings rate down the toilet
New Bankruptcy laws kicking in soon

Result:
Many people will be repaying debt for life
Foreclosure rates up
Spending rate lowers as disposable cash will be limited
Some properties depreciate (many people up-side down)
A property will no longer be a cash machine as equity will be limited and rates are gonna be up.

Conclusion

Economy =

Fibonacci

Greenspan Says Asset Prices Often Fall After Eras of `Euphoria'
2005-09-27 14:47 (New York)


By Craig Torres
Sept. 27 (Bloomberg) -- Federal Reserve Chairman Alan
Greenspan said long eras of economic stability and low risk often
give rise to ``human euphoria'' and that is later followed by
declines in asset prices.
``A decline in perceived risk is often self-reinforcing in
that it encourages presumptions of prolonged stability,''
Greenspan said in the text of his remarks via satellite the
National Association for Business Economics meeting in Chicago.
``History cautions that extended periods of low concern about
credit risk have invariably been followed by reversal with an
attendant fall in the prices of risky assets.''
Greenspan did not address the near-term course of interest
rates in his speech, which focused on the virtues of deregulation
and economic flexibility. Increased flexibility in the U.S.
economy has helped it weather several shocks in recent years,
including the rise of energy prices, he said.
The chairman pointed to an issue he has addressed before over
the past few months: the ``irony'' that economic stability
produces its own risks when markets become overpriced. It's not
realistic to expect central banks to prevent increases in asset
price bubbles such as the technology stock surge of the 1990s, he
said.
``Such developments apparently reflect not only market
dynamics but also the all-too-evident alternating and infectious
bouts of human euphoria and distress and the instability they
engender,'' Greenspan said. ``Because it is difficult to suppress
growing market exuberance when the economic environment is
perceived more stable, a highly flexible system needs to be in
place.''
The Fed chairman wasn't specific about whether he was
referring to some regional home prices or bond prices, two markets
he has referred to as being abnormally priced in recent months.
Yields on U.S. 10-year notes have fallen since June 2004 when
the Fed began a series of 11 rate hikes, an event Greenspan has
called ``unprecedented.'' The median price of an existing home
rose 15.8 percent for the 12 months ending August, the National
Association of Realtors said yesterday, to a record $220,000. The
Fed chairman said yesterday ``signs of froth have clearly emerged
in some local markets where home prices seem to have risen to
unsustainable levels.


Source: Bloomberg.com


Deflating of the housing market (which has been the source of the most recent economic expansion) will not occur as quickly as the NASDAQ correction, but it could possibly be more brutal and far reaching.

Fibonacci

Two worrisome signs
Consumer sentiment and new homes both tumble, pointing to a slowdown in economic growth ahead.
September 27, 2005: 4:36 PM EDT



NEW YORK (CNN/Money) - The optimistic view of plunging consumer confidence is that it's due mainly to back-to-back monster hurricanes and the spike in gas prices that resulted.

According to this rosy view, as the Gulf Coast rebuilds and gas prices head south, consumer confidence will rebound as quickly as President Bush dumped his former FEMA chief.

The pessimistic view is that high gas prices aren't going away anytime soon and that this could continue to crimp consumers for awhile.

In this mindset, a steep drop in August new home sales, which occurred before New Orleans filled up with water, is evidence that Katrina and Rita are not the sole or even the main cause of a nationwide shift in sentiment.

On the face of it, a plunge in the Conference Board's index of consumer confidence to a nearly two-year low of 86.6 in September, after a rebound to 105.5 in August, was alarming. After all, it was the biggest monthly drop since October 1990, after Iraq invaded Kuwait and before the first U.S.-Iraq war.

"Hurricane Katrina, coupled with soaring gasoline prices and a less optimistic job outlook, has pushed consumer confidence to its lowest level in nearly two years and created a degree of uncertainty and concern about the short-term future," Lynn Franco of the New York-based Conference Board, a business research group, said in a statement.

But Franco, who should know a thing or two about these things, is not worried because she also predicted that lower gas prices and rebuilding after the hurricane would help boost confidence by early next year.

Economist Gina Martin at Wachovia Securities noted that basically happened last year after the quadruple hurricane hit in Florida: Confidence sank 10 points and then rebounded once rebuilding started, spurring new jobs and construction and all kinds of confidence-boosting stuff. The hope, of course, is that history will repeat itself.

But it's not just back-to-back monster hurricanes that are hurting consumer confidence now. And let's not forget that this same apparent loss of confidence has shown up in every major confidence survey.

High gas prices and a sense that something fundamental has changed in the oil market that will lead to prices staying high is also worrying people, according to the latest polls.

And maybe that's why consumers are so worried.

Confidence in the present state of U.S. economy fell sharply, and their expectations for the future fell even more dramatically, according to the Conference Board survey.

Economists say it is consumers' view of the future that most affects spending, which is crucial since consumer spending fuels nearly three-quarters of the nation's economy.

In fact, 20 percent of the 5,000 households polled said they expect business conditions to worsen over the next six months, while only 10 percent expected them to improve.

As for the job market, the number saying jobs are "hard to get" rose while the number saying jobs are "plentiful" fell. (For more on the report, click here).

And you can't blame a big drop in new home sales in August on Katrina, because all these numbers were gathered before it hit. New home sales fell a larger-than-expected 9.9 percent in August while the number of unsold homes jumped to a record high.

The Commerce Department report said sales of new single-family homes fell to an annual rate of 1.24 million units from a record high 1.37 million in July. (For more on the home sales report, click here.)

The August sales rate was up more than 6 percent from a year earlier. But the large decline from the previous month -- the biggest since November of last year -- pushed the supply of unsold homes up to a record 479,000 at the end of August, the department said.

The decline was broad-based, with sales down more than 10 percent in the West, Midwest and Northeast.

Mortgage rates are still low but if the Conference Board survey can be believed, the job market may be softening up a bit. Could this be the cause of a less hot housing market?

According to economist David Resler of Nomura Securities the report overall shows that, "The story of a broad topping in the housing market remains intact. "

Optimists can point to the very healthy jump in existing home sales in August that was reported on Monday.

But it's important to remember that the new home sales are recorded when buyers sign their contracts to buy while existing home sales are recorded when the sale actually closes, so economists consider the new home sales a more timely measure of what is going on in the housing market.

Taken together, both reports "point to much weaker consumption growth in (the fourth quarter) and potentially beyond, especially if the Fed pushes ahead with further tightening," said Andrew Pyle at Scotia Capital, referring to the Federal Reserve's signals that it will keep raising interest rates to fight inflation.

Let's hope the optimists at the Fed and on Wall Street are correct, and that consumers grow more optimistic too.


http://money.cnn.com/2005/09/27/comm...ex.htm?cnn=yes

zamo

As expected.


http://www.sun-sentinel.com/business...business-front

zamo

http://www.sun-sentinel.com/business...business-front

Fibonacci

Hertz, Clear Channel Among $88 Billion Falling Into Junk Market
2005-10-04 09:19 (New York)


By Caroline Salas
Oct. 4 (Bloomberg) -- More than $88 billion of U.S.
corporate debt is teetering on the edge of investment grade and
soon may join the record amount of bonds downgraded to junk this
year.
Hertz Corp., the world's largest car rental firm, and radio
broadcaster Clear Channel Communications Inc. are among 46
companies that probably will be categorized as non-investment
grade, according to credit-rating company Standard & Poor's.
A surge in debt-financed takeovers and concern that higher
oil prices will hurt profit growth is eviscerating credit quality
in the $5 trillion market for corporate bonds, according to some
strategists. Investors face greater risks, while companies once
considered safe and now classified as so-called fallen angels,
may see borrowing costs rise.
Not since the Depression of 1929 has corporate America
received so many black eyes. Detroit-based General Motors Corp.,
the world's largest automaker, Sears Holdings Corp., the biggest
U.S. department store chain, and Eastman Kodak Co., the largest
photography company, led 27 borrowers whose $499 billion of
outstanding debt obligations suffered the ignominy of being
downgraded to junk.
And if history is any guide, there will be no rebound soon.``You don't see companies get downgraded and work their way up by
and large,'' said Greg Peters, head of U.S. credit strategy at
New York-based Morgan Stanley, the largest U.S. securities firm
measured by market value.
Peters should know. His firm helped the finance unit of
Dearborn, Michigan-based Ford Motor Co., the second-largest U.S.
automaker, sell $750 million of bonds in March that S&P lowered
to BB+, or junk, on May 5. Bonds rated below BBB- at S&P or below
Baa3 at Moody's Investors Service are considered junk.

`Already Peaked'

Fallen angels default at almost twice the rate of companies
that never had investment-grade ratings, and seven of 10 stay
junk, S&P said in a March study analyzing 24 years of data. The
junk bond market is about $1 trillion in size.
``The credit cycle has probably already peaked,'' said Steve
Kellner, head of credit portfolios at Newark, New Jersey-based
Prudential Investment Management's fixed-income group. The firm
manages $163 billion in fixed income, including $13 billion in
junk bonds.
S&P yesterday put the debt of GM and Ford under review for
another downgrade because of concerns about North American losses
and high gasoline prices. GM is rated BB by S&P, or two levels
below investment grade.
The combined $320 billion of bonds sold by GM and Ford sent
the dollar value of fallen angels past the $202 billion record
set in 2002, which included the downgrade of WorldCom Inc. Kodak
is based in Rochester, New York, and Sears is based in Hoffman
Estates, Illinois.

Hertz, Clear Channel

The number of companies that became fallen angels this year
is eight more than the same period of 2004. Park Ridge, New
Jersey-based Hertz, which is the target of a leveraged buyout,
and San Antonio-based Clear Channel, the biggest radio
broadcaster, have the lowest investment-grade credit ratings, and
may be lowered to speculative grade, S&P said.
About 618 companies overall are on the verge of having their
ratings cut, compared with 318 that are poised for an upgrade,
S&P said. The firm has tracked the data for less than a year.
Companies with the highest junk ratings pay about 90 basis
points, or 0.90 percentage point, more in yield than companies at
the lowest end of investment grade, according to Merrill Lynch &
Co. index data. The difference represents about an extra $900,000
in annual interest expense for every $100 million borrowed. The
gap averaged about 104 basis points in 2004.
Investors often anticipate a ratings decline before it
happens. Moody's identifies 75 investment-grade borrowers with
$226 billion in debt that on Sept. 28 traded as if they were
already high-yield borrowers, said David Munves, managing
director in charge of firm's credit strategy in New York.

Market Optimism

Yields for the debt of fallen angels don't always reflect
the reality that their credit ratings may keep sliding.
They yield an average of 7.76 percent, compared with 8.17
percent for the wider junk-bond market, Merrill indexes show. The
lower yield makes debt-financed acquisitions more attractive.
The extra yield investors demand to buy the debt rather than
U.S. Treasuries expanded less than 25 basis points this year,
compared with 44 basis points for junk bonds on average,
according to Merrill indexes. Investment-grade spreads grew 5
basis points.
Spreads for fallen angels have held up better than junk
bonds overall because investors view them as having ``resilient''
businesses, said Diane Vazza, S&P's New York-based global head of
fixed-income research.

LBO Risk

One way a company becomes a fallen angel is through a
buyout.
``While the corporate credit market has weathered a number
of surprises, hurricanes, etcetera, probably the biggest near-
term risk is LBOs,'' Vazza said.
A record $204 billion of leveraged buyouts may be funded
this year, including the $15 billion takeover of Hertz. LBOs are
typically financed by borrowing in the acquired company's name,
piling up debt, endangering credit ratings and making existing
bonds riskier.
S&P said it may reduce Hertz's rating to junk, citing
``reduced financial flexibility'' after the takeover.
Wayne, Pennsylvania-based SunGard Data Systems Inc., the
maker of computer programs that handle most Nasdaq trades, lost
its investment-grade ranking before selling $3 billion of bonds
to finance the biggest leveraged buyout since RJR Nabisco Inc. in
1989.

Neiman, Clear Channel

S&P cut Dallas-based Neiman Marcus Group Inc. to speculative
grade last week after it sold $1.2 billion in bonds to fund its
$5.1 billion takeover. Moody's lowered the luxury department
store chain to junk 10 days earlier.
Moody's and Fitch Ratings on April 29 said Clear Channel may
lose its investment-grade rating after the company announced
plans to raise its dividend, spin-off a division and sell 10
percent of another unit, raising concern about cash flow.
In February, the company, which has $6.6 billion in debt,
wrote down the value of its licenses by $4.9 billion. Clear
Channel spokeswoman Jennifer Gery in New York said in an e-mailed
statement that S&P affirmed the company's investment-grade rating
Aug. 9 and declined to comment further.
S&P kept a ``negative'' outlook, citing competition for
radio advertising demand.

`Proceed With Caution'

Investors ``have to proceed with caution,'' Moody's New
York-based chief economist John Lonski said. Balance sheet
``improvement has slowed and the outlook is significantly more
uncertain than it was in June,'' he said.
Economists cut fourth-quarter economic growth forecasts by
0.4 percentage point, according to the median of 60 estimates in
a Bloomberg survey taken between Aug. 31 and Sept. 8.
By the end of 2006, ``you could be looking at profits
actually falling,'' said Ian Shepherdson, chief U.S. economist
for High Frequency Economics in Valhalla, New York.
Defaults, which touched an eight-year low of 1.8 percent in
June, will rise to 3.1 percent by August 2006, Moody's said.
``We've had a marked increase in the number of credit-rating
downgrades compared to upgrades in the third quarter,'' Moody's
Lonski said.

The following is a list of this year's fallen angels, total rated
debt and date of downgrade, according to Moody's.

--Editor: Pittman, Burgess.

*T

Date Company Amount (in millions)
Feb. 16 Northeast Generation $440
Feb. 23 Kansas Gas and Electric $1,705
March 8 Delphi Corp. $2,900
March 30 Sears Roebuck $8,300
April 29 Ferro Corp. $350
April 14 Kerr-McGee Corp. $3,200
April 14 Hawaiian Telecom $300
April 27 Maytag $1,000
April 28 American Ref-Fuel $275
April 29 Eastman Kodak $2,400
May 3 CalEast Industrial IR
May 11 Rock-Tenn $400
May 16 USF $650
June 24 AMLI Residential Properties $100
June 29 Ashland $300
July 1 Great Lakes Chemical $410
July 6 SEACOR Holdings $135
July 29 Lear $1,800
Aug. 17 SunGard Data Systems $500
Aug. 18 Liberty Media $12,185
Aug. 24 Ford Motor $150,000
Aug. 24 General Motors $170,000
Sept 19 Pier 1 Imports IR
Sept. 20 Entergy New Orleans $175
Sept. 20 Neiman Marcus Group $225
Sept. 22 Sun Microsystems $1,050
Sept. 30 Interpublic Group $2,600

IR stands for issuer rating.

zamo

http://www.sun-sentinel.com/business...business-front

Fibonacci

China and Kate-Moss-Thin Credit Spreads: William Pesek Jr.
2005-10-06 15:29 (New York)


(Commentary. William Pesek Jr. is a Bloomberg News
columnist. The opinions expressed are his own.)

By William Pesek Jr.
Oct. 7 (Bloomberg) -- In this intertwined financial world of
ours, coincidences are becoming fewer and fewer. Such may be the
case with China's economic boom and the surging popularity of
credit derivatives.
The market for credit derivatives, mainly contracts designed
to transfer risk associated with bonds and loans, grew 48 percent
to more than $12 trillion in the first half, an almost five-fold
increase in the past two years, according to the International
Swaps and Derivatives Association. It's growing so fast that the
financial infrastructure is having trouble keeping up; some
contracts to insure bond payments are going unsigned for months.
The trend reflects a move by banks to go beyond selling off
their loans in the form of asset-backed or other securities to
hedging their credit exposure on a huge scale. And why not, given
that an explosion in the number of hedge funds globally is
creating demand for greater risk?
The upshot, says Charles Dumas, London-based managing
director of Lombard Street Research, may be that ``a big chunk of
the world's debt is suddenly being laid off as credit
derivatives.''
In a world of surging oil prices and myriad other
uncertainties, Dumas is intrigued by the ``Kate-Moss-style
slimness'' in the difference between U.S. Treasuries and riskier
debt. While credit spreads widened a bit after the May downgrades
of General Motors Corp. and Ford Motor Co. debt, they ``look
unduly narrow'' once again, he says.
At the same time, a study done for the Federal Reserve found
that foreign demand for U.S. government debt is keeping yields on
10-year Treasuries about 1.50 percentage points lower than they
otherwise would be, a thinner gap than estimated by some Wall
Street strategists.

The China Angle

What's China got to do with all this? Brad Setser, a U.S.
Treasury economist who now works for Roubini Global Economics in
New York, was one of the first to suggest a relationship between
the surge in credit derivatives, the explosion in the number of
hedge funds and the buildup in China's currency reserves.
Setser's theory is this: Demand for Treasuries from China's
central bank -- and others in Asia -- is a key reason U.S. yields
are so low. Low Treasury rates, in turn, have inspired a search
for yield that's propelling the growth in the market for
collateralized-debt obligations, or CDOs and, eventually, the
market for ``synthetic'' collateralized debt obligations.

Systemic Risks?

Collateralized-debt obligations bundle together bonds, loans
or credit default swaps into pools of assets. A synthetic CDO
pumps up the risk and return potential by using other derivatives
as its underlying assets. All this may amount to untold leverage
and risk in a global financial system struggling to keep up.
The growth in the market isn't necessarily a bad thing. It
may just reflect how derivatives have come into their own as risk
management tools. Ditto for the growth of the hedge-fund industry
-- it may be a sign of maturity for the global investment
business.
The question is whether China's accumulation of currency
reserves is raising the stakes. The People's Bank of China holds
roughly $753 billion of reserves, and keeps adding more.
That growth comes against the backdrop of a readiness by
China -- and other Asian central banks -- to keep its currency
from rising and the U.S. dollar from falling. It has put a floor
under the dollar and a ceiling above U.S. debt yields. The risk
is that it's created complacency in global markets -- a sense
among investors that rates won't move against them.

Rate `Normalization'

This is something Setser and economist Nouriel Roubini of
Roubini Global Economics have been warning about for months. They
wonder if the risks are larger than investors appreciate,
especially with the Bush administration thinking it has an
infinite credit line to increase borrowing. U.S. rates at current
levels may not amply compensate investors for the risk of a
plunging dollar.
It hardly helps that the world is in a rising interest-rate
environment. ``Normalization of policy rates in expanding
industrial economies will put upward pressure on all kind of
rates and risk premia that have been held down by low policy
rates,'' Raghuram Rajan, the International Monetary Fund's chief
economist, said in April. ``This could cool some red hot markets
including the market for housing and high-yield debt.''
Steps are afoot to improve the derivatives market's
infrastructure. On Sept. 15, the Federal Reserve Bank of New York
summoned 14 of the world's biggest banks to a meeting to reduce a
backlog of unconfirmed trades. Regulators are concerned it
threatens the stability of the banking system.
Yet the bottom line, Setser and Roubini say, may be a
financial system that's out of whack -- one that's developed an
unhealthy reliance on the willingness of central banks in Asia to
buy U.S. debt indefinitely. This arrangement is arguably
unprecedented.
``No one has any experience with the adjustment process that
will ensue when the world's biggest economy is also the world's
biggest debtor, while it alone is absorbing most of the world's
spare savings,'' Setser argues.

source: bloomberg.com

Fibonacci

U.S. Investment Income Close to `Tipping Point': John M. Berry
2005-10-13 00:02 (New York)


(Commentary. John M. Berry is a Bloomberg News columnist. The
opinions expressed are his own.)

By John M. Berry
Oct. 13 (Bloomberg) -- The U.S. may be approaching a
dangerous ``tipping point'' in its international transactions.
At the end of last year, foreign investments in the U.S. were
worth $2.5 trillion more than this country's investments in the
rest of the world. Yet last year, those U.S. assets abroad
remarkably still earned $30 billion more than the foreign assets
here.
That stunning disparity in returns is one of many reasons why
the huge U.S. current account deficits of recent years have been
so readily financed. The sagging net investment position wasn't
being compounded by an ever higher interest bill -- as is the case
with the mounting U.S. government debt.
This year the game has changed.
Net U.S. investment income turned negative by $455 million
dollars in the second quarter, marking a swift deterioration from
a $15 billion surplus in the first three months of 2004.
If this trend continues -- and there's no reason to think it
won't -- the U.S. will be paying a steadily rising net amount to
foreigners, and those payments will both increase the U.S. current
account deficit and worsen the country's net investment position.
In a recently published analysis, economists Pierre-Olivier
Gourinchas of the University of California at Berkeley and Helene
Rey of Princeton University warned this situation could have
serious consequences for the U.S.

The Dollar's Credibility

``Reaching the `tipping point' where the U.S. for the first
time since the second World War ceases to have a positive net
return on its net assets could be seen by the market as a
significant blow to the credibility of the dollar,'' the
economists say.
``In a context where the external net worth of the U.S. is
negative and the return on its net assets also turns negative,
market participants could start demanding a higher premium on
their dollar assets.''
That the U.S. has been able to sustain financing for its
international deficits up to this point is primarily due to the
American dollar being the world's principal reserve currency, the
center of the global monetary system.
Gourinchas and Rey's analysis traces how over the past half
century U.S. investments abroad came to pay far greater returns
than foreign investments here. The paper, published by the
National Bureau of Economic Research in August, is ``From World
Banker to World Venture Capitalist: U.S. External Adjustment and
the Exorbitant Privilege.''

`Exorbitant Privilege'

The phrase ``exorbitant privilege'' was coined by French
Finance Minister Valery Giscard d'Estaing in 1965. He used it to
describe ``the ability of the U.S. to run large direct investment
surpluses, ultimately financed by the issuance of dollars held
sometimes involuntarily by foreign central banks,'' the authors
say.
In those days, economists regarded the U.S. as ``the Banker
of the World,'' lending for long and intermediate terms and
borrowing short, they say.
``Since then, the U.S. has become an increasingly leveraged
financial intermediary as world capital markets have become more
and more integrated. Hence, a more accurate description of the
U.S. in the last decade may be one of the `Venture Capitalist of
the World,' issuing short term and fixed income liabilities and
investing primarily in equity and direct investment abroad,''
Gourinchas and Rey write.

U.S. Balance Sheet

Initially, U.S. assets shifted from long-term bank loans to
direct investments, such as the purchase of foreign companies, and
in recent years, toward equity investments. Meanwhile, foreign
investment has favored low-yielding safer assets, including bank
loans, trade credit and debt, particularly Treasury securities.
``Hence the U.S. balance sheet resembles increasingly one of
a venture capitalist with high return risky investments on the
asset side,'' the economists say. ``Furthermore, its leverage
ratio has increased sizably over time.''
Nevertheless, all the advantages that accrue to the U.S. as
the provider of the central currency in the global monetary system
can't forever offset the impact of the country consuming more than
it produces. What if a ``tipping point'' has been reached?
Gourinchas and Rey say their analysis ``does not imply that
the current situation can be maintained indefinitely.''

The Possible Repercussions

``Foreign lenders could decide to stop financing the U.S.
external deficit and run away from the dollar, either in favor of
another currency such as the euro, or just as dramatically,
require a risk premium on U.S. liquid assets whose safety could
not be guaranteed any longer.
``In either case, the repercussions could be quite severe,
with a decline in the value of the dollar, higher domestic
interest rates and yields, and a global recession,'' they caution.
``In a world where the U.S. can supply the international
currency at will, and invest it in illiquid assets, it still faces
a confidence risk,'' they say.
Should confidence be lost, the value of the dollar could
plunge, and a world financial crisis could ensue. At that point,
even the U.S. could be forced to stop living beyond its means.

source: bloomberg.com


Cliff's Notes: Wish I had the ability to accurately predict how this all will pan out. In a nutshell, caution is the word of the day. Save, save, save - cash is king. I'm an optimist, but also a realist. I'm very worried that the next recession will be particularly nasty.

Fibonacci

The news keeps getting better...

U.S. Consumer Spending May Slump in a `Cold, Dark' Winter
2005-10-17 00:15 (New York)


By Steve Matthews and Will Edwards
Oct. 17 (Bloomberg) -- U.S. consumers, and the businesses
that depend on them, are bracing for what Lehman Brothers Inc.
economists call a ``cold, dark and expensive'' winter.
A growing number of Wall Street forecasters, including
those at Goldman, Sachs & Co. and Merrill Lynch & Co., are
pulling back on estimates for consumer spending. They cite a
convergence of rising energy prices, falling real wages and new
rules requiring bigger credit-card payments that threaten to
increase delinquencies at a time when a record number of
borrowers are already behind on their bills.
``We are hitting the consumer with headwinds that we have
not witnessed on record,'' says Andrew Pyle, senior economist
with Scotia Capital in Toronto.
Goldman, Sachs predicts a 1.5 percent annual rate of
consumer spending over the next two quarters, half the pace of
the previous two years; Merrill Lynch & Co. set its fourth-
quarter estimate closer to 1 percent. ``It's very likely
consumer spending will slow down significantly in coming
months,'' says Ethan Harris, Lehman's chief U.S. economist.
A slowdown threatens not only the U.S. economy -- consumer
spending accounts for two-thirds of gross domestic product --but
the world's as well: The U.S. is the destination for 18 percent
of the world's goods.
Energy prices are the catalyst, though not the only reason,
for the anticipated slowdown. The price of crude oil, gasoline
and natural gas all reached records after Hurricane Katrina
slammed into the Gulf Coast, an energy hub; Lehman estimates
consumers will pay $25 billion more this season to heat homes.
In an Oct. 14 report entitled ``Cold, Dark and Expensive,'' the
firm said higher energy prices may cut U.S. gross domestic
product growth by half a percentage point in the next two
quarters.

The True Test

The true test for the consumer may come in few months,
when heating bills arrive. Some economists say home-equity
loans, which are still bolstering Americans' ability to spend,
will help cushion the blow; they also take heart from the latest
reports on post-hurricane spending. The Commerce Department said
Oct. 14 that retail sales rose 0.2 percent in September and by
1.1 percent, the most since April, when auto sales were
excluded.
``Despite high energy prices, consumer spending will hold
up relatively well,'' says Jason Schenker, economist at
Charlotte, North Carolina-based Wachovia Corp., which forecasts
consumer spending increases of 2 percent in the first half of
next year, rising to 2.7 percent by the fourth quarter of 2006.
``Consumer behavior is not changing a lot.''

Feeling the Pain

Consumers are certainly beginning to feel some pain:
consumer prices rose last month by 1.2 percent, the most in 25
years, as energy costs posted the biggest jump on record, the
Labor Department said Oct. 14.
Merchants including Richmond, Minnesota-based Target Corp.,
the nation's second-largest discount retailer, and sporting-
goods retailer Cabela's Inc. are blaming rising energy prices
for hurting sales. On the same day as the inflation report,
Sidney, Nebraska-based Cabela's said sales at its stores that
have been open at least 15 months may drop as much as 9 percent.
The two consumer categories among 10 subgroups in the
Standard & Poor's 500 Stock index have each posted losses in the
past six months even as the overall index rose 3.9 percent.

Falling Wages

The surge in energy prices is contributing to a decline in
Americans' wages once inflation is taken into account. The Labor
Department said Oct. 14 that so-called real wages fell 1.2
percent last month, the biggest drop since January 1996, and
that the 12-month decline was the biggest since March 1991.
``There is no question that many households are suffering
declines in real incomes,'' William Poole, president of the
Federal Reserve Bank of St. Louis, said at a speech in
Washington later that day.
The decline erodes the purchasing power of American
consumers, who Morgan Stanley says have accounted for 71 percent
of gross domestic product since 2002, up from an average 67
percent the previous 25 years.
``Consumers have stagnant real wages and they are getting
hit with the shocks of higher energy prices,'' says Stephen
Roach, the firm's chief global economist in New York. ``This is
not a good combination for the overstretched consumer.''

Delinquent Consumers

Chad and Jennifer Fielding are among those
``overstretched'' consumers and illustrate another of the risks
that may contribute to slower consumer spending this winter.
With energy prices soaring, an increasing number of
Americans are falling behind on credit-card payments; at the
same time, new rules taking effect by year-end mean most
consumers will be required to pay 4 percent of their outstanding
balances each month, up from about 2 percent now. That will
boost payments as much as $2,400 a year for borrowers with
$10,000 in debt.
The Fieldings filed for bankruptcy protection Oct. 2 after
their credit-card debt ballooned to $30,000 over a decade of
spending. A new law taking effect today will make it harder for
consumers to erase debt through bankruptcy.
``You hit a breaking point, and something had to be done,''
says Chad, 31, an administrator at Henderson State University in
Arkadelphia, Arkansas. Jennifer, 32, a teacher, says the couple
paid the $900-a-month minimum on cards and ``the balance never
went down.''

Credit Cards

The share of delinquent credit-card accounts rose to 4.81
percent during April to June from 4.76 percent in the prior
three months, the American Bankers Association says. Consumers
spent 13.55 percent of their disposable incomes on debt service
in the second quarter, an all-time high, the Federal Reserve
says.
Carl Steidtmann, chief economist at Deloitte Research in
New York says delinquencies may approach 6 percent this quarter
as the higher minimum payments take effect. Some companies
already may be feeling the pinch. Citigroup Inc., the largest
U.S. financial services company, later today may report its
first drop in profit in five quarters because of rising credit-
card defaults, based on average economist forecasts in a Thomson
Financial survey.
Fed policy makers say overextended consumers may be a
source of weakness for the economy.
``There will be some pressures on households, and that will
be particularly true if we have a cold winter and natural-gas
prices go up even further,'' Poole said in an Oct. 4 press
briefing. Bankruptcy filings rose ahead of the new law, which
may be giving an incentive for filings, he said.
Rising energy prices will prompt consumers to ``pull back
on spending,'' Thomas Hoenig, Poole's counterpart at the Kansas
City Fed, said Oct. 5. ``Consumer debt has risen,'' he said, and
the increase in ``is significant.''

--With reporting by Carlos Torres, Craig Torres, Scott Lanman,
Victor Epstein and Courtney Schlisserman in Washington, Justin
Baer in New York and Min Zeng in New York. Editors: Rohner,
Miller, Chan

Story Illustration: To graph the rate of growth in U.S. consumer
credit, see {CICRTOT <INDEX> GP <GO>}.

source: bloomberg.com

Fibonacci

Fairly close to the mark....


The rising risk of a hard landing
>By Stephen Roach
>Published: November 1 2005 02:00 | Last updated: November 1 2005 02:00


It never fails. Every presentation or speech I have made on the economics of global rebalancing over the past three and a half years almost always ends with the same question: "When will these adjustments ever occur?" The history of the past few years is littered with false alarms over the coming US current account adjustment. Call it the "boy-cries-wolf syndrome". The longer the world endures mounting imbalances without suffering any serious consequences, the more the financial market consensus believes this disequilibrium is sustainable.

Yet there are new and increasingly urgent grounds for concern. Global imbalances continue to compound at an alarming rate. But there is a dangerous asymmetry in the mix of these imbalances. America's record current account shortfall will account for about 70 per cent of the total deficit positions in the global economy in 2005. By contrast, the incidence of surpluses is far more diffused: it takes some 10 economies to account for 70 per cent of the total global current account surplus in 2005. The world, in effect, is balanced on the head of the US external-imbalance pin. Washington is quick to point the finger elsewhere in blaming a growth-starved world for these imbalances. But in the end there can be no mistaking the disproportionate share of the blame that falls on a US economy that is short of savings.

And the situation is likely to go from bad to worse. In large part, that is because America's national savings outlook is about to enter a new phase of deterioration. In a post-Hurricane Katrina, energy-shocked climate deterioration is likely in all three big components of domestic US saving - for households, for the government sector and for businesses. American consumers were already running a negative personal saving rate before the energy shock intensified; to the extent that households now attempt to defend their lifestyles in the face of energy-related shortfalls of disposable income, the personal saving rate should move deeper into negative territory. At the same time, Katrina-related recovery and reconstruction costs could add at least one percentage point to the federal budget deficit in 2006. And the business-sector savings cushion seems likely to diminish as the combination of rising energy prices and mounting unit labour costs puts a dent in corporate profit margins.

This could take a savings-short US economy to an important flashpoint. America's net national saving rate - which has averaged a record low of 1.5 per cent of gross domestic product since early 2002 - could well pierce the "zero" threshold at some point over the next year. That would imply that the world's economic leader is not even saving enough to cover the replacement of its worn-out capital stock.

There is also reason to worry about global imbalances from the other side of the equation. The impacts of America's increased draw on the global savings pool are likely to be compounded by recoveries in several key surplus economies. That is true in Japan and could well be the case in Germany. To the extent that recoveries in Germany and Japan rely increasingly on support from domestic demand, surplus saving will be absorbed. That would then leave them providing less capital to fund America's ever-deepening savings shortfall. Moreover, China - the third largest surplus saver in the world - is very focused on stimulating domestic private consumption. To the extent China succeeds in its own rebalancing, that will put downward pressure on its saving - undermining yet another key source of funding for America's gaping current account deficit.

This is where the asymmetries in the mix of global saving could come into play. If the world's dominant deficit economy - the US - goes even deeper into deficit at the same time that the world's leading surplus economies start to absorb their domestic saving, the noose will tighten on America's external financing pressures. This raises the distinct possibility that these pressures will have to be vented in world ÂÂfinancial markets in the form of a classic current account adjustment - complete with a weaker dollar and higher US interest rates. As long as the rest of the world was in an excess saving position, a big repricing of dollar-denominated assets could be avoided. But now, with surplus economies beginning the long march of absorbing their excess saving, it could well become all the tougher for the US to avoid this treacherous endgame.

Sure, this is all theory, leaving unanswered the key question of what it will take to spark the adjustments implied by this theory. There are several possible event risks, or shocks, that I believe would be capable of triggering the rebalancing. They include an energy shock, an outbreak of US protectionism, the bursting of the US housing bubble, a US inflation problem and the uncertainty that always arises during the transition to a new Federal Reserve Board chairman. All of these potential risks have two things in common - they are not a stretch and they could shake the confidence factor that underpins overseas investor appetite for ÂÂdollar-denominated assets.

In the end, the history of economic crises is clear on one important thing: the longer any economy holds off in facing its imbalances, the greater the possibility of a hard landing. In my view, an unbalanced world has waited far too long to face up to the heavy lifting of global rebalancing. I would reluctantly conclude that there is now about a 40 per cent probability of a hard landing at some point in the next 12 months.

The writer is chief economist at Morgan Stanley



Find this article at:
http://news.ft.com/cms/s/68303e64-4a...cl=,s01=1.html

Fibonacci

Foreign Investors Losing Appetite for U.S. Treasuries (Update3)
2005-11-14 07:09 (New York)


(Updates yield in fifth paragraph.)

By Joshua Krongold
Nov. 14 (Bloomberg) -- The U.S. government is growing more
dependent on investors from abroad just as their appetite for
Treasury securities is waning.
Overseas investors, who own half of all U.S. government debt,
bought 14 percent of the $79 billion in benchmark 10-year notes
auctioned this year, down from 21 percent in 2004, Treasury
Department data show. Bidders including foreign central banks
purchased a smaller percentage of the $44 billion in three-,
five- and 10-year notes the Treasury sold last week than they did
a year ago.
A drop in demand may extend the slump that pushed Treasury
yields to the highest this year, raising the government's
borrowing costs to finance a $319 billion deficit. The U.S. will
borrow a record $171 billion from January to March, about double
the amount this quarter, to help pay for relief efforts after
Hurricanes Katrina and Rita.
``I'd wait before buying because there is still more upside
for yields,'' said Masayuki Yoshihara, a Tokyo-based investor who
helps manage the equivalent of $25 billion at Sumitomo Life
Insurance Co., Japan's fourth-largest life insurer. Investors
``are cautious about buying too aggressively right now with
yields rising so quickly,'' he said in a Nov. 10 interview.
The yield on the benchmark 10-year note rose to 4.68 percent
on Nov. 4 from 3.98 percent on Sept. 1, just after Katrina struck
the Gulf Coast. The yield, which moves inversely to the note's
price and is used to help determine corporate and consumer
borrowing costs, traded at 4.55 percent as of 7:02 a.m. in New
York, according to bond broker Cantor Fitzgerald LP.

Foreign Participation

Foreign investors bought about 21 percent of the $218
billion of two-year notes auctioned this year, down from 31
percent in 2004, according to Treasury data. They also purchased
about 21 percent of the $154 billion of five-year notes sold by
the Treasury, compared with 30 percent last year.
The figures don't include the results of last week's sales,
which will be released in December. Indirect bidders, a larger
group that includes U.S. institutional investors, foreign central
banks and overseas investors, bought 34.9 percent of the debt
sold. The percentage is down from 47.4 percent at the quarterly
auction of three-, five- and 10-year notes a year earlier.
``Foreign buying is a very important source of demand for
Treasuries and the market is concerned by evidence that it is
waning,'' Joseph Di Censo, a bond strategist at Lehman Brothers
Inc. in New York, said Nov. 11. ``This would obviously put upward
pressure on yields. The Treasury will always be able to finance
the budget deficit. The real question is at what cost.''

`Haunting' Deficit

Foreign investors increased Treasury holdings by 9 percent
this year, compared with more than 23 percent in each of the past
two years. The current pace is the lowest since 2001, when net
purchases rose 2.45 percent.
Overseas investors owned $2.06 trillion, or half the $4.11
trillion in tradable Treasuries as of August, up from less than
40 percent three years ago and 34 percent in 2000.
Debt strategists have credited foreign investors with
keeping U.S. yields in check as the budget deficit ballooned to a
record $412.8 billion in fiscal 2004 ending Sept. 30 and the
Federal Reserve raised interest rates 12 times. Since 2002,
foreign purchases have reduced 10-year Treasury yields by 19
basis points, according to Banc of America Securities LLC. A
basis point is 0.01 percentage point.
``You can't build in these constant deficits without having
them come back to haunt you,'' said Richard Fisher, president of
the Federal Reserve Bank of Dallas, on Nov. 3 at Harvard
University in Cambridge, Massachusetts.

`Better Places'

Japan, the largest foreign owner of Treasuries, cut its
holdings of the securities this year to $684.5 billion in August
from last year's peak of $699.4 billion in August, according to
the latest Treasury data.
An update on international demand comes in two days with the
Treasury International Capital report for September. The median
forecast of three economists surveyed by Bloomberg is that net
purchases of stocks, bonds and other financial assets slowed to
$70 billion from $91.3 billion in August.
There is little incentive to invest in U.S. debt with
inflation accelerating and the Fed forecast by most economists to
keep raising rates into 2006, said Don Quigley, co-manager of the
$209 million Julius Baer Total Return Bond Fund in New York.
``The better places to go are overseas,'' said Quigley, who
invests around the world. ``The Fed has really wanted to get
ahead of inflation and stay ahead of it. You're going to see
higher yields.''

Prefers German Debt

Quigley's fund is up 3.1 percent over the last 12 months,
the best among 23 similar funds, according to data compiled by
Bloomberg. Quigley on Nov. 7 said he prefers German government
debt to Treasuries even with yields on U.S. 10-year notes
exceeding bunds by about the most in six years.
The median estimate of 63 economists surveyed by Bloomberg
this month is for the Fed to raise its target rate to 4.75
percent by mid-2006. In June, the estimate was 4 percent.
Treasury yields are the highest among the Group of Seven
nations, which may help temper sales by foreign investors. The
10-year Treasury yields 103 basis points more than the German
government security with a similar maturity. The difference, or
spread, reached 123 basis points last month, the widest since
July 1999.
``Treasuries are pretty good value,'' Douglas Roberts, who
helps oversee $117 billion at Standard Life Investments Ltd. in
Edinburgh, Scotland, said Nov. 9. ``I would recommend getting in
at these levels.''

`Shunning Dollar Assets'

The rise in the U.S. dollar to a two-year high against the
euro and yen may work against Treasuries, said William Prophet,
an interest-rate strategist at the securities unit of UBS AG,
Europe's biggest bank by assets. Gains in the currency make it
more expensive for foreign investors to finance their purchases
of U.S. debt.
``We have seen some Japanese accounts shunning dollar
assets,'' the Stamford, Connecticut-based Prophet said Nov. 9.
``Foreign investors look at purchasing U.S. assets as two pieces:
buying dollars and then buying the securities. If one of these
pieces gets too rich, then the transaction becomes less
attractive.''
The Fed's daily average holdings of Treasuries for foreign
central banks and international accounts has climbed just 2
percent in 2005, after rising by almost 25 percent each of the
last two years and 14 percent in 2002.

--With reporting by Shamim Adam in Singapore, Kabir Chibber and
Bronwyn Curtis in London and Erin Burnett in New York. Editors:
Burgess (njr sfc)

Story illustration: For a list of U.S. Treasury prices and
yields, see {BBT <GO>}. To graph the yield on the 10-year note,
see {GT10 <Govt> GY <GO>}. To graph foreign holdings of U.S.
debt, see {HOLDTOT <Index> GP <GO>}. For the annual budget
balance, see {FDEBTY <Index> GP <GO>}.

source: bloomberg.com

ccannizz11

seriously piston, you need to start posting cliffs notes with all your articles.

Fibonacci

Trade Deficit Hits Record, Threatening U.S. Growth
By EDMUND L. ANDREWS
WASHINGTON, Dec. 14 - The United States' trade deficit ballooned to a record in October, the government said Wednesday, with imports climbing much faster than exports even though prices for imported oil declined.

The trade deficit widened by $3 billion, to $68.9 billion, confounding forecasts on Wall Street that the gap would narrow and signaling that the nation's huge trade imbalance has not begun to stabilize.

The nation's trade deficit is on track to top $700 billion this year, up from last year's record of $618 billion, and its foreign indebtedness is rising at least as rapidly.

Because imports are about 50 percent higher than exports, the United States would need to increase exports twice as fast as imports simply to keep its imbalances from growing even more.

The widening gap is likely to reduce the nation's overall growth in the final quarter of this year. Morgan Stanley reduced its forecast for growth this quarter to 3 percent, from 3.4 percent on Wednesday, and Merrill Lynch shaved its already pessimistic forecast to just 2.3 percent.

News of the deficit also ignited a fresh round of political accusations in Washington over trade and globalization, with Democrats accusing President Bush of being soft on countries like China.

The United States stepped up its purchases from every part of the world and in most categories of goods, even as global demand softened, the Commerce Department reported.

The trade deficit with China through October hit $166.8 billion, exceeding the $162 billion deficit with China for all of last year.

Over all, the Commerce Department estimated that American exports grew by 1.7 percent in October, while imports climbed 2.7 percent.

But exports were weaker than the headline numbers implied, because virtually all of the increase stemmed from a big increase in aircraft sales after the end of a strike at Boeing.

Excluding aircraft, exports of capital goods and industrial goods were essentially flat. Exports of consumer goods declined 5.6 percent, to $9.37 billion.

Many analysts had expected the trade deficit to narrow slightly, partly because of the increase in airplane exports and partly because oil prices declined slightly during the month.

But American thirst for imported petroleum shot up 13 percent, largely to make up for the loss of production in the Gulf of Mexico caused by Hurricane Katrina.

The United States' trade deficit with the Organization of the Petroleum Exporting Countries totaled $77 billion for the first 10 months of this year, up from $59.1 billion for the same period last year. The higher deficit is the result of both higher oil prices over the last year and higher volumes of imports. But that was only part of the reason that the trade balance deteriorated. The trade balance for nonpetroleum products for the first 10 months of this year has widened to $447 billion, up from $400 billion last year.

Representative Benjamin L. Cardin of Maryland, a top Democrat point man on trade issues, accused the Bush administration of failing to create an effective strategy for dealing with unfair trade practices.

Representative Marcy Kaptur, an Ohio Democrat, stepped up her call for legislation to force the administration to take action against countries that consistently run trade surpluses with the United States of more than $10 billion a year.

Even some Republicans expressed dismay at the size of the deficit.

"Small business owners in Maine and across the nation are fighting to remain competitive with countries such as China that flagrantly disregard fair trade practices," said Senator Olympia J. Snowe, Republican of Maine.

The Treasury secretary, John W. Snow, said the administration was pushing countries like China, but added that the trade deficit was largely a result of slow growth in other countries.

"If our major industrialized trading partners were growing faster, the U.S. wouldn't have such a large trade gap," Mr. Snow said at a briefing on the economy with Commerce Secretary Carlos M. Gutierrez and Labor Secretary Elaine L. Chao.

The American economy grew at an annual rate of 3.8 percent in the first three quarters of this year, far faster than either the European Union or Japan.

A growing number of economists worry that the United States has become locked into being the world's consumer of last resort, a role that is leading to ever higher levels of foreign indebtedness financed in large part by central banks of China, Japan and other Asian countries.

Robert Sinche, a currency strategist at Bank of America, predicted on Wednesday that foreigners would own about $4 trillion in American assets, about 30 percent of its gross domestic product, by the end of 2006.

http://www.nytimes.com/2005/12/15/bu...gewanted=print

Cliff's Notes: We're in uncharted waters. Trade deficit is unsustainable. How it ends, nobody knows. Soft landing Hard landing

zamo

Lets see, if I start spending more than what I earn, how long will it take for me to deplet my savings? Oh wait, wasnt I 500+ billion in debt?

doopstr

Dow/S&P 500 closed at 4 year highs yesterday. I'm not currently concerned about the economy.

Fibonacci

Turkeys about to get their heads chopped off aren't concerned about the future either.

I just follow the Boy Scout motto: Be Prepared.

Fibonacci

The economy that Alan Greenspan is about to hand over is in a much less healthy state than is popularly assumed



DESPITE his rather appealing personal humility, the tributes lavished upon Alan Greenspan, the chairman of the Federal Reserve, become more exuberant by the day. Ahead of his retirement on January 31st, he has been widely and extravagantly acclaimed by economic commentators, politicians and investors. After all, during much of his 18½ years in office America enjoyed rapid growth with low inflation, and he successfully steered the economy around a series of financial hazards. In his final days of glory, it may therefore seem churlish to question his record. However, Mr Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history.

One should not exaggerate Mr Greenspan's influence—both good and bad—over the economy. Like all central bankers he is constrained by huge uncertainties about how the economy works, and by the limits of what monetary policy can do (it can affect inflation, but it cannot increase the long-term rate of growth). He controls only short-term interest rates, not bond yields, taxes or regulation. Yet for all these constraints, Mr Greenspan has long been the world's most important economic policy maker—and during an exceptional period when globalisation and information technology have been transforming the world economy. His reign has coincided with the opening up to trade and global capital flows of China, India, the former Soviet Union and many other previously closed economies. And Mr Greenspan's policies have helped to support globalisation: the robust American demand and huge appetite for imports that he facilitated made it easier for these economies to emerge and embrace open markets. The benefits to poorer nations have been huge.


So far as the American economy is concerned, however, the Fed's policies of the past decade look like having painful long-term costs. It is true that the economy has shown amazing resilience in the face of the bursting in 2000-01 of the biggest stockmarket bubble in history, of terrorist attacks and of a tripling of oil prices. Mr Greenspan's admirers attribute this to the Fed's enhanced credibility under his charge. Others point to flexible wages and prices, rapid immigration, a sounder banking system and globalisation as factors that have made the economy more resilient to shocks.

The economy's greater flexibility may indeed provide a shock-absorber. A spurt in productivity has also boosted growth. But the main reason why America's growth has remained strong in recent years has been a massive monetary stimulus. The Fed held real interest rates negative for several years, and even today real rates remain low. Thanks to globalisation, new technology and that vaunted flexibility, which have all helped to reduce the prices of many goods, cheap money has not spilled into traditional inflation, but into rising asset prices instead—first equities and now housing. The Economist has long criticised Mr Greenspan for not trying to restrain the stockmarket bubble in the late 1990s, and then, after it burst, for inflating a housing bubble by holding interest rates low for so long (see article). The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit.



Burning the furniture
Ben Bernanke, Mr Greenspan's successor, likes to explain America's current-account deficit as the inevitable consequence of a saving glut in the rest of the world. Yet a large part of the blame lies with the Fed's own policies, which have allowed growth in domestic demand to outstrip supply for no less than ten years on the trot. Part of America's current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. The words of Ludwig von Mises, an Austrian economist of the early 20th century, nicely sum up the illusion: “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.”

As a result of weaker job creation than usual and sluggish real wage growth, American incomes have increased much more slowly than in previous recoveries. According to Morgan Stanley, over the past four years total private-sector labour compensation has risen by only 12% in real terms, compared with an average gain of 20% over the comparable period of the previous five expansions. Without strong gains in incomes, the growth in consumer spending has to a large extent been based on increases in house prices and credit. In recent months Mr Greenspan himself has given warnings that house prices may fall, and that this in turn could cause consumer spending to slow. In addition, he suggests that foreigners will eventually become less eager to finance the current-account deficit. Central banks in Asia and oil-producing countries have so far been happy to buy dollar assets in order to hold down their own currencies. However, there is a limit to their willingness to keep accumulating dollar reserves. Chinese officials last week offered hints that they are looking eventually to diversify China's foreign-exchange reserves. Over the next couple of years the dollar is likely to fall and bond yields rise as investors demand higher compensation for risk.

When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble. Given that consumer spending and residential construction have accounted for 90% of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy.

Handovers to a new Fed chairman are always tricky moments. They have often been followed by some sort of financial turmoil, such as the 1987 stockmarket crash, only two months after Mr Greenspan took over. This handover takes place with the economy in an unusually vulnerable state, thanks to its imbalances. The interest rates that Mr Bernanke will inherit will be close to neutral, neither restraining nor stimulating the economy. But America's domestic demand needs to grow more slowly in order to bring the saving rate and the current-account deficit back to sustainable levels. If demand fails to slow, he will need to push rates higher. This will be risky, given households' heavy debts. After 13 increases in interest rates, the tide of easy money is now flowing out, and many American households are going to be shockingly exposed. In the words of Warren Buffett, “It's only when the tide goes out that you can see who's swimming naked.”

How should Mr Bernanke respond to falling house prices and a sharp economic slowdown when they come? While he is even more opposed than Mr Greenspan to the idea of restraining asset-price bubbles, he seems just as keen to slash interest rates when bubbles burst to prevent a downturn. He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall. This is dangerous as it encourages excessive risk taking and allows the imbalances to grow ever larger, making the eventual correction even worse. If the imbalances are to unwind, America needs to accept a period in which domestic demand grows more slowly than output.

The big question is whether the rest of the world will slow too. The good news is that growth is becoming more broadly based, as demand in the euro area and Japan has been picking up, and fears about an imminent hard landing in China have faded. America kept the world going during troubled times. But now it is time for others to take the lead.

http://www.economist.com/opinion/Pri...ory_id=5385434

Fibonacci

http://www.sprott.com/pdf/marketsata...01-17-2006.pdf

Fibonacci

My instincts tell me that this will be a very, very interesting year...

zamo

Yes, I am looking forward on the housing market here in south FL, where many people I know have bought the house with ARMs that are soon to be adjusted. I already told them to just be prepared for that.

Fibonacci

My sense is that there is too much general complacency: low risk premiums, inverted yield curve, real estate bubble deflating, geo-political risks rising, etc.

Not sure exactly when or how, but something is going to rattle the markets in a significant way in the near future

Fibonacci

The U.S. and China's savings problem
The Chinese have taken thrift to excess, while profligate Americans have spent their way into debt.
By Stephen Roach
March 8, 2006: 6:08 PM EST


(FORTUNE Magazine) - The two major players in the global economy, the U.S. and China, are operating at opposite ends of the saving spectrum. Thrifty Chinese have taken saving to excess, while profligate Americans have spent their way into debt.

Neither of these trends is sustainable -- they lead to destabilizing economic and political developments for both nations -- and a better balance must be struck. China needs to convert excess saving into consumption, while the U.S. needs to end its buying binge and rediscover the art of saving.

The numbers leave little doubt as to the extraordinary contrast between the two economies. Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the U.S. saved only 13% of its national income, or $1.6 trillion. That's right, the U.S., whose economy is six times the size of China's, can't manage to save twice as much money.

And that's just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level -- a personal saving rate in China of about 30% of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income).

Depression-era habits
These are extreme readings by any standard. The U.S. hasn't pushed its personal saving rate this far into negative territory since 1933, in the depths of the Depression. And the Chinese rate is higher than it has been at any point in the past 28 years, since its modern reforms began.

Similar extremes show up in the consumption shares of the two economies -- the mirror image of trends in personal saving rates. U.S. consumption has held at a record 71% of GDP since early 2002, while Chinese consumption appears to have slipped to a record low of about 50% of GDP in 2005.

In China's case, relatively weak consumption means its growth dynamic is skewed heavily toward exports and fixed investment. These two sectors account for more than 75% of Chinese GDP and are growing by more than 25% a year.

If China stays with this growth mix, any further increase on the export side would be a recipe for trade frictions and protectionist responses. That's certainly the direction Washington is heading in these days. Moreover, a continued burst of Chinese investment could lead to excess capacity and deflation at home.

Using homes as ATMs
The U.S. saving shortfall is equally stressful. American consumers have mistaken bubble-like appreciation of their homes for saving. Facing anemic growth in labor incomes -- real compensation paid out by the private sector has lagged behind the norm of past business cycles by more than $360 billion -- they have turned to debt-financed equity extraction from their homes in order to keep consuming. And the binge has reached record highs in terms of both the amount consumers owe as a share of their incomes and the interest expenses they incur to service those obligations.

America's lack of saving has also put unprecedented demands on the rest of the world, since the U.S. must import surplus saving from abroad in order to grow. America's current account deficit hit a record of nearly 6.5% of GDP in 2005 and could well be headed north of 7% this year. That translates into a lifeline of foreign capital totaling about $3 billion per business day.

There is a more insidious connection between the saving postures of China and the U.S.: Chinese savers are, in effect, subsidizing the spending binge of American consumers. In order to fuel its export-led economic growth, China has decided to keep its currency relatively cheap and tightly pegged to the dollar. To do so, it must constantly recycle a large portion of its saving into dollar-denominated financial assets -- an investment strategy that helps keep U.S. interest rates low and an interest-rate-sensitive American housing market in a perpetual state of froth.

That's dangerous for the U.S., but it's also an increasingly risky proposition for China because it bloats that country's money supply. This excess liquidity then spills over into the Chinese financial system, leading to asset bubbles, such as those in its coastal property markets. China is also exposed to the potential fiscal costs of a sharp markdown of its portfolio of dollar-based assets in the event of a depreciation of the U.S. currency.

It is in neither country's best interest to stay the present course. Instead, there must be a role reversal: China's savers must be turned into consumers, and the excesses of U.S. consumption must be converted into saving. This won't be an easy task for either nation, but it sure beats the increasingly treacherous alternatives.

In the U.S., it will take nothing short of a major campaign to boost national saving. That will require a reduction of public-sector dissaving (i.e., outsized federal budget deficits) and the enactment of some form of consumption tax.

A pro-saving agenda
A national sales tax would be the simplest and most efficient prescription, provided there are exemptions for low- and lower-middle-income families. It would reduce incentives for consumption, freeing up income to be saved, and also help reduce the federal deficit.

Sadly, there is little reason to be optimistic that Washington is about to embrace a pro-saving policy agenda. The budget deficit is going the other way, and the lack of political support for tax reform effectively quashes any immediate hopes for private-saving incentives.

In China, it will also take major policy initiatives to spark consumption-led growth. Actions are needed on two fronts -- the establishment of a social-welfare safety net to deal with job and income insecurity arising from reforms of state-owned enterprises; and the creation of new jobs, especially in the undeveloped services sector, to expand the purchasing power of China's enormous population.

The good news is that the Chinese leadership is focused on shifting its growth mix toward private consumption. Pilot projects already have been established setting up a social security system. And under the terms of China's WTO accession, the opening of domestic services to foreign investors in areas like retail and insurance is likely to accelerate over the next three to five years.

China's determination stands in sharp contrast to Washington's inattentiveness to saving initiatives. That could spell trouble. As Chinese saving is converted into consumption, it will have less surplus capital that can be used to fund America's saving shortfall. That means China will be reducing its support for the American consumer. And that would raise the odds of a hard landing for the dollar and the U.S. economy, with dire consequences for a still U.S.-centric global economy.

The U.S. and China need to get their saving agendas in order before it is too late for them -- and for the rest of the world.

Stephen S. Roach is chief economist at Morgan Stanley.

http://money.cnn.com/2006/03/03/news...ex.htm?cnn=yes

Fibonacci

Rome is burning, but nobody cares...

Fibonacci

We may have just discovered that the global economy is like a car without a driver

5o9

Things are swell

Sorry to report that there is a negative correlation between stock market performance and house price appreciation. Another nail in the housing coffin.

National housing index should do ok in 2006, worse in 2007, maybe takes four years to shake out some markets. Don't catch a falling knife