RED ALERT: U.S. Consulate Attacked In Pakistan
RED ALERT: U.S. Consulate Attacked In Pakistan
April 5, 2010
Three explosions, two rocket attacks and subsequent gunfire have been reported in the near vicinity of the U.S. consulate in Peshawar, Pakistan, on April 5. The attack occurred early afternoon local time when the consulate would have been full of both American and local employees. The death toll is reported at 36 but is expected to rise.
There are no assessments yet of the damage that the consulate building has sustained, but reports indicate that the explosions led to the collapse of other, adjacent buildings. Pakistani soldiers are also reported to be engaging militants in gunfire, indicating that militants are actively engaged in an attack near the area - possibly with the intention of breaching the U.S. consulate.
Many U.S. diplomatic missions (including the one in Peshawar) have a number of built in security features, such as a perimeter wall, ample stand-off distance between the buildings and the wall, reinforced concrete structure and windows and marines stationed inside to ward off attacks. While militant activity in the tribal belt of northwest Pakistan has led to regular attacks against targets of the Pakistani state, today’s assault against the consulate is an extremely rare direct attack on a U.S. target. STRATFOR is monitoring the situation for more details. Monitor our coverage.
Germany and the euro
May the best man share
What the Germans see as economic virtue, some of its partners see as vice
Angela prepares for battleIT WAS Greece that let public spending rip, lied about it and is now trying to stave off default. But the Greek crisis has somehow morphed into the German problem. Angela Merkel, the German chancellor, led resistance to a bail-out of Greece. For her pains, she was lionised at home (Bild, a tabloid, depicted her as a sword-bearing reincarnation of Bismarck) but denounced by her neighbours. “Angela, have a little courage,” pleaded Viviane Reding, vice-president of the European Commission. Other countries see Germany’s huge current-account surpluses as almost as big a problem as Greece’s deficits. They keep expecting a history-chastened Germany to contribute generously to the European project and to demand less than its due. Now it stands accused of turning away.
On March 25th European leaders patched up their differences over Greece. Under a deal cooked up by Mrs Merkel and the French president, Nicolas Sarkozy, Greece’s euro partners will come to its aid as a last resort (see article). That would be the bail-out that Mrs Merkel wanted to avoid, but it may never happen. Any help will require the unanimous approval of the 16 euro-area members, giving Germany a veto. IMF involvement will shield Germany from blame for imposing tough conditions. The hope is that the mere talk of a rescue will be enough to ease speculative attacks on Greece.
Yet the contradictions that caused the crisis, which go back to the euro’s birth in 1999, remain unresolved. Germany greeted the single currency as a levelling of the commercial playing-field and has been honing its competitiveness ever since. Greece and other Mediterranean countries saw the euro as an opportunity to engage in business as usual, but with the benefit of lower interest rates. There is broad agreement that Greece and the rest must change. The question is, must Germany, Europe’s biggest economy, change too?
To most Germans the idea verges on the ridiculous. Germany entered the single currency handicapped, they say, by a strong D-mark and the cost of unification. Employers and trade unions co-operated to keep a lid on labour costs. The government contributed by liberalising the jobs market. It also cut social-security contributions, partly making up the shortfall with higher value-added tax. Between 2000 and 2008 unit labour costs declined by 1.4% a year in Germany while rising by nearly 1% a year in France and Britain. Germany breached the euro’s budget-deficit ceiling of 3% of GDP, but eliminated its deficit by the eve of the crisis.
But this abundance of virtue looks like vice to several of Germany’s EU partners. Germany’s duel with China to be the world’s top exporter demands that it suppress incomes and so Germans’ ability to consume. Its current-account surpluses—and the mirror-image deficits of others—are a prime cause of instability. When France’s finance minister, Christine Lagarde, recently called for surplus countries to “do a little something” to promote European growth, she was casting doubt on Germany’s export-driven model.
She did not explicitly propose France as a role model but IMK, a German research institute close to the unions, does. France’s wage growth has kept up with productivity and inflation. Its exports have grown more slowly than Germany’s, but private consumption has advanced at almost triple the rate. Between 1999 and 2007 French GDP grew a third faster and employment twice as fast as Germany’s. Gustav Horn of IMK reckons that Germany’s focus on exports created 400,000 jobs, but weak demand cost another 1m.
Many Germans detect a plot to nobble their exporters. A sprinter should not have to “put lead weights in his shorts”, snarled the economy minister, Rainer Brüderle. The idea of imitating France, with its budget deficits and sickly manufacturing sector, seems bizarre. German officials reject the most obvious ways of shrinking the current-account surplus. Markets, not governments, set wages, they say. To push them up artificially would merely raise unemployment, which would depress consumption and imports still further.
One answer, Mrs Lagarde argues, would be to cut taxes, an idea supposedly favoured by Germany’s coalition government, which combines Mrs Merkel’s Christian Democratic Union with the Free Democratic Party. But a new balanced-budget amendment to the constitution will force Germany to slash spending or raise taxes next year—the opposite of what is needed to correct Europe’s imbalances and shore up growth.
There are other ways to shrink the gap between Germany’s high savings rate and relatively low investment, the underlying reason for its current-account surplus. A new OECD survey of Germany says the key is to boost investment, for example by encouraging innovation, which Mrs Merkel is keen to do; and by liberalising entry into professions such as law and accounting, which she may not want. But these are not quick fixes. Europe will be stuck with Germany’s surpluses for years to come.
You say Lwów, I say Lviv
Europe.view
You say Lwów, I say Lviv
A guide to Eastern Europe's most tedious arguments
LAST week’s column dealt with the arcane name squabble between Macedonia (aka FYROM) and Greece. This piece was soon the most-commented on the Economist’s website. That was no thanks to the brilliance of the prose and the lucidity of argument. The subject was one of those issues that attracts bigots, scaremongers and polemicists, with a vanishingly tangential relationship to truth, logic and courtesy.
The article described the row as “the most tedious dispute in the Balkans”. The ex-communist region sets a high standard in such matters, so the epithet is not to be bestowed lightly. Here is an outsider’s guide to a few of the other rows. All the arguments below are a) historically plausible and b) strike most outsiders as quite mad.
Are you calling me a Tatar?Moldova/Romania A sizeable number of Romanians believe that what is today called the Republic of Moldova is nothing more than a lost province of real Romania, snatched by Stalin out of spite (along with northern Bukovina, which went to Ukraine). The sooner this “pretend Moldova” rejoins Romania the better. Handing out passports to as many Moldovans as possible brings this nearer.
Bulgaria/Macedonia From a certain Bulgarian-nationalist viewpoint, the idea of a discrete Macedonian ethnicity or language is a nonsense—rather like defining “Texan” as an ethnicity in America. Yugoslav Macedonia was a historical accident, and the sooner the detritus joins Bulgaria the better. After that, it will be time to liberate the brother-Slavs of northern Greece.
Slovakia/Hungary According to hardline Slovak nationalists, the whole idea of a Hungarian ethnic minority in the country is absurd. These people (many of whom are Gypsies anyway) should shut up and get on with being Slovaks: ie, speaking Slovak and thinking like Slovaks. Any other behaviour is a sign that they are still imprisoned by their imperial mindset. If they don’t like living in Slovakia, they should go back to Hungary (where, incidentally, the Slovak-speaking minority has dwindled to nothing—proving that it is the Magyars who are the real ethno-nationalists).
Lithuania/Poland Not many people realise this, but most of the people speaking Polish and Belarussian in the area in and around Vilnius are not really Slavs but polonised Lithuanians, the legacy of centuries of forced assimilation. That is a terrible fate, so the right (and kindest) thing to do is to depolonise these people and relithuanianise them. A good way to start is to make sure that they do not get trapped into using foreign Polish letters and silly spellings when writing their names. It is Adomas Mickevicius, not Adam Mickiewicz. Let nobody forget it.
Ukraine/Poland Anyone who spells the capital of Galicia as Lwów is a Polish nationalist who bayonets Ukranian babies for fun. Anyone who says it is spelled Lviv is a Ukrainian fascist who bayonets Polish babies for fun. Anyone who spells it Lvov is a Soviet mass murderer. And anyone who calls it Lemberg is a Nazi. See you in Leopolis for further discussion.
Among the runners-up: “Tatar” is a derogatory and invented name for the inhabitants of modern Tatarstan, who are in fact the descendants of Volga Bulgars. Kievan Rus was not Russian. Any talk of a Ruthenian nation is ill-informed, stupid, possibly mad and the product of Muscovite attempts to split and destroy Ukraine.
Outside pressure has mostly calmed these arguments within formal politics. But on the internet the rows still rage, with tortured facts, arguments and syntax, all mixed with vituperative insults, phoney politeness and seemingly RANDOM Use Of Capital letters. There is a whiff of pyjamas-at-noon, and of people who check their emails in the small hours. Time to get a life?
Argentina's bond swap
Eating their words
The government tries to make peace with international capital markets
BACK in 2005 when he oversaw a deal to restructure some $82 billion in bonds on which the country had defaulted four years earlier, the country’s then president, Néstor Kirchner, hung tough. The government offered new bonds worth only about 35% of the old ones. This prompted creditors with around a quarter of the debt to hold out for better terms, even though Mr Kirchner ordered Congress to pass a law forbidding any further payment. The creditors obtained court orders barring Argentina from raising fresh debt in international markets. But the economy was recovering strongly, and the world was awash with liquidity: the government managed to sell bonds worth $8.5 billion in the local market and $7.6 billion to Venezuela, albeit in some cases at high interest rates. It even paid off the IMF, partly to avoid being forced to deal with the holdouts.
That was then. Mr Kirchner’s wife, Cristina Fernández, who succeeded him in 2007, is in difficulties. Recession, from which Argentina is now recovering, pushed the public finances into the red. The Kirchners’ hopes of holding on to power at a presidential election due next year are threatened by their unpopularity. Venezuela’s Hugo Chávez has financial problems of his own. Argentina is feeling the price it has paid for excluding itself from the world financial system.
Ms Fernández first expressed interest in reaching a deal with the bondholders ten months after taking office. But with investors panicking the world over, yields on Argentina’s bonds surged to prohibitive levels (see chart). So the government has tried to tap some unorthodox sources of revenue. First it nationalised private pension funds, allowing itself to draw on their $30 billion in assets. An attempt to raid the Central Bank’s reserves in order to repay $6 billion in debt falling due this year foundered on resistance first from Martín Redrado, who was sacked as the bank’s governor over the issue, and then from Congress, where the opposition now holds a majority.
With markets calmer, Ms Fernández wants to make peace with the bondholders. At her request, Congress lifted the ban on reopening the debt restructuring. This month her officials filed a new offer with regulators in the United States, Italy and Japan. Although the details have not yet been made public, the terms are likely to be similar to those offered in 2005, while also including an extra bond to cover interest due over the past five years, according to Alberto Bernal of Bulltick Capital Markets, an investment bank. As with the previous deal, the new bonds may come with a warrant that will pay extra if the economy grows faster than forecast.
Investors have welcomed the news. The risk premium on Argentina’s bonds has fallen. Analysts reckon that around three-quarters of the holdouts will accept the deal, meaning that 94% of all the defaulted debt from 2001 will have been swapped. Officials will hope that such widespread acceptance would persuade American judges to ignore the pleas of vulture funds still seeking to obtain the full face-value of bonds they bought after the default. And Argentina would then be free to borrow again.
Whether the government and Argentine companies will be able to do so as cheaply as their counterparts in Brazil and Chile depends on Ms Fernández changing other policies. She would need to clean up the government’s dodgy economic statistics, and stop harassing private business. There is no sign of this. So Argentina’s debt is likely to continue to be bracketed with that of Ecuador and Venezuela as the riskiest in Latin America until Ms Fernández’s term ends in 2011.
The week ahead
The coming days
The week ahead
The leaders of Russia and America will sign a new strategic-arms reduction treaty in Prague
• BARACK OBAMA will meet Russia’s president, Dmitry Medvedev, in Prague on Thursday April 8th to sign a strategic-arms reduction treaty. Over ten years this will cut the number deployed strategic warheads to 1,550 on each side. Delivery systems (missiles, bombers and the like) will be reduced to 700 apiece. That is still enough to wipe out whole continents, but it makes the Nobel peace prize sitting on Mr Obama’s mantelpiece look a little less like an invitation to hubris.
• THE foreign ministers of India and China will meet in Beijing on Monday 5th April. Asia’s two rising powers have a polite but tense relationship—thanks to their long-running and lengthy border dispute, and the sense that they are competing for the same slot as Asia’s dominant power. India’s foreign minister, S.M. Krishna, and his Chinese counterpart, Yang Jiechi, are expected to hold talks on bilateral, regional and global themes.
• INDIA’S place in the world will also be under discussion when Tim Geitner, America’s Treasury secretary, visits Delhi on Tuesday 6th April. Mr Geitner will launch the US-India Economic and Financial Partnership with India’s finance minister, Pranab Mukherjee. America already has a similar partnership with China. Ties with India are cordial, after America offered support for India’s plans for its civil nuclear sector.
• THE British prime minister, Gordon Brown, is expected to make the short trip from his office in Downing Street to Buckingham Palace, on Tuesday April 6th, to ask the Queen to dissolve Parliament, thus triggering a general election. Once the quaint rituals are over, a month of intensive campaigning will follow. The vote itself will probably be on May 6th. Polls suggest that Britain will see the Conservatives in power for the first time since 1997.
• COPYRIGHT law turns 300 on Friday 9th April. During Queen Anne’s reign in Britain an old system of royal warrants that gave control of works to a clique of publishers and printers was replaced with a law that allowed authors ownership of their work for a limited period.
U.S. Decline, Sloth Look a Lot Like End of Rome
U.S. Decline, Sloth Look a Lot Like End of Rome: Mark Fisher
Commentary by Mark Fisher
-- Historians cite the late second century as the turning point of the Roman Empire, when the once- proud, feared society began its descent into infamy.
As the ruling class was undermined by civil wars and attacks by outsiders, the Romans’ respect for law and social institutions began to erode. In the end, a combination of political and economic mistakes led to the empire’s downfall.
The U.S. today is a mirror image of the Roman Empire as it tipped into chaos. Whether we blame our bloated government, a greedy elite or a lethargic population, the similarities between the two foreshadow a gruesome future.
The Roman economy grew fat from the plunder of conquered territories and the added productivity offered by new lands. The waning of expansionism didn’t bode well for the empire.
While the U.S. ascended quite differently, it also used its position as a superpower to fuel economic expansion. Because the country had the strongest military and economy in the post-World War II era, the U.S. dollar became the de facto global reserve currency, ensuring endless competitive advantages -- which have vanished in the last decade.
Americans have become less productive while relying more on social safety-net programs such as Medicare, Medicaid and Social Security -- and now expanded health-care insurance. Worse, like the ancient Romans, a sense of entitlement has replaced the drive and motivation we once championed. With easy access to abundant government handouts, it’s no wonder so many jobless people have stopped looking for work.
Bread and Circuses
In the fifth century, the Roman political elite began searching for ways to distract its population from the hopelessness at hand. Bread and circuses postponed the ultimate fall. The tactic stopped working when people realized their bread tasted stale and sensed the true scope of the impending disaster.
The U.S. government’s version of bread offerings proliferated throughout the fiscal crisis, in which collapse was averted only by a massive financial bailout and an endless supply of paper money, along with the rest of the seemingly endless sustenance being shoved down America’s throat.
Meanwhile, the administration hasn’t yet tackled the most pressing issue: job creation. Given the current state of the labor market, American workers can’t possibly provide enough tax revenue to support the government’s swelling debt.
Even more unsettling is the government’s inability to fix the financial crisis. After a stream of stimulus programs and bailouts, the Federal Reserve continues to print enormous quantities of dollars and buy the nation’s debt.
California Like Greece
Many state governments are in even worse shape. With California’s 10-year debt currently yielding about 4.5 percent (municipal debt typically yields less than 10-year Treasuries, which now yield about 3.9 percent), the state poses the same sort of danger to the U.S. that Greece does to the European Union. If the federal government decides to bail out California, what happens when Michigan and New York start demanding the same treatment?
The burden of underfunded pension liabilities will cause states’ budget deficits to further balloon. Since defined state benefit plans assume an unrealistic 8 percent rate of return -- zero percent, at best, is more likely -- we can only imagine the catastrophe to come once states have to make good on their obligations.
As our society becomes increasingly immobile and sits on the couch doing nothing but surfing the Internet, using iPhones and watching “Jersey Shore,” the hopelessness of the situation becomes clear.
Fear Mounts
Unless the government creates a massive jobs program, cuts spending and taxes, and gains control of the national budget and the balance of payments crises, we should fear for our future. Unless our fellow Americans relearn the value of hard work, no government plan stands a chance.
Once the world realizes that the U.S. is the new Rome, the traditional tenets governing asset correlations will no longer hold, and we can expect a breakdown in traditional stock-bond portfolio theories.
Since paper assets are ultimately shoved down to zero, expect hard assets to benefit -- especially gold, energy and grains -- along with commodity-related equities.
The name of the game going forward -- let’s say the next five years -- will be buying ahead of whatever China and other developing nations are trying to accumulate and diversifying away from the U.S.
The China Factor
Consider the trading relationship between the U.S. and China. When the U.S. funnels its unfinished products to China, the Asian nation is able to send back manufactured goods -- thanks to its abundant supply of cheap labor -- in return for dollars. While the American people are busy tinkering with their newly manufactured playthings, the Chinese continue to use their new wealth to buy energy and commodity assets.
Thus, China and the other developing countries that are amassing dollars, euros and pounds basically play a game of global hot potato, trying to pass the potato -- worthless paper currencies -- to others in exchange for energy, water and valuable food assets.
As China continues to thrust its dollars at all things commodity-related, it’s hard not to laugh when hearing President Barack Obama speak about trying to identify “environmentally sound” opportunities in energy.
Meltdown Ahead
It’s only a matter of time before the mechanism that has allowed the government to sustain its trade deficit for longer than it should have -- similar to the Asian dollar peg of the 1990s -- causes a simultaneous decline in the U.S. currency, asset prices and the economy.
Once people begin to realize that their paper currencies, stocks and bonds are all garbage, we can expect a meltdown.
Although it may be too early to predict an impending collapse in paper assets and an immediate need to acquire hard assets, it’s clear that we’ve reached a turning point. The ship has begun to sink. As I await a global re-set of asset values and prices, I will continue to monitor the swelling federal and state tax revenue levels, the rising animosity between Main Street and Wall Street and the progress made by commodity-hungry nations as they continue to eat our lunch.
While I continue to hope for the best, it’s far wiser to prepare for the worst.
Energy Independence Talk
Energy Independence Talk Is Just So Much Gas: Kevin Hassett
Commentary by Kevin Hassett
April 5 (Bloomberg) -- Last week, in front of a bio-fuel jet fighter at Andrews Air Force Base, President Barack Obama announced his intention to open up much of the eastern seaboard and parts of the Gulf of Mexico and Alaska to offshore oil drilling.
The White House press release said the move will “enhance our nation’s energy independence while protecting fisheries, tourism, and places off U.S. coasts that are not appropriate for development.” As Obama put it, “For decades we’ve talked about how our dependence on foreign oil threatens our economy -- yet our will to act rises and falls with the price of a barrel of oil.”
The president apparently decided that the potential environmental risks are worth taking because of the benefits of energy independence -- a nonsensical goal that would never be pursued by anyone who understands economics. We will never get energy policy right if our leaders continue to traffic in such silly misconceptions.
Nobody ever talks about independence for other products. We don’t care about automobile independence, or bottled water independence, or underwear independence. We avoid asserting that those would be worthy goals, for a good reason: Free trade enhances our welfare by allowing us to import products from those who have a comparative advantage producing them.
Why should energy be any different? Three arguments are most commonly offered.
Fluctuating Prices
The first is that oil price fluctuations harm the economy, and that owning more oil would help inoculate against them. This is specious. If the U.S. does discover a mother lode of oil, that discovery will affect the global price of oil. After the price adjusts to the new supply, it will go on and fluctuate from there. Before the discovery, Americans would pay the world price of oil, and watch and suffer as it moves up and down. Ditto for after the discovery.
It might be nice, of course, to own the oil or oil companies if the price increases sharply. That way, U.S. citizens see their wealth increase to offset some of the damage of the higher price. But if that hedge is viewed as attractive, we don’t need to drill to acquire it. We could just encourage Americans to invest in the equities of publically traded foreign oil companies such as BP Plc, PetroChina Co. or Royal Dutch Shell Plc.
Fear of Embargo
The second reason sometimes given for more U.S. production is that a foreign enemy might decide to organize an embargo against us and shut off our supply of oil. Such an embargo might, indeed, harm the economy, as it did back in 1973.
Still, think about it. If we fear there might be an embargo in the future, the optimal response is to purchase more oil from abroad today, not less. We should try to get as much as we can before the spigot is turned off. We should also reduce domestic production, not increase it, secure in the knowledge that the oil is there, available when we need it, in places such as the Arctic National Wildlife Refuge. If we ramp up production today, then we may find ourselves facing an embargo down the road after we have drained all of our own domestic reserves.
The third argument one sometimes hears is that we should stop buying oil from evil-doers such as Iran, as that only provides them with resources they can use to do us harm. But the problem is, oil is a commodity, and if we do not purchase it from a given supplier, someone else will. Such a boycott has no effect whatsoever.
Focus on Benefits
This doesn’t mean that Obama’s idea to allow drilling offshore is necessarily a bad idea. But the benefits and costs need to be weighed rationally. The benefit is that an oil discovery increases our collective wealth, which is a good thing. Once we know that we have a proven reserve, we can choose to let it appreciate in the ground, or tap it and generate current income. In either case, we are better off.
That benefit must be weighed against the costs, the biggest of which is environmental.
Last September I wrote about the leaking oil platform in the Timor Sea that was pouring about 2,000 barrels of oil per day into pristine ocean. That environmental catastrophe was finally stopped on Nov. 3. By then it had spewed more than 100,000 barrels of oil over the course of 74 days, producing oil slicks that cumulatively covered more than 22,000 square miles, according to one estimate, an area almost the size of West Virginia.
Clearly, a spill like that would be an environmental catastrophe in our waters, too. Whether we should accept the risk of such a catastrophe depends on the odds that such an accident could be repeated here.
I doubt such cold calculation was behind the latest decision to allow more drilling. One suspects that the almost religious commitment of both parties to the pursuit of energy independence makes costs and benefits irrelevant.
China Trade Tensions With U.S. Have Been ‘Amplified
China Trade Tensions With U.S. Have Been ‘Amplified,’ Kirk Says
By Jim Efstathiou Jr.
April 3 (Bloomberg) -- China’s trade disputes with the U.S. have been “amplified” and in some cases are no worse than those with other countries, U.S. Trade Representative Ron Kirk said ahead of a visit to Washington this month by President Hu Jintao.
Kirk declined to single out China as a protectionist nation in an interview on Bloomberg Television’s “Political Capital With Al Hunt” airing this weekend. The U.S. and China, with $409 billion in annual trade, have a complex relationship that holds “great promise,” Kirk said.
“Our challenges with China I think get amplified because there’s so much attention focused on China,” Kirk said. “But we have challenges throughout Asia.”
President Barack Obama would like to complete at least one of three pending trade agreements with Korea, Colombia and Panama this year, Kirk said. While he declined to say which accord would come first, Kirk said the administration is making “good progress” on resolving labor and tax issues with Panama.
Bipartisan cooperation will be required on trade issues to keep the U.S. competitive with other countries that are lowering tariffs, Kirk said. He has met with representatives of labor unions and congressional Democrats over the past 14 months to try to defuse the emotions surrounding trade, Kirk said.
Tire Tariffs
“We’re not going to be able to move forward if we have a poisoned political environment in Washington in which every issue that comes up becomes the next health care,” Kirk said. “If we do it right, we ought to be able to thread the needle in a way that we can answers some of their criticisms honestly but still find a way to move forward.”
Obama in September placed tariffs on automobile tires from China after labor union complaints that imports were pushing U.S. factory workers out of jobs. In February China, the largest market for U.S. chicken, said it would impose anti-dumping duties on imports of American poultry products, threatening to deepen a trade rift.
China’s trade relations with the European Union have also been strained, with Beijing complaining to the World Trade Organization about the European Union’s anti-dumping measures targeting leather shoes made in China.
U.S. Treasury Secretary Timothy F. Geithner is under congressional pressure to label China a currency manipulator after China kept the value of the yuan unchanged against the dollar for almost two years. Critics say that gives Chinese exporters an unfair advantage.
Nuclear Summit
It’s in China’s interest to move toward a more flexible exchange rate and he’s confident officials will take action, Geithner said yesterday in an interview with Bloomberg Television. China needs to depend less on exports for growth, he said.
Hu’s attendance this month at a nuclear summit improves the chances China won’t be called a currency manipulator when the U.S. Treasury releases its biannual report on exchange rates, said China International Capital Corp., a Beijing-based investment bank that’s part-owned by Morgan Stanley.
In an hour-long call on April 1, Obama sought Hu’s support for Group of 20 pledges to sustain the global economic recovery and for cooperation to help stop Iran from developing nuclear weapons, the White House said in a statement.
“We need to encourage Chinese investment in the United States,” Duke Energy Corp. chief Jim Rogers said in an interview on April 1. “It’s a one-way street right now. We’ve got to reduce the rhetoric and focus on being competitive.”
Pegged Yuan
China pegged the yuan at about 8.3 per dollar from 1995 until July 2005, when the government shifted policy and allowed some fluctuation by managing its exchange rate against an undisclosed basket of currencies. After a 21 percent gain in the currency that hurt its exporters, China in July 2008 began restraining the yuan’s value.
Yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace. Twelve-month non-deliverable forwards advanced 0.2 percent to 6.6491 per dollar as of 5:30 p.m. yesterday in Hong Kong, reflecting bets the currency will strengthen 2.7 percent from the spot rate of 6.8256, according to Bloomberg data.
Greenspan Should Have Seen Housing Crisis
Greenspan Should Have Seen Housing Crisis, Burry Says in Times
By Jeff Bliss
April 5 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan should have foreseen the collapse of the U.S. housing market and warned the public, one of the most prominent bettors against the subprime market wrote in a New York Times commentary yesterday.
“He should have seen what was coming and offered a sober, apolitical warning,” Michael Burry, who was head of Scion Capital LLC, wrote in the Times. “Everyone would have listened; when he talked about the economy, the world hung on every single word.”
“Unfortunately, he did not give good advice,” Burry said. In 2005, “Mr. Greenspan trumpeted the expansion of the subprime mortgage market” at a time when “the tide was about to turn,” Burry wrote.
“The signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences and when the government could have acted to minimize the fallout,” Burry said in his commentary.
Burry, who was among the first to bet on subprime mortgage defaults, said Greenspan and other Fed officials have never asked how he came to his conclusions about the market.
“Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat,” Burry wrote.
Burry said Greenspan has dismissed those who saw the coming crisis as people who just got lucky.
Greenspan Interviews
Burry referred to Greenspan’s appearance last month on Bloomberg Television’s “Political Capital with Al Hunt” in which he said the success Burry and others had in predicting the economic collapse was a “statistical illusion.”
On ABC’s “This Week” program, Greenspan said yesterday his comments weren’t directed specifically at Burry.
It’s possible Burry is part of “an extremely small group” of economists and investors who are “really exceptionally adroit” at forecasting, Greenspan said.
Greenspan said he and much of the “sophisticated investing public” didn’t predict the economy’s collapse. That allowed Burry, who bet against the subprime market, to make his money, Greenspan said.
Burry is one of the main characters in Michael Lewis’s recently published book “The Big Short,” the story of the people who shorted the most questionable mortgage deals.
In the book, Burry is portrayed as a loner from a young age who excelled in areas that required intense concentration.
Originally, investing was a hobby for Burry, who as a resident neurosurgeon at Stanford Hospital in the late 1990s typed his ideas onto message boards late at night.
Overpriced House
In looking for undervalued companies, Burry discovered his own house in San Jose, California, was overpriced, prompting a broader investigation of the housing market.
In the article, Burry said he began seeing problems in the housing market as far back as 2004 with the reappearance of interest-only mortgages.
“Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality,” Burry wrote.
At the same time, the Federal Bureau of Investigation reported cases in mortgage fraud increased fivefold between 2001 and 2004, Burry said.
Geithner Counts on Delay to Let China Strengthen Yuan
Geithner Counts on Delay to Let China Strengthen Yuan (Update1)
By Greg Stohr and Phil Mattingly
April 5 (Bloomberg) -- Treasury Secretary Timothy F. Geithner, by delaying a report on global currency policies, is betting international diplomacy will work better than U.S. pressure to get China to strengthen the yuan.
In an April 3 statement, Geithner announced the delay of the report, scheduled for April 15, and urged China to move toward a more flexible currency. He said a series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy. The decision came days after Chinese President Hu Jintao announced plans to visit Washington for a nuclear summit April 12-13.
The Treasury chief faces demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead expressing confidence that China, where financial markets are shut today for a holiday, will take steps on its own in the next several months to strengthen its currency.
The move will give China space to relax currency controls “without looking like they’re kowtowing to U.S. pressure,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
Gilmore said China may allow the yuan to appreciate in a “moderate” way within weeks. He said the options probably include widening the current peg’s trading band or returning to the July 2008 policy of a “crawling peg” that allowed for 5 percent annual appreciation. The “least likely” alternative: revaluing the currency in a “step-like fashion,” Gilmore said.
U.S. Strategy
In an April 2 interview with Bloomberg Television, Geithner said the U.S. strategy is “designed to increase the odds that China does decide to do what’s in their interest, which is to let their currency start to move up again, and that’ll be part of making sure we have a more healthy global recovery in place.”
In the U.S., lawmakers from both parties said administration officials are wrong to expect that negotiations will prompt such a move from China’s leaders. With the U.S. unemployment rate hovering near a 26-year high, some lawmakers say China’s policies give its exporters an unfair advantage over their U.S. competitors.
Lawmakers’ Criticism
“We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E. Schumer, a New York Democrat, said in an e-mailed statement two days ago. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”
Schumer, along with four other senators including South Carolina Republican Lindsey Graham, last month introduced legislation to require the Treasury to determine if a nation had a currency misaligned with the dollar and make it easier to respond by imposing import duties.
The Treasury’s delay “underscores the urgent need” for Congress to pass such legislation, said Alan Tonelson, research fellow with the U.S. Business and Industry Council, a Washington-based organization representing about 2,000 manufacturing companies.
“There can be no question that attempts to negotiate an end to China’s currency manipulation have failed for eight years and it is long past time for unilateral U.S. responses,” Tonelson said in an interview.
Trade Sanctions
Schumer, a member of the Senate Finance and Banking committees, said in his statement he intended to push forward with his legislation.
Still, Yu Yongding, a former adviser to the People’s Bank of China, welcomed Geithner’s decision as “of course good news,” adding that confrontation is “meaningless.”
“Problems between China and the U.S. can be solved through negotiations,” Yu said in a telephone interview from India yesterday. “If you want to hurt the other side, then you’ll hurt yourself.”
Last month, Chinese executives, in interviews with Bloomberg News, joined in backing a stronger yuan, even as Premier Wen Jiabao says the currency isn’t undervalued.
Yang Yuanqing, chief executive officer of Beijing-based computer maker Lenovo Group Ltd., said gains would boost consumers’ purchasing power. Qin Xiao, chairman of China Merchants Bank Co., said an end to the yuan’s 20-month peg to the dollar would let lenders set market-based interest rates. Chen Daifu, chairman of Hunan Lengshuijiang Iron & Steel Group Co., said a stronger currency would cut import costs.
“There is pressure within China for a yuan revaluation, and as long as exports continue to rebound, there is a good chance that it will happen,” said Elizabeth Economy, director of Asia studies at the Council on Foreign Relations in New York.
Investors’ Bets
Last week, yuan forwards posted their biggest weekly gain in almost three months on mounting speculation China will loosen its grip on the currency after data showed an economic recovery is gathering pace.
While a stronger yuan will help cut costs in imported fertilizers and pesticides, some agricultural sectors may face a “collapse” if exchange-rate pressures climb, the China Chamber of Commerce of Import and Export of Foodstuffs, Native Produce & Animal By-Products, said in an April 2 report on its Web site.
Twelve-month non-deliverable forwards were little changed at 6.6485 per dollar as of 9:01 a.m. in Tokyo, reflecting bets the currency will strengthen 2.7 percent from the April 2 spot rate of 6.8256, according to data compiled by Bloomberg. China’s financial markets are closed today for a national holiday.
China’s foreign-exchange policy has contributed to a rise in the country’s reserves to $2.4 trillion, the world’s largest. That, in turn, has enabled China to become the largest foreign holder of U.S. Treasuries, with a total of $889 billion in January.
Past Delays
The Treasury hasn’t labeled any country a currency manipulator since 1994, and the department’s biannual report has been delayed in the past under both Democratic and Republican administrations.
The latest delay “is probably the politically smart thing to do,” with Hu planning to be in Washington for talks with President Barack Obama, said Charles Freeman, a China expert at the Center for Strategic and International Studies in Washington.
“I’m not sure Treasury really knows what it wants to do yet,” Freeman said. “It’s testing the political waters on Capitol Hill.”
Peso Ascends With Loonie as Funds Favor Nafta Region
Peso Ascends With Loonie as Funds Favor Nafta Region (Update2)
By Chris Fournier and Ye Xie
April 5 (Bloomberg) -- Mexico’s peso and Canada’s dollar are outperforming all other major currencies for the first time since at least 1998 and probably will keep rallying as the U.S. recovery lifts the rest of the world’s largest trading bloc.
The currencies gained 5.9 percent and 3.7 percent against the greenback in 2010’s opening months, rising in tandem with the Intercontinental Exchange Inc.’s Dollar Index for a second straight quarter for the first time in 11 years. Hedge funds and large speculators are the most bullish on the peso and Canada’s loonie since at least April 2008, before the credit crisis swamped Lehman Brothers Holdings Inc. five months later, driving both down as much as 31 percent.
As U.S. stimulus efforts totaling as much as $8.2 trillion lift demand for Mexican engine parts from Alfa SAB in Monterrey and Canadian oil from Suncor Energy Inc. in Alberta, the strength of all three countries’ currencies is demonstrating the North American Free Trade Agreement’s benefits. By contrast, ballooning deficits in Greece, Spain and Portugal weighed on the currency of the world’s biggest monetary union as the euro fell 5.7 percent versus the dollar in the first quarter.
“With U.S. growth resumption, we should see channels of support for the Canadian dollar and Mexican peso assert themselves,” said Sacha Tihanyi, a strategist in Toronto at Bank of Nova Scotia, one of the first quarter’s three most- accurate forecasters on Canada’s currency in a Bloomberg survey.
“Trade unions do have an implicit advantage: Each constituent nation can still tailor monetary policy to their specific situation, given that their economic structures may be quite different, whereas a currency-union is bound by a constant policy,” Tihanyi said.
Most Since ‘77
The peso and the loonie topped all 13 other most traded currencies tracked by Bloomberg in January, February and March. The duo and the Dollar Index gained an average of 4.5 percent in the first quarter, the most since 1977. Last year, the greenback fell 14.9 percent in nine months against the euro, yen, pound, Swiss franc, loonie and Swedish krona, the Dollar Index’s fastest decline since 1987.
Mexico’s currency will rise another 2.4 percent to 12 per dollar by Dec. 31, from 12.2914 today, according to Royal Bank of Scotland Group Plc, the first quarter’s most accurate peso forecaster along with Royal Bank of Canada, which sees it strengthening 4.6 percent to 11.75 in a year.
The loonie, nicknamed for the aquatic bird on Canada’s C$1 coin, will gain 1.1 percent to reach parity with the U.S. dollar for the first time since July 2008, and then appreciate 3 Canadian cents more by Dec. 31, according to Standard Bank and Bank of Nova Scotia, two of the first quarter’s three top forecasters on the currency. It climbed as much as 0.6 percent to C$1.0052 today.
Risk Appetite
Alan Wilde, head of fixed-income and currencies in London for a unit of Baring Asset Management, said the peso and loonie will continue rising because Mexico’s currency looks inexpensive and Canada’s tends to appreciate as risk appetite improves.
“If you have a flexible policy to allow your currency to drift lower on its own, then you can benefit in an economic downturn because your goods trade cheaply,” said Wilde, whose firm oversees $45 billion. “Greece doesn’t have the policy option to use the currency as some sort of stimulus as Mexico and Canada did during the financial crisis.”
The U.S. and Canada enlarged an existing free-trade deal to include Mexico in 1994. Two years earlier, the Maastricht Treaty created the European Union, clearing the way for the 1999 debut of the euro, which is shared by 16 countries.
Trade Triples
Trade among Nafta’s 444 million people amounts to $2.6 billion a day, triple 1994’s level, and the zone generates a combined annual output of about $17 trillion, according to a Web site run by Nafta members. Output in the euro region, home to 330 million people, totals $13.6 trillion.
Consumer spending in the U.S. rose in February for a fifth month and retail sales grew 0.3 percent, the most since November. Payrolls rose by 162,000 workers last month, the most since March 2007, the Labor Department said. The world’s largest economy consumes four-fifths of Mexico’s exports and three- quarters of Canada’s. The three economies will grow 3 percent or more this year, almost three times as fast as the euro region.
Nafta “is recognized around the world as a success,” said John Manley, head of the Canadian Council of Chief Executives and the country’s former finance minister. “Nafta has been a source of strength for the North American economies from the moment it went into effect in 1994. Bear in mind that Canada, the United States and Mexico don’t just sell goods and services to one another. We make things together and sell them to the rest of the world.”
Nafta’s Downside
Critics of the agreement in Congress led by Representative Gene Taylor, a Mississippi Democrat, introduced a bill in February to repeal it, citing a 29 percent decline in U.S. manufacturing employment since 1993. Prior to Nafta, the U.S. benefited from a $1.7 billion trade surplus with Mexico, according to a statement accompanying the legislation. By 2007, Mexican exporters sold the U.S. $75 billion more worth of goods than American companies shipped south of the border. Before being elected president, Barack Obama voiced support for renegotiating the agreement.
Not everyone is convinced the loonie and peso will keep gaining. Median Bloomberg survey forecasts see the loonie falling 4.2 percent by Dec. 31 and the peso gaining no more than 0.3 percent against the dollar as Federal Reserve interest-rate increases make the greenback more attractive. The last two times the peso and loonie simultaneously rose in consecutive quarters, in 2004 and 1999, both weakened in the next three months.
‘Less Enthusiastic’
Canadian Imperial Bank of Commerce, the nation’s fifth largest lender, sees them weaker at the end of 2010 as the world’s recovery falters.
“Slowing global growth makes investors less enthusiastic about commodities currencies,” said Avery Shenfeld, CIBC’s Toronto-based chief economist. Danske Bank, the other top loonie forecaster in the first quarter, sees Canada’s dollar weakening 6.5 percent to C$1.07 by the end of this year.
Sixteen years ago, Canada had the highest debt-to-output ratio among Group of Seven countries after Italy. Moody’s Investors Service cut Canada’s Aaa rating in 1994. The following year, then-Prime Minister Jean Chretien’s Liberal Party of Canada imposed austerity measures that led to 11 straight budget surpluses and reinstatement of the country’s Aaa rating in May 2002. Since then, the loonie has appreciated more than 50 percent.
Opening Competition
After the 1994 peso crisis drove the currency down as much as 40 percent in December and sparked the country’s worst recession in half a century, Mexico reduced its current account as a percentage of gross domestic product to 1.5 percent in 2008, from 7 percent in the year of the crisis.
“Canada took the tough decisions; Mexico made some too,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Royal Bank of Canada, the nation’s biggest lender. “Those that haven’t are paying now,” he said, referring to countries in Europe with bigger deficits.
Mexico and Canada will have budget deficits equal to 2.6 percent and 2.8 percent of their gross domestic product this year, less than the euro zone’s 6.9 percent and the U.K.’s 12.3 percent, according to median economist estimates.
Both countries have benefited from the rising price of oil, their largest export. Oil traded at $85.67 a barrel today, up from below $34 a barrel in December 2008. Canada is the largest exporter of oil to the U.S. and sits on the biggest pool of reserves outside the Middle East. The Mexican government, the world’s seventh-biggest oil producer, gets almost a third of its revenue from crude exports.
Bullishness
Speculators had 70,296 more bets that the loonie would rise than contracts that profit from it falling as of March 30 and 73,027 more the week before, when the gap was the widest since October 2007, data from the Washington-based Commodity Futures Trading Commission show.
The bullish outlook reflects an economy growing faster than analysts forecast, lower budget deficits and a banking system that didn’t need government funds during the financial crisis.
Canada is on course to be the first G-7 nation to erase its budget gap following the global recession. Prime Minister Stephen Harper’s Conservative Party outlined plans last month to narrow the deficit to C$1.8 billion ($1.78 billion) in 2014, from a record C$53.8 billion last year.
Sound Financials
The economy grew at a 5 percent annualized rate in the fourth quarter, the fastest pace since 2000. The country’s financial system has been the soundest in the world for two consecutive years, according to the Geneva-based World Economic Forum, and Canadian banks lead 12-month gains on the nation’s equity benchmark, the Standard & Poor’s/TSX Composite Index, which is up almost 40 percent in the past year.
Shares of Calgary-based Suncor surged 8.6 percent last month after Canada’s largest oil company announced plans to take advantage of higher crude prices by increasing output. The Bank of Nova Scotia last week raised its recommendation on the stock to “outperform.”
The peso is riding Mexico’s export-led recovery, said Clyde Wardle, an emerging-market currency strategist at HSBC Holdings Plc in New York. He sees the peso gaining by year-end to 12.25 per dollar.
Mexico reported a preliminary trade surplus of $244 million for February, compared with a median prediction of a $5 million deficit. Industrial production in Latin America’s second-largest economy gained 3.6 percent in January, the most since April 2008.
Transmissions
Alfa, the world’s largest producer of aluminum engine heads, jumped 344 percent in the past 12 months as Mexico’s car production doubled in January from a year earlier and rose more than 50 percent in February. Mexico City-based Grupo Kuo SAB, which makes transmissions for Ford’s Mustang coupe and Chrysler Group LLC’s Dodge Ram pickup, more than tripled over the past year, compared to the benchmark Bolsa stock index’s 70 percent rise.
Bullish bets on the peso outnumbered bearish ones by 109,598 on March 30 and by 109,862 a week before, the most since April 2008. The peso is trading 10.6 percent below its average of 11 per dollar in the past decade even after rallying 26.5 percent from its March 2009 low. Bank of America Merrill Lynch estimates it’s undervalued by 10 percent.
“We expect a marathon of slow and steady peso appreciation,” said Alberto Boquin, an analyst for the bank in New York, in a March 26 note. “Fundamental undervaluation of the peso should correct over time.”
No comments:
Post a Comment