Buttonwood
.
The power of faith
.
Equity markets are rallying again on hopes of central-bank action
.
Aug 11th 2012

.







IF A couple of trading days could sum up the mood of financial markets this year, it has to be August 2nd and 3rd. First, equities plunged in reaction to the latest statement from the European Central Bank (ECB): investors were disappointed that it had not announced an immediate wave of bond-buying. Then markets rallied just as strongly the next day as they reflected on the ECB’s statement (see article); crucially, the yields on Spanish government bonds fell back.

.




It has been a switchback year all the way through. The volatility also illustrated how dependent financial markets are on the actions of central banks. Fiscal policy is generally being tightened in the developed world, whether voluntarily (as in Britain) or under pressure from creditors (as in southern Europe).



.
But there is still scope for monetary easing in the form of bond-buying programmes, financed with newly created money. So investors wait agog for every central-bank announcement, every publication of the latest meeting minutes, every speech by a board member.
.
Although the markets have often been disappointed by European rescue plans, hope springs eternal that the ECB and the politicians will come up with some kind of package that will prevent a break-up of the single currency and stop the continent’s slide into deep recession. When hopes of such a deal rise, investors can be indiscriminate about which assets they buy. In July, European shares, ten-year German Bunds and gold all rose by more than 2.5%. According to Dhaval Joshi of BCA Research, it was the first month in 400 that all three had risen by so much.




.
The latest rally occurred despite some dismal European economic data and a steady downgrade of profit forecasts. The latest batch of bad news included a 0.7% fall in Italian GDP during the second quarter, and very weak manufacturing surveys in France and Germany. The Bank of England is now not expecting the British economy to grow at all this year.




The American economy is still growing, at least, although the recovery is hardly robust. Developing countries are generally set to post lower GDP growth than they did in 2011. All this has caused profit growth at S&P 500 companies to slow from an annual rate of 29.2% in the fourth quarter of 2011 to just 6.6% in the second quarter of this year, according to Société Générale.





As ever, analysts are optimistic that this slowdown will be temporary. The annual profits-growth rate of S&P 500 companies is expected to be back in double digits by the fourth quarter.



.
Globally, profits growth of 13.5% is predicted for 2013 after 7.5% this year. But this anticipated rebound is pretty hard to square with the latest economic data. It would probably require further increases in margins from levels that are already, in America, close to 50-year highs.



Wall Street is priced as if these margins can be maintained. The cyclically-adjusted price-earnings ratio (which smooths profits over ten years) is still 21.4, well above the historical average, according to Robert Shiller of Yale University. Euro-zone shares look a lot cheaper—their cyclically-adjusted p/e ratio is 11.5, according to Absolute Strategy Research, a consultancy. But the risks appear to be much greater.





Where could a boost to growth come from? Earlier this year, lower energy prices seemed to offer some prospect of relief: a fall in the petrol price is the equivalent of a tax cut for Western consumers.




But Brent crude has rebounded very sharply in recent weeks (see chart), from $90 to almost $110 a barrel, in part because of fears that the Syrian conflict will spread across the Middle East. Developing countries do have scope to ease monetary policy and boost growth. Central banks in the Philippines, South Korea and Vietnam all cut interest rates in July.



But the main argument for owning equities is the unappealing nature of the alternatives. The return on cash is close to zero in most of the developed world. In terms of developed-country government bonds, investors have the choice of yields below 2% in America, Britain, Germany and Japan, or a plunge into the riskier markets of southern Europe. Emerging-market debt enjoys much better credit ratings these days but here too yields are often very low: Brazil’s dollar-denominated ten-year bonds yield just 2.3%.




Contrast that with the 3.7% dividend yield on London’s FTSE 100 index, or with the 3.4% yield available on German shares, and the temptation to switch some money into equities is understandable. Any good news is likely to prompt a rally. Investors just have to hope that central banks really can rescue their economies with the tools they have available.

.
.
The Obama Doctrine’s First Term
.
Joseph S. Nye
.
08 August 2012
.




ASPENPublic-opinion polls in the United States indicate a close presidential election in November. While President Barack Obama outpolls the Republican challenger, Mitt Romney, on foreign policy, slow economic growth and high unemploymentissues that are far more salient in US elections favor Romney.



.
And, even on foreign policy, Obama’s critics complain that he has failed to implement the transformational initiatives that he promised four years ago. Are they right?
.



Obama came to power when both the US and the world economy were in the midst of the worst financial crisis since the Great Depression. Indeed, some of Obama’s economic advisers counseled him that unless urgent steps were taken to stimulate the economy, there was a one-in-three chance of entering a full-scale depression.




Thus, although Obama also inherited two ongoing wars, nuclear-proliferation threats from Iran and North Korea, and the continuing problem of Al Qaeda’s terrorism, his early months in office were devoted to addressing the economic crisis at home and abroad. His efforts were not a complete success, but he managed to stave off the worst outcome.




Obama’s rhetoric during his 2008 campaign and the first months of his presidency was both inspirational in style and transformational in objective. His first year in office included a speech in Prague in which he established the goal of a nuclear-free world; a speech in Cairo promising a new approach to the Muslim world; and his Nobel Peace Prize speech, which promised to “bend history in the direction of justice.”




In part, this series of speeches was tactical. Obama needed to meet his promise to set a new direction in foreign policy while simultaneously managing to juggle the issues left to him by George W. Bush, any of which, if dropped, could still cause a crisis for his presidency. Nonetheless, there is no reason to believe that Obama was being disingenuous about his objectives. His worldview was shaped by the fact that he spent part of his youth in Indonesia and had an African father.



.
In the words of a recent Brookings Institution book, Obama had an “activist vision of his role in history,” intending to “refurbish America’s image abroad, especially in the Muslim world; end its involvement in two wars; offer an outstretched hand to Iran; reset relations with Russia as a step toward ridding the world of nuclear weapons; develop significant cooperation with China on both regional and global issues; and make peace in the Middle East.” But his record of achievement on these issues has been mixed.




Seemingly intractable circumstances turned him from the would-be architect of a new global order into a leader focused more on repairing relationships and reacting to crises most notably the global economic crisis,” the report continued. And while he eliminated Osama bin Laden and weakened Al Qaeda, some counterterrorism policies ended up undercutting his appeal in places like the Middle East and Pakistan.




Some of the half-empty glasses were the result of intractable events; some were the product of early naiveté, such as the initial approaches to Israel, China, and Afghanistan. But Obama was quick to recover from mistakes in a practical way. As one of his supporters put it, he is a “pragmatic idealist.”




In this sense, though Obama did not back away from rhetorical expressions of transformational goals regarding such issues as climate change or nuclear weapons, in practice his pragmatism was reminiscent of more incremental presidential leaders like Dwight Eisenhower or George H. W. Bush. Despite his relative inexperience in international affairs, Obama showed a similar skill in reacting to a complex set of foreign-policy challenges. This was demonstrated by his appointments of experienced advisers, careful management of issues, and above all, keen contextual intelligence.




This is not to say that Obama has had no transformational effects. He changed the course of an unpopular policy in Iraq and Afghanistan; embraced counter-insurgency tactics based on less costly uses of military and cyber power; increased American soft power in many parts of the world; and began to shift America’s strategic focus to Asia, the global economy’s fastest-growing region.




With respect to Iran, Obama struggled to implement United Nations-approved sanctions and avoid a premature war. And, while the Arab Spring revolutions presented him with an unwelcome surprise, after some hesitation he came down on what he regarded as the side of history.




In a new book, Confront and Conceal, David Sanger describes what he calls an “Obama Doctrine” (though he faults the president for not communicating it more clearly): a lighter military footprint, combined with a willingness to use force unilaterally when American security interests are directly involved; reliance on coalitions to deal with global problems that do not directly threaten US security; and “a rebalancing away from the Middle East quagmires toward the continent of greatest promise in the future Asia.”




.
The contrast between the killing of Bin Laden and the intervention in Libya illustrates the Obama Doctrine. In the former case, Obama personally managed a unilateral use of force, which involved a raid on Pakistani territory. In the latter case, where national interests were not as clear, he waited until the Arab League and the UN had adopted resolutions that provided the legitimacy needed to ensure the right soft-power narrative, and then shared the leadership of the hard-power operation with NATO allies.


.
The long-term effect of the Obama Doctrine will require more time to assess, but, as he approaches the November election, Obama appears to have an edge over his opponent in foreign policy. Obama has not bent the arc of history in the transformational way to which he aspired in his campaign four years ago, but his shift to a pragmatic approach may turn out to be a good thing, particularly if voters continue to have doubts about the economy.



Joseph S. Nye, a former US assistant secretary of defense and chairman of the US National Intelligence Council, is a professor at Harvard University and one of the world’s foremost scholars of international relations. He co-founded the important liberal institutionalist approach to international relations, and introduced the idea that states and other international actors possess more or less “soft power.”



.
Copyright Project Syndicate - www.project-syndicate.org




August 9, 2012 7:26 pm

Environment: The end of the line





There is a photo from the 1930s, published in National Geographic magazine, that shows a scene almost unimaginable today.



A man stands in the sea, water up to his knees, surrounded by a frenzied shoal of huge, thrashing totoaba fish on a spawning run off the coast of Mexico.
.

Click to enlarge
 
 
 
 
“They were so thick in the water that you could wade in and pull them out with bare hands or a pitchfork,” says the prominent marine conservation biologist, Callum Roberts.





Not any more. Commercial fishers started netting the creatures, which could grow as long as 2m and weigh more than 330 lbs. Dams such as the Hoover were built along the Colorado River, curbing vital freshwater flows to breeding grounds.



Today, the totoaba is one of 414 species rated critically endangered on the Red List, the compendium of threatened plants and animals kept by the venerable International Union for Conservation of Nature.




Another 486 fish are endangered; 1,141 are vulnerable and 60 are extinct, mostly thanks to the same species that killed off the totoaba: us.




The human impact on fish has been worrying scientists and environmental campaigners for decades.




But it has also become an increasingly disturbing economic issue for authorities overseeing the fate of the 90m tonnes of marine and freshwater fish the world’s 4.36m fishing boats catch each year, with their estimated value of $100bn.




This was evident a few weeks ago, when the UN’s Food and Agriculture Organisation published its latest State of World Fisheries and Aquaculture report, a comprehensive assessment it has done since 1994.



For the most part, the organisation said pretty much what it has said since 1994: too many countries have too many fishing boats doing too good a job.




This year it added that the manytroublinganalyses of global fisheries suggested an “over-stressedsystemin imminent danger of collapse”.




“I think probably we’re using stronger language now because we have been saying a lot of the same things very gently for quite a while, and maybe having less impact than is required,” said Richard Grainger, chief of the statistics and information service in the FAO’s fisheries and aquaculture department.



The collapse mentioned in the report refers primarily to economic rather than biological extinction, he added, meaning stocks could decline to the point it no longer pays to fish for them. But both prospects are disconcerting.

Galapagos Damsel CRITICALLY ENDANGERED: This fish lived around the Galapagos Islands, but has not been seen since nearby seas warmed in 1982-83 during an intense El Nino period – an event some scientists say is happening more often in that part of the world because of climate change. That could make the damsel the first to become extinct because of global warming.


Galápagos Damsel
CRITICALLY ENDANGERED: This fish lived around the Galápagos Islands but has not been seen since the seas there warmed in 1982-83 during an intense El Niño period – an event some scientists say is happening more often in that part of the world because of climate change. That could make the damsel the first fish species to become extinct because of global warming.
Basking shark VULNERABLE: The world’s second biggest shark, after the whale shark, this huge, filter-feeding creature has been heavily protected for years but is still deemed under threat because it is so slow to mature and reportedly still hunted illegally



Basking shark
VULNERABLE: The world’s second biggest shark, after the whale shark, this huge, filter-feeding creature has been heavily protected for years but is still deemed under threat because it is so slow to mature and reportedly still hunted illegally
Beluga Sturgeon CRITICALLY ENDANGERED: Its caviar is considered among the world’s finest but over-fishing and loss of breeding grounds has seen its numbers fall by as much as 90 per cent in 30 years, despite trade quotas and other restrictions.



Beluga sturgeon
CRITICALLY ENDANGERED: Its caviar is considered among the world’s finest but over-fishing and loss of breeding grounds has seen its numbers fall by as much as 90 per cent in 30 years, despite trade quotas and other restrictions.
Blue Marlin VULNERABLE: One of the world’s most prized blue-water game fish, the marlin is often an incidental catch of longliners. Its declining numbers have led some anglers to release it after it is caught, but conservation groups say it needs more protection.




Blue marlin
VULNERABLE: One of the world’s most prized blue-water game fish, the marlin is often an incidental catch of longliners. Its declining numbers have led some anglers to release it after it is caught but conservation groups say it needs more protection.
Blue Whale ENDANGERED: The largest animal in the world was nearly wiped out by whaling but has been protected worldwide since 1966. Its population is believed to be increasing but it is still regarded as under threat



Blue whale
ENDANGERED: The largest animal in the world was nearly wiped out by whaling but has been protected worldwide since 1966. Its population is believed to be increasing but it is still regarded as under threat.
Southern Bluefin Tuna CRITICALLY ENDANGERED: Prized by sushi lovers and known as the Porsche of the sea because it can reach speeds of up to 70km/hour and travel vast distances, bluefin numbers have plummeted since the 1950s, prompting widespread calls for more protection.



Southern bluefin Tuna
CRITICALLY ENDANGERED: Prized by sushi lovers and known as the Porsche of the sea because it can reach speeds of up to 70km/hour and travel vast distances, bluefin numbers have plummeted since the 1950s, prompting widespread calls for more protection.
Baiji CRITICALLY ENDANGERED: This freshwater dolphin, nicknamed “Goddess of the Yangtze”, thrived in China’s Yangtze River until ship traffic, over-fishing and pollution made it what appears to be the first cetacean humans have driven to extinction. There have been no documented sighting since 2002.




Baiji
CRITICALLY ENDANGERED: This freshwater dolphin, nicknamed “Goddess of the Yangtze”, thrived until ship traffic, over-fishing and pollution made it what appears to be the first cetacean humans have driven to extinction. There have been no documented sighting since 2002.
Common Skate CRITICALLY ENDANGERED: As its name implies, this fish was once abundant across north-western Europe but it has disappeared from many areas, because of commercial fishing, researchers say.




Common skate
CRITICALLY ENDANGERED: As its name implies, this fish was once abundant across north-western Europe but it has disappeared from many areas because of commercial fishing, researchers say.
European Eel CRITICALLY ENDANGERED: Numbers of this popular freshwater treat have fallen by an estimated 90 per cent since the early 1980s. It is not known precisely why, but over-fishing is considered a prime suspect.




European eel
CRITICALLY ENDANGERED: Numbers of this popular freshwater treat have fallen by an estimated 90 per cent since the early 1980s. It is not known precisely why, but over-fishing is considered a prime suspect.



Atlantic Goliath Grouper CRITICALLY ENDANGERED: Numbers of this slow-moving giant, which can weigh up to 800 pounds, have fallen an estimated 80 per cent in 40 years. Despite fishing bans in the US and Brazil since 1990, researchers say their recovery is not assured.
Atlantic Goliath Grouper CRITICALLY ENDANGERED: Numbers of this slow-moving giant, which can weigh up to 800 pounds, have fallen an estimated 80 per cent in 40 years. Despite fishing bans in the US and Brazil since 1990, researchers say their recovery is not assured.
Scalloped Hammerhead ENDANGERED: The Hammerhead’s curious appearance makes it one of the world’s best known sharks. But the high value of its fins and its tendency to get caught up in fishing gear has seen numbers plummet as much as 90 per cent in some areas.



Scalloped hammerhead
ENDANGERED: The hammerhead’s curious appearance makes it one of the world’s best known sharks. But the high value of its fins and its tendency to get caught up in fishing gear has seen numbers plummet as much as 90 per cent in some areas over three decades.
Wide Sawfish CRITICALLY ENDANGERED: Once common in many parts of the world, the distinctive tooth-studded saw on this fish has made it vulnerable to getting tangled in nets, and it now seems to be extinct in regions such as the Mediterranean.


Wide sawfish
CRITICALLY ENDANGERED: Once common in many parts of the world, the distinctive tooth-studded saw on this fish has made it vulnerable to getting tangled in nets, and it now seems to be extinct in regions such as the...



Mediterranean Vaquita
CRITICALLY ENDANGERED: Since the apparent extinction of China’s baiji dolphin, this Gulf of California porpoise is now regarded as the world's most critically endangered cetacean species. Its biggest threat: getting caught up in gillnets.
Whale Shark VULNERABLE: The world’s largest living fish is harmless, docile, slow and valuable. Its massive fins have fetched more than $10,000 in Asia, and it is still hunted in some regions even though it is classed as threatened and protected in many countries.



Whale shark
VULNERABLE: The world’s largest living fish is harmless, docile, slow and valuable. Its massive fins have fetched more than $10,000 in Asia and it is still hunted in some regions even though it is classed as threatened and protected in many countries.
Whitetip Shark VULNERABLE: This once abundant shark can be lethally dangerous to humans, and vice versa. Often caught as bycatch, its fins are also sought for shark fin soup and it is deemed critically endangered in some areas because of the sharp decline in its numbers.



Whitetip shark
VULNERABLE: This once abundant shark can be lethally dangerous to humans, and vice versa. Often caught as bycatch, its fins are also sought for shark fin soup and it is deemed critically endangered in some areas because of the sharp decline in its numbers.


Boats powered by bigger engines and laden with more sophisticated fish-finding gear have left nearly a third of marine stocks over-exploited, and 57 per cent fully exploited, meaning they are at or very close to sustainable production levels.




Efforts to cut fleet capacity have taken hold in Europe and elsewhere. They even worked for a time in China but have faded since 2008. In many countries, politicians remain understandably reluctant to adopt a policy that cuts jobs and induces costly compensation payments.




This is bad news for the world’s poorest people, who rely on fish for nearly a quarter of their animal protein, though rising fish farm production helps.




Nor is it good for big-bodied sea creatures such as the shark, ray and skate species that reproduce relatively infrequently. It is hard for their numbers to recover once they start falling.




And fall they have, some by as much as 90 per cent since the 1960s.




Some species, such as the bluefin tuna prized by sushi lovers, face a vicious circle: over-fishing makes them rarer, which forces up prices (one fish sold for a reported record $736,000 in Tokyo this year), which in turn spurs more fishing and the illegal catches that plague many fish stocks.




Then there is global warming. One fish, the Galápagos damsel, may have achieved the distinction of becoming “the first fish species to become extinct because of climate change”, says American IUCN researcher Beth Polidoro.




It is not as if nothing is being done.



Supermarkets and restaurants are increasingly buying fish meeting sustainable standards set by certification bodies such as the Marine Stewardship Council.




Many countries have introduced marine reserves off their coasts that allow species to recover.
But not much more than 1 per cent of the world’s seas are protected, compared with nearly 15 per cent of the land areas. And some scientists fear the extinction threat is even higher for freshwater creatures unable to swim off to another ocean to avoid the impact of a new dam or factory waste dumped in a river.




There are still lots of fish in the sea and the rivers. Just not as many of the ones we know best, from the basking shark to the beluga sturgeon. And if current trends continue, many more seem likely to share their decline.



Copyright The Financial Times Limited 2012.