Up and Down Wall Street
A Whiff of the Cliff

Stocks have rallied so far this year, but the fiscal cliff is a mere three months away, and miracles can only last so long.


Even in this age of rage, miracles can happen and did last Thursday: After a fairly miserable slump, the stock market showed it can go up! We kid you not. In seeking a cause for this phenomenal about-face many of the Street's most keen-eyed observers fingered Spain's vow to be a good corporate citizen and mend its profligate ways, which they seized upon as a favorable omen not only for Spain, but for the future of the staggering European Monetary Union as well. Others gave the nod as a bolstering influence to expectations that China would get its act together long enough to try to pump some life into its faltering economy.

Our own view is a mite different and, we trust, nowhere near as shopworn. We suggest that investors got a shot in the arm from the news that the NFL settled its lockout of the refs by kicking in some more dough and firing the fill-ins whose attention often seemed elsewhere, especially in keeping track of who did what on close plays. It dawned on Wall Street that it's just the kind of thing that got the masses all riled up and if, heaven forbid, rigid accountability for bad calls spread to the investment arena, it would lead to wholesale sacking of strategists and analysts. Thousands of poor souls would find themselves adrift without notable skills to perform even the most humble of tasks.

Normally, if something as awful as that happened, we would take due note and urge the swelling ranks of on-the-dole investment pros not to lose heart. For opportunities for employment are still extant, provided you know where to look for them. By way of example, we would cite a very recent case in which a prisoner sued because he was forced to share his cell with cockroaches and mice.

While the court's ruling was to dismiss his suit on technical legal grounds, it envisioned the possibility that such conditions might be a violation of the Eighth Amendment to the Constitution. In which case, the infested cells would have to be cleaned up and necessitate the hiring of workers. The only catch, it occurs to us, is whether laid-off Street people are sufficiently adept in the use of a broom or a shovel to qualify for the job.

But, alas, miracles come with a time limit these days and it took only one session for stocks to resume their lackluster ways and Friday ended on a down note, although a spectacular September put a gloss on the quarter as a whole. The good old Dow was up almost 3% last month and added more than 500 points in the July-September stretch. The S&P 500 was up 2.42% in September and rose nearly 80 points in the quarter; the comparable numbers were 1.6% and 181 points for Nasdaq, and 3.1% and 39 points for the Russell 2000.

In recent months (and not for the first time since equities began their astonishing climb from the ignominious lows set in the frigid depths of March 2009), a gap, often huge, opened between the buoyant mood of the markets and the glum state of the economy. On the latter score, although the most recent week's tally of new claims for unemployment insurance fell by an impressive 26,000, hiring is anything but robust. Durable-goods orders turned in a miserable performance, dropping an awesome 13% in August, reflecting a precipitous decline in aircraft orders, while the critical nondefense capital equipment, which includes stuff like computers and telecommunications, managed the feeblest rise.

Consumer spending was a tad higher in August, with the bulk of the gain accounted for by rising prices for food and at the pump. For the first time in almost a year, disposable income, adjusted for inflation, was lower, and to make ends meet households were chipping away at their nest eggs, as evident in the decline in the savings rate to 3.7% from 4.1%.

Second-quarter GDP, alas, was revised downward to 1.3%, from the previous gauge of 1.7%. All of which at the least should temper expectations (that weren't very juiced-up in any case) of what September's jobs report, due for release on Friday, will show.

Little wonder, really, that investors have gone from joyous to jittery as the spate of dour news has flushed out a new wave of negativism among the Street's professional kibitzers. And little wonder, too, that the Fed felt the need to do something to puff up a rapidly deflating recovery. What gives us pause before joining the funereal chorus prating on about the sins that are destined to issue from the third round of quantitative easing is the fact that no one has a good word for it. Even to a congenital skeptic like ourselves, the blamed thing deserves more than a week to prove its worth or worthlessness. Contrary opinion is great; lopsided opinion, chances are, is anything but.

IF YOU'RE DESPERATE FOR SOMETHING to worry about -- or even if you're not -- keep your eye on the fiscal cliff, a mere three months off and drawing irrevocably closer each and every day. We've been babbling on about it for quite a spell now, and we can't say the passage of time has witnessed any significant progress on the part of the powers-that-be to make its prospective arrival any less daunting.

Despite their pronounced tendency to fall prey to mundane or more immediate distractions like buttering up possible clients or striving to find the next big momentum winner, portfolio managers have cobbled together some contingency plans against the day the game changes with the arrival of the cliff. And corporate types have been especially sensitive to the economic drag its advent likely would bring, which explains in no small way their affection for piling up cash rather than, say, piling into capital investment.

Consider the foregoing a prologue to a brief recounting of a recent report by Bank of America Merrill Lynch on–by gosh you've guessed it -- the fiscal cliff and, more specifically, its potential impact on the global economy. We won't keep you in suspense, the impact will be ponderable. Or, as the report puts it succinctly, it is shaping up as the biggest "known unknown" (pace Donald Rumsfeld). U.S. businesses, the firm's global economic team says, are pulling back, which could mean a softer fourth quarter than the consensus is forecasting.

From the standpoint of international, cross-border contagion, the report warns, jumping off the cliff would administer "a major shock" to economies around the globe. From where we sit, that could prove to be a major understatement. The report notes that U.S. growth is largely driven by domestic demand and so is apt to have "larger spillover effects on the rest of the world." And, it cites researchers at the IMF as finding the potential size of cross-border spillovers has measurably increased in recent years.

It also dubs the fiscal cliff "a wholly U.S. -- made crisis." Which means that U.S. fiscal contraction would hit "the global economy as a brand-new shock." And while the firm posits that Washington may be able to temper some of the fallout from the cliff, in light of the parlous condition of the global economy, a 2% of GDP fiscal pullback would still inflict serious pain to outsiders.

If U. S. growth suddenly weakened, the report asserts, global activity would be affected through a trifecta of channels consisting of confidence, finance, and trade. In terms of trade, the most exposed economies are those of Canada and Mexico. But trade takes a back seat in importance to confidence and finance. European exposure is particularly acute. The euro area is caught in a deepening recession, slowing growth elsewhere, and further slippage in the global economy would obviously hurt all the more.

According to the report's reckoning, European growth weakens quickly following U.S. fiscal contractions, but typically, the eventual impact is moderate. One has to wonder, though, given the current bedraggled state of so many of the Old World's economies, if this reaction would sedulously follow that script. Forgive us our doubts.

In any case, the report attests to the close relationship between U.S. and global conditions. And it cautions that "a tense run-up to the cliff could spark a broad market reaction similar to the correction seen at the 11th hour of last year's debt-ceiling agreement." Which, in case you've forgotten, laid the groundwork for the infamous fiscal cliff.

WE'RE NOT TELLING YOU ANYTHING you don't know when we point out that housing has been one of the brighter sectors lighting up the investment landscape. Our own suspicion is that shares of home builders have outrun the recovery, but why quibble? What we find noteworthy is that Robert Shiller -- yes, that Shiller of Yale University and the Case-Shiller index of home prices -- is more than a trifle tentative in hailing the housing rebound.

We have to own up to being on the tardy side in catching up to this interesting tidbit and we're indebted to the Daily Beast for providing it in a posting on Sept. 18. What's newsworthy is that Bob Shiller is in no rush to celebrate the return to the land of the living just yet. If it's any consolation, he allows as housing may have hit bottom, but it looked that way also 2009, 2010, and 2011.

And even if it finally has achieved something like a sustainable recovery, he needs more evidence that it's the real thing and that housing prices will enjoy anything approaching a true rebound worthy of the name. He warns that housing prices have to do more than merely keep even with inflation to enhance the true value of homes.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

Europe's betrayal of Spain
By Ambrose Evans-Pritchard
Last updated: September 27th, 2012

We discoveryet again, you might say – that Germany, Holland, and Finland will not stand behind their solemn pledge of solidarity when push comes to shove.

Spain’s premier Mariano Rajoy has been betrayed. Nobody should be entirely surprised if he and the Spanish arch-nationalists in his circle offer a condign riposte, and bring down the entire temple on the heads of the creditor powers.

He bit the bullet and agreed to the highly intrusive terms of a €100bn eurozone rescue for the Spanish banking system on a specific understanding: that the ESM bail-out fund would ultimately take over the burden by recapitalising Spain’s banks directly.

This deal has been breached. Can we believe anything that the Chancellor of Germany, the prime minister of Holland, and the prime minister of Finland say from now on? The EMU rescue edifice is built on sand.

You might say Mr Rajoy had no choice. But he did. There were those whispering in his ear that Spain should instead retake control over its own monetary, exchange, and sovereign policy levers, and break out of its debt-deflation trap.

Such a course might or might not be disastrous for Spain, depending on your analysis of EMU’s structural flaws, but it would certainly be disastrous for German and Dutch banks. (Given that it would cause the collapse of monetary union in the worst possible way).

The Spanish bubble was after all a joint venture. Spain was flooded with cheap capital from Germany and Holland that it could not prevent or control under the EMU system. Did the German and Dutch regulators recognise the danger, or try to stop the excesses? Not really. They were complicit.

The ECB’s uber-loose money (to help Germany when it was in slump) led to negative real interest rates for Spainminus 2pc for years – that fuelled a massive credit boom. Policy was far too lax for a fast-growing Tiger economy.

Did the Spanish make big mistakes? Of course. But the ECB and the European Commission did not make that critique at the relevant moment. They too were smoking weed.

Be that as it may, Mr Rajoy now learns that the AAA trio will not permit direct recapitalisation of the Spain’s "legacy" banks by the ESM, even after the new European bank regulator is up and running.
The burden will fall entirely on Spain, or so it seems. Spain must raise €60bn in fresh debt on the capital markets to plug the hole, or nearer €150bn if City sceptics are right.

The accord signed by EMU leaders in June is crystal clear, as the European Commission remind the Northern powers yesterday. The purpose was to break the "vicious circle" between banks and sovereign states.


We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding.
The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

The Germans, Dutch and Finns (in particular) say they were bounced into this deal. It would not surprise if they were outmanoeuvred by Italy’s Mario Monti, and if too-clever-by-half Council officials tweaked the language at the last minute. But this was the accord.

It was a key foundation of the global market rally of the last two months. The Nordics have now ripped it up. Investors in Asia and the Middle East might justifiably conclude that the Chancellor of Germany is blowing smoke in their eyes, that Germany will not in fact "save the euro". Eurozone rhetoric is a sham.

So we are back to crisis.

I have no idea what Spain will do, but emotions are running high and the country – in the words of Confidencial this morningrisks "disintegrating". We watch and wait to see whether the Basque revolt or the Catalan revolt will detonate first, and whether the Spanish will really use "all means" to hold the union together.

The newspapers ABC and La Razon both called on the government to deploy " the arms of the state" to stop Catalonia holding an independence referendum.

It is as if the Daily Telegraph were to call for coercion to stop Scottish independence. Imagine the response in Scotland.

Mr Rajoy’s authority is collapsing. Some 84pc of Spaniards have lost confidence in his leadership. The current course is becoming hopeless.

Today he will announce a fresh round of austerity measures to meet EU targets that cannot be met, adhering to reactionary strategy of "internal devaluation" imposed by Germany that is destroying his country.

And now he has just been betrayed by the German bloc anyway. Es el colmo. If he were to request full sovereign rescue, he would most likely be shafted again. Who can blame him for dragging his feet?

The temptation to tell the Germans and Dutch to go to Hell – and to pull the pin on their banking systems – must be growing mightily. Desperate men do desperate things. 

sábado, septiembre 29, 2012



The economy

Express or stopping?

India’s growth rate, supercharged for a decade, is falling back to older, lower levels

Sep 29th 2012

INDIA’S TRAINS MOVE slowly. That gives passengers plenty of time to observe their fellow riders. They are travelling far to visit a hospital, take up a job, enroll at college. Odishan coffee pickers in Karnataka, Assamese students in Kerala and Bihari diamond polishers in Gujarat all move as freely around their country as Americans hop from state to state. That mobility should give India an advantage over countries like China that penalise farmers when they leave their land.

Indians are also increasingly well connected. On one 4,200km train ride, through 615 stations, your correspondent never once lost his mobile-phone signal. A decade ago few would have cared, since only 9% had a phone of any kind. Now, according to census data from last year, 63% of householders have a phone, usually a mobile. Ericsson, a maker of phone handsets, said this month that three-quarters of Indians now have access to a mobile.

The endless rows of concrete houses with trailing wires seen from the windows tell a story too. The same census showed that of India’s 247m households, two-thirds have electricity and nearly half TV. A similar number own bicycles, though only 5%, so far, have a car.

According to a new report by PricewaterhouseCoopers, in 2010 some 470m Indians had incomes between $1,000 and $4,000 a year. The consultancy reckons that this figure will rise to 570m within a decade, creating a market worth $1 trillion. The big Indian firms that are doing best—such as Mahindra and Mahindra, a carmaker, Hero MotoCorp, which makes motorbikes, or Hindustan Unilever, which produces small consumer goods—are those targeting such buyers.

Yet the rosy forecasts were drawn up when the economy was roaring ahead and it seemed that another decade or two of similarly high growth would deliver a big mid-income economy. Now that prospect is in question. The next few years are likely to see much slower expansion.

Doubters had long been saying that India’s potential rate of growth was bound to be lower than, say, China’s. They agreed that India could achieve much more than the 3% stopper-train growth rate that was the norm before reforms in 1991. But they gave warning that it could not keep up an express-train speed of close to 10% because its economic engine quickly overheats. Recent years have brought high inflation, especially in food prices. Roads, ports and railways are overwhelmed, blackouts are common and labour has become as expensive as in China, even though the Chinese, on average, are three times richer.

The Transport Corporation of India, a logistics firm, reported in May that every one of 17 important road routes was clogged. To drive the 1,380km from Delhi to Mumbai, for example, takes an average of nearly three days, an average of just 21km an hour. The firm says the delays are getting worse: the road network is growing by 4% a year but traffic by 11%.

The railways are no better. Raising passenger fares is politically impossible. When Dinesh Trivedi, then the railways minister, tried it in March, for the first time in nine years, his party leader forced him out. To subsidise the fares, freight charges keep being raised, pushing many goods off the tracks and into overloaded lorries on crowded roads.

Seen in that light, the slowdown in economic growth to about 5% was almost welcome. “We should not try to get back to the highest growth path. India hurts when it is growing at 8.5%,” argues Cyrus Guzder, a Parsi businessman in Mumbai. His particular worry is energy. India has a voracious appetite for energy and minerals, he suggests, but cannot dig, import or shift enough coal to keep the lights on even though there are new power stations, and in theory quite a lot of capacity.

Nor have India’s politicians shown much appetite for reforms to improve matters. One obvious remedy would be to deregulate the distribution of coal, argues N.K. Singh, an MP from Bihar and economic adviser to the BJP-led government of 1998-2004. The government could even break up or sell off Coal India, a massive and badly run state monopoly.

Congress did free petrol prices in 2010, and over the years the rupee has been allowed to float more freely, but reforms tend to be introduced only little by little. Some scarce goods are now sold by auction, but only after years of scams. Single-brand retailers, such as IKEA, have been allowed in, and multi-brand ones look set to follow. But sustained rapid growth would require a slew of big second-round reforms, to include things like land acquisition, labour laws and tax.

Politicians naturally prefer to spend. Congress is fond of entitlement schemes such as NREGA, which promises 100 days of paid work a year for every rural household. That, along with other new welfare measures, is helping some of India’s poorest people, lifting rural incomes and boosting consumer markets, but probably also raising labour costs.

Surjit Bhalla, a Delhi-based economist, points out that spending on welfare to relieve poverty now represents 2.5% of GDP. That is not a huge share, but it is rising fast: during Mr Singh’s first government it was just 1.6%. Mr Bhalla worries that this sort of spending does less to help the poor than, say, the creation of productive jobs.

Fiscal policy is generally profligate. Diesel prices went up this month, but the fuel remains massively subsidised, along with kerosene, fertiliser and food.
All this suggests that potential growth is nowhere near double digits but close to what India has today, especially given a weak global economy.

Businessmen, particularly those enjoying buoyant consumer demand, are still cheerful. Sevantilal Shah, the boss of Venus Jewel, a big diamond polisher and producer in Surat, says domestic sales are flourishing. Anand Mahindra, of the Mahindra Group, says he can’t imagine anything but an improvement on a dreadful year: “I remember that old watch ad, ‘takes a licking, keeps on ticking’, that’s what I hope we’ll say of India soon.”

Economists are more cautious. At a meeting in April Raghuram Rajan, an academic and former chief economist at the IMF who has just taken over as the government’s chief economic adviser, inveighed against the “paralysis in growth-enhancing reforms” and an “unholy” alliance of some businessmen and politicians that blocks change. He said India had to raise fuel prices rapidly, to be “kinder” to investors in order to attract capital, and “to become paranoid again” about generating growth. At the time Mr Rajan had not yet been appointed to his new job, but the prime minister was at his side—and clapped. In private, most senior officials say something similar.

Sadly Mr Rajan, like his affable and clever predecessor, Kaushik Basu, lacks political clout. Mr Basu remains an optimist on the economy, contrasting it with the late 1980s when the country felt like a warmer outpost of Soviet thinking. He is particularly pleased that India has persistently high national savings and investment which in his view can be sustained, despite some recent slippage. So he reckons that the country will return to a high growth rate, near 9%, once the current uncertainty and urgent fiscal problems are dealt with. He puts faith in the expanding young, urban and literate population and in new technology. As for the rotten bits of the economy, the state-run firms, thankfully they account for only 14% of GDP (against about a third in China).

A hole in the middle

Yet optimists need to address another problem: the structure of employment, which is very different from that in most East and South-East Asians economies. Agriculture still employs roughly half of all working Indians, many of whom are much less productive than they might be. And the service sector already makes up 59% of GDP (see chart 3) and is still growing rapidly. In particular, IT and outsourcing companies such as TCS and HCL are performing well, despite global worries.

The missing middle is industry and manufacturing, of the sort that thrives in China and drives exports. More factories could provide more jobs for the 13m people that join India’s workforce every year, many still poorly educated. Manufacturing makes up just 15% of the economy, much the same as in the 1960s. More than other sectors, it suffers from India’s entrenched bureaucracy and wretched infrastructure. Indian labour costs are high and laws are restrictive. As Chinese wages rise, countries such as Bangladesh are well placed to pick up business, but India is not. When firms persuade unions to allow contract labour to increase flexibility, workers can end up getting paid different rates for the same job. At a Maruti factory near Delhi this summer, that led to clashes which left an HR manager dead.

Manufacturers also complain about the high cost of credit in India. This may ease a bit as inflation subsides, allowing interest rates to come down. A weaker rupee will make the country more attractive as a base for exporters. And its own booming markets offer a growing incentive for manufacturers to overcome their problems. India’s carmakers, by and large, have done well (though Tata’s Nano, a cheap small car, is not yet the triumph it was billed as). But there seems no prospect of a big leap in Indian manufacturing in the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by.