Up and Down Wall Street


Ben's Ultimate Driving Machine


The possibility of less quantitative easing sends the market off the high road.


There are known knowns, former Defense Secretary Donald Rumsfeld famously said, and one of them is that BMW drivers drive, well, differently. That's been apparent to anyone who has been cut off by a Bimmer, from a wannabe 1 Series to a ubiquitous 3 Series to a top-of-the-line 7 Series, which is to say pretty much anybody who's been on the road in recent years. We all know this to be the case, but now there are data to back it up.

A study published in the Proceeding of the National Academy of Sciences that swept through the media last week found that, last year, drivers of fancy autos were the worst in their road manners, being less likely to yield to pedestrians in a crosswalk or more likely to cut in front of other drivers at a four-way stop at an intersection. "BMW drivers were the worst," Paul K. Piff, a researcher at the Institute of Personality and Social Research at the University of California at Berkeley, who conducted the study of 152 drivers in California, told the New York Times. But drivers of the ever-so-socially conscious Toyota Prius hybrids also were more likely to commit "infractions," he added.

This tendency doesn't seem unique to BMW drivers in California or the U.S., for that matter. The U.K.'s Daily Mail reports that the vehicles with the highest incidences of road rage were BMWs, followed closely by Land Rovers and Audis, according to a study of 2,837 motorists by an outfit called VoucherCodesPro. The worst culprits were men 35 to 50 years old who drove blue Bimmers on Fridays around 5:45 p.m.

My personal research (conducted in a dark navy 328i, albeit not late on a Friday afternoon, which is too near Barron's deadline) finds that, contrary to these studies, BMW drivers gain an exaggerated sense of self-confidence from the capabilities of their autos.

Their precision handling, braking, and power instill a sense of nonchalance that lures the driver into what appears untoward behavior to others, like going 80 in a 55-mph zone, because it feels as if you're loafing even at that speed. And I hope that works if I get pulled over.

Investors have been speeding along to record highs—with a significant boost from the trillion-dollar-a-year turbocharger from the Federal Reserve. But the potential for Fed Chairman Ben Bernanke to lift his foot off the gas—to use his metaphor—has been sending markets into reverse.

Last week, U.S. stocks suffered their worst week of 2013, with the Dow Jones Industrial Average shedding 344 points or 2.2% by Friday, after posting its eighth down session of the past 10. And that, in large part, reflected the surge in bond yields on the prospect of the T wordtaper—or the reduction in the Fed's $85 billion-a-month purchases of Treasury and agency mortgage-backed securities. The benchmark 10-year Treasury's yield wound up at a two-year closing high of 2.83%, up a hefty 25 basis points (one-quarter of a percentage point) on the week.

That the equity market shudders on the prospect of a taperbeginning possibly as soon as the Sept. 17-18 meeting of the policy-setting Federal Open Market Committeeisn't surprising. Wilshire Associates reckons that a cool $2.9 trillion has been added to the value of U.S. stocks since the third round of quantitative easingbetter known as QE3—was announced last September. But the efficacy of quantitative easing in achieving its stated goal of spurring the economy—as opposed to asset prices—has been, at best, modest.

According to an article in the FRBSF Economic Letter by researchers Vasco Curdia of the San Francisco Fed and Andrea Ferrero of the New York Fed, the previous round of Fed purchasesQE2, which totaled $600 billionadded an estimated 0.13 of a percentage point to real growth in gross domestic product and 0.03 of a percentage point to inflation. Moreover, even this negligible boost fades after two years, they add.

Writing in the Washington Post in November 2010 to explain the Fed's decision to engage in QE2, Bernanke asserted that the Treasury purchases would help push up stock prices, increasing consumer wealth and confidence, and thus encouraging spending. The San Francisco Fed article suggests that, while the stock market hovers near historic highs with QE3 still in full swing, the effect on the real economy is rather less pronounced and transitory.

Wall Street is showing itself loath to give up QE3, even gradually. Investors have found that Fed buying has produced rising prices of assets almost across the board, especially in stocks and real estate.

That makes quantitative easing a luxury difficult to forgo, like driving a BMW.

THE STOCK MARKET'S DEPENDENCE on bond yields that, despite their 100-basis-point or so rise from their recent lows of three months ago, remain near historic lows, was amply demonstrated last week by none other than Carl Icahn.

The corporate activist sent out a Twitter tweet that he had accumulated a major position in Apple (ticker: AAPL). That ignited the afterburners on the stock, which already had lifted off from its low of just under $400, touched at the end of June. Apple climbed back over the $500 mark for the first time since January, for a gain of 10.5% on the week, as Icahn called the purchase of the shares a "no brainer," given that the company could borrow at what he estimated to be just 3%.

What's remarkable is that Icahn's Apple investment isn't predicated on the inspired products that sprang from the tech giant when it was led by Steve Jobs, but rather on the sort of financial engineering that Jobs abjured. Since the Apple CEO's passing, however, the company has acceded to calls to manage its capital more efficiently, instituting a dividend (yielding 2.7%, which had been comfortably higher than the 10-year Treasury note until the bond market's backup in yields last week) and share repurchases, in part financed with a record, $16 billion bond offering.

But from the perspective of private-equity and other early-stage investors, these salubrious financial conditions have provided an opportunity to cash out. As noted in this column on May 6, another famed financier, Leon Black of Apollo Global Management (APO), said then "there is a time to reap and a time to sow." Now was the time to harvest the gains made from earlier investments.

Similar sentiments have been voiced by the heads of other big private-equity firms, including Fortress Investment Group (FIG) and Blackstone Group (BX), according to a Bloomberg article a couple of weeks ago.

That has been further exemplified by the roaring market for initial public offerings, which allows private equity to cash out and the public to get in. Whether you want to buy when they're selling is another matter; Blackstone shares have never again seen their June 2007 price of $35, attained in the wake of one of the best-timed initial public offerings in history.

The IPO machine was running flat out until it finally slowed last week for the lazy days of summer. According to Thomson Reuters, through Aug. 15, some 120 deals had been brought to the U.S. market this year, the highest tally for that stretch since the halcyon days of 2007, and up from 87 last year. However, the dollar volume of $28.7 billion was off 6.8% from the year-earlier total, which of course included Facebook (FB).

BUT WHILE THE FED'S LARGESS has been showered on Wall Street, less seems to be finding its way to consumers on Main Street.

Last week saw another parade of weaker-than-expected earnings and sales reports or punk projections from a slew of retailers. After hits to the likes of Abercrombie & Fitch (ANF) and Aeropostale (ARO), retailers from every strata took tumbles, from Macy's (M) in the midrange to Nordstrom (JWN) at the high, along with Wal-Mart (WMT), the discount behemoth. The slow sales of soft goods contrast sharply with recent strong home and auto sales, which demonstrate the divide. The latter depend on credit and wealth, which have been growing in the bull market.

Purchases of clothing depend more on income, which has been sluggish. A sharper-than-expected decline in the early August Reuters University of Michigan consumer sentiment index, to 80 from 85.1, is consistent with the retailers' experience. Meanwhile, news of 4,000 layoffs at Cisco (CSCO) because of a weak outlook is unlikely to boost confidence.

A Fed taper with weak full-time employment would be the "worst of both worlds," writes Steve Wang, research director of Reorient Financial Markets in Hong Kong. Part-time employment is up 1.038 million this year, while full-time jobs are up 172,000, according to the Labor Department's household survey. Meanwhile, the rise in payroll taxes and higher gasoline prices also don't boost consumers' ability or willingness to spend.

The weakness reported by retailers and the pullback of mortgage applications since rates have been on the ascent appears to be giving some Fed officials pause. Two Fed district presidents, James Bullard of St. Louis (a voter on the FOMC this year) and Dennis Lockhart of Atlanta (a nonvoter) suggested that a September taper isn't certain.

In particular, Lockhart noted that there would be another employment report for August (on Sept. 6, the Friday after Labor Day) to add to the data mix. Then there's the ongoing debate as to who will succeed Ben Bernanke and the potential for a government shutdown on Oct. 1.

September historically is the worst month for equities, with an average loss of 0.52% from 1971 to 2012, according to the Stock Trader's Almanac. Given the Fed's evident sensitivity to the stock market, the taper is more likely to be pushed back. 


Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved

18, 2013 4:50 pm
Europe needs new fables as Dutch and Portuguese go off-script
Crises’ roots lie in domestic credit regulation, not eurozone capital imbalances, says Martin Sandbu
A man holds a Portuguese flag as he takes part in a demonstration against the government's austerity measures©AFP
Pay close attention to the European economic figures that came out last week, and look behind the headline news that the eurozone as a whole is out of recession. Your reward will be a tale of two countries that shows how stubbornly Europe’s economy is ignoring the script from which its politicians have been preaching.
They are Portugal and the Netherlands: midsized countries emblematic of the monetary union’ssouth” and “north”, or “periphery” and “core”. They are at opposite ends of an axis that sceptics see as the euro’s congenital flaw: the asymmetry between competitive rich countries, which a fixed exchange rate turned into structural savers, and their uncompetitive poor cousins whose inveterate overspending the euro just made worse.

Throughout the euro era, Portugal has had large budget deficits, hitting double digits as a share of annual output at the height of the crisis. The country did not even enjoy the unsustainable boom that got Greece, Spain, and Ireland into trouble. The Portuguese economy only shuffled through the euro’s first decade. It is now nursing a bad hangover without ever having been to the party.
Contrast with the Dutch. They have out-teutonised the Germans on many metrics that define Germany’s frugal, export-led economic model. The current account has been more positive in the Netherlands than in Germany almost every year of the euro’s existence. The Dutch public deficit was consistently smaller than the German one before the crisis. In their view of economic policy, too, the Dutch often outdo the Germans, insisting more loudly than Berlin on painful deficit cuts in Portugal and other deficit states as the price they have to pay for financial rescues.

According to the morality play guiding the European Commission and the creditor economies that steer eurozone policy, the Dutch will be rewarded with economic success and Portugal condemned to financial purgatory until cleansed of its sins. The alternative fable told by sceptics of monetary union says these nations should never have shared a  currency, and their different prospects are as ineluctable as the permanent north-south transfers that will be needed to keep the euro together.

And so things have looked until recently. But Europe’s economy is more complex than the stories admit. As if it wanted to make a point, it has begun to go off-message.

In the second quarter, Portugal grew at an annualised rate of 4.5 per cent – the fastest of any EU country. The Netherlands kept shrinking, by 0.2 per cent in the last quarter (0.8 per cent on an annualised basis).

One should be careful to draw firm lessons from one quarter’s data. Portugal’s growth spurt no doubt reflects one-off factors more than a change of trend. Still, the contrast serves to illustrate how impoverished the most common stories told about the eurozone really are.

Against those who preach fiscal discipline above all else, the Dutch recession shows that neither solid public finances nor (this is even less commonly appreciated) large current account surpluses are sufficient to prevent credit bubbles that bring the economy down when they burst. The Dutch are suffering the consequences of an entirely self-inflicted housing bubble. The household debt-to-income ratio is 250 per cent.
House prices have fallen by 21 per cent. This makes overstretched homeowners 30 per cent owe more than their house is worthconsume less. Add public deficit cuts, which the Dutch imposed on themselves in their enthusiasm for a fiscal compact to bind the Portuguese and others, and a depressed economy is the unavoidable consequence.
This is but a milder version of what has been happening in Ireland and Spain. While current account deficits helped fuel the bubble in those countries, the Netherlands shows that a net creditor economy can mess up its housing market too. In other words, the crisis in many euro countries has more to do with bad domestic credit regulation than with the capital imbalances between them – though these indisputably encouraged bad domestic policy.

The bright side of this is that the euro is not as flawed as all that. Asymmetric capital flows are not incompatible with healthy economiesprivate sector lending from richer economies to poorer ones is to be desired – but such credit must fund productive investment. That requires better banks. After trying everything else first, eurozone leaders are finally starting to address the real problem.

Copyright The Financial Times Limited 2013.


August 16, 2013, 10:31 p.m. ET

China's Leader Embraces Mao as He Tightens Grip on Country


WUHAN, ChinaOn a visit here in July, Chinese President Xi Jinping went to a lakeside villa where Mao Zedong spent summers in the 1950s enjoying such luxuries as a swimming pool and air conditioning. Opening a new exhibition there that makes no mention of the millions who died under Mao's leadership, Mr. Xi declared that the villa should be a center for educating youth about patriotism and revolution.

A week earlier, he went to a village from which Mao attacked Beijing in 1949. There, Mr. Xi vowed that "our red nation will never change color."
Communist Party Chief Xi Jinping

It isn't just Mr. Xi's rhetoric that has taken on a Maoist tinge in recent months. He has borrowed from Mao's tactical playbook, launching a "rectification" campaign to purify the Communist Party, while tightening limits on discussion of ideas such as democracy, rule of law and enforcement of the constitution.
Mr. Xi's apparent lurch to the left comes as Chinese authorities prepare for the coming trial of Bo Xilai, the former party rising star who led a Maoist revival movement until his dramatic downfall last year. Two of Mr. Bo's lawyers said they expected the trial where he faces corruption charges to take place next week. Before he was detained, Mr. Bo rejected allegations of corruption.
The Chinese president's Maoist leanings have dismayed many advocates of political reform, who hoped that Mr. Bo's downfall signaled a repudiation of his autocratic leadership style and might lead to a strengthening of the rule of law and other limits on party power.
But Mr. Xi's recent record has delighted and emboldened many former Bo supporters who advocate stronger, centralized leadership as the solution to the country's problems.
"Chairman Mao is a rich resource for us," said Hu Angang, an economist and leading member of the "New Left" intellectual movement that backed Mr. Bo. "I'm not surprised by what Xi is doing."
Zhang Hongliang, another New Left economist, said in a blog post last month that the New Left should support Mr. Xi because his recent speeches showed he had fully absorbed their political agenda.
The Chinese Foreign Ministry, which usually handles inquiries from the foreign press, didn't respond to a request for comment for this article.
Mr. Xi's use of Maoist imagery, rhetoric and strategy sets him apart from his two predecessors—who both emphasized collective leadership—and suggests to many party insiders that he won't pursue meaningful political reform during the 10 years he is expected to stay in power.
Jeremy Page/The Wall Street Journal
A wax model of Mao at a new exhibition in Wuhan opened in July by Communist Party Chief Xi in Beijing.

In fact, he appears to be doubling down on China's authoritarian political model, while borrowing elements of Mr. Bo's Maoist revivalism and media-savvy politics to boost his own stature and revive public support for the party, according to political insiders and analysts.
Last month Mr. Xi launched a yearlong campaign to strengthen and purify the party that for many insiders is a conscious echo of Mao's "rectification" movements to purge rivals and enforce ideological discipline.
He has commanded army generals and senior officers to reconnect with the "masses" by serving as privates for 15 days minimum.
The new Chinese leadership has also ordered officials to combat the spread of "seven serious problems" including universal values, press freedom, civil society and judicial independence.
At the same time, state media have published a series of attacks on civil society and "constitutionalism"—the idea that the party's power be limited by China's existing constitution.
Human-rights groups say police have detained dozens of political activists in recent weeks, including Xu Zhiyong, a constitutional lawyer who has called for officials to declare their financial assets publicly. The government hasn't commented on Mr. Xu's detention. 

Mr. Xi's attitude toward political reform is a critical issue in China today because the country may be entering a prolonged period of slower economic growth and mounting public discontent over environmental problems, patchy public services and widespread corruption.
The new Chinese leadership has sent clear signals that it plans to unveil a package of economic reforms this year to stimulate domestic consumption as an alternative growth engine to the investment and exports that have powered the economy for the past 30 years.
On the political front, however, Mr. Xi has shown no sign of considering even limited liberalization, party insiders say. "Xi is really starting to show his true colors," said one childhood friend who recalls Mr. Xi spending hours reading books on Marxist and Maoist theory as a teenager. "I think this is just the beginning."
That friend and others who have known Messrs. Xi and Bo for many years said they had been deeply affected by the experience of their fathers, both revolutionary heroes who were jailed by Mao in the 1960s and rehabilitated after his death.
Yet rather than losing faith in one-party rule, both Mr. Xi and Mr. Bo had worked harder than many contemporaries to prove their allegiance to Mao as young men, and had been left with a heightened sense of how to get ahead in Chinese politics.
"Their thinking is quite similar: They have the same Maoist education, the same red family background, and the same experiences growing up," said Zhang Lifan, a historian whose father was a senior official. "When they face a problem, they revert quickly to Maoist thinking."
No one expects Mr. Xi to turn the clock back to the Mao era, during which millions of Chinese died as a result of political campaigns and a man-made famine. 

Mr. Xi's predecessor, Hu Jintao, also paid public homage to Mao, as did the president before him, Jiang Zemin, and both carried out limited campaigns to root out corruption in the party. But neither launched those campaigns so early in their tenures, or in such explicitly Maoist terms.

Mr. Xi's political posturing is all the more striking in the context of the controversy surrounding Mr. Bo, whose wife was convicted last year of murdering a British businessman. 

After Mr. Bo was detained, many in the party concluded that he made powerful enemies through his policies in Chongqing, the city he governed, which included a crackdown on organized crime and a campaign to revive Maoist values through mass renditions of revolutionary songs.
Now, however, party insiders are saying that the charges against Mr. Bo are far less severe than expected.
They believe that Mr. Xi has struck a deal with Mr. Bo's supporters and other "princelings"—sons and daughters of party chieftains—under which Mr. Bo will plead guilty to lesser charges as long as no further action is taken against his family and allies, or other princelings whose families have gotten rich in recent years.
In exchange, many of Mr. Bo's former supporters and several powerful princelings have thrown their weight behind Mr. Xi's efforts to establish himself as much a stronger leader than his predecessor, the party insiders said. 

Mr. Xi spent much of his first few months in office trying to reunify the party by appealing to different interest groups, including advocates of limited political reform such as the sons of Hu Yaobang, a reformist party chief who was close to Mr. Xi's father but was ousted by hard-liners in 1987.
But people in the latter camp were alarmed when Mr. Xi made a speech in December in which he declared that the Soviet Union had collapsed because of a lack of ideological conviction among its leaders, and because there was no "real man" to stop the process.
In June, the transcript of a speech by Hu Yaobang's second son, Hu Dehua, was posted online in which he directly contradicted Mr. Xi's analysis, arguing that the Soviet Union collapsed because a privileged elite monopolized power and resources for its own benefit.
"We blame everyone else, but never try to find problems from within. Is this a correct attitude?" he said.
Hu Dehua confirmed that the transcript online was his, but declined further comment, telling the Journal: "I've said everything I want to say."
Party insiders say his views are shared by senior people in the party, but many of them are now in their 70s or 80s and have dwindling political influence.
Advocates of political liberalization have been further dismayed in recent weeks by a spate of attacks on constitutionalism and civil society in prominent party publications, some of them penned by prominent New Leftists.
"Just as liberals pinned their hopes on Xi supporting their agenda, the New Left saw an opportunity when Xi's rhetoric veered to the left and adopted Maoist overtones," said Joseph Fewsmith, an expert on Chinese politics at Boston University.
More important, Mr. Xi was given a highly unusual public endorsement last month from former President Jiang, who was once a patron of Mr. Bo and is still considered the leader of an influential group of current and retired party officials.
A statement on the Foreign Ministry website said Mr. Jiang had met with Henry Kissinger, the former U.S. Secretary of State, in Shanghai and declared that "a big country like China with a population of 1.3 billion needs a strong and capable leader." 

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved