Wednesday, August 17, 2011
Tuesday, August 9, 2011
Wednesday, August 3, 2011
U.S. Economy Running at ‘Stall Speed’ - Yahoo! Finance
Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling.
Bill Gross, who runs the world’s biggest bond fund at Pimco, and Peter Fisher, head of fixed income at BlackRock, say the Federal Reserve is preparing measures to counter the slowdown.
“We’re not looking at a recession yet, but we’re at a tipping point,” Gross said yesterday in an interview on Bloomberg Television. “We’re at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created,” said Gross, who is based in Newport Beach, California.
The U.S. recovery that began two years ago has been losing momentum and there are even odds the nation will slip into a recession, according to Harvard University economics professor Martin Feldstein. Investors who are seeking safety from a slowing economy and betting the central bank will keep interest rates on hold are snapping up Treasuries, sending two-year yields to a record low 0.3081 percent today.
The Fed may arrange a third round of quantitative easing, known as QE3, Gross said. The central bank purchased bonds to cap borrowing costs in the first two easing efforts. The Fed has also promised to keep the target for overnight bank lending low for an “extended period.” Policy makers cut the target rate to a range of zero to 0.25 percent in 2008 to support the economy.
QE3 ‘Potential’
“There’s a potential for a QE3,” said Gross, who oversees $1.28 trillion as Pimco’s co-chief investment officer. “I suggest, however, that that takes the form really of language, of extended period language, and maybe some type of cap on five- or even 10-year Treasury securities.”
Two-year notes yield seven basis points more than the upper end of the Fed’s target range, the least since Dec. 15, 2008. Policy makers cut the benchmark to the record-low current range the following day.
The U.S. economy is “very close to stall speed” and the Fed may need to consider signaling a longer commitment to low interest rates, according to BlackRock’s Fisher, who is based in New York.
“I believe the Fed is dusting off contingency plans if the economy does not improve,” he said in a report that BlackRock distributed by e-mail today. Fisher worked for 15 years at the Fed Bank of New York, according to BlackRock, which has $3.66 trillion in assets.
U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, according to the Commerce Department.
“This economy is really balanced on the edge,” Feldstein said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession,” he said.
Tuesday, August 2, 2011
China loses trust in US economic stewardship
The Chinese have long admired America's economic dynamism. But they have lost confidence in America's government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.
Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, "This is truly shocking… We understand politics, but your government's continued recklessness is astonishing."
China is no innocent bystander in America's race to the abyss. In the aftermath of the Asian financial crisis of the late 1990's, China amassed some $3.2 trillion (Dh11.74 trillion) in foreign-exchange reserves in order to insulate its system from external shocks.
Fully two-thirds of that total — around $2 trillion — is invested in dollar-based assets, largely US Treasuries and agency securities (ie, Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.
Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world's reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.
Those days are over. China recognises that it no longer makes sense to stay with its current growth strategy — one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves. Three key developments led the Chinese leadership to this conclusion:
Competitive
First, the crisis and Great Recession of 2008-2009 were a wake-up call. While Chinese export industries remain highly competitive, there are understandable doubts about the post-crisis state of foreign demand for Chinese products. Long the most powerful driver of Chinese growth, there is now considerable downside to an export-led impetus.
Second, the costs of the insurance premium — the outsize, largely dollar-denominated reservoir of China's foreign-exchange reserves — have been magnified by political risk.
In recent years, Chinese Premier Wen Jiabao and President Hu Jintao have repeatedly expressed concerns about US fiscal policy and the safe-haven status of Treasuries.
Like most Americans, China's leaders believe that the US will ultimately dodge the bullet of an outright default. But that's not the point. There is now great scepticism as to the substance of any "fix".
All of this spells lasting damage to the credibility of Washington's commitment to the "full faith and credit" of the US government. And that raises serious questions about the wisdom of China's massive investments in dollar-denominated assets.
Finally, China's leadership is mindful of the risks implied by its own macroeconomic imbalances — and of the role that its export-led growth and dollar-based foreign-exchange accumulation plays in perpetuating those imbalances. Moreover, the Chinese understand the political pressure that a growth-starved developed world is putting on its tight management of the renminbi's exchange rate relative to the dollar — pressure that is strikingly reminiscent of a similar campaign directed at Japan in the mid-1980's.
However, unlike Japan, China will not accede to calls for a sharp one-off revaluation of the renminbi. At the same time, it recognises the need to address these geopolitical tensions. But China will do so by providing stimulus to internal demand.
With these considerations in mind, China has adopted a very transparent response. Its new 12th Five-Year Plan says it all — a pro-consumption shift in China's economic structure that addresses head-on China's unsustainable imbalances.
So China, the largest foreign buyer of US government paper, will soon say, "enough". Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits.
The cavalier response heard from Washington insiders is that the Chinese wouldn't dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets?
China's answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington's hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.
Putin says U.S. is parasite on global economy | Reuters
Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.
"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi while touring its lakeside summer camp some five hours drive north of Moscow.
"They are living like parasites off the global economy and their monopoly of the dollar," Putin said at the open-air meeting with admiring young Russians in what looked like early campaigning before parliamentary and presidential polls.
US President Barack Obama earlier announced a last-ditch deal to cut about $2.4 trillion from the U.S. deficit over a decade, avoid a crushing debt default and stave off the risk that the nation's AAA credit rating would be downgraded.
The deal initially soothed anxieties and led Russian stocks to jump to three-month highs, but jitters remained over the possibility of a credit downgrade.
"Thank god," Putin said, "that they had enough common sense and responsibility to make a balanced decision."
But Putin, who has often criticized the United States' foreign exchange policy, noted that Russia holds a large amount of U.S. bonds and treasuries.
"If over there (in America) there is a systemic malfunction,
this will affect everyone," Putin told the young Russians.
"Countries like Russia and China hold a significant part of their reserves in American securities ... There should be other reserve currencies."
U.S.-Russian ties soured during Putin's 2000-2008 presidency but have warmed significantly since his protégé and successor President Dmitry Medvedev responded to Obama's stated desire for a "reset" in bilateral relations.
EARLY CAMPAIGNING?
Casually dressed in khaki trousers and a striped white shirt, Putin flew by helicopter to the tented camp as part of a string of appearances that are being closely watched in the run-up to the elections.
He did not say whether he plans a return to the Kremlin or will stand aside for Medvedev, his partner in Russia's leadership tandem, to run for a second term.
But young people crowding round Putin, caught up in the campaigning spirit created by huge portraits of Putin hung from trees, were not shy about saying who they wanted as president.
"Russia's next president will be small, bald and look like Putin," 17-year-old Ilya Mzokov joked with reporters. Asked why Medvedev was not paying a visit to the summer camp, he said: "Only serious people come here."
Youngsters chanted Putin's name and applauded his remarks as he strolled round the camp, where US-style business seminars, extreme sports and political mudslinging were among the topics on offer.
Putin, whose macho image appeals to many Russians, briefly swung himself up the first half of a climbing wall, filmed by a gaggle of state television cameras.
Nashi, which means "Our People," was created by the Kremlin to counter popular dissent after youth activism helped topple a pro-Moscow government in Ukraine's 2005 Orange revolution.
The group has worked to spread a personality cult around Putin and regularly campaigns against Kremlin critics.
Opinion polls show Putin, still widely viewed as the country's paramount leader, retains near 70 percent approval.
But his United Russia party is trying to reverse a slide in popularity before December parliamentary polls, hoping to use a strong showing there to help Putin in the March 2012 presidential vote.
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