10/10/09
The Real Threat to Future Economic Stability
In yesterday's Market Observation column for Financial Sense, I noted the continuing deterioration in our nation's finances:
- Via Financial Armageddon
The latest results of Washington’s spending-and-borrowing spree are in and, as you might expect, they don’t look pretty. According to the Congressional Budget Office, the U.S. budget deficit hit a record $1.4 trillion in the fiscal year just ended; at 9.9% of gross domestic product, it was the largest such shortfall since 1945. In addition, September’s monthly deficit was the 12th in a row, a losing streak that has not been seen in least four decades.I also highlighted some recent remarks by an old market hand suggesting the steady accumulation of red ink has reached dangerous proportions:
More ominous, perhaps, is the fact that the FY 2009 deficit turned out to be just over 40% of outlays. According to research highlighted by Hayman Advisors in their October Letter, the fact that such a sizeable share of government spending is being financed with borrowed money has, historically at least, been a harbinger of trouble ahead:As it happens, another savvy commentator, Dylan Grice, a member of Societe Generale's Strategy Research team and a colleague of Albert Edwards -- one of those rare individuals who is always worth paying attention to -- has also highlighted the unsettling historical relationship between reckless government spending and runaway inflation in a research piece entitled "Popular Delusions: Inflation Is Always and Everywhere a Fiscal Phenomenon":
There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.
Given the extremely bad habits Washington has adopted during the past two years, one has to wonder, as Hayman Managing Partner Kyle Bass puts is, whether America has “reached the critical tipping point”?
Even before the “Great Recession”, unfunded fiscal obligations made government finances an accident waiting to happen. The crisis has merely brought forward the day of reckoning. The question isn’t whether developed governments will “default” on them, with attendant consequences for other asset classes, it’s when and how. Yet long-term inflation is priced at 2% in the US. This could be the biggest pricing anomaly across markets today.From where I sit, those commentators who believe that a bursting credit bubble precludes inflation, or who are focusing on what the Fed will or won't do next, may be discounting the real threat to future economic stability.
- Believe it or not, the first great inflation occurred in third century AD Rome. The territorial limits of empire had been reached several decades earlier and the huge army, which in former times had financed itself (through the conquest of new, plunderable and taxable lands), was now needed to protect the border from barbarian invaders.
- Just like the baby boomers of today's developed world, that cohort of Roman society which had once been its engine of growth became its unsustainable financial burden, straining imperial finances so thoroughly that the government could only fund itself by debasing the coinage. The silver content of a denarius, which had been 75% in 180AD, was a mere 0.02% by 270AD. Fiscal pressure had caused the first inflation and the Empire would never regain its former greatness.
- And since this early Roman experience the theme has repeated itself again and again. Medieval Europe, Sung China, revolutionary France, America during its civil war, Weimar Germany and arguably even post WW2 Britain and America, all saw inflations in which money was the vehicle, but the root cause was a government unable to pay its way.
- Albert Edwards has always said the Ice Age would end in substantially higher inflation because political desperation to avoid Japan's fate would drive government debt to such extreme levels that default would be inevitable. Driven by an age old dynamic, this is exactly what is playing out now.
- Via Financial Armageddon
Politics of Water Brings California Back to Brink
California lawmakers are racing to hammer out a deal aimed at alleviating the state's growing water shortages, with Gov. Arnold Schwarzenegger threatening to veto about 700 unrelated bills if legislators don't find a water solution by midnight Sunday.
Mr. Schwarzenegger was huddled in closed-door meetings with legislative leaders in the Democratic-run statehouse Friday, as they worked to close sharp differences on a package of water measures that the Republican governor says are critical to meeting California's future water needs.
An irrigation canal is dry this spring on a farm near Firebaugh, Calif., that receives no water allocation. Central Valley farmers and farm workers are enduring a third year of drought that has brought extreme water shortages and job losses, idling a half-million acres of crop land. The key point of contention is the insistence by Mr. Schwarzenegger and GOP leaders on a bond measure for as much as $12 billion that would finance new dams and other water-infrastructure improvements.Mr. Schwarzenegger has said the state needs more dams to help store water for its growing population. "We have been decades talking about water infrastructure, and we've got to bring it up to date," he told a conference of community-college trustees in San Francisco Thursday
But Assembly Republicans and some Democrats call a $12 billion bond measure supported by the Senate too costly. The timing is bad for a big bond measure, they say, given that California lawmakers have already used billions in bon
ds to help close a series of past budget deficits. "Going to the voters and racking the credit card up another $12 billion is a very hard sell," said Jared Huffman, a Democratic assemblyman from Marin County.
Mr. Schwarzenegger was huddled in closed-door meetings with legislative leaders in the Democratic-run statehouse Friday, as they worked to close sharp differences on a package of water measures that the Republican governor says are critical to meeting California's future water needs.
But Assembly Republicans and some Democrats call a $12 billion bond measure supported by the Senate too costly. The timing is bad for a big bond measure, they say, given that California lawmakers have already used billions in bon
The Lost Generation
Bright, eager—and unwanted. While unemployment is ravaging just about every part of the global workforce, the most enduring harm is being done to young people who can't grab onto the first rung of the career ladder.
Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago.
For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods.
Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.
When today's unemployed finally do get jobs in the recovery, many may be dissatisfied to be slotted below people who worked all along—especially if the newcomers spent their downtime getting more education, says Richard Thompson, vice-president for talent development at Adecco Group North America, which employs more than 300,000 people in temporary positions. Says Thompson: "You're going to have multiple generations fighting for the jobs that are going to come back in the recovery."
What's more, the baby boom generation is counting on a productive young workforce to help fund retirement and health care. Instead, young people risk getting tracked into jobs that don't pay as well, says Lisa B. Kahn of the Yale School of Management. That would mean lower tax payments for Social Security and Medicare.
Only 46% of people aged 16-24 had jobs in September, the lowest since the government began counting in 1948. The crisis is even hitting recent college graduates. "I've applied for a whole lot of restaurant jobs, but even those, nobody calls me back," says Dan Schmitz, 25, a University of Wisconsin graduate with a bachelor's degree in English who lives in Brooklyn, N.Y. "Every morning I wake up thinking today's going to be the day I get a job. I've not had a job for months, and it's getting really frustrating."
Affected are a range of young people, from high school dropouts, to college grads, to newly minted lawyers and MBAs across the developed world from Britain to Japan. One indication: In the U.S., the unemployment rate for 16- to 24-year-olds has climbed to more than 18%, from 13% a year ago.
For people just starting their careers, the damage may be deep and long-lasting, potentially creating a kind of "lost generation." Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities, or come to be seen by employers as damaged goods.
Equally important, employers are likely to suffer from the scarring of a generation. The freshness and vitality young people bring to the workplace is missing. Tomorrow's would-be star employees are on the sidelines, deprived of experience and losing motivation. In Japan, which has been down this road since the early 1990s, workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression, stress, and work-related mental disabilities, according to the Japan Productivity Center for Socio-Economic Development.
When today's unemployed finally do get jobs in the recovery, many may be dissatisfied to be slotted below people who worked all along—especially if the newcomers spent their downtime getting more education, says Richard Thompson, vice-president for talent development at Adecco Group North America, which employs more than 300,000 people in temporary positions. Says Thompson: "You're going to have multiple generations fighting for the jobs that are going to come back in the recovery."
What's more, the baby boom generation is counting on a productive young workforce to help fund retirement and health care. Instead, young people risk getting tracked into jobs that don't pay as well, says Lisa B. Kahn of the Yale School of Management. That would mean lower tax payments for Social Security and Medicare.
Only 46% of people aged 16-24 had jobs in September, the lowest since the government began counting in 1948. The crisis is even hitting recent college graduates. "I've applied for a whole lot of restaurant jobs, but even those, nobody calls me back," says Dan Schmitz, 25, a University of Wisconsin graduate with a bachelor's degree in English who lives in Brooklyn, N.Y. "Every morning I wake up thinking today's going to be the day I get a job. I've not had a job for months, and it's getting really frustrating."
TARP deadbeats
Thirty-three TARP recipients missed a scheduled dividend payment to taxpayers last month, according to the Treasury Department, including 18 banks that missed a payment for the first time. It’s a powerful indication that the U.S. banking system remains troubled. And it throws cold water on talk that taxpayers are “making money” on the bailout.
(Click to enlarge in new window)
“It’s too early to tell if we’re making money on TARP,” according to Eric Fitzwater, an associate director at SNL Financial in Virginia. “Certainly the vast majority of the bailout money is still outstanding. While a lot of larger recipients say they plan to pay it back, we’re still waiting.”
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.
A few of the banks may ultimately be able to pay what they owe, according to Fitzwater. These newer banks — “de novo” in regulator parlance — actually are not allowed to pay dividends.
Still, the bigger issue is the ultimate cost of the bank bailout, which we may not know for years.
When stronger banks including Goldman Sachs, Morgan Stanley and American Express repurchased warrants at modest premiums after paying back TARP, most news reports suggested that taxpayers were profiting from the bailout. But those reports didn’t tell the whole story.
For one, they ignored adverse selection, the propensity for the best borrowers to exit the program first, leaving Treasury holding the poorest performing investments. According to the latest data from Treasury, 42 banks have paid back some or all of the cash they got from TARP’s Capital Purchase Program, $70.7 billion in total. But more than 600 banks remain in the CPP program. Together, they still owe $134 billion.
And this excludes other TARP bailout programs that are likely to cost billions. The automotive industry owes TARP $80 billion. And AIG owes TARP $69.8 billion. Much of that isn’t coming back.
It’s also myopic to view TARP in isolation. Take Citigroup. After converting its preferred equity investment to 7.7 billion common shares at $3.25, Treasury is showing a paper profit of $11 billion. Sounds great, right?
But Citigroup’s common equity would long ago have fallen to zero if other bailouts, in particular FDIC’s debt guarantee program, weren’t insulating shareholders from losses.
Citigroup is the only large bank still using the FDIC’s program. Two weeks ago, the bank sold another $5 billion worth of guaranteed debt, bringing its total issued under the program to $49.6 billion.
The bottom line is that the government still stands behind the banking sector. While the cost of this “no more Lehmans” policy may not be known for years, our experience with Fannie Mae and Freddie Mac tells us that such implicit guarantees ultimately prove very expensive. The fact that more banks are falling behind on dividend payments reminds us the tab is growing.
- Via Reuters
(Click to enlarge in new window)
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.
A few of the banks may ultimately be able to pay what they owe, according to Fitzwater. These newer banks — “de novo” in regulator parlance — actually are not allowed to pay dividends.
Still, the bigger issue is the ultimate cost of the bank bailout, which we may not know for years.
When stronger banks including Goldman Sachs, Morgan Stanley and American Express repurchased warrants at modest premiums after paying back TARP, most news reports suggested that taxpayers were profiting from the bailout. But those reports didn’t tell the whole story.
For one, they ignored adverse selection, the propensity for the best borrowers to exit the program first, leaving Treasury holding the poorest performing investments. According to the latest data from Treasury, 42 banks have paid back some or all of the cash they got from TARP’s Capital Purchase Program, $70.7 billion in total. But more than 600 banks remain in the CPP program. Together, they still owe $134 billion.
And this excludes other TARP bailout programs that are likely to cost billions. The automotive industry owes TARP $80 billion. And AIG owes TARP $69.8 billion. Much of that isn’t coming back.
It’s also myopic to view TARP in isolation. Take Citigroup. After converting its preferred equity investment to 7.7 billion common shares at $3.25, Treasury is showing a paper profit of $11 billion. Sounds great, right?
But Citigroup’s common equity would long ago have fallen to zero if other bailouts, in particular FDIC’s debt guarantee program, weren’t insulating shareholders from losses.
Citigroup is the only large bank still using the FDIC’s program. Two weeks ago, the bank sold another $5 billion worth of guaranteed debt, bringing its total issued under the program to $49.6 billion.
The bottom line is that the government still stands behind the banking sector. While the cost of this “no more Lehmans” policy may not be known for years, our experience with Fannie Mae and Freddie Mac tells us that such implicit guarantees ultimately prove very expensive. The fact that more banks are falling behind on dividend payments reminds us the tab is growing.
- Via Reuters
10/9/09
Investors Are Showing They're Not Afraid of the Fed
Despite a fairly aggressive round of Fedspeak, investors are paying only moderate heed to the notion that a change in policy is likely any time soon.
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The Federal Reserve headquarters in Washington, DC. |
Recent remarks from Federal Reserve Chairman Ben Bernanke and several other central bank officials sparked concern that interest rates may have to rise in order to stem inflation and defend the softening US dollar.
But market behavior in the face of all the talk indicates a belief in more of the same: accommodative monetary policies that lead to a weak dollar, which in turn boosts all asset prices and helps pull the economy, at least for the moment, out of the worst pullback since the Great Depression.
"Taking a historical perspective, we're a long way from an exit. The point in time for an exit strategy won't came until the second half of 2010," said Kurt Karl, chief economist at Swiss Re in New York. "You're just not rolling along strongly enough to contemplate an exit strategy."
Bernanke's remarks Thursday that the Fed would begin tightening as the economy recovered drew only modest reaction Friday. Stocks rose slightly, as did the dollar, while bond prices slipped.
The strength of the dollar is important these days to Wall Street, which is counting on a weak greenback to keep export prices low and stimulate growth.
In fact, the bottoming of the dollar and the beginning of the seven-month stocks rally happened nearly simultaneously in March.
The PowerShares US Dollar Index Bullish [UUP 22.72 
0.18 (+0.8%) 
] ETF topped out in the early part of that month at $26.75, and it has tumbled almost in a straight line 15 percent lower since then as stocks rallied about 50 percent.
0.18 (+0.8%) ] ETF topped out in the early part of that month at $26.75, and it has tumbled almost in a straight line 15 percent lower since then as stocks rallied about 50 percent.Inverse correlation between stocks and the dollar coincided with strong buying in commodities, particularly gold, which has hit a succession of record highs as the dollar has tumbled.
With a low level of fear about the Fed changing policies, the commodities trade is likely to stay intact.
"For the last six months we've been heavily overweight in commodities—energy and gold," said Michael Church, president of Addison Capital in Yardley, Pa. "It seems to me like sentiment's really shifted now from where we were six months ago. Longer term, these are probably the places to be."
Yet like many market experts, Church worries that the long-term ramifications of the tacit weak-dollar policy could be harmful.
"Maybe some people think you can ease your way to prosperity," he said. "It's really a very simple concept: You can slice a pizza up into a hundred pieces, but just because you get six doesn't mean you're not going to be hungry after you eat them.
"It's working for [some] asset classes, but the risks are larger than anyone gives credit for. At some point down the road, this all ends with significantly higher rates of inflation."
Bernanke acknowledged concerns about rate movements when he spoke Thursday and said the Fed eventually will have to act to temper inflation.
Markets reacted somewhat Friday, sending the dollar nearly 1 percent higher even as stocks posted gains. Commodity prices were little changed, with oil lingering around its recent trading range and gold easing off its powerful rally this week.
The reaction was far more muted than last week, when Fed governor Kevin Warsh wrote in the Wall Street Journal that tightening could be on the way, and perhaps even before the market is ready.
FOR INVESTORS
Investors may have turned savvy that even if officials are giving some heed to the need for a stronger currency, that day of reckoning is still not near.
"With everyone trying to call a top (in the dollar) and sentiment so overwhelmingly one-sided, we're taking that in contrary fashion," said Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati. "It's going to be a while before we see the end of this run."
Some analysts in fact are altering forecasts to reflect that the Fed may sit on its hands even longer than the late-2010 estimate that seems to be in vogue among rate-watchers.
"We are extending our Treasury rate forecast out to 2011 and making mark-to-market adjustments to our 2009 and 2010 views," Ethan Harris, global economics analyst at BofA-Merrill Lynch Global Research, wrote in a note to clients. "We do not expect the Fed to raise rates until at least 2011 though the market may anticipate a number of rate cycles before the Fed actually moves to raise rates."
Indeed, any fear the market may have shown during last week's saber-rattling wasn't in evidence this week.
"They might be trying to jaw-bone, and good for them, but it seems pretty toothless," Kim Rupert, managing director at Action Economics in San Francisco, told Reuters. "I do think the Fed needs to start talking up an exit strategy. I think we could see an improvement in all the markets actually."
- Via CNBC
Finding a Job Now Toughest Since Recession Began
The number of job seekers competing for each opening has reached the highest point since the recession began, according to government data released Friday.
The employment crisis is expected to worsen as companies stay reluctant to hire. Many economists expect a jobless recovery, putting pressure on President Barack Obama and congressional Democrats to stimulate job creation.
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There are about 6.3 unemployed workers competing, on average, for each job opening, a Labor Department report shows.
That's the most since the department began tracking job openings nine years ago, and up from only 1.7 workers when the recession began in December 2007.
The highest point after the 2001 recession was 2.8 workers per opening in July 2003, as the economy suffered through a jobless recovery.
Employers have cut a net total of 7.2 million jobs during the downturn. While layoffs are slowing, Friday's report shows the other critical piece of a labor market recovery -- hiring -- has yet to begin.
"Fewer people are facing job loss," said Heidi Shierholz, an economist at Economic Policy Institute in Washington, "but once you have lost your job, you are in serious trouble."
The department's Job Openings and Labor Turnover survey found less than 2.4 million openings in August, the latest data available. That may seem like a lot of jobs, but it's down from 3.7 million a year ago and half its peak in June 2007. It's also the lowest tally on nine years of government records.
At the same time, the number of unemployed Americans doubled from the beginning of the recession to 14.9 million in August. Economists fear the job market will take years to recover.
Shierholz said the economy faces a "jobs gap" of almost 10 million -- the 7.2 million jobs lost plus the roughly 125,000 per month that would have been needed since the recession began just to keep up with population growth.
To close that gap and get back to pre-recession levels in two years would require more than 500,000 new jobs per month, a pace of job creation that hasn't been seen since 1950-51, Shierholz said.
Most analysts expect the nation to keep losing jobs through this year and the unemployment rate to peak above 10
The jobs crisis is likely to have political repercussions. The last time the unemployment rate topped 10 percent, in 1982, President Ronald Reagan's Republican party lost 26 seats in midterm elections.
Congressional Democrats are working on various proposals to both provide relief to the unemployed and create jobs. The House and Senate have both agreed to extend jobless benefits, though the two bills have to be reconciled.
House and Senate leaders also are considering extending an $8,000 tax credit for first-time homebuyers, and creating a new credit for companies that add jobs.
Still, Republicans in Congress say rising joblessness and the talk of additional policy moves demonstrates that the administration's $787 billion stimulus package hasn't worked. Administration officials contend that job losses would have been worse without it.
The Federal Reserve, meanwhile, is expected to keep the short-term interest rate it controls at a record low near zero until sometime next year, in an effort to bolster the economy. High unemployment makes price hikes less likely, but some analysts fear inflation could result if the Fed waits too long to raise rates.
Economists offer several reasons why companies aren't hiring. Many employers laid off huge numbers of workers earlier this year but have since found that productivity jumped, enabling them to maintain output.
"For now, many of them are trying to find out how far they can push that," Gault said.
Many employers also are unsure about whether the economy can continue to grow once the impact of government stimulus fades and aren't likely to hire until that uncertainty eases, Gault said.
Efforts by the administration to reform health care and address climate change also create uncertainty among businesses about whether they'll soon be facing higher costs, according to Steven Davis, an economics professor at the University of Chicago.
"When there's that type of uncertainty in the air, it's a good reason to pull back and wait before making any (hiring) decisions," he said.
- Via CNBC
Washington starts cooking third stimulus
The bleak September jobs report appears to have cracked the political logjam blocking progress on a third stimulus package.
Many economists have come to think that a third stimulus makes good sense. "I think the economy needs more help and they should provide it," said Mark Zandi, chief economist at Moody's Economy.com.
This by itself would never be enough to get a package through Congress. But analysts say that Democrats are likely to need a new initiative to show voters they are trying to create more jobs.
The first stimulus package of $152 billion came in early 2008, mostly in the form of tax-rebate checks.
,
The second stimulus of $787 billion was passed in February 2009, and included reduced tax withholding for most working Americans, aid to states, and spending on infrastructure projects.
Washington had been hostile environment for another stimulus proposal all summer. Even the word "stimulus" has become political dynamite.
The public has come to equate the word with the deeply unpopular $700 billion bank rescue package rushed through Congress in the fall of 2008, said Ethan Siegel, an analyst with The Washington Exchange, a firm that monitors Congress for institutional investors.
Independent voters "look at the [bank bailout] with horror," agreed political analyst Charles Cook, at a conference earlier this week. The measure is viewed as a grab for more control over the economy by big government, Cook said.
Republicans have been quick to capitalize on the anti-government mood, successfully tying the programs to Democrats, even though it was initially proposed by two Republican appointees: Henry Paulson and Ben Bernanke.
"Republicans have successfully raised the deficit in the public consciousness. Any stimulus will be judged not just on whether it stimulates the economy but what it would do to the deficit," said Stan Collender, a budget analyst.
Given the political reality, the Obama administration pulled back, hoping the economic recovery would be strong enough to avoid the need for more government assistance.
"The dominant view of policy people was 'we're going to ride this out,'" said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research.
Since August, disappointing economic data have been accumulating, most pointing to a lackluster recovery. Then last Friday, the Labor Department reported that employers cut 263,000 jobs in September. The unemployment rate rose to a 26-year high of 9.8%.
Fears of a double-dip recession are now returning, said Richard Berner, economist at Morgan Stanley. The most recent data "is consistent with our view that a healthy third quarter would give way to a wobbly fourth quarter," Berner wrote in a note to clients.
The Blue Chip consensus forecast sees GDP growth around 2.75% over the next year, well short of previous recoveries.
Berner himself believes that the economy will avoid a double-dip recession, but many other economists are less confident. Pessimists -- given short shrift only weeks ago -- are now being given new credence.
"It is pretty clear the situation is going to get worse," said Nobel-prize winning economist Joseph Stiglitz, earlier this week in a televised interview at the annual meeting of the World Bank and the International Monetary Fund.
Growth is going to be well short of the pace needed to generate jobs, Stiglitz noted.
A recent forecast of the Congressional Budget Office has the unemployment rate staying above 8% through 2011.
Economist Paul Krugman paints the same picture in terms of an "output gap" or the difference between what the economy could be producing and what it actually will produce.
"We're looking at an output gap of between $2 trillion and $3 trillion over the next year and a half, while the remaining stimulus in the pipeline is probably less than $400 billion. We have to do much more," Krugman wrote recently on his blog.
Congressional Democrats appear to have had enough.
Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid rushed to the White House this week to discuss what to do about the economy.
Cook said there is now as great as a 50-50 chance that Democrats will lose the House in mid-term elections next November.
Democrats feel a "political need" to put together a jobs bill, Siegel said. "The 2010 midterm elections will be about three things -- jobs, jobs, jobs."
The measure will have to be christened as "a jobs bill," Siegel said. "If they call it stimulus they should be sent back to kindergarten."
"People in Congress and the administration will run from you if you say the word 'stimulus,'" agreed Baker.
Earlier this week, White House spokesman Robert Gibbs insisted any legislation to extend some of the expiring provisions of the Obama stimulus package should not be called a stimulus.
At the same time, President Obama said in his weekly radio address that he was "working closely with my economic team to explore additional options to promote job creation."
But there has been a flurry of activity.
White House officials have said Obama is looking at extending jobless benefits and health-care subsides for unemployed workers through 2010. Also under consideration is an extension or expansion of the $8,000 tax credit for first-time home buyers.
Zandi of Moody's Economy.com, who has worked closely with Pelosi, suggested there might be a two-pronged approach.
He said Congress should pass the extension package by the end of the year at a cost of roughly $100 billion. This would include extending jobless benefits, health-care subsidies, the homebuyer tax credit and a provision to allow Fannie Mae and Freddie Mac to continue to finance larger mortgages.
Then, early in 2010, if the economy is not gaining traction, another package should be put in place, Zandi said. This proposal should include additional aid to states, more money for mortgage modifications, expanding the housing tax credit to all buyers, and credit for small businesses, Zandi said.
The total cost -- another $100 billion.
Many analysts are skeptical that a plan could succeed.
In the current political climate, Republicans will not want to help Obama, Collender said. Given the straightjacket of the deficit, "where is the room to maneuver?" Collender asked.
"Whether Democrats can get it done remains very much up in the air," Siegel said. But Siegel said that a package that includes tax breaks aimed at businesses may be able to get bipartisan support.
Rep. Eric Cantor, a top House Republican leader, has put forward a tax credit for companies to create new jobs.
The credit was in the first Obama stimulus package but was dropped on concern that businesses could game the system.
For instance, companies that now contract out custodial staff could move them onto the payroll. This would not result in net new jobs.
Baker of the CEPR proposed that companies be given a tax credit for shortening the work week. A variation of the plan is in place in Germany, he said. Cutting hours would force some companies to turn around and hire more workers, Baker said.
- Via Market Watch
Many economists have come to think that a third stimulus makes good sense. "I think the economy needs more help and they should provide it," said Mark Zandi, chief economist at Moody's Economy.com.
This by itself would never be enough to get a package through Congress. But analysts say that Democrats are likely to need a new initiative to show voters they are trying to create more jobs.
The first stimulus package of $152 billion came in early 2008, mostly in the form of tax-rebate checks.
,
The second stimulus of $787 billion was passed in February 2009, and included reduced tax withholding for most working Americans, aid to states, and spending on infrastructure projects.
Washington had been hostile environment for another stimulus proposal all summer. Even the word "stimulus" has become political dynamite.
The public has come to equate the word with the deeply unpopular $700 billion bank rescue package rushed through Congress in the fall of 2008, said Ethan Siegel, an analyst with The Washington Exchange, a firm that monitors Congress for institutional investors.
Independent voters "look at the [bank bailout] with horror," agreed political analyst Charles Cook, at a conference earlier this week. The measure is viewed as a grab for more control over the economy by big government, Cook said.
Republicans have been quick to capitalize on the anti-government mood, successfully tying the programs to Democrats, even though it was initially proposed by two Republican appointees: Henry Paulson and Ben Bernanke.
"Republicans have successfully raised the deficit in the public consciousness. Any stimulus will be judged not just on whether it stimulates the economy but what it would do to the deficit," said Stan Collender, a budget analyst.
Given the political reality, the Obama administration pulled back, hoping the economic recovery would be strong enough to avoid the need for more government assistance.
"The dominant view of policy people was 'we're going to ride this out,'" said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research.
Since August, disappointing economic data have been accumulating, most pointing to a lackluster recovery. Then last Friday, the Labor Department reported that employers cut 263,000 jobs in September. The unemployment rate rose to a 26-year high of 9.8%.
Fears of a double-dip recession are now returning, said Richard Berner, economist at Morgan Stanley. The most recent data "is consistent with our view that a healthy third quarter would give way to a wobbly fourth quarter," Berner wrote in a note to clients.
The Blue Chip consensus forecast sees GDP growth around 2.75% over the next year, well short of previous recoveries.
Berner himself believes that the economy will avoid a double-dip recession, but many other economists are less confident. Pessimists -- given short shrift only weeks ago -- are now being given new credence.
"It is pretty clear the situation is going to get worse," said Nobel-prize winning economist Joseph Stiglitz, earlier this week in a televised interview at the annual meeting of the World Bank and the International Monetary Fund.
Growth is going to be well short of the pace needed to generate jobs, Stiglitz noted.
A recent forecast of the Congressional Budget Office has the unemployment rate staying above 8% through 2011.
Economist Paul Krugman paints the same picture in terms of an "output gap" or the difference between what the economy could be producing and what it actually will produce.
"We're looking at an output gap of between $2 trillion and $3 trillion over the next year and a half, while the remaining stimulus in the pipeline is probably less than $400 billion. We have to do much more," Krugman wrote recently on his blog.
Congressional Democrats appear to have had enough.
Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid rushed to the White House this week to discuss what to do about the economy.
Cook said there is now as great as a 50-50 chance that Democrats will lose the House in mid-term elections next November.
Democrats feel a "political need" to put together a jobs bill, Siegel said. "The 2010 midterm elections will be about three things -- jobs, jobs, jobs."
The measure will have to be christened as "a jobs bill," Siegel said. "If they call it stimulus they should be sent back to kindergarten."
"People in Congress and the administration will run from you if you say the word 'stimulus,'" agreed Baker.
Earlier this week, White House spokesman Robert Gibbs insisted any legislation to extend some of the expiring provisions of the Obama stimulus package should not be called a stimulus.
At the same time, President Obama said in his weekly radio address that he was "working closely with my economic team to explore additional options to promote job creation."
But there has been a flurry of activity.
White House officials have said Obama is looking at extending jobless benefits and health-care subsides for unemployed workers through 2010. Also under consideration is an extension or expansion of the $8,000 tax credit for first-time home buyers.
Zandi of Moody's Economy.com, who has worked closely with Pelosi, suggested there might be a two-pronged approach.
He said Congress should pass the extension package by the end of the year at a cost of roughly $100 billion. This would include extending jobless benefits, health-care subsidies, the homebuyer tax credit and a provision to allow Fannie Mae and Freddie Mac to continue to finance larger mortgages.
Then, early in 2010, if the economy is not gaining traction, another package should be put in place, Zandi said. This proposal should include additional aid to states, more money for mortgage modifications, expanding the housing tax credit to all buyers, and credit for small businesses, Zandi said.
The total cost -- another $100 billion.
Many analysts are skeptical that a plan could succeed.
In the current political climate, Republicans will not want to help Obama, Collender said. Given the straightjacket of the deficit, "where is the room to maneuver?" Collender asked.
"Whether Democrats can get it done remains very much up in the air," Siegel said. But Siegel said that a package that includes tax breaks aimed at businesses may be able to get bipartisan support.
Rep. Eric Cantor, a top House Republican leader, has put forward a tax credit for companies to create new jobs.
The credit was in the first Obama stimulus package but was dropped on concern that businesses could game the system.
For instance, companies that now contract out custodial staff could move them onto the payroll. This would not result in net new jobs.
Baker of the CEPR proposed that companies be given a tax credit for shortening the work week. A variation of the plan is in place in Germany, he said. Cutting hours would force some companies to turn around and hire more workers, Baker said.
- Via Market Watch
New billion-dollar hole in California's budget
State revenue has already fallen more than $1 billion short of assumptions in the budget lawmakers passed less than three months ago, according to a new report from the state controller.
Disappointing income tax receipts are the main culprit, falling 11% below what lawmakers and Gov. Arnold Schwarzenegger expected when they agreed on a patchwork budget during the summer, halting the state’s issuance of IOUs. Sales and corporate taxes have also slid below projections.
"While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down,” said Controller John Chiang in a statement. He called the new figures “a major blow to a budget that is barely 10 weeks old.”
Even before the bad fiscal news, policymakers were bracing for a big budget deficit next year. The Department of Finance anticipates a $7.4-billion deficit in 2010-11. That’s a conservative estimate, because lawsuits have tied up or reversed some planned budget cuts.
“I urge lawmakers and the governor to prepare for more difficult decisions ahead," Chiang said.
Disappointing income tax receipts are the main culprit, falling 11% below what lawmakers and Gov. Arnold Schwarzenegger expected when they agreed on a patchwork budget during the summer, halting the state’s issuance of IOUs. Sales and corporate taxes have also slid below projections.
"While there are encouraging signs that California's economy is preparing for a comeback, the recession continues to drag state revenues down,” said Controller John Chiang in a statement. He called the new figures “a major blow to a budget that is barely 10 weeks old.”
Even before the bad fiscal news, policymakers were bracing for a big budget deficit next year. The Department of Finance anticipates a $7.4-billion deficit in 2010-11. That’s a conservative estimate, because lawsuits have tied up or reversed some planned budget cuts.
“I urge lawmakers and the governor to prepare for more difficult decisions ahead," Chiang said.
China detects deadly nerve gas at border with N. Korea
TOKYO — China has detected deadly nerve gas at its border with North Korea and suspects an accidental release inside the secretive state, a Japanese news report said Friday.
The Chinese military is strengthening its surveillance activities after detecting the highly virulent sarin gas in November last year and in February in Liaoning province, the Asahi Shimbun newspaper reported, citing anonymous sources from the Chinese military.
Sarin gas, which was developed in Germany before World War I, was used in the deadly 1995 nerve gas attack on the Tokyo subway by a doomsday cult.
The Chinese special operations forces found 0.015-0.03 microgrammes of the gas per cubic metre when they were conducting regular surveys while there were winds from the direction of North Korea, the report said.
China suspects that there were some experiments or accidents in its neighbouring country, it said.
The Chinese military is strengthening its surveillance activities after detecting the highly virulent sarin gas in November last year and in February in Liaoning province, the Asahi Shimbun newspaper reported, citing anonymous sources from the Chinese military.
Sarin gas, which was developed in Germany before World War I, was used in the deadly 1995 nerve gas attack on the Tokyo subway by a doomsday cult.
The Chinese special operations forces found 0.015-0.03 microgrammes of the gas per cubic metre when they were conducting regular surveys while there were winds from the direction of North Korea, the report said.
China suspects that there were some experiments or accidents in its neighbouring country, it said.
Obama-Media Parasites:CNN Brings Indoctrinated BLACK Children to Sing Praise/Push Obama's HealthCare
This just keeps getting worse and worse.
Telephone Company is Arm of Government, Feds Admit in Spy Suit
AT&T was the first of many telcos sued for helping the NSA spy on Americans without warrants
Fortunately, a judge says that relationship isn’t enough to squash a rights group’s open records request for communications between the nation’s telecoms and the feds.
The Electronic Frontier Foundation wanted to see what role telecom lobbying of Justice Department played when the government began its year-long, and ultimately successful, push to win retroactive immunity for AT&T and others being sued for unlawfully spying on American citizens.
The feds argued that the documents showing consultation over the controversial telecom immunity proposal weren’t subject to the Freedom of Information Act since they were protected as “intra-agency” records:
“The communications between the agencies and telecommunications companies regarding the immunity provisions of the proposed legislation have been regarded as intra-agency because the government and the companies have a common interest in the defense of the pending litigation and the communications regarding the immunity provisions concerned that common interest.”
U.S. District Court Judge Jeffery White disagreed and ruled on September 24 that the feds had to release the names of the telecom employees that contacted the Justice Department and the White House to lobby for a get-out-of-court-free card.
“Here, the telecommunications companies communicated with the government to ensure that Congress would pass legislation to grant them immunity from legal liability for their participation in the surveillance,” White wrote. “Those documents are not protected from disclosure because the companies communicated with the government agencies “with their own … interests in mind,” rather than the agency’s interests.”
The feds were supposed to make the documents available Friday, but in a motion late Thursday, the Obama administration is asking for a 30-day emergency stay (.pdf) so it can file a further appeal.
Read more at the EFF’s blog.
- Via Wired
10/8/09
This mall is d-e-a-d
So as I sit here at Mission Mall waiting for Jenn to finish her interview I couldn't help but notice the flow of cows moving around the stables. I'm actually very surprised to even see people here shopping. It blows me away that there are still people blowing their paychecks and driving themselves deeper into debt. These must be the few that are left that still believe everything is going to be peachy keen. The ones that watch the news and see green shoots with somehow missing the huge looming doom fest that's soon about to destroy everything they have so comfortably gotten used to. Its impossible if you spend any amount of time looking at the numbers, the reports [CBO] or just have some kind of basic knowledge of how monetary policy works to conclude any other answer of where this country is going. Were about to fall off a fucking cliff and there's people here blowing their husbands money at Ann Taylor. By the time they finish renovating this Apple store the fan boys wont have any more cotton paper to throw at Steve Jobs turtle neck collection. Like I just want to slap them in the face and scream "Wake the fuck uppp!" Stop checking out the Land Rover on the floor below. You cant afford it. A sign of the declining atmosphere for America. Land Rover is now owned by Tata an Indian company. The only thing you should be seriously spending money on is increasing your stake in gold/silver bullion. Coins, bars whatever you can get your hands on. Trust me when the dollar collapses no one is going to want that flat screen tv or your PS3.
The future for you my friends is the barter system. With all this looming debt and the more we keep piling on to actually look people in the eyes and tell them there's green shoots and were coming out of the recession I'm surprised these people are actually alive. Remember these are the same clown suits that told you everything was honky fucking dorey when the market was at 12000. What happened? Oh yeah I forgot we tanked to 6000. On some perverted way im still shocked to see these rats on Tv shitting out the mantra that has been pre written for you to consume.
I want to end with something I was thinking about on the way over here. Now I'm pretty on top of the news on a daily basis. I roll through about 50 sites a day from all over the world so my feed isnt fixed or bias. I know how to interpert what im getting from both sides and come to my own conclusion. When that story from the Independent UK broke about the behind the scenes chatting/planning about dumping the dollar, there were only a few people here on the networks that really went into detail. One example is Beck. But from what I observed no one in the administration said a word about it. Now from my observations over the years people who are in charge usually do one of two things when it comes to something like this. One they either talk about it but deny it with serious passion [Bush] and in a few weeks the truth comes out and they talk about it finally. Or they dont say a word about at all and a few weeks later it comes out in the news and they try and use it to their advantage [Bush 9/11]. In the weeks that follow I suggest you all to be very observant of news in and out of the country so you are aware of whats going on to better protect your family.
Good luck.Evan
CBO: Budget deficit hit record $1.4T in 2009
The federal budget deficit tripled to a record $1.4 trillion for the 2009 fiscal year that ended last week, congressional analysts said Wednesday.
The Congressional Budget Office estimate, while expected, is bad news for the White House and its allies in Congress as they press ahead with health care overhaul legislation that could cost $900 billion over the next decade.
The unprecedented flood of red ink flows from several factors, including a big drop in tax revenues due to the recession, $245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and Freddie Mac. Then there is almost $200 billion in costs from President Barack Obama's economic stimulus bill, as well as increases in programs such as unemployment benefits and food stamps.
The previous record deficit was $459 billion and was set just last year.
The Obama health plan would be "paid for" with new revenues and curbs in spending. But the overhaul effort would eat up tax increases and spending cuts that could be used to bring the deficit down.
Obama has attributed the nation's dismal fiscal situation to the financial and economic crises he inherited. White House Budget Director Peter Orzsag is overseeing the administration's efforts to tackle the soaring deficit next year.
"As part of the fiscal 2011 budget, we will be putting forward proposals that return us to a fiscally sustainable path and that have lower deficits in the out-years," Orszag said in a recent Associated Press interview.
The huge deficits have raised worries about the willingness of foreigners to keep purchasing Treasury debt. The administration promises that once the recession is over and the financial system is stabilized, it will move forcefully to get the deficits under control.
Economists worry that the deficits could place upward pressure on interest rates in future years as the government has to offer higher rates to attract investors
Republicans pounced on the bad news.
"This new CBO data makes it clear that our children and grandchildren will end up buried under a mountain of debt if we continue taxing, spending and borrowing at these dangerous levels," House Minority Leader John Boehner, R-Ohio, said. "How many alarm bells have to be set off before Washington Democrats get serious about tackling dangerous budget deficits?"
Economists say the best measure of the deficit is to compare it with the size of the economy. On those terms, the 2009 deficit reached almost 10 percent of gross domestic product, a level not witnessed since World War II.
The White House says it wants deficits in the next few years to stabilize at or below 3 percent of GDP. But by the White House's own estimates released in August — which predicted deficits averaging about 4 percent through the rest of the decade — it would take several hundreds of billions of dollars in new taxes or spending curbs to just get the deficit down to 3 percent of GDP.
Such steps would almost certainly force Obama to break his promise to limit tax increases to the wealthy.
Other budget experts predict higher deficits that would require even more painful steps.
History has not been kind recently to presidents who tackle the deficit. President George H.W. Bush lost re-election in 1992 after violating his "no new taxes" promise. His successor, Bill Clinton, lost control of Congress in 1994 after pushing through a deficit-reduction plan laden with tax hikes.
Still, Democrats controlling Congress acknowledge they have no choice but to tackle the problem — even if they inherited it from George W. Bush.
"It should be remembered that fiscal year 2009 began during the Bush administration, which left in its wake the worst recession since the 1930s, including a sharp plunge in revenues," said Rep. John Spratt Jr., D-S.C., chairman of the House Budget Committee. "But today's figures send us the latest alarm. As the economy stabilizes and starts to recover, we will have to turn our focus back to deficit reduction."
- Via AP
The Congressional Budget Office estimate, while expected, is bad news for the White House and its allies in Congress as they press ahead with health care overhaul legislation that could cost $900 billion over the next decade.
The unprecedented flood of red ink flows from several factors, including a big drop in tax revenues due to the recession, $245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and Freddie Mac. Then there is almost $200 billion in costs from President Barack Obama's economic stimulus bill, as well as increases in programs such as unemployment benefits and food stamps.
The previous record deficit was $459 billion and was set just last year.
The Obama health plan would be "paid for" with new revenues and curbs in spending. But the overhaul effort would eat up tax increases and spending cuts that could be used to bring the deficit down.
Obama has attributed the nation's dismal fiscal situation to the financial and economic crises he inherited. White House Budget Director Peter Orzsag is overseeing the administration's efforts to tackle the soaring deficit next year.
"As part of the fiscal 2011 budget, we will be putting forward proposals that return us to a fiscally sustainable path and that have lower deficits in the out-years," Orszag said in a recent Associated Press interview.
The huge deficits have raised worries about the willingness of foreigners to keep purchasing Treasury debt. The administration promises that once the recession is over and the financial system is stabilized, it will move forcefully to get the deficits under control.
Economists worry that the deficits could place upward pressure on interest rates in future years as the government has to offer higher rates to attract investors
Republicans pounced on the bad news.
"This new CBO data makes it clear that our children and grandchildren will end up buried under a mountain of debt if we continue taxing, spending and borrowing at these dangerous levels," House Minority Leader John Boehner, R-Ohio, said. "How many alarm bells have to be set off before Washington Democrats get serious about tackling dangerous budget deficits?"
Economists say the best measure of the deficit is to compare it with the size of the economy. On those terms, the 2009 deficit reached almost 10 percent of gross domestic product, a level not witnessed since World War II.
The White House says it wants deficits in the next few years to stabilize at or below 3 percent of GDP. But by the White House's own estimates released in August — which predicted deficits averaging about 4 percent through the rest of the decade — it would take several hundreds of billions of dollars in new taxes or spending curbs to just get the deficit down to 3 percent of GDP.
Such steps would almost certainly force Obama to break his promise to limit tax increases to the wealthy.
Other budget experts predict higher deficits that would require even more painful steps.
History has not been kind recently to presidents who tackle the deficit. President George H.W. Bush lost re-election in 1992 after violating his "no new taxes" promise. His successor, Bill Clinton, lost control of Congress in 1994 after pushing through a deficit-reduction plan laden with tax hikes.
Still, Democrats controlling Congress acknowledge they have no choice but to tackle the problem — even if they inherited it from George W. Bush.
"It should be remembered that fiscal year 2009 began during the Bush administration, which left in its wake the worst recession since the 1930s, including a sharp plunge in revenues," said Rep. John Spratt Jr., D-S.C., chairman of the House Budget Committee. "But today's figures send us the latest alarm. As the economy stabilizes and starts to recover, we will have to turn our focus back to deficit reduction."
- Via AP
10/7/09
Dollar Falls to 2-Week Low as Recovery Signs Spur Yield Demand
The dollar fell to a two-week low against the euro as signs the global economy is recovering boosted demand for higher-yielding assets.
The U.S. currency slid against all 16 of its most-traded counterparts as Asian stocks gained before reports economists say will show German industrial output rose for a second month and Japan’s machine orders climbed in August. Australia’s dollar reached a 14-month high as employment unexpectedly increased.
“People believe that the worst is over, which makes sense,” said Phil Burke, chief dealer for foreign-exchange spot trading at JPMorgan Securities in Sydney. “Overall, the dollar is still in a mid-term downtrend.”
The dollar dropped to $1.4757 per euro at 6:38 a.m. in London from $1.4691 in New York yesterday. It earlier touched $1.4774, the lowest since Sept. 24. The euro was unchanged at 130.18 yen. The dollar fell to 88.22 yen from 88.61 yen. Yesterday, the greenback declined to as low as 88.01, the weakest level in more than eight months.
The MSCI Asia Pacific Index of regional shares climbed 1.1 percent, and Japan’s Nikkei 225 Stock Average added 0.2 percent. Gold climbed to a record for a third-straight day.
The dollar weakened as economists in a Bloomberg News survey forecast German industrial output expanded 1.8 percent in August following a 0.9 percent drop in July. The Economy Ministry in Berlin is set to report the data today.
A separate survey estimated Japan’s machinery orders, an indicator of capital spending in the next three to six months, gained 2.1 percent in August after a 9.3 percent drop in July. The data is due tomorrow in Tokyo.
‘Rebounding’
“The global economy is rebounding,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “That’s what the equity market is telling us and commodity markets are telling us. On that basis, I’m bullish on the euro.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, declined 0.5 percent to 76.029.
The European Central Bank will hold its main refinancing rate at a record low of 1 percent, and the Bank of England will keep its main rate at an all-time low of 0.5 percent, according to Bloomberg surveys. Both central banks meet today.
The Federal Reserve will start raising its benchmark rate in the third quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.
Interest Rates
Benchmark interest rates are as low as zero in the U.S., compared with 1 percent in the euro zone, 3.25 percent in Australia and 2.5 percent in New Zealand, making assets in the 16-nation region and those South Pacific countries attractive to investors seeking higher returns.
Australia’s dollar rose 1.3 percent to 90.26 U.S. cents, the highest level since August 2008, from 89.12 cents yesterday in New York.
The number of people employed rose by 40,600 last month from August 2008, the statistics bureau said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg was for a decline of 10,000. The jobless rate fell to 5.7 percent from 5.8 percent.
Adding to signs the region’s economy is recovering, Japan’s Finance Ministry said today the nation’s current-account surplus widened 10.4 percent to 1.171 trillion yen ($13.3 billion) in August from a year earlier. The median estimate of 22 economists surveyed by Bloomberg News was for 1.15 trillion yen.
‘Uncomfortable’ Level
New Zealand’s dollar climbed to 74.03 U.S. cents from 73.64 yesterday. Earlier it touched 74.21 cents, the strongest since July 2008. New Zealand Finance Minister Bill English said he’s “uncomfortable” with the level of its currency.
“Generally when we’ve had a recession, a low dollar has helped us kick-start out of that recession,” English said in an interview in London late yesterday. “That’s clearly not going to be the case this time.”
New Zealand is being “bundled” with Australia by investors when its economy has not performed as well, exacerbating the currency’s strength, he said.
The yen traded near the highest level in more than eight months against the dollar on speculation the Bank of Japan will be quicker than the Federal Reserve in withdrawing emergency stimulus measures.
Bank of Japan Governor Masaaki Shirakawa said on Oct. 3 the need for programs to buy commercial paper and corporate bonds has eased. The central bank may decide as soon as this month to let the measures expire at the end of the year, people with direct knowledge of the discussions have said. New York Fed President William Dudley said on Oct. 5 that U.S. interest rates should stay low for a while to ensure a “robust recovery.”
“It’s possible that the BOJ may be faster than the Fed in taking exit strategies,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Corp. in Tokyo. “This may fuel buying of the yen.”
The yield advantage of benchmark 10-year Treasuries over similar-maturity Japanese government bonds narrowed to 1.92 percentage points today from 2.01 percentage points at the end of last month, diminishing the appeal of U.S. assets.
- Via Bloomberg
The U.S. currency slid against all 16 of its most-traded counterparts as Asian stocks gained before reports economists say will show German industrial output rose for a second month and Japan’s machine orders climbed in August. Australia’s dollar reached a 14-month high as employment unexpectedly increased.
“People believe that the worst is over, which makes sense,” said Phil Burke, chief dealer for foreign-exchange spot trading at JPMorgan Securities in Sydney. “Overall, the dollar is still in a mid-term downtrend.”
The dollar dropped to $1.4757 per euro at 6:38 a.m. in London from $1.4691 in New York yesterday. It earlier touched $1.4774, the lowest since Sept. 24. The euro was unchanged at 130.18 yen. The dollar fell to 88.22 yen from 88.61 yen. Yesterday, the greenback declined to as low as 88.01, the weakest level in more than eight months.
The MSCI Asia Pacific Index of regional shares climbed 1.1 percent, and Japan’s Nikkei 225 Stock Average added 0.2 percent. Gold climbed to a record for a third-straight day.
The dollar weakened as economists in a Bloomberg News survey forecast German industrial output expanded 1.8 percent in August following a 0.9 percent drop in July. The Economy Ministry in Berlin is set to report the data today.
A separate survey estimated Japan’s machinery orders, an indicator of capital spending in the next three to six months, gained 2.1 percent in August after a 9.3 percent drop in July. The data is due tomorrow in Tokyo.
‘Rebounding’
“The global economy is rebounding,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “That’s what the equity market is telling us and commodity markets are telling us. On that basis, I’m bullish on the euro.”
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, declined 0.5 percent to 76.029.
The European Central Bank will hold its main refinancing rate at a record low of 1 percent, and the Bank of England will keep its main rate at an all-time low of 0.5 percent, according to Bloomberg surveys. Both central banks meet today.
The Federal Reserve will start raising its benchmark rate in the third quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.
Interest Rates
Benchmark interest rates are as low as zero in the U.S., compared with 1 percent in the euro zone, 3.25 percent in Australia and 2.5 percent in New Zealand, making assets in the 16-nation region and those South Pacific countries attractive to investors seeking higher returns.
Australia’s dollar rose 1.3 percent to 90.26 U.S. cents, the highest level since August 2008, from 89.12 cents yesterday in New York.
The number of people employed rose by 40,600 last month from August 2008, the statistics bureau said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg was for a decline of 10,000. The jobless rate fell to 5.7 percent from 5.8 percent.
Adding to signs the region’s economy is recovering, Japan’s Finance Ministry said today the nation’s current-account surplus widened 10.4 percent to 1.171 trillion yen ($13.3 billion) in August from a year earlier. The median estimate of 22 economists surveyed by Bloomberg News was for 1.15 trillion yen.
‘Uncomfortable’ Level
New Zealand’s dollar climbed to 74.03 U.S. cents from 73.64 yesterday. Earlier it touched 74.21 cents, the strongest since July 2008. New Zealand Finance Minister Bill English said he’s “uncomfortable” with the level of its currency.
“Generally when we’ve had a recession, a low dollar has helped us kick-start out of that recession,” English said in an interview in London late yesterday. “That’s clearly not going to be the case this time.”
New Zealand is being “bundled” with Australia by investors when its economy has not performed as well, exacerbating the currency’s strength, he said.
The yen traded near the highest level in more than eight months against the dollar on speculation the Bank of Japan will be quicker than the Federal Reserve in withdrawing emergency stimulus measures.
Bank of Japan Governor Masaaki Shirakawa said on Oct. 3 the need for programs to buy commercial paper and corporate bonds has eased. The central bank may decide as soon as this month to let the measures expire at the end of the year, people with direct knowledge of the discussions have said. New York Fed President William Dudley said on Oct. 5 that U.S. interest rates should stay low for a while to ensure a “robust recovery.”
“It’s possible that the BOJ may be faster than the Fed in taking exit strategies,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Corp. in Tokyo. “This may fuel buying of the yen.”
The yield advantage of benchmark 10-year Treasuries over similar-maturity Japanese government bonds narrowed to 1.92 percentage points today from 2.01 percentage points at the end of last month, diminishing the appeal of U.S. assets.
- Via Bloomberg
Gold Hits Another Record, Above $1,050 an Ounce
Spot gold topped $1,050 per ounce to mark a record high for the third session in a row on Thursday as the dollar's continued struggle made the precious metal more attractive to investors.
 |
AP |
Bullion has gained about 20 percent this year, helped by the dollar's weakness and inflation worries after central banks and governments across the globe poured money into the financial system to help stimulate the economy.
Gold rose as high as $1,051.05 per ounce as of 0234 GMT.
The dollar is expected to continue to struggle, which is likely to mean more gains for gold.
"Investors are turning towards gold as a hedge in dollar weakness," said Adrian Koh, an analyst at Phillip Futures in Singapore.
Further gains could be on hold for the rest of the day, however, as investors await news that will provide clues to the state of the global economy.
"Looking forward today, we have got a couple of key interest rate announcements from the BOE and the ECB and traders are likely to be cautious and will be keen to listen to what they have to say about their respective economies," Koh said.
U.S. gold futures for December delivery were at $1,050.0 per ounce, up 0.5 percent. On the physical front, despite gold's rise to another record, sales of scrap were limited in Asia, suggesting that consumers were waiting for more gains in prices before cashing in.
"People don't want to sell at these levels. There isn't much scrap coming in," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong. He said there was talk bullion could reach as high as $1,600. "I think we are all bullish, but watch out for a correction."
Dealers also noted light buying from main consumer India, keeping premiums for gold bars steady in the bullion trading centres of Singapore and Hong Kong. "Gold keeps testing new highs, so people have become more cautious. But if the price maintains ... these levels, then I
think more scrap will enter the market," said a dealer in Singapore.
think more scrap will enter the market," said a dealer in Singapore.
"Don't be surprised, India is still buying," he said. India, which accounts for more than 20 percent of global demand for gold jewellery, is in the midst of the festival season, a period when jewellery is traditionally purchased.
Gold's rally has boosted inflows into exchange-traded funds for two days in a row.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,109.314 tonnes as of Oct. 7, up 0.8 percent or 8.8 tonnes from the previous business day, when they also rose.
The dollar was again on the defensive on Thursday, after Alcoa Inc posted a surprise profit, supporting overall bullishness about a global recovery.
Strong oil prices also fanned worries about inflation, providing gold with additional fuel to help the rally.
Oil prices traded above $70 per barrel on Thursday, recovering from the previous session when they fell after U.S. data showed a surge in fuel stocks last week.
- Via CNBC
Gore Vidal's United States of fury
Gore Vidal's brutal manner of criticism hasn't waned. He describes the United States as a 'madhouse' and its President as 'overwhelmed' and 'incompetent'
Gore Vidal's brutal manner of criticism hasn't waned. He describes the United States as a 'madhouse' and its President as 'overwhelmed' and 'incompetent'
In Russian, the phrase "gore vidal" means "he has seen grief". As Gore Vidal is wheeled towards me across an empty London hotel lobby, it seems for the first time like an apt translation. In the eight years since I saw him last, he has lost his partner of 50 years, most of his friends, most of his enemies, and the use of his legs. The man I met then – bristling with his own brilliance, scattering witticisms around like confetti – has withered. His skin is like parchment, but the famous cheekbones are still sharp beneath the crags. "It is so cold in here," he says, by way of introduction. "So fucking cold."
Gore Vidal is not only grieving for his own dead circle and his fading life, but for his country. At 83, he has lived through one third of the lifespan of the United States. If anyone incarnates the American century that has ended, it is him. He was America's greatest essayist, one of its best-selling novelists and the wit at every party. He holidayed with the Kennedys, cruised for men with Tennessee Williams, was urged to run for Congress by Eleanor Roosevelt, co-wrote some of the most iconic Hollywood films, damned US foreign policy from within, sued Truman Capote, got fellated by Jack Kerouac, watched his cousin Al Gore get elected President and still lose the White House, and – finally, bizarrely – befriended and championed the Oklahoma bomber, Timothy McVeigh.
Gore Vidal's brutal manner of criticism hasn't waned. He describes the United States as a 'madhouse' and its President as 'overwhelmed' and 'incompetent'
In Russian, the phrase "gore vidal" means "he has seen grief". As Gore Vidal is wheeled towards me across an empty London hotel lobby, it seems for the first time like an apt translation. In the eight years since I saw him last, he has lost his partner of 50 years, most of his friends, most of his enemies, and the use of his legs. The man I met then – bristling with his own brilliance, scattering witticisms around like confetti – has withered. His skin is like parchment, but the famous cheekbones are still sharp beneath the crags. "It is so cold in here," he says, by way of introduction. "So fucking cold."
Gore Vidal is not only grieving for his own dead circle and his fading life, but for his country. At 83, he has lived through one third of the lifespan of the United States. If anyone incarnates the American century that has ended, it is him. He was America's greatest essayist, one of its best-selling novelists and the wit at every party. He holidayed with the Kennedys, cruised for men with Tennessee Williams, was urged to run for Congress by Eleanor Roosevelt, co-wrote some of the most iconic Hollywood films, damned US foreign policy from within, sued Truman Capote, got fellated by Jack Kerouac, watched his cousin Al Gore get elected President and still lose the White House, and – finally, bizarrely – befriended and championed the Oklahoma bomber, Timothy McVeigh.
Is the U.S. Preparing to Bomb Iran?
Is the U.S. Stepping Up Preparations for a Possible Attack on Iran's Nuclear Facilities?
Is the U.S. stepping up preparations for a possible attack on Iran's nuclear facilities?
The Pentagon is always making plans, but based on a little-noticed funding request recently sent to Congress, the answer to that question appears to be yes.
First, some background: Back in October 2007, ABC News reported that the Pentagon had asked Congress for $88 million in the emergency Iraq/Afghanistan war funding request to develop a gargantuan bunker-busting bomb called the Massive Ordnance Penetrator (MOP). It's a 30,000-pound bomb designed to hit targets buried 200 feet below ground. Back then, the Pentagon cited an "urgent operational need" for the new weapon.
Now the Pentagon is shifting spending from other programs to fast forward the development and procurement of the Massive Ordnance Penetrator. The Pentagon comptroller sent a request to shift the funds to the House and Senate Appropriations and Armed Services Committees over the summer.
Click here to see a copy of the Pentagon's request, provided to ABC News.
The comptroller said the Pentagon planned to spend $19.1 million to procure four of the bombs, $28.3 million to accelerate the bomb's "development and testing", and $21 million to accelerate the integration of the bomb onto B-2 stealth bombers.
'Urgent Operational Need'
The notification was tucked inside a 93-page "reprogramming" request that included a couple hundred other more mundane items.Why now? The notification says simply, "The Department has an Urgent Operational Need (UON) for the capability to strike hard and deeply buried targets in high threat environments. The MOP is the weapon of choice to meet the requirements of the UON." It further states that the request is endorsed by Pacific Command (which has responsibility over North Korea) and Central Command (which has responsibility over Iran).
Is the U.S. Preparing to Bomb Iran?
The request was quietly approved. On Friday, McDonnell Douglas was awarded a $51.9 million contract to provide "Massive Penetrator Ordnance Integration" on B-2 aircraft.This is not the kind of weapon that would be particularly useful in Iraq or Afghanistan, but it is ideally suited to hit deeply buried nuclear facilities such as Natanz or Qom in Iran.
- Via CBS
Gold loses luster when priced in euros, pounds, Aussies
The price of gold will continue to rise and outperform stock markets and could go as high at $2,000, depending on the strength of the S&P 500 index, according to Chris Locke, managing director at Oystertrade.com Management.
Gold has already passed the $1,000 level, and “the next point should be pretty quickly to $1250-$1300,” Locke told CNBC Wednesday. He said “no matter what happens to stocks and stock industries gold will outperform.”
Because of the current strength of gold, “dips should be very well supported,” he said, adding that “if the S&P holds around the 1,050 level, then gold should move to around $2,000.”
Locke’s outlook for the S&P 500 remains bearish.
“We’ve broken this uptrend from the lowest point of momentum last October,” he said, adding that “cracks are beginning to show for the S&P.”
- Via CNBC
Gold loses luster when priced in euros, pounds, Aussies
Gold's performance in the euro, British pound and other currencies has been lackluster compared to its rise in U.S. dollars, a trend suggesting investors are more interested in bullion as a hedge against the greenback than global inflation.
That sensitivity also means the gold rally could quickly reverse if the U.S. dollar gains ground, one analyst warned.
"The lion's share of the gold-price increase is due to the weak dollar," said Carsten Fritsch, a commodities analyst for Commerzbank in Frankfurt. "Once things make a turn there, you could see a quite rapid correction in gold prices."
Gold, which hit new record highs this week, has advanced about 4% off its February highs and rallied 18% in U.S. dollars this year. The December contract closed at $1,044.40 an ounce Wednesday.
That's helped shares in the biggest gold exchange-traded fund, the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 102.75, +0.39, +0.38%) , gain by the same amount. See full story.
In contrast, investors who bought gold in euros have seen the value of their holdings sink about 10% since euro-denominated gold hit a record high in February. For the year, gold in euros has gained about 12%.
In British pounds, gold has sunk about 6% from February highs and is up just 6% for the year, based on pricing of the most active contracts at the time.
In Australian dollars, the metal has tumbled about 25% from its February highs and has actually lost ground for the year.
The disparity reveals just how crucial a role the falling U.S. dollar has played in driving up gold and other commodities prices.
Gold is usually seen as the ultimate currency - a liquid investment that holds fast when paper currencies depreciate, potentially because inflation is rising. But in recent months, investors seem to be treating the metal specifically as a hedge against the dollar's drop than a deterioration in currencies in general.
"What's going on right now is really dollar related," said Nicholas Brooks, head of research and investments at ETF Securities, which has constructed commodities exchange-traded funds including the recently launched ETFS Physical Swiss Gold /quotes/comstock/13*!sgol/quotes/nls/sgol (SGOL 104.64, +0.30, +0.29%) , which gives investors a share of physical gold stored in Switzerland.
Buyers of gold in euro, pounds and Aussie dollars could see their fortunes turn quickly around if the U.S. dollar strengthens - even if gold prices stabilizes or falls.
Dollar hedge
Since early March, the dollar index /quotes/comstock/11j!i:dxy0 (DXY 76.42, +0.16, +0.21%) has lost about 14% as measured against a basket of its six major rivals since March 6. That's when global stocks started rallying on belief that the worst of the financial crisis had ended.
At the same time, investors shifted more of their money into currencies from countries with higher interest rates and with economies seen as emerging faster from recession.
The greenback has lost 25% against the Brazilian real since March 6 and 28% against the Australian dollar.
The dollar index dropped to a one-year low on Tuesday after the Reserve Bank of Australia became the first G20 central bank to raise interest rates in this cycle, lifting its policy rate by a quarter point to 3.25%. See full story.
The decline in the U.S. dollar is closely linked to the Federal Reserve's unprecedented efforts to lift the U.S. economy out of the worst recession since the Great Depression. With its target interest rate near zero percent and the combination of fiscal stimulus and special Fed lending programs pumping trillions of dollars into the U.S. economy, the U.S. government is effectively printing more U.S. dollars.
"One of the classic ways of easing monetary policy, besides interest rates, is to let the currency depreciate," said Brooks. With these themes in mind, "investors recognizing this are wary of keeping too large a portion of their assets in dollars."
Gold Hits Record High
Gold rallied to a new high Tuesday on concerns about the weakness of the U.S. dollar. Brian Hicks, portfolio manager with U.S. Global Investors, says he's raising his target on the metal. MarketWatch's Stacey Delo reports.
Of course, inflation is an underlying worry when a country like the U.S. engages in a fiscal policy that sends its currency lower. That broader uncertainty about U.S. inflation may also be triggering gold buys, Brooks says.
Earlier this week, the San Francisco Federal Reserve Bank released a report that noted professional forecasters are increasingly at odds over their outlooks for both short-term and longer-term inflation.
For projections of average inflation over the next ten years, a measure of disagreement amount forecasters - specifically, the standard deviation - has doubled over the past five years.
"Some forecasters are concerned that inflation will rise, possibly because the Fed may not be able to appropriately remove its extraordinary monetary stimulus," wrote Sylvain Leduc, the SF Fed's research advisor.
- Via Market Watch
That sensitivity also means the gold rally could quickly reverse if the U.S. dollar gains ground, one analyst warned.
"The lion's share of the gold-price increase is due to the weak dollar," said Carsten Fritsch, a commodities analyst for Commerzbank in Frankfurt. "Once things make a turn there, you could see a quite rapid correction in gold prices."
Gold, which hit new record highs this week, has advanced about 4% off its February highs and rallied 18% in U.S. dollars this year. The December contract closed at $1,044.40 an ounce Wednesday.
That's helped shares in the biggest gold exchange-traded fund, the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 102.75, +0.39, +0.38%) , gain by the same amount. See full story.
In contrast, investors who bought gold in euros have seen the value of their holdings sink about 10% since euro-denominated gold hit a record high in February. For the year, gold in euros has gained about 12%.
In British pounds, gold has sunk about 6% from February highs and is up just 6% for the year, based on pricing of the most active contracts at the time.
In Australian dollars, the metal has tumbled about 25% from its February highs and has actually lost ground for the year.
The disparity reveals just how crucial a role the falling U.S. dollar has played in driving up gold and other commodities prices.
Gold is usually seen as the ultimate currency - a liquid investment that holds fast when paper currencies depreciate, potentially because inflation is rising. But in recent months, investors seem to be treating the metal specifically as a hedge against the dollar's drop than a deterioration in currencies in general.
"What's going on right now is really dollar related," said Nicholas Brooks, head of research and investments at ETF Securities, which has constructed commodities exchange-traded funds including the recently launched ETFS Physical Swiss Gold /quotes/comstock/13*!sgol/quotes/nls/sgol (SGOL 104.64, +0.30, +0.29%) , which gives investors a share of physical gold stored in Switzerland.
Buyers of gold in euro, pounds and Aussie dollars could see their fortunes turn quickly around if the U.S. dollar strengthens - even if gold prices stabilizes or falls.
Dollar hedge
Since early March, the dollar index /quotes/comstock/11j!i:dxy0 (DXY 76.42, +0.16, +0.21%) has lost about 14% as measured against a basket of its six major rivals since March 6. That's when global stocks started rallying on belief that the worst of the financial crisis had ended.
At the same time, investors shifted more of their money into currencies from countries with higher interest rates and with economies seen as emerging faster from recession.
The greenback has lost 25% against the Brazilian real since March 6 and 28% against the Australian dollar.
The dollar index dropped to a one-year low on Tuesday after the Reserve Bank of Australia became the first G20 central bank to raise interest rates in this cycle, lifting its policy rate by a quarter point to 3.25%. See full story.
The decline in the U.S. dollar is closely linked to the Federal Reserve's unprecedented efforts to lift the U.S. economy out of the worst recession since the Great Depression. With its target interest rate near zero percent and the combination of fiscal stimulus and special Fed lending programs pumping trillions of dollars into the U.S. economy, the U.S. government is effectively printing more U.S. dollars.
"One of the classic ways of easing monetary policy, besides interest rates, is to let the currency depreciate," said Brooks. With these themes in mind, "investors recognizing this are wary of keeping too large a portion of their assets in dollars."
Gold Hits Record High
Gold rallied to a new high Tuesday on concerns about the weakness of the U.S. dollar. Brian Hicks, portfolio manager with U.S. Global Investors, says he's raising his target on the metal. MarketWatch's Stacey Delo reports.
Of course, inflation is an underlying worry when a country like the U.S. engages in a fiscal policy that sends its currency lower. That broader uncertainty about U.S. inflation may also be triggering gold buys, Brooks says.
Earlier this week, the San Francisco Federal Reserve Bank released a report that noted professional forecasters are increasingly at odds over their outlooks for both short-term and longer-term inflation.
For projections of average inflation over the next ten years, a measure of disagreement amount forecasters - specifically, the standard deviation - has doubled over the past five years.
"Some forecasters are concerned that inflation will rise, possibly because the Fed may not be able to appropriately remove its extraordinary monetary stimulus," wrote Sylvain Leduc, the SF Fed's research advisor.
- Via Market Watch
Fresh & Easy is expected to lose $259 million in fiscal year
A Fresh & Easy in Azusa that opened in February. The chain now has 70 branches
in Southern California, which has been hit hard by the recession.
in Southern California, which has been hit hard by the recession.
Fresh & Easy Neighborhood Market's trademark apple logo is green, but the chain of small grocery stores is bleeding red ink.
Tesco, the British parent of the 130-store company, said Tuesday that its American division would lose about $259 million this year, or about $2 million for each of its stores.
Fresh & Easy is struggling with the overhead of a large infrastructure designed to support hundreds of stores and a price war that has broken out in the supermarket industry.
There are 70 stores now open in Southern California, which has been hurt more than other regions by the recession. Fresh & Easy also opened stores in other areas with poor economies, including Phoenix and Las Vegas.
Broken water main creates Newport Beach sinkhole
A 90-square-foot section of road collapsed in Newport Beach early this morning after a water main broke in a commercial neighborhood, covering a block-long area with as much as 6 inches of water.
City utility crews were notified about the problem along Via Lido, near Newport Boulevard, at about 1 a.m., but when they shut off the broken 20-inch pipeline, the road began caving in, said Tara Finnegan, spokeswoman for the city of Newport Beach.
[Updated at 1:45 a.m.: City utilities director George Murdoch said the break occurred in a connector between the 20-inch pipe and a 12-inch pipe. The connector and parts of both pipes will be replaced, he said.]
The sinkhole grew to 10 feet deep, but no businesses or homes were flooded, and only one commercial site was without water.
Both westbound lanes of Via Lido were closed, but crews planned to temporarily repair the line and reopen one lane by tonight, Finnegan said. Full repair is expected by Thursday, she said.
The Greater Los Angeles area has been plagued by frequent water main breaks, including about 35 major blowouts since Sept. 1.
- Via LA Times
Hotel defaults, foreclosures rise in California
More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.
Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.
The list of troubled properties includes the St. Regis Monarch Beach in Dana Point, the downtown Los Angeles Marriott, the Sheraton Universal and the W hotel in San Diego.
Most struggling hotels remain open, but industry experts believe many properties are likely to be closed down in the months ahead, even if they are not in foreclosure, because they are losing so much money. The owners of the renowned Quail Lodge Resort and Golf Club in Carmel, for example, plan to close the hotel Nov. 16.
"I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."
The problem is not unique to California, but the effect is being felt especially hard here because of tourism's importance to the state.
In Southern California alone, there were at least 140 hotels in default or foreclosure in September, including 55 hotels in the Inland Empire, 33 in Los Angeles County and 30 in San Diego County, according to the report by Atlas Hospitality Group. Statewide, 260 hotels were in default on their loans and 47 had been taken over by their lenders in foreclosure, the Atlas report said.
The industry's woes are compounded by the sour commercial real estate market, which has left many resort operators owing more than their properties are worth. Even as they struggle to make payroll, scores of resorts and inns have given up on paying their mortgages, fueling the skyrocketing level of defaults.
"It's a prolonged downturn, and it will be a long time before we get out of it," said hotel broker Alan X. Reay of Atlas Hospitality, who tracks foreclosures and defaults in the state.
Part of the problem is that unlike home loans, mortgages on larger hotels typically are supposed to be repaid in full after five to 10 years. Many of them are coming due now. But like their residential counterparts, many hotel owners refinanced their places at the top of the real estate market, often taking equity out of their properties. So the loans are ballooning at just the time when there are few guests at the hotels, and the properties are worth little.
"We expect this number to rise dramatically by the end of the year and into 2010, because we're seeing so many hotels operating under forbearance," Reay said.
Industry leaders blame the slump on several factors, including loose lending and irrational exuberance during the boom, an increase in new hotel openings because of the easy money, and a dramatic drop in business travel.
Joseph McInerney, chief executive of the American Hotel and Lodging Assn., tried to put a positive spin on the news, saying, "I think we've bottomed out."
But a leading hotel consulting firm, Smith Travel Research, recently issued a report that predicted no significant improvement for the hotel industry until 2011 at the earliest.
"It's going to be a lot worse than it is now," said Bobby Bowers, senior vice president of Smith Travel Research.
Cities such as Las Vegas, San Francisco, New York and Los Angeles may have a harder time recovering, Bowers said, because businesses remain reluctant to budget for travel and entertainment in cities with reputations for lavish spending.
Bowers partly blamed this on the continuing backlash to news last year that giant insurer American International Group Inc., teetering near collapse, had spent about $400,000 on a retreat at the St. Regis Monarch Beach after taking an $85-billion federal bailout.
Reay said there were comments about this "AIG effect" at a conference he attended last week.
"People were saying that if you've got 'resort' in your name -- you're a golf resort, a spa, whatever -- you have to take it off," he said. "Because the business traveler isn't going to get reimbursed unless it's just the plain Hilton hotel."
At local hotels, managers and owners say they have had to rely on deep discounts and promotional packages just to keep the doors open and staff employed.
"Sometimes you have to do what you have to do," said Marc Loge, a spokesman for the Wilshire Grand hotel in L.A.
David Horowitz, general manager of the Hyatt Regency Century Plaza, said rate cuts and promotions had become almost standard. "We do have to make deals," he said. "We have to keep things going."
But an increasing number of hotels have so little revenue that they can't even afford to pay their operating bills and payroll, not to mention servicing debt.
Owners of such hotels are increasingly handing the keys back to the lenders, and the problem is likely to get worse: As many as 1 in 5 U.S. hotel loans may default through 2010, UC Berkeley economist Kenneth Rosen said.
In some cases the lenders are simply locking up the properties, figuring they'll spend less money on watering the lawns and paying a few guards than they would on keeping the doors open.
A real estate investment trust that owns 40 upscale hotels in the U.S. recently announced plans to forfeit a 293-room Marriott hotel at the airport in Ontario to the servicer overseeing the hotel's $26.6-million mortgage. The investment trust, Sunstone Hotel Investors Inc., based in San Clemente, had announced plans in June to forfeit the 258-room W San Diego hotel because it would not support its $65-million mortgage.
The hotel industry continues to buzz about how that happened this year in the Bahamas, when a lender closed the Four Seasons Resort Great Exuma, a $350-million property built in 2003.
Small resorts also have closed in Big Bear and South Lake Tahoe, the latter involving an owner who allegedly tried to hold down costs by not paying the local room tax imposed by the city and was arrested.
"There's a lot of owners doing that these days, but it's not a good idea because the money you save doesn't belong to you," he said. "They take that seriously in South Lake Tahoe."
- Via Los Angeles Times
Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.
The list of troubled properties includes the St. Regis Monarch Beach in Dana Point, the downtown Los Angeles Marriott, the Sheraton Universal and the W hotel in San Diego.
Most struggling hotels remain open, but industry experts believe many properties are likely to be closed down in the months ahead, even if they are not in foreclosure, because they are losing so much money. The owners of the renowned Quail Lodge Resort and Golf Club in Carmel, for example, plan to close the hotel Nov. 16.
"I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."
The problem is not unique to California, but the effect is being felt especially hard here because of tourism's importance to the state.
In Southern California alone, there were at least 140 hotels in default or foreclosure in September, including 55 hotels in the Inland Empire, 33 in Los Angeles County and 30 in San Diego County, according to the report by Atlas Hospitality Group. Statewide, 260 hotels were in default on their loans and 47 had been taken over by their lenders in foreclosure, the Atlas report said.
The industry's woes are compounded by the sour commercial real estate market, which has left many resort operators owing more than their properties are worth. Even as they struggle to make payroll, scores of resorts and inns have given up on paying their mortgages, fueling the skyrocketing level of defaults.
"It's a prolonged downturn, and it will be a long time before we get out of it," said hotel broker Alan X. Reay of Atlas Hospitality, who tracks foreclosures and defaults in the state.
Part of the problem is that unlike home loans, mortgages on larger hotels typically are supposed to be repaid in full after five to 10 years. Many of them are coming due now. But like their residential counterparts, many hotel owners refinanced their places at the top of the real estate market, often taking equity out of their properties. So the loans are ballooning at just the time when there are few guests at the hotels, and the properties are worth little.
"We expect this number to rise dramatically by the end of the year and into 2010, because we're seeing so many hotels operating under forbearance," Reay said.
Industry leaders blame the slump on several factors, including loose lending and irrational exuberance during the boom, an increase in new hotel openings because of the easy money, and a dramatic drop in business travel.
Joseph McInerney, chief executive of the American Hotel and Lodging Assn., tried to put a positive spin on the news, saying, "I think we've bottomed out."
But a leading hotel consulting firm, Smith Travel Research, recently issued a report that predicted no significant improvement for the hotel industry until 2011 at the earliest.
"It's going to be a lot worse than it is now," said Bobby Bowers, senior vice president of Smith Travel Research.
Cities such as Las Vegas, San Francisco, New York and Los Angeles may have a harder time recovering, Bowers said, because businesses remain reluctant to budget for travel and entertainment in cities with reputations for lavish spending.
Bowers partly blamed this on the continuing backlash to news last year that giant insurer American International Group Inc., teetering near collapse, had spent about $400,000 on a retreat at the St. Regis Monarch Beach after taking an $85-billion federal bailout.
Reay said there were comments about this "AIG effect" at a conference he attended last week.
"People were saying that if you've got 'resort' in your name -- you're a golf resort, a spa, whatever -- you have to take it off," he said. "Because the business traveler isn't going to get reimbursed unless it's just the plain Hilton hotel."
At local hotels, managers and owners say they have had to rely on deep discounts and promotional packages just to keep the doors open and staff employed.
"Sometimes you have to do what you have to do," said Marc Loge, a spokesman for the Wilshire Grand hotel in L.A.
David Horowitz, general manager of the Hyatt Regency Century Plaza, said rate cuts and promotions had become almost standard. "We do have to make deals," he said. "We have to keep things going."
But an increasing number of hotels have so little revenue that they can't even afford to pay their operating bills and payroll, not to mention servicing debt.
Owners of such hotels are increasingly handing the keys back to the lenders, and the problem is likely to get worse: As many as 1 in 5 U.S. hotel loans may default through 2010, UC Berkeley economist Kenneth Rosen said.
In some cases the lenders are simply locking up the properties, figuring they'll spend less money on watering the lawns and paying a few guards than they would on keeping the doors open.
A real estate investment trust that owns 40 upscale hotels in the U.S. recently announced plans to forfeit a 293-room Marriott hotel at the airport in Ontario to the servicer overseeing the hotel's $26.6-million mortgage. The investment trust, Sunstone Hotel Investors Inc., based in San Clemente, had announced plans in June to forfeit the 258-room W San Diego hotel because it would not support its $65-million mortgage.
The hotel industry continues to buzz about how that happened this year in the Bahamas, when a lender closed the Four Seasons Resort Great Exuma, a $350-million property built in 2003.
Small resorts also have closed in Big Bear and South Lake Tahoe, the latter involving an owner who allegedly tried to hold down costs by not paying the local room tax imposed by the city and was arrested.
"There's a lot of owners doing that these days, but it's not a good idea because the money you save doesn't belong to you," he said. "They take that seriously in South Lake Tahoe."
- Via Los Angeles Times
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