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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Chispas who wrote (21354)	1/14/2005 11:06:36 AM
From: mishedlo	Read Replies (2) \| Respond to of 116555

Global: The Dollar Can't Do It Alone Stephen Roach (New York) It wasn’t supposed to be this way. Global rebalancing appears to be stymied. Nearly three years into the dollar’s correction and the US trade gap keeps hitting new records. The external deficit on goods and services widened to a staggering $60 billion in November 2004. I’m old enough to remember when this would be a bad number for a year! This seemingly anomalous outcome reflects an important new shift in the macro fabric of the US economy -- a diminished sensitivity to currency fluctuations. That means it will probably take more than just a weaker dollar to spark global rebalancing. The diminished sensitivity of the US economy to currency fluctuations has been increasingly evident over the past 15 years. Normally, a weakening currency results in a narrowing of a nation’s current account deficit and a pick-up in inflation. That’s pretty much what happened in the 1970s and especially in the late 1980s in the aftermath of the dollar’s sharp downward adjustment during most of that latter period. But then it all seemed to change in the 1990s. The dollar’s decline in the first half of that decade was accompanied by a shift in the current account from surplus back to deficit. And inflation barely budged. A similar outcome has been evident in the past three years -- a 16% decline in the broad dollar index (in real terms) accompanied by an ever-widening current-account deficit and persistently low inflation. It’s not altogether clear why this relationship has broken down. My suspicion is that globalization is the main culprit. The globalization of supply chains biases import content to the upside for the high-cost developed world; it also forces the advanced economies to abdicate price setting at the margin to low-cost producers in the developing world. The result is a sharply diminished industrial base in countries like the United States. Manufacturing employment currently stands at only about 13% of America’s private nonfarm workforce -- down sharply from the nearly 23% share that prevailed in the mid-1980s, the last time the dollar entered a serious correction. Moreover, value-added in the US manufacturing sector fell to only about 14% in 1993-- down from 20% in 1985. The sharply diminished size of America’s industrial base makes it exceedingly difficult for the US to turn dollar depreciation into an advantage and trade its way out of a severe current-account problem through enhanced export growth and import substitution. Nevertheless, the global rebalancing construct that I endorse still assigns an important role to a realignment of major foreign exchange rates. In my view, a lopsided world economy needs a shift in relative prices in order to establish a new and more balanced equilibrium. Currencies are nothing more than relative prices, essentially comparing the fundamentals of one economy versus another. With the dollar the dominant relative price in the world today, a depreciation of the greenback is necessary for global rebalancing. And, based on current account adjustments of the past, there’s good reason to believe that the broad dollar index has a good deal more to go on the downside. However, due to America’s reduced currency elasticities, a weaker dollar no longer appears to be a sufficient condition to complete the global rebalancing process. If a weaker dollar can’t do the trick, what can? The answer, in my view, is real interest rates -- the price adjustment that could well qualify as the sufficient condition for America’s role in global rebalancing. The only way America can ever get a handle on its trade and current account conundrum is on the import side of the equation. After all, imports are currently 52% larger than exports (in real terms), making it almost mathematically impossible for the US to export its way out of its trade deficit. Given the asset-dependent character of US domestic demand growth, the interest rate connection becomes all the more critical as an instrument of rebalancing. Higher real interest rates will not only curtail the pace of asset appreciation butwill also raise the cost of debt service -- thereby exerting twin pressures on the asset-driven portion of domestic demand. Needless to say, the saving-short, overly-indebted, and asset-dependent American consumer should feel the impacts of such an adjustment most acutely. But homebuilding will also be hit, as will business capital spending to a more limited extent. So far, interest rates haven’t budged nearly enough to spark a meaningful rebalancing of a lopsided world. I suspect that the Federal Reserve is about to lead the way in changing that. The recently released December FOMC minutes reveal a Fed that may well be contemplating larger than expected interest rate hikes in the months and quarters ahead. The reason: The US central bank is now warning of a looming shift in its risk assessment -- expressing concerns over potential inflationary pressures and speculative activity in financial and property markets (see my 7 December dispatch, “Game Over?”). Unlike the case last year, when the debate was all about taking short rates up to the neutral threshold, a year later -- with the Fed voicing newfound concern over inflation -- the target may well have shifted into the restrictive zone. If that’s the case, then I still believe there is a good chance for the nominal federal funds rate to move into 4% to 5% zone by year-end 2005. The Federal Reserve, of course, can only operate at the short end of the yield curve. The long end is a different matter altogether. Yet without an adjustment in long rates, progress on the rebalancing front could well continue to be disappointing. The outcome at the long end is likely be shaped by two competing forces: Yield pressures will be tipped to the downside if Fed tightening prompts a meaningful weakening in the real economy. But upside pressures could emerge if foreign investors start to diversify out of dollar-denominated assets and/ or demand to be compensated for taking additional currency risk. Barring a prompt and dramatic shortfall of real US economic activity, I believe that the upside pressures will predominate -- precisely the same outcome as in 1994, when a 300 basis point policy normalization was accompanied both by a back-up in long rates as well as by a sharp weakening of the dollar. In looking at real US interest rates over the broad sweep of history, there’s nothing but upside from current levels. The real federal funds rate remains around “zero” and the real rate on a 10-year Treasury note is down to its post-1986 low of 0.7%. If the Fed steps up to the plate, as I suspect, and if Asian central banks finally start to diversify their foreign exchange reserve holdings, then real interest rates across the curve should move considerably higher. And that takes us back to the issue at hand -- global rebalancing. A weaker dollar has not been enough to spark this major adjustment in the world economy. It will take higher real interest rates to crimp the excesses of the asset-based component of consumer demand. The odds, in my view, are tipping in that direction. morganstanley.com

To: Chispas who wrote (21354)	1/14/2005 11:22:59 AM
From: mishedlo	Respond to of 116555

U.S. Dec. industrial output up 0.8% - Friday, January 14, 2005 3:01:00 PM afxpress.com WASHINGTON (AFX) - The output of U.S. factories, mines and utilities rose a better-than-expected 0.8 percent in December, the Federal Reserve reported Friday. The capacity utilization rate rose to 79.2 percent in December, the highest in four years, but still 1.9 percentage points below its long-term average. Economists were anticipating a slower 0.4 percent growth in December output and were expecting the utilization rate to rise to 78.8 percent from a revised 78.7 percent in November. Industrial production had risen 0.2 percent in November The rise in the capacity utilization rate hit the bond market, pushing the yield on the 10-year note to 4.23 percent from 4.18 percent Thursday. Tight capacity utilization could lead to inflation as buyers scramble to find reliable suppliers. See In other reports Friday, the Labor Department said its producer price index tumbled 0.7 percent in December as energy costs sank 4 percent, the biggest drop since April 2003. Also, the Commerce Department said business inventories increased by 1 percent in November. Output in December was 4.4 percent higher than in December 2003. The capacity utilization rate increased by 2.4 percentage points Total output increased 4.1 percent in 2004, the best growth since 2000. Capacity of the nation's industries increased a modest 0.7 percent for the year, reflecting slow investment amid what is still global overcapacity. All of the growth in capacity was accounted for by high-tech industries and utilities In December, the production of manufacturing industries increased 0.7 percent, the output of utilities rose 2.7 percent and the output of mines increased 0.4 percent. Output of high-technology goods increased 1.7 percent in December and 18.6 percent in 2004, nearly identical to 2003's increase. Semiconductors enjoyed the strongest growth in 2004, rising 29.2 percent, while computers and communication equipment slowed to single-digit increases Output of motor vehicles increased 0.5 percent in December after falling in September and November. Motor vehicle output increased 2.5 percent in 2004, about half the growth rate in 2003 and about a fourth of the increase in 2002 Production of consumer goods increased 0.7 percent in December, as consumer energy goods output increased 2.9 percent. Consumer autos increased 0.4 percent, offsetting a 2.2 percent decline in home electronics Production of business equipment increased 0.9 percent in December. Information technology output gained 1 percent and industrial equipment output increased 1.3 percent. Production of nonindustrial supplies increased 0.9 percent in December, the highest since February. Production of materials increased 0.9 percent

To: Chispas who wrote (21354)	1/14/2005 11:45:13 AM
From: Chispas	Respond to of 116555

cs.caltech.edu

To: Chispas who wrote (21354)	1/14/2005 12:42:06 PM
From: mishedlo	Respond to of 116555

OUTLOOK UK Christmas shopping data to take centre stage in coming week Friday, January 14, 2005 2:41:42 PM afxpress.com LONDON (AFX) - Sterling markets will next week get a better idea about how the household sector performed in the run up to Christmas, when a raft of economic data is released Though the Bank of England's rate-setting Monetary Policy Committee is not expected to change borrowing costs in the next month or two, analysts said the upcoming data flow will impact on expectations for the future direction of interest rates Analysts said most interest will be focused on official retail sales figures for December on Friday and on various other household surveys They expect the office of National Statistics to confirm that the fourth quarter was the softest three month period since the first quarter of 2003, in the run-up to the war in Iraq "Given the poor reports from some retailers and a weak British Retail Consortium survey, there is little reason to expect this pattern to change," said John Butler, UK economist at HSBC, who is pencilling a 0.5 pct monthly decline The consensus of analysts polled by AFX News is for the monthly rate to slip to 0.3 pct from 0.6 pct in November and the annual increase to drop to 5.6 pct from 6.1 pct Other data on Friday, from the likes of the Council of Mortgage Lenders, the Building Societies' Association and the British Bankers Association, are also likely to confirm a slowdown in the rate of consumption, whether it be on the high street or in the housing market Meanwhile, the monthly Royal Institution of Chartered Surveyors survey on Tuesday is expected to show the housing market on the backfoot, though the rise in the equivalent survey from the Halifax, the UK's biggest mortgage lender, served as a reminder that a crash is not currently taking place The MPC has raised the cost of borrowing a quarter point on five occasions since November 2003, taking its key repo rate up to 4.75 pct, as it sought to stem inflationary pressures arising from above-trend growth and rampant consumer demand But evidence of a general economic slowdown, alongside subdued inflation data, has raised expectations that the next interest rate move may actually be down. The money markets have already begun to factor in unchanged rates for the first few months of this year, especially after the minutes of the December MPC meeting showed the nine-member panel discussed the possibility of cutting rates. Though there was unanimity about the January decision, there is a wide range of views of where interest rates will go next year, with some economists predicting reductions as consumption slows down further, while others are forecasting further rate hikes as growth remains firm and earnings pick up Earnings data on Wednesday are likely to show a further modest build-up in pay pressures, but not to the level that is likely to trigger alarm bells on the MPC Analysts expect headline earnings in the three months to November to be 4.2 pct higher, compared with the 4.1 pct recorded in the three months to October, while average earnings, excluding bonuses are expected to be unchanged at 4.4 pct David Page, economist at Investec Securities, noted that the central bank has postulated a number of reasons why earnings growth has remained relatively subdued despite low levels of unemployment "The fact that the Bank is considering these factors suggests it is less concerned about wage inflation and more sanguine over the inflation outlook and this, in part, explains why we now believe rates have probably peaked," he said Inflation data on Tuesday are not expected to generate concerns, with the December consumer price index at an annual 1.5 pct, way below the MPC's 2.0 pct target Analysts said the petrol effect, which lifted prices in the previous two months, is set to reverse following the sharp falls in crude prices "Petrol apart, the December 2004 data are unlikely to be very different from the previous year," said Geoff Dicks, economist at Royal Bank of Scotland

To: Chispas who wrote (21354)	1/14/2005 1:18:41 PM
From: mishedlo	Respond to of 116555

NHTSA accuses GM of being slow to recall vehicles after finding defects HARRY STOFFER \| Automotive News Posted Date: 1/14/05 WASHINGTON — Federal safety officials accused General Motors of being slow to recall vehicles after finding defects, documents made public this week reveal. GM paid $1 million last year to settle the case. In an unusually stern rebuke, an official of the National Highway Transportation Safety Administration said that “GM’s recent history with regard to the timing of defect determinations has, and continues to be, a matter of significant concern to the agency.” According to the documents, NHTSA warned the automaker last year it was subject to a fine of more than $15 million for such tardiness — an alleged violation of federal law. NHTSA and GM settled on a payment of $1 million last July. That payment resolved a NHTSA claim that GM knew windshield wipers were defective in nearly 600,000 SUVs in late 2002 but didn’t plan a recall until early 2004. NHTSA disclosed the $1 million penalty at the end of 2004, in an announcement of all civil fines the agency collected in the calendar year. GM did not acknowledge any violation of law in the settlement agreement. Unusual rebuke Undisclosed documents included NHTSA’s rebuke of GM for what the agency called a pattern of slow response to safety defects. The Center for Auto Safety, a consumer group, obtained the documents under the federal Freedom of Information Act and made them available Wednesday. NHTSA last week declined a reporter’s request for the documents. Last March NHTSA chief counsel Jacqueline Glassman wrote GM that the automaker’s actions in the wiper case exposed it to a potential fine that “far exceeds the existing $15,000,000 statutory maximum.” She added: “Nor is this an isolated incident. Glassman offered to close the case for a $3 million payment. That would have been the highest penalty ever in a safety defect case. Allegations disputed In a response, GM general counsel Thomas Gottschalk disputed the allegations. He said GM thoroughly investigated complaints about the wipers and took timely action once it found a defect. Gottschalk noted the wipers could malfunction in several ways, only one of which — complete failure — might pose a safety hazard, he said. At that, Gottschalk added, in an estimated 25 billion miles of use by owners of the affected SUVs, there was only one report of a crash blamed on wiper failure. He wrote: “The overall record is replete with instances where GM has stepped up immediately to a product issue which it felt had obvious negative safety ramifications and undertaken a prompt voluntary recall without any encouragement from NHTSA.” Gottschalk proposed that GM and NHTSA discuss ways to help GM avoid what the agency considered to be delays in decision-making about recalls. A NHTSA spokeswoman maintained this week that GM’s $1 million payment sent a strong signal to the industry. Vehicles in the case are getting new wiper assemblies. They include some 2002-03 Chevrolet TrailBlazers and TrailBlazer EXTs, GMC Envoys and Envoy XLs, Oldsmobile Bravadas and Isuzu Ascenders. autoweek.com

To: Chispas who wrote (21354)	1/14/2005 1:29:12 PM
From: mishedlo	Read Replies (2) \| Respond to of 116555

White House: Social Security accounts don´t boost debt Friday, January 14, 2005 6:02:25 PM White House: Social Security accounts don't boost debt WASHINGTON (AFX) - Allowing workers to divert a chunk of their Social Security payroll taxes into private investment accounts would boost government borrowing in coming years but wouldn't increase federal debt, White House budget director Josh Bolten said on Friday Bush's Social Security plans have stirred a fierce debate over the fiscal implications of creating private accounts. Since payroll taxes are used to pay current benefits, allowing workers to divert a portion into private accounts would force the government to find alternative means of funding payments to current Social Security beneficiaries Bush has ruled out raising payroll taxes to fund the transition to private accounts. Speaking at the U.S. Chamber of Commerce, Bolten reasserted the administration's stance that the transition should be funded by increased government borrowing While borrowing requirements - estimated at as much as $2 trillion over the next decade - would be reflected in the near-term fiscal picture, it wouldn't represent "an increase in debt," Bolten said [borrowing costs rise but there is no extra debt - Is this new math? - Mish] He argued that the costs would be a wash over the long haul, with a revamped Social Security system wiping out the program's long-term projected shortfall of more than $10 trillion "These are not new costs to the system," Bolten said Critics charge that financial markets could react negatively to the increase in near-term borrowing. That's because Social Security's long-term unfunded commitments represent "implicit debt," which is viewed less warily by financial markets than the "explicit debt" that would be created by the transition borrowing, they argue [Implicit debt vs explicit debt - too funny - mish] While some lawmakers have indicated that debt associated with the transition could be held off budget, Bolten said the borrowing requirements would mean "as a matter of accounting we are required to recognize that cost to the government earlier" than would otherwise be the case [Gee there is a solution - Let's hold it off budget and pretend it does not exist. LOL Mish] Bolten criticized use of the term "transition costs" to describe the borrowing associated with creating the accounts, saying it would be better described as "transition financing." Bolten, however, said any transition borrowing wouldn't be reflected in the fiscal 2006 budget outline the White House is due to send to the printer in coming days because Bush has yet to lay out a detailed proposal [It's not a transition cost it's merely "transition financing". Good god! What's next? Mish] But some details may be coming soon [Looks like I have my answer to that last question I asked already: "Who Knows?" Mish] "I do expect that by the time that budget comes out on Feb. 7 there will be the opportunity to lay out more specifics," Bolten said. [Gee, One might hope so. But with this administration I sure would not count on it. Mish] forexstreet.com

To: Chispas who wrote (21354)	1/14/2005 2:08:43 PM
From: mishedlo	Respond to of 116555

Heinz on the Yield curve Date: Fri Jan 14 2005 10:10 trotsky (mugwump@yield curve) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved if they really do that ( act to invert the curve ) , the following has a high probability of happening: the gold bull market will be over for a while. at least a medium sized financial catastrophe, if not worse, will occur as a number of carry trades that were predicated on the 'measured pace' rhetoric have to be unwound in a hurry. inter alia the stock market would probably crash ( along with corporate and emerging market bonds ) and the housing bubble should finally flop as well. following this series of financial accidents, we'd probably get a full-blown consumer recession, worse than e.g. the early 80's Volcker double-dipper. this in turn could have the unintended consequence of inducing a banking crisis in China - which would be very damaging for all of the Asian exporters to China, who have come to depend on the unsustainable credit boom there. emerging market liquidity would evaporate, commodities and commodity currencies would crash as well. the word deflation would be back in fashion faster than you can say '1929'. next, the gold bull market resumes as CBs all over the show frantically attempt to stop the deluge with emergency rate cuts and 'extraordinary measures' ( helicopters ) . however, i don't think it'll really come to that ( i.e. the inversion ) . not because they know what's going to happen, but because some of it may happen before they get around to hiking that far. economic growth is already decelearating from what was really the most anemic recovery in 60 years. in leading indicator economies the consumer spending light-switch has already been abruptly turned off. there is a huge global malinvestment bulge that has formed as a result of several years of EZ credit in addition to the as-of-yet unliquidated malinvestments dating from the previous boom, so the house of cards has simply acquired several new stories. none of this is sustainable in the face of tighter credit conditions. and it won't help much that long rates keep falling, since everybody has shifted the maturity spectrum of their debt downward which increasingly necessitates ever bigger rollovers of maturing debt - an activity that's per definition dependent on ample liquidity - which is what the Fed is now threatening to take away. they may talk the talk, but they won't walk the walk imo...and the same goes for the recent 'we'll cut the budget deficit' pronouncements from the administration. they have of course no intention whatsoever to cut spending - instead they're secretly hoping that revenues will keep recovering , which they then want to sell as proof of a successful 'plan' ( Iraq is testament to their planning abilities...if these guys had been in charge of the Soviet Union, it would have collapsed a few decades earlier than it did ) . this hope is grounded in the mainstream economic consensus which basically always consists of 'what happened last year will happen this year as well'. only, it probably won't. the lag effect of higher energy costs is imo beginning to bite and should accelerate the slowdown that has been in evidence since mid '04 ( the 'soft patch' ) . barring an out-and-out dollar crisis, short rates should hurry back to the 'zero boundary' by the end of the year...at a distinctly 'unmeasured' pace.