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

To: RealMuLan who wrote (54314)	8/4/2006 11:58:35 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Global: Doha Doesn't Matter Stephen S. Roach (New York) Too much has been made of the apparent failure of the Doha Round of trade liberalization. It does not spell the end of globalization. Nor does it signal an imminent threat to the expansion of cross-border trade. Instead, the lessons of Doha bear more on the trust factor - the unwillingness of the world’s body politic to buy into the win-win boosterism of globalization. In the rough and tumble arena of global competition, that may be par for the course -- but hardly the disaster that the breakdown of trade talks was widely made out to be. The Doha Round was probably doomed from the start. Conceived in the highly emotional aftermath of 9/11 as a politically motivated endorsement of globalization, there was great hope for a major new breakthrough on the world trade front. However, it turns out that the macro climate made concessions exceedingly difficult for rich and poor countries, alike. The seemingly intractable battle over agricultural subsidies -- always a contentious issue under the best of circumstances -- was a foil for much deeper-rooted misgivings. A powerful global labor arbitrage put employment and real wages under intense pressures in the developed world -- causing great resistance to a further lowering of trade barriers in the industrial world. And rapidly growing export-led developing countries resented being cast in the role of scapegoats -- giving them little incentive to offer concessions of their own. For about a year, the handwriting has been on the wall that this round of trade liberalization was going nowhere. By the time the talks finally collapsed, expectations were so low that not all that much was really lost. In the end, the global trade dynamic matters much more than a high-profile media event staged around a breakthrough in multilateral negotiations. Despite repeatedly stiff resistance to the Doha agenda for nearly five years, there can be no mistaking the powerful gains in world trade that have occurred over that same period. Global trade volumes -- calculated as the average of export and import growth -- rose by 6.6% per annum over the 2002-05 period; that pace was about 50% faster than the 4.3% average world GDP growth over the same time frame. As a result, the ratio of exports to world GDP rose by 4.0 percentage points from 24.1% in 2001 to 28.1% in 2005 -- the strongest four-year increase since the early 1970s. Putting it another way, the growth in global exports accounted for fully 40% of the cumulative increase in world GDP over the past four years. In the end, that’s what matters most. Despite the psychological headwinds of a doomed Doha Round, the strength in global trade went well beyond any vigor that can be attributed to the global business cycle. What that means is that global trade barriers may already be low enough to have established a breakthrough threshold for accelerating globalization. I can’t help but think that the hyper-speed of IT-enabled connectivity is an important new catalyst in this equation -- providing multinational corporations with new options to cope with increasingly intense competitive pressures. Not only has the Internet revolutionized the cross-border logistics of price discovery and supply-chain management in manufacturing businesses, but it has also transformed the knowledge-based output of once non-tradable services into tradable activities. A Doha breakthrough -- especially the watered-down agreement that negotiators were aiming for in the end -- would have paled in comparison to these powerful organic developments that are now driving cross-border trade in an IT-enabled global economy. All this is not to say there aren’t serious problems on the global trade front. Suffering from the twin pressures of job and real wage insecurity, rich countries feel increasingly threatened by globalization and are pushing back on free and open trade. The rapid growth of white-collar offshoring is a particularly big deal in the current climate. Even though the absolute number of lost jobs has been small so far, the fear of where this trend is going -- and what it implies for real wage convergence -- are sources of considerable anxiety amongst long-sheltered knowledge workers in the developed world. “No jobs are safe any more,” is the refrain I hear constantly in he developed world. The US and China are lightning rods in this debate. America, with its massive trade deficit, feels more exposed than ever. With a $200 billion bilateral imbalance with China having accounted for 25% of a record $800 billion multilateral US trade deficit in 2005, Washington has fallen into the blame game. Over 20 pieces of China-bashing trade legislation have been introduced in the US Congress in recent years. A multilateral breakthrough in the Doha Round would have done little, in my view, to dissuade Washington from taking dead aim on China. In a narrow sense -- namely, from the point of view of hard-pressed workers --- the politicization of globalization is understandable. Yet in a broader context, protectionism is entirely misplaced and may well be an inappropriate response to unusual macro characteristics of both the US and Chinese economies. For example, as long as the United States runs a “zero” net national saving rate, it is forever doomed also to run large current-account and trade deficits. Like it or not, this is an inherent bias of America’s wealth-dependent, saving-short economy. By going after China, Washington politicians are unwittingly taking aim on the mix of the US trade deficit, while doing absolutely nothing to reduce the magnitude of the overall external imbalance. Similarly, nearly two-thirds of China’s export growth over the past dozen years is attributable to “foreign-invested enterprises” -- Chinese subsidiaries of foreign multinational corporations and joint-venture partners. The very existence of these subsidiaries is an outgrowth of conscious decisions made by Western businesses -- an outgrowth of efficiency solutions implemented in the name of competitive survival. This is a very different development than unfair competition by indigenous Chinese companies. Politicians continue to ignore these macro sources of trade tensions. I guess it’s always easier to find a scapegoat than to look in the mirror. Nor would a Doha breakthrough have cracked this denial either. There is a potentially tragic irony to the juxtaposition between the surging global trade and the political backlash against globalization. There are inherent biases to the macro performance of both the United States and China that are setting up these two nations for trade conflicts. If left unattended, these conflicts pose much greater risks to globalization than the failure of trade talks. A successful completion of the Doha Round would have done next to nothing to diffuse these pressures. From the start, Doha was a sideshow to the main event in the global economy. Nearly five years of disappointing progress in multilateral negotiations didn’t make a dent in an increasingly powerful world trade dynamic. Nor would a breakthrough -- watered down or not -- have done much of anything to temper the mounting bilateral sources of protectionism. A successful completion of the Doha Round of trade liberalization would have been nice. But the benefits would have been fleeting, at best. There are much bigger fish to fry in an increasingly contentious era of globalization. morganstanley.com

To: RealMuLan who wrote (54314)	8/4/2006 12:36:33 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

S. Florida builders battle rising costs, canceled contracts, soaring property taxes sun-sentinel.com Land writedowns latest builders' dilemma nj.com

To: RealMuLan who wrote (54314)	8/4/2006 1:53:11 PM
From: mishedlo	Respond to of 116555

United States: Financial Market Implications of Pension Reform: Update Richard Berner (New York) After nearly two years of debate, Congress has just passed pension reform legislation, and the President likely will sign it. The Pension Protection Act of 2006 improves on current law in several important respects, but together with pending changes in pension accounting, it would expose more fully the economic cost of defined-benefit (DB) plans. As a result, I continue to think that plan sponsors are likely to accelerate the ongoing shift from DB to defined-contribution (DC) plans, and potentially re-allocate portfolios away from equities and towards longer-duration bonds (see for example, “Financial Market Implications of Pension Reform,” Global Economic Forum, January 18, 2005). Indeed, that shift will probably continue even if the reform process bogs down again. But I also think that the resulting market effects could be smaller than I judged two years ago. Here’s why. First, let’s look at the provisions of the new law. It tries to strike a balance between improving the soundness of the pension and retirement saving system and mitigating the resulting increase in costs accruing to plan sponsors. To their credit, the framers embraced some widely-accepted, “best practice” principles for reform. They would require plan sponsors to use more realistic mortality, discount-rate and return assumptions than in current law to calculate funding targets for single-employer plans. For example, the Act requires the IRS to prescribe that most plans use current mortality tables instead of those from 1983 now in use. The Act would require discounting cash flows with a yield curve that matched these flows’ time profile rather than a single corporate yield. It would limit the smoothing of asset values to no more than a 24-month period rather than five years. It would require plans to be 100% funded rather than the 90% currently allowed. The new law would also better define plans at risk, require action to fund them, and increase premiums paid to the pension insurer, the Pension Benefit Guarantee Corporation. It would deem plans at risk if they fell below 70% funded status under worst-case assumptions or 80% under standard assumptions. Plans so designated for two of the past four years would face accelerated funding rules. Such plans could not increase benefits or allow lump-sum distributions. PBGC premiums would rise sharply for riskier plans. The Act would also tighten funding and withdrawal rules for multi-employer plans. The framers of the law understand that the DB system will continue morphing into a DC framework, forcing workers to shoulder more interest-rate, return, and longevity risks. Recognizing that DC plans like 401(k)s also come up short, the new law would improve rules governing such plans as well. It would encourage automatic enrollment with an opt-out provision to increase participation. And it would extend the DC sweeteners enacted in earlier legislation, such as increasing contribution limits, allowing “catch-up” contributions for older workers, and making permanent and indexing the “Savers’ Credit” that allows a tax credit for contributions up to $2000 in 2006 dollars. There’s no mistaking the major compromises and gaps in the Act. While the framers tightened funding rules, opponents of change forced them to accept extended transition periods, especially for some troubled airlines. The delayed start (in 2008) and long phase-in of tougher rules (to 2011 for well-funded plans, to 2013 for those at risk, and to 2023 for airlines that opt for a “hard freeze” of their plans — closing them to new entrants and eliminating further benefit accruals) reduce the proposals’ effectiveness. As I see it, lawmakers would not have needed such compromises had the bill mandated the separation and defeasing of “legacy costs,” or the value of unfunded past promises. That’s because defeasance would wipe the slate clean and thus put consideration of future promises by all sponsors on equal footing (see “Defeasing Legacy Costs,” Global Economic Forum, November 28, 2005). And lawmakers did not sufficiently toughen return and other assumptions. But politically, such radical change is difficult to achieve. That the current effort has won praise from diverse critics such as the United Auto Workers union and the American Benefits Council speaks to the concessions needed to translate reform proposals into reality. Even with long transitions that soften the blow to sponsors of tougher funding rules, the Act would expose more clearly the true economic costs of DB pensions than is apparent under current law. The Financial Accounting Standards Board’s proposal to amend significantly accounting rules for pension and other postretirement benefits — first including the under- or over-funded status of plans in shareholders’ equity and subsequently putting gains or losses in the income statement — would further expose such costs to investor scrutiny. The reality of pension reform thus could accelerate the freezing of DB plans as more CFOs decide that they are simply too expensive. My colleagues and I have argued that the incipient demand for duration resulting from these changes could cap both long-term yields and equity returns in coming years (see “Demand for Duration: Coming Soon? Global Economic Forum, March 10, 2006). But the effects may be small — indeed, smaller than the potential flows out of equities into bonds might imply. The reasons: The transition period for both new pension regulations and accounting rules is long, and some of this is likely already in the price after years of discussion and dozens of plan freezes. That Congress has passed pension reform and will send it to the President for signing is good news, but it isn’t the end of the story. While HR 4 is a tome of 907 pages, the devil is always in the details of complex legislation. Many of the provisions are already laced with exceptions and some are obscure. Talk is already circulating of a “clean-up” bill that would correct, clarify and amend some provisions. The danger from a public policy perspective is that some of the provisions will be further watered down, leaving taxpayers and the pension system still at risk. morganstanley.com