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Friday, March 07, 2003

Germany: All Bets Are Off

Stephen Roach lambasts the bureaucrats at the ECB for their inability to respond in kind to the magnitude of the problem which faces them. But as he says when deflationary pressures arise in the eurozones biggest economy, then all bets may be of. That is, the one size fits all policy may need to be adapted to give priority to Germany's special needs: as anyone who has read my last two posts will already know, I wholeheartedly agree. However I don't think anyone is likely to be willing to listen. There's too much political cudos at stake, and the inflation 'sinners' would complain like hell.

But there’s an added wrinkle to Europe’s conundrum. Germany, its largest economy, is probably already in recession. Unfortunately, Germany has entered this recession with only a 1% inflation rate, implying that it wouldn’t take much of a contraction to tip fully one-third of the Euroland economy into deflation. Yet there doesn’t seem to be much leeway in the rigid EMU policy framework to give Germany special treatment. That’s precisely the problem. For a nation whose current structural dilemma goes back to the uneconomic terms of German reunification in 1990 — a one-for-one exchange rate between the high-productivity West and the low-productivity East — some policy flexibility is essential. Yet focused on backward looking gauges of pan-European inflation that were still flashing an estimated 2.3% y-o-y increase in February 2003, the ECB’s latest incremental move suggests that it remains wedded to its formulistic approach of targeting price stability in the 0 to 2% zone.

Therein could lie Europe’s biggest pitfall. From the start, the European Monetary Union has been framed around the “one size fits all” credo. In other words, what’s good for Europe is presumed to be good for Germany. This approach may work fine under most circumstances. But when deflationary pressures emerge in the largest economy in the region, all bets could be off. At such extremes, Germany’s dominant share in the Euroland economy may well require precisely the special treatment that the ECB refuses to offer. To do otherwise may well risk a contagion of German deflation quickly to the rest of the region. Consequently, in an effort to set policies for the region as a whole, the ECB may be neglecting not only the biggest link in the chain, but also the weakest. To be sure, the outcome is hardly known with precision. But the risks of a German-led deflation in Europe are now rising. In my view, incrementalism under those circumstances may well be a recipe for disaster.
Source: Morgan Stanley Global Economic Forum

Duisenberg Fiddles, While...German Unemployment Soars

Up to now I've been constrained by decency and caution. I really think that the euro cannot work, but I have been willing to let those who think they know better give it a try. But looking at the panorama that is unfolding in Germany, I think it is time to put the Spain, Greece, Portugal inflation preoccupations on the back burner (they have, after all, had plenty of warning about where they are headed) and try to put the German fire out as a matter of top priority. If not the whole eurozone risks sinking with them.

Unemployment in Germany has risen to 4.7 million. At 11.3 percent of the available workforce, it's the highest level since Chancellor Gerhard Schroeder's Social Democrats were first elected in 1998. Between January and February a further 83,000 people became jobless. And, compared to the level one year ago, there are 410,000 more out of work. Economy Minister Wolfgang Clement, who wants modernised labour laws, urged Schroeder to break with the past in a Bundestag speech he will deliver next Friday. It was time to act, not talk, Clement added. An opposition conservative deputy leader Friedrich Merz spoke of a disaster and government wrangles leading to inertia. The deputy chairwoman of the German trade union federation, Ursula Engelen-Kefer warned against rumoured cuts in allowances for long- term unemployed. Employers' association president Dieter Hundt said a shake-up was needed on tax, welfare and consultative bargaining.
Source: Deutsche Welle

Why So Small?

Those of us brought up on the humour of Mel Brooks and Blazing Saddles may feel constained by propriety from putting this most obvious of questions to Mr Duisenberg. The Economist, however, has no such reticence. I would say they have got the worst of both worlds, and that this is a result of decision by committee. You get the inevitable compromise. Either they should have followed Greenspans earlier more daring example, and made a bigger cut, or they should have waited to see if there is to be a war, and then cut dramatically. This way they waste amunition, have little meaningful effect and then have limited capacity down river. Talk about wasting your options. but I guess that just about sums up the noble history of the ECB: wasted options and missed opportunities. Meanwhile they are always at the ready to 'act decisively'.

WHY so small? That is the question many economists and businesses were asking after the announcement by the European Central Bank (ECB) on March 6th that it was lowering interest rates by a quarter of a percentage point. With the ECB’s benchmark rate now down to 2.5%, European interest rates are at their lowest level for more than three years. But the modest reduction came as the Swiss National Bank cut rates by half a percentage point. It will not silence the critics who believe that the ECB has moved too slowly to ease monetary policy.

This time, at least, the euro area’s central bank cannot be accused of trying to catch people out. The latest cut—the first since a 0.5% reduction last December—was widely expected after heavy hints from Wim Duisenberg, the president of the ECB, and some of his colleagues. Given the ECB’s longstanding reluctance to reduce rates, few seriously expected a larger cut, however much they might have hoped for it. But just as the bank is showing signs of improved communications skills, it has opened itself to the accusation that the substance of its policy is misguided.For all the moans, many economists reckon that, until recently, the ECB had managed European monetary policy rather better than its critics were willing to acknowledge. There has long been a gap between what the bank has said and what it has done. Thus the ECB’s repeated emphasis on the need to meet its inflation target—below 2%—has often been at odds with decisions to reduce interest rates when inflation was above target. In fact, prices have been rising faster than the target rate for more than half of the ECB’s existence. That has not stopped the bank from reducing interest rates in the past—even if the cuts have not been as frequent or as large as those made by the Federal Reserve, America’s central bank.

Central bankers always find themselves juggling priorities, even when, as in the ECB’s case, they have a clearly defined mandate to focus on a single policy objective. The Fed is legally obliged to worry about growth as well as inflation. The ECB is supposed only to ensure price stability as defined by its own governing board. In practice, though, the ECB has shown itself ready to act for other reasons: in September 2001, for instance, it joined the Fed in cutting interest rates in an effort to restore confidence to the financial markets. Public comments from Mr Duisenberg and other ECB officials have underlined how concerned they are about sluggish growth in the euro area—though speaking after this week’s rate cut, Mr Duisenberg said the main driving force for recovery would have to be a restoration of confidence. He made it clear that the ECB stood ready to “act decisively” if global uncertainty made that necessary.

But the context in which the ECB takes its decisions is rather different to that in which the Fed operates—and that, say the critics, is one of the problems. The ECB is a supranational organisation. Mindful of the problems that could result from exposing differences among national members of the governing board, the ECB prefers to operate by consensus.
Source: The Economist

Corporate France Having a Hard Time

While Chirac steals the big media show, it is perhaps the plight of some of the French multinationals that should really be grabbing the attention. Is this another example of French exceptionalism at work, well it would be if the write offs were not equaled by those of AOL etc. I am not convinced that we have sufficiently digested the implications of all this for the business strategy of the conventional corporation yet. In the business it is known as the incumbent's problem.

Shares in Vivendi Universal opened 8 per cent lower on the back of its huge goodwill writedowns and record full-year net loss, having lost more than 4 per cent following the earnings announcement late on Thursday.Vivendi Universal re-took the record for the largest loss in French corporate history from France Telecom, title-holder for all of a day, as goodwill writedowns pushed it €23.3bn ($25.6bn) into the red in 2002.On Thursday, announcing the troubled media group's results to a room filled largely with the investment bankers who picked up €200m in fees from the company last year, chief executive Jean-René Fourtou said the liquidity crisis that almost bankrupted the group last year was over. "It's not that I feel in competition with my friend Thierry Breton [newly installed chief executive of France Telecom] that I announce these results," Mr Fourtou said. "It's the mechanical effect of deteriorating markets on the goodwill on our books."Over the past two years, Vivendi Universal, which lost €13.6bn in 2001, has seen almost €40bn of shareholders' equity wiped out as the group has paid dearly for the ambitions of former chairman Jean-Marie Messier..................Mr Fourtou refused to be drawn on the future shape of the group, except to say: "One cannot consider Vivendi Universal to be a coherent business. It is a basket of assets that have little to do with each other."
Source: Financial Times

Europe: Everybody's Doing It, Doing It

Following the Japanese example that is and falling to multi year lows:

European bourses came off their worst levels in mid-morning trade but still hovered around multi-year lows after Wall Street ended in the red following a negative update from Intel, the world's largest semiconductor maker.Sentiment was also dented ahead of a key report from Hans Blix, the UN weapons inspector, to the Security Council later on Friday. Fears of imminent military action in Iraq intensified overnight after George W. Bush, the US president, accused Saddam Hussein of engagaing in "a willful charade".Tony Blair, the UK prime minister, added oil to the fire when he said he was prepared to defy the vetoes of more than one state if he believed they had been cast unreasonably.Many European bourses were again trading near multi-year lows as investors struggled to find a positive catalyst for the suffering markets.By 0950 GMT, the Eurotop 00 index was down 1.1 per cent at 730.8. In France, the CAC 40 recovered half of its early losses to trade 0.9 per cent lower at 2,611.2, slipping below the key 2,612 points support level. Frankfurt's Xetra Dax was 0.2 per cent weaker at 2,433.4 having earlier been at its lowest level since March 1996. In London the FTSE 100 shed 0.9 per cent to 3,522.6. The US markets slid overnight and the Dow Jones Industrial Average closed down 101.61 points at 7,673.99 while the Nasdaq closed 11.51 lower at 1,302.89.
Source: Financial Times

Down and Down We Go Again

Of course, all this continuing economic uncertainty is doing nothing to revive interest in buying shares in the stock markets. Yesterday it was Japans turn with the Nikkei howevring near two decade lows and the Topix falling straight through.

Tokyo shares fell on Friday morning after a speech by George W. Bush, the US president, increased market nerves, while a report of a probe into alleged stock manipulation by Nikko Salomon Smith Barney hit brokerages.The Topix index fell to a two-decade low on war fears, losing 1.1 per cent to 807.36. The Nikkei average was down 1.2 per cent at 8,269.21. Shares in Sony fell 2.5 per cent to Y4,220 as investors expect the electronics exporter to be one of the front line casualties if war in Iraq leads to a fall in US consumer spending.

The brokerage sector put in the worst performance of the morning after a local newspaper said Nikko Salomon Smith Barney would be investigated by Japan’s securities watchdog on allegations of manipulating stock prices. Shares in Nikko Cordial, which set up the brokerage in a joint venture with Citigroup of the US, fell 9.9 per cent to Y382. Nomura, Japan’s leading brokerage, lost 2.9 per cent to Y1,314. Semiconductor equipment makers were also down after Intel said on Thursday that its revenues in the first quarter could fall 2.7 per cent against the previous year. Advantest lost 3.5 per cent to Y4,960 and Tokyo Electron shed 1. 3 per cent to Y5,230. Hitachi fell 3.7 per cent at Y466 after the company said it may consider selling its headquarters building to a real estate investment trust to help it cut costs.
Source: Financial Times

Another Emperor Has No Clothes

When I started this blog I did briedly consider referring to myself (ironically of course) as Chief Economist at Bonobo Land. Now , looking at what the other chief economists get up to (with of course some notable exceptions: Roach, Rogoff...) I'm glad I didn't. This time it is the turn of the OECDs Jeanne Phillipe Cotis to get it absolutely and blindingly wrong. Apart from an obvious lack of harmony with the current US data readings, the tax cut is all about encouraging saving, not current consumption! I've seen it said that we bloggers were discrediting journalism because we don't check our facts, I think the comment would be better directed at some 'expert' economists. Of course, final US growth for 2003 is anyone's guess, that's the 'official' bonobo land view. By the way, does anyone else share the feeling that IMF publications have picked up a lot since Rogoff took over?

The transatlantic gap in economic performance is set to widen, the OECD said on Thursday, as it prepared to reduce its euro-zone growth forecast while maintaining its prediction for the United States. The Organisation for Economic Cooperation and Development will maintain its 2.6 per cent US growth prediction for 2003 but "significantly" revise its euro-zone forecast in the face of declining investor confidence, chief economist Jean-Philippe Cotis announced. "The difference in outlooks between Europe and the United States may already be getting wider," he said. "In the United States, growth it holding up, with a rise in durable goods orders and a return of investment, which is good news," Cotis said. Promised tax cuts should also help to sustain US consumer spending, he said.
Source:Australia Financial Review

Mind the Gap, Again

With productivity numbers coming in like this, and growth so uninspiring, it is hard to see the jobs situation improving any.

U.S. worker productivity rose last year at the fastest clip since 1950 as wary businesses extracted more from their workforces -- a trend that has lingered as lines for jobless benefits lengthened last week, government reports showed on Thursday. The Labor Department (news - web sites) said the hourly output of workers outside the farm sector rose by 0.8 percent in the fourth quarter, a big improvement from the 0.2 percent fall previously reported. The revised gain was bigger than economists were expecting and was taken as somewhat positive news. "With productivity gains like these, it's not surprising that hiring was so weak," said Joel Naroff, of Naroff Economic Advisors in Holland, Pa. For the year, nonfarm productivity advanced by 4.8 percent, the biggest annual gain since 1950, the Department said. Exacerbated by severe winter weather, weakness in the labor market lingered with the number of Americans signing up last week for new jobless aid hitting its highest level since December.
Source: Yahoo News

The Storm Clouds Look a Little Bit Darker Today

Despite the fact that Krugman is undoubtedly right in criticising the Bush apologists for imagining that if you repeat something often enough it becomes true, it does seem that the oft repeated mantra of beware the oil shock is taking its inevitable toll. Of course, at times its often difficult to disentangle cause from effect, in this case to say whether the economy is weakening because consumers are getting jittery, or whether the consumers are getting jittery because the economy is weakening. And in either case, whether this is happening because people are being told early and often enough that oil shocks provoke recessions. We also need to include a caveat emptor here about anyone making any call at all with all this 'geopolitical' uncertainty: I can, after all imagine a couple of simple scenarios which could change today's depression into tomorrows elation on the political front (the capture of Bin Laden, unseating Saddam without a war........). But my gut feeling is still that any economic elation would still be short lived, two of the world's premier economies would still either be in, or flirting with, deflation mode. In the US the output gap would still continue to be a problem, and the third world ex China and India would still be struggling to define a role for itself. But let's leave tomorrow's problems for tomorrow, there'll be time enough for the.

Today what we face is an oil shock, and the longer this situation continues, the worse it looks:

Fear of an impending U.S. war with Iraq and little profit improvement in the hard-hit manufacturing sector are likely to suppress hiring for a good part of this year, economists say. Friday's closely watched employment report is expected to show that wary businesses indeed held off on hiring, and many economists believe the data to show businesses actually cut back on their payrolls. "The best we can hope for is that the rate of the losses will slow," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. Economists in a Reuters poll forecast, on average, that the Labor Department report, due out Friday at 8:30 a.m., will show that businesses added a meager 8,000 jobs in February after a surprising 143,000 new jobs in January. The unemployment rate is expected to ratchet back up, hitting 5.9 percent after a brief fall to 5.7 percent in January.

However, a poor jobs outlook in the manufacturing sector signaled in the Institute for Supply Management's latest survey of purchasing managers has many economists now expecting no new hires any time soon in this beaten-down sector. Alarming for an already grim jobs outlook, the ISM's employment index slumped to its lowest reading in a year, serving as a grim omen for the February payrolls report. In the Reuters poll, economists forecast that average hourly earnings rose by 0.3 percent in February after being unchanged a month earlier, while the average work week inched down to 34.1 hours from 34.2.

Amid growing war jitters, corporations have steadily been increasing the number of planned job layoffs, according to the latest study by Challenger Gray and Christmas, the Chicago-based outplacement tracking firm. According to the firm's latest survey, planned job cut announcements last month rose 5 percent to 138,177 from January's 132,222. February's layoff announcements were up 8 percent from a year ago. "It now appears that economic uncertainties and war talk have put the brakes on business spending plans and companies are once again in a serious cost-cutting mode," said John Challenger, chief executive of the firm. He noted that job cut announcements rose 151 percent last October, about the time that the war signals from Washington began in earnest. "It is doubtful that a turnaround in hiring can be expected before fall, if then," Challenger said. Going forward, hiring is not going to show much improvement, according to Milwaukee-based Manpower Inc.'s latest survey, which found that U.S. businesses in the second quarter will be hiring at a moderately slower pace. "The survey results are clearly showing a dominating sense of uncertainty, as hiring intentions have dipped for the first time in over a year," said Jeffrey Joerres, chairman and chief executive of Manpower. Of nearly 16,000 employers polled, 63 percent plan to maintain their current staff levels, that survey found. But in some sectors, including durable goods manufacturing, many expect to reduce hiring activity.
Source: Yahoo News

The US retail sales figures don't look too smart, either:

Winter storms dealt a major blow to February sales at the nation's retailers, where business has already suffered amid the weak economy and worries about a possible war with Iraq. As merchants reported their February results Thursday, Wal-Mart Stores Inc. announced sales at the low end of its expectations, and apparel retailers and department stores were again the hardest hit. Consumers had no incentive to buy spring fashions like micro-miniskirts in the frigid cold, analysts said.

Such an overall weak economic environment is stalling sales even at discount chains, like Wal-Mart, which reported a modest 2.6 percent increase in same-store sales, in line with the consensus from Thomson First Call. But that was at the low end of the company's goal of a 2 percent to 4 percent rise. Target Corp. said same-store sales were down 1.4 percent, weaker than the 1.0 percent decrease analysts expected. Kohl's Corp. announced disappointing results, turning in a 4.6 percent decrease in same-store sales. Meanwhile, many department stores and apparel stores reported deeper same-store sales declines. But Gap, in the midst of a turnaround, reported an 8 percent increase, better than the 6.9 percent gain that analysts estimated. And Pacific Sunwear, which released sales figures on Monday, said same-store sales were up 14.8 percent, well exceeding Wall Street's projection of a 6.5 percent increase. While some retail executives held out hope for a brighter spring, analysts remain cautious. To be sure, February is the second least important month of the year behind January on a retailer's sales calendar, and represents 25 percent of first quarter sales. But Niemira and other analysts believes the sluggish trend will continue through at least March, putting more pressure on retailers to make up for lost sales by discounting aggressively.
Source: Yahoo News

Thursday, March 06, 2003

Federal Beige Book Out

The latest issue of the Federal Reserve Beige Book - the bi-monthly report on the general state of US economic conditions - is out. It does not make very palatable reading. In particular it highlights the extent to which geopolitical and economic uncertainties are constraining consumer and business spending and tempering near-term expectations. It is the combination of weakening consumer demand with no evident pick up in investment or employment that is most preoccupying. The housing factor will kick in later - negatively - if the other two don't pick up in the meantime.

Consumer spending remained weak, on balance, with a few Districts noting a little improvement and others indicating a slight deterioration. Business spending was very soft, with little change in capital spending or hiring plans. Nearly all Districts indicated that real estate and construction activities were mixed, with strength on the residential side and weakness on the nonresidential side. Most Districts still described manufacturing activity as weak or lackluster, although half of the reports noted at least some degree of improvement. Refinancing activity continued to drive growth in household loans, while business loan demand remained weak. Contacts in most Districts expressed concern over rising energy and insurance costs, but noted that businesses had difficulty passing along much, if any, of the cost increases to their customers. The agricultural sector continued to be affected by poor weather in many Districts. Mining and energy extraction activity picked up, but energy production was limited by supply problems and some shortages of skilled labor.

Business spending remained very soft, as geopolitical concerns and uncertainty over the strength of demand continued to constrain spending and hiring plans. Capital expenditures remained sluggish, with most Districts noting little change in recent months........Most Districts reported that businesses were still very cautious about hiring permanent workers, though Cleveland and Atlanta noted a pickup in the use of overtime and part-time employees.........Nearly all Districts indicated that real estate and construction activities remained mixed, with strength on the residential side and weakness on the nonresidential side. New and existing home sales remained strong in nearly all Districts, with only Dallas reporting that activity was soft.
Source: Federal Reserve

CJD Cure Hope

Another piece of good news amidst all the gloom and doom

Scientists say they have proof that it will one day be possible to prevent diseases such as vCJD and BSE. It is thought that these diseases, and others that also progressively destroy the brain, are caused by rogue particles called prions. A team from Imperial College in London has discovered the development of prion disease can be prevented in mice using molecules produced by the immune system called monoclonal antibodies.

Prions are proteins that bind to normal proteins in the brain and twist them into abnormal shapes. These then clump together, causing brain damage. Monoclonal antibodies work by binding to both prions and normal proteins, blocking them from binding to each other. Although the work is in its infancy and clinical studies with patients are some years away, the results raise the real possibility that a similar therapy might work on humans. The Imperial team carried out a 17-month study on mice who were infected with prions which cause the disease scrapie. Mice treated with monoclonal antibodies have shown no sign of developing scrapie - a year after the untreated mice succumbed to disease. The monoclonal antibodies appear to have stopped the conversion of normal prion protein into the abnormal infectious form, preventing it accumulating.
Source: BBC News

Argentina: the Agony Continues

Judging by this news of the supreme court decision, the Argentine population is still in a state of denial about what just happened to them. Deeply as I sympathise with all those people who have lost a sizeable chunk of their saving, with only 10 billion dollars in reserves it is impossible to see how the peso deposits could be re-converted into dollars, even by the best intentioned government in the planet - which of course Argentina hasn't got. One of the problems with having deeply corrupt politicians is that you become paranoid. I am sure many of those who were outside the court banging drums and cheering believe that the money is still there, in dollar denominated assets held by fat-cats in New York. In part they may be right, maybe Argentina's reserves were systematically transferred abroad by groups of unscrupulous insiders taking advantage of the ridiculously overvalued peso. And in part the responsibility for this lies with all those international politicians and financial institutions who allowed that situation to continue. In particular I would fault the IMF for extending the 40 billion dollar credit in January 2001. This must have been one of the worst calls in recent memory, and it cannot have been purely coincidental that it coincided with a change in US presidency (ie no-one wanted problems in just that moment). But the consequence was a lethal dose. Argentina limped on with an untenable situation, extracting sacrifice after sacrifice from an already weary population. What this meant was that when the real crisis came, as it inevitably had to, all the half-way reasonable politicians were already totally discredited, and Argentina was handed over to the group of cynical demagogues who now have their hands on the tiller.

What unfortunately has to happen now is that the Argentines have to pass from denial, pass from anger, and move on to reconstruction. This is going to be difficult given the lack of obvious strategic direction. They can no longer rely on commodity exports to deliver the standard of life to which they aspire. Argentina, like much of Latin America seems to be suffering from an economic version of identity loss, and that is very dangerous in a world which is moving as fast as the present one. A few years out of touch could prove decisive (call it butterfly economics, or sensitive path dependence , or whatever).

What then can they do? China seems to be standing full-square in the path of converting Argentina into a manufacturing hub. Global services in Spanish, perhaps, Argentina, after all, has one of the most educated middle classes in Latin America. But for that, or any other forward looking opportunity to become a reality they have to let go of the past. In addition, to convince myself that high vaue global Spanish services could work I would need to be more convinced of Spain's economic future. More convinced that is that Spain's inclusion in the euro-peg wasn't going to end up as yet another Argentina re-run. For this I feel is the most preoccupying aspect of the Argentine tragedy, where are we learning the lessons? If, as I keep arguing, part of the problem stems from an over-appreciation by those responsible for international economic policy of the importance of underwriting financial institutions externally, and an underappreciation of the importance for economies with inflationary tendencies inbuilt, like Argentina and Spain, of internal policy flexibility, then I cannot but expect that we will witness more 'Argentinas' . By the way, has anyone else noticed what has been happening in Bulgaria lately?

Argentina's highest court today ordered the federal government to repay money effectively seized from depositors when officials converted the value of bank accounts held in U.S. dollars to that of the Argentine peso. The ruling sent cheering demonstrators to the streets of the capital in hopes that the decision would restore all dollar bank accounts frozen when the government defaulted on its international debt. The Supreme Court decision applies only to $247 million in bank deposits held at the state-controlled Banco Nacion by the provincial government of San Luis, which challenged the federal government's decision a year ago to eliminate the peso's parity to the U.S. dollar. The peso has lost more than two-thirds of its value since then, now trading at about 3.2 pesos to the dollar. But economists and lawyers said the ruling could open the door to litigation forcing the cash-strapped government to repay all depositors who lost money as a result of the conversion. "Never again will the rights of the citizens be trampled on," said Nito Artaza, a comic actor who leads a grassroots organization of depositors seeking to recoup funds lost in the government conversion. "Property is inviolable." It was unclear how many depositors are affected by the ruling. Rafael Baer, a Buenos Aires economist, said that the restored debt could be a severe blow to a government that already has defaulted on more than $100 billion to its creditors. "If all the deposits are restored the impact will have a value to the government of [about] $2.5 billion," Baer said.

The link between the value of the peso and the dollar has played a role both in this country's nearly decade-long boom during the 1990s and its sudden financial collapse two years ago. Then-President Carlos Menem's decision in 1991 to tie the value of the peso to the dollar, making the peso freely convertible on a 1-to-1 basis. That prevented the government from simply printing enough money to pay its bills, thereby averting hyperinflation. The result was a boost in foreign investment and a currency so strong that middle-class families were able to afford such first-time luxuries as European vacations. But when investors began to sour on the Argentine economy and stopped pouring their money into Argentine coffers, recession followed. The government found itself unable to pay its crushing debts and in December 2001 announced the largest government default in history. The following month, President Eduardo Duhalde ordered all bank deposits held in U.S. dollars converted to pesos, a cost-saving measure that saw many depositors lose much of their life-savings. The chain of events since then has helped trigger a deep economic crisis. Nearly a quarter of the workforce is jobless and banks here have since become fortresses, some guarded around-the-clock by police or armed security guards to protect against angry and sometimes violent depositors who stage daily demonstrations outside many banks here. Last September, one woman doused herself with gasoline and set herself ablaze inside a bank when she was denied access to her savings.

Protesters erupted in cheers and chants outside the Supreme Court after the verdict was announced today. "At last we have justice in Argentina," said one jubilant woman, her hands held triumphantly above her head. "This is wonderful," said Alicia Lemme, governor of San Luis, who led the province's challenge to the conversion of its deposits in court. "We fought for this and this is an excellent result." The court ruled 5-3 in favor of Lemme, declaring essentially that the government's devaluation of the peso was an unconstitutional seizure of private property. Dozens of depositors have won similar verdicts in lower courts but today's decision sets the stage for broader sanctions. "We must keep fighting to build a new nation always under the Constitution," Lemme said.
Source: Washington Post

Wednesday, March 05, 2003

No Investment Boom in Sight

Just when the consumer may be faltering, the news on the investment front could not be less promising. Steven Roach reckons that continuing fear of deflationary pressures is keeping many corporate wallets tight shut.

Deflation may well be a monetary phenomenon, but it also reflects an inherent imbalance between aggregate supply and demand in the real economy. And business capital spending is what drives the supply side of this equation. Lacking in pricing leverage and fearing the globalization of an Asian-style deflation, companies should be biased against making incremental additions to capacity. With a post-bubble world still awash in excess supply of goods and services, a sudden burst of capital formation would only add to the overhang. Over the past several months, I have had conversations with executives from a broad cross-section of America’s leading companies. I can assure you they get it. They are virtually unanimous -- with the exception of a few energy businesses -- in expressing the view that caution on capital spending goes hand in hand with a lack of pricing leverage. These executives don’t forget for a moment how badly they were burned by the open-ended capex surge in the late 1990s. Until the supply-demand balance turns more favorable, the businesspeople I have spoken with tell me this post-bubble caution is unlikely to fade -- irrespective of war-related gyrations in the US economy. The only capacity expansion programs they are contemplating are in low-cost outsourcing platforms such as China.
Source: Morgan Stanley Global Economic Forum

Greenspan on Mortgage Refinancing

Here are some extracts from the Greenspan speech referred to in the last post. As he says, last year was an incredible year for US housing finance, with over 10 million regular home mortgages refinanced, and 1.75 trillion dollars of cashouts, representing almost one third of all regular mortgages held by US citizens.However, despite the large equity drawdown, net equity actually increased due to a 7% price increase in housing. This price push has, in my opinion, some connection with the flight from the equity markets and the very low interest rates which makes holding cash seem unattractive. Just how important this connection is is impossible to say at this stage. Two things, however, are clear: this equity withdrawal has been fuelling a not unimportant part of US consumption of late, and this rate of price increase is unlikely to be sustained. Quite what the consequences will be for aggregate consumption remains to be seen, but the danger of a negative shock stemming from this source should be a cause for concern.

Last year was surely one of the most memorable years ever experienced by the home mortgage market. Owing largely to the lowest mortgage interest rates in more than three decades and rising home prices, close to 10 million regular home mortgages were refinanced. I use the term regular mortgage to exclude both home equity and construction loans. The outsized dollar volume of these refinancings--by our estimates, $1-3/4 trillion net of cash-outs--was an all-time record and represented almost one-third of the value of all regular home mortgages outstanding at the beginning of last year. Total regular mortgage originations, at $2-1/2 trillion, also proceeded at a record pace.

As part of 2002's process of refinancing, households "cashed out" almost $200 billion of accumulated home equity, net of fees, taxes, points, and commissions. That represented almost 3 percent of estimated total home equity at the beginning of the year, up slightly from the 2001 share. In no year prior to 2001, as best we can judge, did cash-outs exceed 1-3/4 percent of total home equity. Of last year's cash-outs, approximately $70 billion was apparently applied to repayment of home-equity loans, and a significant part was employed to reduce higher-cost credit card debt, judging from the slowed pace of growth in installment debt outstanding.
All in all, the amount of previously built-up equity extracted from owner-occupied homes last year, net of fees and taxes, totaled $700 billion by our calculations, or more than 10 percent of estimated equity at the beginning of the year. Home equity extraction for the economy as a whole is, of necessity, financed by debt. In fact, the $700 billion of equity extraction is similar to the increase in mortgage debt last year.

Despite the exceptionally large extraction of equity, the total remaining equity at the end of 2002 was higher in dollar terms than at the beginning of the year, owing to a 7 percent increase in existing home prices over the four quarters of last year and $300 billion in new home construction, net of mortgage extensions on those homes. Mortgage debt as a percent of the market value of homes accordingly rose somewhat more than 1 percentage point during the year.

The very large flows of mortgage funds over the past two years have been described by some analysts as possibly symptomatic of an emerging housing bubble, not unlike the stock market bubble whose bursting wreaked considerable distress in recent years. Existing home prices (as measured by the repeat-sales index) rose by 7 percent during 2002, and by a third during the past four years. Such a pace cannot reasonably be expected to be maintained. And recently, price increases have clearly slowed.

In evaluating the possible prevalence of housing price bubbles, it is important to keep in mind that home prices tend to consistently rise relative to the general price level in this country. In fact, over the past half century, the annual pace of home price increases has been approximately 1 percentage point faster on average than the rise in the GDP deflator. This is apparently the result of productivity growth on largely custom built new home construction persistently lagging productivity in the economy overall. This lag in productivity growth drives up new home prices relative to the general price level and, by arbitrage, it drives up the prices of existing homes as well. In addition, local building and land use restrictions continue to constrain the supply of buildable land in many areas, whose price increases also tend to outstrip the rate of inflation.

Clearly, after their very substantial run-up in recent years, home prices could recede. A sharp decline, the consequences of a bursting bubble, however, seems most unlikely. Nonetheless, even modestly declining home prices would reduce the level of unrealized capital gains and presumably dampen the pace of home equity extraction. Home mortgage cash-outs and home equity loan expansion would likely decline in the face of declining home prices. However, the five-year old home building and mortgage finance boom is less likely to be defused by declining home prices than by rising mortgage interest rates.

Should rates rise, it is entirely possible that new and existing home sales would decline, leading to a lower level of realized capital gains on homes, a further narrowed refinance spread and, as a consequence, less overall home equity extraction. It is worth bearing in mind, however, that any sustained increase in rates presumably would occur only in the context of a more vigorous upturn in the pace of business activity, suggesting that the net effect on housing activity might be relatively limited.

Home equity extraction directly finances household purchases of goods and services by liquefying previously illiquid assets. It also indirectly finances such purchases by facilitating outlays financed by credit card and other nonmortgage consumer debt. Equity extraction has been a major source of repayment of such debt.

Borrowing against home equity has been a staple of household finance for decades, but as I noted earlier, it has been only in the past decade or so that such practices have been encouraged by lenders. We need to far better understand the economics of this major addition to household finance and its impact on the economy. One hopes, new data will form the basis of better insights.

There can be little doubt that the availability of a ready source of home equity has reduced the costs and uncertainties associated with income volatility, retirement, unexpected medical bills and a host of other life events that can unexpectedly draw down savings. Home equity extraction may be the household sector's realization of the benefit of a rapidly evolving financial intermediation system.
Source: Federal Reserve

Difficult to See the Wood from the Trees

It is hard to place any transcendental significance on the data as it comes in. With the Iraq showdown so close everybody has the jitters. Still these car and housing data are consistent with what the consumer confidence surveys are showing, a wearing down in the American consumer.

Weak sales figures from the carmakers and sober comments on the housing market from Alan Greenspan weighed heavily on the US stock market on Tuesday, fanning worries about the health of the economy in the exasperatingly uncertain geopolitical climate. By the close, the Dow Jones Industrial Average dropped 132.99 to 7,704.87 while the broader S&P 500 index had shed 12.82 to 821.99. The Nasdaq Composite was off 12.53 to 1,307.76.Stocks in car manufacturers fell after reports of lower sales figures for February. The auto and components sector suffered the heaviest losses in the S&P 500 index, down nearly 5 per cent by the close.
The worst performers in the subindex included component makers Visteon and Delphi, which lost 8.6 per cent to $5.73, and 8.3 per cent at $7.06, respectively. They were downgraded to "sell" from "hold" by analysts at Deutsche Bank. The Deutsche analysts also cut the ratings of General Motors and Ford to "sell". Those stocks were off 5.8 per cent to $31.24 and 4.2 per cent to $7.73, respectively, with GM leading losses on the Dow.Rod Lache and colleagues wrote: "We are increasingly concerned about the outlook for US demand. In fact, we believe that the risk of a prolonged downturn [lasting through 2005] is greater than is commonly perceived." They project US light vehicle sales will decline by 2005, and the annual pace of price deflation could get worse.

The resilience of auto sales, helped by aggressive incentive schemes, has been credited with helping to keep the US economy from slipping into a renewed recessionary spell. The incentive programmes have cut into the companies' margins and recent spikes in fuel prices have added to their worries. Homebuilder Lennar was down 7.2 per cent at $50.55, on disappointing figures for new home orders in its fiscal first quarter. Rival KB Home also fell, down 5.9 per cent at $44.35. The sector was not helped by Federal Reserve chairman Alan Greenspan, who told a bankers' conference that the growth of the housing market could slow this year. Alongside car purchases, the real estate market has fuelled the resilient consumer spending in the US economy.
Source: Financial Times

Not Particularly Concerned

More Grist to the mill for those of us addicted to tea leaf reading. John Snow declares he is not particularly concerned about the fall of the dollar. Monumental gaff, or calculated strategy. If, like me, you think that fighting deflation is currently the number one priority in US economic policy, then getting the dollar down is important, doing it while those who might suffer the consequences (the eurozone governments) do not notice that this is intentional could also be important, after all, what you are trying to do is export deflation. I can't help feeling that the Bush administration (with Cheney as mastermind, or Rove?) is turning image fabrication of themselves as a 'wild bunch' of crazy cowboys, dedicated, if not to robbing banks, then at least to pilfering the contents of the social security system and the oil reserves in Iraq, into something of an art form. This it seems to me is what they WANT the world's press to believe. But could it be that while they try to keep us mesmerised with their 'irresponsibility' what they are actually about is something far more responsible? Like I keep saying, don't watch what they say, watch what they actually do.

The dollar fell to a four-year low against the euro on Tuesday after John Snow, US Treasury secretary, said he was "not particularly concerned" about the greenback's recent decline. Following his remarks the dollar dropped to $1.0984 against the euro though it strengthened to $1.096 after a US treasury department spokesman said Mr Snow still favoured a strong dollar. The dollar also slid to a four-year low against the Swiss franc and was trading at Y117.24 from Y117.65 in Tokyo trading on Wednesday.The comment was the first time Mr Snow has publicly remarked on the value of the dollar, as opposed to reiterating the administration's rhetorical "strong dollar" policy.

Paul O'Neill, Mr Snow's predecessor, caused several sharp movements in the dollar by attempting to explain the policy or commenting on the markets. Mr Snow's remarks followed an appearance in front of a congressional committee on Tuesday. He said: "I am not particularly concerned" about the recent slide in the currency. "The dollar is going to rise and fall some. The dollar is in the marketplace and it's within normal ranges," he said. Mr Snow's comments seemed to have caught the dollar at a vulnerable point, when thin trading volumes at the end of the US session made it particularly vulnerable to sharp movements.
Source: Financial Times

Tuesday, March 04, 2003

Japan: Long Term Yields Continue to Fall

Yes, deflation in Japan is definitely settling down for the long haul. Ten year yields of government bonds hit a historic low of 0.74 per cent today indicating that investors have no belief in recovery any time soon. One passing thought, all the commentaries on Japan make the comparison with 1930s style dramatic deflation. But what we are seeing in Japan, and what we may see elsewhere, is more creeping deflation, hovering in the 1% to 2% range almost indefinately. This seems to me to be knew as a historical phenomenon, and worthy of comment in its own right (an omission which, of course, I will try to correct on another occasion).

Masaru Hayami took the governor's chair at the Bank of Japan's policy board meeting for the final time on Tuesday as government bond yields plunged to record depths, confirming the market does not see an imminent end to deflation.The yield on the 10-year government bond hit a historical low of 0.74 per cent on Tuesday signalling that investors do not expect price rises to erode the value of bond income any time soon.
Source: Financial Times

The US Housing Enigma

This may or may not be a bubble, but the question still remains, what is going to happen when this comes to an end? US house prices rose by 6.89 per cent in 2002, way above the CPI and way above earnings increases. Long term this is not sustainable, in fact there is some indication in laster quarter numbers that the upward push may already be waneing. Housing can be thought to serve as a useful investment window for the young (first home), and the not so young (trading up, or second home investment), and with values rising nicely those who want to consume rather than save can refinance. But look down the road a little at the changing age structure, and ask yourself what is going to happen to prices when all the baby boomers want to cash in savings and sell the second homes, or trade down to something smaller to pay all those medical bills. Where are all the buyers coming from? And what will happen to consumption if there is no refi upside?

U.S. home prices rose 6.89 percent during the fourth quarter of 2002 from the same period in 2001, as record low mortgage rates fueled home sales to all-time highs last year, the Office of Federal Housing Enterprise Oversight (OFHEO) said on Monday. The U.S. housing market has been a pillar of strength for the sluggish U.S. economy. Strong demand for homes has buttressed construction jobs and sales of household goods. Consumers, who account for two-thirds of the U.S. economy, have been tapping into higher home values through "cash-out" refinancings of their existing mortgages to get cash for spending or paring their debt.

Average fourth quarter U.S. home prices appreciated a tiny 0.83 percent from the third quarter, the smallest quarter-to-quarter increase since the second quarter of 1998, according to the U.S. regulatory agency that oversees the financial soundness of mortgage finance giants Fannie Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news). Four states and 22 metropolitan areas experienced declines in home prices from the third quarter to the last three months of 2002. In the third quarter, seven states and 33 localities posted home price decreases, OFHEO said.
Source: Yahoo News

Global Stagdisinflation?

This time its Dick Berner who is hitting the button on deflation. Roach must have the whole team at it by now. The central point is that while the seventies shock, which, in fairness, was much bigger, produced an inflation explosion, with global overcapacity, and soft patch demand, lack of pricing leverage means that the energy shock is more likely to hit growth than prices. The sixty four thousand dollar question then is: why were the seventies inflationary, and why are we now staring deflation in the face. I think we are getting the descriptive level fine, it's the explanatory framework that I think we're still not getting.

A curious paradox is nonetheless unfolding. Unlike in the 1970s, deflation is a bigger risk than stagflation, or than higher inflation, at least for now. In the 1970s, the rise in energy prices hit when lax monetary policy nurtured inflationary psychology and capacity use was high. Industrial operating rates in 1978 exceeded 85% -- nearly 10 points higher than they are today. In contrast, I believe that energy shocks today tax growth more than they boost inflation. The potential for higher energy prices to filter through to costs -- and thus to “core” inflation and inflation expectations -- is one set of forces. But more powerful and working in the opposite direction, an extended period of sluggish global growth, ample capacity, and relatively restrictive policies abroad all argue for lower, not higher global inflation.
Source: Morgan Stanley Global Economic Forum

Monday, March 03, 2003

Is Paul Krugman Missing Something?

Much as I admire Paul Krugman the economist, and much as I share many of his preoccupations over the growing deflation danger, the balooning deficit and the general lack of economic vision shown by the current US administration, I can't help feeling he's falling into a self made trap, and letting himself become obsessed with the Bush tax cut obsessions. I find his comments on Mankiw uncharitable, not to say bordering on contempt. To suggest that "when the political apparatchiks who make all decisions in this administration want Mr. Mankiw's opinion, they'll tell Mr. Mankiw what it is", is to kinda forget that there is a person called Mr Mankiw, and he may, or may not, be agreeable. I think Glenn Hubbard left the White House, not because he had a knife in his back, but because he was too much of a yes man, even for this administration. I mean, rewriting your own text book, that sounds like something from the old Russia, doesn't it. And his FT article on deflation and the coming American prosperity read more like the dribblings of one of those Merrill Lynch analysts now facing charges for misleading investors, than the considered reflection of an economist with sufficient capacity to be the adviser to the US president, even if that president is George W Bush. And as for the "I almost feel sorry for Mr. Mankiw, who I suspect has no idea what he's getting into; I'm sure he will soon feel frustrated over his inability to have any real influence on this disastrous policy", well I'm sorry, only time will tell whether Mr Mankiw, Mr Bernanke, Mr Taylor, Mr Rogoff and others are able to influence policy to the good. All I can say is that on the face of it they're a damn sight better than the crowd that just left. And that if you don't trust this administration then you shouldn't be so naieve as to believe what they actually say about themselves.

After all it is Paul Krugman himself who has drawn attention to the nudge,nudge wink,wink theatricals which characterise policy execution. Politics is the art of knowing that you can fool some of the people all of the time, and all of the people some of the time, but that you can't fool all of the people all of the time. The art comes in drawing the limits. Who is playing with whom? John Snow says that he supports the strong dollar policy, yet the dollar is down, and it looks like there is more to come, with even the Japanese playing ball and allowing the yen to strengthen. Over at the Fed Greenspan has been critcising the dangers of increasing the deficit, is this anti-Bush, or a let-off for Bush himself? After all, when you're backed into a corner, there are many ways to help dig you out. Again at the Fed it seems that Bernanke's star is rising, while Rogoff has his hand on the tiller over at the IMF. When you look at this horizon, and the intractability of some of the looming problems, getting hold of someone like Greg Mankiw, someone who knows a thing or two about economics, and who may not be afraid to speak his mind, may well be entirely consistent with Bush's real ambition: winning the next election. I think his main obsession may be to avoid his father's fate, and to avoid spending his old age being reminded, 'it was the economy, stupid'. Power, as they say corrupts, and even the most closely held principle, even the most enormous tax cutting programme in history, may find itself betrayed when needs must. Who here is Ahab, and who Moby Dick? Remember, watch not what they say, but what they do.

So Glenn Hubbard has resigned as chairman of the Council of Economic Advisers — to spend more time with his family, of course. (Pay no attention to the knife handles protruding from his back.) Gregory Mankiw, his successor, is a very good economist, but never mind: When the political apparatchiks who make all decisions in this administration want Mr. Mankiw's opinion, they'll tell Mr. Mankiw what it is.

Why is the administration so uninterested in helping the economy? Here's my theory: The depressed state of the economy provides a convenient if bogus rationale for the huge, extremely irresponsible long-run tax cuts that, after Iraq, constitute this administration's principal obsession. To do anything else to help the economy would suggest that it's possible to create jobs now without putting the country's future solvency at risk — and that's not a message this administration wants to convey. I almost feel sorry for Mr. Mankiw, who I suspect has no idea what he's getting into; I'm sure he will soon feel frustrated over his inability to have any real influence on this disastrous policy. But on second thought I'll save my sympathy for the two million people who have lost their jobs over the past two years, and are not likely to find new ones any time soon.
Source: New York Times

Food Again Under the Microscope

Even though it is stating the obvious, I think its well worth doing. You are what you eat, as they say, and this WHO report is timely and to the point.

Processed foods are to blame for the sharp rise in obesity levels and chronic disease around the globe, according to the World Health Organization. In a report published on Monday, it urged people to cut their intake of such foods, which are often high in saturated fats, sugar and salt. The team of international scientists, who compiled the report, said eating more fruit and vegetables and exercising more were the best way to protect against chronic disease. The scientists have set out new guidelines for healthy eating. These will be adopted by WHO as part of its new global strategy to reduce heart disease, cancer, diabetes, obesity, osteoporosis and dental disease. The panel have urged people to eat a healthy balanced diet and to limit their intake of salt, sugar and saturated fats. They warned that chronic diseases are caused not only be overeating but also by eating too much of the wrong types of food. They also blamed changing lifestyles with fewer family meals eaten together and more children watching television or playing on computers rather than being outside. The problem is particularly acute among people living in cities who, the reports says, are more likely to be exposed to "energy-dense" food and take less exercise.
Source: BBC News

Critical Shock Analysis

Vive la difference. This is not a reference to Frances supposed cultural exception, but rather a critical reflection on the state of shock analysis in macro economic theory. It is simple but it is true: each shock is different. This is why all those macro provisions have such a hard time of it, and why it is a brave forecaster who would offer a 2004 projection with any degree of confidence right now (still, as the saying goes, fools do rush in......). And this week, there reminding us of the truth which proves so hard to swallow is Stephen Roach, who points out that in his book shock analysis has two critical dimensions — the magnitude and duration of the shock itself, and the pre-shock condition of the affected economy. The first dimension is totally unknown at present (for the innocent abroad, we are taking about oil here, how high can it go and how long can it stay there?), the second one , as he keeps reminding us (and well, you already knew this part), looks none to healthy.

There are times when it pays to be overly-simplistic on the global macro call. This is one of those times. Three key points are most obvious to me insofar as the cyclical prognosis for the world economy is concerned: First, in a US-centric world, the global call is basically a call on the US economy. Second, the US is in the midst of a classic oil shock. And, third, that shock has occurred at a point of maximum vulnerability — when a US-centric industrial world had slowed to a virtual standstill. The conclusion is inescapable: The recession warning model that I have long advocated is now flashing a serious alert for the US and for the US-centric global economy. A stalling economy lacks the cyclical immunities that cushion it from an unexpected blow. A stalling economy that has been hit by a shock is a recipe for recession. Unfortunately, it’s that simple.

It’s educated guesswork as to where oil prices are headed. It’s a painful reality check to see where they have come from. Crude oil (WTI spot) prices have now pierced the $37 threshold — fully 89% above the level prevailing in January 2002. Moreover, as of the close of February 27, oil prices have now equaled the highs of $37.20 hit on September 20, 2000, that played an important role in triggering the recession of 2001. With oil inventories low, disruptions in Venezuela lingering, and war looming, the risk is that oil prices will move higher before they begin their fairly typical post-shock mean reversion. But those risks lie in a murky and uncertain future. At this point in time, the facts speak for themselves — an oil shock has already occurred.
Source: Morgan Stanley Global Economic Forum

3G Hits Europes Streets

So 3G is finally going to hit the streets here in Europe. Only one question, will it be with a roar, or a loud crash. The Economist, as per usual, is hedging its bets.

FORGET the euro100 billion ($108 billion) shelled out by Europe's mobile network operators for third-generation (3G) licences. Disregard the huge debts, the languishing share prices and the endless wrangling over the licence terms. Never mind that several would-be 3G operators have folded their tents and given up. None of that matters to the shoppers who can now see 3G phones available for sale on the high streets of London, Birmingham, Rome and Milan. Admittedly, these whizzy new phones—which can send and receive live video—are only being demonstrated and will not be delivered until mid-March. But now that 3G has finally arrived in Europe, will anyone buy it? Nobody knows, which is why the industry is avidly watching what happens in Britain and Italy, where Europe’s first commercial 3G networks are being launched by 3, a new operator backed by Hutchison Whampoa of Hong Kong. 3 has signed up 140,000 customers in Italy, and a comparable number in Britain. Unsurprisingly, the company is emphasising the unique video capability of its 3G handsets.

But whether videotelephony will be enough to get 3G off the ground remains uncertain.A more cautious approach is being taken by the established operators who, unlike 3, currently have millions of customers using 2G networks. Rather than make a song and dance about 3G, these operators—notably Vodafone and T-Mobile—are instead promoting mobile data services, under the brands “Vodafone live!” and “t-zones” respectively. At the moment, these services, including the ability to send still photos (but not video) from one handset to another, are delivered using enhanced 2G, or 2.5G, networks. But the capacity of 2.5G networks is limited, so as more subscribers sign up for such services, the operators will quietly switch new customers over to 3G networks over the next few years. “People will be using 3G without being aware of it,” says Ben Wood of Gartner.

In short, where 3 is pushing 3G as revolutionary, to lure subscribers away from other networks, the incumbent operators prefer to see it as evolutionary, as they attempt to hold on to them. The 3G hype of a couple of years ago has evaporated, and a new pragmatism is abroad in the industry.But there is, of course, another possibility: consumers may decide that voice calls and text messages are enough, and shun the other new services on which 3G is predicated, in both its revolutionary and evolutionary forms. In that case, operators will have to fall back on 3G’s ability to carry voice calls in higher volumes, and at lower cost, than 2G networks. “Voice is not a market to be sniffed at,” says Mr Lee. Even ten years from now, he says, mobile voice revenues will exceed revenues from sending data. The mobile operators will then set about cannibalising the fixed-line voice business with their 3G networks. It will be quite a come-down for a technology that was once expected to change the world. The vast licence fees will probably never be recouped.
Source: The Economist

Asian Stock Markets in Review

That Japans economic problems have produced a generalised collapse in the stock market there, with values tied down back at early 1980s levels, is common knowledge. What few seem to be prepared to think through are the long term consequences of a continuation of this state of affairs. The vote for a traditionalist at the top of the BoJ means that the dripfeed deflation is set to continue into an indefinite future. This reality is also reflected in the level of long term interest rates, with a yield curve which is now virtually flat over ten years, and aspiring towards the horizontal even up to 30. So as one economy shrinks slowly into the sunset, others continue to grow. With time relative valuations will change significantly. Of course what is happening now in S Korea and Taiwan is comparatively small beer compared to what could happen if and when China's financial architecture comes of age.

Tokyo, traditionally the home to Asia's biggest and most profitable companies, has long been the starting point for most investors looking at the region. But now, the biggest, most heavily traded companies in Asia are often found outside of Japan. In electronics, Sony Corp. lost its top spot in the sector, in U.S. dollar market-capitalization terms, to Samsung Electronics of South Korea late last year, according to Thomson Datastream. Japan's biggest microchip maker, NEC, has trailed Taiwan Semiconductor Manufacturing Co. since mid-2000. In the property sector, Mitsubishi Estate fell behind Hong Kong companies Cheung Kong Holdings and Sun Hung Kai in the early 1990s.

Japan is still the world's second-largest economy behind the U.S., and its stock market is still bigger than the rest of the region's combined. But as the country seems ever less likely to throw off its economic malaise -- the latest disappointment was last week's appointment of a new central banker unlikely to make the radical changes Japan needs -- investors are speaking out. In a January report that sent Tokyo financial circles abuzz, Nikko Salomon Smith Barney strategist Alexander Kinmont put forth the view that "Japan is of no general importance except as a laboratory experiment concerning deflation." As Asia's and Japan's valuations draw closer together, he wrote, the region would increasingly be thought of as one block. Partly, it is a story of Japan's weak economy, and debt-laden corporations involved in too many disparate businesses. But just as important, a few companies elsewhere in Asia -- despite setbacks including a weak global economy and falling stock markets -- are gaining market share and building up bigger brands than their Japanese counterparts. Eventually, logic dictates, they will attract more investment dollars, and smaller companies will follow in their footsteps.

Many of these big companies beat out their Japanese counterparts on a number of investing criteria. Samsung, for example, trades at about seven times next year's estimated earnings, according to Thomson, compared with 23 for Sony. Often, Asian companies outside Japan are far more profitable. Samsung recently reported record net profits of 7.05 trillion won ($5.9 billion) for 2002. Its profit amounted to 17% of total revenue, up from 9% in 2001. Sony's net profit for the year ended in March 2002 was $115 million, or just 2% of total revenue. Stocks outside Japan are also frequently easier to trade than their Japanese counterparts. "While Japan's market capitalization looks large relative to the rest of developed Asia, it is an essentially illiquid market," wrote Mr. Kinmont in his report. Because they have some significant advantages such as greater liquidity and profitability, why aren't Asian companies outside Japan trading at higher values? Some reasons are out of their control. One key factor: Global pension-fund and other institutional money, which tends to have a big influence on markets, is generally invested according to guidelines that often restrict the funds to developed markets only. Most of Asia, including South Korea and Taiwan, is considered an emerging market, which rules them out for many big pension funds. If these countries were to win developed-market status from index-setter Morgan Stanley Capital International, which would require meeting standards on factors including the size of the economy and the securities-regulatory environment, it would automatically mean a large influx of funds that would drive up stock prices, money managers say.

Second, while Asia has made progress since the 1997-1998 financial crisis in restructuring its industries and cleaning up its bad debt, it is still tarnished in the eyes of some investors. "I still think there's an overhang," says Ayaz Ebrahim, regional chief investment officer for HSBC Asset Management. "Not all investors have bought back into the program." Third, broad economic factors are creating changes that will make it hard for stocks in certain sectors, whether in Japan or elsewhere, to make further gains for the time being. Take chip stocks, which have started trading more like cyclical stocks, meaning they should see big gains only when the global economy starts turning up. Many analysts say that if that cyclicality holds, most chip foundries deserve lower valuations. Fourth, Japanese stocks are still expensive -- despite a drop of 40% in the Nikkei 225 since the start of 2001 -- because local Japanese investors continue to hold them. Much retail money has left the market along with the Tokyo Stock Exchange's long slide, but banks, finance companies and conglomerates are supporting stock prices through their complex web of cross-shareholding.
Source: WSJ

Sunday, March 02, 2003

Indian Design on the Up and Up

Ajit Balakrishnan, chairman of the Indian internet outfit Rediff.com, has some interesting things to say about Indian Design. I think people in Europe really are missing how rapidly the Indian scene is changing. After all, all those call centres are bound to lead somewhere, in part because more people in Indian already speak fluent English than in the whole ex-UK EU, and the more they use it the better they'll get. This obviously goes for a lot of other things too.

I quote next from a report Design for Development written by Ashok Chatterjee the former head of NID “…the consumer market established the importance and ability of the design profession…[but] …not a few design institutions are troubled by the take-over by market forces of a professional once linked to concepts of ‘dignity, service and love.’” Here it is again, the brahmanical distaste for the market, the condescending concession to the consumer market as a distasteful barrier one must leap so that the designer could then go back to his true calling- ‘designing for development’. Here is my submission - by designing products of mass consumption , that save users time and money and effort and drudgery, you will do more for the cause of India’s development than any so called design for development . Let me take you back to the origins of design to see what its true mission is.

The place is England and the time is the late 1700’s. England is agog with recent inventions like the steam engine and the spinning jenny. It is a time of Empire – the sun, at that time, truly never set on the British Empire. At that time a young man saw that the rising new middle class in England were taking to drinking tea recently made available at very cheap prices from India. He saw that money could be made by making tea sets that had the look and finish of expensive Chinese items. His first great success was the perfection of cream-colored crockery which had been produced in Staffordshire from the early 18th century onwards. The chemical composition was actually that of stoneware clay, but it was fired to an earthenware temperature and lead-glazed, giving it it's characteristic creamy yellow color. He was able to eliminate the problem of crazing (he appearance of small cracks in the glaze) which had been a great problem in English pottery up to that time.- this simple 'cream-colored' ware became wildly popular, especially it was conferred royal patronage by Queen Charlotte of England, in merit of this ware, which was from then on called 'Queen's Ware'. This 'Queen's Ware' became so popular and well-known that in 1767 he wrote: "The demand for this cream color, alias Queen's Ware, alias Ivory still increases. It is really amazing how rapidly the use of it has spread almost over the whole globe and how universally it is liked." This was Josiah Wedgwood. Wedgwood was perhaps the first designer in the currently accepted sense of the term. And you can see his mission was to provide the middle classes of Industrial Revolution England ceramic cups and plates to replace the pewter and wood of that time.

I recently polled a few design professionals and academicians about the three India-designed products that they greatly respected. Here is the list in no particular order:
The Titan Watch including its presentation in showrooms and advertisements. The TVS Victor bike And, the Electronic Voting Machine from Bharat Electronics.
The Titan watch case has been inspirational because it taught all of us that design is a great driver in differentiating brands where the underlying technology has got commoditized. HMT, the pioneer paid a heavy price for persisting with the notion that consumers bought watches just to tell time. The TVS people are harbingers of the time when foreign collaborations will be seen to be just short-term engagements to learn things; and that in a joint venture with a foreign company you can let your partner nominate the Finance Director and control the money or the Marketing Director to drive marketing, but you must always control technology. The Electronic Voting Machine has shown us how rugged, well-thought electronic design can reduce the cost of elections, declare results instantly and make irrelevant those staples of Indian elections- rigging and booth capturing. Your list of the best three may be different- but I am happy if the list is made up of useful products that make life a little easier to live and which have been sold in large quantities to middle-class India.

Population: Switchback Divergence Bigtime

The initial highlight results of the 2002 Revision of official world population estimates and projections, prepared by the Population Division of the United Nations, has just been published. The full results of the 2002 Revision will appear later in a series of three volumes which are currently being prepared. Notwithstanding the fact that we will have to wait to read the fine print in the full results, the report makes sombre reading. First the good news, fertility is declining across an ever wider range of Less Developed Countries (LDC's). In fact it is falling so fast and so much that by 2050 3 out of 4 LDC's will have below replacement fertility. This result needs to be nuanced by two important details: firstly, the numbers are characterised by increased an increasing divergence beween the majority who are achieving big reductions and a small minority who continue to have exploding populations (I still can't help feeling that this is the real 'divergence big time' that lies behind the famous Lance Pritchett paper), and, secondly, this reduction in fertility to below the replacement level will mean that the vast majority of countries follow the economically developed countries down the road of rapidly aging populations. There will in fact be a symmetrical switch from a high (youth) dependency ratio to a high (elderly) one. The economic consequences of this are, however, far from symmetrical. Young people remember face an entirely different future income potential to that of old people. Young societies, for example, can face credit driven expansions (like the current US or UK ones) whilst old societies obviously cannot.

Secondly, things are going to get worse before they get better. population lags are even longer than economic ones, so many countries, despite the drop in fertility, will still have steadily growing populations for many years to come. Thirdly there are the estimations of the impact of the HIV/AIDS epidemic. The UN projections here are extremely bleak, attributing the same downward impact on their 2050 provisions to AIDS related deaths as are attributed to increasing fertility reduction. And, as they don't cease to stress there could be enormous and incalculable unforeseen upside to these estimates. Finally there is the news that there no less than 33 developed countries are expected to experience population decline (NB decline and increasing age dependence), with an anticipated 22 per cent drop, and (watch out) anywhere between 30 and 50% drop in the so called Eastern Europe 'Transition Economies'. Clearly this transformation is unprecedented historically, and will brings with it consequences which are now barely imaginable. My expectation, for what it's worth, is that this will mean a big deflationary tonic all round, negative growth in most of the developed world, and an enormous window of opportunity for those LDCs about to pass through 'critical population growth mode'. As Joel Mokyr has reminded us time and again, one of the key features of the transition from traditional to industrial society was the changing role and importance of fixed capital formation. The information age, in contrast, seems likely to be characterised by human capital formation. This is going to be the century of human capital, the premium is going to be on youth (don't believe all those old wives tales about embodied workforce experience: just take a glance at Germany and Japan), and we are likely to see divergence switchback BIG TIME. Oh, and yes, when we find the time to get round to it, we may have to come up with something in the way of an alternative economic system, since the one we have now feeds on growth, and growth is one thing that's going to be kinda hard to come by in a world which is both shrinking and aging at the same time. There have long been substantial criticisms of Adam Smith's market as 'hidden hand', on the grounds that the market, for all its virtues, is a mechanism which seems to be unable in and of itself the conditions of its own existence. The example of the 'population slowdown' is then just one more philosphical nail in the coffin, unless that is we broaden the idea to encompass emergent, 'order for free', autopoeic processes, in which case, unfortunately the modern market finds itself reduced to just one more 'contingent' phenomenon.

The 2002 Revision of the official United Nations population estimates and projections breaks new ground in terms of the assumptions made on future human fertility and the impact of the HIV/AIDS epidemic. For the first time, the United Nations Population Division projects that future fertility levels in the majority of developing countries will likely fall below 2.1 children per woman, the level needed to ensure the long-term replacement of the population, at some point in the twenty-first century. By 2050, the medium variant of the 2002 Revision projects that 3 out of every 4 countries in the less developed regions will be experiencing below-replacement fertility.

A second important change in the 2002 Revision is that it anticipates a more serious and prolonged impact of the HIV/AIDS epidemic in the most affected countries than previous revisions. The impact of the disease is explicitly modelled for 53 countries, up from the 45 considered in the 2000 Revision. The dynamics of the epidemic, as estimated by UNAIDS, are assumed to remain unchanged until 2010. Thereafter prevalence levels are assumed to decline in a manner consistent with modifications of behaviour that reduce the rates of recruitment into the high risk groups as well as the chances of infection among those engaging in high risk behaviour. The resulting HIV prevalence levels remain relatively high until 2010 and then decline, but are still substantial by mid-century.

As a consequence of these changes, the 2002 Revision projects a lower population in 2050 than the 2000 Revision did: 8.9 billion instead of 9.3 billion according to the medium variant. About half of the 0.4 billion difference in these projected populations results from an increase in the number of projected deaths, the majority stemming from higher projected levels of HIVprevalence. The other half of the difference reflects a reduction in the projected number of births, primarily as a result of lower expected future fertility levels.

The results of the 2002 Revision confirm key conclusions from previous revisions and provide new insights into the sensitivity of population projections to future trends in fertility and mortality. The main findings of the 2002 Revision are summarized below.

1. Despite the lower fertility levels projected and the increased mortality risks to which some populations will be subject, the population of the world is expected to increase by 2.6 billion during the next 47 years, from 6.3 billion today to 8.9 billion in 2050. However, the realization of these projections is contingent on ensuring that couples have access to family planning and that efforts to arrest the current spread of the HIV/AIDS epidemic are successful in reducing its growth momentum. The potential for considerable population increase remains high. According to the results of the 2002 Revision, if fertility were to remain constant in all countries at current levels, the total population of the globe could more than double by 2050, reaching 12.8 billion. Even a somewhat slower reduction of fertility than that projected in the medium variant would result in additional billions of people. Thus, if women were to have, on average, about half a child more than according to the medium variant, world population might rise to 10.6 billion in 2050 as projected in the high variant. The low variant, where women have, on average, half a child less than in the medium variant, would result in a 2050 population of 7.4 billion

2. World population is currently growing at a rate of 1.2 per cent annually, implying a net addition of 77 million people per year. Six countries account for half of that annual increment: India for 21 per cent; China for 12 per cent; Pakistan for 5 per cent; Bangladesh, Nigeria and the United States of America for 4 per cent each.

3. The increasing diversity of population dynamics among the countries and regions of theworld is evident in the results of the 2002 Revision. Whereas today the population of the more developed regions of the world is rising at an annual rate of 0.25 per cent, that of the less developed regions is increasing nearly six times as fast, at 1.46 per cent, and the subset of the 49 least developed countries is experiencing even more rapid population growth (2.4 per cent per year). Such differences, although somewhat dampened, will persist until 2050. By that time, the population of the more developed regions will have been declining for 20 years, whereas the population of the less developed regions will still be rising at an annual rate of 0.4 per cent. More importantly, the population of the least developed countries will likely be rising at a robust annual rate of over 1.2 per cent in 2045-2050.

4. As a result of these trends, the population of more developed regions, currently at 1.2 billion, is anticipated to change little during the next 50 years. In addition, because fertility levels for most of the developed countries are expected to remain below replacement level during 2000-2050, the populations of 33 countries are projected to be smaller by mid-century than today (e.g., 14 per cent smaller in Japan; 22 per cent smaller in Italy, and between 30 and 50 per cent smaller in the cases of Bulgaria, Estonia, Georgia, Latvia, the Russian Federation and Ukraine).
Source: UN Population Division

FCS and Linux

Interesting post on the rise and rise of Linux from slashdot:

jkastner writes "In 2001 Boeing was chosen to be the lead system integrator for the Army's Future Combat System. The bumper sticker description of this project is 'see first, understand first, act first and finish decisively,' and while Boeing's official FCS site doesn't have a lot of technical details, but you can find some good information at Global Security. To quote their page, "FCS is envisioned as a networked 'system of systems" that will include robotic reconnaissance vehicles and sensors; tactical mobile robots; mobile command, control and communications platforms; networked fires from futuristic ground and air platforms; and advanced three-dimensional targeting systems operating on land and in the air.' The Phase 2 request for proposals just appeared and the estimated price is $26 billion through fiscal year 2009. The fact that the Army is spending billions of dollars on a project isn't anything new, but a little known fact is that the OS for FCS will be Linux ( FAQ 4 here)"

A Dedication to Microsoft

I'm afraid I'm in a rather melancholic, Dylan Thomas type mood today, so I can't resist following up my last post with this one (forget all that stuff about the other Dylan and Springsteen being the modern variant of oral poetry: writers of good source code have always been the best candidates, what, when all's said and done, better measure is there of a piece of code than its aesthetic integrity):

You can tear a poem apart to see what makes it tick... You are back with the mystery of having been moved by words. The best craftsmanship always leaves holes and gaps... so that something that is not in the poem can creep, crawl, flash or thunder in.

Catching Up With the Curve

For once something which seems like good news for Telecoms. People have been predicting for some time now that all that late ninetees excess capacity would be burnt off at some point. Clearly the growth of broadand based data transfer will have an important impact, it's all a question of when (and if) the uptake in demand accelerates past the continuing expansion in capacity: put simply, when user end demand growth overtakes Moore's Law type supply growth. I don't hold much store by projections in this area (it's difficult to forget what Forrester and Jupiter were saying in the late ninetees), but downsizing the IDC report for exaggerations a bit, this latest piece does seem plausible. After all, if anyone can make money from the internet business, it ought to be those who supply the connections, and their equipment suppliers. But also don't fail to notice the suggestion that mobile bandwidth will not account for an enorous part of the data transfer market, predictable bad news this for the mobile phone industry. (Do not go gentle into that good night, Old age should burn and rave at close of day; Rage, rage against the dying of the light. From 'An Ode to 3G' by Dylan Thomas).

IDC predicts that the volume of Internet traffic generated by end users worldwide will nearly double annually over the next five years, increasing from 180 petabits per day in 2002 to 5,175 petabits per day by the end of 2007. To put these figures into perspective, the entire printed collection of the Library of Congress amounts to only 10 terabytes of information. By 2007, IDC expects Internet users will access, download, and share the information equivalent of the entire Library of Congress more than 64,000 times over, every day. "Some industry observers have speculated that slowing growth in Internet traffic is at the root of the current telecom malaise, but IDC research shows that not only is Internet traffic growth strong, but it will continue at near triple digit rates over the next five years," said Sterling Perrin, senior research analyst, Optical Networks at IDC. This has some interesting implications for telecommunications equipment suppliers, particularly in the optical market. "As long as the total amount of voice and data traffic on the network continues to increase, then the need will arise for carriers to buy equipment, such as next-generation optical, that transports and manages it cheaper and more efficiently than the earlier generation of pure SONET-based products," said Perrin. The IDC study finds that, although growth in the number of Internet users will continue to be an important traffic driver, the migration of those Internet users to bigger access pipes will be even more significant. In particular, broadband adoption by consumers around the world will make this the fastest growing and largest segment in terms of Internet traffic volume generated. By 2007, IDC believes that consumers will account for 60% of all Internet traffic generated, versus roughly 40% for business users. Mobile Internet users are expected to have only a minimal impact on overall traffic volume during the forecast period.
Source: Light Reading