Canada’s dollar touched a level beyond parity with its U.S. counterpart for a third consecutive day on speculation the global economic recovery will strengthen in 2011, making growth-linked currencies more attractive.
The loonie, as the currency is nicknamed, has gained 3 percent in 2010, the sixth-best performance in a measure of 10 developed-nation currencies, Bloomberg Correlation-Weighted Currency Indexes showed. Australia’s dollar rose 12 percent, while the U.S. dollar fell 2.8 percent. U.S. businesses unexpectedly expanded in December at the fastest pace in 22 years, data showed.
“The pick-up in the U.S. economy will be a benefit to our domestic economy,” Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said via e-mail. “We’ve been stuck essentially in a 20-point range for two days now. I expect it to break once we get into the new year.”
The Canadian currency rose 0.1 percent to C$1 per U.S. dollar at 5 p.m. in Toronto, compared with C$1.0009 yesterday. It gained as much as 0.2 percent to 99.91 cents per U.S. dollar.
The loonie remained stronger as data showed first-time claims for unemployment benefits in the U.S., Canada’s biggest trade partner, declined to the lowest level since July 2008 and a gauge of U.S. business unexpectedly climbed.
The claims decreased by 34,000 to 388,000 in the week ended Dec. 25, Labor Department figures showed today in Washington.
Highest Since 1988
The Institute for Supply Management-Chicago Inc. said its business barometer rose to 68.6 this month, the highest level since July 1988, from 62.5 in November. The median forecast in a Bloomberg survey was for a drop to 61.
Italian business confidence rose this month to the highest in almost three years, Isae institute date showed, helping to boost demand for currencies that benefit from global growth.
“The economic optimism going into the calendar year-end and beyond will likely contribute to more risk-related activity in currency markets, which should benefit the Canadian dollar,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto.
Canada’s currency fell against 11 of its 16 most-traded peers today, sliding the most against Brazil’s real while appreciating the most versus the pound. The loonie has risen 2.6 percent in December versus the greenback. It has gained the most this month versus the pound, 3.4 percent, and fallen the most against the Swiss franc, 4.5 percent.
2010 Performance
For the year, the Canadian dollar, called the loonie for the image of the aquatic bird on the C$1 coin, has strengthened against seven of its major counterparts. It advanced the most against the Danish krone, 12 percent, and fell the most versus the yen, 8.4 percent.
The loonie will trade at parity with its U.S. counterpart at the end of March, weaken to $1.01 per greenback by June, and end 2011 at parity, according to the median forecast in a Bloomberg survey of 29 economists and analysts.
Government bonds were little changed today. The two-year note yielded 1.70 percent after reaching 1.77 percent yesterday, the highest level since July 9. The 1.5 percent security due in December 2012 slipped one cent to C$99.63. A basis point is 0.01 percentage point. The 10-year note yielded 3.15 percent.
Canada’s government bonds have returned 5.9 percent in 2010, after losing 1.5 percent last year, according to a Bank of America Merrill Lynch index. The securities gained 12 percent in 2008. Global sovereign bonds are up 3.5 percent this year, according to a separate Merrill Lynch index.
Canadian corporate debt has returned 7.1 percent this year, and provincial bonds have gained 7 percent.
Crude oil for February delivery traded at $89.43 a barrel in New York, down 1.9 percent. It rose to $91.88 on Dec. 27, the highest level since Oct. 7, 2008. Canada is the largest supplier of crude to the U.S.
Source: www.bloomberg.com
Thursday, December 30, 2010
Wednesday, December 29, 2010
Population Changes Accelerate Global Economic Shift to Asia, Census Shows
A global economic power shift is being accelerated by population growth in Asia’s emerging markets, while the U.S. will be buoyed by a relatively youthful populace, according to analyses of international figures.
Germany, Europe’s biggest economy, is poised to see its population contract at a 0.2 percent rate in 2015 after expanding at a 0.3 percent in 1995, data from the U.S. Census Bureau yesterday showed. China, the world’s most populous country, is projected to grow at a 0.4 percent rate and India will expand at a 1.2 percent rate in 2015.
Changes in population help determine a country’s economic prospects. Slowing growth rates, and even contracting populations, in advanced economies had been offset by migrating workers in the past decade. That trend has fallen off in recent years as a result of the global recession.
“There will be a difficult adjustment period ahead as advanced economies, particularly the smaller ones, have to cede their dominant positions on the world economic stage to the dynamic emerging markets,” said Eswar Prasad, a professor of international trade policy at Cornell University.
“Emerging markets will have to grow into their role as major economic powers and shoulder their responsibilities to contribute to the collective global good,” he said.
U.S. Count
The latest count of the U.S. population shows the nation’s population grew 9.7 percent to 308,745,538 in the 2010 Census, the slowest pace of growth since 1940. The government estimated the growth rate in 2015 would be 1 percent.
The Census Bureau estimates that 194 of 227 countries are seeing growth accelerate, yesterday’s figures showed. Germany, the world’s fourth-largest economy, and Japan, ranked second by gross domestic product, are the only Group of Seven nations with contracting populations.
“One of the concerns when you have slow growth is the aging of the population,” said Peter Johnson, special assistant for international demographic and economic studies at the U.S. Census Bureau. “That to some extent can be mitigated by immigration, particularly by able-bodied people who can work and contribute to the support of the elderly.”
The U.S. has the lowest median age -- 36.6 years -- of the Group of Seven nations, according to United Nations’ estimates for 2010. Youthfulness is one variable for future growth because younger people tend to have more children.
Aging China
The population in China, the world’s third-largest economy, will become older than that of the U.S. by 2025, the U.N. estimates show. China’s median age now is 34.2 years, and will rise to 38.9 in 2025 compared with 38.7 for the U.S., the U.N. data shows.
“For two decades, fertility in China has been below the level for the population to replace itself,” said Feng Wang, a senior fellow at the Brookings Institution in Washington. “Demographic changes as such are creating new imperatives for changing its model of economic growth, moving away from a heavily labor-intensive pattern and creating a comprehensive social safety net before it is too late.”
Slower population growth can be a drag on economic expansion. Higher fertility rates mean more potential workers and consumers -- who can both stoke economic growth with tax revenue and spending.
Chinese industrial companies’ profits rose 49.4 percent in the 11 months through November from a year earlier, putting pressure on the central bank to add to this year’s two interest- rate increases.
Profits in China
Net income climbed to 3.88 trillion yuan ($585 billion), the statistics bureau said in a Dec. 27 statement on its website. That compared with a 7.8 percent gain in the same period in 2009 and an increase of 55 percent in January through August.
“In the decade to come India and China are going to be the center of international trade,” said Laishram Ladu Singh, professor and head of the Department of Mathematical Demography & Statistics at International at the International Institute for Population Sciences in Mumbai. “Unless there is a big U-turn in the outsourcing policies of these developed countries, the world economy is going to be concentrated in these two countries.”
While there is evidence of a so-called brain drain, in which educated residents seek employment in another country, Singh said that about 2 percent of India’s annual $1.3 trillion GDP comes by way of remittances from workers abroad.
Migration’s Influence
China has the smallest share of net migrants -- the difference between the number of migrants entering and those leaving a country -- and the U.S. has the biggest, according to yesterday’s figures.
Some demographers say China and India are decades away from becoming advanced economies.
“Both countries are still very, very poor,” said Jane De Lung, president of the Princeton, New Jersey-based Population Resource Center. “China is growing by leaps and bounds, but the majority of the Chinese still live in very poor and poverty- stricken areas. You don’t have widespread economic growth outside the cities in either country.”
By Timothy R. Homan and Catherine Dodge
Source: BLOOMBERG
http://www.bloomberg.com
Germany, Europe’s biggest economy, is poised to see its population contract at a 0.2 percent rate in 2015 after expanding at a 0.3 percent in 1995, data from the U.S. Census Bureau yesterday showed. China, the world’s most populous country, is projected to grow at a 0.4 percent rate and India will expand at a 1.2 percent rate in 2015.
Changes in population help determine a country’s economic prospects. Slowing growth rates, and even contracting populations, in advanced economies had been offset by migrating workers in the past decade. That trend has fallen off in recent years as a result of the global recession.
“There will be a difficult adjustment period ahead as advanced economies, particularly the smaller ones, have to cede their dominant positions on the world economic stage to the dynamic emerging markets,” said Eswar Prasad, a professor of international trade policy at Cornell University.
“Emerging markets will have to grow into their role as major economic powers and shoulder their responsibilities to contribute to the collective global good,” he said.
U.S. Count
The latest count of the U.S. population shows the nation’s population grew 9.7 percent to 308,745,538 in the 2010 Census, the slowest pace of growth since 1940. The government estimated the growth rate in 2015 would be 1 percent.
The Census Bureau estimates that 194 of 227 countries are seeing growth accelerate, yesterday’s figures showed. Germany, the world’s fourth-largest economy, and Japan, ranked second by gross domestic product, are the only Group of Seven nations with contracting populations.
“One of the concerns when you have slow growth is the aging of the population,” said Peter Johnson, special assistant for international demographic and economic studies at the U.S. Census Bureau. “That to some extent can be mitigated by immigration, particularly by able-bodied people who can work and contribute to the support of the elderly.”
The U.S. has the lowest median age -- 36.6 years -- of the Group of Seven nations, according to United Nations’ estimates for 2010. Youthfulness is one variable for future growth because younger people tend to have more children.
Aging China
The population in China, the world’s third-largest economy, will become older than that of the U.S. by 2025, the U.N. estimates show. China’s median age now is 34.2 years, and will rise to 38.9 in 2025 compared with 38.7 for the U.S., the U.N. data shows.
“For two decades, fertility in China has been below the level for the population to replace itself,” said Feng Wang, a senior fellow at the Brookings Institution in Washington. “Demographic changes as such are creating new imperatives for changing its model of economic growth, moving away from a heavily labor-intensive pattern and creating a comprehensive social safety net before it is too late.”
Slower population growth can be a drag on economic expansion. Higher fertility rates mean more potential workers and consumers -- who can both stoke economic growth with tax revenue and spending.
Chinese industrial companies’ profits rose 49.4 percent in the 11 months through November from a year earlier, putting pressure on the central bank to add to this year’s two interest- rate increases.
Profits in China
Net income climbed to 3.88 trillion yuan ($585 billion), the statistics bureau said in a Dec. 27 statement on its website. That compared with a 7.8 percent gain in the same period in 2009 and an increase of 55 percent in January through August.
“In the decade to come India and China are going to be the center of international trade,” said Laishram Ladu Singh, professor and head of the Department of Mathematical Demography & Statistics at International at the International Institute for Population Sciences in Mumbai. “Unless there is a big U-turn in the outsourcing policies of these developed countries, the world economy is going to be concentrated in these two countries.”
While there is evidence of a so-called brain drain, in which educated residents seek employment in another country, Singh said that about 2 percent of India’s annual $1.3 trillion GDP comes by way of remittances from workers abroad.
Migration’s Influence
China has the smallest share of net migrants -- the difference between the number of migrants entering and those leaving a country -- and the U.S. has the biggest, according to yesterday’s figures.
Some demographers say China and India are decades away from becoming advanced economies.
“Both countries are still very, very poor,” said Jane De Lung, president of the Princeton, New Jersey-based Population Resource Center. “China is growing by leaps and bounds, but the majority of the Chinese still live in very poor and poverty- stricken areas. You don’t have widespread economic growth outside the cities in either country.”
By Timothy R. Homan and Catherine Dodge
Source: BLOOMBERG
http://www.bloomberg.com
Tuesday, December 28, 2010
Bank bonuses in global disclosure call
The Basel Committee of the world's financial regulators has revealed plans for banks to disclose their bonuses.
A consultation paper suggests banks publish details of how pay is linked to performance, as well aggregate figures for different types of remuneration.
It would include individual pay details for top managers, risk management staff and "other material risk takers".
It is hoped stock markets can then pressure banks to give employees better incentives to reduce long-term risks.
Sounding out
In its consultative document, the Committee said that it hoped the proposed requirements "will support an effective market discipline and will allow market participants to assess the quality of the compensation practices and the quality of support for the firm's strategy and risk posture".
The consultation process - which will be open to comments from all interested parties - is expected to be complete by 25 February.
The proposal comes in response to the 2008 global financial crisis, which was partly blamed on bankers taking on hidden risks at their firms in the pursuit of cash bonuses based on short-term reported profits.
The Committee also expressed concern that previous, less detailed, guidelines had been applied inconsistently by different countries, making international comparisons of bank pay policies difficult.
The new, more detailed disclosure requirements would be "qualitative" - covering details of how pay is decided and how it is linked to performance - as well as "quantitative".
However, the global regulatory body made clear that it intends to rely on market and peer pressure to moderate pay levels.
It did not go as far as its European counterpart, who set explicit limits earlier this month on the percentage of banker bonuses that can be paid upfront and in cash.
A consultation paper suggests banks publish details of how pay is linked to performance, as well aggregate figures for different types of remuneration.
It would include individual pay details for top managers, risk management staff and "other material risk takers".
It is hoped stock markets can then pressure banks to give employees better incentives to reduce long-term risks.
Sounding out
In its consultative document, the Committee said that it hoped the proposed requirements "will support an effective market discipline and will allow market participants to assess the quality of the compensation practices and the quality of support for the firm's strategy and risk posture".
The consultation process - which will be open to comments from all interested parties - is expected to be complete by 25 February.
The proposal comes in response to the 2008 global financial crisis, which was partly blamed on bankers taking on hidden risks at their firms in the pursuit of cash bonuses based on short-term reported profits.
The Committee also expressed concern that previous, less detailed, guidelines had been applied inconsistently by different countries, making international comparisons of bank pay policies difficult.
The new, more detailed disclosure requirements would be "qualitative" - covering details of how pay is decided and how it is linked to performance - as well as "quantitative".
However, the global regulatory body made clear that it intends to rely on market and peer pressure to moderate pay levels.
It did not go as far as its European counterpart, who set explicit limits earlier this month on the percentage of banker bonuses that can be paid upfront and in cash.
Monday, December 27, 2010
Why don't Chinese spend more money?
If anyone on the planet can afford to head down to the neighborhood mall and indulge in a shopping spree, you'd think it would be the Chinese. After all, they live in an economy that routinely posts growth rates of 9% or higher, resulting in surging incomes and boundless job opportunities. While much of the world experienced GDP contractions and dramatic spikes in unemployment during the Great Recession, China, supported by massive stimulus programs, barely missed a beat. In theory, as income increases, and the prospects for future earnings become brighter, families should be more willing to postpone savings and spend now.
But in China, just the opposite is happening. It's still proving difficult to convince the average Chinese to part with his or her money, even though his or her stash of cash is bigger than ever. Sure, Chinese consumers are spending more and more each year on items like cars and appliances. But simultaneously, the urban Chinese household saves twice as much of its income today as 20 years ago – from 15% in the early 1990s to over 30% in recent years. Oddly, as Chinese incomes have grown, so has their propensity to save.
The fact that Chinese are saving more is of great importance to all of us. Getting the Chinese to spend is necessary to restore the global economy to true health. If the world is to “rebalance” – or eliminate the massive surpluses and deficits that underpinned the Great Recession – consumers in surplus nations like China need to spend more. If they did, China would import greater quantities of stuff from the rest of the world and reduce its giant trade surplus, while simultaneously shifting China's sources of growth away from its unhealthy dependence on investment (in sectors like property). However, the role of consumer spending in China's economy has been heading in the wrong direction. Private consumption accounted for 46% of GDP in 2000; by 2009, that ratio had fallen to about 35%. Very simply, the sources of Chinese growth aren't rebalancing, and without that, the entire global economy can't rebalance either.
Why won't the Chinese loosen their wallets? A new study by economists Marcos Chamon, Kai Liu and Eswar Prasad sheds some light on the financial calculations of the average Chinese. After studying Chinese statistical surveys of household incomes dating back to the 1980s, they conclude that even though Chinese incomes have increased, so has the uncertainty Chinese feel about their income, due to the market-oriented nature of Chinese reforms. And as a result of that heightened uncertainty, Chinese are more inclined to save a larger proportion of their income even in a rapid-growth economy.
This study shows just how much more spending power the Chinese have gained over the years. From 1989 to 2006, average annual household income almost tripled, from RMB12,830 to 32,040 in real terms. (To give you an idea, at current exchange rates, that's a jump from about $1,900 to $4,800.) That increase in income is without question a result of the dismantling of the Communist command economy in China, a process started by Deng Xiaoping in the late 1970s. Those reforms expanded the role of the private sector, gave the average Chinese more freedom over how they work, and opened up the economy to the world through foreign investment and trade.
But those same capitalist reforms have also made the life of the average Chinese riskier. Instead of permanent employment at state-owned or collective enterprises (SOCEs), Chinese workers are more likely to have jobs in the private sector where job security is not as guaranteed. In the sample used in this study, the proportion of workers employed in the SOCE sector fell dramatically from 81% in 1989 to 64% in 2006. Even for those workers still employed by SOCEs, the terms of employment are not as secure as they used to be. State companies in China have gone through their own painful process of market reform, to make them more competitive with private firms and more profitable. Jobs in those state enterprises are no longer locked in for life either, while wages are linked more to performance and productivity. Here's a bit from the study:
The transition from a centrally planned economy to a market economy may have resulted in an increase in firm-level volatility related in part to state enterprise restructuring and an increase in the link between wages and firm-level performance. Wages paid to workers may be increasingly tied to firm performance and more reflective of individual productivity due to tightening of budget constraints on SOCEs, increased competition and more openness to foreign trade.
On top of that, Chinese workers have also had to adjust to a new pension scheme. Pensions were once paid by enterprises, but in 1997, a national system was introduced with “individual accounts” that hold retirement contributions from both employer and employee. This new system seems to have caused Chinese workers to fret that they won't have enough of a nest egg for their golden years – and likely with good reason. Retired workers are probably seeing reduced pension payments compared to their pre-retirement income in the new system compared to the old.
The result of these changes to the Chinese economy is a U-shaped savings pattern. Savings rates are higher among younger people – who feel the need to set aside a “buffer” of savings for protection against greater income uncertainty – and older folks – who are beefing up savings for their retirement. Here's more from the study:
Higher income uncertainty and pension reforms can together explain much of the rise in average savings among urban households in China…Moreover, the calibrated response to saving rates implies changes to the cross-section of savings over time that are sharper among households at the two ends of the age distribution of household heads. Even 10 years after the initial increase in uncertainty and pension reform, we estimate the youngest and the oldest households save 5 percentage points more than before those changes, compared to only 2.5-3.5 percentage points more for those in their late thirties-early forties.
The Chinese government is fully aware of the impact market reform has had on income security, and thus on the country's efforts to rebalance its economy, and policymakers are striving to address it by building up the confidence of the Chinese consumer. The government, for example, is undertaking a massive investment in healthcare to convince Chinese they don't have to save as much to cover possible medical bills. But the process of making Chinese feel secure enough to spend will be slow. Whatever Chinese policymakers do, they can't eliminate the greater degree of risk inherent in an economic system based on free enterprise. Short of returning to the old socialist system of worker protection, the average Chinese family is going to have to adjust to the new realities of a market-oriented economy – both the potential upside (greater income potential, more job choice) and the downside (less job security, fewer automatic benefits). Remember, many of these market-based reforms are still very new to the Chinese (10-15 years old), so they're just not accustomed to the level of uncertainty that comes with capitalism. In other words, the Chinese are in the process of dealing with the kind of risks that Americans have faced for centuries.
The Chinese are thus saving more to protect themselves. That may be wise for their own personal security, but not necessarily all that great for the world economy. Confidence in the future, even one as bright as China's, won't be created overnight, whatever Chinese policymakers attempt to do. So don't expect the Chinese consumer to swoop in and save the world economy, and least not these days, when it badly needs saving.
Source: Time
http://curiouscapitalist.blogs.time.com
But in China, just the opposite is happening. It's still proving difficult to convince the average Chinese to part with his or her money, even though his or her stash of cash is bigger than ever. Sure, Chinese consumers are spending more and more each year on items like cars and appliances. But simultaneously, the urban Chinese household saves twice as much of its income today as 20 years ago – from 15% in the early 1990s to over 30% in recent years. Oddly, as Chinese incomes have grown, so has their propensity to save.
The fact that Chinese are saving more is of great importance to all of us. Getting the Chinese to spend is necessary to restore the global economy to true health. If the world is to “rebalance” – or eliminate the massive surpluses and deficits that underpinned the Great Recession – consumers in surplus nations like China need to spend more. If they did, China would import greater quantities of stuff from the rest of the world and reduce its giant trade surplus, while simultaneously shifting China's sources of growth away from its unhealthy dependence on investment (in sectors like property). However, the role of consumer spending in China's economy has been heading in the wrong direction. Private consumption accounted for 46% of GDP in 2000; by 2009, that ratio had fallen to about 35%. Very simply, the sources of Chinese growth aren't rebalancing, and without that, the entire global economy can't rebalance either.
Why won't the Chinese loosen their wallets? A new study by economists Marcos Chamon, Kai Liu and Eswar Prasad sheds some light on the financial calculations of the average Chinese. After studying Chinese statistical surveys of household incomes dating back to the 1980s, they conclude that even though Chinese incomes have increased, so has the uncertainty Chinese feel about their income, due to the market-oriented nature of Chinese reforms. And as a result of that heightened uncertainty, Chinese are more inclined to save a larger proportion of their income even in a rapid-growth economy.
This study shows just how much more spending power the Chinese have gained over the years. From 1989 to 2006, average annual household income almost tripled, from RMB12,830 to 32,040 in real terms. (To give you an idea, at current exchange rates, that's a jump from about $1,900 to $4,800.) That increase in income is without question a result of the dismantling of the Communist command economy in China, a process started by Deng Xiaoping in the late 1970s. Those reforms expanded the role of the private sector, gave the average Chinese more freedom over how they work, and opened up the economy to the world through foreign investment and trade.
But those same capitalist reforms have also made the life of the average Chinese riskier. Instead of permanent employment at state-owned or collective enterprises (SOCEs), Chinese workers are more likely to have jobs in the private sector where job security is not as guaranteed. In the sample used in this study, the proportion of workers employed in the SOCE sector fell dramatically from 81% in 1989 to 64% in 2006. Even for those workers still employed by SOCEs, the terms of employment are not as secure as they used to be. State companies in China have gone through their own painful process of market reform, to make them more competitive with private firms and more profitable. Jobs in those state enterprises are no longer locked in for life either, while wages are linked more to performance and productivity. Here's a bit from the study:
The transition from a centrally planned economy to a market economy may have resulted in an increase in firm-level volatility related in part to state enterprise restructuring and an increase in the link between wages and firm-level performance. Wages paid to workers may be increasingly tied to firm performance and more reflective of individual productivity due to tightening of budget constraints on SOCEs, increased competition and more openness to foreign trade.
On top of that, Chinese workers have also had to adjust to a new pension scheme. Pensions were once paid by enterprises, but in 1997, a national system was introduced with “individual accounts” that hold retirement contributions from both employer and employee. This new system seems to have caused Chinese workers to fret that they won't have enough of a nest egg for their golden years – and likely with good reason. Retired workers are probably seeing reduced pension payments compared to their pre-retirement income in the new system compared to the old.
The result of these changes to the Chinese economy is a U-shaped savings pattern. Savings rates are higher among younger people – who feel the need to set aside a “buffer” of savings for protection against greater income uncertainty – and older folks – who are beefing up savings for their retirement. Here's more from the study:
Higher income uncertainty and pension reforms can together explain much of the rise in average savings among urban households in China…Moreover, the calibrated response to saving rates implies changes to the cross-section of savings over time that are sharper among households at the two ends of the age distribution of household heads. Even 10 years after the initial increase in uncertainty and pension reform, we estimate the youngest and the oldest households save 5 percentage points more than before those changes, compared to only 2.5-3.5 percentage points more for those in their late thirties-early forties.
The Chinese government is fully aware of the impact market reform has had on income security, and thus on the country's efforts to rebalance its economy, and policymakers are striving to address it by building up the confidence of the Chinese consumer. The government, for example, is undertaking a massive investment in healthcare to convince Chinese they don't have to save as much to cover possible medical bills. But the process of making Chinese feel secure enough to spend will be slow. Whatever Chinese policymakers do, they can't eliminate the greater degree of risk inherent in an economic system based on free enterprise. Short of returning to the old socialist system of worker protection, the average Chinese family is going to have to adjust to the new realities of a market-oriented economy – both the potential upside (greater income potential, more job choice) and the downside (less job security, fewer automatic benefits). Remember, many of these market-based reforms are still very new to the Chinese (10-15 years old), so they're just not accustomed to the level of uncertainty that comes with capitalism. In other words, the Chinese are in the process of dealing with the kind of risks that Americans have faced for centuries.
The Chinese are thus saving more to protect themselves. That may be wise for their own personal security, but not necessarily all that great for the world economy. Confidence in the future, even one as bright as China's, won't be created overnight, whatever Chinese policymakers attempt to do. So don't expect the Chinese consumer to swoop in and save the world economy, and least not these days, when it badly needs saving.
Source: Time
http://curiouscapitalist.blogs.time.com
Friday, December 24, 2010
Global Financial and Economic Crisis: Implications for Agricultural Sector in India
By Shah, Deepak
INTRODUCTION The early nineties saw a substantial overhauling of the Indian economy through Structural Adjustment Programme (SAP), which encompassed a number of measures, viz., liberalisation of export-import policy, drastic lowering of import duties on many products, removal of import restrictions, reduction of investment in the agricultural and industrial sectors so as to allow the private sector to take over, exchange rate adjustment, decanal isation and reduction in peak tariff rates, besides abolition of export subsidies, improving competitiveness of Indian exports and integration of the national market with international market. However, some of these measures adversely affected the agricultural sector. The restructuring of the public distribution system also had an adverse affect on the availability of foodgrains to the poor at subsidised rates and this had substantial implications for the farm sector (Mathew, 2008).
The performance of Indian agriculture was not so encouraging in the aftermath of liberalisation as the decade of nineties and the period thereafter was marked with drastic decline in the growth rate of foodgrains, deceleration in the rate of growth of the gross domestic product (GDP) in agriculture and allied sectors; which was just 1 per cent during 2002-05, fall in per capita availability of foodgrains, import of foodgrains at a price higher than domestic price, rise in unemployment in the agriculture sector, fall in prices of farm products, rise in input prices, etc. During the time when Indian agriculture was experiencing some serious concerns, the entire world got a major jolt by global financial and economic crisis. There were several underlying causes of the current global crises, which mainly revolved around the following: (a) prolonged boom in housing prices, (b) massive borrowing binge in the United States and some European countries, (c) rapid financial innovation, (d) growing culture of weak regulation, and (e) greed, fuelling the huge asset price bubbles in housing, stock markets and commodity prices (Acharya, 2009). The fall in US housing prices in the winter of 2006-07 rendered many of the "sub-prime" (not credit worthy) housing loans as bad loans, which meant hundreds of billions of financial derivatives to lose their value, resulting in collapse of "the house of financial cards" by the summer of 2007. The financial meltdown of September 2008 led to sharp slowdown in economic activity in the US and Europe with a massive drop in demand for goods and services from major exporting nations like China, Japan, Germany and other Asian countries, including India. In the light of this background, this paper attempts to evaluate the implications of global meltdown on the agricultural sector of India, especially with respect to commodity price, investment in agriculture and in general food security of the country.
GLOBAL CRISES
The prolonged boom in housing prices enjoyed by the US and other European countries since the early nineties right upto the end of 2006 made people believe that real estate prices may only go up, leading to massive amounts of lending by banks for purchase of houses to those who did not even have a steady income, and who were actually sub-prime borrowers because of the high risk of defaults. Since riskdistributing new financial products' enabled banks to sell off (at a discount) their loan mortgages to investment funds, banks did not worry about defaulting of sub-prime loans as these derivatives had spread the risk and the funds were earning on the discounts (Swamy, 2010). During 2003-07, the US economy was booming due to loose monetary policy and low interest rates, which led to rise in the global international trade due to surge in US imports. However, in August 2007, a mild recession hit the US economy, which was enough to trigger and cascade bankruptcies in Investment Funds. In fact, the housing bubble - part of a massive borrowing binge in the US and European countries by households and financial institutions - was fuelled by the easy money policies of their central banks and inflows of funds from capital surplus countries such as China, Japan, Germany and oil exporters (Acharya, 2009). Since big exporting nations sold their products to US and European consumers and then parked their surpluses in these Government securities, there was massive increase in borrowings by the households and financial firms and, as a result, the ratio of gross debt to GDP of US households, business and government more than doubled from 160 per cent in 1982 to 340 per cent in 2007. Further, since the rapid financial innovations spread the risks of the underlying weak credits throughout the Western financial system, the explosion of financial innovation led to excess growth of the finance industry on a weak base of shaky credit risks (Acharya, 2009). The growing culture of weak regulation of financial institutions and markets in the U.S., U.K. and other countries was the main reason for this sorry state of affairs of global financial crisis that fuelled the entire world.
The recession became more prominent in September 2008 when a large number of American and European banks announced huge losses on their mortgage related to securities and investments. The process of financial collapse gradually gained further momentum when major American investment banks like Lehman Brothers collapsed and AIG2 declared bankruptcy. Nonetheless, other investment funds/banks like Merrill Lynch were saved through forced merger with banks having sound footing. Most of the blue collared workers were sub-prime loanees and when they became unemployed because of recession they could not repay even a fraction of the loan instalments. Due to growing unemployment and recession, Lehman Brothers could not auction off the properties and they had to saddle with house properties on foreclosures of loan defaulters (Swamy, 2010). The bankruptcy of Lehman and others and consequent reduction in liquid funds resulted in collapse of stock market, which consequently affected European economies and US demand for goods (imports). The chain reaction of this was felt by China whose economic boom was export-led. The setback was also felt by the Indian economy mainly because of our own perfidious financial derivatives called Participatory Notes3 (PNs) - compounded by an antinational agreement with Mauritius - which allowed even $ 1 paid-up companies to invest in Indian stock market without capital gains tax levied to them. Although the Tarapore Committee on Financial Reforms strongly condemned PNs and wanted them scrapped, all the warnings were ignored. Since billions of dollars of money entered into the Mumbai stock exchange through buying and selling of shares with PNs used like cash, the PNs accounted for 60 per cent -of the foreign institutional investment (FII) funds in the stock market. At the time when liquidity crunch developed in US and subsequently in Europe and when interest rates rose, the PNs of the order of $ 60 billion were shipped out of India during the period between October 2008 and January 2009, and this resulted in steep fall in die sensex index due to crash in stock market, which in turn caused financial crises in India.
MELTDOWN AND INDIA
Although India initiated adequate measures to correct stock prices in January 2008, our major concern continued to remain on the rising inflation due to rise in commodity prices, which increased from 5 per cent in February 2008 to over 10 per cent by April 2008. The steep rise in inflation rate was seen despite the fact that Government did not change the issue prices of foodgrains, fertilisers, petrol, diesel, kerosene and LPG during this period. The acceleration in the prices of oil, metals, fertilisers and foodgrains from late 2007 was mainly due to the global economic boom during 2002 to 2007 (Acharya, 2009). In fact, the events of September 2008 were marked with the collapse of Wall Street banks, freezing of bank credit flow in the West, worldwide liquidity crunch, precipitation of recessionary forces in the US, Europe and Japan and consequent liquidity shock/crunch in India as foreign institutional investors started withdrawing their money, resulting in drying up of loans from foreign banks and vanishing of credit for foreign trade. The outflow of foreign capital and drop in the export earnings had an implication for the exchange rate of rupee. However, RBI took every possible measure to avoid any currency crisis by checking the slide in the value of rupee. In fact, the economic performance of India was substantially affected by the global crisis as the economic growth of India slowed down to 5-6 per cent in the second half of the financial year 2008-09, which actually averaged 9 per cent during the previous five years. It is to be noted that when India was experiencing drop in inflation rate due to sharp fall in global commodity prices, food prices in India still remained quite high. Further, the recession after September 2008 led to thousands losing jobs due to sharp fall in exports from India with respect to gems and jewellery, garments, leather production and footwear. It is to be noted that the UNDP Administrator, Kemal Dervis, had already warned in October 2008 that the effect of the financial crisis could reduce demand for developing countries' exports, as well as the availability of credit and foreign direct investment to finance projects. Therefore, the developing countries were advised to come out with a strong mix of social and economic policies to stimulate productive public and private investment that could sustain inclusive growth. The estimates reported in September 2008 by the UN World Food Program revealed that there are 850 million chronically hungry people in the world, whereas the World Bank estimates reported that the number of poor increased by at least 100 million as a result of the food and fuel crises. According to its November 2008 report, the poorest households were "forced to switch from more expensive to cheaper and less nutritional foodstuffs, or cut back on the total caloric intake altogether, face weight loss and severe malnutrition." The rise in fuel and food prices not only affected poor in India but also in China. The 2008 Global Hunger Index of the IFPRI already indicates India to have alarming levels of people suffering from hunger. In the Indian economy agriculture is a crucial sector. Therefore, there is both challenge and an opportunity to produce and distribute larger quantities of foodgrain and stabilise our food prices, besides playing a significant role in the international market. At the time when the recessionary forces are affecting the economy of several developed and developing countries, our national agricultural policy has to be realistic, which necessitates integration and reforming of our economic and trade policies. Further, since U.S.A. has been trying hard to push the WTO reforms in its favour to facilitate the U.S. and E.U. agriculture and food exports to Indian markets, there is need for India to have reciprocal policy. Recession has already created a situation where our farmers are hard hit by credit crisis, low demand for their produce and also depressed export markets for our food products.
RECESSION AND INDIAN AGRICULTURE
There has been every possible indication that the growth in Indian processed food sector may not be very significant and so in the case of exports with respect to foodgrains and processed food, especially in the next couple of years or so. Interestingly, while on the one hand there has been a ban on foodgrain exports, the raw sugar, on the other hand, is subjected to zero import tariff. This has led to widespread protest by the sugar industry and there is fear that the area under sugarcane can be further reduced owing to "free" imports of raw sugar. Since sugar is a critical daily item of consumption for the vast population, there is obviously a need to have adequate control on the domestic prices of all essential commodities of common consumption, including sugar. The futures trading in agricultural commodities has to be controlled to avoid further speculation in these commodities. India needs to have a stable price regime with a view to keep the common man away from the perception that economic recession will create a gloom in the growth of food sector. At a time when global economic recession is yet to register full recovery, the growth prospects for Indian agricultural sector would depend on: (a) greater investment in rural infrastructure in the form connectivity of road and water management, (b) greater emphasis on commercially applicable research and development in agriculture, (c) improvements in primary education and health cover to bring greater returns in terms of agricultural productivity, (d) overcoming deficiencies in rural credit delivery system, (e) greater public and private spending in agriculture, etc. (Acharya, 2009).
Though the global economic slowdown has not adversely impacted the Indian economy as compared to more closely globally integrated economies of developed countries, there is some evidence of job losses in India in the exports of goods sector owing to recession. The recession, in general, has affected GDP growth in India. For instance, the GDP at factor cost in India declined from 9.7 per cent in the third quarter of 2007-08 to 5.8 per cent in the fourth quarter of 2008-09 with a make up in the same to 7.9 per cent in the second quarter of 2009-10 (Table 1). This is despite the fact that the interim budget presented on 16 February 2009 spoke of a nominal GDP growth of 1 1 per cent in 2009-10. The decline in GDP growth with respect to agriculture and allied sector was sharper and it decelerated from 4.7 per cent in 200708 to 1.6 per cent in 2008-09 and further to -0.2 per cent in the first half of 2009-10.
TABLE 1. QUARTERLY GROWTH RATES AT GDP AT CONSTANT 2004-05 PRICES IN INDIA
As for the impact of slowdown, the Rural Marketing Association of India conducted a study between July and December 2008 on India's rural markets and found no evidence of a slowdown on those who earn their livelihood from agriculture (Debroy, 2009). Further, the 11th Five Year Plan (2007-12) document mentions that the incremental employment growth between 2000 and 2005 was 46.72 million, which encompassed 8.84 million jobs in agriculture, 8.64 million in manufacturing, 6.44 million in construction, 10.70 million in trade, hotels and restaurants, 4.04 million in transport, storage and communications, 3.12 million in financial, insurance, real estate and business services and 4.59 million in community, social and personal services, implying major growth in employment in the unorganised sector. Since the bulk of the employment creation has occurred in other sectors than in agriculture, these sectors are, therefore, likely to suffer from the slowdown. Further, according to Mahajan (2009), the economic slowdown in recent times do not indicate any job loss in the food and agricultural sector as the jobs involved in the production, procurement, transport, storage, processing and retailing of cereals, oilseeds and pulses remained intact - whether the volumes are due to domestic production being exported or due to imports. This is particularly true in the case of processing units. Since the Indian food processing industry5 exports commodities like basmati rice, pulses, herbs, meat, fruits and vegetables, there is hardly any adverse effect of slowdown on their demand, and, rather these products have shown robust demand throughout the world even during the period of global meltdown. This is an indication of the fact that investments in food and agricultural industry are not at all affected by the economic slowdown. In this context, even Debroy (2009) has mentioned that though there stands an indirect impact of global prices and trade policy, the problems relating to agriculture have nothing much to do with global slowdown as agriculture sector is a somewhat different entity in India. However, a counter argument put forward by Ghosh (2009) is that the global crisis, accompanied by changes in employment and relative prices, has adversely affected three sections of the Indian population, encompassing cultivators, migrant workers and home-based women workers. Not only this, it has several implications with respect to food security of the country that happens to be already at stake. In fact, the cultivators in India have been facing agrarian crisis for the past one-decade or so despite rise in international crop prices. The problems concerning farming system in India are multifarious and mainly include weather related problems like less reliable monsoon, frequent drought or floods, problems of soil degeneration, lack of insurance and institutional credit, problems relating to inputs, lack of marketing facilities and high crop prices volatility. These problems have led to decelerating growth in GDP with respect to agriculture and allied sectors, which fluctuated heavily over the past two decades and even became negative in 2002-03 and 2009-10, and kept decelerating during the period coinciding with the worldwide economic slowdown (Table 2).
It is interesting to note that despite global economic slowdown, the demand for cereals remained significantly high in India. Although income elasticity of demand for the population of India has been declining for cereals and nearing to zero, the low income groups still show positive income elasticity of demand for cereals (Mahajan, 2009). As a result, the demand for cereals has less tendency to decline even if the average income falls marginally as it is expected that under such circumstances people will switch over to basic foods at the expense of other items of consumption. This not only ensures higher demand for farm produce but also significantly high demand for labour in agriculture. It is to be noted that 80 per cent of the farmers in India are either small or marginal and they hardly produce any marketable surplus with marginal dependence on hired labour. The remaining 20 per cent of the farmers encompassing medium and large farmers produce 80 per cent of die marketable surplus of wheat and rice with significantly higher dependence on hired labour. In the states like Punjab and Haryana, the demand for labour has outstripped supply and in these states labourers are seen to negotiate wages on per acre contractual basis rather than daily rates. This has created shortage of labour, which could be partly attributed to the implementation of the National Rural Employment Guarantee Scheme that offer work opportunities to them within their village. This is a reflection of the fact that the employment of village labour has remained unaffected during the period of slowdown and rather their demand has increased in recent times because of their better bargaining power.
TABLE 2. ANNUAL AVERAGE OVERALL GDP GROWTH RATE AND AGRICULTURE GROWTH RATE IN INDIA
Indian Agriculture and Price Volatility
Though extremely volatile crop prices follow an international pattern, the major reasons for the volatility of output prices associated with rising input prices in India can be traced in government attempts to reduce fertiliser subsidies and deregulation of supply of inputs like seeds and pesticides. During the period of global economic recession, the volatility in crop prices became much worse as it compounded the problems of cash crop growers. Although global primary commodity prices rose dramatically upward in 2007 and during the first half of 2008, a collapse in the same was noticed thereafter, leading to wiping out whatever gain in prices occurred. Obviously, the farmers, who produced cash crops hardly had any benefit from such a short-lived price boom (Ghosh, 2009). The farmers producing cash crops saw lower prices on offer for their produce despite rise in food prices. This held particularly true for cultivators of cotton and oilseeds who saw crash in prices of these crops during the period of global meltdown, which were rising just a year ago before the economic slowdown caught up with the world. The farmers, who preferred to cultivate cotton and oilseeds when their prices were quite high, have now been facing a complex kind of situation where costs and prices configuration stand entirely different, and this has serious implications as it could make the cultivation process financially completely unviable (Ghosh, 2009). Further, during the period of slowdown when the overall prices remained stagnant, the food prices continued to rise so much so that foodgrain prices went up by more than 10 per cent between April 2008 and March 2009, which solely cannot be blamed on higher procurement prices as the prices of pulses, not covered by public procurement, also went up sharply during this period. Even the prices of fruits, vegetables, eggs, fish and meat, etc. rose, though not as sharply as in the case of foodgrains. It was only in the case of edible oils that prices declined due to crash in the world prices of oilseeds. On the other hand, the prices of non-food primary products hardly changed. While the prices of fibres like cotton, jute and silk remained unchanged, there was a 5 per cent fall in the prices of oilseeds, which obviously affected the producers of cash crops. This was despite the fact that the farmers paid more for fertilisers and pesticides, which saw more than 5 per cent rise in their prices. As for the food sector, the major cause of concern is the 10 per cent rise in wholesale price of cereals between December 2007 and December 2008 period as this has resulted in a reduction in real income of all urban households and a large segment of rural population encompassing the landless households and small and marginal farmers who are net buyers of cereals (Mahajan, 2009). In order to improve domestic supply of pulses and keep their prices in check, the Government of India has extended zero customs duty for one more year with respect to the import of pulses and even extended ban on its exports till March 2010. Similarly, the government reduced import duties on edible oils to keep their prices low. As a safety measure, India imported 5.60 million tonnes of edible oil during 2007-08 to keep their prices in check in domestic market. This cautioned Indian consumers when the food economy of several developing countries was jeopardised during the period of economic slowdown.
FALLING GLOBAL COMMODITY PRICES
With the onset of the global recession, the international commodity prices with respect to non-energy agricultural beverages and food, fat and oil, and also grains fell from 2008 to 2009 with recovery thereafter. Some of the beverage and food items like coffee, tea, coconut oil, copra, groundnut oil, palm oil, soybean, barley, maize, etc. in particular showed steep fall in their international prices during the time of recession (Table 3).
TABLE 3. INTERNATIONAL COMMODITY PRICES FOR NON-ENERGY AGRICULTURE BEVERAGES, FOOD, FATS AND OILS, GRAINS, OTHER FOOD AND FERTILISERS (2008-2010)
The period between 2008 and 2009 saw not only drop in the prices of food and beverages but also input prices like fertilisers. In fact, huge inflows of speculative finance into the commodity futures market led to sharp increase in commodity prices in 2008, which following the financial meltdown, came down even more sharply in the subsequent year. Such sharp fluctuations in the agricultural commodity prices obviously adversely affected the peasantry in the developing world. The peasantry of developing world are exposed to high risks of international price fluctuations owing to the policies of trade liberalisation followed by them and the agricultural sector of these economies that has become more export-oriented.
COPING STRATEGIES
The fall in GDP growth to 5.3 per cent in the third quarter (October-December 2008), negative rates of 2.2 per cent and 0.20 per cent, respectively, with respect to agriculture and manufacturing sectors, decline in the exports and imports by 15.9 per cent and 18.2 per cent, respectively, in dollar terms in January 2009 as compared to January 2008, etc. are some of the indications of the adverse effect of slowdown on the Indian economy. The coping strategies to counter the impact of slowdown include increasing public investment in agriculture, extending protection against price crashes of crops through price support and increased import tariffs, extending employment guarantee for more number of days than stipulated in NREG scheme, providing employment guarantee in the urban areas, enhancing state intervention, providing relief packages for crisis affected sectors, etc. This means that a significant amount of public expenditure is needed for the creation of jobs and raising purchasing power of the rural and urban population. Equally important is to raise public investment, especially for the development of agriculture, social sector and infrastructure, aside from generating employment in the rural and urban areas of India.
CONCLUSIONS
Although the global economic downturn has resulted in large- scale job losses and mass unemployment in many export-oriented sectors, the situation in food and agricultural sector has remained stable with little job losses. However, since the agricultural sector in India is a somewhat different entity, the impact of global crisis in this sector is seen to have percolated in varied forms. During the period of slowdown when there stood a virtual ban on the foodgrain exports, raw sugar was subjected to zero import tariff, leading to widespread protest by the sugar industry. The "free" imports of raw sugar raised concerns regarding cultivation of sugarcane in the country. Adequate control obviously needs to be exercised on the domestic prices of all essential commodities of common consumption, including sugar. Interestingly, despite decline in the income elasticity of .demand for cereals in India, the lowincome groups still show positive income elasticity of demand for cereals, indicating little tendency of decline in demand for cereals even if income falls marginally. This not only ensures higher demand for farm produce but also significantly high demand for labour in agriculture. However, the global economic recession has certainly compounded the problems of cash crop growers as the farmers producing cash crops saw lower prices on offer for their produce despite rise in food prices. Further, though prices of edible oil in India declined due to crash in the world prices of oilseeds, the price of non-food primary products hardly changed. Nonetheless, the major cause of concern for the food sector of India is the 10 per cent rise in wholesale prices of cereals between December 2007 and December 2008 period as this has resulted in reduction in real income of all urban and rural households. Although government has initiated some measures to check prices, there is still need for other measures to safeguard the Indian economy from global economic slowdown.
Source: http://www.americanchronicle.com
INTRODUCTION The early nineties saw a substantial overhauling of the Indian economy through Structural Adjustment Programme (SAP), which encompassed a number of measures, viz., liberalisation of export-import policy, drastic lowering of import duties on many products, removal of import restrictions, reduction of investment in the agricultural and industrial sectors so as to allow the private sector to take over, exchange rate adjustment, decanal isation and reduction in peak tariff rates, besides abolition of export subsidies, improving competitiveness of Indian exports and integration of the national market with international market. However, some of these measures adversely affected the agricultural sector. The restructuring of the public distribution system also had an adverse affect on the availability of foodgrains to the poor at subsidised rates and this had substantial implications for the farm sector (Mathew, 2008).
The performance of Indian agriculture was not so encouraging in the aftermath of liberalisation as the decade of nineties and the period thereafter was marked with drastic decline in the growth rate of foodgrains, deceleration in the rate of growth of the gross domestic product (GDP) in agriculture and allied sectors; which was just 1 per cent during 2002-05, fall in per capita availability of foodgrains, import of foodgrains at a price higher than domestic price, rise in unemployment in the agriculture sector, fall in prices of farm products, rise in input prices, etc. During the time when Indian agriculture was experiencing some serious concerns, the entire world got a major jolt by global financial and economic crisis. There were several underlying causes of the current global crises, which mainly revolved around the following: (a) prolonged boom in housing prices, (b) massive borrowing binge in the United States and some European countries, (c) rapid financial innovation, (d) growing culture of weak regulation, and (e) greed, fuelling the huge asset price bubbles in housing, stock markets and commodity prices (Acharya, 2009). The fall in US housing prices in the winter of 2006-07 rendered many of the "sub-prime" (not credit worthy) housing loans as bad loans, which meant hundreds of billions of financial derivatives to lose their value, resulting in collapse of "the house of financial cards" by the summer of 2007. The financial meltdown of September 2008 led to sharp slowdown in economic activity in the US and Europe with a massive drop in demand for goods and services from major exporting nations like China, Japan, Germany and other Asian countries, including India. In the light of this background, this paper attempts to evaluate the implications of global meltdown on the agricultural sector of India, especially with respect to commodity price, investment in agriculture and in general food security of the country.
GLOBAL CRISES
The prolonged boom in housing prices enjoyed by the US and other European countries since the early nineties right upto the end of 2006 made people believe that real estate prices may only go up, leading to massive amounts of lending by banks for purchase of houses to those who did not even have a steady income, and who were actually sub-prime borrowers because of the high risk of defaults. Since riskdistributing new financial products' enabled banks to sell off (at a discount) their loan mortgages to investment funds, banks did not worry about defaulting of sub-prime loans as these derivatives had spread the risk and the funds were earning on the discounts (Swamy, 2010). During 2003-07, the US economy was booming due to loose monetary policy and low interest rates, which led to rise in the global international trade due to surge in US imports. However, in August 2007, a mild recession hit the US economy, which was enough to trigger and cascade bankruptcies in Investment Funds. In fact, the housing bubble - part of a massive borrowing binge in the US and European countries by households and financial institutions - was fuelled by the easy money policies of their central banks and inflows of funds from capital surplus countries such as China, Japan, Germany and oil exporters (Acharya, 2009). Since big exporting nations sold their products to US and European consumers and then parked their surpluses in these Government securities, there was massive increase in borrowings by the households and financial firms and, as a result, the ratio of gross debt to GDP of US households, business and government more than doubled from 160 per cent in 1982 to 340 per cent in 2007. Further, since the rapid financial innovations spread the risks of the underlying weak credits throughout the Western financial system, the explosion of financial innovation led to excess growth of the finance industry on a weak base of shaky credit risks (Acharya, 2009). The growing culture of weak regulation of financial institutions and markets in the U.S., U.K. and other countries was the main reason for this sorry state of affairs of global financial crisis that fuelled the entire world.
The recession became more prominent in September 2008 when a large number of American and European banks announced huge losses on their mortgage related to securities and investments. The process of financial collapse gradually gained further momentum when major American investment banks like Lehman Brothers collapsed and AIG2 declared bankruptcy. Nonetheless, other investment funds/banks like Merrill Lynch were saved through forced merger with banks having sound footing. Most of the blue collared workers were sub-prime loanees and when they became unemployed because of recession they could not repay even a fraction of the loan instalments. Due to growing unemployment and recession, Lehman Brothers could not auction off the properties and they had to saddle with house properties on foreclosures of loan defaulters (Swamy, 2010). The bankruptcy of Lehman and others and consequent reduction in liquid funds resulted in collapse of stock market, which consequently affected European economies and US demand for goods (imports). The chain reaction of this was felt by China whose economic boom was export-led. The setback was also felt by the Indian economy mainly because of our own perfidious financial derivatives called Participatory Notes3 (PNs) - compounded by an antinational agreement with Mauritius - which allowed even $ 1 paid-up companies to invest in Indian stock market without capital gains tax levied to them. Although the Tarapore Committee on Financial Reforms strongly condemned PNs and wanted them scrapped, all the warnings were ignored. Since billions of dollars of money entered into the Mumbai stock exchange through buying and selling of shares with PNs used like cash, the PNs accounted for 60 per cent -of the foreign institutional investment (FII) funds in the stock market. At the time when liquidity crunch developed in US and subsequently in Europe and when interest rates rose, the PNs of the order of $ 60 billion were shipped out of India during the period between October 2008 and January 2009, and this resulted in steep fall in die sensex index due to crash in stock market, which in turn caused financial crises in India.
MELTDOWN AND INDIA
Although India initiated adequate measures to correct stock prices in January 2008, our major concern continued to remain on the rising inflation due to rise in commodity prices, which increased from 5 per cent in February 2008 to over 10 per cent by April 2008. The steep rise in inflation rate was seen despite the fact that Government did not change the issue prices of foodgrains, fertilisers, petrol, diesel, kerosene and LPG during this period. The acceleration in the prices of oil, metals, fertilisers and foodgrains from late 2007 was mainly due to the global economic boom during 2002 to 2007 (Acharya, 2009). In fact, the events of September 2008 were marked with the collapse of Wall Street banks, freezing of bank credit flow in the West, worldwide liquidity crunch, precipitation of recessionary forces in the US, Europe and Japan and consequent liquidity shock/crunch in India as foreign institutional investors started withdrawing their money, resulting in drying up of loans from foreign banks and vanishing of credit for foreign trade. The outflow of foreign capital and drop in the export earnings had an implication for the exchange rate of rupee. However, RBI took every possible measure to avoid any currency crisis by checking the slide in the value of rupee. In fact, the economic performance of India was substantially affected by the global crisis as the economic growth of India slowed down to 5-6 per cent in the second half of the financial year 2008-09, which actually averaged 9 per cent during the previous five years. It is to be noted that when India was experiencing drop in inflation rate due to sharp fall in global commodity prices, food prices in India still remained quite high. Further, the recession after September 2008 led to thousands losing jobs due to sharp fall in exports from India with respect to gems and jewellery, garments, leather production and footwear. It is to be noted that the UNDP Administrator, Kemal Dervis, had already warned in October 2008 that the effect of the financial crisis could reduce demand for developing countries' exports, as well as the availability of credit and foreign direct investment to finance projects. Therefore, the developing countries were advised to come out with a strong mix of social and economic policies to stimulate productive public and private investment that could sustain inclusive growth. The estimates reported in September 2008 by the UN World Food Program revealed that there are 850 million chronically hungry people in the world, whereas the World Bank estimates reported that the number of poor increased by at least 100 million as a result of the food and fuel crises. According to its November 2008 report, the poorest households were "forced to switch from more expensive to cheaper and less nutritional foodstuffs, or cut back on the total caloric intake altogether, face weight loss and severe malnutrition." The rise in fuel and food prices not only affected poor in India but also in China. The 2008 Global Hunger Index of the IFPRI already indicates India to have alarming levels of people suffering from hunger. In the Indian economy agriculture is a crucial sector. Therefore, there is both challenge and an opportunity to produce and distribute larger quantities of foodgrain and stabilise our food prices, besides playing a significant role in the international market. At the time when the recessionary forces are affecting the economy of several developed and developing countries, our national agricultural policy has to be realistic, which necessitates integration and reforming of our economic and trade policies. Further, since U.S.A. has been trying hard to push the WTO reforms in its favour to facilitate the U.S. and E.U. agriculture and food exports to Indian markets, there is need for India to have reciprocal policy. Recession has already created a situation where our farmers are hard hit by credit crisis, low demand for their produce and also depressed export markets for our food products.
RECESSION AND INDIAN AGRICULTURE
There has been every possible indication that the growth in Indian processed food sector may not be very significant and so in the case of exports with respect to foodgrains and processed food, especially in the next couple of years or so. Interestingly, while on the one hand there has been a ban on foodgrain exports, the raw sugar, on the other hand, is subjected to zero import tariff. This has led to widespread protest by the sugar industry and there is fear that the area under sugarcane can be further reduced owing to "free" imports of raw sugar. Since sugar is a critical daily item of consumption for the vast population, there is obviously a need to have adequate control on the domestic prices of all essential commodities of common consumption, including sugar. The futures trading in agricultural commodities has to be controlled to avoid further speculation in these commodities. India needs to have a stable price regime with a view to keep the common man away from the perception that economic recession will create a gloom in the growth of food sector. At a time when global economic recession is yet to register full recovery, the growth prospects for Indian agricultural sector would depend on: (a) greater investment in rural infrastructure in the form connectivity of road and water management, (b) greater emphasis on commercially applicable research and development in agriculture, (c) improvements in primary education and health cover to bring greater returns in terms of agricultural productivity, (d) overcoming deficiencies in rural credit delivery system, (e) greater public and private spending in agriculture, etc. (Acharya, 2009).
Though the global economic slowdown has not adversely impacted the Indian economy as compared to more closely globally integrated economies of developed countries, there is some evidence of job losses in India in the exports of goods sector owing to recession. The recession, in general, has affected GDP growth in India. For instance, the GDP at factor cost in India declined from 9.7 per cent in the third quarter of 2007-08 to 5.8 per cent in the fourth quarter of 2008-09 with a make up in the same to 7.9 per cent in the second quarter of 2009-10 (Table 1). This is despite the fact that the interim budget presented on 16 February 2009 spoke of a nominal GDP growth of 1 1 per cent in 2009-10. The decline in GDP growth with respect to agriculture and allied sector was sharper and it decelerated from 4.7 per cent in 200708 to 1.6 per cent in 2008-09 and further to -0.2 per cent in the first half of 2009-10.
TABLE 1. QUARTERLY GROWTH RATES AT GDP AT CONSTANT 2004-05 PRICES IN INDIA
As for the impact of slowdown, the Rural Marketing Association of India conducted a study between July and December 2008 on India's rural markets and found no evidence of a slowdown on those who earn their livelihood from agriculture (Debroy, 2009). Further, the 11th Five Year Plan (2007-12) document mentions that the incremental employment growth between 2000 and 2005 was 46.72 million, which encompassed 8.84 million jobs in agriculture, 8.64 million in manufacturing, 6.44 million in construction, 10.70 million in trade, hotels and restaurants, 4.04 million in transport, storage and communications, 3.12 million in financial, insurance, real estate and business services and 4.59 million in community, social and personal services, implying major growth in employment in the unorganised sector. Since the bulk of the employment creation has occurred in other sectors than in agriculture, these sectors are, therefore, likely to suffer from the slowdown. Further, according to Mahajan (2009), the economic slowdown in recent times do not indicate any job loss in the food and agricultural sector as the jobs involved in the production, procurement, transport, storage, processing and retailing of cereals, oilseeds and pulses remained intact - whether the volumes are due to domestic production being exported or due to imports. This is particularly true in the case of processing units. Since the Indian food processing industry5 exports commodities like basmati rice, pulses, herbs, meat, fruits and vegetables, there is hardly any adverse effect of slowdown on their demand, and, rather these products have shown robust demand throughout the world even during the period of global meltdown. This is an indication of the fact that investments in food and agricultural industry are not at all affected by the economic slowdown. In this context, even Debroy (2009) has mentioned that though there stands an indirect impact of global prices and trade policy, the problems relating to agriculture have nothing much to do with global slowdown as agriculture sector is a somewhat different entity in India. However, a counter argument put forward by Ghosh (2009) is that the global crisis, accompanied by changes in employment and relative prices, has adversely affected three sections of the Indian population, encompassing cultivators, migrant workers and home-based women workers. Not only this, it has several implications with respect to food security of the country that happens to be already at stake. In fact, the cultivators in India have been facing agrarian crisis for the past one-decade or so despite rise in international crop prices. The problems concerning farming system in India are multifarious and mainly include weather related problems like less reliable monsoon, frequent drought or floods, problems of soil degeneration, lack of insurance and institutional credit, problems relating to inputs, lack of marketing facilities and high crop prices volatility. These problems have led to decelerating growth in GDP with respect to agriculture and allied sectors, which fluctuated heavily over the past two decades and even became negative in 2002-03 and 2009-10, and kept decelerating during the period coinciding with the worldwide economic slowdown (Table 2).
It is interesting to note that despite global economic slowdown, the demand for cereals remained significantly high in India. Although income elasticity of demand for the population of India has been declining for cereals and nearing to zero, the low income groups still show positive income elasticity of demand for cereals (Mahajan, 2009). As a result, the demand for cereals has less tendency to decline even if the average income falls marginally as it is expected that under such circumstances people will switch over to basic foods at the expense of other items of consumption. This not only ensures higher demand for farm produce but also significantly high demand for labour in agriculture. It is to be noted that 80 per cent of the farmers in India are either small or marginal and they hardly produce any marketable surplus with marginal dependence on hired labour. The remaining 20 per cent of the farmers encompassing medium and large farmers produce 80 per cent of die marketable surplus of wheat and rice with significantly higher dependence on hired labour. In the states like Punjab and Haryana, the demand for labour has outstripped supply and in these states labourers are seen to negotiate wages on per acre contractual basis rather than daily rates. This has created shortage of labour, which could be partly attributed to the implementation of the National Rural Employment Guarantee Scheme that offer work opportunities to them within their village. This is a reflection of the fact that the employment of village labour has remained unaffected during the period of slowdown and rather their demand has increased in recent times because of their better bargaining power.
TABLE 2. ANNUAL AVERAGE OVERALL GDP GROWTH RATE AND AGRICULTURE GROWTH RATE IN INDIA
Indian Agriculture and Price Volatility
Though extremely volatile crop prices follow an international pattern, the major reasons for the volatility of output prices associated with rising input prices in India can be traced in government attempts to reduce fertiliser subsidies and deregulation of supply of inputs like seeds and pesticides. During the period of global economic recession, the volatility in crop prices became much worse as it compounded the problems of cash crop growers. Although global primary commodity prices rose dramatically upward in 2007 and during the first half of 2008, a collapse in the same was noticed thereafter, leading to wiping out whatever gain in prices occurred. Obviously, the farmers, who produced cash crops hardly had any benefit from such a short-lived price boom (Ghosh, 2009). The farmers producing cash crops saw lower prices on offer for their produce despite rise in food prices. This held particularly true for cultivators of cotton and oilseeds who saw crash in prices of these crops during the period of global meltdown, which were rising just a year ago before the economic slowdown caught up with the world. The farmers, who preferred to cultivate cotton and oilseeds when their prices were quite high, have now been facing a complex kind of situation where costs and prices configuration stand entirely different, and this has serious implications as it could make the cultivation process financially completely unviable (Ghosh, 2009). Further, during the period of slowdown when the overall prices remained stagnant, the food prices continued to rise so much so that foodgrain prices went up by more than 10 per cent between April 2008 and March 2009, which solely cannot be blamed on higher procurement prices as the prices of pulses, not covered by public procurement, also went up sharply during this period. Even the prices of fruits, vegetables, eggs, fish and meat, etc. rose, though not as sharply as in the case of foodgrains. It was only in the case of edible oils that prices declined due to crash in the world prices of oilseeds. On the other hand, the prices of non-food primary products hardly changed. While the prices of fibres like cotton, jute and silk remained unchanged, there was a 5 per cent fall in the prices of oilseeds, which obviously affected the producers of cash crops. This was despite the fact that the farmers paid more for fertilisers and pesticides, which saw more than 5 per cent rise in their prices. As for the food sector, the major cause of concern is the 10 per cent rise in wholesale price of cereals between December 2007 and December 2008 period as this has resulted in a reduction in real income of all urban households and a large segment of rural population encompassing the landless households and small and marginal farmers who are net buyers of cereals (Mahajan, 2009). In order to improve domestic supply of pulses and keep their prices in check, the Government of India has extended zero customs duty for one more year with respect to the import of pulses and even extended ban on its exports till March 2010. Similarly, the government reduced import duties on edible oils to keep their prices low. As a safety measure, India imported 5.60 million tonnes of edible oil during 2007-08 to keep their prices in check in domestic market. This cautioned Indian consumers when the food economy of several developing countries was jeopardised during the period of economic slowdown.
FALLING GLOBAL COMMODITY PRICES
With the onset of the global recession, the international commodity prices with respect to non-energy agricultural beverages and food, fat and oil, and also grains fell from 2008 to 2009 with recovery thereafter. Some of the beverage and food items like coffee, tea, coconut oil, copra, groundnut oil, palm oil, soybean, barley, maize, etc. in particular showed steep fall in their international prices during the time of recession (Table 3).
TABLE 3. INTERNATIONAL COMMODITY PRICES FOR NON-ENERGY AGRICULTURE BEVERAGES, FOOD, FATS AND OILS, GRAINS, OTHER FOOD AND FERTILISERS (2008-2010)
The period between 2008 and 2009 saw not only drop in the prices of food and beverages but also input prices like fertilisers. In fact, huge inflows of speculative finance into the commodity futures market led to sharp increase in commodity prices in 2008, which following the financial meltdown, came down even more sharply in the subsequent year. Such sharp fluctuations in the agricultural commodity prices obviously adversely affected the peasantry in the developing world. The peasantry of developing world are exposed to high risks of international price fluctuations owing to the policies of trade liberalisation followed by them and the agricultural sector of these economies that has become more export-oriented.
COPING STRATEGIES
The fall in GDP growth to 5.3 per cent in the third quarter (October-December 2008), negative rates of 2.2 per cent and 0.20 per cent, respectively, with respect to agriculture and manufacturing sectors, decline in the exports and imports by 15.9 per cent and 18.2 per cent, respectively, in dollar terms in January 2009 as compared to January 2008, etc. are some of the indications of the adverse effect of slowdown on the Indian economy. The coping strategies to counter the impact of slowdown include increasing public investment in agriculture, extending protection against price crashes of crops through price support and increased import tariffs, extending employment guarantee for more number of days than stipulated in NREG scheme, providing employment guarantee in the urban areas, enhancing state intervention, providing relief packages for crisis affected sectors, etc. This means that a significant amount of public expenditure is needed for the creation of jobs and raising purchasing power of the rural and urban population. Equally important is to raise public investment, especially for the development of agriculture, social sector and infrastructure, aside from generating employment in the rural and urban areas of India.
CONCLUSIONS
Although the global economic downturn has resulted in large- scale job losses and mass unemployment in many export-oriented sectors, the situation in food and agricultural sector has remained stable with little job losses. However, since the agricultural sector in India is a somewhat different entity, the impact of global crisis in this sector is seen to have percolated in varied forms. During the period of slowdown when there stood a virtual ban on the foodgrain exports, raw sugar was subjected to zero import tariff, leading to widespread protest by the sugar industry. The "free" imports of raw sugar raised concerns regarding cultivation of sugarcane in the country. Adequate control obviously needs to be exercised on the domestic prices of all essential commodities of common consumption, including sugar. Interestingly, despite decline in the income elasticity of .demand for cereals in India, the lowincome groups still show positive income elasticity of demand for cereals, indicating little tendency of decline in demand for cereals even if income falls marginally. This not only ensures higher demand for farm produce but also significantly high demand for labour in agriculture. However, the global economic recession has certainly compounded the problems of cash crop growers as the farmers producing cash crops saw lower prices on offer for their produce despite rise in food prices. Further, though prices of edible oil in India declined due to crash in the world prices of oilseeds, the price of non-food primary products hardly changed. Nonetheless, the major cause of concern for the food sector of India is the 10 per cent rise in wholesale prices of cereals between December 2007 and December 2008 period as this has resulted in reduction in real income of all urban and rural households. Although government has initiated some measures to check prices, there is still need for other measures to safeguard the Indian economy from global economic slowdown.
Source: http://www.americanchronicle.com
Thursday, December 23, 2010
Canada's housing market one of global top performers
TORONTO — Scotia Economics says Canada's housing market turned in one of the best, but also one of the most volatile, performances among advanced countries in 2010.
In its year-end real estate report, Scotia Economics says global residential real estate markets experienced a modest but uneven recovery this year, supported by ultra-low interest rates and gradually improving economic conditions.
Canada was among six of 12 countries studied that saw home prices increase.
Prices in the U.S. and Germany were flat, while those in Ireland, Italy, Japan and Spain fell.
The Canadian real estate market experienced an unusually active winter and spring prompted by pent-up demand coming out of the recession that gave way to an unusually soft summer.
The bank predicts a more subdued Canadian market in 2011 as interest rates remain near historical lows amid an uncertain global economy.
Source: www.ctv.ca
In its year-end real estate report, Scotia Economics says global residential real estate markets experienced a modest but uneven recovery this year, supported by ultra-low interest rates and gradually improving economic conditions.
Canada was among six of 12 countries studied that saw home prices increase.
Prices in the U.S. and Germany were flat, while those in Ireland, Italy, Japan and Spain fell.
The Canadian real estate market experienced an unusually active winter and spring prompted by pent-up demand coming out of the recession that gave way to an unusually soft summer.
The bank predicts a more subdued Canadian market in 2011 as interest rates remain near historical lows amid an uncertain global economy.
Source: www.ctv.ca
Wednesday, December 22, 2010
Global Recession Turns Top-Tier Economies Upside Down
This year, the big list of who's naughty and nice won't come from Santa. The International Labour Organization has published its Global Wage Report 2010/11. It's another reminder that workers should expect no glad tidings in the coming year as the recession continues to snowball around the globe.
It wasn't all bad news. Wages are generally on an upward trendline. But in its analysis of national wage data sampled from 115 countries and territories, the ILO reports:
growth in average monthly wages slowed from 2.8 per cent in 2007, on the eve of the crisis, to 1.5 per cent in 2008 and 1.6 per cent in 2009. Excluding China from the aggregate, the global average wage growth drops to 0.8 in 2008 and 0.7 in 2009....
In particular... since the mid-1990s the proportion of people on low pay – defined as less than two-thirds of median wage – has increased in more than two-thirds of countries with available data.
The range of countries that have seen a growth in low-paid workers span the spectrum of "development," including "Argentina, China, Germany, Indonesia, Ireland, the Republic of Korea, Poland and Spain." Paradoxically this growth in the low-wage labor force will be met with Europe's onslaught of harsh austerity measures, which economists predict will not only shred the safety net but also deepen the overall economic contraction (meaning more misery for ordinary people).
Some countries, however, might be getting smarter about rejiggering their economies with a combination of organized labor power and aggressive fiscal policy. For example, the ILO says, departing from policies tried by governments in response to earlier economic crises, half of the surveyed countries this time around "have adjusted their minimum wages either as part of the regular minimum wage review process or with the aim of protecting the purchasing power of the most vulnerable workers." Building on the baseline of economic security provided by government, the ILO finds, "Wages are better aligned with productivity in countries where collective bargaining covers more than 30 per cent of employees."
The United States saw a significant drop in real average weekly earnings from 2007 to 2008, followed by an uptick going into 2009, which the ILO attributes largely to falling consumer prices (increasing relative purchasing power). The U.S. sits near the top of the ILO's list of industrialized countries in terms of the portion of its workforce comprised of low-paid full-time workers (about a quarter of the U.S. labor force compared to six percent in Sweden, for instance).
On both sides of the Atlantic, the oft-maligned public sector again appears to be better shielded from recessionary woes. In most of the surveyed European nations, “nominal earnings in the public sector have risen faster – or fallen less – than earnings in the private sector." Earnings rose faster in the U.S. for state and municipal employees than for private sector employees from March 2008 to 2010.
But the budget axe looms over civil servants. The ILO says “this trend may be reversed in some of the countries that have implemented austerity measures to contain public debt and/or which have signed recent agreements with the IMF.”
In this recession, the bigger they come, the harder they fall. The “advanced" countries that helped drive markets over a cliff have spiraled downward while meeker economies have stayed afloat, according to the wage report. Though global average wages grew substantially over the past decade, the increase was unevenly concentrated:
while wage growth slowed but remained consistently positive in Asia and Latin America, other regions such as Eastern Europe and Central Asia experienced a dramatic fall. Advanced economies experienced a drop in the level of real wages which fell in 12 of 28 countries in 2008 and in seven in 2009.
For the "emerging economies," the psychological ramifications of feeling as though your nation is moving up as opposed to toppling over, are reflected in a new Gallup poll showing economic optimism clustered in less wealthy countries.
Yet the U.K. Guardian's analysis suggested that the global downturn could be a great leveler of sorts. On one hand, writes Vittorio Longhi, the recession will inevitably have an acute impact on the most impoverished, least educated, least politically empowered workers. Relegated to the "3D's" ("dirty, dangerous and demanding" jobs), these are often women, youth, ethnic minorities and members of otherwise marginalized communities.
Still, there's nothing like a crashing economy to concentrate officials' minds on designing a better safety net. Countering the EU's “austerity” mantra, the ILO identifies key areas where lawmakers can coordinate social and labor policies to boost recovery and reduce inequity.
The researchers recommend that on top of a government-mandated wage floor, "there must be a system of wage policies which benefits all workers, irrespective of wage levels, union membership or employment status." For workers higher on the economic ladder, that means stronger collective bargaining and organizing rights at work, especially in "non-standard" sectors like domestic workers. Wage supplements like tax credits need to work in tandem with minimum-wage guarantees to prevent employers from ruthlessly driving down wages.
The ILO report also notes that labor policies cannot be designed in a vacuum. While certain principles of decent work hold true universally, like the benefits of unionization, local patterns of racial, gender and ethnic discrimination must also be addressed to ensure a just recovery.
On that front, the U.S. remains a case study in the shameful entanglement of economic, racial and gender inequalities. Meanwhile a disillusioned underclass has spiraled into virulent jingoism and wingnutty theatrics amid increasing confusion over the root causes of the crisis. Once-privileged citizens of the U.S. and European economies will understandably feel dispirited during this holiday season. But the global wage report suggests it's possible to envision other ways overcoming the economic storm, as long as workers don't get mired in the politics of self-defeat.
By Michelle Chen
Source: In These Times
http://inthesetimes.com
It wasn't all bad news. Wages are generally on an upward trendline. But in its analysis of national wage data sampled from 115 countries and territories, the ILO reports:
growth in average monthly wages slowed from 2.8 per cent in 2007, on the eve of the crisis, to 1.5 per cent in 2008 and 1.6 per cent in 2009. Excluding China from the aggregate, the global average wage growth drops to 0.8 in 2008 and 0.7 in 2009....
In particular... since the mid-1990s the proportion of people on low pay – defined as less than two-thirds of median wage – has increased in more than two-thirds of countries with available data.
The range of countries that have seen a growth in low-paid workers span the spectrum of "development," including "Argentina, China, Germany, Indonesia, Ireland, the Republic of Korea, Poland and Spain." Paradoxically this growth in the low-wage labor force will be met with Europe's onslaught of harsh austerity measures, which economists predict will not only shred the safety net but also deepen the overall economic contraction (meaning more misery for ordinary people).
Some countries, however, might be getting smarter about rejiggering their economies with a combination of organized labor power and aggressive fiscal policy. For example, the ILO says, departing from policies tried by governments in response to earlier economic crises, half of the surveyed countries this time around "have adjusted their minimum wages either as part of the regular minimum wage review process or with the aim of protecting the purchasing power of the most vulnerable workers." Building on the baseline of economic security provided by government, the ILO finds, "Wages are better aligned with productivity in countries where collective bargaining covers more than 30 per cent of employees."
The United States saw a significant drop in real average weekly earnings from 2007 to 2008, followed by an uptick going into 2009, which the ILO attributes largely to falling consumer prices (increasing relative purchasing power). The U.S. sits near the top of the ILO's list of industrialized countries in terms of the portion of its workforce comprised of low-paid full-time workers (about a quarter of the U.S. labor force compared to six percent in Sweden, for instance).
On both sides of the Atlantic, the oft-maligned public sector again appears to be better shielded from recessionary woes. In most of the surveyed European nations, “nominal earnings in the public sector have risen faster – or fallen less – than earnings in the private sector." Earnings rose faster in the U.S. for state and municipal employees than for private sector employees from March 2008 to 2010.
But the budget axe looms over civil servants. The ILO says “this trend may be reversed in some of the countries that have implemented austerity measures to contain public debt and/or which have signed recent agreements with the IMF.”
In this recession, the bigger they come, the harder they fall. The “advanced" countries that helped drive markets over a cliff have spiraled downward while meeker economies have stayed afloat, according to the wage report. Though global average wages grew substantially over the past decade, the increase was unevenly concentrated:
while wage growth slowed but remained consistently positive in Asia and Latin America, other regions such as Eastern Europe and Central Asia experienced a dramatic fall. Advanced economies experienced a drop in the level of real wages which fell in 12 of 28 countries in 2008 and in seven in 2009.
For the "emerging economies," the psychological ramifications of feeling as though your nation is moving up as opposed to toppling over, are reflected in a new Gallup poll showing economic optimism clustered in less wealthy countries.
Yet the U.K. Guardian's analysis suggested that the global downturn could be a great leveler of sorts. On one hand, writes Vittorio Longhi, the recession will inevitably have an acute impact on the most impoverished, least educated, least politically empowered workers. Relegated to the "3D's" ("dirty, dangerous and demanding" jobs), these are often women, youth, ethnic minorities and members of otherwise marginalized communities.
Still, there's nothing like a crashing economy to concentrate officials' minds on designing a better safety net. Countering the EU's “austerity” mantra, the ILO identifies key areas where lawmakers can coordinate social and labor policies to boost recovery and reduce inequity.
The researchers recommend that on top of a government-mandated wage floor, "there must be a system of wage policies which benefits all workers, irrespective of wage levels, union membership or employment status." For workers higher on the economic ladder, that means stronger collective bargaining and organizing rights at work, especially in "non-standard" sectors like domestic workers. Wage supplements like tax credits need to work in tandem with minimum-wage guarantees to prevent employers from ruthlessly driving down wages.
The ILO report also notes that labor policies cannot be designed in a vacuum. While certain principles of decent work hold true universally, like the benefits of unionization, local patterns of racial, gender and ethnic discrimination must also be addressed to ensure a just recovery.
On that front, the U.S. remains a case study in the shameful entanglement of economic, racial and gender inequalities. Meanwhile a disillusioned underclass has spiraled into virulent jingoism and wingnutty theatrics amid increasing confusion over the root causes of the crisis. Once-privileged citizens of the U.S. and European economies will understandably feel dispirited during this holiday season. But the global wage report suggests it's possible to envision other ways overcoming the economic storm, as long as workers don't get mired in the politics of self-defeat.
By Michelle Chen
Source: In These Times
http://inthesetimes.com
Tuesday, December 21, 2010
Euro debt may spark more global jitters
THE Reserve Bank has acknowledged Europe's fast-spreading debt problems are emerging as a threat to the Australian economy and could set off a round of jitters in global credit markets.
The dominance of Europe in discussion at the RBA's last monthly board meeting suggests it is now paying closer attention to how the debt crisis is playing out.
The December 7 meeting was held before last week's move by ratings agency Moody's to cut Ireland's credit rating to three notches above junk.
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But minutes of the meeting, released yesterday, suggest the RBA is sticking to its medium-term view of the domestic economy, with growth here underpinned by the continued strength of Asia's key drivers, China and India.
The minutes provide economists with an insight into the central bank's thinking on the factors bearing on monetary policy.
Whether the RBA would have left the cash rate at 4.75 per cent, as it did, on December 7 in the absence of Europe's troubles is not clear from the minutes.
But they show the RBA took into account the banks' super-sized increases in mortgage rates after its 25-basis-point lift in the cash rate last month. The high level of the Australian dollar remains a factor in its thinking.
The board judged current monetary policy conditions as ''mildly restrictive'', though ''appropriate'' given the booming export market and positive outlook for business investment.
While the RBA is widely expected to begin a new round of rate rises next year, economists judged from the tone of the latest minutes that this would not start until April.
''The RBA is 'comfortable' with current policy settings and it could take some time for them to be uncomfortable again,'' said Commonwealth Bank senior economist Michael Workman. He believes the central bank may wait for clear signs of higher inflation and consistently strong jobs growth before lifting rates again.
The RBA also appears to be more relaxed about any signs of an overheating economy, for now at least.
The minutes said improved household savings rates and lower consumer spending had allowed business investment to rise without causing a build-up in inflationary pressures.
While Europe's debt problems provided downside risks to the global economy, the central bank said it was prepared to see how events played out before acting further.
Former Reserve Bank economist Paul Bloxham, now with HSBC, is tipping official cash rates will rise next year.
''If you believe, as we do, that the saving rate won't stay at its current historically high level all on its own- and something will need to restrain it - then you also have in mind that interest rates will need to rise further,'' he said.
By Eric Johnston
Source: www.smh.com.au
The dominance of Europe in discussion at the RBA's last monthly board meeting suggests it is now paying closer attention to how the debt crisis is playing out.
The December 7 meeting was held before last week's move by ratings agency Moody's to cut Ireland's credit rating to three notches above junk.
Advertisement: Story continues below
But minutes of the meeting, released yesterday, suggest the RBA is sticking to its medium-term view of the domestic economy, with growth here underpinned by the continued strength of Asia's key drivers, China and India.
The minutes provide economists with an insight into the central bank's thinking on the factors bearing on monetary policy.
Whether the RBA would have left the cash rate at 4.75 per cent, as it did, on December 7 in the absence of Europe's troubles is not clear from the minutes.
But they show the RBA took into account the banks' super-sized increases in mortgage rates after its 25-basis-point lift in the cash rate last month. The high level of the Australian dollar remains a factor in its thinking.
The board judged current monetary policy conditions as ''mildly restrictive'', though ''appropriate'' given the booming export market and positive outlook for business investment.
While the RBA is widely expected to begin a new round of rate rises next year, economists judged from the tone of the latest minutes that this would not start until April.
''The RBA is 'comfortable' with current policy settings and it could take some time for them to be uncomfortable again,'' said Commonwealth Bank senior economist Michael Workman. He believes the central bank may wait for clear signs of higher inflation and consistently strong jobs growth before lifting rates again.
The RBA also appears to be more relaxed about any signs of an overheating economy, for now at least.
The minutes said improved household savings rates and lower consumer spending had allowed business investment to rise without causing a build-up in inflationary pressures.
While Europe's debt problems provided downside risks to the global economy, the central bank said it was prepared to see how events played out before acting further.
Former Reserve Bank economist Paul Bloxham, now with HSBC, is tipping official cash rates will rise next year.
''If you believe, as we do, that the saving rate won't stay at its current historically high level all on its own- and something will need to restrain it - then you also have in mind that interest rates will need to rise further,'' he said.
By Eric Johnston
Source: www.smh.com.au
Monday, December 20, 2010
THE GLOBAL ECONOMY BETWEEN ECONOMIC SHOCKS? Star hedge fund manager thinks it’s not over
The government tells us America is now out of the Great Recession and that we, and other industrialized nations, are on the way to recovery.
A well-known hedge fund manager disagrees.
David Einhorn, co-founder and president of the nearly $7 Billion hedge fund Greenlight Capital believes the global economy is “in a period between crises,” according to a new report in thestreet.com.
The report says Einhorn thinks the global economy is in a period where things for the moment seem relatively stable but that there's still a lot of “unfinished business” from the last crisis that will cause another global crisis.
Einhorn was interviewed on the Charlie Rose Show on PBS last week and predicted that at some point in the future a crisis not unlike the 2008-2009 recession will be triggered by growing problems not in the private sector but in the public sector.
He said on that show, “"I think what we did in the last crisis in resolving it was rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on, I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things…we managed to transfer a lot of the problems sort of from the private sector to the public sector. The problem is that it's such a large problem that eventually, I'm concerned that will eventually threaten the public sector as well.”
Einhorn claims that what happened in the economic crash of 08" is that government papered over the real problems.
“We bailed out a lot of institutions…a lot of people that had positioned themselves incorrectly -- ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it's investors and so forth. And because we weren't willing to go through that, we haven't been able to effectively clean up that mess, and it's created a very, very large budget deficit. And it's created a monetary policy that is extremely easy, and it seems to be perpetuating itself into a way that I think is going to eventually come to a tough spot."
And that tough spot he says, the next recession type event, will be caused this time by countries bankrupting themselves because of huge budget deficits.
Source: Sky valley chronicle
www.skyvalleychronicle.com
A well-known hedge fund manager disagrees.
David Einhorn, co-founder and president of the nearly $7 Billion hedge fund Greenlight Capital believes the global economy is “in a period between crises,” according to a new report in thestreet.com.
The report says Einhorn thinks the global economy is in a period where things for the moment seem relatively stable but that there's still a lot of “unfinished business” from the last crisis that will cause another global crisis.
Einhorn was interviewed on the Charlie Rose Show on PBS last week and predicted that at some point in the future a crisis not unlike the 2008-2009 recession will be triggered by growing problems not in the private sector but in the public sector.
He said on that show, “"I think what we did in the last crisis in resolving it was rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on, I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things…we managed to transfer a lot of the problems sort of from the private sector to the public sector. The problem is that it's such a large problem that eventually, I'm concerned that will eventually threaten the public sector as well.”
Einhorn claims that what happened in the economic crash of 08" is that government papered over the real problems.
“We bailed out a lot of institutions…a lot of people that had positioned themselves incorrectly -- ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it's investors and so forth. And because we weren't willing to go through that, we haven't been able to effectively clean up that mess, and it's created a very, very large budget deficit. And it's created a monetary policy that is extremely easy, and it seems to be perpetuating itself into a way that I think is going to eventually come to a tough spot."
And that tough spot he says, the next recession type event, will be caused this time by countries bankrupting themselves because of huge budget deficits.
Source: Sky valley chronicle
www.skyvalleychronicle.com
Saturday, December 18, 2010
Yearender: Economic growth helps India sit on high tables in int'l community
By Liu Yanan
MUMBAI, Dec. 18 (Xinhua) -- India, the third largest economy in Asia, has managed to sit on high tables like G20 in international community and eyes one permanent seat at United Nations' Security Council, bolstered by its near 9 percent gross domestic product (GDP) growth in 2010.
Indian top decision makers have played an active role in global economic governance, reform of international monetary system and climate change so far this year.
INDIA'S GROWTH STORY CONTINUES
Indian officials and businessmen often said that India's economy was almost insulated from horrible global financial tsunami since 2008, which is still playing out at corners of the globe.
Indian economic growth rebounded from 6.7 percent in fiscal year 2008-2009, and 7.4 percent in fiscal year 2009-2010 thanks to the dominance of domestic consumption and monetary stimulus policies.
The GDP growth even could rise to 9 percent in fiscal year 2010- 2011 starting from April 1, 2010, according to the mid-term economic analysis by the Ministry of Finance.
Earlier this year, Indian Prime Minister Manmohan Singh said he hoped that the country's economy could see 9 to 10 percent growth in the coming 25 years.
Standard Chartered Bank released a report in November, saying that India could grow faster than China as early as 2012 and turn into an economic entity with 30 trillion U.S. dollars by 2030 as the third largest economy in the world.
The Indian government has mapped out a blueprint to channel one trillion U.S. dollars of investment into infrastructure sector within 12th five-year plan period starting from April 2012 in order to reap demographic dividends and improve its productivity.
The impressive economic growth has drawn record-setting 38.27 billion U.S. dollars of investments from foreign institutional investors into its equity and debt market by Dec. 14 this year.
EYEING ACTIVE ROLE IN INT'L COMMUNITY
India pays great importance to the G20 summit and wants to interact with more powers in comparison with smaller club of BRIC countries including Brazil, Russia, India and China, said Kaushik Basu, chief economic adviser at the Ministry of Finance, prior to G20 summit held in Canada's Toronto in June 2010.
Afterwards, India sought to reconcile the tensions between China and the United States on the exchange rate of Chinese currency RMB by calling for dialogue and against protectionism at G20 Summit in Seoul, South Korea, in November this year.
India held a mild but clear stance at the meeting and strived to force ahead Doha Round trade talks despite the lack of enthusiasm from developed economies in the time of recession.
"Now that we've arrived at the 'high table', what is it that we want the 'high table' to do," said Raghuram G. Rajan, an honorary economic advisor to Prime Minister Manmohan Singh.
Rajan called for India to play more proactive role at G20 again from the largely reactive one and resume its role in the era of Non-Aligned Movement in the 1950s.
India also successfully leveraged the BRIC forum to push forward the reform of the international financial bodies and lifted its quota shares from 2.44 percent as the 11th shareholder to 2.75 percent as the 8th one.
India won support from the United States and France for its pursuit of permanent membership of an expanded Security Council when U.S. President Barack Obama and French President Nicolas Sarkozy visited India at the end of 2010.
During the recent visit by Chinese Premier Wen Jiabao to India, Wen stressed that China and India have shared interests and common views on the issue of U.N. Security Council reforms.
"We both maintain that priority should be given to increasing the representation of developing countries," Wen said, "Closer cooperation between our two countries on Security Council reform will help uphold the interests of developing countries and promote democracy in international relations."
Wen said China understands and supports India's desire to play a bigger role in the United Nations, including its Security Council.
"As a fast-growing big country with over one billion people, India should and can play an increasingly important role in international affairs," Wen said.
INFLATION HAUNTS "AAM AADMI"
Although India's economy has been growing rapidly in recent years, its high inflation at home threatens to derail the prospects of near double-digit economic growth in addition of laggard progress in infrastructure both physically and socially.
Inflation tax could plague India's "aam aadmi" (common people) in the coming years due to dependence on imported commodities, vulnerable agricultural sector and structural problems in the economy.
Meanwhile, the India government has caught in between socialist policies for economically weak people and market guidelines in the coming years in a bid to fight inflation, win ballots, lift the poor from poverty and maintain political stability.
Inflation is the most distorted part of India's economy with complex underlying forces, said a retired official at a conference in Mumbai.
Though the wholesale price index has come down to 7.48 percent in November as the lowest so far this year, inflation is still very high and close to economic growth rate.
High inflation has triggered nationwide protests in India in July and marred the credibility of incumbent government's ability to govern the country.
India will have 5 to 5.5 percent of inflation in the medium term resulting from structural causes, said recently Chetan Ahya, a well-known economist in India and South East Asia.
India's inflation will be very high in the next two or three years due to the inflows of cheap money printed in the developed economies, associate director with Angel Commodities Naveen Mathur said recently.
Naveen Mathur estimated that India's inflation will range from 6 to 7 percent next year even domestic fundamentals are fine. "We're bullish on crude oil prices with world economy in recovery and crude oil will be traded above 75 U.S. dollars per barrel even up to pre-crisis levels next year," said Kamlesh Jogi, an analyst with Fortune Equity Brokers in India.
India now imports around 75 percent of crude oil consumption and relies heavily on imported cooking coal and edible oil products.
Additionally, India has to tweak existing rigid labor laws and provide efficient training so that the promising demographic dividend will not become a nightmare to the economy.
Source: Xinhuane
www.xinhuanet.com
MUMBAI, Dec. 18 (Xinhua) -- India, the third largest economy in Asia, has managed to sit on high tables like G20 in international community and eyes one permanent seat at United Nations' Security Council, bolstered by its near 9 percent gross domestic product (GDP) growth in 2010.
Indian top decision makers have played an active role in global economic governance, reform of international monetary system and climate change so far this year.
INDIA'S GROWTH STORY CONTINUES
Indian officials and businessmen often said that India's economy was almost insulated from horrible global financial tsunami since 2008, which is still playing out at corners of the globe.
Indian economic growth rebounded from 6.7 percent in fiscal year 2008-2009, and 7.4 percent in fiscal year 2009-2010 thanks to the dominance of domestic consumption and monetary stimulus policies.
The GDP growth even could rise to 9 percent in fiscal year 2010- 2011 starting from April 1, 2010, according to the mid-term economic analysis by the Ministry of Finance.
Earlier this year, Indian Prime Minister Manmohan Singh said he hoped that the country's economy could see 9 to 10 percent growth in the coming 25 years.
Standard Chartered Bank released a report in November, saying that India could grow faster than China as early as 2012 and turn into an economic entity with 30 trillion U.S. dollars by 2030 as the third largest economy in the world.
The Indian government has mapped out a blueprint to channel one trillion U.S. dollars of investment into infrastructure sector within 12th five-year plan period starting from April 2012 in order to reap demographic dividends and improve its productivity.
The impressive economic growth has drawn record-setting 38.27 billion U.S. dollars of investments from foreign institutional investors into its equity and debt market by Dec. 14 this year.
EYEING ACTIVE ROLE IN INT'L COMMUNITY
India pays great importance to the G20 summit and wants to interact with more powers in comparison with smaller club of BRIC countries including Brazil, Russia, India and China, said Kaushik Basu, chief economic adviser at the Ministry of Finance, prior to G20 summit held in Canada's Toronto in June 2010.
Afterwards, India sought to reconcile the tensions between China and the United States on the exchange rate of Chinese currency RMB by calling for dialogue and against protectionism at G20 Summit in Seoul, South Korea, in November this year.
India held a mild but clear stance at the meeting and strived to force ahead Doha Round trade talks despite the lack of enthusiasm from developed economies in the time of recession.
"Now that we've arrived at the 'high table', what is it that we want the 'high table' to do," said Raghuram G. Rajan, an honorary economic advisor to Prime Minister Manmohan Singh.
Rajan called for India to play more proactive role at G20 again from the largely reactive one and resume its role in the era of Non-Aligned Movement in the 1950s.
India also successfully leveraged the BRIC forum to push forward the reform of the international financial bodies and lifted its quota shares from 2.44 percent as the 11th shareholder to 2.75 percent as the 8th one.
India won support from the United States and France for its pursuit of permanent membership of an expanded Security Council when U.S. President Barack Obama and French President Nicolas Sarkozy visited India at the end of 2010.
During the recent visit by Chinese Premier Wen Jiabao to India, Wen stressed that China and India have shared interests and common views on the issue of U.N. Security Council reforms.
"We both maintain that priority should be given to increasing the representation of developing countries," Wen said, "Closer cooperation between our two countries on Security Council reform will help uphold the interests of developing countries and promote democracy in international relations."
Wen said China understands and supports India's desire to play a bigger role in the United Nations, including its Security Council.
"As a fast-growing big country with over one billion people, India should and can play an increasingly important role in international affairs," Wen said.
INFLATION HAUNTS "AAM AADMI"
Although India's economy has been growing rapidly in recent years, its high inflation at home threatens to derail the prospects of near double-digit economic growth in addition of laggard progress in infrastructure both physically and socially.
Inflation tax could plague India's "aam aadmi" (common people) in the coming years due to dependence on imported commodities, vulnerable agricultural sector and structural problems in the economy.
Meanwhile, the India government has caught in between socialist policies for economically weak people and market guidelines in the coming years in a bid to fight inflation, win ballots, lift the poor from poverty and maintain political stability.
Inflation is the most distorted part of India's economy with complex underlying forces, said a retired official at a conference in Mumbai.
Though the wholesale price index has come down to 7.48 percent in November as the lowest so far this year, inflation is still very high and close to economic growth rate.
High inflation has triggered nationwide protests in India in July and marred the credibility of incumbent government's ability to govern the country.
India will have 5 to 5.5 percent of inflation in the medium term resulting from structural causes, said recently Chetan Ahya, a well-known economist in India and South East Asia.
India's inflation will be very high in the next two or three years due to the inflows of cheap money printed in the developed economies, associate director with Angel Commodities Naveen Mathur said recently.
Naveen Mathur estimated that India's inflation will range from 6 to 7 percent next year even domestic fundamentals are fine. "We're bullish on crude oil prices with world economy in recovery and crude oil will be traded above 75 U.S. dollars per barrel even up to pre-crisis levels next year," said Kamlesh Jogi, an analyst with Fortune Equity Brokers in India.
India now imports around 75 percent of crude oil consumption and relies heavily on imported cooking coal and edible oil products.
Additionally, India has to tweak existing rigid labor laws and provide efficient training so that the promising demographic dividend will not become a nightmare to the economy.
Source: Xinhuane
www.xinhuanet.com
Thursday, December 16, 2010
EU leaders meeting amid eurozone jitters
Concerns about the stability of the eurozone are set to dominate a meeting of European leaders in Brussels.
The two-day summit is expected to see an agreement to set up a permanent system for rescuing countries that get heavily into debt.
But there is still much debate about how such a system should operate.
Meanwhile concern over Spain's financial stability continued as it was forced to pay a higher rate of interest in a government bond sale.
Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.
That bail-out followed the 110bn-euro rescue of Greece in May.
Arriving at the summit, Sweden's Prime Minister Fredrik Reinfeldt stressed that beyond crisis management there was a long-term need for EU countries to reform labour markets and boost competitiveness.
Greece's Prime Minister George Papandreou said "the challenge is a collective one now - more integration... and all have to live up to their responsibilities".
'Succeed together'
Issues on the agenda in Brussels include:
* How to change the EU's Lisbon Treaty to allow changes to create a permanent stability mechanism for eurozone members
* Whether to increase the eurozone's 750bn-euro temporary bail-out fund, the European Financial Stability Facility (EFSF)
* The possibility of creating pan-European bonds to boost confidence in the euro.
But even assuming that leaders do agree to the way countries are helped, the slow pace of politics in Brussels means a permanent stability arrangement will not come into force until 2013, says BBC Europe correspondent Matthew Price.
In the meantime they will have to rely on the current temporary mechanism that has already been used to rescue Greece and the Irish Republic, he added.
And analysts have expressed concern that talks will not address a key issue - whether or not investors who have bought bonds in struggling euro nations will have to lose money, or in the language of the financial world, take a "haircut", on their investment between now and 2013.
This was causing "uncertainty" in financial markets, said Carsten Brzeski, a senior analyst at ING.
"This is an inconsistency. The politicians need to address this insolvency issue in the period between now and 2013," he told the BBC.
German caution
French Foreign Minister Michele Alliot-Marie said that the EU had to stop speculators from attacking eurozone countries and would adopt ways to do that at the summit.
And separately the Prime Minister of Luxembourg, Jean-Claude Juncker, said European leaders were determined to do everything to ensure the eurozone's financial stability.
On Wednesday, German Chancellor Angela Merkel stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."
But she has been an opponent of some suggested actions, including increasing the eurozone's euro bail-out fund or introducing euro bonds.
Concerns reflected
In its latest bond auction, Madrid managed to raise 2.4bn euros.
But the yield on the Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - was higher than that on previous auctions of similar bonds.
The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November,
And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.
The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.
Madrid insists it will not need to apply for a bail-out from the EFSF - the temporary rescue scheme funded by the EU and International Monetary Fund.
Downgrade threat
While the demand for Spanish bonds remained oversubscribed, concerns remained about Spain's ability to get affordable funding to refinance its debts and support its banks, said Kathleen Brooks, research director at Forex.com.
And this had wider implications for the single currency, she added.
"Spain is the canary in the coal mine for the survival of the eurozone," Ms Brooks said.
On Wednesday, ratings agency Moody's said it was reviewing Spain's credit rating with a view to downgrading it - warning of problems the country faced in refinancing its debts next year.
Moody's had already cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.
The two-day summit is expected to see an agreement to set up a permanent system for rescuing countries that get heavily into debt.
But there is still much debate about how such a system should operate.
Meanwhile concern over Spain's financial stability continued as it was forced to pay a higher rate of interest in a government bond sale.
Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.
That bail-out followed the 110bn-euro rescue of Greece in May.
Arriving at the summit, Sweden's Prime Minister Fredrik Reinfeldt stressed that beyond crisis management there was a long-term need for EU countries to reform labour markets and boost competitiveness.
Greece's Prime Minister George Papandreou said "the challenge is a collective one now - more integration... and all have to live up to their responsibilities".
'Succeed together'
Issues on the agenda in Brussels include:
* How to change the EU's Lisbon Treaty to allow changes to create a permanent stability mechanism for eurozone members
* Whether to increase the eurozone's 750bn-euro temporary bail-out fund, the European Financial Stability Facility (EFSF)
* The possibility of creating pan-European bonds to boost confidence in the euro.
But even assuming that leaders do agree to the way countries are helped, the slow pace of politics in Brussels means a permanent stability arrangement will not come into force until 2013, says BBC Europe correspondent Matthew Price.
In the meantime they will have to rely on the current temporary mechanism that has already been used to rescue Greece and the Irish Republic, he added.
And analysts have expressed concern that talks will not address a key issue - whether or not investors who have bought bonds in struggling euro nations will have to lose money, or in the language of the financial world, take a "haircut", on their investment between now and 2013.
This was causing "uncertainty" in financial markets, said Carsten Brzeski, a senior analyst at ING.
"This is an inconsistency. The politicians need to address this insolvency issue in the period between now and 2013," he told the BBC.
German caution
French Foreign Minister Michele Alliot-Marie said that the EU had to stop speculators from attacking eurozone countries and would adopt ways to do that at the summit.
And separately the Prime Minister of Luxembourg, Jean-Claude Juncker, said European leaders were determined to do everything to ensure the eurozone's financial stability.
On Wednesday, German Chancellor Angela Merkel stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."
But she has been an opponent of some suggested actions, including increasing the eurozone's euro bail-out fund or introducing euro bonds.
Concerns reflected
In its latest bond auction, Madrid managed to raise 2.4bn euros.
But the yield on the Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - was higher than that on previous auctions of similar bonds.
The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November,
And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.
The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.
Madrid insists it will not need to apply for a bail-out from the EFSF - the temporary rescue scheme funded by the EU and International Monetary Fund.
Downgrade threat
While the demand for Spanish bonds remained oversubscribed, concerns remained about Spain's ability to get affordable funding to refinance its debts and support its banks, said Kathleen Brooks, research director at Forex.com.
And this had wider implications for the single currency, she added.
"Spain is the canary in the coal mine for the survival of the eurozone," Ms Brooks said.
On Wednesday, ratings agency Moody's said it was reviewing Spain's credit rating with a view to downgrading it - warning of problems the country faced in refinancing its debts next year.
Moody's had already cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.
Gulf of Mexico leak: BP shares hit over legal move
BP shares have fallen after the US said it was suing the oil giant for alleged violations of federal safety laws over the Gulf of Mexico oil spill.
The lawsuit asks BP and and eight other firms be held liable without limitation for all clean-up and damage costs.
The Deepwater Horizon drilling rig explosion in April killed 11 workers and spilled millions of barrels of oil over several months.
BP's shares in London were trading down 1.7%.
BBC business editor Robert Peston said that drop had taken the edge off a recent strong run in BP shares.
But he added: "Investors plainly believe that the nature of the Department of Justice's case against BP hasn't increased potential liabilities for the company in a fundamental way."
BP said that it would respond to the claims later, adding the action did not constitute "any finding of liability or any judicial finding that the allegations have merit".
The oil leak became the worst environmental disaster in US history.
And BP has set aside $39.9bn (£25bn) to cover the costs stemming from the disaster.
But our business editor said that if BP were found to be grossly negligent, the costs it faced could rise significantly.
It could potentially add almost $16bn to the penalties BP would have to pay under the US Clean Water Act, he said.
And it would make it "perhaps impossible" for BP to recover costs it is incurring in the clean up and restitution from its co-owners of the Macondo Well, Anadarko and Mitsui, he added.
Precautions
The lawsuit charges the companies under the US Clean Water Act and Oil Pollution Act.
US Attorney General Eric Holder said the complaint alleged that "violations of safety and operational regulations" caused the explosion on 20 April.
The companies named in the lawsuit are BP Exploration and Production Inc, Anadarko Exploration & Production LP, Anadarko Petroleum Corporation, MOEX Offshore 2007 LLC, Triton Asset Leasing GMBH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc, Transocean Deepwater Inc and insurer QBE Underwriting Ltd/Lloyd's Syndicate 1036.
The key accusations are:
* Failing to take necessary precautions to keep the Macondo well under control in the period leading up to the 20 April explosion
* Failing to use the best available and safest drilling technology to monitor the well's conditions
* Failing to maintain continuous surveillance
* Failing to use and maintain equipment and material that were available and necessary to ensure the safety and protection of personnel, equipment, natural resources and the environment
"We intend to prove that these defendants are responsible for government removal costs, economic losses and environmental damages without limitation," Mr Holder said.
"As investigations continue, we will not hesitate to take whatever steps necessary to hold accountable those responsible for this spill."
BP said it would continue to co-operate with government inquiries and fulfil its commitments to clean up spilt oil in the Gulf.
Halliburton, the company that cemented the Macondo well, and Cameron International, which provided equipment for the well, was not targeted in the lawsuit.
Transocean disputed the charges brought by the government, saying that it should not be held liable for the actions of others.
"No drilling contractor has ever been held liable for discharges from a well under the Oil Pollution Act of 1990," the company said in a statement.
"The responsibility for hydrocarbons discharged from a well lies solely with its owner and operator."
Source: BBC
www.bbc.co.uk
The lawsuit asks BP and and eight other firms be held liable without limitation for all clean-up and damage costs.
The Deepwater Horizon drilling rig explosion in April killed 11 workers and spilled millions of barrels of oil over several months.
BP's shares in London were trading down 1.7%.
BBC business editor Robert Peston said that drop had taken the edge off a recent strong run in BP shares.
But he added: "Investors plainly believe that the nature of the Department of Justice's case against BP hasn't increased potential liabilities for the company in a fundamental way."
BP said that it would respond to the claims later, adding the action did not constitute "any finding of liability or any judicial finding that the allegations have merit".
The oil leak became the worst environmental disaster in US history.
And BP has set aside $39.9bn (£25bn) to cover the costs stemming from the disaster.
But our business editor said that if BP were found to be grossly negligent, the costs it faced could rise significantly.
It could potentially add almost $16bn to the penalties BP would have to pay under the US Clean Water Act, he said.
And it would make it "perhaps impossible" for BP to recover costs it is incurring in the clean up and restitution from its co-owners of the Macondo Well, Anadarko and Mitsui, he added.
Precautions
The lawsuit charges the companies under the US Clean Water Act and Oil Pollution Act.
US Attorney General Eric Holder said the complaint alleged that "violations of safety and operational regulations" caused the explosion on 20 April.
The companies named in the lawsuit are BP Exploration and Production Inc, Anadarko Exploration & Production LP, Anadarko Petroleum Corporation, MOEX Offshore 2007 LLC, Triton Asset Leasing GMBH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc, Transocean Deepwater Inc and insurer QBE Underwriting Ltd/Lloyd's Syndicate 1036.
The key accusations are:
* Failing to take necessary precautions to keep the Macondo well under control in the period leading up to the 20 April explosion
* Failing to use the best available and safest drilling technology to monitor the well's conditions
* Failing to maintain continuous surveillance
* Failing to use and maintain equipment and material that were available and necessary to ensure the safety and protection of personnel, equipment, natural resources and the environment
"We intend to prove that these defendants are responsible for government removal costs, economic losses and environmental damages without limitation," Mr Holder said.
"As investigations continue, we will not hesitate to take whatever steps necessary to hold accountable those responsible for this spill."
BP said it would continue to co-operate with government inquiries and fulfil its commitments to clean up spilt oil in the Gulf.
Halliburton, the company that cemented the Macondo well, and Cameron International, which provided equipment for the well, was not targeted in the lawsuit.
Transocean disputed the charges brought by the government, saying that it should not be held liable for the actions of others.
"No drilling contractor has ever been held liable for discharges from a well under the Oil Pollution Act of 1990," the company said in a statement.
"The responsibility for hydrocarbons discharged from a well lies solely with its owner and operator."
Source: BBC
www.bbc.co.uk
Saturday, December 11, 2010
10 best stocks for 2011
Investors' fears that a bear market will return (and linger) has made for some bargains - and this group should thrive even if inflation returns.
Opportunity in growth stocks
Despite a gain of more than 10% in the S&P 500 over the past three months, there's still a real buying opportunity in growth stocks: Our 10 best for 2011 are expected to bolster their profits an average of 61% next year -- vs. 14% for the S&P -- and yet they trade at an average 12 times next year's earnings, vs. 13 times for the S&P.
Our selections this year are slanted toward commodities. Exposure to oil, chemicals, and fertilizer should provide protection against a falling dollar or an outbreak of a 1970s-style rise in inflation, which we think is a bigger threat than a double-dip recession. (We've also made some contrarian selections, including one housing-related stock.)
Mosaic
Market cap: $30.2 billion
2009 Revenue: $10 billion
P/E ratio: 15.4
Dividend yield: 0.3%
Ticker: MOS
As corn goes, so go the makers of fertilizer. That's good news for Mosaic, whose stock has had an 89% correlation with corn prices (if 100% means mirroring them exactly) during the past five years, according to SIG Susquehanna agriculture analyst Don Carson. The price of corn has jumped 25% over the last 12 months, and inventories are at their lowest since 1995. The reason: Heavy rains and scorching heat caused the2010 harvest to decline 4% from 2009 -- even as demand rose, with ethanol now consuming 41% of the U.S. corn crop and growing wealth in developing countries leading to increased food consumption.
Mosaic is up only 11% for the year, which means it has some catching up to do. And with analysts expecting a 48% earnings rise in 2011, the stock (which trades at 15.4 times those estimated profits) seems primed to flourish.
Mosaic enjoys other catalysts for greater sales of its main fertilizer products, phosphate and potash. According to a recent Merrill Lynch report, China -- which accounts for 20% of phosphate exports -- may soon restrict its sale outside that country, creating potential opportunity for Mosaic to increase its market share elsewhere in the world. Meanwhile BHP Billiton's failed bid to buy Potash Corp. of Saskatchewan and the acquisition of Potash One by German fertilizer company K S Aktiengesellschaft underscore potash's statusas "a commodity you want to be invested in," says Jennifer Dowty, portfolio manager of the John Hancock Global Agribusiness Fund, which has a large position in Mosaic.
Because the cost of building a potash mine can run into the billions, supply tends to lag well behind demand. Potash prices have tripled since 2004, and the International Fertilizer Association is expecting demand to grow 4.5% a year in coming years. Such fundamentals validate Mosaic's decision four years ago to invest heavily in expanding existing mines in the U.S. and Canada. Mosaic's potash production capacity has grown 10% since 2006 and is expected to increase another 60% between now and 2020. And as it rises, the company's stock seems likely to follow.
Agrium
Market cap: $12.6 billion
2009 Revenue: $9.1 billion
P/E ratio: 11.8
Dividend yield: 0.1%
Ticker: AGU
The basic argument for Agrium is similar to Mosaic's: Increased production of biofuels combined with rising global food demand means more need for fertilizer. But with Agrium that's only half the story.
Natural gas represents 80% of the cost of manufacturing Agrium's primary product, nitrogen fertilizer -- and the price of natural gas has fallen 50% since 2008. With U.S. gas production rising because of massive, recently exploited "shale gas" fields in Louisiana, Pennsylvania, and Texas, the International Energy Agency expects a gas "glut" to further depress prices in 2011.
Agrium's costs are dropping -- but that isn't the case for many of its competitors. Natural gas is difficult to transport, so new supplies in North America don't have much impact on prices elsewhere. "That gives Agrium a real competitive advantage," says mutual fund manager David Jordan, whose Agrium shares are among the largest positions in his Tributary Growth Opportunities Fund. Agrium's competitors in Eastern Europe are paying prices twice as high. Indeed, according to a Citigroup report on shale gas and its impact on the chemical industry, Agrium is the best positioned of all major fertilizer companies to benefit from the falling price of natural gas.
Agrium is not only a manufacturer of fertilizer but a retailer of it as well, as the company operates a 1,200-location chain of farm-product stores in six countries. This, says Richard Kelertas, an ag sector analyst at Canada's Dundee Securities (Agrium is headquartered in Calgary), allows the company to capture more of the spread between falling production costs and rising retail prices. "It's also a stable business with better margins," Kelertas says, noting that customers are buying not just products but services. "If the farmer is spending a lot of money on specialty seeds and fertilizers, he's not going to want to have inefficient application systems."
Agrium's earnings are on pace to jump 60% in 2010, and analysts are expecting another 44% bump next year -- giving Agrium's stock a forward P/E of 11.8.
Dow
Market cap: $36.1 billion
2009 Revenue: $45 billion
P/E ratio: 12.8
Dividend yield: 1.9%
Ticker: DOW
Cheap natural-gas prices are also a boon for Dow Chemical, which uses a key gas byproduct to make ethylene, a building block for the chemicals used to make plastic, rubber, paint, pharmaceuticals, detergents, and countless other products. "They've gone from being in the 80th percentile in terms of cost of production to the 20th percentile," says fund manager Tom Marsico, who counts Dow as a top 10 holding in his Marsico Focus and Marsico Growth funds.
Dow's business mix is improving too. In 2009, Dow acquired Rohm & Haas, a maker of specialty chemicals used heavily by the tech industry. The deal, which was announced just before the financial crisis began to unfold, got off to a rough start: Kuwait pulled out of a joint venture that was supposed to provide part of the financing. Forced to finance the $19 billion purchase on its own, Dow's stock took a beating from which it still hasn't fully recovered.
Nevertheless, by helping Dow broaden its portfolio -- which now includes chemicals used to make LED lighting, semiconductors, solar panels, and screens for TVs and smartphones -- Rohm & Haas has not only boosted Dow's earnings but also helped make them less cyclical. (As a bonus, Marsico thinks Dow may be on the verge of collecting a billion-dollar settlement from Kuwait, ending a dispute over the Rohm & Haas financing.)
Dow is also making hay in its agrosciences division; boosted by new Smartstax hybrid corn seeds that Dow co-developed with Monsanto, the division's operating profits are on pace to rise 14% in 2010 and another 16% next year, according to Credit Suisse analyst John McNulty.
Companywide, Dow's gross margins have improved from 13% to 19% over the past two years. Long-term debt has been pared by $4 billion. And analysts expect 2011 earnings to be up 32% -- on the heels of a 212% earnings improvement this year. (Granted, 2009 was a disaster.) Best of all, Dow's stock isn't priced to reflect the growth company it has become. The share's forward P/E is just 12.8. Says Marsico: "This is now a stock with a real long-term tailwind."
Transocean
Market cap: $21 billion
2009 Revenue: $12 billion
P/E ratio: 9.2
Dividend yield: N.A.
Ticker: RIG
The disaster that killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico didn't just crush BP's stock. It also sank shares of offshore driller Transocean, which owned and operated the Deepwater Horizon (which BP had leased). The rig was insured for $560 million -- already paid to Transocean -- but investors feared the company would be held liable for billions in cleanup costs and restitution.
Transocean maintained that its contract with BP shields it from liability. BP disagreed. So Transocean published the contract: BP "shall assume full responsibility for and shall protect, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination ... without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]." BP even indemnified Transocean against "gross" negligence or "any other theory of legal liability" claimed by plaintiffs or regulators.
Most analysts now agree the early worries were overblown. "We think that the company is well indemnified against blowout-related liability," writes Stifel Nicolaus analyst Thaddeus Vayda. He has an $82 price target for Transocean shares, up 22% from the current $67.
We think Transocean's upside is even greater, despite increased scrutiny of offshore drilling and the Obama administration's decision to reverse its expansion of gulf exploration. Oil prices have risen 17% since May as global demand has rebounded to 2007 levels. Weakness in the West has masked voracious demand in China and India. As North America and Europe recover, the return of triple-digit oil seems likely. Meanwhile production isn't keeping up with demand. All of that means a greater need for deepwater drilling. And consider this: There's a correlation between the price of oil and the value of the long-term contracts oil companies sign to lease Transocean's drilling rigs. Transocean earned $16.57 per share back in 2007 (when oil prices averaged $64). Apply its current 9.2 P/E ratio to those earnings, and you've got a $150 stock.
Royal Dutch Shell
Market cap: $108 billion
2009 Revenue: $278 billion
P/E ratio: 8.3
Dividend yield: 5.5%
Ticker: RDSA
Offshore drillers like Transocean tend to be the energy sector's more volatile stocks. If wild rides aren't your thing, consider Royal Dutch Shell. "Buying this stock is kind of like buying a utility with a call option on oil prices," says Greg Padilla, co-manager of the Nuveen Tradewinds Global Resources fund, which owns a significant Shell stake. Padilla means that as a compliment, but we'd go further. Yes, the stock has attributes that conservative investors favor, such as low debt and $28 billion a year in free cash flow. Shell's 5.5% dividend yield is higher than Chevron's (3.6%) or Exxon Mobil's (2.5%). It trades at a bargain 8.3 P/E, a shade below the 9.1 average for its peer group (and well below the S&P 500's 13).
But Shell is also a growth story. Analysts expect it to increase profits at a higher rate than any of its Big Oil brethren over the next two years. The reason? Many of them are struggling to find enough new oil to offset depletion in old wells. By contrast, Shell is expanding reserves and pumping up production. "They're one of the few majors with significant production growth," says Ben Fischer, portfolio manager of the Allianz NFJ International Value Fund.
The key has been Shell's hefty investment in research and development, typically higher than that of any other oil company. Next year, for example, Shell will open a $19 billion plant in Qatar that uses state-of-the-art technology (backed by 3,500 Shell patents) to convert Qatar's abundant natural-gas supplies into 260,000 barrels a day of diesel and other liquid fuels.
Shell has another advantage: geography. Much of the world's oil and gas is located in countries that are politically unstable, riddled with violence, or run by corrupt politicians (and sometimes all of the above). Perhaps burned by its experiences in places like Nigeria, Shell is now placing some of its biggest bets on unconventional oil-and-gas production in ultrastable countries such as Australia, Canada, and the U.S. "People tend to look at Royal Dutch Shell as a safe place to get a dividend yield, which it is," says Fischer. "But it has a really good set of strategic initiatives going for it too."
Lennar
Market cap: $2.8 billion
2009 Revenue: $3.1 billion
P/E ratio: 25
Dividend yield: 1.1%
Ticker: LEN
Lennar is one of the nation's largest homebuilders -- which hasn't been anything to boast about. It has careened from earning $1.4 billion in 2005 to a loss of $417 million in 2009, and its stock has swooned from $67 to $15 a share.
So why recommend Lennar? Consider the big picture. Between 1959 and 2007, housing starts in the U.S. averaged 1.5 million a year, a figure propelled by a potent force: Historically there have been 1 million to 1.5 million new households formed in the U.S. every year. But since the end of 2008, housing starts have averaged 575,000 a year. "It's unbelievable -- housing starts have been near 50-year lows for two years," says Karl Case, the Wellesley College economics professor who started sounding the alarm about the real estate bubble back in 2004.
Yes, foreclosures and inventories of unsold homes continue to be a drag on home prices -- and Lennar is a stock that will require patience -- but the market seems to be clearing. Inventories have declined for four consecutive months and are now down 25% since 2008. Harvard's Joint Center for Housing Studies expects 1.2 million household formations per year through 2015. Case thinks demand could soon outstrip supply, which would lead to higher prices. Analyst Stephen Kim of Alpine Funds is more optimistic: "There's no question you're going to see a snap-back in the housing market."
Moreover, Lennar has a history of making lemonade from real estate lemons. During the S&L crisis in the early 1990s, it made a small fortune buying distressed properties at 30¢ or 40¢ on the dollar and then reselling them for 50¢ or 60¢. The operation was so successful it was eventually spun off into a separate company -- LNR -- that was acquired for $3.8 billion. The brains behind LNR was Jeffrey Krasnoff, and he's now back at Lennar running a new distressed real estate unit called Rialto. Michael Winer, manager of the Third Avenue Real Estate Value Fund and a Lennar shareholder, thinks Rialto can cash in even without an immediate rebound in home prices. Says Winer: "This is a stock that could move very quickly. By the time everybody believes there's a recovery underway, it'll be too late. Lennar could already be up 40% or 50%."
East West Bancorp
Market cap: $2.6 billion
2009 Revenue: $880 million
P/E ratio: 12.9
Dividend yield: 0.2%
Ticker: EWBC
Like every other regional bank, East West Bancorp was hammered by the financial crisis. But unlike many competitors, East West owned up early to its problem loans. The Pasadena-based commercial bank raised $200 million and set aside $140 million in loan-loss provisions during the first half of 2008 -- before the bottom fell out of the credit markets.
That paid off, allowing East West to acquire the assets of two failed rivals from the FDIC at fire-sale prices. The FDIC even agreed to cover more than 80% of losses on the acquired loans and real estate. "I don't think the FDIC would have looked as favorably on the transactions if East West didn't already have its own portfolio in order," says George Henning, manager of the Pacific Advisors Small Cap Fund, which counts East West as a top-five holding.
The bank's results are heading in the right direction. East West recorded third-quarter profits of 27¢ a share vs. a 91¢ loss in the third quarter of '09. Analysts expect next year's earnings to climb 51%, above the 11% growth projected for East West's peer group. The bank is better capitalized than its competitors, according to a Sterne Agee report, and its percentage of nonperforming loans is lower -- 3.1% vs. 5.1%. Despite all this, East West's stock trades at 12.9 times projected 2011 earnings, a significant discount to the 19 P/E of its peers.
It's not just the numbers that look good. East West's demographics are attractive too. With the two FDIC transactions, East West is now believed to be the largest Chinese-American-focused bank in the country. (In addition to its 131 branches in the U.S., the bank also has three branches in China.) According to a recent Ariel/Hewitt study, Asian Americans boast a savings rate 19% higher than the national average. The median household income among Asian Americans is $65,469, vs. $49,777 for the entire U.S., and the number of Asian-owned businesses in the U.S. is growing at twice the national rate.
That helps explain why East West boasts a return on equity four times higher than the median regional bank, and why its shares seem likely to appreciate.
Royal Caribbean
Market cap: $8.7 billion
2009 Revenue: $5.9 billion
P/E ratio: 12.6
Dividend yield: N.A.
Ticker: RCL
After a stormy period, the sailing has lately been -- dare we say it? -- smooth for Royal Caribbean. The cruise company was pounded by the Great Recession, with earnings dipping from $2.68 to 75¢ per share between 2008 and 2009. Now leisure spending is recovering, and Royal Caribbean is benefiting from the fact that cruises have always cost less than comparable land vacations. The company's earnings are on pace to rise 168% in 2010. By comparison, operating earnings at Disney's theme parks and resorts fell 7% during Walt Disney Co.'s fiscal year that ended Oct. 2.
The recovery in vacation spending has been stronger in Europe than in the U.S., but that hasn't been a hindrance for Royal. "A hotel builder makes a big capital commitment and hopes that the geography works. If it doesn't, they're in big trouble," says Ken Kuhrt, an analyst and fund manager at Ariel Investments, which owns 2.5 million RCL shares. "Royal Caribbean simply comes up with new itineraries and moves its assets to wherever they're going to get the greatest return." By 2012, 50% of the cruise line's passengers will be international, according to William Blair analyst Sharon Zackfia, up from 25% five years ago.
Based on current bookings and the early success of its new Oasis of the Seas cruise ship (and her just-launched sister, Allure of the Seas), Royal Caribbean has said it expects 2011 earnings to surpass its previous record of $3.26 a share, which would mean profit growth next year of at least 62%. The two new ships boast 5,400 rooms -- vs. 3,600 for rival Carnival's biggest vessel -- as well as zip lines, water parks, and 3-D movie theaters. "People are willing to pay a premium to be on these new ships," says Kuhrt. "They're assets nobody else has -- it would take three years if somebody wanted to build a comparable ship."
The stock, now $40 a share, is trading at a modest 13 times 2011 earnings, but Kuhrt thinks it deserves a P/E closer to 17, which was Royal Caribbean's average valuation from 1997 to 2007. That translates to a stock price of $54 -- just the sort of gain that could fund a pleasant holiday.
Entropic
Market cap: $750 million
2009 Revenue: $116 million
P/E ratio: 11.7
Dividend yield: N.A.
Ticker: ENTR
Every stock portfolio needs one swing-for-the-fences bet on the latest gotta-have-it gadget or technology. San Diego-based Entropic is our pick. The company makes semiconductor chipsets that operate a home-networking system known as MoCa. That's the technology behind the multiroom DVR players -- marketed ad nauseam by DirecTV and Verizon FiOS -- that allow you to record a TV show in one room and then watch it in another.
DirecTV and FiOS already install MoCa in their new HD set-top boxes, and the three leading cable companies -- Comcast, Time Warner Cable, and Cox Communications -- have announced plans to add Entropic chipsets to theirs in 2011. If multiroom DVR capability does become standard on new HD set-top boxes -- and that's where the market seems headed -- the payoff for Entropic would be enormous. It currently controls 85% of the MoCa market. It can even afford to cede some share to Broadcom, as analysts anticipate it will, since the overall market for MoCa chipsets is expected to grow at a 35% to 40% annual rate over the next three years.
Chris Retzler, manager of the Needham Small Cap Growth Fund, sees another opportunity. He envisions a day in which Entropic chipsets are built into TVs, home stereos, game consoles, and Blu-ray players too, allowing for easy sharing of audio and video content across home networks. (In other words, if the kids are playing Wii downstairs on the TV that is connected to your Blu-ray player, you could still pop in a movie and watch it on the upstairs TV.) That could make Entropic a takeover target. "The opportunity for Entropic is enormous," says Retzler, whose fund owns 100,000 shares of Entropic.
Analysts expect 43% earnings growth from Entropic next year. Normally you'd have to pay a hefty premium for a tech stock with this kind of growth potential, but Entropic is priced more like a value stock: At $9 a share, it trades at 11.7 times projected 2011 earnings. Investors seem unduly alarmed by the competitive threat posed by Broadcom and perhaps by the jump in its stock price -- more than 200% this year. But we think it still has plenty of room to run.
Apple
Market cap: $284 billion
2009 Revenue: $43 billion
P/E ratio: 15.7
Dividend yield: N.A.
Ticker: AAPL
At $315 a share and up 47% for the year, Apple looks expensive. We thought so when we wrote about it in September. But after poring over Apple's recent financials, we're now convinced it's cheaper than it appears and that sales of the already hot iPhone and the iPad are set to go stratospheric. A concern we raised was Apple's vulnerability to a key misstep -- such as the iPhone 4 antenna problem that grabbed headlines this past summer. Yet during the July-to-September quarter, iPhone sales thrashed expectations, skyrocketing 91% vs. the same period last year.
What's astounding is that Apple did it with one hand tied behind its back. The iPhone isn't yet sold via the dominant wireless carriers in the U.S., China, Japan, and South Korea. Once Apple sheds exclusivity deals such as AT&T's in the U.S., iPhone sales should get a huge boost. Industrywide, smartphone sales increased 96% last quarter, according to Gartner Research. Apple's market share doubled in Canada and France once the top carriers started selling the iPhone.
Then there's the iPad. Apple sold 3.3 million of the tablet computers in its first three months, surpassing the debuts of both its own iPhone and the netbook category. Don't bet on a sophomore slump: Sales of iPhones and netbooks rose 246% and 155%, respectively, in their second year, says Bernstein Research.
Analysts predict Apple will earn $19.85 a share in the 2011 calendar year (up from $16.73 in 2010), which translates to a price/earnings ratio of 15.7. Sure, this is higher than the S&P 500's 13 P/E, but Apple's earnings have increased an average of 45% over the past three years, while the S&P's earnings have declined 4% per year.
Moreover, Apple's P/E is arguably inflated. Its free cash flow -- money actually flowing into company coffers -- is 14% higher than its reported net income, notes Bernstein analyst Toni Sacconaghi. Apple has over-reserved for U.S. taxes on foreign profits, but, according to Sacconaghi, the company is moving to reduce that, which will have the effect of boosting Apple's reported earnings and reducing its P/E. "The stock is definitely not overpriced," says Sacconaghi, "especially not for a company so well positioned in such fast-growing markets."
Source: CNN
www.snn.com
Opportunity in growth stocks
Despite a gain of more than 10% in the S&P 500 over the past three months, there's still a real buying opportunity in growth stocks: Our 10 best for 2011 are expected to bolster their profits an average of 61% next year -- vs. 14% for the S&P -- and yet they trade at an average 12 times next year's earnings, vs. 13 times for the S&P.
Our selections this year are slanted toward commodities. Exposure to oil, chemicals, and fertilizer should provide protection against a falling dollar or an outbreak of a 1970s-style rise in inflation, which we think is a bigger threat than a double-dip recession. (We've also made some contrarian selections, including one housing-related stock.)
Mosaic
Market cap: $30.2 billion
2009 Revenue: $10 billion
P/E ratio: 15.4
Dividend yield: 0.3%
Ticker: MOS
As corn goes, so go the makers of fertilizer. That's good news for Mosaic, whose stock has had an 89% correlation with corn prices (if 100% means mirroring them exactly) during the past five years, according to SIG Susquehanna agriculture analyst Don Carson. The price of corn has jumped 25% over the last 12 months, and inventories are at their lowest since 1995. The reason: Heavy rains and scorching heat caused the2010 harvest to decline 4% from 2009 -- even as demand rose, with ethanol now consuming 41% of the U.S. corn crop and growing wealth in developing countries leading to increased food consumption.
Mosaic is up only 11% for the year, which means it has some catching up to do. And with analysts expecting a 48% earnings rise in 2011, the stock (which trades at 15.4 times those estimated profits) seems primed to flourish.
Mosaic enjoys other catalysts for greater sales of its main fertilizer products, phosphate and potash. According to a recent Merrill Lynch report, China -- which accounts for 20% of phosphate exports -- may soon restrict its sale outside that country, creating potential opportunity for Mosaic to increase its market share elsewhere in the world. Meanwhile BHP Billiton's failed bid to buy Potash Corp. of Saskatchewan and the acquisition of Potash One by German fertilizer company K S Aktiengesellschaft underscore potash's statusas "a commodity you want to be invested in," says Jennifer Dowty, portfolio manager of the John Hancock Global Agribusiness Fund, which has a large position in Mosaic.
Because the cost of building a potash mine can run into the billions, supply tends to lag well behind demand. Potash prices have tripled since 2004, and the International Fertilizer Association is expecting demand to grow 4.5% a year in coming years. Such fundamentals validate Mosaic's decision four years ago to invest heavily in expanding existing mines in the U.S. and Canada. Mosaic's potash production capacity has grown 10% since 2006 and is expected to increase another 60% between now and 2020. And as it rises, the company's stock seems likely to follow.
Agrium
Market cap: $12.6 billion
2009 Revenue: $9.1 billion
P/E ratio: 11.8
Dividend yield: 0.1%
Ticker: AGU
The basic argument for Agrium is similar to Mosaic's: Increased production of biofuels combined with rising global food demand means more need for fertilizer. But with Agrium that's only half the story.
Natural gas represents 80% of the cost of manufacturing Agrium's primary product, nitrogen fertilizer -- and the price of natural gas has fallen 50% since 2008. With U.S. gas production rising because of massive, recently exploited "shale gas" fields in Louisiana, Pennsylvania, and Texas, the International Energy Agency expects a gas "glut" to further depress prices in 2011.
Agrium's costs are dropping -- but that isn't the case for many of its competitors. Natural gas is difficult to transport, so new supplies in North America don't have much impact on prices elsewhere. "That gives Agrium a real competitive advantage," says mutual fund manager David Jordan, whose Agrium shares are among the largest positions in his Tributary Growth Opportunities Fund. Agrium's competitors in Eastern Europe are paying prices twice as high. Indeed, according to a Citigroup report on shale gas and its impact on the chemical industry, Agrium is the best positioned of all major fertilizer companies to benefit from the falling price of natural gas.
Agrium is not only a manufacturer of fertilizer but a retailer of it as well, as the company operates a 1,200-location chain of farm-product stores in six countries. This, says Richard Kelertas, an ag sector analyst at Canada's Dundee Securities (Agrium is headquartered in Calgary), allows the company to capture more of the spread between falling production costs and rising retail prices. "It's also a stable business with better margins," Kelertas says, noting that customers are buying not just products but services. "If the farmer is spending a lot of money on specialty seeds and fertilizers, he's not going to want to have inefficient application systems."
Agrium's earnings are on pace to jump 60% in 2010, and analysts are expecting another 44% bump next year -- giving Agrium's stock a forward P/E of 11.8.
Dow
Market cap: $36.1 billion
2009 Revenue: $45 billion
P/E ratio: 12.8
Dividend yield: 1.9%
Ticker: DOW
Cheap natural-gas prices are also a boon for Dow Chemical, which uses a key gas byproduct to make ethylene, a building block for the chemicals used to make plastic, rubber, paint, pharmaceuticals, detergents, and countless other products. "They've gone from being in the 80th percentile in terms of cost of production to the 20th percentile," says fund manager Tom Marsico, who counts Dow as a top 10 holding in his Marsico Focus and Marsico Growth funds.
Dow's business mix is improving too. In 2009, Dow acquired Rohm & Haas, a maker of specialty chemicals used heavily by the tech industry. The deal, which was announced just before the financial crisis began to unfold, got off to a rough start: Kuwait pulled out of a joint venture that was supposed to provide part of the financing. Forced to finance the $19 billion purchase on its own, Dow's stock took a beating from which it still hasn't fully recovered.
Nevertheless, by helping Dow broaden its portfolio -- which now includes chemicals used to make LED lighting, semiconductors, solar panels, and screens for TVs and smartphones -- Rohm & Haas has not only boosted Dow's earnings but also helped make them less cyclical. (As a bonus, Marsico thinks Dow may be on the verge of collecting a billion-dollar settlement from Kuwait, ending a dispute over the Rohm & Haas financing.)
Dow is also making hay in its agrosciences division; boosted by new Smartstax hybrid corn seeds that Dow co-developed with Monsanto, the division's operating profits are on pace to rise 14% in 2010 and another 16% next year, according to Credit Suisse analyst John McNulty.
Companywide, Dow's gross margins have improved from 13% to 19% over the past two years. Long-term debt has been pared by $4 billion. And analysts expect 2011 earnings to be up 32% -- on the heels of a 212% earnings improvement this year. (Granted, 2009 was a disaster.) Best of all, Dow's stock isn't priced to reflect the growth company it has become. The share's forward P/E is just 12.8. Says Marsico: "This is now a stock with a real long-term tailwind."
Transocean
Market cap: $21 billion
2009 Revenue: $12 billion
P/E ratio: 9.2
Dividend yield: N.A.
Ticker: RIG
The disaster that killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico didn't just crush BP's stock. It also sank shares of offshore driller Transocean, which owned and operated the Deepwater Horizon (which BP had leased). The rig was insured for $560 million -- already paid to Transocean -- but investors feared the company would be held liable for billions in cleanup costs and restitution.
Transocean maintained that its contract with BP shields it from liability. BP disagreed. So Transocean published the contract: BP "shall assume full responsibility for and shall protect, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination ... without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]." BP even indemnified Transocean against "gross" negligence or "any other theory of legal liability" claimed by plaintiffs or regulators.
Most analysts now agree the early worries were overblown. "We think that the company is well indemnified against blowout-related liability," writes Stifel Nicolaus analyst Thaddeus Vayda. He has an $82 price target for Transocean shares, up 22% from the current $67.
We think Transocean's upside is even greater, despite increased scrutiny of offshore drilling and the Obama administration's decision to reverse its expansion of gulf exploration. Oil prices have risen 17% since May as global demand has rebounded to 2007 levels. Weakness in the West has masked voracious demand in China and India. As North America and Europe recover, the return of triple-digit oil seems likely. Meanwhile production isn't keeping up with demand. All of that means a greater need for deepwater drilling. And consider this: There's a correlation between the price of oil and the value of the long-term contracts oil companies sign to lease Transocean's drilling rigs. Transocean earned $16.57 per share back in 2007 (when oil prices averaged $64). Apply its current 9.2 P/E ratio to those earnings, and you've got a $150 stock.
Royal Dutch Shell
Market cap: $108 billion
2009 Revenue: $278 billion
P/E ratio: 8.3
Dividend yield: 5.5%
Ticker: RDSA
Offshore drillers like Transocean tend to be the energy sector's more volatile stocks. If wild rides aren't your thing, consider Royal Dutch Shell. "Buying this stock is kind of like buying a utility with a call option on oil prices," says Greg Padilla, co-manager of the Nuveen Tradewinds Global Resources fund, which owns a significant Shell stake. Padilla means that as a compliment, but we'd go further. Yes, the stock has attributes that conservative investors favor, such as low debt and $28 billion a year in free cash flow. Shell's 5.5% dividend yield is higher than Chevron's (3.6%) or Exxon Mobil's (2.5%). It trades at a bargain 8.3 P/E, a shade below the 9.1 average for its peer group (and well below the S&P 500's 13).
But Shell is also a growth story. Analysts expect it to increase profits at a higher rate than any of its Big Oil brethren over the next two years. The reason? Many of them are struggling to find enough new oil to offset depletion in old wells. By contrast, Shell is expanding reserves and pumping up production. "They're one of the few majors with significant production growth," says Ben Fischer, portfolio manager of the Allianz NFJ International Value Fund.
The key has been Shell's hefty investment in research and development, typically higher than that of any other oil company. Next year, for example, Shell will open a $19 billion plant in Qatar that uses state-of-the-art technology (backed by 3,500 Shell patents) to convert Qatar's abundant natural-gas supplies into 260,000 barrels a day of diesel and other liquid fuels.
Shell has another advantage: geography. Much of the world's oil and gas is located in countries that are politically unstable, riddled with violence, or run by corrupt politicians (and sometimes all of the above). Perhaps burned by its experiences in places like Nigeria, Shell is now placing some of its biggest bets on unconventional oil-and-gas production in ultrastable countries such as Australia, Canada, and the U.S. "People tend to look at Royal Dutch Shell as a safe place to get a dividend yield, which it is," says Fischer. "But it has a really good set of strategic initiatives going for it too."
Lennar
Market cap: $2.8 billion
2009 Revenue: $3.1 billion
P/E ratio: 25
Dividend yield: 1.1%
Ticker: LEN
Lennar is one of the nation's largest homebuilders -- which hasn't been anything to boast about. It has careened from earning $1.4 billion in 2005 to a loss of $417 million in 2009, and its stock has swooned from $67 to $15 a share.
So why recommend Lennar? Consider the big picture. Between 1959 and 2007, housing starts in the U.S. averaged 1.5 million a year, a figure propelled by a potent force: Historically there have been 1 million to 1.5 million new households formed in the U.S. every year. But since the end of 2008, housing starts have averaged 575,000 a year. "It's unbelievable -- housing starts have been near 50-year lows for two years," says Karl Case, the Wellesley College economics professor who started sounding the alarm about the real estate bubble back in 2004.
Yes, foreclosures and inventories of unsold homes continue to be a drag on home prices -- and Lennar is a stock that will require patience -- but the market seems to be clearing. Inventories have declined for four consecutive months and are now down 25% since 2008. Harvard's Joint Center for Housing Studies expects 1.2 million household formations per year through 2015. Case thinks demand could soon outstrip supply, which would lead to higher prices. Analyst Stephen Kim of Alpine Funds is more optimistic: "There's no question you're going to see a snap-back in the housing market."
Moreover, Lennar has a history of making lemonade from real estate lemons. During the S&L crisis in the early 1990s, it made a small fortune buying distressed properties at 30¢ or 40¢ on the dollar and then reselling them for 50¢ or 60¢. The operation was so successful it was eventually spun off into a separate company -- LNR -- that was acquired for $3.8 billion. The brains behind LNR was Jeffrey Krasnoff, and he's now back at Lennar running a new distressed real estate unit called Rialto. Michael Winer, manager of the Third Avenue Real Estate Value Fund and a Lennar shareholder, thinks Rialto can cash in even without an immediate rebound in home prices. Says Winer: "This is a stock that could move very quickly. By the time everybody believes there's a recovery underway, it'll be too late. Lennar could already be up 40% or 50%."
East West Bancorp
Market cap: $2.6 billion
2009 Revenue: $880 million
P/E ratio: 12.9
Dividend yield: 0.2%
Ticker: EWBC
Like every other regional bank, East West Bancorp was hammered by the financial crisis. But unlike many competitors, East West owned up early to its problem loans. The Pasadena-based commercial bank raised $200 million and set aside $140 million in loan-loss provisions during the first half of 2008 -- before the bottom fell out of the credit markets.
That paid off, allowing East West to acquire the assets of two failed rivals from the FDIC at fire-sale prices. The FDIC even agreed to cover more than 80% of losses on the acquired loans and real estate. "I don't think the FDIC would have looked as favorably on the transactions if East West didn't already have its own portfolio in order," says George Henning, manager of the Pacific Advisors Small Cap Fund, which counts East West as a top-five holding.
The bank's results are heading in the right direction. East West recorded third-quarter profits of 27¢ a share vs. a 91¢ loss in the third quarter of '09. Analysts expect next year's earnings to climb 51%, above the 11% growth projected for East West's peer group. The bank is better capitalized than its competitors, according to a Sterne Agee report, and its percentage of nonperforming loans is lower -- 3.1% vs. 5.1%. Despite all this, East West's stock trades at 12.9 times projected 2011 earnings, a significant discount to the 19 P/E of its peers.
It's not just the numbers that look good. East West's demographics are attractive too. With the two FDIC transactions, East West is now believed to be the largest Chinese-American-focused bank in the country. (In addition to its 131 branches in the U.S., the bank also has three branches in China.) According to a recent Ariel/Hewitt study, Asian Americans boast a savings rate 19% higher than the national average. The median household income among Asian Americans is $65,469, vs. $49,777 for the entire U.S., and the number of Asian-owned businesses in the U.S. is growing at twice the national rate.
That helps explain why East West boasts a return on equity four times higher than the median regional bank, and why its shares seem likely to appreciate.
Royal Caribbean
Market cap: $8.7 billion
2009 Revenue: $5.9 billion
P/E ratio: 12.6
Dividend yield: N.A.
Ticker: RCL
After a stormy period, the sailing has lately been -- dare we say it? -- smooth for Royal Caribbean. The cruise company was pounded by the Great Recession, with earnings dipping from $2.68 to 75¢ per share between 2008 and 2009. Now leisure spending is recovering, and Royal Caribbean is benefiting from the fact that cruises have always cost less than comparable land vacations. The company's earnings are on pace to rise 168% in 2010. By comparison, operating earnings at Disney's theme parks and resorts fell 7% during Walt Disney Co.'s fiscal year that ended Oct. 2.
The recovery in vacation spending has been stronger in Europe than in the U.S., but that hasn't been a hindrance for Royal. "A hotel builder makes a big capital commitment and hopes that the geography works. If it doesn't, they're in big trouble," says Ken Kuhrt, an analyst and fund manager at Ariel Investments, which owns 2.5 million RCL shares. "Royal Caribbean simply comes up with new itineraries and moves its assets to wherever they're going to get the greatest return." By 2012, 50% of the cruise line's passengers will be international, according to William Blair analyst Sharon Zackfia, up from 25% five years ago.
Based on current bookings and the early success of its new Oasis of the Seas cruise ship (and her just-launched sister, Allure of the Seas), Royal Caribbean has said it expects 2011 earnings to surpass its previous record of $3.26 a share, which would mean profit growth next year of at least 62%. The two new ships boast 5,400 rooms -- vs. 3,600 for rival Carnival's biggest vessel -- as well as zip lines, water parks, and 3-D movie theaters. "People are willing to pay a premium to be on these new ships," says Kuhrt. "They're assets nobody else has -- it would take three years if somebody wanted to build a comparable ship."
The stock, now $40 a share, is trading at a modest 13 times 2011 earnings, but Kuhrt thinks it deserves a P/E closer to 17, which was Royal Caribbean's average valuation from 1997 to 2007. That translates to a stock price of $54 -- just the sort of gain that could fund a pleasant holiday.
Entropic
Market cap: $750 million
2009 Revenue: $116 million
P/E ratio: 11.7
Dividend yield: N.A.
Ticker: ENTR
Every stock portfolio needs one swing-for-the-fences bet on the latest gotta-have-it gadget or technology. San Diego-based Entropic is our pick. The company makes semiconductor chipsets that operate a home-networking system known as MoCa. That's the technology behind the multiroom DVR players -- marketed ad nauseam by DirecTV and Verizon FiOS -- that allow you to record a TV show in one room and then watch it in another.
DirecTV and FiOS already install MoCa in their new HD set-top boxes, and the three leading cable companies -- Comcast, Time Warner Cable, and Cox Communications -- have announced plans to add Entropic chipsets to theirs in 2011. If multiroom DVR capability does become standard on new HD set-top boxes -- and that's where the market seems headed -- the payoff for Entropic would be enormous. It currently controls 85% of the MoCa market. It can even afford to cede some share to Broadcom, as analysts anticipate it will, since the overall market for MoCa chipsets is expected to grow at a 35% to 40% annual rate over the next three years.
Chris Retzler, manager of the Needham Small Cap Growth Fund, sees another opportunity. He envisions a day in which Entropic chipsets are built into TVs, home stereos, game consoles, and Blu-ray players too, allowing for easy sharing of audio and video content across home networks. (In other words, if the kids are playing Wii downstairs on the TV that is connected to your Blu-ray player, you could still pop in a movie and watch it on the upstairs TV.) That could make Entropic a takeover target. "The opportunity for Entropic is enormous," says Retzler, whose fund owns 100,000 shares of Entropic.
Analysts expect 43% earnings growth from Entropic next year. Normally you'd have to pay a hefty premium for a tech stock with this kind of growth potential, but Entropic is priced more like a value stock: At $9 a share, it trades at 11.7 times projected 2011 earnings. Investors seem unduly alarmed by the competitive threat posed by Broadcom and perhaps by the jump in its stock price -- more than 200% this year. But we think it still has plenty of room to run.
Apple
Market cap: $284 billion
2009 Revenue: $43 billion
P/E ratio: 15.7
Dividend yield: N.A.
Ticker: AAPL
At $315 a share and up 47% for the year, Apple looks expensive. We thought so when we wrote about it in September. But after poring over Apple's recent financials, we're now convinced it's cheaper than it appears and that sales of the already hot iPhone and the iPad are set to go stratospheric. A concern we raised was Apple's vulnerability to a key misstep -- such as the iPhone 4 antenna problem that grabbed headlines this past summer. Yet during the July-to-September quarter, iPhone sales thrashed expectations, skyrocketing 91% vs. the same period last year.
What's astounding is that Apple did it with one hand tied behind its back. The iPhone isn't yet sold via the dominant wireless carriers in the U.S., China, Japan, and South Korea. Once Apple sheds exclusivity deals such as AT&T's in the U.S., iPhone sales should get a huge boost. Industrywide, smartphone sales increased 96% last quarter, according to Gartner Research. Apple's market share doubled in Canada and France once the top carriers started selling the iPhone.
Then there's the iPad. Apple sold 3.3 million of the tablet computers in its first three months, surpassing the debuts of both its own iPhone and the netbook category. Don't bet on a sophomore slump: Sales of iPhones and netbooks rose 246% and 155%, respectively, in their second year, says Bernstein Research.
Analysts predict Apple will earn $19.85 a share in the 2011 calendar year (up from $16.73 in 2010), which translates to a price/earnings ratio of 15.7. Sure, this is higher than the S&P 500's 13 P/E, but Apple's earnings have increased an average of 45% over the past three years, while the S&P's earnings have declined 4% per year.
Moreover, Apple's P/E is arguably inflated. Its free cash flow -- money actually flowing into company coffers -- is 14% higher than its reported net income, notes Bernstein analyst Toni Sacconaghi. Apple has over-reserved for U.S. taxes on foreign profits, but, according to Sacconaghi, the company is moving to reduce that, which will have the effect of boosting Apple's reported earnings and reducing its P/E. "The stock is definitely not overpriced," says Sacconaghi, "especially not for a company so well positioned in such fast-growing markets."
Source: CNN
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