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The economic slowdown in the United States is likely to last two quarters before easing, said the Ministry of Trade and Industry (MTI).

It bears similarities to recent recessions there in 2001 and 1997, said MTI Second Permanent Secretary Ravi Menon yesterday.

‘We believe we will see two or three quarters of slow or negative growth followed by a recovery, based on the current scenarios,’ he said at a media briefing.

He felt that the outlook for Asia remains positive, but he noted that a deepening financial crisis in the US could worsen the global environment.

‘The critical uncertainty remains in the US economy. A widespread financial crisis could make the US recession sharper and longer.’

He noted that while the worst was probably over for the US financial market, episodes like the Bear Stearns bailout cannot be ruled out.

The Wall Street bank nearly collapsed in the wake of the sub-prime mortgage crisis and was effectively bailed out by the Federal Reserve.

Source : Straits Times - 24 May 2008

NEW YORK - COMMODITIES are too small and specialised an asset class to receive the kind of money stocks are used to - that is the simple but compelling logic some analysts and politicians are using to push for new laws against speculators in oil and other raw materials.

As oil hit a record US$135 a barrel on Thursday, escalating the debate over the impact speculators are having on commodity prices, the argument for new limits on investor activity focused on the disproportionate amount of funds that could be flowing into relatively small markets.

‘Commodities futures markets are much smaller than the capital markets, so multibillion-dollar allocations to commodities markets will have a far greater impact on prices,’ Mr Michael Masters, an equities hedge fund manager, said on Tuesday in testimony that a United States Senate committee plans to use as a centrepiece in its efforts to curb speculation in commodities.

He added that pensions, sovereign wealth funds and university endowments investing in passive commodity indexes were one of the reasons, if not the primary one, for record energy and food prices.

Commodity indexes basically track contracts in commodity futures markets. Although such contracts run according to calendar months and expire at scheduled periods, an investor in a commodity index typically moves to another contract before one expires.

Critics of this investment model say it creates an unrealistic demand for commodities as investors are perpetually ‘long’ or bullish, and never ’short’ or bearish - the two elements required for any market to work in balance.

‘They never sell,’ Mr Masters said, referring to index investors.

‘When institutional investors decide to allocate 2 per cent to commodities futures, for example, they come to the market with a set amount of money.

‘They will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been ‘put to work’.’

As a result, he said, index investors theoretically owned the equivalent of 1.1 billion barrels of petroleum - eight times the US Strategic Reserve. They own enough corn futures to fuel the US ethanol industry at full capacity for a year. The 1.3 billion bushels of wheat they own could make all the bread, pasta and baked goods Americans needed for two years.

The solution? Mr Masters suggests closing a loophole in the Commodity Exchange Act that allows Wall Street banks an exemption from speculative position limits when they hedge in over-the-counter (OTC) swaps for commodities.

OTC trade refers to commodity deals done outside exchanges such as the New York Mercantile Exchange, the Intercontinental Exchange or the Chicago Board of Trade, which account for a large portion of formally traded raw materials.

Putting limits on speculation through OTC swaps ‘would curtail index speculation and…force all speculators to face position limits,’ Mr Masters said.

A spokesman for the US Senate’s Homeland Security and Governmental Affairs Committee under Senator Joseph Lieberman said a panel was being convened to study the merits of closing the swaps loophole after Mr Masters’ testimony.

Some disagree with Mr Masters’ findings.

Barclays Capital estimated that the money in commodity futures and related instruments had reached US$225 billion (S$307.5 billion) by the end of the first quarter of this year, and only half of that belonged to institutional investors.

‘Beyond some wildly incorrect numbers being placed into the public domain, the actual inflow of net new investor money is very modest indeed,’ the bank said in a report on Thursday.

But legislation to control speculation more effectively in commodity markets over the longer term may be an option after the Bush administration’s tacit admission this week that it could not do much about oil prices in the near term.

‘We think Congress will take some steps that could indirectly dent the energy price spiral by hiking margins on energy investments and/or restricting fund flows into the sector,’ said Mr Edward Meir, an analyst for oil and metals at MF Global, the world’s largest commodity futures brokerage. - REUTERS

MAJOR CAUSE OF PRICE SURGE

Mr Michael Masters, an equities hedge fund manager, says pensions, sovereign wealth funds and university endowments investing in passive commodity indexes were one of the reasons, if not the primary one, for record energy and food prices…

An investor in a commodity index typically moves to another contract before one expires.

Critics say this model creates an unrealistic demand for commodities as index investors are perpetually ‘long’ or bullish, and never ’short’ or bearish - the two elements required for any market to work in balance.

Source : Straits Times - 24 May 2008

Inflation pressures override need to boost slowing growth

(WASHINGTON) Federal Reserve officials strongly suggested they won’t be inclined to cut interest rates further even as they sharply downgraded their forecast for economic growth this year. They cited damage from a housing slump, credit crunch and galloping energy prices for the slow growth.

In fact, the Fed’s decision to lower interest rates at its April 29-30 meeting was a ‘close call’, according to minutes of those private deliberations released on Wednesday.

The Fed hopes that its series of powerful rate cuts ordered since last September and the government’s US$168 billion stimulus package of tax rebates for people and tax breaks for businesses will help energise growth somewhat in the second half of this year.

Fed officials viewed economic activity ‘as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of this year’, the documents stated.

The Fed also forecast higher unemployment and inflation for this year.

Given the hope of a second-half economic pickup but worried about inflation, Fed officials signalled last month that their one-quarter-point rate reduction, which dropped their key rate to 2 per cent, might be their last rate cut for some time.

‘Most members viewed the decision to reduce interest rates at this meeting as a close call,’ the documents showed. ‘Although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices.’

Many economists believe the Fed will hold its key rate steady when it meets next, on June 24-25.

That sentiment was borne out in the Fed’s documents as well as recent speeches by Fed officials.

Looking ahead, some Fed members - not identified in the documents - noted that it was ‘unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening in the economic outlook’, according to the Fed papers.

Separately, Fed governor Kevin Warsh, in remarks on Wednesday, also suggested that the Fed was not inclined to cut rates again. ‘Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again.’

Under its new projections, the Fed now believes that gross domestic product will grow between just 0.3 per cent and 1.2 per cent this year.

That’s lower than a Fed forecast, released in late February, that estimated growth to be between 1.3 per cent and 2 per cent.

With economic growth slowing, the Fed projected that the national unemployment rate will rise to between 5.5 per cent and 5.7 per cent this year. That is higher than the central bank’s old forecast for the rate to climb as high as 5.3 per cent. Last year, the unemployment rate averaged 4.6 per cent.

And, with energy prices marching upwards, the Fed raised its projection for inflation. The Fed now expect inflation to be between 3.1 per cent and 3.4 per cent this year. That’s higher than its old forecast of 2.1 per cent to 2.4 per cent.

At the Fed meeting in April, two members - Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas - opposed cutting rates, a crack in the usually unified front the Fed often shows the public.

Both men have a reputation for being especially vigilant about fighting inflation. And, some fear that further rate cuts could aggravate inflation.

Wednesday’s report may have raised investor concerns about stagflation, the combination of stagnant growth and high inflation seen in the 1970s, said Keith Hembre, chief economist at Minneapolis-based FAF Advisors. — AP, Bloomberg

Source : Business Times - 23 May 2008

No one can now know when the global economies will recover from recent turmoil

A CENTURY ago, the esteemed philosopher George Santayana warned: ‘Those who ignore history will be condemned to repeat it.’ One can add: ‘And those of us who do know history will be condemned to repeat it with them.’

Why did our top experienced experts fail to anticipate the worldwide financial turmoil brought on by the 2006 bursting of the real estate bubble?

No one can be a perfect forecaster. But leaders do differ in their long-run average of prediction accuracy. Alan Greenspan, during his decades of public service and private consulting, was definitely better than most.

Prior to 1997, he made only a few bad calls. But mostly, these were venial sins, not what theologians call mortal sins.

However, just before his January 2006 retirement as top Federal Reserve governor, he made the mortal error that will mar forever his reputation.

While just before his eyes the bursting of the sub-prime mortgage bubble was taking place, Mr Greenspan viewed it all through rose-coloured glasses.

New models of financial engineering, under rash deregulation, were exploding with dysfunctional finance. To him, they looked like clever risk-bearing by respected Wall Street activists.

What was dysfunctional before and after the fact looked rosy to Mr Greenspan. I suspect this traces to his gut remembrance of Ayn Rand’s extreme libertarianism.

Mr Greenspan has been in plentiful company. None of the CEOs of the biggest investment banks ever had the least understanding of the mathematics of derivatives nor of the hyper-leveraging that they were involving themselves in.

Now Wall Street Journal pundits tell us on Monday, Wednesday and Friday ‘the worst is behind us’. But on Tuesday, Thursday and Saturday, pundits tell us ‘the worst is yet to come’.

Who is right? What knowledge of past history could help answer that timing question? Actual economic history, almost by definition, is what mathematicians call a non-stationary time series.

Their past probabilities can be helpful, but only somewhat. And when new things happen, palaver about history can sometimes be materially harmful.

There can always be something new under the sun - even if you should not bet on it. The 1929-1939 Great Depression could not happen. But it did.

Hitler’s Germany almost won World War II. But it didn’t.

All of the above is a way of saying that no one can now know when the global economies will recover from recent serious turmoil.

This one can be known, however. The system cannot be counted on to heal itself. Fed chief Ben Bernanke did the right thing when he stretched the powers of our central bank to check the financial bleeding.

My guess is that after the Democratic Party victories in November 2008, new shifts in policy towards the centre will be needed:

(1) to improve sensible regulating; and maybe

(2) the US will have to rely in the end on myriad federal spending to clean up the financial engineering messes.

That was what had to be done in both the United States and Germany back in the 1933-1939 period of recovery from a depression that was brought on by massive deficit spending.

This, and not easier credit by central banks, is what mostly restored job opportunities to the one in three American and German workers who were suffering from long-term unemployment.

Searching for scapegoats is all too easy. The SEC monitors of speculative risk-takers were asleep at the switch. So were the central bankers in the US, the UK and the new EU central bank.

And where were the great, tried-and-true accounting firms? They were leading and abetting the charge into unknown abysses of leveraging and risk-taking, rather than controlling against them. The list goes on and on.

I stop at the abject failure of the three principal rating agencies.

They indiscriminately gave AAA ratings to good fish, foul fish, and stinking-foul foul fish. Why? Because, of course, they would otherwise lose the fat fees their customers paid only to messengers of good-sounding news.

To sum up, the financial system on President George Bush’s watch became systemically fragile and dangerous.

After all my bad news, it may come as cheerful when I say that the ills are not incurable. With time and good sense, after next November’s victory for centrist policies, each of them can be remedied.

However, because homes, offices and factories are such long-lived durable goods, the housing meltdown is likely to last for years, not months.

Furthermore, realists must expect the early kind of unwise actions by the Democratic victors: Such marred Franklin Roosevelt’s New Deal programmes during his first few years in office.

Also, the good economic deeds from former president Bill Clinton came mostly during his second term in the White House.

No democracy is perfect. One worrisome thing is the kind of promising to special groups that the victors had to make in order to become victors.

I will leave for another day the threat of extreme protectionism bred by how much the middle classes have suffered during Mr Bush’s eight years in office. — Tribune Media Services

The writer is considered one of the founders of modern neo-classical economics and was awarded the Nobel Prize for Economics in 1970

Source : Business Times - 23 May 2008

It also signals pause in rate cuts, fearing impact on value of greenback

WASHINGTON - THE United States Federal Reserve’s warning about possible higher inflation and a weaker American economy sparked fears that the country faces stagflation.
 
In minutes released on Wednesday, the US central bank broke its traditional silence to highlight the danger of a slide in the value of the US dollar.

It also slashed its economic growth forecast for this year and signalled that mounting concerns over inflation would make further interest-rate cuts unlikely.

In the minutes, the Fed revealed increasing discomfort at the US dollar’s impact on import prices, with one official also blaming interest-rate cuts for sapping the greenback’s value and contributing to a climate that further impairs economic growth.

This followed a noticeable increase in dollar remarks from Fed officials, including vice-chairman Donald Kohn - trespassing on the turf of the US Treasury, which by long agreement acts as the country’s spokesman on foreign exchange.

The dollar had hit record lows against the euro and other major currencies as the Fed slashed interest rates to shield the world’s largest economy from the US sub-prime mortgage market meltdown.

The US Treasury has shown no inclination to bow to foreign pressure to do something about its sickly currency, beyond doggedly repeating the mantra that a strong dollar is in the country’s interest, and that strong long-term fundamentals of the American economy will be reflected in exchange rates.

Mr Kohn’s remarks on Tuesday seemed innocuous. He observed that a weaker dollar boosts US exports while potentially fuelling imported inflation - a statement of accepted economic wisdom.

But policymakers of Mr Kohn’s stature do not make accidental references to the dollar in carefully crafted speeches, and it was not an isolated incident.

Fed officials debating whether to cut interest rates at their last policy meeting were worried that a weak dollar was adding to inflation pressures by making imports into the country more expensive, minutes of the meeting showed.

‘Many participants - noticeably more than in January - saw the upside risks to inflation as greater than the downside risks,’ the minutes of the April 29-30 meeting said.

‘In particular, the pass-through of recent increases in energy and commodity prices as well as of past dollar depreciation to consumer prices could be greater than expected.’

Dallas Federal Reserve bank president Richard Fisher, who opposed the most recent rate cut, was concerned that an ‘adverse feedback loop’ was developing. He feared that lowering the funds rate would push down the exchange value of the dollar, contribute to higher commodity and import prices, cut real spending by businesses and households and, ultimately, impair economic activity, the minutes said.

The minutes were released shortly after Fed governor Kevin Warsh said that central bankers could not ignore the plight of the currency.

Fed officials also said in the minutes that cutting benchmark interbank lending rates by a quarter percentage point to 2 per cent at their last meeting was ‘a close call’.

‘If you had any doubt that the Fed is signalling a pause, that doubt is gone,’ said Mr Christopher Low, the chief economist at FTN Financial.

In an accompanying forecast, the Fed cut its projection for US growth this year to a scant 0.3 per cent to 1.2 per cent, down from the 1.3 per cent to 2 per cent it had forecast three months ago.

US stocks tumbled on Wednesday after the Fed forecast, with the Dow Jones Industrial Average closing off nearly 1.8 per cent.

REUTERS
 
Source : Straits Times - 23 May 2008