Tuesday, March 28, 2006

3/28 FHPN Nuclear power in news

"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts, with bold emphasis added for key points, from selected recent stories, often focused on a single important theme, and my bold italicized comments. See 3/11 "Digests of my previous posts for busy people" link for blog's core ideas.

Thanks to those who have recently e-mailed or posted their comments, I greatly appreciate it.

This edition of FHPN focuses on nuclear power. I am simply posting summaries of a spate of recent articles on the subject without my comment for now, as I continue to try to evaluate this emotionally charged issue. Given the very high stakes, including national and energy security and the environment, responsibly commenting on nuclear power requires rationally trying to take into account at least the six different perspectives indicated by the acronym BEGETS in my blog's tag line. For a related subject, also see my 3/14 "FHPN Evidence of climate change faster than modeled mounts from Arctic, Antarctica, Greenland" link. The 3/21 FHPN, link, focused on "Real estate slowdown, Spring clearer look at fundamentals, speculative psychology tipping point."

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3/13 Bloomberg "Uranium May Lead Rally in Metals on Nuclear Revival" link "Nuclear energy's revival can best be seen in uranium, which outperformed the metals markets in 2005 and may do so again this year ... Uranium last year gained 76 percent, beating all but one of the 19 commodities in the Reuters/Jefferies CRB Index. ... Just 60 percent of the uranium consumed in the world's nuclear reactors is mined each year. Without supplies from stockpiles and recycled from Russian warheads, the energy industry wouldn't have enough uranium to keep all of its plants running ...Speculators "have taken out whatever slack exists in the market" ... Investors are "getting to available supplies of uranium before the utilities." After three decades of stagnation, the nuclear industry may receive more than $200 billion of investment by 2030, according to the International Energy Agency in Paris. As well as the 24 reactors now being built, another 41, with a capacity of almost 43,000 megawatts, have been ordered or are planned, according to the World Nuclear Association in London ... [one analyst foreceast] "The uranium market will remain tight for at least the next three years." ... [another] forecasts that wholesale uranium will peak at an average $38 a pound next year and fall to $32 in 2008 as new mines come on stream and reactors use uranium more efficiently."

3/24 AFP "Nuclear an integral part of China's 15-year energy plan" link "China's will speed up construction of nuclear power stations as part of a 15-year national strategy to satisfy massive energy demand, state media has reported. The State Council, or cabinet, has approved the energy blueprint for 2005-2020 with nuclear to play an "integral role", the China Daily reported ... By 2020, the country's nuclear power generation capacity is expected to reach 40,000 Megawatts, or four percent of China's total power output, the report said ... China has to build at least one nuclear power station with a capacity of 1,800 megawatts per year ... an effort to overcome ongoing energy shortages and to build up alternatives to massive coal use ... China already has 11 nuclear reactors in operation ... China's nuclear drive has sparked huge international interest."

3/4 AsiaTimes "China embraces the atom" link Note: this is a thorough review article, from which I can give only limited excerpts, please go to the original. "Beijing has embraced nuclear power as a solution. According to the China National Nuclear Corp (CNNC), the government body responsible for much of the country's nuclear-power program, China plans to invest US$48 billion to build 30 nuclear reactors by 2020. Currently, the country has nine reactors in operation with another two under construction at a combined cost of $3.2 billion ... The US Department of Energy's Energy Information Administration (EIA) predicts China's annual nuclear-energy consumption could rise to 66 billion kilowatt-hours in 2010, up dramatically from 16 billion kWh in 2000. In addition, EIA predicts the country's nuclear electricity consumption will rise to 129 billion kWh by 2015 and 142 billion kWh by 2020, surpassing both Canada and Russia ... fears in Beijing that oil could control the country's destiny, making the identification and development of alternative energy sources a key priority ... A key component of China's energy program is the development of alternative nuclear power technologies. This year, a $370 million, 190-megawatt nuclear plant using "pebble-bed technology" is expected to begin construction. Built by China Huaneng Group, parent of Huaneng Power International Inc, the power plant will use new high-temperature, gas-cooled reactor technology instead of the pressurized-water technology ... In another move designed to develop alternative energy technologies, China has partnered with the United States, the European Union, Russia, South Korea, India and Japan to experiment with nuclear fusion."

3/27 ABC "China looks to Australian uranium deal" link "Australia and China look set to sign agreements on the use of Australian uranium in Chinese nuclear power plants. China's second highest leader Wen Jiabao arrives in Australia this Saturday for the first visit by a Chinese Premier in 18 years. The centrepiece of his four-day trip appears to be a deal over uranium. A Chinese spokesman this afternoon said two agreements will be signed over China's peaceful use of nuclear energy and the exploration and exploitation of uranium."

3/26 AP "France a leader in nuclear power" link "a new crop of leaders, from North America to Europe to Asia, is thinking nuclear ... France the only European country that continued making new nuclear plants after Chernobyl, France has up-to-date expertise that it's keen to export ... even a few environmental activists are reconsidering nuclear power ... China and India are embracing nuclear energy ... The United States and Russia are reviving long-dormant nuclear plans ... Finland is building the first new reactor in Western Europe since 1991 ... Sweden and Germany are shutting down, not starting up, reactors ... France's key partner in promoting that renaissance is an unexpected one: the United States ... Some 25 reactors are under construction around the world, adding to the network of 440 commercial nuclear-power plants spread out over 31 countries that supply 16 percent of the world's total electricity. The Bush administration has enraged environmental groups with its new "alternative energy" plan which, while promising money for wind and solar energy, makes the government's first big pitch for nuclear energy in 27 years ... This month former U.S. Energy Secretary Spencer Abraham was appointed chairman of the board of Areva, the company's U.S. operation... a University of Chicago study concluded that a new fleet of more efficient reactors can be expected to produce power as cheaply as coal and natural gas ... The high-profile battle for control of U.S. nuclear company Westinghouse — which Toshiba recently bought from British Nuclear Fuels for $5.4.billion, twice the expected price — underscores the business world's view that the industry is poised for a takeoff ... While European public opinion remains strongly anti-nuclear, some governments are hoping that a European Union proposal to boost nuclear energy will help them overcome the naysayers."

3/27 GuardianUK "Most EU leaders back reviving nuclear power" link "The overwhelming majority of leaders at last week's European Union summit, including Tony Blair, strongly backed a revival of nuclear power as the answer to Europe's growing dependence on overseas supplies and to combat climate change. Only Germany and Austria explicitly rejected the nuclear option in secret summit talks ... Angela Merkel, the chancellor and a trained physicist, favoured it personally but was bound by her Social Democrat coalition partners to reject it. Andris Piebalgs, EU energy commissioner and author of this month's green paper on a common energy policy, made it plain in an interview that a revival of atomic power was not the "silver bullet" ... Last week's summit endorsed the notion of an EU action plan designed to save 20% of energy consumption by 2020 and plans to raise the 6% of energy provided by renewables to 20% by the same date ... Mr Piebalgs ... indicated that a critical answer to Europe's long-term supply needs was to increase the market for liquefied natural gas (LNG), which could be imported from several countries. He suggested that LNG should provide 20%-25% of European energy within the next 25 years."

3/27 BusRep "Study for another Koeberg is under way" link "[South Africa Public Enterprise Minister] Erwin also painted a rosy picture of the pebble bed project, confirming that the government envisaged setting up 30 of the minireactors in the country. He said the introduction of the pebble bed reactor could not have come at a more economically opportune time. "Its positive attributes from an environmental point of view and its potential link with hydrogen production add immensely to the attractiveness of this technology." Erwin said that the pebble bed reactor would "reduce dangerous emissions" and that its waste was "very highly manageable. It was produced in small amounts that can be stored without harm to people or the environment." The initial reactor project entails the building of a demonstration reactor at Koeberg and a pilot fuel plant near Pretoria ... construction of the demonstration plant is scheduled to start in 2007 and be completed by 2011. The first commercial reactor modules are planned for 2013. Investors in the company running the project include the government, Eskom, the Industrial Development Corporation and US nuclear giant Westinghouse."

3/28 "SA's 'small, safe' nuclear power" link Note: thorough background article on pebble bed modular reactor (PBMR) technology mentioned in articles above on South Africa and China. I will give excerpts from this article later today when I have the time.

3/26 AFP "Japan's long-stalled nuclear power project gets boost" link "Japan's long-stalled controversial plan to use recycled fuel in nuclear power reactors received a boost after a rural town accepted the method despite nationwide safety concerns ... Kyushu Electric plans to start operating a reactor at its Genkai nuclear power plant with MOX fuel in the business year to March 2011. It will become Japan's first plant to use MOX fuel ... In the so-called pluthermal process, plutonium extracted from spent nuclear fuel is combined with uranium oxide to create MOX fuel, which is then burned in light-water reactors. The Japanese government has been pushing the pluthermal process since 1997 as the center of its nuclear-fuel recycling policy to make up for the country's poor reserves of natural resources. Its plan to use a fast-breeder reactor, which produces more plutonium than it uses, had been suspended due to a sodium leak accident in 1995 at its pilot plant Monju ... Japan relies on nuclear power for one third of its electricity, and the ratio is expected to go up to 40 percent by 2010. The Japanese electric industry has plans to use the pluthermal method at 16-18 nuclear reactors in the country by the year to March 2011. But they have been stalled by a series of accidents and scandals. Tsunehisa Katsumata, who heads the Federation of Electric Power Companies of Japan, welcomed Genkai's move as "an extremely significant step forward.""

3/26 RFE/RL "China/India: Emerging Giants Look To Nuclear Power" link "Since [Chernobyl], virtually no new reactors have been built in the West, and many of the more than 440 nuclear reactors in the world will soon be reaching the end of their operational lives ... the soaring price of oil and increasing concerns about climate change have produced a new interest in nuclear power. In Europe and the United States, serious consideration is being given to new power plants, despite the radioactive waste the process produces ... China brought six new reactors on line between 2002 and 2004, and plans at least another 30 in the next 15 years. India, likewise, is aiming for 30, with seven due to come on line by 2008. Both countries are starting from a low base, in that in 2004 nuclear power accounted for less than 3 percent of each country's total electricity production ... Flavin [president of WorldWatch Institute] says the swing to nuclear power must not be exaggerated. Even 30 new reactors each would leave China and India well behind some European countries ... Flavin dismisses doubts about the practicality of renewable energy sources as a "myth" and says this is likely the way China and India will go."

3/24 BBC "Japan's shaky nuclear record" link "The decision by a Japanese court to order the closure of the country's newest nuclear reactor casts a shadow over the future of Japan's nuclear power industry ... Japan has the third largest nuclear generation capacity in the world, with 55 reactors, behind only France with around 80, and the United States with over 100 ... If any of them are even temporarily closed down, it would leave the country with a serious power shortage, as they account for about a third of its electricity needs. In the US, in comparison, nuclear power provides about 20% of the country's electricity ... While Japan holds a good reputation for public safety ... public trust has been shaken by a number of mainly minor accidents in recent years."

3/22 AFP "Germany still needs nuclear power: economy minister" link "German economy minister Michael Glos said his nation still needs nuclear energy, calling for a review of the previous administration's decision to shut down its atomic power plants ... Glos emphasized his view was purely personal and said he realized it would be difficult to reverse the decision taken by the previous government under Gerhard Schroeder to phase out nuclear power. But a review of Germany's energy policy was required because of political instability in oil and gas producer regions, he said."

3/25 AFP "UN nuclear chief wants urgent reform of Security Council" link "The head of the United Nations nuclear watchdog called for urgent reform of the UN Security Council to give it greater powers, especially in addressing the threat of nuclear proliferation. "It is clearly time for the Security Council to be reformed, expanded and strengthened, as part of the current efforts to reform and revitalize the United Nations," said Mohamed ElBaradei, head of the International Agency for Atomic Energy (IAEA) in Vienna ... "When dealing with threats of nuclear proliferation and arms control, the Security Council has too often fallen short." In specific cases of arms control, the Security Council's efforts had not been very systematic or successful."

3/26 USAT "U.S. confronts issue of 'loose nukes' on several fronts" link "With little fanfare, U.S. utilities have been buying uranium that once sat in Soviet nuclear weapons to fuel civilian nuclear power reactors. The program supplies half the uranium used by U.S. nuclear plants which, in turn, generate 20% of all U.S. commercial power. That means, essentially, that one in every 10 light bulbs in America is powered by uranium that once sat atop a Russian missile. Linton Brooks, head of the Energy Department's National Nuclear Security Administration, called the program one of several aimed at preventing a terrorist weapon from entering the USA aboard a container ship. The U.S. strategy against what is sometimes called the "loose nukes" problem includes: Securing sites ... Securing nuclear material ... Reducing quantities ... Border control ... Port security"

3/26 USAT "Official warns of unsecured nuclear reactors" link "One-third of the world's 130 civilian nuclear research reactors lack security upgrades needed to prevent theft of materials that terrorists could use to build an atomic bomb, the chief U.S. nuclear proliferation official says ... The U.S. government won't say specifically where the unsecured reactors are. All reactors in the USA, Russia and Eastern Europe have adequate security, according to the National Nuclear Security Administration and Holly Harrington of the Nuclear Regulatory Commission. That's an improvement over 10 years ago when many Soviet bloc research reactors were particularly vulnerable to theft ... That leaves 47 reactors with inadequate or questionable security in China, Ghana, Jamaica, Pakistan and Uzbekistan, according to an International Atomic Energy Agency list. There are also research reactors in countries hostile toward the United States, including Iran and North Korea ... Brooks said security has improved at former Soviet bloc research reactors with U.S. funds of about $1 billion a year ... The world's research reactor security efforts are "at about 3" on a 1-to-10 scale with 10 being safest, said Nunn, who helped create the 1991 U.S. plan to secure nuclear materials."

3/26 AP "Nations look at sites for nuclear plants" link Article gives a summary "look at some countries building or considering new nuclear reactors."

3/24 ColumbiaStar "Nuclear power for electric power, again" link "Duke Power dropped its Cherokee County plans for a new nuclear plant 23 years ago. Now, at the same site, the same company announced last week it is planning a new nuclear power plant, this time in partnership with Southern of Atlanta ... Also talking new nuclear power plants is Columbia's SCANA and Raleigh's Progress Energy. For now, in the present regulatory environment, Duke can sell wholesale electric power to Southern and wheel it through SCANA lines for a regulated fee. So if Duke finishes its next generation of nuclear plants first, Duke can wheel its new-found bulk-rate electric power to the other utilities at a volume discount while SCANA and Progress get their new nukes on line ... Duke, Southern, SCANA, and Progress are saying each needs new nuclear power plants to generate electricity for their designated and regulated and protected respective domains. But the other shoe could drop on the electric utility industry's regulatory protection. The electric utilities could lose their designated, regulated, and protected domains. Competition could come in on the retail level, freeing up access for everybody, and rendering some of the new electric power unnecessary, like in 1984."

Friday, March 24, 2006

3/24 Economic/Financial Monitor: Potential Tipping Points Could Make Spring Very Interesting 4345 words

I will post articles similar to this one monitoring the economic and financial environment in the future, hopefully shorter, perhaps on a weekly basis (time permitting), please look for them, thanks.

With the global economy humming along in the first quarter, even the perennial laggards Japan and Germany are doing better than expected after a very long period of corporate restructuring, micro and macro reforms, with Japan seemingly finally exiting its deflationary environment, with commercial land prices rising 1% in Tokyo last year, not much but the first increase in more than a decade.

Although most investors wouldn't know it just looking at the major U.S. stock market averages, overall financial market euphoria is at one of the highest levels in the past twenty years, best indicated by extremely low credit spreads across the board (similar to stratospheric p/e's during the massive TMT equity bubble in the late 1990s).

It perhaps wouldn't take too much to start the mass psychology pendulum downward in the other direction (unless the pendulum flies right off in another huge speculative blow-off, as occurred at the end of 1999 and early 2000).

If normal seasonal and four-year presidential cycles still hold, then the U.S. stock market may top out in the next month or so, then decline, perhaps much more sharply then many might currently expect, into an October low. Whether a strong rally ensues from that low, as usually occurs to a high next year, would depend on the larger secular bear vs. bull debate.

Below are some of the areas that possibly could begin the speculative euphoria pendulum's downward swing in the next few months, i.e. significantly increasing risk aversion, implied volatilities and credit spreads and compressing p/e's. These are NOT predictions or forecasts of imminent, impending doom, but rather legitimate risk areas that we will continue to monitor closely for you.

A few preliminary caveats. Prospects for the real estate sector are key yet difficult to forecast since this sector is in unchartered territory in this cycle. Perhaps surprisingly because of its critical importance to the U.S. economy during this economic cycle, this sector is generally not analyzed closely enough by Wall Street equity research departments, including the macroeconomists, especially the risks posed by mortgage resets and "investor" home flippers.

And while most individual investors have good knowledge of this area based upon their own personal experience as homeowners, many becoming experts after multiple refis, they may tend to have an optimistic bias extrapolating recent experience and based upon their financial self-interest.

Three other areas critical in this cycle where equity investors could also be blind-sided are credit derivatives, emerging markets and oil prices. The first is simply a "black box" for Wall Street equity research, rarely considered, which is usually okay except when one of those "fat tail" statistical outlier credit events comes along, such as LTCM in 1998.

While emerging markets are heavily researched by Wall Street, the average equity investor should not fool himself regarding his ability to really understand what's happening in Shanghai or Bangalore as compared to Silicon Valley or Detroit. Oil is also heavily researched, but oil prices can be strongly influenced by geopolitical events that no expert can really forecast with precision.

One final initial caveat. Without the now-retired Wizard of Oz at the Fed, it should be noted that there are virtually no viable mainstream economic/political alternatives waiting in the wings right now that financial markets would have great confidence in, which could make the situation get much worse much more quickly than expected should things start to unravel.

While the global real economy still seems strong, there are wild cards in the deck as the hands are dealt out. Here are some of them.

Economic and Financial Risks

Real estate: According to today's WSJ, "New-home sales recorded the steepest drop in nearly nine years during February, marking the fourth decline in six months ... The level of demand was the lowest since May 2003 ... There [was] a 6.3 months supply at the current sales rate and the highest inventory level since January 1996's 6.4 months supply," up from 5.3 months this January." The median sales price was down 2.9% from a year ago.

The previous day, existing home sales were reported to be surprisingly strong in February, the largest percentage gain in two years, partly attributed to the effects of unusually warm weather in January, after declining 9% in the prior five months, with 5.3 months of supply. Sales have fallen by double-digit percentage in some of the hottest markets, but may be heating up in some of the most affordable ones.

In general, prices have been modestly declining since last summer; inventories are rising; and purchase mortgage applications are off, 16% in the last twelve months, 26% in the last week from the peak in June. An index of home builder sentiment is the lowest in three years. Buyers and sellers have seemed to be in a stand off, who is in denial should be more clearly evident this spring selling season.

According to a recent report (see my 3/21 "FHPN Real estate slowdown, Spring clearer look at fundamentals, speculative psychology tipping point" link), 71 U.S. housing markets were "extremely overvalued" at year's end, with 18 of 20 of the most overvalued markets in California and Florida.

Key issues in these extremely overvalued markets would include how long speculative “investor” flippers and sub-prime, adjustable-rate mortgage borrowers will hold on before panic selling starts to begin. In the Midwest, weak industrial employment is already taking its toll. Foreclosures in several key states there and Georgia are now at their highest levels since the 1979 Iran oil crisis

Since there never has been this much real estate speculative activity and so many questionable mortgages to less creditworthy borrowers, no one really knows the riskiness of the situation. One study recently concluded that about one million households would eventually foreclose in the next few years, assuming current levels of home prices and interest rates. A recent poll indicated that more than one-quarter of holders of adjustable rate mortgages aren't sure if they can make their payments if interest rates go up.

One thing seems fairly certain, expectations are way too high if home prices continue not to rise, and the dashing of them would start to have self-fulfilling negative consequences. In a recent survey cited in my 3/21 FHPN only 5% expected no increase in the next three years.

Even with flat prices, with consumer debt servicing now rising faster than disposable income due to both rising debt and rising interest rates, and the home equity ATM significantly declining due to flattening home prices, it would only seem to be a matter of time before consumer "shop til you drop" mentality finally starts to get reined in.

Despite all the stories summarized in my latest real estate FHPN referenced above, as to whether there is a real estate bubble, in the final analysis I still basically go with my gut. This worked well in the TMT equity bubble. Back then, how could anyone look at literally hundreds of new companies going public that were hemorrhaging red ink, without experienced management teams nor even viable business plans, and claim with a straight face, as the Fed would do, that it couldn't tell if there was a huge bubble

Similarly, my gut simply tells me that there is no way that a non-income producing asset, a small, fifty-year old run-down ranch house on a slab foundation on a postage stamp lot on a dreary treeless sun-baked street, on a dangerous fault line no less, in a region which has seen employment decline about 20% in the past five years, Silicon Valley, is really worth $700,000 or more.

This is an extreme example in a state that is notorious for its anti-development bias which greatly limits the supply of new housing. Nevertheless, given the huge price increases in so many highly speculative markets over the past five years or so, can anyone, including Fed governors, seriously say with a straight face that there isn't a bubble, and thus that the purchasing power and store of value of the dollar plummeted over that time due to massive credit excess?

Unlike the bursting of the TMT equity bubble, what isn't clear to me at all this time, or seemingly to anyone else as far as I can tell, is how long a situation can continue where people adamantly refuse to believe what their eyes and simple common sense seem to tell them because of their bank accounts (see my 2/14 “Mommy, Where Do McMansions Come From?” link).

Corporate capex: Especially if real estate slows more rapidly than consensus, at what point does Global 1000 use its record cash flow and profit margins to stop trying to buy growth and competitive position through m&a, often frittered away to the immense benefit of the i-banks and private equity funds, and actually start to more heavily re-invest, as in a more normal business cycle, in new p&e, r&d, employment, etc.

The consensus expects corporate capex to pick up the slack if the consumer starts to, finally, slow. What if the consensus is wrong?

I mentioned above that I rely on gut feel when it comes to the real estate bubble issue. But I much prefer a more objective approach. When it comes to economic forecasts, my favorite tool is leading indicators. The Economic Cycle Research Institute, ECRI, does an excellent job producing and interpreting real-time leading economic indicators. According to a March 1 Reuters story:

""An industrial slowdown could come when consumer spending growth is already slowing, resulting in much weaker overall growth than generally anticipated this year," said Lakshman Achuthan, ECRI managing director ... ECRI argues that may be more of a last gasp for manufacturing in the current economic cycle then the start of a sustainable upward trend in activity. "The not-too-hot, not-too-cold 'Goldilocks' economy envisaged by many economists could turn out to be a mirage," said Achuthan ... "The correction in metals prices appears to be in line with earlier signals of a cyclical slowdown in the industrial sector, and may thus be the early stage of a cyclical downswing rather than just 'noise,'" Achuthan said."

Oil: Price could spike up on bad news on supply disruptions from Mideast, etc., or start to decline due to rising inventories and demand growing slower than global economies. While the second scenario would seem to be positive for the economy, energy stocks tend to be late cyclical.

If that cyclical relationship continues, and some would argue that it's changed due to an increase in secular demand from China and other developing economies, then a topping in this sector would be a sign of a stock market top. If the oil sector, strongest in terms of profits and stock price increases for more than two years, starts to top out, what would replace it?

We can't go into here the issue of whether or not "Peak Oil" will be soon, or already is, upon us, but suffice it to say that there is seemingly legitimate uncertainty regarding the size of global oil reserves and the prospects for greatly increasing them (see my 2/11 "The Global Speculative Financial System as “Enabler” of America’s Addiction to Oil," link).

Bond prices: yields on 2-, 5-, 10-year bonds are right at 10-year down trendlines. If yields decisively break upward, real estate market assumptions of “soft landing” will start to tip to “hard,” tipping everything else in the process too. Spikes in bond yields have been common early in the year the past 5-6 years, so it's still too early to tell this year.

Central bank tightening and yield curve: Will Bernanke over or under-shoot and stop at 5%, 5.5%, does he even know what target he's shooting at? For the first time in a long time, all three of the largest developed region central banks are simultaneously tightening, will they overdo it, or will the Fed end sooner than expected well before the others? Are Asian central banks behind inflation in their growing economies, and will they have to play catch up in raising rates?

The bottom line is how restrictive are credit conditions. Those with a bullish bias would maintain that monetary conditions and excess liquidity are still quite loose even while the Fed has now re-loaded its liquidity weapon and can once again cut rates, should the need arise. Those with the opposite bias point out that flat or inverting yield curves have signaled recessions in similar low-rate environments in the past, and that the stock market usually performs poorly after the final Fed tightening.

In an era of deregulated global capital markets, how much does the Fed and other central banks really control the hyper speculative expansion of credit in the first place? I.e., who is really driving the bus, the global speculative financial entities or the supposedly now "independent" central banks ostensibly chartered in the public interest?

Earnings estimate and profit margins: Consensus estimates actually show a significant acceleration of earnings growth in the second half of 2006, especially a very large one from already high growth for small cap stocks, which seems overly optimistic, since record-high margins don't seem to have further room for significant expansion. We will have more to say on this issue in coming weeks as we approach first-quarter earnings reporting season.

Emerging markets: The center of gravity of the global economy is shifting dramatically away from the slow-growth developed economies to the fast-growth developing ones, especially in east and south Asia. But charts of equity price rises in emerging markets, including those in eastern Europe and Latin America, along with the EEM ETF are beginning to bear a familiar resemblance to the TMT equity bubble of late 1990s, flying way beyond normal upside standard deviations. One might argue with the analogy on the grounds of valuation (emerging market forward p/e's are lower than developed markets), trend sustainability and even historical significance of the respective changes.

Nevertheless the euphoric mood seems in high gear despite a March sell-off,with more mutual fund inflows in this sector so far this year than all of last year. Russia's economic minister openly worried about a stock market bubble in his country, but nobody seems to care (see my 3/6 "FHPN Real estate slowdown, emerging markets risks" link). Any slowdown in China, the U.S., and/or energy prices could significantly take some of the air out of these sails, and other regions may join the Persian Gulf, which may have seen its stock bubble just burst.

China export and consumption growth: If the U.S. slows in the second half, is China export and investment growth sufficiently less dependent on the U.S. and now enough on intra-Asia, and if China export growth does slow, will its domestic consumption growth pick up the slack fast enough? Would the improved economic prospects for Europe and Japan, the latter surprisingly stronger than expected recently, be enough to make up for the slowing of the twin engines of global economic growth the past few years, the U.S. consumption and Chinese investment booms. As with profit margins, we will have more on this area shortly.

Credit derivatives and carry trades: Financial excesses in this credit cycle are concentrated and hidden in these huge but highly opaque private financial markets (unlike equity markets, which are public and highly regulated) which are being roiled by GM, once again, and Bank of Japan and Fed.

Because hedge funds and other hot money have so heavily piled into the same trades chasing yield, it might take surprisingly very little to disrupt the current fragile equilibrium euphoria. NY Fed Pres Geithner, others have expressed concerns (see upcoming FHPN on this issue).

As with the LTCM disaster in Sep-Oct 1998, this is a wild-card because only insiders can really see a looming disaster, and scramble to try to get out of harm's way and/or take advantage. Due to the opacity of the private transactions, the last to know will be the more rabid bulls in the public equity markets.

Yet as with LTCM, the insiders take on huge leverage expecting to be bailed out by the Fed due to the "too big to fail" syndrome, creating immense and immoral "moral hazard" of public insurance for huge private gains by the most wealthy, with virtually no economic benefit in supporting sheer speculation.

(Note to Fed Governor Kohn, who in a recent speech disputed the notion of a "Greenspan put," that is not what the traders at hedge fund and bank proprietary trading floors believed, isn't that what matters on the issue).

Global macro imbalances: The U.S. current account deficit was 7% of GDP in the 4th quarter, currently being net financed solely by purchases low-yielding fixed income securities, and is expected to get even larger this year. In the past most economies started to experience financial distress at around 5%, so how much extra leeway does the putative "sole superpower" continue to get?

Despite all the cries of wolf by highly-regarded experts that have been wrong so far (in terms of economic timing, not morality), this can’t go on forever like this, despite what the “Bretton Woods II” and “dark matter” camp believes, there must be some credible limit eventually established, so far there isn’t.

U.S. fiscal deficit: Ditto, at some point there must be a credible plan to stop the red ink from flowing to infinity into the baby boomer retirement horizon. So far there isn’t.

Rubin, Volcker, Peterson, Concord Coalition faction of "enlightened capitalists" have made no headway on the issue, lacking a political vehicle to do so, their austerity program would not go over well anyway with electorate tired of no longer credible call for "shared sacrifices" that never materialize for the haves and the have-mores, as Bush once described his wealthy base.

Banks: Still looking strong right now, especially the i-banks with record profits, but what if some of the above start to occur, then what happens to U.S. corporate profits highly dependent on financial giants (see my 3/15 "FHPN Goldman profit, US trade deficit both records, end-result of 30-year rise of speculative finance" link).

Dollar: Finally, but perhaps ultimately most importantly, at what point do U.S. foreign creditors, who currently hold $11.1 trillion of U.S. assets (heavily skewed, especially by Asia, to low-yielding fixed income securities), look at all of the above and say the dollar's positive interest rate differential isn't worth it, let's diversify away from the dollar, better to take the hit to our bloated dollar reserves sooner rather than later?

Increased strength in other major economies, e.g. Japan and Germany, could lower the relative attractiveness of U.S. growth. Productivity trend growth in the U.S. may be about to start slowing, just as it is improving further in Japan and perhaps even in Europe. Lower home bias, i.e. the willingness of foreigners to invest abroad, has greatly helped the U.S. dollar, what if this starts to reverse.

Especially if the geopolitical stuff below, such as in the Mideast or friction with China, starts to really go against the U.S., and a Eurasian "balancing coalition" starts to form, around national and energy security issues, against the sole U.S. "superpower" hegemon, then "feedback loops" with the above areas could accelerate. E.g. having to raise interest rates, which would further jeopardize the real estate market, thus consumer spending, thus capex spending, starting a downward spiral in the dollar.

Geopolitical and Other Systemic Risks

Iraq, Iran, Syria, N. Korea, etc.: This also can’t go on forever, despite what the neocons believe. Iraq either tips into a full scale civil war, totally destabilizing this critical region in one of the biggest U.S. foreign policy disasters ever, driving oil prices much higher, or some actual, real, credible good news starts to come out of Iraq. Ditto for Iran. Ditto for N. Korea.

The multilateralist faction of "enlightened capitalists" have offered no viable alternatives, and don't have a political vehicle, with Hillary, other centrist Clinton Dem's trying to out-Cheney Bush in Iraq. Most multilateralists don't seriously address the fact that the rest of the world is mainly pre-occupied with economic development and does not buy into the Bush/Cheney agenda that the "war on terror" is priority number one, and the spread of democracy two.

China, protectionism: The protectionist drums are beating in Congress on China’s trade and currency. Pressure will mount for something to happen on Hu's U.S. state visit to placate the pols grandstanding for November elections. It’s not likely, then what, a new Smoot-Hawley 1930 tariff? Then how would Walmart fill its aisles with all that stuff from China? And it's not nice to lecture one of your two largest creditors, try that with your credit card company (see 3/18 "FHPN Rice tells China what it "needs to," "should" do, tone doesn't seem to be going over well in Asia" link).

Global inequality: A critical underlying factor behind most geopolitical problems, not fully appreciated in the U.S. because "class war" is a taboo topic in corporate mass media, mainstream American politics, among U.S. elite (except Buffett, who honestly said his class was winning a couple of years ago).

The U.S. might flirt with "Gilded Age" extremes if current trends continue indefinitely, with real wages stagnant past five years (down 17% since 1972, see Table B-47, pg 338, "2006 Economic Report of the President," link), home equity ATM has been only thing maintaining U.S. living standards.

Once again, there is no viable mainstream alternative being offered, with the Dem's still mainly peddling discredited "funeral insurance" of re-training and yet more education (see 3/20 "FHPN Huge income inequality due to 30-year rise of speculative finance, not just to education levels" link).

This is a huge global issue, with most of the stress, and potential resistance, to rising global inequality having moved offshore, along with the factories, i.e. Walmart temp workers with no benefits aren't going to risk their jobs for dubious chance at change. E.g. China trying to defuse escalating political tensions over rising inequality, local corruption; populist governments recently elected in Latin America; the immigration issue in many countries, including the U.S.; etc.

Terrorism, proliferation of wmd, civil wars, crime such as kidnapping, trade in drugs, weapons, people, money laundering, piracy, etc., etc.: For now, I will just lump all these together, I may separate them out later, as signs of massive breakdowns of civil society and political authority due to socio-economic stresses, including population growth in poor countries. The standard developed world response so far has been to try to ignore the problems, deal with their symptoms, or try to wall them out, physically and psychologically, rather than deal with the huge costs of the underlying causes.

Another terrorist shoe could always drop, with "24" tv show type response now that Patriot Act has been renewed, little resistance to warrantless wiretaps, and the Supreme Court packed with those supporting the Bush/Cheney view of extremely expansive executive powers. However, if another very large shoe never does drop, then history might record that the Bush Admin's nearly obsessive political focus with the "war on terror" distracted the U.S. from dealing with critical, but seemingly to it less pressing at the time, problems, paving the way for the unexpected long-term decline of the putative "sole superpower."

China, Taiwan: Taiwan President recently tweaked China's nose yet once again, what if he pushes the "dragon," "big brother" just a little too much. U.S. public completely unaware of historical, political, psychological importance of this issue for China, Communist Party and PLA military, which can't and won't back down if push ever comes to shove (see 3/13 "FHPN China, India, U.S." link). Any large political and/or military confrontation would have the potential to drastically disrupt global manufacturing supply chains.

Bird flu: Human death toll now past 100, when would panic start setting in, impacting affected economies on a much larger scale than SARS. The worst case scenarios that have been publicized by the WHO would result in historic levels of death and illness and, needless to say, wreak havoc with the global economy.

This risk is just one symptom of the persistent threat caused by massive underinvestment in global health care, nutrition, clean water, sustainable agriculture, etc. Africa, in particular, has already paid a huge price from AIDS and other diseases, genocide, famine, etc., while malnutrition leading to permanent human developmental damage is actually most widespread in south Asia.

The West willfully ignoring these tragedies encompassing hundreds of millions, even billions, of people, will probably eventually be considered one of the historic great moral crimes of this era, the other being willfully risking perhaps irreversible damage to the biosphere to maintain current carbon fuel lifestyle consumption, on a far greater scale than most other crimes currently viewed that way, imho.

While most of the developed world can continue to essentially ignore all this, with a few well-meaning but effectively futile gestures, it may come back to more directly haunt it someday.

Environmental degradation and global warming: Both are very real, the former especially in the most rapidly industrializing, urbanizing developing countries, the latter in new studies showing much more rapid than expected melting of ice near both poles (see 3/14 "FHPN Evidence of climate change faster than modeled mounts from Arctic, Antarctica, Greenland" link).

At some point the huge unaccounted for costs of these "externalities" will need to be paid, that burden is increasingly and unfairly being passed to future generations by the current "shop til you drop" mindset.

Demographic timebombs: In the U.S. the large baby boom population starts to hit retirement age in a couple of years. Other developed nations are starting to age much more rapidly than the U.S., some (e.g. Japan, Italy) will even experience declining populations.

Again, retirement costs are increasingly and unfairly being passed to future generations by the current "shop til you drop" mindset, which will eventually generate a strong political counter-reaction (see 3/16 "FHPN Krugman's NYRB long essay, "The Health Care Crisis and What to do About It," brief excerpt" link).

Tuesday, March 21, 2006

3/21 FHPN Real estate slowdown, Spring clearer look at fundamentals, speculative psychology tipping point

"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts, with bold emphasis added for key points, from selected recent stories, often focused on a single important theme, and my bold italicized comments. See 3/11 "Digests of my previous posts for busy people" link for blog's core ideas.

This edition of FHPN focuses on real estate, which we will continue to regularly publish on. The 3/20 edition, link, focused on income inequality.

To access multiple articles on some news sites either free register or delete cookies.

3/16 MarketWatch "Fed won't act to preserve high home prices: Kohn 'Greenspan put' theory doesn't stand scrutiny"link "The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday. "If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions," Kohn said in a speech prepared for delivery to a European Central Bank forum in Frankfurt, Germany"

3/14 CNNMoney "Mortgage rates up...affordability down Interest rates are the highest in years, helping to make housing markets even more overvalued" link " a report released Monday from Global Insight, a financial information provider, and National City. The report figures 71 of the 299 largest U.S. housing markets were "extremely overvalued" at year's end, up from 62 markets a quarter earlier ... a jump in interest rates from 6 percent to 7 percent on a 30-year loan adds about 10 percent to a monthly mortgage bill ... California and Florida accounted for 18 of the 20 most overvalued markets ... Undervalued markets are much less common and tend to be priced only slightly below where they should. They're especially common in Texas; eight of the top 10 are in the Lone Star State"

3/11 AOL/WSJ "Millions Are Facing Monthly Squeeze On House Payments Many Adjustable-Rate Loans, Popular in Recent Years, Will Soon Be Reset Higher" link "More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007 ... A recent study ... projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans ... About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to strain their finances. Assuming that home prices stay around current levels and interest rates don't rise sharply, Dr. Cagan figures about one million households eventually will default and lose their homes to foreclosure. That would cause about $110 billion of losses for lenders, he says ... "It will be spread out over several years."

3/16 USAT "Home loan delinquency rate shows increase" link "homes going into foreclosure reached alarming levels in a handful of Midwest states — Ohio, Indiana and Michigan ... Ohio had the highest number of loans in foreclosure for the second year in a row. In addition to layoffs at auto and steel factories, residents have fallen victim to predatory lenders ... The rates of new foreclosures in Michigan, Indiana, Wisconsin and Georgia are at their highest since 1979. "This is evidence of a structural change — an economic chain reaction,""

3/15 Reuters "Home builder sentiment sours in March: report" link "An index of U.S. home builder sentiment fell in March to the lowest in nearly three years in response to rising mortgage rates and softening demand ... The confidence level, however, remained above the midpoint that indicates the majority of builders still see conditions as positive in their markets ... NAHB Chief Economist David Seiders ... attributed March's decline to eroding affordability conditions, as well as a gradual withdrawal of investor demand in some areas."

3/8 LAT "Homeowners Expect Prices to Keep Rising" link "according to a Los Angeles Times/Bloomberg poll. More than one-quarter of those who have adjustable-rate mortgages say they aren't sure they'll be able to make their monthly payments if their interest rate goes up ... The median price of existing U.S. homes sold in January was $211,000, down from a record high of $220,000 in August ... nearly half of homeowners expected the price of their primary residence to rise 5% to 15% over the next three years. Twenty-five percent expected appreciation of 16% or more in that period. Just 5% predicted no price increase ... 36% of all respondents ... expected homes in their neighborhood to increase in the next six months, while 49% expected prices to stay the same. A minority of 14% predicted a decline in prices in that period. In the West, 43% of respondents predicted rising prices in their neighborhood in the next six months."

3/15 SEW "Finding the Values of U.S. Homes" link "Zillow is a free service that's very easy to use. Simply enter an address, street or neighborhood together with a city, state or zip code, and Zillow searches through the information it has compiled on more than 60 million residential properties in the U.S. to provide you with an approximate valuation of the property. Results are displayed on a map that you can zoom in or out or drag around ... Zillow was created by Rich Barton and Lloyd Frink, founders of pioneering online travel service Expedia.com."

3/19 Bloomberg "Homeowners may cut spending in 2006 Cooler housing market slows borrowing against equity" link "This year, home-equity extraction will drop 50%, according to Freddie Mac ... Incomes and credit-card borrowing won't increase enough to compensate, meaning consumer spending will slow and hold back economic growth ... [Wealth effect] alone boosted consumer spending $120 billion in 2005, contributing a full percentage point to economic growth."

3/15 CNNMoney "MBA: U.S. demand for home loans slips Industry group's index shows a 0.2% decrease, citing multiyear highs on 30-year rates; refinancing applications also dip" link "The group's seasonally adjusted index of refinancing applications decreased 1.9 percent to 1,583.6 compared to 1,614.4 the previous week. A year earlier the index stood at 2,267.5. The MBA's seasonally adjusted purchase mortgage index rose 1 percent to 403 from the previous week's 399. The index, considered a timely gauge of U.S. home sales, was below its year-ago level of 462.8."

3/18 LAT "Housing Speculators Relocate to Hotter Spots Some who scored with L.A.-area property take their profits to Las Vegas and Arizona. Their flight may soften the local market's landing" link "Close to 40% of the homes in Maricopa, Pinal and Pima counties, which include Phoenix and Tucson, were bought by absentee owners as investments or second homes last year ... Speculative buyers helped pump up Phoenix's median home price by a whopping 40% in 2005, the highest growth rate in the nation ... speculators with less staying power are beginning to sell in larger numbers ... Since August, the supply of homes for sale in Maricopa and Pinal counties has more than doubled ... looking to sell now because they are having trouble finding renters willing to pay enough to cover their mortgages."

3/17 CCT "Bay Area housing market cools House and condos sales were up last month over January, but well down from previous year; also, units are not selling as fast" link "The Bay Area real estate market eased off the brakes slightly in February, but sales remained at their lowest level in five years and prices continued to flatten ... [sales] up 3.4 percent from January, but down 16.8 percent from a year ago -- making February the 11th straight month of year-over-year sales declines ... [price] flat compared with six months ago, and the annual increase was the lowest rate since January 2004."

3/15 LAT Home Prices Hit New High Southern California's median rises to $480,000 in February, but the number of sales is down link "In February, the median home price in the six-county [Socal] region up 12.9% from a year earlier ... the number of homes sold in February was the lowest in five years ... sales declined 7% from a year earlier and 0.9% from January. It was the third month in a row that sales fell from the previous year ... it would take about 19 weeks to sell all the homes on the market in Los Angeles and Orange counties today ... up from 12 weeks a year earlier ... New homes remained in high demand in February as sales rose 19% from a year earlier ... But new-home prices declined in Los Angeles and Orange counties, falling 5.4% and 21.5%, respectively ... Analysts were reluctant to draw too many conclusions from January's and February's results, saying that by the end of this month a more accurate picture should become apparent. By then, the market will be entering the spring selling season."

3/14 SDUT "Home prices rise, but sales keep cooling Tight lending, higher rates are catalysts in slowdown" link "San Diego County home prices ... 6.4 percent higher than a year ago ... the volume of sales in February declined for the 20th straight month ... down 16.8 percent from a year earlier ... unsold listings stand at their highest level in eight years of record keeping. It's taking an average of 68 days to sell a single-family home, up from 59 days a year ago ... “Once we have March figures, we'll have a much better indication of what's going on,”

3/21 CSM "Homeowners stretched perilously" link "More than one-quarter of Boston's mortgage-holders appear to be stretched thin financially, spending at least half their income on housing, according to an analysis of census figures. That's more than twice the national average and the highest of any major city except Miami ... Foreclosure filings in the county that includes Boston nearly doubled in January from a year ago."

3/20 AFP "Shanghai's sizzling property market fizzles" link "prices slumping more than 30 percent for some apartments and increasing reports of mortgage defaults ... saw prices double in the three years from mid-2002. But housing prices began sliding in June last year after the government introuced a package of tightening measures for the runaway sector ... imposed nationwide varying capital gains taxes linked to the length of a buyer's holding period, the banning of pre-completion sales and a tightening of land-use rights. Under pressure from the central government, Shanghai enacted even stiffer regulations, requiring homeowners to pay off their existing mortgages before selling a property ... loans now require a downpayment of 30 percent of the price, up from 20 percent."

3/21 OCRegister "Home prices 'soft landing' can hurt If growth in real estate jobs stalls, economy might follow suit" link "This year, the local housing market has started off slowly. Prices are still at last August's level. And sales activity hasn't been this sluggish since 1997 ... Pimco's anxious about the end of hyper-appreciation. Simon suggests that simply a return to modest home gains – 5 percent a year – could result in 25 percent fewer home sales across the nation ... real estate of all sorts employed ... up almost 80 percent since 1995 ... 17 percent of all workers employed in Orange County ... Orange County real estate businesses employ practically twice the work force of bosses running factories."

3/13 Reuters Housing market expected to slow in 2006 link "House prices should increase about 5.8% this year, far below the double-digit appreciation posted in recent years, as mortgage rates rise and buying slows, a trade group said Monday. The National Association of Realtors ... Resales of U.S. homes will likely decline 5.7% to 6.67 million in 2006 from the record 7.08 million in 2005. new-home sales should fall 7.7% to 1.18 million from a record 1.28 million in 2005. Still those sales levels would be the third highest after 2005 and 2004, the group said. Housing starts should hit 1.98 million this year, down from 2.06 million in 2005, the group said."

3/19 USAT "Slowing home market to ripple through job market" link "Almost four out of every 10 jobs created in the past four years were in housing-related fields. At the end of last year, a record 9.8% of U.S. workers were employed in the real estate industry, up from 8.2% a decade ago, according to Moody's Economy.com ... So far, the economic impact of the downturn in housing has been soft. Other sectors of the economy are adding jobs."

3/16 "U.S. Housing Starts Fall 7.9% to 2.12 Million Rate in February"link ""With a lag we should see housing starts fade. The second quarter will really tell the tale.'' ... Changes in housing starts can lag fluctuations in sales by six months to a year, economists said. New home sales peaked in July."

3/16 MarketWatch "Housing starts retreat in February Sales drop to 2.12 million units from 12-year high in Jan" link "Real-estate experts say it will take until April or May to get a sense of how much the sector will slow ... economists say that a slowdown in housing starts is coming ... housing starts lag home sales, which are falling. And warm weather supported starts, Shepherson said. Economists at Barclays Capital noted that starts are a supply-side indicator of activity. Demand-side measures, including mortgage applications and home sales have been slowing recently."

3/14 AP "U.S. Seeks More Control Over Fannie Mae" link "The Bush administration and a key House lawmaker on Tuesday cited the investigation that found a breakdown in financial controls at Fannie Mae to bolster their push for tighter federal control of the mortgage giant and its government-sponsored sibling, Freddie Mac."

FHPN: Comment to be added shortly.

Monday, March 20, 2006

3/20 FHPN Huge income inequality due to 30-year rise of speculative finance, not just to education levels

"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts, with bold emphasis added for key points, from selected recent stories, often focused on a single important theme, and my bold italicized comments. See 3/11 "Digests of my previous posts for busy people" link for blog's core ideas.

This edition of FHPN focuses on rising income inequality. The 3/19 edition, link, focused on new media and "citizen journalism."

To access multiple articles on some news sites either free register or delete cookies.

3/3 Krugman, KCStar "Facing up to income inequality" link "What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy. Income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite ... Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose by less than 1 percent per year ... A research paper ... gives the details ... Between 1972 and 2001, the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent. So being in the top 10 percent of the income distribution, like being a college graduate, wasn’t a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent ... this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726 ... The notion that it’s all about returns to education suggests that nobody is to blame for rising inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system ... the growth of inequality may have as much to do with power relations as it does with market forces ... rising inequality is driven by the giant income gains of a tiny elite, not the modest gains of college graduates."

3/17 Roach, MS "Perils of a New Globalization" link "Economics and politics are on a dangerous collision course ... the drumbeat of protectionism is growing louder …the services economy is now on the leading edge of feeling the stresses and strains of an increasingly competitive and open world economy … Economists have long dubbed services as “nontradables” … service providers had to be in close proximity with their customers … an IT-enabled globalization that throws long-sheltered knowledge workers into the global competitive arena for the first time ever … Factory sector workers currently account for only about 15% of total employment in the G-7 … the US portion is now close to 10% … this aspect of the hollowing has just about run its course … deepening sense of anxiety that afflicts workers who have long harbored the belief that they would not have to face pressures from low-wage offshore talent pools. The persistent stagnation of inflation-adjusted wages in the developed world — even in a high-productivity-growth US economy — has shattered that sense of security … In the G-7 countries, services currently account for close to 75% of the total workforce — literally five times the share of manufacturing … IT-enabled globalization has moved at hyper-speed to the upper echelons of the occupational hierarchy … the availability of an enormous reservoir of high-quality offshore knowledge workers … the global labor arbitrage is forcing a realignment of relative wages in the world economy — with the developed world fearing a “race to the bottom” while the developing world is hoping to ride the rising tide"

3/16 Pearlstein, KCStar "Income inequality new reality" link "inflation-adjusted income for all but a tiny fraction of the wealthiest households hasn’t increased ... changes in the structure of the labor, product and capital markets are accelerating a long-term trend toward income inequality ... in 1979, the top 10 percent of households earned 33 percent of all pretax income. By 2003, their share had climbed to 44 percent. The shares of everyone else declined ... First, the share of the economic pie going to workers ... seems to have fallen, while the share going to holders of capital has gone up. The culprits here include the variety of factors that go under the heading of globalization — all of which have weakened the position of workers in negotiating for wages and benefits. Just as significant have been the decline in the influence of labor unions, the employer tilt of labor laws and the rising influence of Wall Street that now focuses corporate managers on the single-minded goal of increasing shareholder value. [Second] even while labor’s share of the economy is shrinking, the distribution of income within labor’s share has become more unequal. Until recently, most of the academic research focused [on] ... the more education you had, the better off you were. But two recent studies ... have found that most of the impact from trade and technology has shifted to workers in the middle of the wage and skill distribution ... At the high end, they have increased demand for workers with the higher-level skills needed to design and market this new technology and the new goods and services associated with it ... these newly enriched people near the top now demand more services ... boosting demand for such lower-paid workers who can’t easily be replaced by machines ... “hollowing out” the middle of the income scale"

3/17 Pearlstein, KCStar "Safety net could use big repair" link "shifs the tax burden onto the rich without unduly distorting economic decisions or imposing the high marginal rates that only invite tax avoidance ... close loopholes in both the corporate and individual income taxes that benefit the rich more than everyone else ... restoration of a reasonable inheritance tax that couldn’t be bypassed through insurance scams or offshore trusts. You can construct a tax regime that, without increasing the top marginal rate beyond 35 percent, would not only balance the federal budget but also provide extra revenue to extend the social safety net and revive public services ... [Americans'] tolerance is wearing thin as they see Wall Street sharpies and corporate executives getting fabulously rich by undercutting the economic security of the working poor and middle class. Not only are job security, private pensions and employer-provided health-care coverage being cut back, but there is also a noticeable erosion in the public services that serve as a backstop ... the top 10 percent of income earners now take in an extra $750 billion a year because of their increased share of national income ... it hardly “class warfare” to suggest taking back a chunk of that good fortune and investing it in public goods ... modest steps can be taken to soften the rules of competition and rebalance the power relationship ... giving workers more bargaining leverage by restoring the right of workers to form a union ... requiring shareholders to approve executive compensation packages. Increasing the minimum wage, and indexing it to inflation ... what if all companies had to pay half the cost of catastrophic health insurance for their workers? Or if companies were required to fully fund their pension promises each year before using free cash"

3/10 Krugman, KCStar "Decisions by and for the elite" link "We’re living in a time when many Americans are feeling economically insecure, but a tiny elite has been growing incredibly rich ... U.S. workers deserve a better answer than yet another assertion that a rising tide raises all boats, because that’s manifestly untrue. We’re living in a time when most Americans are seeing little if any benefit from overall income growth, because their share of the economic pie is falling. Between 1979 and 2003, the share of overall income received by the bottom 80 percent of taxpayers fell from 50 percent to barely over 40 percent. The main winners from this upward redistribution of income were a tiny, wealthy elite: More than half the income share lost by the bottom 80 percent was gained by just one-fourth of 1 percent of the population, people with incomes of at least $750,000 in 2003. And those fortunate few are the only people Bush seems to care about. Look at what he had to offer after asserting, in effect, that workers get outsourced because they don’t have the right education: lower taxes, deregulation and fewer lawsuits. That sounds like a wish list for wealthy individuals and big corporations. Bush once joked that his base consisted of the “haves and the have-mores.”"

FHPN mini-essay: These five recent articles, two by economist Paul Krugman, op-ed columnist for "The New York Times," one by Stephen Roach, chief economist of Morgan Stanley, and two by Steven Pearlstein, columnist for "The Washington Post," come much closer to the truth about tremendous income inequality in the U.S. than most in the mainstream media (they don't discuss wealth inequality, which is actually far greater than income).

Krugman's very important contribution in the first article is in debunking the notion that the extreme level of inequality in the U.S. today is mainly due to differences in education levels. Doing so is critical if the U.S. policy debate is to get past the notion strongly peddled by both political parties for the past twenty five years that retraining and more education is going to address the issues of stagnating real wages and rising inequality.

But as helpful as these articles are, they still miss a critical point, imho. As I've noted many times already on this blog, average real (inflation-adjusted) weekly earnings of American workers have declined 17% since 1972 (see Table B-47, pg 338, "2006 Economic Report of the President," link).

Something started to change in 1972, and that something was a complete break with the post-WW II international monetary system known as Bretton Woods. It was replaced by a flexible rate currency system and increasingly deregulated financial markets.

Since that fateful change, the main economic trends have been crystal clear. There has been an almost unimaginable expansion of credit creation no longer "fettered" by the dollar's tie to gold and by financial regulation.


Shown on a graph, debt has expanded so far in excess of real GDP since 1972 that one wonders how much longer it can possibly go on, since ultimately the two must remain linked. Seeing the yawning gap between debt and real production on a graph for the first time makes one's jaw drop in wonder at how long is this sustainable?

That honest reaction is why such a graph is never, ever shown in the mainstream media, much less regularly highlighted, like other less important economic charts. If it were, it would be like pulling the curtains on the Wizard of Oz, or like saying the emperor has no clothes. The ensuing loss of public confidence in the economic/financial system might be significant.

This debt creation has been fueled by a huge increase in short-term speculative financial activity, whose demand for ultra-high short-term returns drove out investment in fixed assets, long-term basic r&d, labor contracts, etc used in highly skilled industrial manufacturing. As a result, industrial employment has sharply fallen the past few decades, while Walmart jobs have greatly increased, resulting in the declining earnings statistics I keep citing.

Since the debt has a legal claim on real production, which can't possibly grow nearly fast enough to service the burgeoning debt claims, the extra necessary cash flow must be generated by not paying the fully accounted for real costs of current and future production, including the full lifetime costs, from infancy to old age, of producing highly educated workers.

This is done by taking advantage of the much greater mobility of capital, especially the financial variety, to seek out the most "efficient," low cost, high quality methods of production, having the effect of pitting workers against each other, first within nations and then between them, i.e. outsourcing, offshoring, globalization, etc.

This uneven battle, often a rout, results in layoffs and speed-ups, stagnant real wages in developed nations and underpayment in developing ones (without ever having had to pay any of the costs of raising from childhood the literally billions of new workers entering the global market economy from outside it after the fall of the Soviet Union and opening of SE Asia, China, India, etc. a huge free subsidy to the speculative financial system), abrogating and robbing legal contractual benefits and pensions, etc., etc., etc.

It also results in not accounting for and fully paying all of the various externalities, such as environmental degradation (especially in rapidly developing nations); climate change (see my 3/14 article, "FHPN Evidence of climate change faster than modeled mounts from Arctic, Antarctica, Greenland," link); underfunding of sustainable energy development (see my 2/11 article, "The Global Speculative Financial System as “Enabler” of America’s Addiction to Oil," link and my 2/10 article, "Bush’s American Competitiveness and Advanced Energy Initiatives: “Deja Vu All Over Again” Twenty-five Years Too Late?" link);

in grossly inadequate and inequitable health care (see my 3/16 article, "FHPN Krugman's NYRB long essay, "The Health Care Crisis and What to do About It," brief excerpt," link); substandard education (see my 2/12 article "The Home-Equity ATM of Blue-State Liberals and the Lopsided Inequitable Funding of American Education," link); widespread malnutrition; extremely commercialized popular culture (see my 2/27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave," link), etc. etc. etc.

And no amount of tinkering at the margin has redressed this situation, nor will it, so it will probably not change until another periodic large crisis eventually occurs, the last such crisis period being from the late 1960s to early 1980s , eventually giving way to the largest secular bull market in history.

The crises before that one were in the 1930s and 1890s, roughly every 30-35 years as the financial speculative excesses are dealth with, one way or another, with some sort of political solutions, but always poorly and always at the expense of the least culpable, least powerful, and least capable of bearing the burden.

Then a new generation of financial speculators starts the game all over again, promoting the next wave of new technologies, products, and markets, proclaimed as the latest "new new thing."

That's just built into greedy, jealous human nature since time immemorial, and won't change until the financial systems the elites construct for their benefit create ways of controlling hyper-speculative excesses while still promoting beneficial innovation.

Except for a few rare historical moments, that combination has been very difficult to achieve, sometimes innovation is too stifled, sometimes too much speculation occurs, it's been very difficult to get it even close to just right.

In response to this latest era of globalization (human history is actually the history of increasing globalization), the Democrats lost the support of their industrial worker base, and then the actual base itself, by promising the effectiveness of retraining programs, which came to be rightly derided as "funeral insurance."

As that false remedy increasingly could not be credibly peddled, the Clinton "banker" Democrats, exemplified by his Treasury Secretary Robert Rubin, tried to sell the long-term benefits of "free trade," such as Nafta, which also never materialized as promised for industrial employment, and free capital markets, to the benefit of the Citigroups and Goldmans (at both of which Rubin has held the highest positions).

To be fair to the Democrats, by far the two largest periods of very sharp declines in manufacturing employment were Reagan's first term and Bush II's first term, both times millions of jobs in that high-wage sector were lost. Also, the only sustained increase since 1972 in average real (inflation-adjusted) weekly earnings of workers was during Clinton's second term, 1996-2000, again see Table-B47 in the "2006 ERP," link given just above.

That, in a few paragraph nutshell summary, is essentially what has been going on economically and politically up until the Bush Admin, which we will cover shortly, during this more than thirty-year era of increasingly hyper global speculative finance.

Now, with the U.S. industrial work force essentially decimated, the battleground seemingly has shifted to services, as Roach notes in the article above and many others.

I have added to this essay at marked ADDED MATERIAL STARTS HERE as of the time stamp shown below, and will finish it later today or tomorrow.

Sunday, March 19, 2006

3/19 FHPN New report from "Project for Excellence in Journalism" supports my view that new media hasn't changed the world just yet

"FHPN," "Fair, Honest, Principled News," is a regular feature which gives links and excerpts from selected recent key stories, often focused on a single theme, with my bold italicized comments. See 3/11 "Digests of my previous posts for busy people" link for blog's core ideas.

This edition of FHPN focuses on the media, with the release of the annual report by the "Project for Excellence in Journalism." The 3/18 edition, link, focused on Rice's harsher-than-expected comments about China during her Asian trip.

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3/13 "Project for Excellence in Journalism," affiliated with Columbia University's Graduate School of Journalism "The State of the News Media 2006 An Annual Report on American Journalism" link:

"Will we recall [2005] as the year when journalism in print began to die? ... declining circulation, pressure on revenues, stock prices for the year down 20% ... Even if newspapers are not dying, they and other old media are constricting, and so, it appears, is the amount of resources dedicated to original newsgathering ... On local TV news ... the range of topics that get full treatment is narrowing even more to crime and accidents, plus weather, traffic and sports. On the Web, the Internet-only sites that have tried to produce original content ... have struggled financially, while those thriving financially rely almost entirely on the work of others. Among blogs, there is little of what journalists would call reporting (our study this year finds reporting in just 5% of postings)

In the future, we may well rely more on citizens to be sentinels for one another. No doubt that will expand the public forum and enrich the range of voices ... Yet the changes will probably also make it easier for power to move in the dark. And the open technology that allows citizens to speak will also help special interests, posing as something else, to influence or even sometimes overwhelm what the rest of us know. The worry is not the wondrous addition of citizen media, but the decline of full-time, professional monitoring of powerful institutions [ital added]

In 2006, we see six new trends emerging that deserve highlighting

The new paradox of journalism is more outlets covering fewer stories. Such concentration of personnel around a few stories, in turn, has aided the efforts of newsmakers to control what the public knows. One of the first things to happen is that the authorities quickly corral the growing throng of correspondents, crews and paparazzi into press areas away from the news. [ital added]

The species of newspaper that may be most threatened is the big-city metro paper that came to dominate in the latter part of the 20th century. the big metros are the news organizations most likely to have the resources and aspirations to act as watchdogs over state, regional and urban institutions, to identify trends, and to define the larger community public square.

At many old-media companies, though not all, the decades-long battle at the top between idealists and accountants is now over. The idealists have lost. The troubles of 2005, especially in print, dealt a further blow to the fight for journalism in the public interest ... at many new-media companies, it is not clear if advocates for the public interest are present at all. [ital added]

That said, traditional media do appear to be moving toward technological innovation — finally ... several big questions remain unanswered. One is whether younger audiences care anything about these traditional news brands. Another is, even if these legacy media do finally try to move online seriously, can they change their culture, or will they succumb to the natural tendency to favor their traditional platforms?

The new challengers to the old media, the aggregators, are also playing with limited time. When it comes to news, what companies like Google and Yahoo are aggregating and selling is the work of others — the very same old media they are taking revenue away from. The more they succeed, the faster they erode the product they are selling, unless the economic model is radically changed. Already there are rumblings. [ital added] Can the new rivals become more than technology companies? And if they do, will they have more than rhetorical allegiance to the values of public-interest journalism?

The central economic question in journalism continues to be how long it will take online journalism to become a major economic engine, and if it will ever be as big as print or television. the likelihood that the next battleground will be producers of old media challenging Internet providers and Internet aggregators to begin compensating them for content, the model that exists in cable. [ital added]

3/13 LAT "More News Outlets, Fewer Stories: New Media 'Paradox'" link "Many television, radio and newspaper newsrooms are cutting their staffs as advertising revenue stagnates, but blogs and other online ventures lack the size or inclination to generate information, reports the Project for Excellence in Journalism, a research institute affiliated with the Columbia University Graduate School of Journalism. The study depicts the media in an interregnum — with the reach of print, radio and television reduced, but the promise of an egalitarian online "citizen journalism" unfulfilled. "It's probably glib and even naive to say simply that more platforms equal more choices," project Director Tom Rosenstiel said. "The content has to come from somewhere, and as older news-gathering media decline, some of the strengths they offer in monitoring the powerful and verifying the facts may be weakening as well."

3/16 Economist "Net dreams Traditional media companies are making a huge push onto the internet" link "now the world's largest entertainment companies are rushing to distribute their video content online and, to a lesser extent, to the users of mobile phones. Old media companies are also snapping up internet firms as fast as they can. Most of these are profitable, in contrast to the dotcoms of a few years ago—but only just ... traditional media companies have no choice but to experiment. They are in mature businesses, many of which are endangered by the internet and other technologies. Investors have sold down their shares ... The most obvious opportunity is to put the content they already own on new platforms. Media companies can charge people directly, or sell ads around it ... Only a fraction of the media firms' video content is online, certainly, but every few weeks another slew of popular programmes makes the leap ... Shifting onto the internet will take time, because powerful forces are lined up against changes to video distribution ... And none of the conglomerates want to jeopardise the phenomenal profitability of DVDs."

2/27 WSJ "Blog Epitaphs? Get Me Rewrite! Rumors of Blogs' Demise Are Exaggerated, But a Lot Less Obsession Would Be Healthy" link "Recent weeks have seen the rise of a cottage industry in Whither Blogging? articles. New York magazine cast cold water on newly minted bloggers' dreams with an examination of the divide between a handful of A-list blogs and countless B-list and C-list blogs that can't get much traffic no matter how hard their creators work. Slate's Daniel Gross spotlighted signs that blogs may have peaked as a business. And a much-discussed poll from Gallup concluded that growth in U.S. blog readers was "somewhere between nil and negative." From there it was off to the races ... let blogging become what it was always destined to be: just another digital technology and method of communication, one with plenty to offer but no particular claim to revolution ... Blogs will be everywhere in the near-future ... relatively few people actually yearn to be publishers ... That may not sound like the stuff of revolution or VC riches, but it also doesn't sound like a fad or a failure."

FHPN: I will reiterate for emphasis what the new PEJ report said:

"Yet the changes will probably also make it easier for power to move in the dark. And the open technology that allows citizens to speak will also help special interests, posing as something else, to influence or even sometimes overwhelm what the rest of us know. The worry is not the wondrous addition of citizen media, but the decline of full-time, professional monitoring of powerful institutions."

As the LAT story above notes, "the [PEJ] study depicts the media in an interregnum — with the reach of print, radio and television reduced, but the promise of an egalitarian online "citizen journalism" unfulfilled."

This mirrors the concerns that I wrote about in my 2/27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave—Oscar, Emmy, Clio, or “Amateur Night at the Apollo.” link

Despite the bally-hooed proliferation of new media, I see very few signs that the the majority of the public is becoming more well informed. It is one thing to spend a lot of time online, it is another to use that time to learn about the world.

More importantly, the average American, who is very time constrained, gets his news from tv and radio. And the news there obviously continues to get worse, it is usually simply infotainment, at best, and too frequently what unfortunately best can be described as propaganda controlled by the oligopolistic mass media corporations.

As the PEJ report bluntly says, "At many old-media companies, though not all, the decades-long battle at the top between idealists and accountants is now over. The idealists have lost."

In most old-media, especially tv and radio, pandering in search of ratings and circulation to drive profits has completely triumphed over serious journalism, which is indispensable for a free society.

Imho, the burden of proof is still on advocates of new media that it will fill the huge serious journalism gap left by the rampant commercialization and biased politicization of mass media news.

So far, the Internet era has seen the creation of the largest stock market bubble in history, in part due to mass delusions that the corporate media was complicit in helping to create, and an invasion and costly war of another country for reasons that were not proven, again in part due to corporate media complicity.

To be fair, citizen journalism only gained significant momentum after both events. Nor do I expect online journalism to have changed the world overnight.

So, I proposed a reality check in the 2/27 article referred to above. Let's see in the next year how the real estate market and/or tensions with Iran and others play out.

If the new media optimists are vindicated, then the pessimists just got lucky with the previous TMT bubble and Iraq invasion. If things much worse than expected happen yet again, then the optimists need to seriously consider, "fool me once, shame on you, fool me twice, shame on me."

I believe that one of the main reasons why journalism is not getting better is because politics is not getting better (and vice versa, it's a chicken-egg sort of thing).

Buried underneath the headlines last week of Bush's latest decline in the polls in a March 16 WSJ article was the following:

"two-thirds approve his [Bush] stance on the recently passed USA Patriot Act, and majorities express support for his Supreme Court appointments, Medicare prescription drug benefit and warrantless wiretaps by the National Security Agency."

"Eight months before Election Day, the Democratic Party draws positive ratings from just 32% of Americans, while 37% have a negative view of Mr. Bush's political adversaries. That's nearly as weak as the Republican Party's 34% positive rating and 43% negative one. Among political independents, negative views of the Democratic Party outweigh positive views by 38%-22%."

The fact is that despite extremely low poll ratings, Bush is actually still winning the key political battles. He got the Patriot Act renewed, warrantless wiretapping goes unchallenged, and most importantly he is stacking the Supreme Court with young appointees who support his very expansive view of presidential powers, who likely will impact the nation for decades to come.

If new media and "citizen journalism" are having as much effect as its ardent supporters believe, then how is this happening?

Unless the political situation dramatically changes, huge amounts of amateur-hour blogging and incessant web celebrity searches, media downloads and social networking seem to be having very little meaningful impact on serious policy issues in this country. Again, it's a chicken-egg thing between the abysmal state of the media and abysmal state of politics.

A very good example of what I am concerned about is the Iraq war. Just because support for the war has dramatically eroded, that does not vindicate the idea that the process of informing the public works, if perhaps with a dangerously long lag. It doesn't.

Before the invasion, polls showed that a large majority of Americans supported the invasion on the unproven views that Saddam possessed WMD and/or was involved in 9/11 and was allied with Al Queda (a recent Zogby poll showed that 85% of U.S. troops polled in Iraq still believe they are there because of Saddam's role in 9/11).

Public support for the war, and Bush's ratings, have since plummeted. But NOT because the inital rationales for the invasion were not proven, rather because the task proved much more difficult than promised, i.e. because the claim of "mission accomplished" proved false.

Had it been otherwise, had things gone as promised in Iraq, then there is NO reason to believe that the initial unproven beliefs would have changed. Thus, it is quite possible that a similar scenario of unproven claims leading to war could happen again, given the current state of the news media and the political process.

Even when well-informed, new media lacks the clout to have much impact, because there are no economic or political levers to pull.

It's not an either/or choice, but right now if I had to make one in a fantasy league of big-league, effective economic journalists, I'd take one Paul Krugman at the NYT over all well-informed economic bloggers combined, given both Krugman's ability and the powerful media platforms that carry his columns.

Unfortunately, in terms of serious discourse, much blogging and other web activity isn't worth the currently essentially free bandwidth used to send it, which shouldn't come as a surprise from an economic viewpoint.

I have friends far cooler and hipper than me (not very difficult) who I'm sure will disagree about my views on the media. I hope they're right. But as of now, I don't see it yet. Neither, evidently, does the "Project for Excellence in Journalism."