Monday, August 14, 2006

8/14 After Fed’s Pause, What's Next for Global Economy and Equity Markets?

August 14 (Econotech) -- Since global equity markets topped on May 10, investors, traders and economic forecasters have subjected every little bit of new economic and corporate data to the too cold -- too hot -- just right “goldilocks” test.

Following a sharp correction from that date, global equity markets began from June 13 the bounce off their rising 200-day moving averages, so far retracing about the standard 50% of the prior decline. They have put in higher lows but generally have not clearly surpassed the June-July highs for a higher high. In recent weeks, they have been swinging, even intra-day, near key levels on each daily data point. (All stock index data in this article is as of the close on Friday, Aug 11).

Starting with the June 29 FOMC meeting, equity markets rallied sharply the next three times the just right "goldilocks" economic scenario was reinforced, Bernanke’s July 19 Humphrey-Hawkins testimony, the July 28 second-quarter U.S. GDP report, and the August 4 U.S. employment report (see my 7/19 article, “Bernanke's More Difficult Dilemma” link). Since the bull’s long hoped for Bernanke pause finally occurred August 8, the “buy the rumor, sell the news” equity market reaction has been muted.

Equity markets have tried to regain their footing the past two months by gradually adopting an uneasy view, for the moment, in favor of the "just right" Fed soft landing forecast that the U.S. economy will slow just enough to 2.5% or so growth, modestly but enough below trend to presumably rein in currently too high “headline” (above 4%) and “core” current and expected inflation, but still high enough to continue the string of twelve straight quarters of double-digit earnings growth in the U.S.

As market reaction to second-quarter earnings reports seemed to indicate, there is less margin for error than earlier in the economic cycle with the "just right" soft landing scenario.

"U.S. companies that fail to meet earnings estimates are taking more punishment than usual in the stock market. The losses may widen as analysts cut forecasts for the rest of the year. The percentage of Standard & Poor's 500 Index members to fall more than 10 percent after second-quarter reports is the highest since the current bull market started in October 2002, according to Birinyi Associates Inc ... those that trailed estimates dropped 3.3 percent, the most since the first quarter of 2005. Companies beating estimates rose by an average of 0.3 percent, the smallest advance since the current bull market began." (Bloomberg, July 31)

"The price of labor has taken a sudden jump and is likely to keep climbing, threatening to end the longest U.S. corporate profit boom in more than 40 years ... Labor costs have shot up 3.2 percent over the past 12 months, after average increases of just 0.8 percent a year from 2000 to 2005, the Labor Department reported last week. Companies will have a hard time raising prices to recover those costs, as weakening consumer demand slows the economy for the rest of this year. That means profits will take a hit ... The Commerce Department revised first-quarter data on growth in wage and salary disbursements, a broader measure of compensation than Labor Department data, to 6 percent year-over- year, from 4.2 percent. That picked up in the second quarter to 6.8 percent." (Bloomberg, Aug 14)

Investors and Economists Remain Split Over Macro Outlook in Difficult Phase of Business Cycle

The views of market participants on the global economy remain more split now than earlier in the economic cycle, which is normal at this stage.

Some believe the global economy is too strong and/or liquidity still too high, and the world’s central bankers, including the Fed, will need to continue to tighten. For the moment, this view got a modest boost Friday with the stronger-than-expected retail sales report.

Others think that the economy will slow too much, and the Fed will need to ease next year to avert recession, leading to a bond market rally. The weakness of the U.S. housing market and consumer spending, and slowing of the high growth and profitability of China’s massive investments are well-known keys to determining the extent of a slowdown.

And of course the vast majority of Wall Street and the investment community seem to currently believe that the Fed will achieve the usually elusive mid-cycle “soft landing,” a la 1994-95.

At this stage of the economic cycle, the Fed has obvious difficulty trying to balance inflation expectations and economic growth. How that trade-off is ultimately resolved may be less important at the moment than the simple fact that it exists, whereas earlier in the cycle it was much less a concern, making the “just right” outcome less likely and hence market risks higher the past three months.

"Many economists, though, warn that the soft landing may seem anything but soft, and suggest that the Fed is either too rosy about the looming slowdown or naïve about the difficulty of reaching its goal for inflation ... the Fed has achieved only one true soft landing — in 1994-95 ... This time, many analysts say that the Fed and its new chairman, Ben S. Bernanke, face considerably tougher challenges. Crude oil, at more than $70 a barrel, is selling at prices that would have been unthinkable in 1995. Productivity growth, which was accelerating in 1995, is slowing these days. The dollar, which was climbing against other major currencies in 1995, is declining against most of them now ... Analysts and other experts say that if Mr. Bernanke is serious about his goals for controlling inflation, at least two million more workers may have to lose their jobs over the next two years ... Many other economists contend that inflation is more entrenched and will be more painful to reverse than the Fed thinks. Others predict that inflation will indeed subside, but only because the economy will weaken much more than the Fed is expecting." (NYT, Aug 11)

“By leaving interest rates unchanged yesterday after two years of steady increases, the Federal Reserve sought to balance the risks of a sharp slowdown and rising inflation -- an effort many economists said might not succeed. Reflecting the difficulty of the Fed's task, economists -- like the Fed's policy makers themselves -- aren't unanimous about what the central bank should do as the economy sends mixed signals. Some economists feel the Fed has raised rates too far already, while others say it hasn't raised them enough … The Fed is entering what has traditionally been one of the most delicate phases of the business cycle. The economy has reached full strength and inflation pressures have built. There are signs that higher interest rates are slowing the economy, but it remains unclear if they have slowed it enough -- or too much” (WSJ, Aug 9, by Greg Ip, who is close to Fed officials).

OECD Area Leading Indicators Growth Turns Down, China’s to Follow?

The Aug 4 release of the OECD’s composite leading indicators (CLI, which forecast industrial production) shows the 6-month rate of change for the OECD countries starting to turn down from a lower peak than in the beginning of 2004 (see chart on the first page of the release link). The data is only through June, but once a turn is made, it seems to continue in that direction due to the smoothing.

The same chart shows China’s leading indicator still rising. Whether China’s will continue to do so, as it did after the OECD’s CLI growth peaked in early 2002, or follow the OECD’s down, as it did in 2004, and the resulting impact of China demand on other exporters, remain key questions. (An investment bank recently has questioned whether declines in Asian stock markets follow downturns in the OECD leading indicators, but their data show they do with only single exceptions the last 4-5 times.)

A recent data point: “Japanese machinery orders unexpectedly jumped 8.5 percent in June, adding to the central bank's case that borrowing costs may need to be raised again this year.... The median forecast of 35 economists surveyed by Bloomberg News was for a 0.3 percent gain. Companies including Toshiba Corp. are building factories to benefit from climbing demand for their products at home and overseas, fueling the strongest surge in investment since 1991.” (Bloomberg, Aug 9)

Off further in time, as one Wall Street economist has just noted, the ability to stimulate the U.S. economy through policy will be much less limited in the next cycle, whenever that starts, due to already large fiscal and current account deficits, and far less room to lower the average mortgage rate than occurred in the previous cycle. Another Wall St economist feels that as long as the dollar remains weaker, as indicated by the gold price, the risk of inflation will be a problem.

Weakening U.S. Real Estate, When/How China's High Growth Slows, Areas of Concern

To get to a review below of trends in global equity markets, I will not cover here various economic issues which most investors are by now very familiar, e.g. a U.S. Treasury yield curve that recently has become more inverted, high energy prices, ARM resets biting next year, the very high growth of China’s huge investments, etc.

Though a great deal is published, often with dire headlines, regarding the statistical data and anecdotal evidence on the U.S. housing bubble and China’s booming investments, two key areas of concern, the experts with the strongest opinions on them often seem to simply assert their side of the facts more strongly without making a truly compelling case, at least as of yet, since both situations are historically unique and thus very difficult to forecast.

E.g., yields on 10-year Treasury notes have declined about 30 bp, making mortgages more attractive recently. “U.S. mortgage applications rose for the first time in four weeks as long-term home loan interest rates plunged to their lowest levels since March.” (Reuters, Aug 9)

The current consensus views on the U.S. housing market is captured in the following quotes.

“Nothing has been more important in driving the U.S. economic expansion that began nearly five years ago than housing. It could be just as vital as growth slows. Federal Reserve officials are watching warily to see whether the housing retrenchment that began late last year will remain modest or turn into a rout that could damage the economy severely.” (Bloomberg, July 26 by John Berry, who is close to Fed officials)

"The house party had to end eventually, even if sellers refuse to believe it. Many remain defiant to the point of delusion, demanding one more drink at the housing bar. Real estate bulls point out that the nation's median home price is still up 0.9% this year, to $231,000. But that stat is misleading. There's a stalemate between buyers and sellers: property owners are reluctant to cut prices, and buyers are patrolling from the sidelines, hoping for fire sales." (Time mag, Aug 6)

“The boom has depended heavily on the upbeat psychology of consumers, builders and lenders. As moods swing, the landing could be very hard indeed ... signs of the housing slowdown grow stronger. In June, total single-family-home sales fell 8.7% from a year earlier -- the sharpest year-to-year drop since April 1995 ... they [economists] expect the decline in housing ... to shave about a percentage point off inflation-adjusted GDP growth in 2007 ... Today's housing boom differs radically from its predecessors ... Economists can't quantify some risks, including the biggest: the chance that a sharp drop in house prices -- what economists call a "disorderly downturn" -- would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending -- a move that could snuff out economic growth.” (WSJ, Aug 7)

"William Wheaton, a housing economist at the Massachusetts Institute of Technology, says the wild cards include how many investors [i.e. speculative flippers-econo] or second-home owners will dump properties on the market and how many borrowers will default. Even if there is no surge in defaults or selling by investors, he says, some of the formerly hot local markets may be heading into five or 10 years of flat to slightly higher home prices. He believes many baby boomers on the coasts will cash out of expensive homes and move to cheaper areas; that would restrain price increases along the coasts." (WSJ, July 20)

"The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months. More broadly, just as rising housing prices during the boom added to Americans' sense of wealth and well-being -- encouraging them to spend more on a variety of goods and services -- the reverse could dampen sentiment and lead consumers to pull back on their purchases ... many economists say, the biggest question is whether the orderly real-estate slowdown the Fed has engineered thus far will continue." (NYT, July 29)

“’It's clear that we've seen a very significant slowdown [in price appreciation] and may be approaching an episode of overall declines,’ says Richard DeKaser, chief economist at National City Corp. in Cleveland. He added that ‘I would call this, thus far, a very orderly correction.’ Meanwhile, inventories rose 3.8% to 3.73 million existing homes for sale in June, which is a 6.8-month supply of homes at the current sales pace. That was the highest inventory level since July 1997 and compares with a 4.4-month supply in June 2005.” (WSJ, July 26)

“The popularity of adjustable-rate mortgages means that nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years, according to, a Web site run by Moody's Corp. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007. Those moves won't be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too. The current forecasts from a number of experts have defaults on those loans increasing by 10%.” (MarketWatch, Aug 2)

"As the overall housing market weakens, the interest in buying vacation homes, from the most modest condominiums on up, appears to be falling faster. Unlike most metropolitan areas — where underlying demand and the normal turnover in primary homes as a result of job moves, new households and family changes provide a more solid floor under prices — the second-home market relies on a different set of motivations that tends to exaggerate booms and busts ... In second-home markets around the country, the number of sales is shrinking even as the properties on the market increase. Prices at all levels are softening, and in a few places recently have begun dropping." (NYT, Aug 10)

And the current consensus on China’s investments:

E.g., “China's leaders are finding that the world's largest command economy no longer responds to their commands. Growth is hurtling along at the fastest pace in a decade, defying official efforts to curb investment in unneeded factories and real-estate projects. The government's immediate concerns are that overheated growth will saddle China with excess capacity, create more asset bubbles, and increase friction with the U.S. and other trading partners … Many of China's overheating problems result from the fact that the Chinese economy is still 'in transition from a command economy to a market economy,' says [well-known China expert Nicholas] Lardy. 'A lot of the controls they've had in the past have weakened, but they don't have the market controls in place yet.''' (Bloomberg, July 31)

Btw, as you know, enormously speculative real estate markets are a critical global, not just U.S., issue.

"[China] mainlanders lucky enough to have gotten into the housing market over the last decade are enjoying a sweet ride. Younger couples and rural transplants are having a tough time finding affordable housing ... Nobody wants to see a Japanese-style property bust visit a still-developing economy like China's. Yet even if it doesn't come to that, [President] Hu's government needs to worry about a possible social backlash among a sizable chunk of the population whose incomes aren't growing fast enough to keep up with spiraling housing costs. And we aren't even talking here about the 800 million or so Chinese living in rural regions (where outrageous land seizures by local governments are common) but rather urban dwellers in Beijing and Shanghai." (BW, Aug 9)

"Real estate prices have risen as much as 100 percent in the eight former communist states that joined the EU in 2004, driven by buyers from Western Europe. Many locals, with less than a quarter the buying power of their neighbors, have been locked out of the market, adding to frustration with EU membership and eroding support for budget cuts needed to adopt the euro. East Europeans are angry about rules that prevent them from working in most of the 15 older EU nations, while their own governments reduce spending on pensions, health care and other social programs to join Europe's single currency ... wages in the region are a fraction of those in Western Europe." (Bloomberg, Aug 10)

"Historically Istria [in Croatia] is a poor region of farmers and fishing folk, occupied by fascist Italy, the Austro-Hungarian Empire, and medieval Venice. Now it is fast becoming a summer playground for the monied classes of Europe ... In a country where the average monthly wage is around £500, it is already clear that the locals are priced out of the property market." (Guardian UK, Aug 8)

Private Equity Cancerous Growth Out of Control?

"U.S. companies' second-quarter earnings rose by an average of 19 percent as energy producers, bolstered by record oil prices, regained their standing as the fastest-growing industry group. Profit for members of the Standard & Poor's 500 Index climbed more than 10 percent for the 12th straight quarter, matching the longest streak since 1950, according to Thomson Financial. Oil and gas companies reported a 45 percent increase on average, the largest among the index's 10 main industry groups." (Bloomberg, Aug 4)

Usually minimized by bulls is that about two-thirds of the S&P operating profit increase in the past year has come from just two sectors, energy and financial, with the former often considered a tax on the real economy.

But much financial profit can also be viewed as a tax on productive assets, since it is increasingly generated from speculative trading by hedge funds, which now dominate global market daily activity, and legalized leveraged looting of corporations by private equity LBO’s and M&A, which add little to finance innovative new products and services.

Back in the 1980s, private equity LBO's may have served a useful economic purpose of making corporate America more efficient. Today, however, with that task largely completed, private equity is morphing into speculative financial parasites that "suck out" their loot, to use the phrase in the front page of the Aug 14 Financial Times, seeking a "free lunch," from a July 25 WSJ article.

When will the private equity legal looting finally be enough already? As with equally unjustifiable venture capital returns during the late 1990’s TMT equity bubble, today's exorbitant private equity returns are de facto evidence of excessively speculative, oligopolistic financial markets that are misallocating global capital, and the critical talent and resources it deploys, on a massive scale.

“One year buyout returns saw a very slight increase posting 25.5% for Q1 2006 compared to 25.3% for Q4 2005.” (PRNewswire, July 31) Three-year buyout returns were 17.6%, all data through March 31.

“The sharp rise in leveraged recapitalizations, described as the cocaine of private equity by one US buy-out chief, is damaging companies’ credit quality and could lead to an increase in default rates, Standard & Poor’s will say today. The credit rating agency has found that default rates among a sample of companies that have undergone recaps – a refinancing method that allows private equity groups to suck out large dividend payments by loading their portfolio companies with additional debt – were as high as 6 per cent … ‘Buy-out groups are living dangerously,’ said Steven Bavaria, head of S&P’s bank loan ratings business. ‘They are skating towards the end of the envelope but we won’t know whether they are over the edge until the market tightens up and some of the weaker credits get into trouble.’” (FT front page, Aug 14)

“A rush of multibillion-dollar buyouts has catapulted the volume of private equity deals to their highest level on record, data published on Tuesday shows. Monday's deal by three private equity firms to acquire HCA Inc. , the No.1 U.S. hospital chain, for $21 billion helped lift the total volume of deals so far this year to $372.6 billion. That's already higher than all of last year's total and higher than any other full year on record, according to financial data provider Dealogic. The rise in private equity-backed deals comes as the volume of global mergers and acquisitions has risen to $2.18 trillion in the year to date, topping the $2.13 trillion notched up during the same period in 2000 at the height of the Internet boom, Dealogic data shows." (Reuters, July 25)

"Some analysts said HCA's new owners could end up tempted to seek cost cuts to pay its debt -- only to find the company to be far leaner than it was in the past ... 'The intriguing question is what has Jack Bovender [HCA's CEO] not done for shareholders that Kohlberg Kravis Roberts can do, particularly when KKR wants to earn' double-digit returns on its investment, said Uwe Reinhardt, a Princeton University health economist. 'You've got to ask yourself, where's the free lunch here?' Mr. Bovender is expected to stay as CEO after the buyout. Jeff Goldsmith, president of Health Futures Inc. noted that HCA already has twice culled its sizable hospital holdings in the past two decades to weed out underperforming assets. The company 'isn't known for fluffy staffing numbers,' he said. HCA's hospitals 'are mature franchises that for the most part they've owned for 20 years. It's a very interesting strategic question of what it is going to do to create value to pay down all that debt.'" (WSJ, July 25)

“Buyout firms announced an unprecedented $287 billion of takeovers this year through the end of July, up from $265.5 billion during all of 2005, according to Bloomberg data.” (Bloomberg, Aug 3) “Besides traditional lenders, sales of leveraged loans to investors including managers of collateralized loan obligations and hedge funds rose 69 percent to $162 billion in the first half of the year, according to S&P. The amount compares with 2005's full-year record of $183 billion.” (Bloomberg, Aug 1)

“After a blistering first half, big Wall Street investment banks are seeing a significant third-quarter slowdown, driven by reductions in trading volumes and new securities offerings, and a drop in US mergers and acquisitions. The slowdown is likely to damp earnings at big brokerages that report quarterly figures next month … several analysts said slowing U.S. economic growth, rising chief executive uncertainty and difficult international markets could exacerbate the usual seasonal trends and cut into the traditional fourth-quarter recovery.” (FT, Aug 14)

A “Big Picture” Comparison of Major Global Equity Market Trends since May 10 Top

We can try to make economic guesses and/or search for trends in the world’s stock markets, in an iterative process of testing hypotheses about economic data and market signals, and how each responds to the other. So let’s once again look at the charts following up on my 6/2 article, "Did May's Sharp Global Market Sell-off Signal" link.

A very simplistic “big picture” review below seems to indicate that global markets still remain in their nearly four-year old bull market uptrends, but with a number of indexes flashing cyclical warning signs. I don’t take into account here more sophisticated views of market structure that may better detect more trouble just below the surface.

Note that all data is through the close on Friday, August 11.

Since May 10-11 top, the best performing major indexes have been the S&P 500, DJ Stoxx 50 European stocks, down about 5%, the same as Hong Kong’s China H shares, with its own Hang Seng flat. The first two have been among the weakest indexes during the bull market since Oct 2002, up around 50%, the H shares has been one of the strongest, up nearly 200%.

Since the May top, the worst performing major indexes have been the MSCI emerging markets, industrial metal prices, gold price, S. Korea’s Kospi, and Nasdaq, down -11-13%. The first two have been among the best performing during the nearly four-year bull market, up 200% and more. Nasdaq has been one of the worst, up about 70%.

In other words, since the early May top, two large lagging but less volatile stock indexes, S&P 500 and DJ Stoxx 50, have outperformed most others, though still losing money, while the more volatile star performers of the four-year bull market, emerging market stocks and industrial metal prices, have underperformed.

From the June 13 lows, the best performers once again have been the more volatile assets, led by Hong Kong’s China H shares and Hang Seng indexes, MSCI emerging markets stock index, and gold and industrial metals prices. The worst performing has been Nasdaq and tech stocks.

Btw, I’d guess that the performance of the S&P 500 in the nearly four-year bull market would be even more lackluster if the energy and financial sectors were excluded from the results.

“If insider selling is any guide, the stock-market rally for energy companies may be waning. Sales of shares by officers and directors at oil refiners climbed to a record in July, according to a scoring system used by the Leuthold Group since 1999. Among a broader group of 142 energy producers, insider selling peaked in May, according to Leuthold.” (Bloomberg, Aug 3)

Major Global Equity Markets Now at Important Levels

Throughout the four-year bull market, international indexes have far outperformed U.S. large cap ones. Global markets may now be at an interesting juncture. The “normal” 50% retracements of the sharp declines over May 10-June 13 have been made, and many indexes are near key levels, usually their 200-day moving averages and/or or their June-July rally highs.

The three most comprehensive indexes, the MSCI world (ex US), EAFE (developed economies) and emerging markets, all bounced off their rising 200-day moving averages in both mid-June and mid-July. They closed Friday at or just slightly above their early July peaks, re-tracing about 50% of their May-June sharp declines.

I.e. if these three indexes were to rally further from here, then they would then put in a “higher high” to go along with the higher low made in mid-July, for the moment a short-term uptrend, with the emerging markets index a little stronger but more short-term overbought. Conversely, failure to do so would be a noticeable negative.

Similar comments apply to key individual international markets, especially S. Korea’s Kospi index, which is considered to be particularly cyclically sensitive, and Japan’s Nikkei, but with the big caveat that they both fell well below their 200-day moving averages and now have rallied to just below them. Both countries’ exports are increasingly heavily oriented toward China.

China’s “H” shares are at new highs in their post mid-June rebound, starting to close in on the early May peak, which Hong Kong’s Hang Seng has just reached. China’s “A” shares look more like the overall emerging markets index. As for the other BRIC markets, energy-driven Russia is also closing in on its May peak, while India’s BSE and Brazil’s Bovespa have rallied well to put in modestly higher highs off their mid-June lows.

In the U.S., the S&P 500 closed Friday at 1267 four points below its 200-day moving average; it has tried twice but so far been unable to take out the June-July rally high of 1280. As mentioned, since May 10, it is down about -4%, outperforming U.S. small and mid-cap indexes, down over -10%, which had been U.S. market leaders during the bull market.

The tech-laden Nasdaq is down about -12% since May 10, and the Dow transportation average (which performed better than most other U.S. index over this cycle) about -17%, versus the Dow utilities up 6%, all signs of a cyclical slowdown, along with the ongoing downtrend in retail stocks and the strength in defensive stock groups. The homebuilder stock indexes have collapsed all the way down to their levels in early 2004. Some high-flying popular consumer growth stocks, such as Whole Foods, Starbucks and Cheesecake Factory, have declined sharply in recent months.

Again, failure by major indexes to take out their June-July rally highs, and continued weakness in the more cyclically sensitive domestic and international indexes mentioned above would not bode well for the global economy and equity markets. And conversely, new higher highs in the rally off the June 13 lows could embolden the bulls.

Back in my March 24 article on "Potential Tipping Points" link, I expressed my guess that the U.S. market might see a significant low in the October timeframe, per the usual four-year election cycle. That remains my bias, but I will try to look at the charts and global situation going forward with as an open mind as I can muster.

It's Difficult to Implement Rational Economic - Monetary Policies with Hyper-Speculative Capital Markets

I believe that it is more difficult to implement rational economic/monetary policies when the underlying incentives in the economy may lead to massive capital misallocation, either through formally legal but immoral rampant financial speculation, which permeates the U.S. system, or by local political/economic bosses circumventing national policy, as in China.

“America’s slowdown represents an important transition in the sources of economic growth, away from the vigorous wealth creation of asset bubbles – first equities, then housing – and back towards more subdued labor income generation … In a post-bubble climate, US households will be unable to save through asset appreciation, prompting America to increase income-based saving and reduce its claim on the pool of global saving.” (MS chief economist Stephen Roach, op-ed, FT, Aug 14)

Roach, along with his colleague Andy Xie, for years have been the only major Wall Street economists to very honestly and capably warn of the economic dangers and distortions of the asset bubble economy. But writing without qualifying about “vigorous wealth creation of asset bubbles” and “save through asset appreciation” unintentionally plays into the American mindset which can no longer distinguish between actual, real wealth creation and savings from the new production of innovative goods and services, and mere speculative financial bookkeeping entries on paper assets, be it already existing home property titles, stocks and bonds, and a seemingly infinite array of derivatives, regardless of future cash flow prospects from real economic profit/income generation.

But for that speculative paper wealth transfer to continue without price inflation spiraling out of control, someone somewhere must actually generate enough real economic wealth that the inflated asset prices have claims on, and that someone are the populations and businesses of those countries financing the unprecedented U.S. twin deficits. How long can and will they allow that to continue, trading real economic wealth for speculative, low-yielding pieces of U.S. paper of increasingly dubious future value?

With U.S. national annual home price increases now approaching flat (there has not been a national decline in many decades), will homeowners be willing to give up what they consider their rightful, hard-earned massive equity “wealth” creation from the engineered (by the Fed and government tax and other policies) real estate bubble?

To ask the question is to answer it. Which is why I noted in my last article link that real estate prices are "sticky" to the downside, as currently indicated by the game of chicken between buyers and sellers.

With regard to the difficulty China's leaders are having in gaining control over its economy: “lenders have been fighting corruption in preparation for more foreign competition starting in December. Industrial & Commercial Bank of China and China Construction Bank, both in Beijing, say they have improved risk management, loan practices and technology … Last year, fraud and other irregularities in China's financial institutions amounted to $95.9 billion, a 31 percent increase over 2004, according to the China Banking Regulatory Commission.” (Bloomberg, Aug 1)

Global Hyper-Speculation Continues to Lead to Increasingly Glaring Wealth Inequality

A few recent examples of the glaring inequalities created by the current consensus fantasy view of the hyper-speculative global economy:

“The average U.S. teacher salary fell 0.1 percent in the past school year to $46,953” (Bloomberg, July 25)

``’It bothers me,’'' former Federal Reserve Chairman Paul Volcker said in an interview. ‘I tell you, I don't know why there hasn't been more discussion and more unhappiness about this because it's become quite distinct. For a long time now, if we believe the statistics, the average working guy does not have an increase in income.’'' (Bloomberg, Aug 3)

“Private equity has paid off handsomely for Henry Paulson Jr., the former chief executive of Goldman Sachs. For the past two years, Paulson, now the Treasury secretary, has banked $24 million in investment returns from lucrative partnerships made available to top Goldman executives. The sudden flowering of these investments - last year, Paulson's return was $12.7 million, according to the firm's 2006 proxy - signals vividly how Goldman's growing private-equity business has been gushing profits not only for the firm's executives but also for the investment bank as a whole.” (NYT, July 26)

“Prominent economists of all ideological persuasions long believed that raising the U.S. minimum wage would retard job growth, creating unintended hardship for those at the bottom of the ladder. Today, that consensus is eroding, and a vigorous debate has developed as some argue that boosting the wage would pull millions out of poverty. A moderate increase in the minimum wage won't raise unemployment among low-skilled workers, according to recent studies, many economists say. They are joined by some business executives who say they can live with that, especially if it's coupled with tax relief.” (Bloomberg, Aug 7)

“A federal appeals court reversed a lower court's finding that International Business Machines Corp.'s pension plan discriminated against older workers. The ruling, which involved IBM's move to change from a traditional pension to a cash-balance pension plan, may spur more companies to make the switch, employers say, and may have implications for some of the roughly 400 companies with a total of more than 1,200 cash-balance plans among them. When older workers are shifted from a traditional pension to a cash-balance plan, they lose the steep buildup of pension benefits and can end up with pensions that are 20% to 50% lower. Most companies that adopted the cash-balance formula had large older work forces.” (WSJ, Aug 8)

“in the United States today, there’s a new twist to the familiar plot. Income inequality used to be about rich versus poor, but now it’s increasingly a matter of the ultra rich and everyone else. The curious effect of the new divide is an economy that appears to be charging ahead, until you realize that the most of the people in it are being left in the dust. President Bush has yet to acknowledge the true state of affairs, though it’s at the root of his failure to convince Americans that the good times are rolling.” (NYT, 7/19)

Emotionally Charged National Security and Geopolitical Issues Need Creative Approaches to Lower Global Risks

I always wrestle with how much to say in my articles about often emotionally charged geopolitical and national security issues, and this time is no exception.

Re the Lebanon situation, I won’t go into who did what to whom, when, why and how, in part because it would take far too long, and because viewpoints are once again so strongly entrenched, in large part due to the corporate mass media and major political parties.

For some background on the Lebanon situation, I suggest Seymour Hersh’s "Watching Lebanon" in the August 21 “New Yorker” link (some may think it more balanced than they would expect from Hersh). To balance, for a view from the “realist” conservative Republican faction often identified with Bush Sr, see his close colleague Brent Scowcroft’s July 30 Washington Post op-ed "Beyond Lebanon" link.

Scowcroft lists seven points as "outlines of a comprehensive settlement," starting with “A Palestinian state based on the 1967 borders, with minor rectifications agreed upon between Palestine and Israel” and also “King Abdullah of Saudi Arabia unambiguously reconfirming his 2002 pledge that the Arab world is prepared to enter into full normal relations with Israel upon its withdrawal from the lands occupied in 1967.”

I’d guess that the old U.N. Security Council resolutions and especially the 2002 Saudi proposal that are the basis of Scowcroft's outline solutions are unknown to the vast majority of Americans, not surprisingly, since the Saudi proposal was ignored by the Bush administration and buried by the mainstream media in the concerted push to invade Iraq (during which Scowcroft evidently was no longer welcomed in the Bush/Cheney White House).

The Lebanon situation obviously has further inflamed Arab/Muslim anger against the U.S. political leadership, where both major parties have shown themselves through Congressional resolution to be nearly unanimously strongly pro-war when it comes to Israel.

Yet reality is usually not as simplistic as good vs evil, even when it may appear so. Events leading to wars, hot or cold, develop over long convoluted, messy histories, usually willfully ignored and distorted in mass media sound-bites and political sloganeering.

To take one of the clearest examples, whole-hearted support of war against Nazi Germany was a very necessary moral and geopolitical imperative, libertarian views notwithstanding, but how things could have been prevented from ever getting to the point of incurring casualities in the tens of millions would have required changing decades of misguided policies by the major powers of the era.

As with the case leading up to the invasion of Iraq, it is not too difficult to see very different viewpoints perceived as strongly legitimate by their holders re what led up over the decades to this latest conflict in Lebanon and elsewhere in the Middle East.

Once again perhaps the truth may become clearer as the outcomes unfold over time, maybe even in time to matter, though the nature of war in general and an ultra-secretive “war on terror” tend to go against that.

Despite the hype about a 24/7 connected world, it seems questionable to me whether public opinion is becoming significantly more well-informed about events in distant places. E.g., not to beat a dead horse but to simply illustrate that point:

“Did Saddam Hussein's government have weapons of mass destruction in 2003? Half of America apparently still thinks so, a new poll finds, and experts see a raft of reasons why: a drumbeat of voices from talk radio to die-hard bloggers to the Oval Office, a surprise headline here or there, a rallying around a partisan flag, and a growing need for people, in their own minds, to justify the war in Iraq.” (AP, Aug 6)

This indicates an embarrassing and dangerous lack of knowledge of world affairs by the U.S. public. According to a Bloomberg/LA Times poll, “just 9 percent of teens aged 12 to 17 and 17 percent of young adults aged 18 to 24 in the survey said they read a newspaper for current events.” (Bloomberg, Aug 10)

Obviously Americans can spend their leisure time however they please. But this is not 19th century isolationist America.

Official published U.S. national security policy since 2002 has been to assert the right to militarily intervene when deemed necessary by the President on a preventive, not an imminent pre-emptive (a critical distinction), basis, on the suspicion of a chance of great danger (e.g., see the 2006 book "The One Percent Doctrine" by Ron Suskind), a sharp departure from more than two hundred years of U.S. history and international law.

With that policy change, the public learning as much as possible about those very risky and very costly interventions would seem to be critical for all most directly concerned, including the large number of innocent civilians at the receiving end of the preventive "smart" bombs.

I.e., if the U.S. population continues to acquiesce in the Bush administration claim of a right of alleged preventive wars, then it would seem fair that at minimum the American people would also fully accept the corresponding responsibility to know as much as possible about the situations surrounding such grave proposed actions. Unfortunately, this is very unlikely to happen, given the current abysmal state of the corporate mass media and two major political parties.

With one major U.S. political party with strong ties to big energy, and the other to “blue state” real estate speculation and big corporate media, neither is going to take serious aim at the hyper-speculative mega financial interests dominating the global economy whose distortion of capital market flows away from critical productive investments for a just global economic development continue to underlie many major problems.

Perhaps most importantly, the financial and corporate global 1000 have little national loyalties whatsoever, but rather play nations and regions off against each other.

Only time will tell whether the U.S. "preventive" war policy will result in less national security and greater geopolitical and economic/financial risks down the road, or the “birth” of a “new,” presumably better, Middle East per Rice and Bush. So far, at least, the current trends don’t seem too promising to a great many Americans and a large majority of those outside the U.S., according to the public opinion polls.

It's too bad, for both the U.S. and the world, that Americans currently don't have viable electoral choices to politically express their views. The increasingly dysfunctional major parties find it safer to continue to blame each other while pocketing lobbyists’ money, even though the blame game doesn't work for the public good.