Signs of the Economic Apocalypse 6-6-05

From Signs of the Times 6-6-05:

The euro closed at 1.2236 dollars on Friday, down 2.5% from last week’s 1.2542. That puts the dollar at .8173 euros compared to .7973 the week before. In the U.S. stock market, the Dow closed at 10,460.97, down 0.78% from the previous Friday’s close of 10,542.55. The tech-heavy NASDAQ closed at 2071.43, down 0.2% from 2075.73 a week earlier. The yield on the ten-year U.S. Treasury bond fell again to 3.98% at Friday’s close compared to 4.07% a week earlier. Oil closed at $55.40 a barrel, up sharply (6.8%) from the previous Friday’s $51.85. Oil in euros increased even more sharply, closing at 45.28 euros a barrel, up 9.5% from the previous week’s close of 41.34 euros. Gold closed at $426.10, up 0.8% compared to $422.70 an ounce the week before. Comparing gold to oil, an ounce of gold would buy 7.69 barrels of oil on Friday, down 6.0% compared to 8.15 the previous Friday.

The big news, then, from the past week was the expected drop in the value of the euro following No votes against the proposed EU constitution in France and the Netherlands and the sharp rise in the price of oil. The United States also released the jobs report for May and, although spun positively, was not good news. Only 78,000 non-farm jobs were added in May, a number half as large as expected, with the gains coming in construction and health care. Construction jobs, of course, are heavily dependent on the increasingly fragile housing bubble. There was also a lot of talk about the “conundrum” mentioned by Alan Greenpsan: rising short-term interest rates coinciding with falling long-term rates. Here’s Mark Gilbert on Bloomberg:

Greenspan's Bond Conundrum Ripens Into an Enigma

Mark Gilbert

June 3 (Bloomberg) -- The 10-year U.S. Treasury note was a “conundrum” to Federal Reserve Chairman Alan Greenspan in mid- February at a yield of about 4.10 percent. After cracking the 4 percent barrier this week, it looks more like Winston Churchill's Russia: “a riddle, wrapped in a mystery, inside an enigma.”

The median forecast of 62 of the finest minds in finance, surveyed by Bloomberg News in December, was for the 10-year bond to yield 4.78 percent by mid-year. Instead, the note pays about 3.9 percent, the lowest in more than a year. Barring a market crash in the next four weeks, that's quite a margin of error.

Bond mavens are now lining up to call for lower yields. Morgan Stanley Chief Economist Stephen Roach said earlier this week he's turning bullish on bonds, with a 3.5 percent level possible in the coming year. Bill Gross at Pacific Investment Management Co., never shy to predict an increase in value for the securities he owns, said May 18 that the 10-year rate could drop to 3 percent by the end of the decade.

Gabe Borenstein, managing director of global investments at Investec Holdings Ltd. in New York, predicts a 10-year yield of 2.5 percent in the current business cycle, which has 18 months or less to run. Higher energy costs, renewed wariness among indebted consumers, and continued recycling of dollars into Treasuries by overseas investors will help drive down yields, he says.

‘Serious Recession’

“All of the economic forces point to a dramatic slowdown ahead which will turn into a serious recession, with almost no tools left to abort that possibility,” says Borenstein, whose firm manages $100 billion globally.

What they are saying is that things are going to get worse and more frightening, so people with money will invest them in something safe with guaranteed returns and will bid up the prices, thereby decreasing yields (because, for example, if someone purchases a ten-year bond for $1,000 at 5.00%, say, and sells it to someone for $1,200, the person paying $1,200 will still get the same return, that is $50 a year, only, since they paid $200 more, the yield has now dropped to 4.17%). Remember that these long term interest rate drops fuel the housing bubble, since they keep mortgage rates low. Remember also, that these drops come after a year of the Federal Reserve Board trying to increase interest rates, to cool down the increase in consumer debt.

Does this mean that the financial elite, who, after all, are the ones bidding up long term debt instruments, are losing faith in the economic future? It looks that way.

CFOs' Optimism Declines, Study Finds

Corporate financial chiefs express concern over the continuing surge in the cost of healthcare and energy.

From Reuters

June 3, 2005

Optimism among U.S. chief financial officers tumbled to a three-year low this quarter as executives struggled with high fuel and labor costs, rising interest rates and pricing pressures, according to a business outlook survey released Thursday.

In the survey, 40% of company financial chiefs were more optimistic about the economy than they were in the previous quarter, down from 46% last quarter and 70% a year ago, the survey of 365 U.S. chief financial officers by Duke University and CFO Magazine showed.

"In a situation like this, where the optimists barely outweigh the pessimists, we can expect to see sluggish economic growth," said John Graham, professor of finance at Duke's Fuqua School of Business.

The survey, which also polled hundreds of Asian and European corporate finance chiefs, showed Asian CFOs were as cautious as U.S. CFOs, while almost a majority of European financial chiefs were explicitly pessimistic.

American CFOs were most concerned about the cost of healthcare. They expected those costs to rise 9% in the coming year, on average, the survey showed. They also were concerned about high fuel prices, particularly in the face of limited pricing power.

CFOs also were nervous about the effects on the economy if the Federal Reserve continued to raise its key short-term interest rate, now 3%.

"Right now, the CFOs say we're kind of at a tipping point, where further increases in interest rates would start to put a drag on the economy," Graham said.

Of CFOs surveyed, 83.2% said a Fed rate of 4% would slow U.S. economic growth overall, but far fewer — 43% — said it would slow growth at their own firms.
As rising interest rates contribute to higher costs, many CFOs said they would reduce their capital spending plans.

To make matters worse the Bush administration this past week gave the green light for white-collar crime by replacing the head of the Securities and Exchange Commission (SEC), the main regulator of the stock markets and corporate finance in the United States,

Bush picks anti-regulatory hard-liner to head Wall Street oversight board

By Joseph Kay

4 June 2005

On Thursday, President George Bush nominated Christopher Cox, a Republican congressman from southern California, to head the Securities and Exchange Commission (SEC), the main government regulatory agency for Wall Street.

Cox’s selection is a brazen move by the Bush administration to shift the SEC toward an even more openly pro-corporate policy. It portends an end to the probes into corporate fraud that have occurred in the wake of Enron, WorldCom and other business scandals, and the effective reversal by administrative means of the limited regulatory reforms put in place over the past three years.

Cox has made a name for himself as a partisan of unfettered capitalism, à la Ayn Rand. He is an unabashed defender of big business and an adamant opponent of corporate regulation and taxation. In Congress, he has pushed for measures to cut back or eliminate taxes on capital gains and dividends, championed the repeal of the estate tax, and opposed the mandatory expensing of stock options. He sponsored a key piece of legislation in the mid-1990s that limited the ability of investors to file lawsuits over corporate malfeasance.

Cox’s nomination has been universally hailed by business groups as heralding an end to “regulatory excesses” at the SEC under its outgoing chairman, William Donaldson, also a Bush appointee. Donaldson, a Rockefeller Republican, is considered a turncoat in Republican and corporate circles because he has on numerous occasions sided with the two Democratic members of the five-member SEC in implementing new regulations and fining corporations for wrong-doing.

Marc Lackritz, president of the Securities Industry Association, responded to Bush’s announcement by noting that Cox “has a particular sensitivity to costly and unnecessary regulation.” Lackritz continued, “He understands that the increased costs of regulation put an unnecessary tax on investors.” The Wall Street Journal editorial page, which has long championed Cox, declared on Friday, “We assume the appointment marks the end of the era of post-Enron regulatory overkill.”

Cox entered politics as a staunch anti-communist in the Reagan administration. He served as a legal adviser for Reagan during the Iran-Contra scandal, and later took a position at the elite corporate law firm of Latham & Watkins, serving clients such as Arthur Andersen and Merrill Lynch. He was elected to the House of Representatives in 1988, and since that time has promoted the interests of his major campaign contributors: Wall Street, the technology giants of Silicon Valley, and the major accounting firms.

More than anything else, his role in pushing through a 1995 bill known as the Private Securities Litigation Reform Act has won him the backing of Wall Street. The act, which was passed with bi-partisan support over the veto of President Clinton, significantly raised the standard of proof required in investor lawsuits against corporations and executives.

…Cox has been a strong critic of class action lawsuits in general, helping to push the bill passed into law earlier this year that severely limits the ability of ordinary Americans to use this legal mechanism as a way to challenge the actions of big business.

…Cox is expected to reverse a period of mild regulatory actions taken by the SEC under the leadership of Donaldson, who stepped down on June 1. Wall Street has opposed a measure that had been supported by Donaldson and the two Democrats on the commission—Goldshmid and Roel Campos—that would have given shareholders more power over corporate boards of directors.

Hedge funds—the elite investment companies that cater only to wealthy investors—are strongly opposed to a measure proposed by Donaldson that would have required the funds to register their advisors. This was part of an effort to increase the transparency of hedge funds, which are notoriously opaque to investors and regulators.

While Donaldson cited family reasons for his decision to leave the SEC, the fact that his departure was so quickly followed by the Cox nomination is a clear indication that he was pushed out by the Bush administration. In recent months, actions he has proposed have been publicly criticized by Bush administration officials, including Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan.

…After the wave of accounting scandals that began three-and-a-half years ago with the collapse of Enron, the Bush administration made a show of implementing measures to curb corporate criminality. These measures included the passage of the Sarbanes-Oxley Act, which requires corporate executives to personally certify the accounting books of their corporations. The administration has also prosecuted a handful of corporations and executives for their role in scandals at Enron, WorldCom, Tyco and elsewhere.

The appointment of Cox is an unmistakable signal that even these limited measures will be rolled back. His appointment comes the same week as a Supreme Court decision overturning the obstruction of justice conviction of accounting firm Arthur Andersen for its role in accounting fraud at Enron. The ruling will likely make it harder to charge companies with obstruction of justice, frequently used against white-collar criminals.

There is a degree of extraordinary recklessness in the Bush administration’s policy, which will eliminate even the minimal forms of accountability that had been put in place. The Democrats and sections of the Republican Party—including Donaldson—have pushed these measures as a means of restoring investor confidence in American corporations, a confidence that was severely undermined by the corporate scandals of 2001 and 2002.

That these measures could be characterized as “regulatory overkill” is an indication of the determination of the administration and its backers to eliminate all constraints on the most wealthy and corrupt sections of the American ruling elite.

Are they opening the gates for one last orgy of theft before the whole system comes crashing down?