Keiser Report: Dollar-Trapped

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Bernanke Joins King Tolerating Inflation

Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months. Brazil executed a surprise cut Aug. 31 to safeguard its economy even after inflation quickened to a six-year high.

Policy makers such as Fed Chairman Ben S. Bernanke and Bank of England Governor Mervyn King may be challenging central-bank orthodoxy to replenish depleted toolkits and support recoveries at risk of sliding back into recession. Tolerating higher inflation may make long-term Treasuries less attractive while supporting stocks and commodity prices, said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

“There’s a hint of desperation here,” said Kochan, who helps manage $216 billion in Menomonee Falls, Wisconsin. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to. So they ask themselves, why? And what could we do about it?”

If adopted, the strategy might be called “Generate Inflation Now,” or GIN, Reinhart said, a reversal of the Ford Administration’s “Whip Inflation Now,” or WIN, program in the 1970s.

‘Cutoff’ Question

“Everybody knows high inflation is bad,” said Reinhart, the Fed’s director of monetary affairs from 2001 to 2007 who will become Morgan Stanley’s chief U.S. economist in October. “Nobody is sure of where the cutoff is.”

Bernanke and his Federal Open Market Committee gather tomorrow inWashington for a two-day meeting and will issue a statement Sept. 21 at 2:15 p.m. New York time. Some economists anticipate additional stimulus aimed at reducing long-term borrowing costs and boosting growth. The Fed cut the target for its benchmark federal funds rate almost to zero in December 2008 and has since purchased $2.3 trillion of bonds.

The FOMC at its Aug. 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for theunemployment rate or the inflation rate,” according to minutes released Aug. 30. The commitment should be contingent on joblessness falling to around 7 percent or 7.5 percent as long as inflation stays below 3 percent in the medium term, Charles Evans, president of the Federal Reserve Bank of Chicago, said in a Sept. 7 speech.

Focus on Core

Unemployment was 9.1 percent in August, and the Fed’s preferred inflation gauge, which excludes volatile energy and food prices, rose 1.6 percent in July. Policy makers should focus on core inflation to better reflect trends that are “likely to be sustained over the medium term,” the International Monetary Fund said in a chapter of its World Economic Outlook released Sept. 14, ahead of its annual meeting of central bankers and finance ministers this week.

Columbia University’s Michael Woodford and Harvard University’s Kenneth Rogoff are among proponents of faster price increases, which should result in lower interest rates adjusted for inflation. This might stimulate spending, along with a side- effect of helping pare record debt loads.

While computer simulations imply this strategy will work, it’s untested in the real world, said Woodford, a professor who co-taught economics with Bernanke at Princeton University. There has been “nervousness” among central bankers about saying “you would allow inflation,” he said. Now “there’s at least more willingness to discuss the issue.”

Faltering Growth

Consumer prices worldwide may rise at a slower pace after jumping earlier this year as faltering economic growth drags down food and energy costs. JPMorgan Chase & Co. (JPM)economists estimate inflation in developed markets will average 1.3 percent in the second quarter of 2012, down from 2.7 percent in the same period this year.

The Fed should get U.S. prices back to the path they were on before the September 2008 collapse of Lehman Brothers Holdings Inc., Nobel laureate Roger Myerson at the University of Chicago said Aug. 23 on Bloomberg Television.

According to Bloomberg calculations, the central bank would need to generate annual inflation of 3.3 percent in the two years through July 2013 to return to a hypothetical 2 percent path since July 2008, under the Commerce Department’s personal- consumption-expenditures price index. This gauge rose 2.8 percent in July from a year ago.

Weaker Currencies

Changing policy to tolerate higher inflation means lower bond prices in the long run and weaker developed-market currencies, including the dollar and pound, against emerging markets, said Stephen Jen, managing partner at SLJ Macro Partners LLP in London.

Wells Fargo’s Kochan and Pacific Investment Management Co.’s Anthony Crescenzi agree bond prices would suffer. If the Fed successfully implemented this strategy and European officials managed to contain the continent’s sovereign-debt crisis, two-year yields, which traded at a record low of 0.1512 percent today, might be little changed, while 10-year rates increased to a range between 3 percent and 4 percent within two or three years, said Crescenzi, who helps manage $1.3 trillion as executive vice president at Pimco in Newport Beach, California.

Yields on 10-year Treasuries were at 1.99 percent at 9:56 a.m. in London today. U.S. debt was the best-performing asset class in August as bond investors ignored Standard & Poor’s Aug. 5 decision to strip the U.S. of its AAA rating. Treasuries returned 2.8 percent, while the global bond market gained 1.99 percent, Bank of America Merrill Lynch index data show.
Economic Benefits

Crescenzi cautions that faster inflation may not produce the economic benefits proponents project, instead reducing the amount of goods and services households and businesses could buy. That would cut production -- and eventually incomes.

“It would turn a virtuous cycle into vicious,” he said. “I see it as quite negative.”

Central banks with a target also may have to squelch price increases later, risking harm to growth and “a serious disinflation,” said Raghuram Rajan, former IMF chief economist and a professor at the University of Chicago’s Booth School of Business.

More than 20 central banks have adopted some type of inflation target since the Reserve Bank of New Zealand pioneered the strategy two decades ago. Such targets help control expectations of future price pressures and provide clarity about the direction of interest rates.

Failed to Prevent

The strategy nonetheless took a hit for failing to anticipate or prevent the worst economic crisis since the Great Depression. In the future, inflation targets should be coupled with a tool that helps deliver financial stability, a report sponsored by the Brookings Institution said last week.

The Bank of England has left its benchmark rate at 0.5 percent since March 2009. While inflation may reach 5 percent in the next few months, it might have been below the bank’s 2 percent target without temporary shocks such as this year’s oil- price spike, King said in an Aug. 15 letter to Chancellor of the Exchequer George Osborne.

The U.K. eventually may want to adopt a goal that accounts for stronger global price pressures, said Simon Hayes, chief U.S. economist at Barclays Capital.

Any change at the Fed would face opposition at the U.S. central bank, where policy makers favor a long-run inflation goal of 1.7 percent to 2 percent, according to their most recent economic projections in June.
‘Meager Savings’

Richard Fisher, president of the Federal Reserve Bank of Dallas, told reporters Sept. 12 he couldn’t imagine trying to explain the shift to unemployed workers and others “who don’t want their income or meager savings eroded by price increases.” He was one of three officials to dissent from the August decision to keep rates near zero through at least mid-2013.

Of 27 central banks Morgan Stanley monitors with formal or informal targets, 15 now face inflation running above their aim. Some emerging-market officials may be sacrificing their goal to support economic growth or financial stability, Peter Attard Montalto, an economist at Nomura International Plc in London, said in a Sept. 12 report that identified Turkey and Hungary.

Brazil cut its benchmark rate to 12 percent on Aug. 31 as consumer prices rose 7.23 percent from a year earlier. While the increase exceeded the 6.5 percent upper limit of the bank’s target range for a fifth straight month, officials remain committed to the policy and price increases will start to ease, President Alexandre Tombini, said Sept. 8.
German Legacy

Among developed countries, the European Central Bank has proved less tolerant of faster price increases -- a legacy of Germany’s hatred of the inflation often blamed for weakening democracy in the 1920s and aiding Adolf Hitler’s rise to power.

The Frankfurt-based central bank, which aims to keep inflation just below 2 percent, raised its benchmark rate twice this year, to 1.5 percent, even as the Greek-led debt crisis threatened expansion. With economies slowing, President Jean- Claude Trichet said Sept. 8 that price risks are “broadly balanced” in the medium term, despite inflation at 2.5 percent in August.

More central banks may make similar efforts to “explain away” the temporary nature of inflation as a reason to ignore it, said Jen, a former IMF economist. Policy makers “will put more emphasis on growth,” he said.
Bloomberg

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Four earthquakes rattle Guatemala in under three hours

Four earthquakes hit Guatemala within three hours, killing at least one person and triggering landslides.

The quakes, the biggest a 5.8 magnitude, were centred some 50km (30 miles) southeast of Guatemala City but tremors were felt across the country.

Many residents spent Monday night outside because of fears of further quakes or damage to their homes.

President Alvaro Colom urged calm and said rescuers had been sent to the affected areas.

The first, a 4.8 magnitude earthquake, hit at midday on Monday (18:00 GMT), followed some 30 minutes later by one of 5.8 magnitude and then two smaller ones, according to the US Geological Survey.

The epicentres were near Cuilapa in the Santa Rosa region.


Many of the buildings there are made of mud bricks and are vulnerable to collapse.

"4.8 is a moderate magnitude for well-constructed buildings but for mud brick buildings it's very dangerous," Eddy Sanchez, the head of Guatemala's geological institute, told Reuters.

At least three other people were reported missing in Cuilapa.

There has been serious damage to buildings and large cracks have appeared in roads in the region, Guatemalan media reported.

Mudslides also affected the main road to El Salvador.
BBC

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History’s deadliest volcano comes back to life in Indonesia, sparking panic among villagers

MOUNT TAMBORA, Indonesia — Bold farmers in Indonesia routinely ignore orders to evacuate the slopes of live volcanoes, but those living on Tambora took no chances when history’s deadliest mountain rumbled ominously this month.

Villagers like Hasanuddin Sanusi have heard since they were young how the mountain they call home once blew apart in the largest eruption ever recorded — an 1815 event widely forgotten outside their region — killing 90,000 people and blackening skies on the other side of the globe.





So, the 45-year-old farmer didn’t wait to hear what experts had to say when Mount Tambora started being rocked by a steady stream of quakes. He grabbed his wife and four young children, packed his belongings and raced down its quivering slopes.

“It was like a horror story, growing up,” said Hasanuddin, who joined hundreds of others in refusing to return to their mountainside villages for several days despite assurances they were safe.

“A dragon sleeping inside the crater, that’s what we thought. If we made him angry — were disrespectful to nature, say — he’d wake up spitting flames, destroying all of mankind.”

The April 1815 eruption of Tambora left a crater 7 miles (11 kilometers) wide and half a mile (1 kilometer) deep, spewing an estimated 400 million tons of sulfuric gases into the atmosphere and leading to “the year without summer” in the U.S. and Europe.

It was several times more powerful than Indonesia’s much better-known Krakatoa blast of 1883 — history’s second deadliest. But it doesn’t share the same international renown, because the only way news spread across the oceans at the time was by slowboat, said Tambora researcher Indyo Pratomo.

In contrast, Krakatoa’s eruption occurred just as the telegraph became popular, turning it into the first truly global news event.

The reluctance of Hasanuddin and others to return to villages less than 6 miles (10 kilometers) from Tambora’s crater sounds like simple good sense. But it runs contrary to common practice in the sprawling nation of 240 million — home to more volcanoes than any other in the world.

Even as Merapi, Kelut and other famously active mountains shoot out towering pillars of hot ash, farmers cling to their fertile slopes, leaving only when soldiers load them into trucks at gunpoint. They return before it’s safe to check on their livestock and crops.

Tambora is different.

People here are jittery because of the mountain’s history — and they’re not used to feeling the earth move so violently beneath their feet. Aside from a few minor bursts in steam in the 1960s, the mountain has been quiet for much of the last 200 years.

Gede Suantika of the government’s Center for Volcanology said activity first picked up in April, with the volcanic quakes jumping from less than five a month to more than 200.

“It also started spewing ash and smoke into the air, sometimes as high as 1,400 meters (4,600 feet),” he said. “That’s something I’ve never seen it do before.”

Authorities raised the alert to the second-highest level two weeks ago, but said only villagers within 2 miles (3 kilometers) from the crater needed to evacuate.


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30 Signs That The U.S. Economy Is About To Go Into The Toilet

If you think the U.S. economy is bad now, just wait for a few months.  Things are about to become absolutely nightmarish.  None of the long-term economic trends that are hollowing out our economy have been addressed and more bad economic news seems to come out virtually every single day.  Now there is constant talk of the "next recession" in the mainstream media.  But did the last recession ever truly end?  The number of good jobs continues to decline, more stores are closing, incomes continue to go down, credit card debt and student loan debt are soaring, the housing market resembles a corpse, the number of Americans living in poverty continues to rise and government debt is at unprecedented levels.  We are losing blood fast, and almost all of our leaders are either too corrupt or too incompetent to be able to do anything about it.  The U.S. economy really and truly is about to go into the toilet, and if something is not done very quickly we are going to experience a complete and total economic disaster in this nation.

Americans have been promised over and over that this economic downturn is just "temporary" and that things will return to normal soon.  During this upcoming election cycle, the Democrats will swear that they have all the answers and that if we just elect them everything will be okay.  The Republicans will also swear that they have all the answers and that if we just elect them everything will be okay.

Well, both sides are lying.  The economic plans of both major political parties are a joke.  Neither of them can restore economic prosperity to this nation.

Our politicians could delay the coming economic collapse by borrowing gigantic piles of money and pumping all of that cash into the economy.  But stealing from our children and our grandchildren is not exactly sound economic policy.

Yes, the U.S. economy is in bad shape right now, but things are about to get even worse.  The long-term problems that are destroying our economy have not been fixed, and the leaks in our ship are going to continue to grow.

The following are 30 signs that the U.S. economy is about to go into the toilet....

#1 An increasing number of unemployed Americans have become so desperate that they have started to look for work overseas.  For example, the number of Americans that are submitting applications for temporary work visas in Canadahas approximately doubled since 2008.  Other Americans are willing to learn foreign languages and travel to the other side of the world if that is what it takes to land a decent job.  Just consider the following quote from a recent USA Today report....

Job placement firms are reporting a surge in American worker interest in booming economies such as Hong Kong, Singapore, China and, increasingly, India. Hunt Partners, an executive search firm, estimates that it's getting 50% to 100% more unsolicited résumés from Americans looking for Asia-based positions today than before the recession.

#2 When Barack Obama first took office, the official U.S. unemployment ratewas 7.6 percent.  Today it is 9.1 percent.

#3 The number of Americans that are concerned that they will lose their jobs continues to hover near record highs.  According to Gallup, 30 percent of all employed Americans are worried that they will soon be laid off.

#4 After three straight years of very high unemployment, you can feel frustration and desperation in the air almost everywhere that you go.  Many unemployed Americans are now at the end of their ropes.  The following is from a testimonial that was recently posted on The Atlantic....

The most difficult part of the job search is:

1. that I don't live near a factory or outsource outlet in China, India, or Malaysia.

2. trying not to appear desperate for a job when I am, in fact, quite desperate for a job.

3. that I am subject to everyone's advice on how to get a job, but no real job leads.

4. that I am reminded that having a good job is not an entitlement.

5. that when I become depressed from my job search, I'm told told to cheer up or else give a bad vibe to prospective employers ... yet when I become happy through non-search related activities, I am reminded that I should be looking for work

7. that when I confide to friends and family that I have "given up" to pursue more fruitful interests,  it elicits a crushing look of disbelief, disappointment, and disgust

8. waiting for permission to give up.

#5 The percentage of American men that are employed continues to plummet.  In July, only 63.5 percent of all men in the United States had a job.  Since 1948, that number has only been lower one time (63.3 percent in December 2009).

#6 Back in the 1950s, manufacturing accounted for about 28 percent of U.S. GDP.  Last year, it accounted for just 11.7 percent.  Meanwhile, manufacturing now accounts for about 25 percent of GDP in China and they now actually have more factory production each year than we do.  Sadly, Barack Obama is pushing for even more trade agreements that will send millions more of our jobs overseas.

#7 The percentage of Americans that are working low paying jobs continues to relentlessly march upwards.  Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.

#8 According to John Williams of shadowstats.com, after you add in all short-term discouraged workers, all long-term discouraged workers and all Americans that are working part-time because they cannot find full-time employment, the real unemployment rate should be approximately 23 percent.

#9 We are starting to see another huge wave of store closings and layoffs.  For example, the parent company of Payless stores has announced that it will be permanently closing 475 stores.  Borders is in the process of closing every single one of its 399 stores.  Also, Bank of America has just announced that it will be closing about 600 branches, and that could result in the loss of about 30,000 good jobs.

#10 Median household income has fallen for three years in a row.

#11 Americans are really starting to rack up consumer debt once again.  According to Time Magazine, U.S. consumers are on pace to collectively add 54 billion dollars in credit card debt in 2011.

#12 Student loan defaults are rising very sharply. Just consider the following excerpt from a recent New York Times article....

The share of federal student loan defaults rose sharply last year, especially at for-profit colleges and universities, where 15 percent of borrowers defaulted in the first two years of repayment, up from 11.6 percent the previous year.

#13 According to a chart in The Economist, whenever the number of newspaper articles in the Financial Times and the Wall Street Journal that mention the word "recession" goes over 1,500 in a particular quarter, the U.S. economy almost always goes into a recession.

#14 The U.S. housing crash just continues to get worse.  The index of home builder sentiment put out by the National Association of Home Builders fell once again during the month of September.  With such a glut of unsold foreclosed homes on the market, it is making things really hard of home builders.  Things have gotten so bad that even the U.S. government now owns nearly a quarter of a million foreclosed homes.  The impact of this housing nightmare on families has been absolutely devastating.  Just check out what a recent Time Magazine article had to say about what has been going on in California....

The impact on children has been brutal: since 2007, 7% of the state's children have had a foreclosure process started on their homes, the fourth-highest level in the nation, according to a study released this month by the Annie E. Casey Foundation.

#15 Many believe that due to much tighter lending standards, it is now harder to be approved for a mortgage than at any other time since World War II.  This is absolutely crushing the housing market.

#16 Most Americans don't seem to expect housing prices to recover for an extended period of time.  One recent survey found that 54 percent of Americans believe that there will not be a housing recovery until "2014 or later".

#17 The combined debt of the largest GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to a whopping 6.4 trillion in 2011.  If that debt goes bad, U.S. taxpayers will be left holding the bill.

#18 There are now nearly 50 million Americans that do not have health insurance, and the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row.  Meanwhile, Americans now spendabout 3 times as much on health care as they did back in 1990.

#19 The Postal Service has publicly announced that it is "on the verge" of financial collapse.

#20 The number of small businesses continues to fall.  I recently noted this fact on The American Dream Blog....

The number of "self-employed" Americans continues to rapidly shrink.  According the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006.  Today, that number has shrunk to 14.5 million.  Even though we have 14 million unemployed people in this country and jobs are incredibly difficult to come by, the number of people trying to work for themselves continues to decrease because the environment for small businesses in this country has become so incredibly toxic.

#21 American consumers have become tremendously pessimistic.  According to one recent survey, 61 percent of all Americans believe that they will not return to their "pre-recession" lifestyles until at least 2014.  According to a different recent survey, 39 percent of Americans actually believe that the U.S. economy has now entered a "permanent decline".

#22 Many U.S. investors certainly seem to believe that trouble is coming. According to CNN, last month the number of bets against the S&P 500 was the highest that we have seen in about a year.

#23 The number of U.S. households that are "doubling up" continues to grow.  According to the U.S. Census Bureau, the number of combined households has increased by 10.7 percent since 2007.

#24 When Barack Obama moved into the White House, the average price of a gallon of gasoline in the United States was $1.83.  Today it is $3.58.

#25 The number of Americans living in poverty grew by 2.6 million last year.  That was the largest increase since the U.S. government began calculating poverty figures back in 1959.

#26 Back in the year 2000, 11.3% of all Americans were living in poverty.  Today, 15.1% of all Americans are living in poverty.

#27 On Barack Obama's first day on the job, there were about 32 million Americans on food stamps.  Today, there are more than 45 million Americans on food stamps.

#28 If there is a financial collapse in Europe, that will definitely plunge us into another recession.  Right now, things do not look promising.  At this point, headlines all over the world are proclaiming that Greece is dangerously close to defaulting.

#29 At some point soon, investors all over the globe may decide that it is time to start dumping U.S. government debt.  For example, Chinese officials are now openly talking about the need to "liquidate" their holdings of U.S. Treasuries.

#30 The U.S. national debt continues to explode in size and spiral out of control.  According to Professor Laurence J. Kotlikoff, the U.S. "fiscal gap" increased by about 6 trillion dollars last year.  In fact, Kotlikoff makes a compelling argument that Greece is actually in better shape financially than the United States is.

Do you now understand how much trouble we are in?

The long-term trends that are destroying us continue to get worse.

The United States is steamrolling directly toward an economic collapse.

When this economy hits bottom and splatters all over the place, it is not going to be easy to fix.

The America that we know today is going to be wiped out by a gigantic mountain of debt and by the consequences of decades of really bad decisions.

We were handed the keys to the greatest economic machine in the history of the world and we have wrecked it.

So prepare for really, really hard times ahead.

The era of endless prosperity is ending.

Next comes the pain.

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China bank halts forex swaps with Europe banks

HONG KONG (MarketWatch) -- An unidentified Chinese state-run bank has halted foreign-exchange swaps with several European banks, with the suspension believed to include BNP Paribas SA FR:BNP -4.13% BNPQF -15.94% and UBS AG UBS -0.79% , according to reports citing unnamed sources. The Chinese bank involved is the "most active" in the market for trading those products according to Dow Jone Newswires, which reported that the halt began Monday. Societe Generale SA FR:GLE -4.24% SCGLF -5.96% is also included in the ban along with BNP and UBS, according to Reuters.

Market Watch
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Federal Reserve is expected to announce new bond-buying program

Nervous global investors can't seem to own enough U.S. Treasury debt, yet the Federal Reserve may soon make the bonds even more scarce.

With the U.S. economy struggling, Fed policymakers are expected this week to announce a new bond-buying plan specifically aimed at pulling long-term interest rates lower.

That could help some Americans buy homes or refinance mortgages. But Wall Street doesn't see much hope that the Fed can give a significant boost to the economy.

"Interest rates already are low and it hasn't had any stimulative effect" on most consumers or businesses, said Dan Greenhaus, chief global strategist at brokerage BTIG in New York.

Still, many bond investors believe that the Fed has little choice but to provide what aid it can to the economy, with the Obama administration and Congress battling over fiscal policy.

On Monday, another slump in stocks worldwide helped drive investors back to Treasury bonds as a haven. Traders said some investors also were buying bonds ahead of the Fed's two-day meeting, which begins Tuesday.

The annualized yield on 30-year Treasury bonds dived to 3.22%, down from 3.31% on Friday and the lowest since January 2009 — the depths of the last recession. The 10-year Treasury note yield, a benchmark for mortgage rates, slid to 1.95%, down from 2.05% on Friday and near the generational low of 1.92% reached Sept. 9.

Bond rates fall as the prices of the securities rise.

Treasury yields plummeted for much of August amid a wild rush of buying, as Europe's debt crisis worsened and the U.S. economy showed signs of slowing markedly. Even though credit rating firm Standard & Poor's downgraded the U.S. debt rating in early August for the first time in history, Treasuries kept their status as one of the world's favorite hiding places in times of market turmoil.

As the economic outlook dimmed, Wall Street also began to focus on what else the Fed could do to bolster growth.

Fed Chairman Ben S. Bernanke has signaled that the central bank could resurrect a move it undertook in the 1960s known as Operation Twist: The Fed, which owns $1.6 trillion in Treasuries, could shift that portfolio by selling shorter-term debt and using the proceeds to buy longer-term bonds.

The net effect, the Fed hopes, would be to twist the so-called yield curve, meaning the level of longer-term interest rates compared with short-term rates. In theory, by adding to demand for longer-term Treasury bonds, the Fed could pull those rates down further. That could translate into lower rates on corporate, municipal and mortgage bonds.

Investment bank Credit Suisse expects the Fed to commit to a six-month program of buying $60 billion a month of Treasury debt maturing in seven and 10 years, said Scott Sherman, a Treasury debt strategist at the firm in New York. The Fed would sell bonds maturing in one to three years to finance its purchases of longer-term securities, he said.

Even though the Fed would be selling shorter-term debt in the marketplace, any upward pressure on short-term Treasury interest rates could be limited because the Fed in August said it was likely to keep its benchmark rate near zero through at least mid-2013.

The Treasury bond market isn't showing any fear of higher short-term rates. The two-year T-note yield fell to a new low of 0.16% on Monday from 0.17% on Friday.

If the Fed commits to a new Operation Twist, it would be the third bond-buying program it has launched since November 2008. The last one was a $600-billion purchase program completed in June.

The difference this time is that most analysts believe that the Fed won't print new money to fund its purchases. If the central bank merely swaps shorter-term Treasuries for longer-term securities, the net amount of its holdings won't change.

Bernanke thereby might avoid criticism from Republican leaders, including Texas Gov. Rick Perry, who have said the Fed's efforts to pump more money into the economy could eventually stoke inflation.

"There are certainly political constraints on what the Fed can do now," BTIG's Greenhaus said.

One question Bernanke has to ponder is how much lower longer-term rates can go, even with the Fed pushing on them. Because investors have been betting on a new Operation Twist, bond yields already reflect some of the potential benefit of greater Fed purchases, traders say.

That also happened last fall: The Fed's $600-billion bond purchase program launched in November had been well-telegraphed. The 10-year T-note yield fell as low as 2.38% in October 2010 — then surged to 3.30% by year's end despite the Fed's bond buying.
Los angeles times

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Ankara explosion: First video of deadly Turkey blast, cars ablaze

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Fund withdrawals top Lehman collapse

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

Bears say investors are abandoning stock managers because there’s no end in sight to the decline that pushed the Standard & Poor’s 500 Index within 2.1 percentage points of a bear market in August. Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future.

“When we’re getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything,” Bruce McCain, who helps manage $22 billion as chief investment strategist at the private-banking unit of KeyCorp, said in a phone interview on Sept. 14.

“Market bottoms are less about an improvement in the fundamental situation, whether the economy or outlook for earnings, and a lot more about getting rid of all the anxious investors.”

About $177.7 billion has been removed during the past 30 months from mutual and exchange-traded funds that invest in U.S. shares as the benchmark gauge for American equity rallied as much as 102 percent, before falling 17.9 percent through Aug. 8. Investors pumped in $18.7 billion during the first four months of 2011, before removing about four times that amount since, according to the average of data from EPFR and ICI, the money managers’ trade group. The August estimate doesn’t include ETF data from ICI.

Bond funds added $42.3 billion from the end of April through July and started posting weekly outflows last month, according to ICI. Since the bull market began, fixed-income managers have received a net $666.4 billion.

The last time equity fund outflows exceeded $40 billion during a four-month period was in August 2010, the data show. The S&P 500, which completed a 16 percent decline the previous month, went on to gain 13 percent through November. Monthly outflows in the last two years exceeded $10 billion seven different times. The S&P 500 advanced the next month in five of those cases, according to Bloomberg data. S&P 500 futures dropped 1.6 percent to 1,192 at 8:34 a.m. in London today.

AllianceBernstein Holding LP’s assets under management slipped 5 percent to $433 billion in August, “with retail in particular affected by the month’s volatile capital markets,” the New York-based company said in a Sept. 13 statement. Invesco Ltd.’s equity assets fell 7.8 percent to $276.4 billion from July, reflecting the “effects of negative market returns.”

Withdrawals accelerated in September and October 2008 as Lehman’s bankruptcy, the biggest in U.S. history, dragged down shares and spurred the worst financial crisis since the Great Depression. The S&P 500 dropped 30 percent in two months.

Investors never got over that shock, said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama.

Now, concern Greece will default and spur a banking crisis has driven the S&P 500 down 11 percent since April, leaving it trading at 13.3 times reported earnings, 20 percent less than the last trading session before Lehman fell.

“It’s the once burnt, twice shy phenomenon,” Hellwig said in a telephone interview on Sept. 12. “Investors are much less risk tolerant than they have been in the past. You would think that someone would say, I can take a little bit of risk, look at the P/E,’ but they just want to stay on the sidelines.”

The benchmark gauge for U.S. equities advanced 5.4 percent to 1,216.01 last week, the third-biggest rally since 2009, after central bankers said they would provide dollar loans for European lenders and French President Nicolas Sarkozy and German Chancellor Angela Merkel said they’re convinced Greece will remain in the euro area. The index has lost 3.3 percent in 2011 and is now up 80 percent from its March 2009 low.

Bears say the withdrawals foreshadow more declines. Stocks have fallen four straight months, losing 5.7 percent in August after economists lowered forecasts for global economic growth, manufacturing in the Philadelphia region contracted by the most in more than two years and a debate in Congress over the budget deficit prompted S&P to strip the U.S. of its AAA credit rating.

“The average investor is less financially and psychologically prepared for this increased volatility,” Jason Brady, a managing director at Thornburg Investment Management Inc, who helps oversee about $76 billion from Santa Fe, New Mexico, said in a Sept. 15 telephone interview. “They’re staying out and there’s something of a secular move to a demand for income and safety.”

Chances the global economy enters a recession have risen to 1-in-2, Nobel-prize winning economist Paul Krugman said Sept. 8. JPMorgan Chase & Co. sees the chance of the second recession since 2007 at 40 percent, according to a Sept. 7 note.

Bigger stock swings are leading individuals to sell shares, Brady said.

The VIX, the benchmark measure of U.S. equity derivatives, surged 50 percent to 48 on Aug. 8 for the biggest increase since February 2007 after S&P lowered its rating on U.S. long-term debt to AA+. The VIX has averaged 20.43 over its 21-year history.

“The individual investor is very frustrated and at their wits’ end with the equity market, and it’s hard to blame them,” Walter Todd, who helps manage $940 million at Greenwood Capital in Greenwood, South Carolina, said in a Sept. 16 telephone interview. “It’s certainly not going to help push the market higher if you’ve got that constant drain.”

While BNY Mellon Wealth Management’s Leo Grohowski says he understands the aversion to equity price swings, valuations are too low to justify more selling. Of the 500 companies in the benchmark equity index, 331 had price-earnings ratios at the end of August lower than they were when the year began, data compiled by Bloomberg show.

“There is this lack of confidence in equities as an asset class just due to the volatility,” Grohowski, the chief investment officer for BNY Mellon, which oversees $171 billion, said in a telephone interview on Sept. 15. “But for investors who are long term and intermediate term, the market is undervalued. Now would not be a wise time to be reducing equity exposure because there’s an awful lot of bad news or expectations already priced in to the market.”

Outflows following September 2008 lasted through March 2009. During the last three months of 2008, companies were reporting their fourth quarter of shrinking earnings and the U.S. jobless rate was halfway through its climb to the highest level since 1983. Gross domestic product slid 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s, according to Commerce Department data.

Now, investors are withdrawing funds after companies beat profit estimates for 10 straight quarters. The world’s largest economy posted two years of growth and economists are calling for GDP to expand 1.6 percent in 2011 and 2.2 percent in 2012, according to the median estimates compiled by Bloomberg.

Corporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This year’s earnings will increase 18 percent to a record $99.57 a share and break $100 next year, according to the data.

DirecTV in El Segundo, California, is trading at 14.4 times reported earnings, a valuation 14 percent below the level at the end of 2008. Since the third quarter of 2009, profits at the largest U.S. satellite-television provider increased an average 64 percent each quarter. They’re forecast to rise 26 percent next year, according to analyst estimates compiled by Bloomberg.

Earnings at Dow Chemical Co. retreated during the financial crisis. While profits more than doubled in every quarter of 2010, the shares are down 17 percent this year. The largest U.S. chemical maker fired workers, shut plants and sold assets to bolster earnings. Since 2009, the Midland, Michigan-based company has posted better-than-estimated sales in all but one period.

When fund flows show investors bailing out of stocks at the rate they are now, it’s usually bullish, Brian Barish, the Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, wrote in a Sept. 15 e-mail.

“The five months after Lehman were an epic buying opportunity, yet investors liquidated en masse,” Barish said. “Retail unfortunately tends to time things poorly. I don’t expect the current situation to be all that different.”

Bloomberg.com
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S&P adds to euro stress with Italy cut

(Reuters) - Standard and Poor's rocked the euro and bond markets on Tuesday with a one-notch cut in Italy's credit rating that added fuel to opposition calls for Prime Minister Silvio Berlusconi to resign and increased pressure on the debt-stressed euro zone.

S&P's cut its ratings on the euro zone's third largest economy to A/A-1 from A+/A-1+, judging it less creditworthy than Slovakia, and kept its outlook on negative, warning of a deteriorating growth outlook and damaging political uncertainty.

The euro fell more than half a cent against the dollar before picking up following some reassuring signs from Greece, but bond yields hovered within sight of levels which prompted the European Central Bank to step into the market and buy Italian bonds.

"This is not just more negative news coming out of the euro zone," said Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy. "This is a confirmation that the world's third-largest bond market, and the euro zone's third-largest economy, is in danger of succumbing to a self-fulfilling loss of confidence."

S&P, which put Italy on review for downgrade in May, said that the outlook for growth was worsening and Prime Minister Silvio Berlusconi's fractious centre-right government had not shown it could respond effectively.

Under mounting pressure to cut its 1.9 trillion euro (1.66 trillion pound) debt pile -- 120 percent of gross domestic product -- the government pushed a 59.8 billion euro austerity plan through parliament last week, pledging to balance its budget by 2013.

But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy's underlying problem of persistent stagnant growth.

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P's said in a statement.

"Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges," it said.

Italy has had one of the euro zone's most sluggish economies for a decade and sources said on Monday the government was preparing to cut its growth forecast to 0.7 percent in 2011 from a previous 1.1 percent and for 2012 to "1 percent or below."

"POLITICAL CONSIDERATIONS"

Berlusconi's coalition has been plagued by infighting and policy disagreements and the prime minister himself has been battling a widening prostitution scandal which has distracted the government and badly damaged his personal credibility.

But he lashed out at S&P, saying its move seemed influenced by "political considerations." He said his government had a secure parliamentary majority and was preparing measures to boost growth which would bear fruit in the short to medium term.

"The assessments by Standard & Poor's seem dictated more by newspaper stories than by reality," he said in a statement.

S&P rejected the suggestion that its decision was politically motivated, saying it was based on a detailed analysis of the economy.

The agency said budgetary savings may not be possible because the government is relying heavily on revenue increases in a country that already has a high tax burden and is facing weakening economic growth prospects. In addition, market interest rates are expected to rise, it said.

Berlusconi has been under increasing pressure as the crisis has intensified with groups ranging from business associations to mainstream newspapers and the centre-left opposition saying he must act immediately or step down.

Emma Marcegaglia, head of Confindustria, Italy's main employers federation, said business was tired of being treated as an "international laughing stock."

"The government must either adopt immediate, serious and also unpopular reforms or else, I am not afraid to say it, it must pack its bags and resign," she said.

Italy's Economy Minister Giulio Tremonti was holding talks at the treasury following the agency's decision. S&P will host a conference call to explain the move later on Tuesday.

RATINGS "DICTATORSHIP"

S&P's move drew a mixed response from Italy's European partners with French Foreign Minister Alain Juppe repeating longstanding criticisms of the international ratings agencies.

"We should not cave in under this dictatorship of ratings agencies, whose transparency is in serious need of improvement," he told Europe 1 radio.

However, Peter Altmaier, a senior parliamentarian in Chancellor Angela Merkel's centre-right coalition saying it demonstrated the need for governments to show responsibility.

Financial markets had been expecting rival agency Moody's to move first, after it put Italy on review in June. It said last week it would decide within a month whether to cut its rating but declined to comment on Tuesday.

S&P's rating is now three notches below Moody's and puts Italy below Slovakia and level with Malta.

"The rating downgrade was not totally unexpected, even though it came from the agency we didn't expect," said Paola Biraschi, banking analyst at RBS in London.

"To me it seems like a competition between rating agencies to publish the downgrade first," she said.

Italy's stock market weakened initially but turned positive as other European markets headed higher on short-covering after heavy losses on Monday and as some dealers said markets had already priced in the downgrade.

Italian 10-year government bond yields rose to more than 5.6 percent while spreads over German bunds widened to more than 386 basis points.

The cost of insuring against an Italian default has also risen sharply, with Italian 5-year credit default swaps above the psychologically important 500 level at 508 basis points on Tuesday morning, according to monitor Markit.

Only the European Central Bank, which has been buying Italian bonds to prop up the market, has kept Rome's borrowing costs from spiralling out of control, but yields have crept back up steadily since the ECB stepped into the market in August.

"Italy is now struck in a self-fulfilling downward spiral from which it is unlikely to be able to extract itself without external help," said Sony Kapoor, of Brussels-based think tank Re-Define.

"Without full confidence in the credit-worthiness of Italy, it's impossible to have full confidence in the solvency of the European banking system," he said.
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Federal regulator considering higher mortgage fees

RALEIGH, North Carolina (Reuters) - The regulator for Fannie Mae and Freddie Mac said on Monday he is considering some reform scenarios that include higher costs for mortgages backed by the government and sharing more risk with the private sector.

"A series of periodic, gradual price increases makes more sense than or two large price adjustments," said Edward DeMarco, acting director of the Federal Housing Finance Agency.

Speaking at a mortgage conference sponsored by the North Carolina Mortgage Bankers Association, DeMarco said the goal is to lessen the long-term exposure to risk for the two government-sponsored enterprises.

The increased guarantee fees will "not happen immediately but should be expected in 2012," he added.

Fannie and Freddie, seized three years ago amid fears the two were at risk of failing, have so far cost taxpayers more than $140 billion.

DeMarco also said the regulator will look at a number of ways to dampen the two firms' exposure to risk, including expanding the use of mortgage insurance and securities structures that allow for greater private-sector risk sharing.

"These types of risk-sharing alternatives have an added benefit of providing feedback into the Enterprises' guarantee fee pricing decisions," DeMarco said.
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US home builder outlook worsens in September

WASHINGTON (AP) -- The U.S. homebuilders' outlook worsened in September, as foreclosures and anxious buyers hurt construction and sales activity.

The National Association of Home Builders said Monday that its index of builder sentiment in September fell to 14 from 15. The index has been below 20 for all but one month during the past two years.

Any reading below 50 indicates negative sentiment about the housing market. It hasn't reached 50 since April 2006, the peak of the housing boom.

Last year, the number of people who bought new homes fell to its lowest level dating back nearly a half-century. Sales this year haven't fared much better.

Builders are struggling to compete with foreclosures, which have made the price of re-sale homes more competitive. Many buyers are having difficulty obtaining loans or meeting higher down payment requirements. Low appraisals are scuttling some deals after contracts have been signed and some would-buyers who want to purchase a new home can't sell their old one.

David Crowe, the group's chief economist, said a weakening U.S. economy and high unemployment has made the short-term prospects for the homebuilding industry "fairly bleak." The low indexes reflect "builders' awareness that many consumers are simply unwilling or unable to move forward with a home purchase in today's uncertain economic climate."

While new homes make up a small portion of sales, they have an outsize impact on the economy. The builders' trade group says each new home built creates an average of three jobs for a year and generates about $90,000 in taxes.

Separate gauges of current single-family home sales and foot traffic of prospective buyers each fell two points, to 17 and 11, respectively.

An index of builders' outlook in the Midwest rose one point to 11. In the Northeast and South, the index fell two points to 15 and in the West it fell three points to 12.


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