Sunday, January 11, 2009

France, Germany and fissures in the eurozone

By David Marsh
Published: January 11 2009 18:39 Fnancial Times

International challenges spell good and bad news for the European Central Bank. On the positive side, the credit crisis has given the independent ECB and Jean-Claude Trichet, its president, unexpected authority on the world stage. Most observers agree the 10-year-old economic and monetary union has so far moderated the direct fall-out of the financial crisis for eurozone members. On the negative side, Europe this year faces probably the worst recession since the second world war. Depending on how Emu members react, latent nationalism within the single currency area may emerge as a disruptive force.

Battle lines are being drawn between the “stability first” principles of Europe’s strongest economy, Germany, and the more activist growth policies favoured by France. Mr Trichet, a veteran of fierce battles with the Bundesbank as head of the French Treasury in the early 1990s, has emerged as heir to the German central bank’s anti-inflation throne. The ECB’s president and decision-making council have come under sporadic pressure from European politicians to soften their monetary stance. After the mid-September collapse of Lehman Brothers, the US bank, the ECB cut interest rates three times between October and December – the first reductions since Mr Trichet took office in 2003. But despite recent signs of further economic weakening, there are strong indications that Mr Trichet will continue to garb himself in a mantle of Bundesbank-like firmness.

Emu has required improbable compromises – notably, that it would work without substantial fiscal transfers between countries of markedly different economic performance. Using a single currency to lash together 16 disparate nations has had effects similar to those among occupants of a life raft on a storm-tossed sea. The euro has provided members with an aura of robustness but also made them more prone to fissures caused by disturbances in their internal balance of forces.

A warning signal has come from the sharp rise in the gap or “spread” between yields on bonds issued by heavily indebted Emu countries and those on German government bonds. The crisis has driven up these spreads not only because investors take a less forgiving view of the risks on weaker countries’ debt, but also because of the blockages along what Mr Trichet formerly called the “financial channel” for ironing out discrepancies among member states. The yield spreads – now 2.3 percentage points for Greece, 1.3 points for Italy and 1.7 points for Ireland – are much less than the differences of up to 6 points before the euro was set up. Weaker southern and western states still derive considerable benefit from membership, but – should spreads widen further – that may fast diminish.

A prime reason for the widening spreads is that fixing exchange rates among countries with disparate patterns of prices and productivity has led to changes in relative competitiveness. Since 1999, Germany has gained an overall competitive advantage of more than 10 per cent, while Italy has suffered a loss of nearly 40 per cent, according to Organisation for Economic Co-operation and Development figures based on unit labour costs. During much of the euro’s first decade, the positive impact of generally low, stable Emu interest rates largely outweighed the negative influence of disrupted competitiveness. However, as economies contract, papering over the cracks will become more difficult.

That is exemplified by economic policy differences between France’s President Nicolas Sarkozy and Chancellor Angela Merkel of Germany. Continuing a French tradition shown by predecessors Fran├žois Mitterrand and Jacques Chirac, Mr Sarkozy has irritated the Germans with his suspicion of central banking independence and has been still more outspoken than Mr Chirac in publicly criticising ECB interest rate decisions. Mr Sarkozy has clashed with Peer Steinbr├╝ck, Germany’s no-nonsense finance minister, telling him on one occasion Germany’s strictures spelled “the end of Franco-German friendship”.

At the root of France’s carping is the widespread French belief that Germany has gleaned unfair economic advantage from Emu. Germany has swung from a pre-Emu current account deficit of 0.8 per cent of gross domestic product in 1998 to a surplus of 6.4 per cent in 2008, according to the OECD. France, Italy, and Ireland, with surpluses of 2.6, 1.9 and 0.8 per cent of GDP respectively in 1998, registered deficits of 1.6, 2.6 and 6.2 per cent in 2008. Last year Greece, Spain and Portugal ran deficits of 10 per cent of GDP and more.

There has been no sign so far of any overt move to modify Emu’s “no-bail-out” clause, which prevents less well off states from demanding help from stronger members. However, if other Emu countries find borrowing progressively harder, non-German politicians may ask Germany to use its comfortable financial position to alleviate pressures on weaker Emu brethren.

The German government, which has rejected forming more demand to help out less competitive euro members, would certainly say no to changing the no-bail-out clause. If bond spreads rise towards pre-1999 levels, speculation may rise that one or more weaker states could suspend their membership. Mr Trichet dismisses such thoughts as “fantasies”. Yet leading European monetary officials stated months ago that precisely such an option – although unlikely – could not be ruled out. If 2008 has been tough for Emu, 2009 could bring still greater tests.

The writer is chairman of London & Oxford Capital Markets. His book, The Euro: The Politics of the New Global Currency, is published by Yale University Press in January/February

Saturday, January 10, 2009

Recession creates a load of problems for truckers

Cuts at firms are pushing more haulers into the ranks of independent owner-operators, spurring bidding wars for fewer jobs.

By Ron White

January 7, 2009

In early December, trucker Joe Rini learned that his own personal recession had just gotten worse.

One of his best clients called about a load of building materials that needed to travel to the Pacific Northwest, Northern California and Colorado -- normally a $4,400 job. Rini offered to do it for $3,400.

But before Rini's truck had arrived to pick up the load, the Cleveland-area customer of more than four years called back. Another trucker had offered to do the job for $400 less. Would Rini match it?

The answer, which was hard to spit out, was no.

"I didn't want to bid that low in the first place," said Rini, speaking from the road as he completed a trip from Ohio to California and Arizona and back to Ohio. "I start down that slope and I'm out of business."

"This has been going on a lot lately. People willing to bid so low just to get anything in their trucks," Rini said. "Finding loads in the areas you need has become a hair-pulling experience."

There are few occupations that feel every jolt along the nation's economic highway as deeply as trucking does. Every fuel price surge, such as when diesel hit $5 a gallon last summer, is an immediate hit that can turn a profitable run into a money-loser. The average American might not notice an auto plant closing or business bankruptcy. For truckers, such events represent another loss of steady work. And with so many industries cutting back, 2008 will go down in modern trucking annals as the worst year ever.

After October -- which is normally the busiest month on the road for the holiday season -- turned out to be the worst October for hauling cargo by truck in five years, the American Trucking Assn. reported a slight rise in business in November.

But the trade group's chief economist, Bob Costello, warned that "the freight outlook remains bleak."

A total of 785 trucking companies with a combined fleet of about 39,000 trucks went out of business in the third quarter, bringing the number of company trucks idled in the first nine months of 2008 to more than 127,000, or 6.5% of the industry, reported Donald Broughton, trucking analyst and managing director of Avondale Partners.

"Never have more trucks been pulled off the road in a shorter period of time than in the first three quarters of this year," Broughton wrote in his third-quarter analysis of the trucking industry.

That has pushed tens of thousands of drivers who had been on company payrolls out to compete for slices of the smaller cargo pie with the nation's independent owner-operator drivers, who were already struggling. It's the reason for the desperately low bids facing Rini of Grand River, Ohio, and other truckers.

"I would estimate that we probably lost work for about 100,000 drivers in the first half of 2008 when diesel hit that record high price," said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Assn. "It's hard to know exactly because they don't report it anywhere. They just go away, and they haven't been missed that much yet because the economy has been so bad."

Worse, Spencer said, are all the regulations in what he calls the "supposedly unregulated" trucking industry that are making it more difficult for the average driver to survive. Spencer cited work-hour regulations that allow for 11 hours of driving followed by a requirement of at least eight hours of sleep, which many truckers find difficult to do all at once.

Spencer also pointed to post-9/11 security concerns and the commercial encroachment of land formerly set aside for rest areas and truck stops, making it increasingly difficult to find places around the U.S. where it's acceptable for a driver to park his rig for several hours.

In addition, more states such as California are adopting tougher environmental regulations that require drivers to use the newest, cleanest and most expensive rigs.

"Most of our members are trying to find a niche -- earn enough to stay in business this year," said Spencer, noting that the group's average member is 50 years old, has been driving for about 20 years, owns 1.8 trucks, has no medical insurance or retirement plan and clears about $40,000 annually after taxes.

Driver DuWayne Marshall of Watertown, Wis., found a niche more than a year ago when he got the chance to work directly for the five Brennan's Markets, headquartered in Monroe, Wis., instead of working through a freight broker.

"If I didn't have them, my business would be dead," Marshall said. "I'd be out there struggling for work just like everyone else."

When Brennan's and other customers saw Marshall's fuel costs spiraling out of control last spring and summer, running his costs per mile up from 53 cents to 93 cents, they were willing to pay a fuel surcharge to keep his truck rolling.

To compensate for the fact that even Brennan's orders were getting smaller, Marshall redoubled his efforts to find alternative cargo to carry, so much so that he expected to gross more than $300,000 in 2008 -- which would be his best year ever.

It sounds like a lot, Marshall says, until he starts subtracting.

There was $109,000 spent on fuel through mid-December, even after the collapse to about $2.40 a gallon from diesel's all-time record national average of $4.764 a gallon July 14. He's paying $2,580 a month for his $133,000, 2007 Kenworth W900 rig, $980 a month for the $74,000 refrigerated trailer he's paying off and $7,910 for the refrigeration unit. Insurance costs him an additional $850 a month.

And in the back of his mind is January and beyond, when he suspects there will be more layoffs and even more truck drivers out there looking to undercut his rates.

"If a plant closes and a guy has been hauling freight for them no longer has that business, the easiest way for him to find another haul is to cut someone else's rate," Marshall said, with only a trace of sarcasm in his voice as he drove north on California 99 to pick up a load of raisins, oranges and carrots for Brennan's. "It's the free-enterprise system at work."

In Long Beach, Ventura Transfer Co. has been in the bulk-products hauling business since the 1860s. The company hauls liquid cargo such as fuel additives, cleaning agents and solvents, and dry cargo such as various kinds of plastics, as well as some hazardous cargo. It also maintains its own rail yards for transloading, which is shifting cargo from one mode of transportation to another.

But 2008 was the first year in which the company, which owns 40 rigs, 100 trailers and uses both employee drivers and independent owner-operators, struggled to find new ways of earning money just to keep pace with 2007.

"We have put tremendous pressure on our salespeople," said Brian Oken, chief executive of Ventura Transfer.

"Gone are the days where you can own a trucking fleet and just rely on the demand of the marketplace," Oken said.

Ventura Transfer has begun repairing damaged cargo containers and markets itself as available to quickly transfer the cargo out of any damaged container and move it into a new box quickly enough to avoid shipment delays.

"We can't be a jack of all trades, but we can pick two or three new jobs and be really good at them," said Oken, who added that the new work has helped the company avoid any layoffs. "If we were in transportation only now," Oken said, "we would be dying.",0,5231456.story

Puritans versus spendthrifts: recession’s culture war

By John Willman
Published: January 9 2009 19:57 Financial Times

Sexual intercourse began in 1963, according to the English poet, Philip Larkin – around the same time as the US historian, David Tucker, pinpoints the death of America’s love affair with thrift. In the affluent society created by the postwar boom, instant gratification replaced the deferred variety, and consumption eclipsed frugality as the spirit of the age.

Today saving is back in vogue, as western economies struggle to recover from the after-effects of spending supercharged by excessive borrowing. However, the task facing the world’s leaders is to persuade terrified consumers to spend like there is no tomorrow – and that a return to thrift would make matters much worse.

In theory, it should not be too difficult to persuade people to spend. As Professor Tucker put it in his book on the decline of thrift, humanity in its first 2m years of hunter-gathering was less thrifty than squirrels and ants when it came to hoarding food for the bad times. Once humans invented agriculture, they learnt the value of saving seeds for planting and surplus food for the winter. But when they moved into towns and cities, they developed a love for luxury, waste and extravagance that even religious asceticism struggled to curb.

The heirs of the original Puritans in the New World kept faith with frugality, however – none more so than Benjamin Franklin, whose pamphlet, The Way to Wealth, exalted thrift. “If you would be wealthy,” he advised, “think of saving as well as getting ... What maintains one vice would bring up two children.”

Max Weber, the pioneer of sociology, attributed the rise of capitalism to such Protestant sentiments, which abhorred wasteful spending but urged believers to follow their secular vocations zealously. A hardworking and thrifty person would be of value to the community and to God.

Yet consumption of luxuries always breaks through whenever the consequences of such ethical behaviour lift life above survival. Only when the economy slips into recessions do free-spending consumers remember the virtues of thrift and rebuild their savings safety nets. It took the economic insights of John Maynard Keynes to realise that such retrenchment could be disastrous for the economy as a whole – however rational it might seem to the individuals. Writing during the Great Depression, Keynes described this as the paradox of thrift – the more people saved, the more demand for goods and services fell.

In a 1931 BBC radio talk, he said the urge to save more than usual at times of recession was “utterly harmful and misguided”. When there was a surplus of labour, saving merely added to it – creating a vicious spiral of increasing unemployment.

“Therefore, O patriotic housewives,” he urged, “sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised ... Lay in a stock of household linen, of sheets and blankets to satisfy all your needs.

“And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast.”

Today’s finance ministers could not put the case for spending more eloquently and there will be some who will respond. They include Generation Y, people born since the early 1980s who have been more susceptible to instant gratification than their parents and grandparents.

Debt for them is a way of life that starts at university and continues when they climb on to the housing ladder. These Net Geners – who include my own children – have no memory of past recessions that would prompt them to curb their spending. They are also disinclined to be held back by the attitudes of their baby-boomer parents who built their lives on work and self-denial.

Those at the bottom of the social pyramid are also less inclined to worry about deferring gratification, since shortage of cash makes tomorrow’s needs seem like a foreign country. Poverty campaigners often argue that the best way to give the economy a quick boost is to cut taxes or raise benefits for this group, who will spend the money immediately.

The middle classes, in contrast, will use any additional finance at times such as this to reduce debt and build up savings against the increased likelihood of a rainy day – justifying Keynes’s fears. They are also likely to reason, justifiably, that when asset prices are falling, money held back now will buy more later.

Older people will also be unwilling to spend liberally, with memories of previous recessions and fears about their pensions when stock markets have fallen sharply. Those who rely on savings to top up their pensions will in any case be feeling cash-strapped as interest rates plummet towards zero.

Since it is the older generation and the middle classes who are best off, exhortations to consume more for the greater good are unlikely to be enough. Keynes recognised that as well, which was why he concluded that government spending was the solution to the paradox of thrift.

Some countries have understandable cultural problems with printing money to finance economic activity. But US president-elect Barack Obama and the UK’s Gordon Brown are both drawing up the sort of ambitious public infrastructure programmes that are needed to put the economy right. In the present circumstances, it is governments, not consumers, that will provide the instant gratification needed to boost the economy.

Africa's Land Grab

US investor buys Sudanese warlord’s land

By Javier Blas and William Wallis in London

Published: January 9 2009 23:18 Financial Times

A US businessman backed by former CIA and state department officials says he has secured a vast tract of fertile land in south Sudan from the family of a notorious warlord, in post-colonial Africa’s biggest private land deal.

Philippe Heilberg, a former Wall Street banker and chairman of New York-based Jarch Capital, told the Financial Times he had gained leasehold rights to 400,000 hectares of land – an area the size of Dubai – by taking a majority stake in a company controlled by the son of Paulino Matip.

Mr Matip fought on both sides in Sudan’s lengthy civil war but became deputy commander of the army in the autonomous southern region after a 2005 peace agreement.

The deal, between Mr Heilberg’s affiliate company in the Virgin Islands and Gabriel Matip, is a striking example of how the recent spike in global commodity food prices has encouraged foreign investors and governments to scramble for control of arable land in Africa, even in its remotest parts.

In contrast to land deals between foreign investors and governments, Mr Heilberg is gambling on a warlord’s continuing control of a region where his militia operated in the civil war between Khartoum and south Sudan.

“You have to go to the guns, this is Africa,” Mr Heilberg said by phone from New York. He refused to disclose how much he had paid for the lease.

Jarch Management Group is linked to Jarch Capital, a US investment company that counts on its board former US state department and intelligence officials, including Joseph Wilson, a former ambassador and expert on Africa, who acts as vice-chairman; and Gwyneth Todd, who was an adviser on Middle Eastern and North African affairs at the Pentagon and under former president Bill Clinton at the White House.

Laws on land ownership in south Sudan remain vague, and have yet to be clarified in a planned land act. For this reason, some foreign experts on Sudan as well as officials in the regional government, speaking on condition of anonymity, doubted Mr Heilberg could assert legal rights over such a vast tract of land. The deal is second only in size to the recent lease of 1.3m hectares by South Korea’s Daewoo from the government of Madagascar.

Mr Heilberg is unconcerned. He believes that several African states, Sudan included, but possibly also Nigeria, Ethiopia and Somalia, are likely to break apart in the next few years, and that the political and legal risks he is taking will be amply rewarded.

“If you bet right on the shifting of sovereignty then you are on the ground floor. I am constantly looking at the map and looking if there is any value,” he said, adding that he was also in contact with rebels in Sudan’s western region of Darfur, dissidents in Ethiopia and the government of the breakaway state of Somaliland, among others.

The company was embroiled in a dispute with the south Sudan government over its claims to exploration rights for oil.

Mr Heilberg said Jarch had no expertise in agricultural development but would be seeking joint venture partners to cultivate the land, which is in one of the remotest parts of Sudan, in a region bordering the Nile river but with no tarred roads.

Saturday, January 3, 2009

If this is like 1932, there will be hope as well as pain

By John Authers
Published: January 2 2009 18:24 Financial Times

Everyone became an expert on the deeper reaches of financial history last year. With almost any relationship on which market traders had come to rely in the past three decades breaking down, they had to delve deeper for precedents.

Early in the year, we were looking at the Long-Term Capital Management disaster of 1998 and the savings and loan scandal of the early 1990s. Once it became obvious that the new crisis was deeper than these and oil prices started to surge, comparisons with 1973 and 1974 grew fashionable. Now the oil price has dropped by more than $100 a barrel and we fear the first great deflation since the Depression, attention has turned to the 1930s. Some have disinterred long-forgotten incidents such as the panic of 1907 (which led to the creation of the Federal Reserve), or the panic of 1873, which followed a boom in investing in railroads.

No historical parallel can be perfect. But perhaps two years offer the best point of reference. What if last year was 1931? If so, this year could be 1932. In some ways this is good news. It was when the US stock market finally began its recovery. At one point the Dow Jones Industrial Average more than doubled in barely two months. But it still saw equity indices end the year worth less than when they had started. Intriguingly this is almost exactly in line with the apparently self-contradictory consensus of wisdom about the stock market this year: that it has not yet hit bottom but should do so this year and that at some point there will be an explosive rally.

There are differences. The bear market was already more than a year old when 1931 started, while 2008 started only shortly after equities had reached a final peak. And the point in the political cycle was different, as President Franklin Roosevelt was not elected until November 1932, some months after the stock market bottom. Policymakers took far longer to embrace monetary or fiscal easing.

But in the markets, 2008 looks a lot like 1931. It was the worst year of the 1930s for stock markets, with the S&P 500 falling 47 per cent, driven by fears for the banking system and by seismic shifts in foreign exchange rates.

As 1931 turned to 1932, the extra spread that investors required to buy the bonds of investment-grade companies, rather than US Treasury bonds, reached an all-time high – closely approached in the past few weeks. Then, as now, the Fed was about to buy back Treasury bonds, in a bid to push up their prices and push down their yields – a drastic way to lower interest rates payable in the broader economy, now known as “quantitative easing”.

So 1931 is a better comparison for the year just gone than most.

A look at how 1932 unfolded shows how the conventional wisdom about 2009 may yet come true. The year started with a rally as optimism took hold that the financial sector’s problems were over. That took the S&P 500 up almost 20 per cent by early March. Compare this with the current rally since the rescue of Citigroup in November.

But in spring 1932 gold started flowing out of the US, as foreign investors were convinced the dollar would be devalued, and this sparked a devastating sell-off in US stocks. By midsummer (at what turned out to be the bottom of the bear market), the S&P was down 50 per cent from its high for the year.

For 2009, a renewed run on the dollar is quite conceivable. Another fear is that investors grasp the scale of the damage to corporate profits only in the next few weeks, and this sparks another sell-off. Brokers’ forecasts suggest the scope for serious disappointment is real – and conceivably even enough to drive a sell-off like the one of early 1932.

In July 1932, optimism suddenly took hold that the economy was improving. This, according to Russell Napier’s definitive book Anatomy of the Bear, was based largely on evidence that deflation was coming to an end. The result: stocks gained 111 per cent in two months. Then in September they staged another sell-off as it became clear the economy was not out of the woods, and fell 25 per cent from there to the end of the year. Overall the index was down almost 15 per cent for the year but it never went back to its July 1932 lows.

How could this be repeated in 2009? An explosive rally at some point is possible, simply because record amounts of money are sitting in bonds and cash. And, as in 1932, what might move that money in a hurry would be a clear sign that inflation was returning. At present the risk is deflation and governments are actively trying to engineer a return to inflation: if that were to happen, bonds and cash would become horrible assets to be in, and so the chance of a race at the first sign of inflationary pressure is real.

As in 1932, when economic hope proved illusory, it is possible that could be a false alarm. But in these conditions, even a false alarm could spark a big rally. As for fundamental valuations, long-run indicators that have signalled market turning-points most successfully in the past, such as the multiple of stocks to long-term average earnings, suggest stocks are fairly valued, whereas they already looked cheap in early 1932. A drastic sell-off like the one in early 1932 would help address this.

The precondition for a sustainable rally is that share prices fall to a level where investors are widely convinced they are cheap. As 1932 demonstrated, getting there could yet involve a lot more pain. But it is fair to hope that we get there this year.

The writer is FT investment editor

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