By Indrajit Basu
KOLKATA - It is difficult to imagine that a country that is still far, far away from becoming what the world considers an industrialized nation; a country that is still full of vast slums, poverty-stricken villages and a crumbling infrastructure; let alone problems of corruption, pollution, religious violence and child labor, could produce the richest man in world after just 15 years of economic liberalization.
Yet, as India's benchmark stock index, the Sensex, shattered the psychological 20,000-point barrier on Monday, the head of one of India's most high-profile industrial groups, Reliance Group, emerged as the richest man in the world.
Mukesh Ambani, 50, chairman of the oil, textiles and chemicals giant Reliance, is now ahead of American software czar Bill Gates and US investment guru Warren Buffett, as well as Mexican business tycoon Carlos Slim Helu, after the combined value of his stakes in his three group companies, Reliance Industries Ltd, Reliance Petroleum Ltd and Reliance Industrial Infrastructure Ltd, rose to US$63.2 billion.
His wealth includes $53.3 billion from Reliance Industries (a 50.98% stake), $9.4 billion from Reliance Petroleum (37.5%) and $532 million from Reliance Industrial Infrastructure 46.23%).
The net worth of Gates and Helu is estimated to be slightly lower, at about $62.29 billion each, with Warren Buffett, previously the third-richest in the world, dropping one position with a net worth of about $56 billion.
The only other Indian businessman - although he now holds a British passport - who is in Ambani's wealth league is London-based Lakshmi N Mittal, head of Arcelor Mittal, whose 44.8% in the world's largest steel producer is worth $52 billion.
Ambani's rise is perhaps one of the most conspicuous examples of India's economic prosperity and its unprecedented stock market boom. Ambani, a chemical engineer who quit his studies at Stanford University in the US in 1981 to join Reliance Industries, the flagship company founded by his father, the legendary Dhirubhai Ambani. According to Gita Piramal, corporate chronicler and editor of Smart Manager magazine, Ambani is "a manager with the rare ability of being able to think both wide and deep, to see both the big picture and keep track of the minuscule details in which lie profits".
When he took over the Reliance Group in July 2002 following the death of his father, Reliance's strategy of backward and forward vertical integration as chalked out by his father had almost run its course. Ambani realized that "to remain competitive in the global arena", Reliance Industries would have to further "leverage economies of scale to reduce costs".
Thus he initiated a fresh course of backward integration that went deeper, from textiles and polyester fibers to petrochemicals and oil. During this process, Ambani led the creation of 51 new, world-class manufacturing facilities involving diverse technologies that raised Reliance's manufacturing capacities many times.
Simultaneously, he embarked on an acquisition spree to consolidate Reliance's position in the petrochemical industry. He started by acquiring ailing local petrochemicals company IPCL Ltd in 2002, followed by a similar company, Nocil, in 2004. Within months of these two takeovers, Ambani claimed that he was able to turn around these companies "impressively" through growth caused by "geographical expansion, market consolidation, acquisitions and green-field investments".
The world's largest petroleum refinery now being built, Reliance Petrochemicals Ltd, under construction in Jamnagar, Gujarat state, is his brainchild, as is Reliance Infocomm, one of the largest mobile phone operators in the country. (After a split in the Reliance empire, he had to give up control of this company to his brother, Anil Ambani.)
Ambani is now entering the retail sector in a big way with the establishment of giant "Wal-Mart-like" retail stores all over the country. Recently he forayed into special economic zones (a project created by the government to promote exports) involving investment of millions of dollars. Currently, he is also steering Reliance's initiatives on a world scale into offshore, deep-water oil and gas exploration and production. His petroleum retail network in India involves 5,800 outlets and he started a research-led life sciences program covering medical, plant and industrial biotechnology.
But the one big factor in Ambani's phenomenal rise to the richest man in the world is the stupendous rise in Indian stock values, fueled by over $17 billion of foreign institutional money this year. In the past three years, India's main stock index, the Sensex, has more than tripled, aided by India's economy that is in the throes of a three-year boom.
According to a case study undertaken by Smart Manager on Ambani's management style, although his father followed a highly visible and high-profile existence, Mukesh Ambani's leadership style is not that of an attention-seeker. To many he is shy, almost a recluse, a strict vegetarian who abstains from drinking alcohol.
"India does not need a tie-wearing, golf-playing leader," he said recently in comments on his management style. "You don't need leaders who say we will motivate you, but leaders - and by leaders I am not talking of chief executive officers but leaders at all levels - who can drive your company as strong knowledge-based achievers."
Ambani has generated his share of controversies. Three years ago he was embroiled in a high-profile feud with his brother Anil that saw a vertical division of the group's assets, and a long period of uncertainty regarding the future of the Reliance Group as a whole. Last year he drew a fair amount of criticism from local social organizations for building an extravagant 27-storey family home - that reportedly includes six floors for parking the family's 168 imported cars - over the site of a former Mumbai orphanage. He has a wife, Nita, and three children.
Still, he has managed to come out unscathed because, he says, of his single-minded focus on pursuing growth and consolidation. "Over the years, Reliance has developed the main competency of building businesses from scratch, of building businesses which it did not know anything about ... the way we do it is really grow, consolidate, put a separate team to again grow and the cycle continues," he said in an interview.
Small wonder then that some like Shobhaa De, a bestselling novelist and cultural observer, considers that "he's pretty much running India".
"Policy decisions [that Ambani makes and] the direction India is taking [could fulfill] his ambition to be the most powerful man in the region," she said.
Indrajit Basu is a Kolkata-based journalist.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
Thursday, November 1, 2007
End of the guns and butter economy
By Scott B MacDonald
NEW YORK - Over the past 30 years, the United States has sought and to some extent achieved a guns and butter economy; that is the pursuit of both political-military objectives and an affluent lifestyle.
On the political front, it has dominated the international system, presiding over the defeat of the Soviet Union, its hegemonic rival during the Cold War, and forming a successful military coalition to liberate Kuwait in the first Iraq war in 1991. It became even more unilateral under the Bush the younger administration, with aggressive policies against militant Islam and Iraq in Middle East and South Asia.
At the same time, the consumer-driven US economy continued to expand, with the last great burst being the spike in homeownership in the 2003-2006 period. Homeownership since the mid-1950s was long stuck at 65% of the total population, but by year-end 2006, on the back of cheap credit and lax underwriting standards, it reached 69%.
Significantly, countries such as China, Japan and Germany benefited from the US guns and butter economy, content to sell their exports and finance their purchases via the buying of US debt. This was the upside of globalization.
But in July, the US financial system signaled that the era of cheap money and lax standards was over. Two Bear Stearns hedge funds collapsed and panic hit credit markets, pounding the stock and bond values of any company associated with mortgage lending and housing. By August the rout filtered into the derivatives market (especially those structured financial products that contained exposure to US subprime debt), negatively impacting European and Asian bank and insurance investment portfolios.
The contagion eventually rippled into London's inter-bank market, forcing central banks to inject considerable amounts of liquidity to keep the system running. Even then, nervousness about the standing of banks, especially those dependent on short-term commercial paper for mortgage lending, forced Britain's Northern Rock into a government rescue. This was the downside of globalization.
The US economy is edging toward a significant slowdown in what is left of 2007; it will take concerted effort and luck to avoid a recession. The housing sector is hitting depths associated with the 1930s. The Federal Reserve's September 18 cuts in the discount window and in Fed Funds gave markets a temporary relief, a situation helped along by private sector actions to consolidate the financial sector. This is reflected in Bank of America's purchase of Countrywide Financial shares and Citigroup's stepping up with credit lines for GMAC. But there remains a long distance to the shore of economic safety.
A shadow is being cast by a deficit of unresolved problems in an economy overloaded with debt, a retreating federal responsibility for national infrastructure, and large (and seemingly unending) overseas burdens. In the short term, the problem that looms is that the housing meltdown is finally chipping away at the consumer, who in the butter part of the US economy accounts for about 70% of gross domestic product.
The consumer relied on home equity (and foreign capital) to finance the ongoing parade of goods and drove many households into negative territory in terms of savings. Why save when you are penalized (taxed) on savings amid an unrelenting society-wide pitch to consume? Easy money during the Alan Greenspan years at the Fed helped keep the guns and butter economy afloat without too many major adjustments. That dynamic has changed.
On the short term side there is going to be further bad news on housing. There is a very real prospect of steeper declines in housing prices, pushed along by a growing inventory (already nine months of new homes waiting to be sold not to mention those homes taken off the market by frustrated would be sellers).
In addition, there is a huge resetting of adjustable rate mortgages over the next 12 months, with a large spike in March 2008. Adding to the list of woes is the increasing pace of personnel downsizing in the mortgage industry and declining profitability in the financial sector.
On the longer-term side of the equation, the economic landscape is chilling, considering the massive structural problems. The guns part of the economy is a concern - the war in Iraq and other missions (Afghanistan and Africa) cost somewhere between US$3-5 billion a day.
In August, the Congressional Budget Office (CBO) estimated as of June 2007 up to $500 billion has been spent on combat operations in Iraq. The CBO also noted that if the United States were to maintain 75,000 troops in Iraq over the next five years, the nation would have to pay an additional $900 billion. Moreover, there are further costs attached to training police and ground forces in Iraq and Afghanistan as well as long-term health costs associated with wounded personnel.
There are other structural problems - a long-term imbalance between government expenditures and revenues (related to ongoing pressure for tax cuts). There is a massive problem with national infrastructure - it is aging rapidly and needs to be upgraded with a price tag of $1.6 trillion. That includes roads, bridges, ports and other public utilities.
Any doubt of the infrastructure problem one need only point to the steam conduit that exploded in July in Manhattan - the piping was laid 83 years ago when Calvin Coolidge was president and was part of a system that started to provide energy to New York City in 1882.
In August, a 40-year-old bridge in Minneapolis collapsed, leaving several dead in the accident's wake. The national infrastructure is literally falling down around the population, but the most recently passed Senate transportation and housing bill contained at least $2 billion for pet projects that include a North Dakota peace garden, a Montana baseball stadium and a Las Vegas history museum.
Equally important is the issue of Medicare, Medicaid and Social Security, the combined basis of which is expected to grow 22% faster than the economy over the next decade. This should come more sharply into focus next year when the first of 78 million baby boomers become eligible for early social security benefits.
American politics have reached a very dysfunctional stage, with considerable energy given to the indulgence of maintaining an economy and the debt required to keep it going, with little thought being given to the adjustments now in motion.
Along these lines, it is easier to blame the outside world for troubles at home, hence the turn to protectionism (with a number of bills pending in the US Congress). The plunging value of the US dollar and the huge sell-off in US securities by foreigners in August ($163 billion) should convey the message that not all is well and that unless there is an effort to start living more within one's means, the rest of the world is going to stop financing the North American credit glutton.
The days of guns and butter for the US economy are over; what is going to replace it is a much more volatile world, with substantial questions over the US dollar as the major international currency and the ability of the US consumer to absorb the world's exports. As the US adjusts to this changing scenario, so will the rest of the global economy. It is not going to be an easy transition.
Scott B MacDonald is editor of KWR International Advisor.
(Posted with permission from KWR International, Inc, (KWR), a consulting firm specializing in the delivery of research, communications and advisory services.)
NEW YORK - Over the past 30 years, the United States has sought and to some extent achieved a guns and butter economy; that is the pursuit of both political-military objectives and an affluent lifestyle.
On the political front, it has dominated the international system, presiding over the defeat of the Soviet Union, its hegemonic rival during the Cold War, and forming a successful military coalition to liberate Kuwait in the first Iraq war in 1991. It became even more unilateral under the Bush the younger administration, with aggressive policies against militant Islam and Iraq in Middle East and South Asia.
At the same time, the consumer-driven US economy continued to expand, with the last great burst being the spike in homeownership in the 2003-2006 period. Homeownership since the mid-1950s was long stuck at 65% of the total population, but by year-end 2006, on the back of cheap credit and lax underwriting standards, it reached 69%.
Significantly, countries such as China, Japan and Germany benefited from the US guns and butter economy, content to sell their exports and finance their purchases via the buying of US debt. This was the upside of globalization.
But in July, the US financial system signaled that the era of cheap money and lax standards was over. Two Bear Stearns hedge funds collapsed and panic hit credit markets, pounding the stock and bond values of any company associated with mortgage lending and housing. By August the rout filtered into the derivatives market (especially those structured financial products that contained exposure to US subprime debt), negatively impacting European and Asian bank and insurance investment portfolios.
The contagion eventually rippled into London's inter-bank market, forcing central banks to inject considerable amounts of liquidity to keep the system running. Even then, nervousness about the standing of banks, especially those dependent on short-term commercial paper for mortgage lending, forced Britain's Northern Rock into a government rescue. This was the downside of globalization.
The US economy is edging toward a significant slowdown in what is left of 2007; it will take concerted effort and luck to avoid a recession. The housing sector is hitting depths associated with the 1930s. The Federal Reserve's September 18 cuts in the discount window and in Fed Funds gave markets a temporary relief, a situation helped along by private sector actions to consolidate the financial sector. This is reflected in Bank of America's purchase of Countrywide Financial shares and Citigroup's stepping up with credit lines for GMAC. But there remains a long distance to the shore of economic safety.
A shadow is being cast by a deficit of unresolved problems in an economy overloaded with debt, a retreating federal responsibility for national infrastructure, and large (and seemingly unending) overseas burdens. In the short term, the problem that looms is that the housing meltdown is finally chipping away at the consumer, who in the butter part of the US economy accounts for about 70% of gross domestic product.
The consumer relied on home equity (and foreign capital) to finance the ongoing parade of goods and drove many households into negative territory in terms of savings. Why save when you are penalized (taxed) on savings amid an unrelenting society-wide pitch to consume? Easy money during the Alan Greenspan years at the Fed helped keep the guns and butter economy afloat without too many major adjustments. That dynamic has changed.
On the short term side there is going to be further bad news on housing. There is a very real prospect of steeper declines in housing prices, pushed along by a growing inventory (already nine months of new homes waiting to be sold not to mention those homes taken off the market by frustrated would be sellers).
In addition, there is a huge resetting of adjustable rate mortgages over the next 12 months, with a large spike in March 2008. Adding to the list of woes is the increasing pace of personnel downsizing in the mortgage industry and declining profitability in the financial sector.
On the longer-term side of the equation, the economic landscape is chilling, considering the massive structural problems. The guns part of the economy is a concern - the war in Iraq and other missions (Afghanistan and Africa) cost somewhere between US$3-5 billion a day.
In August, the Congressional Budget Office (CBO) estimated as of June 2007 up to $500 billion has been spent on combat operations in Iraq. The CBO also noted that if the United States were to maintain 75,000 troops in Iraq over the next five years, the nation would have to pay an additional $900 billion. Moreover, there are further costs attached to training police and ground forces in Iraq and Afghanistan as well as long-term health costs associated with wounded personnel.
There are other structural problems - a long-term imbalance between government expenditures and revenues (related to ongoing pressure for tax cuts). There is a massive problem with national infrastructure - it is aging rapidly and needs to be upgraded with a price tag of $1.6 trillion. That includes roads, bridges, ports and other public utilities.
Any doubt of the infrastructure problem one need only point to the steam conduit that exploded in July in Manhattan - the piping was laid 83 years ago when Calvin Coolidge was president and was part of a system that started to provide energy to New York City in 1882.
In August, a 40-year-old bridge in Minneapolis collapsed, leaving several dead in the accident's wake. The national infrastructure is literally falling down around the population, but the most recently passed Senate transportation and housing bill contained at least $2 billion for pet projects that include a North Dakota peace garden, a Montana baseball stadium and a Las Vegas history museum.
Equally important is the issue of Medicare, Medicaid and Social Security, the combined basis of which is expected to grow 22% faster than the economy over the next decade. This should come more sharply into focus next year when the first of 78 million baby boomers become eligible for early social security benefits.
American politics have reached a very dysfunctional stage, with considerable energy given to the indulgence of maintaining an economy and the debt required to keep it going, with little thought being given to the adjustments now in motion.
Along these lines, it is easier to blame the outside world for troubles at home, hence the turn to protectionism (with a number of bills pending in the US Congress). The plunging value of the US dollar and the huge sell-off in US securities by foreigners in August ($163 billion) should convey the message that not all is well and that unless there is an effort to start living more within one's means, the rest of the world is going to stop financing the North American credit glutton.
The days of guns and butter for the US economy are over; what is going to replace it is a much more volatile world, with substantial questions over the US dollar as the major international currency and the ability of the US consumer to absorb the world's exports. As the US adjusts to this changing scenario, so will the rest of the global economy. It is not going to be an easy transition.
Scott B MacDonald is editor of KWR International Advisor.
(Posted with permission from KWR International, Inc, (KWR), a consulting firm specializing in the delivery of research, communications and advisory services.)
Bernanke: Don't take me for granted, boys
By Julian Delasantellis
For this Halloween, it seems that US Federal Reserve chairman Ben Bernanke chose to dress up as Betty "Riz" Rizzo, the young social outcast in the 1978 film Grease.
Riz sings a song of remorse, expressing outward pride but inner shame over being the girl the 1950s boys know they can go to when they want an assured good time:
There are worse things I could do,
Than go with a boy or two.
Even though the neighborhood thinks I'm trashy,
And no good,
I suppose it could be true,
But there are worse things I could do.
I could flirt with all the guys,
Smile at them and bat my eyes.
Press against them when we dance,
Make them think they stand a chance,
Then refuse to see it through.
That's a thing I'd never do.
Picture Bernanke, with signature form-fitting black pedal pusher pants, teased hair, hot pink lipstick, and a tight, "Pink Ladies" girl gang leather jacket, going trick or treating at Wednesday's Federal Open Market Committee meeting, singing a song of his own individual professional conflict between values and popularity:
There are worse things I could do
Than lower an interest rate or two ...
For the third time in the last 75 days, the US Federal Reserve has made a major move to lower interest rates in order to attempt to revive a US economy whose future prospects are looking ever bleaker with each successive economic report.
This move involved a cut of 0.25%, or 25 basis points in money market lingo, in the Federal Funds target rate, to 4.50%; there was also an accompanying 25 basis point cut in the Federal Reserve Discount rate, the interest rate the Fed charges member banks who must borrow from it due to the fact that they have been denied funding at reasonable rates from the private, commercial money markets.
In total, since this current easing rate cycle began on August 17, the discount rate has now been cut a total of 125 basis points, and the Federal Funds rate by 75. US Federal Reserve rate moves usually come in successive series, called cycles, in the same direction, that can last many months or years. There is every indication that due to economic weakness arising from a crippled housing sector, the US is now in the early stages of a new rate cutting cycle, one that we will not see the end of until at least early 2009, perhaps even beyond that.
Unlike the previous Fed move on September 18, when the markets were surprised with stronger than expected twin 50-point cuts of both the Fed Funds target rate and the discount rate, this move was pretty well expected and discounted by the markets prior to the meeting.
In the recent past, during the Alan Greenspan Federal Reserve era, having a predictable Fed was seen as a positive value, something that America's central bank should strive for. There are indications that this policy objective - predictability, or, in market lingo, transparency - is losing favor as a core Fed institutional virtue, and that puts us in the international community of Federal Reserve watchers; indeed, it puts the entire financial world in a wholly new situation.
In an article posted on the Financial Times website, "Fed concern at expectation of rate cut", on October 28, Krishna Guna reported that being a bit too loose with the boys in the financial markets was emerging as a major policy concern with the Bernanke Fed board.
"According to anecdotal reports, there is some resistance among Fed insiders to the notion of a guaranteed rate cut. Many would have preferred to go into the meeting with market odds more evenly balanced, which would give the central bank greater latitude to make its determination without risking market turmoil."
Since at least the opening years of the Alan Greenspan Fed in the early 1990s, the results of the regularly scheduled Federal Reserve meetings have rarely been much of a surprise. Invariably, a few days before the meeting, you'd see stories in the financial media about "Fed insiders" or "highly placed Fed sources" in essence telling the world what the outcome of the meeting would be.
The "Fed insiders" and "highly placed Fed sources" were, of course, Fed officials close to Greenspan; these stories were, in a Washington tradition that probably predates Pierre L'Enfant's arrival in the city to design it, leaks. The leakers did not have to, like Bob Woodward's Watergate era "Deep Throat", meet the reporter in the wee hours in an empty car park; since Greenspan obviously fully approved the procedure, the source probably got some good whiskey and a steak dinner for this valued service to the Fifth Estate.
Greenspan endorsed this dance of the seven Fed veils because he believed that unpredictability carried a cost to the general economy. Unpredictable and unexpected Federal Reserve moves were invariably followed by large concomitant movements in the financial markets. If you are a participant in the markets, whether it be a buyer or seller of stocks, bonds or commodities, your life is made infinitely more complex if you have to provide and plan for regularly expected potential 3-5% moves, in either direction, in your market, rather than more sedate 1% moves.
You can go into the options markets and take out "insurance", buying puts and calls, against extreme market moves, but that costs money, costs that rise along with the projected near-term volatility of the markets. Greenspan believed that the corporate funds utilized to guard - "hedge" - against excess volatility could be better spent on more productive capital investments like plant and equipment.
But as this operational paradigm became a finely honed tradition, an inherent contradiction in the process emerged.
If the markets know, and factor into securities prices, what the
results of a Fed meeting will be prior to the actual meeting, does that mean, in effect, that when the full Federal Reserve Open Markets Committee members gather on meeting day, they will feel that their hands are tied, that they can't act in such a way other than the market expects, for fear of provoking a severe selloff?
Is the tail wagging the dog here? More importantly, in this case, who's the dog and who's the tail?
The Greenspan Fed felt that this was a cost worth incurring, in order to avoid the greater costs of unpredictability. Thus, an entire industry of Fed watchers developed, like Cold War Kremlinologists, in order to read the monetary policy tea leaves, to ascertain the direction and quantity of upcoming Federal Reserve moves so as to profitably position trades in advance of the actual announced decisions.
The Chicago Board of Trade futures exchange actually initiated a commodities futures contract, Federal Funds futures, so that commercial hedgers and punters alike could seek to profit from how the Fed would act.
The Greenspan Fed, and in its early months the Bernanke Fed, never disappointed the markets. Thus, if it is seen that the Fed always follows the markets' lead, then, in essence, it is as if the markets are controlling the Fed, not the other way around. (I wrote about this perception in my September 18 piece, A rate cut with a shoeshine and a smile.)
Bernanke apparently wants to change how the cards in this game are dealt. He surprised the markets with his double-barreled rate cut on September 18, and he found a way to surprise the markets on Wednesday.
The markets did get the dual twenty five basis point rate cuts they had expected, but it was in the post-meeting statement, the booming voice of the monetary gods thundering down from the Olympian heights of their headquarters in Marriner Eccles Hall in Washington, where it can be seen that Bernanke might be trying to make himself a little bit of a mystery to the boys in the markets.
The September post-meeting statement gave the markets every indication, every reason to believe, that there would also be seen a cut at the October meeting, the cut we actually did see on Wednesday.
"Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," the Fed said in September.
But after Wednesday's meeting, it seems that Bernanke batted his eyes, flirtatiously telling the boys that in the future, maybe yes, maybe no.
"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth."
At first, the markets were puzzled by this coquettish new Fed. The Dow Jones Industrial Average was up over 100 points before the announcement, it quickly dropped to be down 20 points after the market got a chance to read the statement, rallied back to close up 134; for now, at least, the market agrees with Hamlet's mother that "The lady doth protest too much."
This leaves the markets, and the economy, in an entirely new place. The worldwide Fed analysis community is certainly not going to pack up and go away. If the Fed is now placing an equal or greater value on unpredictability over transparency, in order to retrieve the policy initiative it feels it imprudently ceded to the markets, will it then take this thinking to its logical conclusion and someday fail to act in such a way that the economy needs, just so that it can surprise the markets?
It is entirely possible, and widely expected in the markets, that the current subprime mortgage mess will spread and intensify, festering across at least the entire housing and financial sectors. If pride holds Bernanke's hand from cutting rates and providing liquidity when he should, just because the markets called it first, the markets will look on this situation very negatively. A lot of wealth could be destroyed in the markets very, very quickly.
It's not as if pride has never ruled over policy in Washington. Veteran journalist Bill Moyers tells a story that, when he was working as president Lyndon Johnson's press secretary in the 1960s, word came down that LBJ was planning to fire cantankerous, obstreperous FBI Director J Edgar Hoover.
As he thought Johnson wanted, Moyers spread the word to the press; when the story came out before Johnson got a chance to make the official announcement, out of pique, he reversed his decision and reappointed Hoover to another term, where he stayed until his death in 1972.
Maybe we in the markets are taking Bernanke for granted. We should not be treating him like a cheap pickup in a singles bar. We should call him the next day. We should send flowers. Maybe we need take the entire Fed board out to breakfast the day after.
Dr Bernanke, did you just want to be held?
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
For this Halloween, it seems that US Federal Reserve chairman Ben Bernanke chose to dress up as Betty "Riz" Rizzo, the young social outcast in the 1978 film Grease.
Riz sings a song of remorse, expressing outward pride but inner shame over being the girl the 1950s boys know they can go to when they want an assured good time:
There are worse things I could do,
Than go with a boy or two.
Even though the neighborhood thinks I'm trashy,
And no good,
I suppose it could be true,
But there are worse things I could do.
I could flirt with all the guys,
Smile at them and bat my eyes.
Press against them when we dance,
Make them think they stand a chance,
Then refuse to see it through.
That's a thing I'd never do.
Picture Bernanke, with signature form-fitting black pedal pusher pants, teased hair, hot pink lipstick, and a tight, "Pink Ladies" girl gang leather jacket, going trick or treating at Wednesday's Federal Open Market Committee meeting, singing a song of his own individual professional conflict between values and popularity:
There are worse things I could do
Than lower an interest rate or two ...
For the third time in the last 75 days, the US Federal Reserve has made a major move to lower interest rates in order to attempt to revive a US economy whose future prospects are looking ever bleaker with each successive economic report.
This move involved a cut of 0.25%, or 25 basis points in money market lingo, in the Federal Funds target rate, to 4.50%; there was also an accompanying 25 basis point cut in the Federal Reserve Discount rate, the interest rate the Fed charges member banks who must borrow from it due to the fact that they have been denied funding at reasonable rates from the private, commercial money markets.
In total, since this current easing rate cycle began on August 17, the discount rate has now been cut a total of 125 basis points, and the Federal Funds rate by 75. US Federal Reserve rate moves usually come in successive series, called cycles, in the same direction, that can last many months or years. There is every indication that due to economic weakness arising from a crippled housing sector, the US is now in the early stages of a new rate cutting cycle, one that we will not see the end of until at least early 2009, perhaps even beyond that.
Unlike the previous Fed move on September 18, when the markets were surprised with stronger than expected twin 50-point cuts of both the Fed Funds target rate and the discount rate, this move was pretty well expected and discounted by the markets prior to the meeting.
In the recent past, during the Alan Greenspan Federal Reserve era, having a predictable Fed was seen as a positive value, something that America's central bank should strive for. There are indications that this policy objective - predictability, or, in market lingo, transparency - is losing favor as a core Fed institutional virtue, and that puts us in the international community of Federal Reserve watchers; indeed, it puts the entire financial world in a wholly new situation.
In an article posted on the Financial Times website, "Fed concern at expectation of rate cut", on October 28, Krishna Guna reported that being a bit too loose with the boys in the financial markets was emerging as a major policy concern with the Bernanke Fed board.
"According to anecdotal reports, there is some resistance among Fed insiders to the notion of a guaranteed rate cut. Many would have preferred to go into the meeting with market odds more evenly balanced, which would give the central bank greater latitude to make its determination without risking market turmoil."
Since at least the opening years of the Alan Greenspan Fed in the early 1990s, the results of the regularly scheduled Federal Reserve meetings have rarely been much of a surprise. Invariably, a few days before the meeting, you'd see stories in the financial media about "Fed insiders" or "highly placed Fed sources" in essence telling the world what the outcome of the meeting would be.
The "Fed insiders" and "highly placed Fed sources" were, of course, Fed officials close to Greenspan; these stories were, in a Washington tradition that probably predates Pierre L'Enfant's arrival in the city to design it, leaks. The leakers did not have to, like Bob Woodward's Watergate era "Deep Throat", meet the reporter in the wee hours in an empty car park; since Greenspan obviously fully approved the procedure, the source probably got some good whiskey and a steak dinner for this valued service to the Fifth Estate.
Greenspan endorsed this dance of the seven Fed veils because he believed that unpredictability carried a cost to the general economy. Unpredictable and unexpected Federal Reserve moves were invariably followed by large concomitant movements in the financial markets. If you are a participant in the markets, whether it be a buyer or seller of stocks, bonds or commodities, your life is made infinitely more complex if you have to provide and plan for regularly expected potential 3-5% moves, in either direction, in your market, rather than more sedate 1% moves.
You can go into the options markets and take out "insurance", buying puts and calls, against extreme market moves, but that costs money, costs that rise along with the projected near-term volatility of the markets. Greenspan believed that the corporate funds utilized to guard - "hedge" - against excess volatility could be better spent on more productive capital investments like plant and equipment.
But as this operational paradigm became a finely honed tradition, an inherent contradiction in the process emerged.
If the markets know, and factor into securities prices, what the
results of a Fed meeting will be prior to the actual meeting, does that mean, in effect, that when the full Federal Reserve Open Markets Committee members gather on meeting day, they will feel that their hands are tied, that they can't act in such a way other than the market expects, for fear of provoking a severe selloff?
Is the tail wagging the dog here? More importantly, in this case, who's the dog and who's the tail?
The Greenspan Fed felt that this was a cost worth incurring, in order to avoid the greater costs of unpredictability. Thus, an entire industry of Fed watchers developed, like Cold War Kremlinologists, in order to read the monetary policy tea leaves, to ascertain the direction and quantity of upcoming Federal Reserve moves so as to profitably position trades in advance of the actual announced decisions.
The Chicago Board of Trade futures exchange actually initiated a commodities futures contract, Federal Funds futures, so that commercial hedgers and punters alike could seek to profit from how the Fed would act.
The Greenspan Fed, and in its early months the Bernanke Fed, never disappointed the markets. Thus, if it is seen that the Fed always follows the markets' lead, then, in essence, it is as if the markets are controlling the Fed, not the other way around. (I wrote about this perception in my September 18 piece, A rate cut with a shoeshine and a smile.)
Bernanke apparently wants to change how the cards in this game are dealt. He surprised the markets with his double-barreled rate cut on September 18, and he found a way to surprise the markets on Wednesday.
The markets did get the dual twenty five basis point rate cuts they had expected, but it was in the post-meeting statement, the booming voice of the monetary gods thundering down from the Olympian heights of their headquarters in Marriner Eccles Hall in Washington, where it can be seen that Bernanke might be trying to make himself a little bit of a mystery to the boys in the markets.
The September post-meeting statement gave the markets every indication, every reason to believe, that there would also be seen a cut at the October meeting, the cut we actually did see on Wednesday.
"Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," the Fed said in September.
But after Wednesday's meeting, it seems that Bernanke batted his eyes, flirtatiously telling the boys that in the future, maybe yes, maybe no.
"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth."
At first, the markets were puzzled by this coquettish new Fed. The Dow Jones Industrial Average was up over 100 points before the announcement, it quickly dropped to be down 20 points after the market got a chance to read the statement, rallied back to close up 134; for now, at least, the market agrees with Hamlet's mother that "The lady doth protest too much."
This leaves the markets, and the economy, in an entirely new place. The worldwide Fed analysis community is certainly not going to pack up and go away. If the Fed is now placing an equal or greater value on unpredictability over transparency, in order to retrieve the policy initiative it feels it imprudently ceded to the markets, will it then take this thinking to its logical conclusion and someday fail to act in such a way that the economy needs, just so that it can surprise the markets?
It is entirely possible, and widely expected in the markets, that the current subprime mortgage mess will spread and intensify, festering across at least the entire housing and financial sectors. If pride holds Bernanke's hand from cutting rates and providing liquidity when he should, just because the markets called it first, the markets will look on this situation very negatively. A lot of wealth could be destroyed in the markets very, very quickly.
It's not as if pride has never ruled over policy in Washington. Veteran journalist Bill Moyers tells a story that, when he was working as president Lyndon Johnson's press secretary in the 1960s, word came down that LBJ was planning to fire cantankerous, obstreperous FBI Director J Edgar Hoover.
As he thought Johnson wanted, Moyers spread the word to the press; when the story came out before Johnson got a chance to make the official announcement, out of pique, he reversed his decision and reappointed Hoover to another term, where he stayed until his death in 1972.
Maybe we in the markets are taking Bernanke for granted. We should not be treating him like a cheap pickup in a singles bar. We should call him the next day. We should send flowers. Maybe we need take the entire Fed board out to breakfast the day after.
Dr Bernanke, did you just want to be held?
Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.
(Copyright 2007 Asia Times Online Ltd. All rights reserved.)
Subscribe to:
Posts (Atom)