US recession more severe than last three decades : Harvard Economist

Martin Feldstein is a Professor of Economics at Harvard University and was one of the contenders for the FOMC or the Fed Chairmanship with Ben Bernanke. He is a widely respected economist and is important now because he believes that US is probably already under recession.

Feldstein said this is a very different recession from the last three recessions, which is the number of recessions we have had over the past quarter century plus, since 1980. “This recession was not created by the Federal Reserve as a way of damping inflation but grew out of the problems in the housing sector and credit markets. Those are not going to be easy to resolve.”

Excerpts from CNBC-TV18’s exclusive interview with Martin Feldstein:

Q: Markets believe that the Fed's concerted action has probably led to the worst of the poison being out of the financial sector. Therefore, maybe in a quarter or two, bad data from the economy may also start plateauing out. You don't believe so. What makes you think that this recession is going to be here for some time?

A: Let me emphasize why I think we are in a recession. The National Bureau of Economic Research, or NBER, is the organization that officially dates recessions in the US. I am not speaking on behalf of the NBER. I am giving you my personal opinion.

When I look at the data and what has been happening in the US in the last several months, I see a whole string of negative news. Private sector employment has fallen for the last three months while real incomes after tax of the household sector is down. Consumer spending is down. Household expectations, and consumer confidence has fallen to levels we haven’t seen for decades. So, when you put all of that together, it looks like the household sector is clearly heading down.

The business sector as well as industrial production has fallen, and manufacturing output is down for two months in a row. There are very few positive indicators of aggregate demand other than on the export side and our exports have been quite strong. I don’t think they are going to be enough to carry this economy going forward over the next year.

Q: In one of your recent writings you said this current recession, which you believe may already be underway, could last maybe much longer than even 1980s recession, which went on for 16 months. The others of course have been much shorter at about eight months. Why do you believe that this one could be nastier up to may be six quarters?

A: This is a very different recession from the last three recessions, which is the number of recessions we have had over the past quarter century plus, since 1980. This recession was not created by the Federal Reserve as a way of damping inflation but grew out of the problems in the housing sector and credit markets. Those are not going to be easy to resolve.

Q: The Fed has come out with a lot of options. It has widened the collateral it takes and has widened the people from whom it will accept collateral. Do you think all this is not enough? What are the other instruments that the Fed can possibly use to pull the markets and economy out of its current morass? Do you think it will use the nuclear option of probably even buying the mortgage-backed securities?

A: The Fed has certainly been creative. It has gone beyond the traditional Federal Reserve policy. It has reduced short-term interest rates from 5.25% to 2.25%. But I don't think that is getting a lot of traction because with housing starts down 40% over the last year another 0.25 or 0.50 on interest rates isn't enough to really stimulate homebuilding.

Similarly, the activities in the credit markets are so locked up and dysfunctional that lower interest rates don't translate into lower cost loans, because they don't translate into loans at all. There is unwillingness on the part of financial institutions to lend or buy financial assets.

What is the Fed going to do going forward? It has been quite creative in taking on collateral. That would not normally be taken on. The numbers sound very big ? USD 200 billion of increased lending facilities to the banks and another USD 200 billion of lending facilities to non-banking securities firms. But in comparison to the size of credit markets and of the problems that we are looking at these are rather small.

Home mortgages, that is home mortgages where the loan to value ratios exceed a 100%, currently have negative equity. This is about USD 1 trillion. That is just one piece of the overall credit market problem. That is not sub-prime loans, but mortgage loans in general. But it is USD 1 trillion of negative equity loans waiting to cause problems for financial institutions.

Q: What kind of contraction are you looking at? Is it indeed about six quarters that you look at in terms of contraction? What is the kind of GDP contraction ? about 1-2% or even worse?

A: I don't have a number in mind. I don't know how deep this is going to get. What I am really saying this is not a sure thing. It depends on what happens next in the economic policy and we don't know what the administration and the Congress are going to come up with. But what I am saying to my colleagues back at home, both in private sector and also in Washington, is that this could be a much more serious problem than previous recessions and therefore requires some more substantial action.

Q: What do you think would be the Fed's next step in terms of monetary policy and interest rates itself, is it going to be up against fairly severe inflation numbers?

A: Yes, we are certainly seeing inflation numbers rise but the Fed is focusing on preventing a deeper downturn. It feels that it can come back to inflation after its dealt with the economic downturn. I don't think the Fed has a lot more options in terms of stimulating this economy and preventing the problems in the housing sector and credit market. It has a limited balance sheet. The Congress and the House of Representatives and the Senate may not be willing to allow the Fed to put its balance sheet further at risk, and put the tax payers online for this kind of a credit expansion.

Q: You don’t see the Fed using options like buying up mortgage securities soon?

A: It could buy up some but how many can it buy up. The Fed has a balance sheet of about USD 800 billion. That is the total balance sheet of the Fed that has been created over the years in the process of creating money for the economy and converting that money into bonds. During the coming year, that might grow by another USD 40 billion. So, that gives you a sense of the magnitude. They have already extended USD 400 billion in the first two facilities plus USD 30 billion in the Bear Stearns acquisition by JP Morgan. So, they don’t have a lot of room left to go.

If you think about the number of mortgages that are in trouble, about a trillion dollars of mortgages currently have loaned value ratios greater than 100%. So, they couldn’t begin to buy up all of those mortgages. We are talking about shifting responsibility from the Fed Reserve to the government, the Congress and the White House.

Q: It will be difficult to put a number to the extent of the recession or the contraction. What would be your best guess?

A: I don’t have a best guess. I am not going to try to put a number on it because it depends on what happens to policy over the next several months. I don’t want to put a number on it.

Q: This possible recession is also breaking out in a very different global context. We see an Asia that is way more resurgent, and that is perhaps in a much more stronger economic position, especially China and India and not excluding the other economies. We also have West Asia which is way richer. So, how will the US recession impact global growth?

A: Everything you just said is absolutely correct. That is good news because although the US is a major importer, a reduction in the economic activity in the US will bring with it some reduction in imports. The impact that would have will only be to slow growth marginally here in India as well as in China and elsewhere in Asia.

It should bring down some of the demand for oil. That should lower oil prices. But the booming demand for oil here in India and particularly in China is going to keep the upward pressure on oil prices. So, I don’t see this having a major international impact this time around.

Q: We have seen some fairly serious inflation in commodity prices, notably in crude. With the US probably getting into a protracted recession, when do you see this surge in inflation probably coming under control?

A: Within the United States, inflation is not as low as we would like it but it is not very high. The overall consumer price index is up 4% over the last 12 months. If you leave out food and energy prices, it is up about 2.3% over the last 12-months and it is not been accelerating in recent months. So, inflation is not as low as we would like but is not out of hand. The compensation of employees increased last year to a more rapid rate.

But, at this stage, we are not seeing very high rates of inflation. With a weakening of the economy, those inflationary pressures are not likely to be very great. Of course, with the dollar coming down, it will continue to come down. With the dollar coming down, that does add to pricing pressures because of imported price increases which continue and have been quite strong over the past year.

Q: There is a huge amount of short dollar, long commodities trade on in currency and commodity markets at this point in time. Do you think this is all building up to a kind of a commodity bubble? Do you think commodity prices are likely to sustain at high levels through 2008 because of Asian demand?

A: It is very hard to make a forecast of what is going to happen over the next nine-months through 2008. I am not a short-term forecaster of commodity prices. But medium-term and long-term pressures for commodity prices remain high.

Whether it is energy prices or agricultural commodity prices, the pressures are certainly there for those prices to remain high. Indeed, they interact one with the other because as bio-fuels have become a viable option, we are seeing land taken out of agricultural production in order to produce bio-fuel crops. That withdrawal of land from agricultural production is pushing up the prices of agricultural production, which is pushing up the prices of agricultural products.

So, both of them are moving up together. The strong demand in China and elsewhere is not going to come down anytime soon. But we could see a reversal of the current USD 100 plus oil price for a matter of months. It is too hard to predict how a speculative market like that is going to respond.

Q: How do you see the dollar panning out? We have seen some severe reverses for the dollar against most of the major currencies. Do you think its position as an international reserve currency could come under threat?

A: The dollar is still very strong. The current level of the dollar continues to cause very large trade deficits for the United States. Fortunately, as the dollar has come down over the last few years, we have begun to see our exports increase substantially and imports slow.

Our trade deficit peaked in 2006 and came down significantly in 2007. But it’s still at more than USD 700 billion annual rate and more than 5 % of GDP and that’s not a sustainable number. So, the dollar will continue to come down in the foreseeable future during the next several years.

The issue of the dollar, as a reserved currency, has now become an issue of investment currency for governments around the world. We are seeing that in what they hold for reserves and also what they hold in sovereign wealth funds.

In other ways, they are shifting out of the dollar because they can get higher interest rates on Euro Bonds. They anticipate that the dollar will continue to come down against the basket of currencies.

Q: I don’t know how seriously you study India as an economy, but the kind of 9% growth that the economy saw over the last three years, do you think that is sustainable considering that global credit may be hard to get? How do you see liquidity flows coming into the country? Will that continue to support growth?

A: I am a great believer in the strength of the Indian economy. I have been coming here regularly more than once a year for a number of years now and I have been very impressed with the transformation that has occurred here.

That doesn’t really depend critically on the inflow of funds from the rest of the world. If there is reduced flow of funds from the rest of the world, it will be possible to supplement credit by an easier policy from the Reserve Bank.

I think the dynamics of growth in India, while they may slow a little bit in 2008 in response to a slowdown in aggregate demand in the US, has every reason to continue to be strong. If we think not just about 2008 but about the intermediate term here in India, that is going to depend much more on supply side policies and policies to fix the infrastructure and regulations that affect markets in India, than on demand or credit availability.
Q13: How do you see sovereign wealth funds (SWF) panning out? We have seen some related investors buying up equity in US banks. Will this become a serious political issue? Do you think SWFs will suddenly start coming under the scanner?
A: They are very much a political issue already in the US. There is a real concern about whether some of the funds that come in from the SWF or other government-related funds are coming in for potentially politically motivated actions, rather than purely commercial investment-based actions. Frankly, one has to distinguish between the funds coming from Russia and China on one hand from the funds coming from other investors around the world. I don’t think that the funds coming from Kuwait or Singapore are politically motivated or likely to act in a political way.
But I don’t have the same kind of confidence about the future of funds coming from China and Russia. I think that’s a shared view in the United States

Link Money Control.Com

Gold markets likely to witness volatility

Gold almost touched $1,000 an ounce last week but met with stiff resistance around the $996-level. The yellow metal slipped to around $965 towards the middle of last week before making some grounds to close at $974.20. Gold still seems to be supported by the weakening dollar and falling equity markets. It is one of the reasons why it is eyeing the $1,000-mark. However, it faces stiff resistance at $993 and if it is able to get past that, then there should be stiff resistance again at the $998-1,000 range. Support for gold is seen around $980.What, in short, the market is likely to witness is volatility due to various factors. While key economic factors would be trying to drive it past the $1,000-mark, need for liquidity and profit booking could be the resisting factors.
To gold’s advantage, the sharp fall in the equity markets is likely to see investors queuing up for the precious metal. However, on the other hand, demand for physical gold, including in India, could be subdued due to the high prices. Most likely, investment and exchange-traded funds would be the ones that could show more interest in the yellow metal.
Not surprisingly then, last week the holdings of the exchange-traded funds was up by over two per cent.
According to brokerage firm Angel, the fundamentally weaker dollar and fear of more interest-rate cuts by US Fed should support gold’s allure. The outcome of the March 18 Fed meeting is keenly awaited by market participants. In the medium term, supply and demand factors, dollar weakness, institutional buying, the price relationship between gold and crude oil (which is trading at record highs), and global economic uncertainty, are the key factors that will determine prices in the future.
The fed funds rate is now lower than the inflation rate, so there’s a negative real interest rate. In the longer run, investors could turn away from paper assets with declining value and turn toward assets with real value. This will provide a shot in the arm for gold. Also, increased volatility in the world financial markets and a possible recession in the US economy could boost flight to quality buying in gold, according to Angel.

Link Business Line

Warren Buffett overtakes Gates as world's richest: Forbes

Mr Warren Buffett has overtaken software czar, Mr Bill Gates as well as Mexican Tycoon Carlos Slim Helu to become the world's richest person, as per Forbes' annual list of billionaires.
They are followed by NRI steel baron, Mr Lakshmi Mittal, Mr Mukesh Ambani and Mr Anil Ambani at the fourth, fifth and sixth position. Another Indian businessman, Mr K.P. Singh, has occupied the eighth position.
In terms of wealth created in the last one year, Mr Anil Ambani is on top, followed by his elder brother Mr Mukesh Ambani. Mr Buffett has been ranked at the top with a net worth of $62 billion, higher than Mr Slim's $60 billion and Mr Gates' $58 billion .
Forbes has put Mr Mittal's net worth at $45 billion closely followed by Mr Mukesh Ambani's $43 billion and Mr Anil Ambani's $42 billion. Mr Singh has a net worth of $30 billion.
The other Indians who have made it to the Forbes list include Mr Ravi and Mr Sashi Ruia and Mr Azim Premji, who have occupied the 43rd and 30th spot with net worth of $15 billion and $12.7 billion respectively. Besides, the list also has Mr Senapathy Go palakrishnan, Mr Rakesh Jhunjhunwala and Mr Rahul Bajaj, each with a worth of $one billion

Link Press Trust of India

Shanghai exchange to get a boost

The Chinese government has signalled a move that would make Shanghai stock market richer by about $30 billion and give credence to long-held suspicion that Shanghai is being consciously built up as a serious competitor to the well-entrenched market in Hong Kong.

The latest move involves giving permission to China Construction Bank to list at the Shanghai exchange to raise $8 billion. Lined up behind CCB for similar listings are "red chips" like PetroChina and China Mobile.

The listing by such "red chips" is expected to boost the market capitalisation of Shanghai by $30 billion, industry experts estimate. Analysts also believe that some foreign companies might eventually be tempted to list in Shanghai instead of the Hong Kong platform to be closer to product markets and please the levers of power in Beijing.

Companies based in the Chinese Mainland are responsible for nearly 70% of the market capitalisation in Hong Kong. Any move to encourage Hong Kong listed companies to go for a second listing in Shanghai is bound to impact its market, sources said.

For historical reasons, many of China's state-owned companies have been listed in Hong Kong and a few of them also went for secondary listing at exchanges in New York and London. These "red chips" are not traded in Chinese exchanges of Shanghai and Shenzhen. As China grew into a economic mammoth in recent years, the Hong Kong market emerged as the biggest beneficiary by providing Chinese companies with an international platform to raise funds.

This was resented by a section of the people and the political system, which felt that the local markets should be given an opportunity to grow in tandem with the country’s industrial development.

But the government found it extremely difficult to support the local markets as the stock index remained stagnant for four long years until it began to raise it head only last year.

This is when the government launched a “return of the prodigal” programme to persuade Hong Kong-listed Chinese companies to seek an additional listing in the home country. It began by pushing the Industrial and Commercial Bank of China, the nation’s largest bank, to go for an IPO in Hong Kong and Shanghai, simultaneously.

The IPO raised a world-record beating $19 billion with some $6 billion being contributed by investors in Shanghai.

There has been a lull until the announcement allowing CCB to go for an IPO. The bank would raise $8 billion if it manages to sell shares at current price of 87 cents ($0.87) a share, sources said.

Link Times

Long-term investors have a bull ride

Indian equity markets are dancing to subprime tunes, giving investors sleepless nights. But if you are a mutual fund investor, you might as well take a vacation. In the past five years, 81% of diversified equity funds managed to outperform (give higher) Sensex returns. This is an encouraging statistic, underscoring the need for investors to look at a long-term investment horizon. For short-term investors though, there are lots of grey areas. In fact, there is only bad news, since the extent of outperformance has been widely fluctuating. In 2007, 68% of equity funds have managed to outperform the Sensex. This is an improvement from the 21% level in 2006 and 40% in 2005. A historical study reveals that fund managers have traditionally relied on mid-caps to beat the Sensex. So equity funds gave higher returns than the Sensex whenever mid-cap indices outperformed large-cap indices. Mid-caps, as measured by the S&P CNX Midcap, gave higher returns than the Sensex in the calendar year 2002, 2003 and 2004. And in all these years, the extent of outperformance was high, with upwards of 90%. But subsequently, in 2005 and 2006, the Sensex ended up giving higher returns than mid caps. This led to many equity fund managers, especially those heavy on midcaps, underperforming the Sensex. Only 40% of equity funds managed to beat the Sensex returns in 2005 and 21% in 2006. During 2007, midcaps have managed to give slightly higher returns than the Sensex so far and the extent of outperformance has improved tremendously. Is the fact that equity fund performance is linked to mid-cap performance a cause for concern? Not really for long-term investors. While over the single year periods, there has been greater vacillation in performance, the statistics are encouraging over the long-term periods. For instance, in the past five years, 81% managed to beat the Sensex returns. It is 59% and 58%, respectively, for one and three year periods. Another interesting trend has been that of fund managers finding it relatively easy to beat the Sensex in a bull run than in a bear run. In the past 15 years, there has been four years of 10% plus correction in Sensex values in 1995, 1998, 2000 and 2001. And except during 1998 — when the outperformance was 90% — in all the other years, the outperformance figures were 50% or lesser. With bearish phases existing in the current market, this is a cause of concern for the short-term investor. With the launch of many variants of equity funds, outperformance might become a tad tougher. This is because a mid-cap fund would be benchmarked with a mid-cap index and not Sensex or BSE 200. Similarly, a broad-market fund would benchmark with a broad-market index like BSE 200 and not a large-cap index like Sensex. While there used to be only one equity fund in the past, which invested across market caps, now there would be a greater focus. Expect lot of action ahead for active fund managers in the equity market.

Link Times of india

Asian stocks continue to slip
Asian stocks tumbled to their biggest two-day drop in a year after Australia’s Rams Home Loans Group said it was unable to refinance $5 billion of debt amid a widening credit crunch. South Korea’s Kospi index plunged 6.9%, its largest loss since June 2002. Macquarie Bank, Australia’s biggest securities company that’s lost almost a third of its value in the past four weeks, led a slide in financial stocks. Toyota and Samsung fell after reports showed US home sales dropped to a four-year low and prices declined in a third of the nation’s cities. BHP Billiton, the world’s biggest mining company, slumped as concerns about slower global growth dragged commodities prices lower. "Blood is hitting the streets, everyone seems to be panicking, and there’s reason to panic," said Patrick Chang, who helps manage $4.5 billion at CIMB-Principal Asset Management Bhd in Kuala Lumpur. "There’s been so much blow-up, we don’t know when it’s going to end. Liquidity is drying up.”" The Morgan Stanley Capital International Asia-Pacific Index lost 2.5% to 141.89, the lowest since March and its biggest two-day decline since June 2006. About 10 stocks retreated for each that gained on Thursday as benchmarks slid across the region. Japan’s Nikkei 225 Stock Average dropped 2% to 16,148.49, its lowest close since November. Sony Corp led Japanese exporters lower after the yen strengthened to the highest against the dollar since March. South Korea’s Kospi plunged the most in five years following a one-day holiday on Wednesday when the MSCI Asia index lost 2.5%. The Standard & Poor’s 500 futures were 0.9% lower on Thursday. US stocks fell on Wednesday on speculation that Countrywide Financial, the nation’s biggest mortgage lender, may be forced into bankruptcy. The S&P 500 erased its gains for the year, dropping 1.4%. US treasury secretary Henry Paulson said financial turmoil will "extract a penalty" US growth rates, yet the economy is strong enough to weather problems without falling into recession, the Wall Street Journal reported on Thursday. Rams Home Loans Group said it was unable to refinance $5 billion of short-term US loans because of a "lack of market liquidity" caused by a global credit rout. It plunged 36% to 86.5 Australian cents, 65% lower than the price at its initial offering last month. "It’s a selling panic," said Mark Mobius, who oversees $30 billion at Templeton Asset Management. "We’re seeing a lot of negative news with very few positives." Countrywide may go bankrupt if creditors force the company to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Merrill Lynch said. KKR Financial Holdingssaid it may lose up to $290 million from a drop in the value of mortgage-backed bonds it owns.
link timesofindia

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