Will China's Economic Slowdown Bring Political Unrest?

Conventional wisdom has it that China's economy must grow at least 8% to absorb the new workers pouring into its cities. Geoff Dyer in Beijing reports that the World Bank forecasts it will fall short of that next year "as it sharply cut its outlook for the country’s economy." As its economic growth falls from from recent double digit, the People's Republic faces danger as it approaches the thirtieth anniversary of Deng Xiaoping's opening to market forces. Also in the Financial Times, Gideon Rachman comments, "the only recent examples of social unrest in one of the world’s main economies have come there, not in the west. Laid-off workers in factories in southern China have staged protests that had to be contained by riot police. There have also been strikes and violent protests by taxi drivers in some cities across the country. The notion that the Chinese economy has so much momentum that it has 'decoupled' from the US looks like a myth."

Deconstructing Fed Speak

Brian Sack of Washington-based Macroeconomic Advisors and a former senior Fed staffer discusses how the Fed explains itself:

If China Sneezes, Will Wichita Catch a Cold?

China is very much in the news and that news is worrisome for Wichita's economy.

The conventional wisdom among world economy watchers has been that while the U.S., the Eurozone, and Japan contract, the BRIC countries, Brazil, Russia, India, and China, will make significant contributions to global economic growth. The conventional wisdom took a blow this week. There were shocking reports that the Chinese economy is faltering.

Andrew Batson and Gordon Fairclough report, "Steep and sudden declines in China's imports and exports show the country's economic slowdown is entering a new and more serious phase -- exacerbating the global slump while challenging a generation of Chinese companies and workers used to steady double-digit gains in sales and salaries." David Winning provides more evidence: "China's monthly crude oil imports in November hit their lowest level this year, providing more evidence that a weakening domestic economy is translating into sharply reduced oil demand." Furthermore, he tells us, "Preliminary customs data Wednesday showed China imported 13.36 million metric tons of crude in November, equivalent to 3.26 million barrels a day. That's down 17.3% from October, despite a fall in crude oil prices over the month." Winning quotes "Paul Ting, an oil analyst who tracks oil trends in China, [who] said in a recent report that demand in China is now declining more swiftly than in the U.S., where oil use is falling at a pace not seen since the 1980s."




External demand has been driving the aircraft industry's prosperity. New orders made 2007 a boom year. Now things look quite different. Lex in The Financial Times reports:

"While all eyes were on Washington, Beijing was patching up gas-guzzlers of its own. On Wednesday night, China Eastern and China Southern, two of the big three state-owned airlines, announced equity injections from their parents. Both surged when they resumed trading yesterday after a fortnight's suspension. Air China was up too, in their slipstream.

"Fate has been dealing from the bottom of the deck for a while. This year alone, natural disasters and forced groundings during the Olympics have been compounded by a depreciating renminbi and huge wrong-way bets on fuel prices. China Eastern, the weakest of the three, admitted last month that fair-value losses from hedging surged six-fold in October, to almost $300m.

But while the help is welcome, it will not offset the airlines' main problem: flagging passenger and cargo revenues. Aggregate losses could top $800m this year. Admitting overcapacity for the first time, Beijing has banned new entrants to the industry until 2012 and is urging existing carriers to cancel orders. About 180 new planes are on order for 2009. This will expand the total fleet by one-seventh. At least 40 per cent of deposits on those orders have been paid, and penalties are probably too high for them to default on the remainder. Delaying delivery and letting aircraft moulder in manufacturers' hangars may not delight Boeing or Airbus but seems the smartest way to address falling loads and slashed fares.

"Textbooks say consolidation is the answer. But synergies from combining carriers across vast geographical areas with big cultural differences have never added up - Southern and Eastern, after all, are still integrating airlines they merged with six years ago. And Beijing, like Detroit, is still wedded to a vision of three big national champions bestriding the mainland - even if they are sustained by the drip-drip of state aid." -copyright, The Financial Times Limited 2008

The GSEs Knew They Were Taking On Higher Risks

The Wall Street Journal's James R. Hagerty tells us that the brass at Fannie Mae and Freddie Mac knew they were taking on risks. He writes, "The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets."

Fannie went through three chief risk officers between 2004 and 2008. As the financial crisis approached they cut their spending on risk control.

Did Freddie fire David Andrukonis for opposing their getting into NINA (no income, no assets) mortgages?

It was not just about market share. They were trying to please their congressional allies, or should I call them their unindicted conspirators.

Central Banks Slash Rates

Last week, Joellen Perry in the Wall Street Journal announced: "Central Banks Deliver Sweeping Global Rate Cuts." But Perry warned, "However, Reductions May Be Losing Impact as Turmoil Continues."

The Financial Times' Dave Shellock reported "A series of aggressive interest rate cuts by European central banks failed to lift the mood in financial markets yesterday as investors continued to fret about the global economic and corporate outlook.

"Government bond yields on both sides of the Atlantic touched historic lows, credit spreads remained at distressed levels and oil prices fell, leaving equities struggling to gain traction."

A Brief History of Central Banks by Michael D. Bordo

Michael D. Bordo, one of the world’s foremost economic historians, provided the Federal Reserve Bank of Cleveland "A Brief History of Central Banks." In it, he describes the forces leading to the evolution of central banking and draws lessons for us now.

What do you think of his recommendation that central banks rather than targeting a positive inflation rate, should target the price level (i.e., zero inflation)?

Stock Rally?

Is this the start of the rally that is a harbinger of an economic recovery? The Associated Press's Tim Paradis reported that the stock market scored "gains of 16.9 percent for the Dow since the rally began Nov. 21, 19.1 percent for the S&P 500; and 16.7 percent for the Nasdaq." For the S&P 500 that represented "the largest five-day percentage gain since March 16, 1933." True half of that was regaining what the market lost in the first two days after the election. Yesterday, we gave some of that back.

The NBER Votes for December, 2007 as the Cyclical Peak

It is now official. A recession began in 2007. The National Bureau of Economic Research's Dating Committee met by phone Friday and made that decision. Looking at monthly indicators and cross checking them against various ways of aggregating quarterly GDP, they judged the recession started in December of last year.

But the Dating Committee should beware. Its analysis is vulnerable to revisions. The data as currently reported shows payroll employment peaked in December, 2008. The Committee looked at various other significant indicators peaked between November, 2007 and June, 2008. Our experience from the 2001 recession was that the payroll employment data got revised down dramatically well after the fact. Since the Bureau of Labor Statistics (BLS) adjusts the data each month for firm births and deaths, it overestimates job growth during recessions. I expect the same will happen again. That would move the payroll employment peak back. A downward revision in payroll employment would also cause personal income minus transfers and GDP to be revised downward.

I agree the economy turned down in 2007. I would argue for an earlier date than December: perhaps one of the summer months. The household survey data indicate an earlier downturn. Employment divided by population peaked in December, 2006 (i.e. a year earlier) and the unemployment rate bottomed out in March, 2007 (nine months earlier.) I rely on the ratios because they avoid difficulties associated with the time series of the household employment aggregates. The household data should do a better job of picking up employment weakness tied to the sectors at the center of the drama: mortgage brokers, real estate agents, and construction workers. Housing starts peaked in January, 2006 (a month or two earlier if you look at the moving averages) and had fallen about 40 percent by summer, 2007.

Are Stocks Cheap? Will They Get Cheaper?

Martin Wolf in the Financial Times tells us, "Why fairly valued stock markets are an opportunity." With the above graph, he looks at the long run fluctuations in Tobin's Q and cyclically adjusted P/E ratios. He gets the former from Andrew Smithers. The latter comes from Robert Shiller.

To my eye, it appears that long run market trends are associated with inflation regime shifts: the World War I inflation, the resumption of the gold standard, Bretton Woods, the Great Inflation of the 1970s beginning in the mid 1960s, the Vocker retrenchment, and the Greenspan punchbowl (i.e., "We do not prick bubbles and we live in fear of the demon deflation." The traditional role of the Fed was to take away the punchbowl just when the party got interesting.)

The valuations in the 1940s and 1950s may be understated, particularly for Tobin's Q. The government accelerated the recognition of much capital investment as part of the war effort in World War II. some economists believe this led to an underestimation of the capital stock and perhaps also an understatement of reported earnings and equity.

How sanguine should we be? Wolf concludes, "investors with long time horizons (the relatively young, or institutions) are, for the first time in almost two decades, confronting attractive, although not sensationally attractive, market valuations. ... nevertheless, formidable pressures for further falls in valuations, as leveraged players continue to be forced to offload assets at bargain prices."

Even GDP Numbers Are Now Showing A Widening World Recession

The U.S. economic recession which began in the summer of 2007 is starting to manifest itself in published GDP growth data.

The Financial Times and the Wall Street Journal report that GDP fell .5% in the third quarter. Since inventory investment added almost one percent to GDP growth, final sales must have fallen at close to a 1.5 % annual rate. Read details in the press release on the BEA website.

Import prices rose almost sixteen percent. For a country importing close to two trillion dollars of goods and services, that is equivalent to America's losing rough $300 billion in purchasing power. Talk about negative stimulus to aggregate demand!

Norma Cohen, FT's Economics Correspondent, reports the Organization for Economic Co-operation and Development (OECD) "is now forecasting four consecutive quarters of contraction for the US, countries using the euro, and OECD nations as a whole."

The Demise of Morgan Stanley

When Glass-Steagall forced J.P. Morgan to separate his commercial banking from his investment banking operations, he spun off the investment banking into what is now Morgan Stanley.

Susan Pulliam, Liz Rappaport, Aaron Lucchetti, and Jenny Strasburg chronicle Morgan Stanley's death throes. Evan Newmark tells us how greed did in Morgan Stanley writing at the Deal Journal on the Wall Street Journal's website.

Bretton Woods II and International finacial Regulation

Martin Wolf argues that agreeing on a new Bretton Woods is vital. Indeed, "The Great Depression of the 1930s was accompanied – and aggravated – by failures of economic co-operation, disintegration of the global economy and resurgent nationalism"; and cooperation is necessary now. Indeed Carmen Reinhart and Kenneth Rogoff argue that political interference played a major role in the curretn financial crisis and that "the need for greater regulatory independence is a compelling reason for establishing an international financial regulator."

Thinking About the Next Bubble

Gerald P. O'Driscoll, Jr. tells us, "To Prevent Bubbles, Restrain the Fed."

It is time to think past the crisis. When Alan Greenspan worried about deflation (falling prices), he kept interest rates too low feeding the investment bankers in the great credit over expansion of the mid-2000s.

How will we soak up all the excess liquidity that could fuel the next bubble?

A Little Country with a Popuation less than Sedgwick County Is at the Center of the Financial Crisis

Robert Jackson writes a "Letter From Iceland" in the Financial Times, "Think of Ireland. Rotate it 90 degrees clockwise, make it a third bigger and hang it like a pendant from the Arctic Circle. Crack open the earth’s crust below to release limitless supplies of geothermal steam, then fill its territorial waters, all 200 miles of them, with an abundance of cod. [read on]"

The Wall Street Journal shows us protests in Iceland:

Speech by Federal Reserve Chairman Ben S. Bernanke : "The Future of Mortgage Finance in the United States"

Greenspan On the Crisis

The IATA Calls the drop In International Air passenger and Cargo Traffic Alarming

Treasury Inflation-Protected Securities, or TIPS

Individual - Treasury Inflation-Protected Securities (TIPS)


Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.
TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
You can buy TIPS from us in TreasuryDirect and Legacy Treasury Direct through non-competitive bidding. Starting in January 2007, the 20-year TIPS is no longer sold in Legacy Treasury Direct, but it continues to be available in TreasuryDirect.

NOTE: At this time, only individuals can hold accounts in TreasuryDirect.

Richard Kavacevich Is another candidate for Banker of the Year

Jamie Dimon and Richard Kavacevich are on the top of the list for Banker of the Year, Big Banks category.

Kovacevich built Citibank into a retail powerhouse only to be passed over in the in house politics of Walter Wriston's world. He went to Norwest bank, built it up, and became CEO of Wells Fargo when it bought Norwest.

Banks talk a lot about cross selling, but actions speak louder than words. Under Kovacevich's leadership, the average Wells Fargo customer uses 5.7 services from the bank. Dan Fitzpatrick discribes Wells Fargo under his leadership as "a selling machine."

Kovacevich now has a chance to evangelize that gospel to Wachovia, which Wells Fargo is planning to take over. Absorbing Wachovia will be a big, big challange. Wachovia announced a $23.7 billion loss today.

Laugh So You Don't Cry

Saturday Night Live had a funny video about the current financial mess. It is a spoof of President Bush and Speaker Pelosi that goes on for about 7 minutes. It also includes the Sandlers, real people.

See the video at: http://www.nbc.com/Saturday_Night_Live/video/clips/c-span-bailout/727521/

For information on the Sandlers see: http://en.wikipedia.org/wiki/Herb_Sandler



Everyone form all political perspectives can enjoy the video from England in 2007. These two comedians have nailed the current crisis.

You may have to copy and paste the link:
http://www.brasschecktv.com/page/187.html

You may note the reference to Bear Stearns. Remember this comes from 2007 before the bailout of Bear Stearns. This was taken off You Tube a few weeks ago and I am happy to see it has resurfaced.

Morgan Stanley Enters Weekend Beset by Doubts on MUFG Deal

Vernon Smith: There's No Easy Way Out of the Bubble Treasury doesn't know much about running a 'reverse auction.'

Business Aviation: Industry and Forecasters are Optimistic about the Very Light Planes

Ron Paul takes Ben Bernanke on about Government & the Business Cycle

Information Regarding the Gramm-Leach-Bliley Act of 1999

You can find Information Regarding the Gramm-Leach-Bliley Act of 1999 at:

http://banking.senate.gov/conf/

Also:

http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html

The American Economy Lost 159,000 Jobs in September

Employment dropped by 159,000 Jobs in September. The unemployment rate is still at a recession level 6.1%.

Among the good news, the Bureau of Labor Statistics reported Wichita's unemployment rate was a percent and a half lower than the national average in August. There was evidence in the national report to that that should continue. Employment in aerospace manufacturing was up.

How to Play the Regulators One off Against the Other

Banks have different regulators depending on what type of depository institution they are and who charters them. This allows some operators to play games. It reminds me of the children running to the father when mom says, "No!" or playing the same trick in reverse when he says "No!" Raymond Lamb was a master at this game and America's fund insuring deposits is $862 million smaller thanks to Mr. Lamb's lending policies.

David Enrich and Damian Paletta write in today's Wall Street Journal, "One key focus in the financial crisis is the way the U.S. regulates banks, a patchwork often criticized as outdated and leaky. To those who say it needs an overhaul, Exhibit A could be a twin bank failure in the Southwest in July."

Chris Dodd and Angelo

Senator Christopher Dodd chairs the Financial Services Committee. Chris Dodd is a Democrat from Connecticut. I used to live in the Second District which he once represented, as did his father, Tom Dodd, before him.

Christopher Keating reports on the Capitol Watch blog for The Hartford Courant that Dodd, the younger, refinanced two 30-year mortgage loans from Countrywide Financial Corp. in 2003.

Countrywide was America's biggest mortgage lender. Countrywide's business model was to write mortgages through its network of offices around the country and package them into mortgage backed bonds. It got itself into financial trouble when it found it could no longer tap short term credit markets to provide bridge financing while it marketed these bonds. That was further aggrevated when investors became reluctant to buy them.

Fannie Mae's and Freddie Mac's exposure to Countrywide was substantial. Bernard Ducalion tells us, "During the first nine months of 2007, Countrywide accounted for about 29% of Fannie’s single-family business volume (Page 106 of 10-Q)."

Countrywide's chairman and chief executive officer, Angelo Mozilo, personally handled Dodd's refinancing. This was under a special procedure for high profile loans called the "Friends of Angelo" program. "Dodd refinanced his Washington townhouse with a loan of $506,000 and refinanced his East Haddam home for $275,042." Conde Nast Portfolio estimates that the favorable rates accorded the then ranking member of the Finacial Services Committee were valuable: "The Conde Nast article stated that Dodd's 30-year loans were both designed to be at 4.875 percent, but the East Haddam loan was reduced to 4.5 percent and the Washington loan was dropped to 4.25 percent. Over the life of the loans, that saved the Dodds about $58,000 on their Washington home and $17,000 on the East Haddam home, according to the article. Countrywide also waived three-eighths of a point on one loan and one quarter of a point on the other."

Curious.

The Center for Responsive Politics has tracked the cumulative contributions since 1989 from those associated with Fannie and Freddie. Senator is #1. Interestingly, Sen. Obama, although handicaped with only four years in Congress, has leapfrogged over the other 533 members of the House and Senate to achieve #2. Sen. McCain, however, appears to be in their now nationalized GSEs' doghouse. He has gotten less than one sixth what Obama has gotten and that is over a period five times as long:

All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

Name	Office	State	Party	Grand Total	Total from PACs	Total from Individuals
Dodd, Christopher J	S	CT	D	$165,400	$48,500	$116,900
Obama, Barack	S	IL	D	$126,349	$6,000	$120,349
Kerry, John	S	MA	D	$111,000	$2,000	$109,000
Bennett, Robert F	S	UT	R	$107,999	$71,499	$36,500
Bachus, Spencer	H	AL	R	$103,300	$70,500	$32,800
Blunt, Roy	H	MO	R	$96,950	$78,500	$18,450
Kanjorski, Paul E	H	PA	D	$96,000	$57,500	$38,500
Bond, Christopher S 'Kit'	S	MO	R	$95,400	$64,000	$31,400
Shelby, Richard C	S	AL	R	$80,000	$23,000	$57,000
Reed, Jack	S	RI	D	$78,250	$43,500	$34,750
Reid, Harry	S	NV	D	$77,000	$60,500	$16,500
Clinton, Hillary	S	NY	D	$76,050	$8,000	$68,050
Davis, Tom	H	VA	R	$75,499	$13,999	$61,500
Boehner, John	H	OH	R	$67,750	$60,500	$7,250
Conrad, Kent	S	ND	D	$64,491	$22,000	$42,491

Asterix Kerviel et al

Charles Bremner is Paris Correspondent for The Times. He has previously reported from New York and Brussels. He maintains a blog that can be quite amusing. Here is a link to his January entries. He tells us the new Asterix movie is very unFrench and not very funny. He has great fun with Jerome Kerviel and His Royal Highness, President Nicolas Sarkozy.

Enjoy.

Darda: A Recession Is Unavoidable

Michael T. Darda, the chief economist of MKM Partners informs us in the Wall Street Journal, "The Treasury bailout plan to recapitalize the U.S. banking system may help the U.S. avoid a deep and protracted recession. But even if the plan succeeds, it almost surely will not prevent a recession."


Indeed, below the GDP figures, lifted by net exports, "Gross domestic purchases contracted during the second quarter. Gross domestic purchases also contracted during the fourth quarter of 2007, and only rose by 0.1% at an annual rate during the first quarter."

Furthermore: "Real retail sales growth has been negative on a year-to-year basis for nine consecutive months, the longest streak of declines since 1991. This data, and the tremendous spike in both jobless claims and the unemployment rate, are telltale signs of an economy that is in reverse gear."

"

Is James Dimon the Banker of the Year?

"In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co." report Robin Sidel David Enrich and Dan Fitzpatrick in the Wall Street Journal this morning (9/26).

James Dimon, J.P. Morgan's chairman and chief executive, has proven the power of holding back and managing your hand carefully. Build your capital when times are good and run a large universal bank like the commercial bankers are in charge. Then pounce when you can acquire franchises cheaply that augment your strategy. That has proven to be the winning end game strategy.

The Journal notes his building a "fortress balance sheet:"

"Since taking the reins of J.P. Morgan nearly three years ago, Mr. Dimon has transformed the bank. Much of those efforts came during a period of prosperity for the banking industry, giving him time to upend the bank's culture and computer systems. Along the way, he has emphasized the need to create a 'fortress balance sheet' that can withstand a weak economy."

So much for the strategy of growth at any cost and fatten yourself on fees. Dimon's power house has bought the fattened calf's dessicated bones.

J.P. Morgan paid a steep price for a rather shaky bank which found itself subject to an old fashioned run: It contributed $1.8 billion to the FDIC fund and plans to take a $31 billion write off. It now plans to raise another $8 billion in capital. Why? J.P. Morgan bank emerges as the #1 bank in the U.S. It takes over a large network of mortgage banking and acquires a big retail footprint in two huge markets it has long coveted: Florida (New York South) and California.

Glass Steagal and McFadden are dead, long live J.P. Morgan!

That rumble you hear is Senator Glass rolling over in his grave!

Martin Wolf on the Treasury Plan

The Financial Times'es Martin Wolf advises us that "Desperate times call for desperate measures. But remember, no less, that decisions taken in haste may shape the financial system for a generation. Speed is essential. But it is no less essential to get any new regime right."

Among other things he agrees on a plan proposed by Professor Calomiris: "If, as seems plausible, a scheme that imposes such pain on the financial sector would be rejected out of hand, the next best alternative would be injection of preference shares by the government into decapitalised institutions, on the lines proposed by Charles Calomiris of Columbia University. This would be a bail-out, but one that constrained the behaviour of beneficiaries, not least on payment of dividends. That would make it far better than dropping benefits on the unworthy, via mass purchases of overpriced toxic paper."

History provides little comfort

In the Financial Times, September 16 2008, historian, Harold James, tells us:

"The drama of the past days – the collapse of Lehman Brothers, the rapid purchase of Merrill Lynch, the weakness of AIG, the threats to other institutions – all have no real historical precedent."

Is this an issue of liquidity or solvency?

AIG Is Rescued

The rescue of AIG:

1) The Federal Reserve (not the federal government) lent AIG $85 billion.

2) AIG pays LIBOR plus 8.5% (The Financial Times described it as: "The Fed’s rescue is on punishing terms: AIG must repay the $85bn loan at a storecard-like 8.5 percentage points over Libor, liquidating perfectly fine assets to do so.")

3) The federal government gets 79.9% of AIG's equity.

4) AIG's CEO steps down (involuntarily.)

5) The Treasury is supplying the Fed with extra funds.

6) Why Do It? Too many banks had bonds insured by AIG that would have had their capital impaired if AIG was downgraded

7) Why the draconian measures? To avoid moral hazard.


Earlier Bank of America bought Merrill Lynch.

The CPI is down!

The Wall Street Journal's Kelsey Hubbard and Kelly Evans discuss the first "good news" on inflation.

Welcome to our merry band of "ideologues," Mr. Secretary.

The Wall Street Journal feels vindicated by the nationalization of Freddie Mac and Fannie Mae, but worries that the reforms will not be soon through to the end. In today's editorial, they are feeling their oats. Meanwhile Senator John McCain and Governor Sarah Palin pledge to see that job through in an Op Ed piece today. Sen. McCain reminds us he warned over two years ago, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose."

Is International Accounting In Our Future?

Accountants: start learning a new set of rules! The Securities and Exchange Commission is moving toward using International Accounting Standards rather than U.S. GAAP.


On the front page of yesterday's (August 28, 2008) Wall Street Journal, Kara Scannell and Joanna Slater reported that the SEC has started the ball rolling to move publicly traded U.S. companies from GAAP to international standards.


They explained the timetable "The SEC's proposal would allow some large multinational companies to report earnings according to international accounting beginning in 2010. The SEC estimates at least 110 U.S. companies would qualify based on their market capitalization, among other factors. The agency also laid out a road map by which all U.S. companies would switch to International Financial Reporting Standards, or IFRS, beginning in 2014, at the expense of U.S. Generally Accepted Accounting Principles, the guiding light of accountants for decades."

Treasuries Fall After Auction, Faster-Than-Forecast GDP Growth

Treasuries Fall After Auction, Faster-Than-Forecast GDP Growth

By Dakin Campbell

Aug. 28 (Bloomberg) -- Treasuries fell after the U.S. sold $22 billion of debt and a government report showed gross domestic product grew faster than forecast, fueling speculation the Federal Reserve will raise interest rates.

U.S. government debt declined as the Standard & Poor's 500 Financials Index rose 3%, easing demand for the relative safety of the Treasury-backed debt. Traders reduced bets the Fed will remain on hold through the first quarter of next year.

``Today's data confirms our belief that bond yields are headed higher,'' said Ajay Rajadhyaksha, the head of fixed- income strategy at Barclays Capital in New York, one of 19 primary dealers that trade with the central bank. ``If you think about what the Fed seems to be banking on, it is that inflation will start moderating because the economy is weakening. The chances of that happening seem less likely.''

The yield on the five-year note rose 4 basis points, or 0.04 percentage point, to 3.05 percent at 2:17 p.m. in New York, after the government sold $22 billion of the maturity, according to BGCantor Market Data. The 3.375 percent security due in July 2013 fell 5/32, or $1.56 per $1,000 face amount, to 101 15/32. The yield on the two-year note advanced 3 basis points to 2.37 percent. Ten-year note yields were little changed at 3.78 percent.

The government's auction of five-year Treasury notes, the biggest sale of the maturity in more than five years, drew a yield of 3.129 percent, the lowest since March. The yield was higher than the 3.110 percent average forecast in a Bloomberg News survey of 10 bond-trading firms.

Weaker-Demand Signal

The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, fell to 2.14 from 2.46 at the last five-year auction, indicating weaker demand. Indirect bidders, a class of investors that includes foreign central banks, bought 29.8 percent of the amount sold, compared with an average of 25.2 percent this year.

The government sold a record $32 billion of two-year debt yesterday, drawing bids for 2.18 times the amount on offer.

``Today's results were weaker than the results of the two- year, which indicates some erosion in sentiment toward Treasuries between yesterday and today,'' said Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York.

Futures contracts on the Chicago Board of Trade show a 32 percent chance the Fed will hold its 2 percent target rate for overnight lending between banks by at least a quarter-percentage point unchanged through the first quarter next year, down from 36 percent yesterday. Policy makers next meet Sept. 16.

`Grain of Salt'

Treasuries have returned 1.5 percent this month the largest one-month increase since January, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. The gain came as the economy has shown signs of further softening and credit market turmoil. Yields on the 10-year note have fallen from a high of 4.17 percent reached on July 23, and are near a three-and-a-half month low.

The increase in yields today ``has to be taken with a grain of salt,'' said Francis Mustaro, who heads a group managing about $1 billion at J&W Seligman & Co. in New York. ``The trends are in place for stagnant growth and for improved inflation numbers.''

Mustaro said he expects lower yields and ``wouldn't be surprised'' if Treasuries declined 25 or 30 basis points in the coming months.

Gross domestic product increased at a revised annual rate of 3.3 percent in the second quarter, from an advance rate of 1.9 percent in the first quarter, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey of 78 economists was for a rise of 2.7 percent.

Initial jobless claims decreased to 425,000 in the week ended Aug. 23 from a revised 435,000 the prior week, the Labor Department said, matching the forecast in a Bloomberg survey.

German Bunds

The difference in yields between U.S. 10-year government notes and similar-maturity German bunds, a benchmark for European debt, was 39 basis points, after widening yesterday to 41, the most since Aug. 1. Bunds fell yesterday after European Central Bank policy makers Axel Weber and Lucas Papademos said rates may have to rise as the economy recovers.

Demand for U.S. Treasuries may be buoyed because money managers need bonds to match monthly changes in the benchmark indexes they use to gauge performance, said Tsutomu Komiya, an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan's second-largest brokerage.

New securities are added to bond market indexes each month. The Treasury issued 10- and 30-year debt in August.

``Demand from investors will increase'' as August comes to a close, said Komiya, who helps oversee the equivalent of $88.7 billion. Prices may decline in September, he said.

Agency Debt

Investors also may show a greater interest in Treasuries as they reduce their holdings of agency debt, notes sold by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Bank of China sold $4.6 billion of agency or agency mortgage-backed debt in July and August, according to a note to clients written by Andrew Brenner, co-head of structured products and emerging markets at MF Global Ltd. in New York, which cited the bank. MF Global is the world's largest broker of exchange-traded futures and options contracts.

Fannie Mae Chief Executive Daniel Mudd replaced three top deputies to restore investor confidence after record losses and a 90 percent drop in the shares, the Washington-based company said in a statement yesterday.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: August 28, 2008 14:22 EDT

Starbucks

Dan Henniger talks about the impact of Starbucks:

Inflation fears steer ECB away from rate cuts

Inflation fears steer ECB away from rate cuts

August 27 2008: Ralph Atkins writes in Frankfurt for The Financial Times:

European Central Bank policymakers signalled fresh alarm over the outlook for eurozone inflation on Wednesday even as German data indicated that headline inflation rates had fallen from record highs.

Comments by ECB governing council members suggested cuts in interest rates were far from being considered by the bank, despite the abrupt slowdown in eurozone growth.

Axel Weber, Germany’s Bundesbank president, warned that another increase in borrowing costs might be necessary when growth recovered.

Reflecting lower energy costs, Germany’s annual inflation rate dropped from 3.5 per cent in July to 3.3 per cent in August on a European harmonised basis, the country’s statistical office reported.

Economists forecast that eurozone figures, released on Friday, would show inflation across the 15-country region had also fallen, perhaps to 3.9 per cent or 3.8 per cent from the record 4 per cent in July.

But eurozone inflation still remains significantly higher than the ECB’s goal of an annual rate “below but close to” 2 per cent.

Lucas Papademos, ECB vice-president, warned in a speech in Buenos Aires that labour cost growth had accelerated and that inflation was likely to remain above the ECB’s target “for a considerable period of time before declining only gradually in the course of 2009”.

The ECB’s fear is that high inflation rates will become entrenched through “second-round effects” with slower growth having little dampening effect. The emergence of a wage-price spiral would “require a stronger degree of monetary tightening in order to achieve price stability”, Mr Papademos warned.

Earlier Jürgen Stark, an ECB executive board member, told a German newspaper that second-round effects had become “broad-based”. Heightening the ECB’s concerns, IG Metall, Germany’s powerful engineering trade union, has indicated it could demand a wage increase of up to 8 per cent in forthcoming wage negotiations.

The ECB policymakers’ comments reinforced expectations that ECB interest rates would remain on hold at least until well into next year.

Unlike the US Federal Reserve – which has slashed US borrowing costs in the past year – the ECB sees its job as focused on controlling inflation rather than riding to the rescue of economic growth.

Eurozone wages and prices are also slower to adjust then in other economies, strengthening the case for a more cautious stance by the ECB.

At the same time, the ECB is sticking to its forecast that eurozone growth could pick up this year. Gross domestic product contracted by 0.2 per cent in the second quarter and activity would remain “subdued” in coming months but “gradually recover in the fourth quarter of this year and in the course of 2009”, Mr Papademos said.

The ECB raised its main interest rate to 4.25 per cent in July largely to underscore its determination to counter second-round effects.

Mr Weber at Germany’s Bundesbank told Bloomberg that discussion about lower eurozone rates was “premature”. He went on: “If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we’ll have to see if action is necessary.”

The Bundesbank president expected that ECB forecasts for eurozone growth, to be released after its interest-rate setting meeting next week, would be revised downwards slightly while its inflation forecasts might be “slightly higher”.

Copyright The Financial Times Limited 2008

Maybe Bernanke Should Learn Portuguese

Brazil's central bank has raised its policy rate to 13%. Our Fed has the federal funds rate at 2% or two hundred and sixty basis points below inflation. So who is following a Third World monetary policy? The home of Embraer or Boeing?

Henrique Meirelles is the head of the Banco Central do Brasil and he understands his job description.

Antonio Regalado and Joanna Slater relate in today's Wall Street Journal, "During one of Brazil's many past bouts of high inflation, Henrique Meirelles recalls, he and his maid had a deal. On payday, she didn't have to work. That way, she could rush to the store and spend her entire month's salary before it became worthless.

"Mr. Meirelles is now head of Brazil's central bank, and the country's inflationary past is a big reason why he now ranks as one of the world's toughest inflation fighters. Even as the global economy slows, the Banco Central do Brasil has acted more aggressively than many of the world's central banks against inflation, raising short-term interest rates to 13%. The bank is expected to raise rates again in September."

The whole article is quite interesting. My favorite quote comes when Senhor Meirelles explains there is little "room for leniency. When there is disequilibrium between supply and demand, he says, it will be corrected in one of two ways: higher prices or higher rates.

"'The big advantage of using the interest rate is that you have someone in the driver's seat. When inflation is taking care of it,' he says, 'no one is driving.'"

A Global Approach Is Needed to Beat Inflation

Adam Posen is an astute observer of international economics and the Peterson Institute for International Economics. His colleague, Arvind Subramanian, is a Senior Fellow. Here they give some sage advice to the worlds central bankers in a commentary on ft.com. The fed has set off a world wide inflation and I will take teamwork to defeat it.

A global approach is needed to beat inflation

By Adam Posen and Arvind Subramanian

The Financial Times: August 21 2008

The world’s top central bankers meeting in Jackson Hole this weekend should do more than bemoan their respective financial risks. They should hammer out a joint approach to reducing global inflation, centred on a common public commitment to tighter monetary policies. Moreover, with the European Central Bank and a few emerging market central banks (such as those of Brazil and India) having taken the lead, the spotlight should be on the US Federal Reserve and People’s Bank of China. They must participate in this effort, rather than try to free-ride – which would only delay and increase the cost of their own inevit­able tightening.

The view of many central bankers is that there are few if any gains from monetary policy co-ordination. This view profoundly misreads the present situation.

Economists Are Divided On Whether We are In a Recession

Your friendly blogger, Malcolm C. Harris, has been saying for some time that the U.S. economy has been in recession since some time last year. The profession is divided as we hear from Phil Izzo interviewed by the Wall Street Journal's Kelsey Hubbart:

Thursday's News

This Week's News In Asia

The Eurozone Economy is Faltering As Inflation Drags It Down

The Financial Times reports, "The eurozone ... economy shrank by 0.2 per cent in the three months to June, as inflation driven by commodity prices wiped out growth." FT understands that inflation is a subtraction from the growth in aggregate demand growth. Indeed, "In the eurozone, inflation was a record 4 per cent in July, according to Eurostat, the European Union’s statistical office, although that was lower than its original estimate of 4.1 per cent."

Inflation Hits 5.6%

Expect to hear one of the Presidential candidates to call for Ben Bernanke's resignation. The Fed has badly missed its inflation target no matter how you game the numbers. The CPI was up 5.6% in June (year over year.) "Core inflation" was up 2.5%. The Fed's target is 1-2%.

Newt Gingrich's Three Ways to Lower Gas Prices: What Do You Think?

Kelly Evans Talks about the Prospects for the Economy

How much of our Standard of Living Do We Want to Sacrifice to Accelerate the Greening of the U.S. Economy?

Last Fall Ellie Berger Became President of Schoalstic Trade Publishing

SCHOLASTIC PROMOTES ELLIE BERGER TO PRESIDENT, TRADE PUBLISHING

Lisa Holton Leaves Scholastic to Launch New Media Venture

New York, NY (October 5, 2007) -- Scholastic, the global children’s publishing, education and media company, today announced that Ellie Berger has been promoted to President of Trade, succeeding Lisa Holton, who resigned her position as President, Trade and Book Fairs to launch a new media venture. Ms. Berger will report to Richard Robinson, Chairman, President and CEO of Scholastic, as will Alan Boyko, who will continue in his role as President, Book Fairs. For the next several months, Lisa will be available to the company in an advisory role.

“I am sorry to see Lisa leave Scholastic, but she has decided the time is right for her to launch her own new media venture,” said Richard Robinson. “At the same time, I know that both inside and outside the company there will be unanimous agreement that Ellie Berger is uniquely qualified to succeed Lisa and to lead our publishing program going forward.”

Mr. Robinson continued, “With more than 20 years experience at Scholastic, Ellie has a depth and breadth of knowledge about every facet of our book business. As Publisher, she has guided the strategic direction of the Trade program, working closely with the editorial staff to acquire, develop and market great books, series and franchises. She has helped to balance the Scholastic portfolio of titles in order to serve the rich diversity of our readers, and has worked closely with all Scholastic channels.

“Ellie is universally respected throughout the industry as the person at Scholastic who makes things happen -- from sales and marketing to publishing, acquisitions and operations. Within Scholastic, Ellie has worked directly with colleagues in every division of the company, earning their deep admiration and trust. I am confident that Ellie will lead us to a strong expansion of our trade publishing program.”

Ellie Berger joined Scholastic in 1985 as Managing Editor and has since held numerous positions at the company. Among her many accomplishments, Ms. Berger has been instrumental in negotiating strategic relationships to publish books based on popular properties and expanding the licensed publishing business. She has also been responsible for directing the Klutz® and The Chicken House companies. Since 1998, she has been involved in guiding the complex production and manufacturing operations around the publication of every one of the Harry Potter books including the seventh and final book in the series that broke all publishing sales records when it launched July 21, 2007.

Mr. Robinson added his praise for Ms. Holton’s leadership during the launch of Harry Potter and the Deathly Hallows. “As recently reported in Scholastic’s first quarter earnings, the release of the seventh Harry Potter book was enormously successful. Lisa’s leadership of the entire Harry Potter team, along with the marketing and distribution strategies that she and the team executed, were instrumental in helping us achieve unprecedented revenue and profit. During her tenure at Scholastic, Lisa contributed significantly to the forward movement of the company and helped position us for our next period of growth. I am grateful for her contributions.”

Since joining Scholastic in May 2005, Ms. Holton has brought in key talent across a number of departments within the Trade division. She worked closely with the Book Fairs group to diversify and deepen the management team as well as extend and expand online marketing activities. She oversaw the acquisition and development of a number of major new series, including Goosebumps Horrorland, which will marry a new line of books with Internet content also written by R.L. Stine, and Allie Finkle’s Rules for Girls, Meg Cabot’s first series for middle grade girls.

Known for her marketing acumen, Ms. Holton also oversaw the shift to campaigns that combine grassroots outreach with Internet marketing, including the Captain Underpants Purple Potty Bus Tour and The Seven Questions campaign leading up to the release of Harry Potter and the Deathly Hallows.

Lisa Holton commented, “I have had a great time at Scholastic and am proud of the many things we’ve achieved. It has been a once-in-a-lifetime experience. I am incredibly excited about exploring the intersection of print and online and look forward to publishing in this new media frontier.”

Scholastic Corporation (NASDAQ: SCHL) is the world's largest publisher and distributor of children's books and a leader in educational technology. Scholastic creates quality educational and entertaining materials and products for use in school and at home, including children's books, magazines, technology-based products, teacher materials, television programming, film, videos and toys. The Company distributes its products and services through a variety of channels, including proprietary school-based book clubs, school-based book fairs, and school-based and direct-to-home continuity programs; retail stores, schools, libraries and television networks; and the Company's Internet site, www.scholastic.com

Contacts:

Scholastic

Kyle Good

212-343-4563

kgood@scholastic.com

Ken Rosen On Fannie Mae and Freddie Mac

Ken Rosen is one of the most astute observers of the housing sector. He heads a real estate hedge fund and is the Chairman of Rosen Consulting Group. He taught at the Haas School (Berkley) for many years.

Here he assesses the situation at Fannie Mae and Freddie Mac:

Fannie Mae and Freddie Mac: Look past the jargon, and you'll find a $5 trillion scandal

My recent Perspective column in the Wichita Eagle.

Greenspan Is Fighting the Last (But Two) War

The United States in in the third of three nineteenth century type trade cycles. Yet our policy makers are still using a very different model of the cycle to guide their way through policy choices. Cyclical rules of thumb are dominated by the first eight post-World War II recessions. These were predominately short inventory cycles.

This puts policymakers in a position very much like the general fighting the last war who makes decisions that were winning one then but disastrous in the current war. The Spanish Armada was the best and most powerful naval force of its time. But it operated under the same model of naval warfare that prevailed at Lepanto, the great Christian victory over the Turks in 1571. At Lepanto, the fleets fought each other as collections of floating castles. The tactics consisted of ramming ships and soldiers fighting soldiers through boarding. Unfortunately for the flower of Spanish chivalry, the British demonstrated the superiority of an entirely new way of fighting naval warfare based on gunnery and maneuverability. Of the forty eight thousand soldiers and sailors who left Spain, barely fifteen hundred returned and the sun set on the greatest empire ever built.

When it comes to economic policy, few generals are as respected as Alan Greenspan. CNBC reported "Greenspan said on Thursday (7/31) that a slowing global economy may push the United States into recession, though it is not yet in one." [He is at least six, if not twelve, months off on that one.]

Greenspan said in an interview on CNBC television: "I think the data at this stage in the United States are not ... suggesting recession," but added, "We're right on the brink and I would be more surprised if we didn't (have a recession) than if we did, given the financial state."

What data was Greenspan looking at? Inventories: "Greenspan said companies were controlling inventories effectively and that 'at this stage, I think they are the major reason why in the very short term we're fending off inflationary pressures.'"

July Employment: The National Recession Is Still Bypassing Wichita

The Bureau of Labor Statistics issued its July Employment report and it gave cold comfort to those who deny we are in a national economic recession. The July unemployment rate rose to 5.7% from a June rate of 5.5%. In contrast, Wichita's unemployment rate was 4.3% in June.

Payrolls fell by 51,000 jobs. Wichita's export base is still doing well. The Labor Bureau does not break out the aircraft industry in its report, but by my analysis of their data jobs grew in the industry by about 1.3% over last year. In contrast many local companies serving other markets have experienced weak demand over the last year.

One measure of how the economy is doing is the ratio of jobs to the American population. Although it is a little noisy from month to month, it portrays the fundamental trends (see the chart.) In this recession the employment ratio has fallen by 107 basis points (1.07 percentage points.) That is mild in comparison with prior recessions: either we have a lot more pain ahead or we are in a very mild recession.

The First Global Financial Crisis of the 21st Century

This is an online book.

From the Wall Street Journal: Fannie Mayhem: A History

Look Past GDP To Judge If the Economy Is In Recession

In the Wall Street Journal, Sudeep Reddy, ("Economists Weigh Possibility of a Recession Amid Economic Growth" July 28, 2008; page a3) reports that the profession perceives that GDP will not be the sole, decisive factor as to whether the U.S. economy is in recession. Some commentators consider a recession to be synonymous with a decline in GDP. That confuses a metric with the phenomenon you seek to measure.

Speaking with the National Bureau of Economic Research's Dating Committee (the folks who make the call), Mr. Reddy learns a much richer analysis is needed: Victor Zarnowitz is the world's leading authority on the business cycle and a committee member. Zarnowitz "says the downturn in the job market 'is not alone enough, but it already tilts the weight toward a recession.' Mr. Zarnowitz, an economist at the Conference Board, a research group, [and] who has been with the NBER since 1952, says a decline in GDP would give him 'considerably more confidence that the whole thing is in decline.'"

Sudeep Reddy further reports that, "Harvard professor Martin Feldstein, president of the NBER until this month, says the nation has been 'sliding into a recession' since January, when many monthly statistics peaked. But a GDP decline isn't necessary 'if there is enough other evidence that the economy is contracting.'"

Hubbard Says The Fed Is Overextended: Amen Brother Economist

We're Asking Too Much of the Fed

By R. GLENN HUBBARD
July 21, 2008; Page A13

"The combination of eye-popping headline inflation of 5% year over year and dramatic expansions of the Federal Reserve's lending activities to limit the credit crunch raise a key question: Are we asking too much of monetary policy?

"The simple answer is yes. The expansion of the Fed's lending has been extraordinary in scale and scope. But it is not the best response to the present credit crunch, and may bring unwelcome side effects."

Read On....

Inflation Hit 5% in May

These are numbers Ben Bernanke and his colleagues at the Fed can not ignore. Inflation is sucking out purchasing power from the economy faster than any stimulus can add it back. The way to fight the recession is to stop inflation now.

Wichita Is Faring Better Than the U.S.

Jerry Siebenmark reports the consensus that our local economy is sailing in a sheltered bay while the national economy struggles to stay afloat in a tempest.

"While high gasoline and food prices are having an effect on the area's economy, they are not dramatically slowing it, local economists said Tuesday.

"'Our local economy, for the most part, is doing very well,' said Malcolm Harris, professor of finance at Friends University. 'Aerospace is doing very well, the farm economy is doing well and natural resources -- oil and gas -- is doing very well.'"

Our local unemployment rate is 1.2 percentage points below the national average.

The ECB's Monetary Policy Is Tighter But the Eurozone's Inflation Is About As Bad as Ours.

Elga Bartsch and Joachim Fels, managing directors at Morgan Stanley, wrote in yesterday's Wall Street Journal: "The main driver behind rising global inflation pressures is well understood: a very lax global monetary policy stance, particularly in the U.S. and in many emerging-market countries. This has fueled higher food and energy prices, and other prices are likely to follow – especially as most central banks around the world are unlikely to tighten policy sharply anytime soon.

"So it is not surprising that inflation is rising everywhere. What does appear puzzling is that, at 4%, euro-area inflation is at about the same level as that in the U.S. and has actually risen by a greater amount over the past year. That's despite a significant appreciation of the euro against the dollar during the same period."

The solution they suggest may be microeconomic rather than macroeconomic: structural reform.

Wichita: median sale price of existing homes was $114,900 in 2007

The median sale price of existing homes reached an all-time Wichita high, $114,900, but the number of houses sold is down by 19.8%.

Maybe the reason home sales are down is that there is a shortage in the price range buyers are looking for. Wayne Short, a former head of the Wichita Area Association of Realtors, provides a breakdown of Wichita's May home inventories by price range. While there are over four months supply of of houses under $100,00 and nine and a quarters months supply of houses between a quarter million and a half million, there were only 3.16 months supply of houses in the $100,000 to $150,000 range. You can find the data in the July 12th posting on his blog.

Builders make their fattest margins from fancier houses, but there might be some money to be made on new houses for ordinary folk.

The IMF to the U.S. and the Other Top Economic Powers: Inflation Must Be Your Chief Concern

Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF) told the leaders of the Group of Eight (G8) July 9 in Hokkaido, Japan that inflation should be the top concern of policymakers confronted by higher food and fuel prices.

The Fed's Inflation Is Driving Wichita's Raw Materials Costs Up

Dan Voorhis reports in the Eagle that "The skyrocketing cost of commodities is putting the squeeze on many Wichita-area manufacturers and wholesalers.

"The leading commodity indexes have risen between 45 and 55 percent in the past 12 months.

"Commodities are raw materials -- such as oil, aluminum, wheat and lumber -- that make up everything consumers buy."

According to Ken Vandruff in the Wichita Business Journal, "Airxcel manufactures air conditioning and heating equipment for recreational vehicles, schools and the telecommunications industry." To produce RV air conditioners, as does Wichita's Airxcel, you need to buy aluminum, steel, and other raw materials. Aluminum prices are up 18% over a year ago. Dan Voorhis quotes "Gary O'Neal, division manager for Central Plains Steel in Wichita," to the effect that hot rolled steel is up 80%.

I am quoted as placing the blame on the worldwide inflation set off by the over expansion of dollar denominated credit. What the ten wisemen at the Fed seem to have forgotten in their haste to deal with the credit crunch is that a general inflation first shows up in commodity prices. Moreover in the three rounds of accelerating inflation Americans suffered through during the Great Inflation of the 1970s, food price inflation was a leading indicator of general inflation. Our own regional Federal Reserve Bank of Kansas City president, Thomas M. Hoenig, has frequently been an inflation hawk, but he rotated off voting membership on the Federal Open Market Committee in January.

-Malcolm C. Harris, Sr., Professor of Finance, Friends University

John Marks Templeton: RIP

In today's Wall Street Journal's Outlook and Review we read his obituary:

Maximum Optimist
July 9, 2008; Page A14

On the eve of World War II, John Templeton bought stock in 104 companies selling at $1 a share or less. Only a few turned out to be worthless, while in time the rest turned large profits. Templeton went on to become one of the world's great fund managers by investing at what he called "points of maximum pessimism."

Yet Templeton, who died yesterday at age 95, was never himself a pessimist. As an investor, he always had confidence his picks would improve over the long term. Appropriately, the same "enthusiasm for progress," as he put it, also made him one of the world's great philanthropists. Life's spiritual dimensions were his abiding inspiration.

In 1972 he founded the Templeton Prize, which recognizes achievement that enriches religious experience. Templeton was unhappy that the Nobel Prize excluded faith, so he ensured the honor always had a higher cash prize (now about $1.6 million). Mother Teresa was the first recipient; others include Aleksandr Solzhenitsyn, Michael Novak and in recent years a distinguished roster of physicists and philosophers. A devout Presbyterian, Templeton believed "that God is vastly greater than human beings can comprehend," and sought to use his wealth to help reconcile science and religion. He thought that the one deepened the other.

To that end, he established the Templeton Foundation, which supports academic research in fields like cognitive science and evolutionary biology, as well as work related to the origin and nature of spirituality. Templeton also knew that many such modern philanthropies tend to begin with good intentions and then slide away from donor intent, so he established multiple checks to ensure that his financial legacy will stay true to his vision long after he was gone.

The Templeton Foundation now has a $1.5 billion endowment and awards some $70 million every year. He was indeed an optimistic investor for the long term.

The ECB Has Focus

The European Central Bank (the ECB) has one focus in its mandate, inflation. It takes that single mandate seriously. While the U.S. Federal Reserve drove the federal funds rate to 2% two hundred and twenty basis points below the U.S. inflation rate, the ECB has raised rates. The ECB's policy rate is now at 4.25%. Here the Wall Street Journal's Joellen Perry questions Jean-Claude Tichet, the ECB President.

Read her article here.

There are signs of a Downturn in Europe

The European edition of the Wall Street Journal reports that Denmark is in economic recession and the whole euro zone is in danger of following the Danes.

Emma Charlton and Joel Sherwood report "The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction.

"Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the United Kingdom and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag."

Unlike our Fed, who is fighting the U.S. recession with the wrong weapon, The European Central Bank (the ECB) is raising rates.

A $64 Billion Dollar Beer?

Robert Mugabe has long been an embarrassment to Africa. He has built a totalitarian regime on the crudest thuggery. Now he is committing economic crimes against humanity. Zimbabwe's hyperinflation is, to the extent it is measurable, running at a million percent, according to David Gaffin on Marketbeat. The picture on the right shows how many bank notes are needed to buy one bottle of beer. But that was a few days ago, prices change minute to minute.

Supplying paper to print the currency has been a lucrative business for a Bavarian company, Giesecke & Devrient. The Wall Street Journal describes it as "a secretive, family-owned Bavarian company that once made its money churning out worthless cash for the doomed Weimar Republic in the 1920s." Giesecke & Devrient "has been airlifting tons of blank notes to the Zimbabwean capital Harare. The company, which has been doing business with the African nation since before Mr. Mugabe took power in 1980, is one of the few sources in the world for the specialized paper that is so important in an age when computers and laser printers have made forgery easy."

What is Zimbabwe's fiscal policy? It is the same as its monetary policy: have paper will print! However that may end. Under pressure from the German government, Giesecke & Devrienthas stopped supplying Mugabe. Will the Chinese now supply his printing presses?

The Latest Employment Report Confirms we Are in A Recession

The graph shows the trend in the percent of American adults who have jobs. Click on the graph to enlarge it.

The Bureau of Labor Statistics issued a employment report this morning that confirmed the national economy is in recession. In June, the Bureau's survey of firms showed them with 61,000 fewer jobs. The national unemployment rate held steady at 5.5%, which is 1.2 percentage points higher than in March, 2007. The most recent data for Wichita shows our unemployment rate (3.5%) two whole percentage points below the national average.