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Current Topic: Markets & Investing

The End of Cheap Labor in China
Topic: Markets & Investing 4:01 pm EDT, Jun 26, 2011

On May 25, U.S. businessman Charles Hubbs made the short trek to Hong Kong from his office just outside Guangzhou, a city in Guangdong province in southeastern China that is known for good reason as the manufacturing workshop of the world. For the 64-year-old native of Louisiana, it was a trip that may have marked the beginning of the end of his successful 22-year run as a China-based exporter of medical supplies.

Hubbs was going to listen to a pitch from the American ambassador in Cambodia, Carol Rodley, and the president of the American Chamber of Commerce in Phnom Penh. Their aim was simple: to get foreign investors, particularly those already with operations in China, to consider setting up shop in Cambodia. Hubbs was all ears. To hear him tell it, the price of labor is on the brink of making his firm, Guangzhou Fortunique, which supplies some of the U.S.'s biggest health care companies, uncompetitive. "We've seen our wage costs in China go up nearly 50% in the last two years alone," he says. "It's harder to keep workers on now, and it's more expensive to attract new ones. It's gotten to the point where I'm actively looking for alternatives. I think I'll be out of here entirely in a couple of years."

The End of Cheap Labor in China

Koo Says U.S. Must Increase Borrowing, Spending
Topic: Markets & Investing 10:04 am EDT, Jun 24, 2011

June 23 (Bloomberg) -- Richard Koo, chief economist at Nomura Research Institute, discusses Federal Reserve monetary policy and U.S. fiscal policy. He speaks from Tokyo with Mark Barton on Bloomberg Television's "First Look."

Koo Says U.S. Must Increase Borrowing, Spending

Supreme Court leaves fund investors hanging
Topic: Markets & Investing 1:36 pm EDT, Jun 19, 2011

The high court has given investors one more reason to ignore a fund’s documents, ruling that a fund’s investment adviser may not be sued for securities fraud due to misstatements made in a fund’s prospectus.

In a 5-4 decision last week, the high court tossed a lawsuit against Janus Capital Group Inc. JNS +0.44% , the sponsor of Denver-based Janus mutual funds. The court ruled that Janus Capital and a subsidiary that advises the funds could not be sued for supposedly misleading statements in the prospectuses of the Janus funds.

The court reasoned that because the parent company is a separate entity from the funds themselves, only the fund can be held to the Securities & Exchange Commission’s standard that “any person, directly or indirectly … [making] any untrue statement of material fact” in the buying or selling process of a security is breaking the law.

Supreme Court leaves fund investors hanging

Commodity Prices and the Mistake of 1937: Would Modern Economists Make the Same Mistake?
Topic: Markets & Investing 7:47 am EDT, Jun  6, 2011

In 1937, on the eve of a major policy mistake, U.S. economic conditions were surprisingly similar to those in the nation today. Consider, for example, the following summary of economic conditions: (1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.

While this summary arguably describes current trends, it is taken from an account of conditions in 1937 that appears in “The Mistake of 1937: A General Equilibrium Analysis,” an article I coauthored with Benjamin Pugsley. What we call “the Mistake of 1937” was, in broad terms, a decision by the Fed and the administration to implement a series of contractionary policies that choked off the recovery of 1933-37 and brought on the recession of 1937-38, one of the worst on record. What is particularly noteworthy is that the inflation fears that triggered the Mistake of 1937 were largely driven by a rally in commodity prices. These circumstances invite direct comparison with our own time, when a substantial recent rise in commodity prices (which now seems to be abating somewhat) stoked inflation fears and led some commentators to call for an increase in the federal funds rate.

The question for the contemporary reader is this: If we could transport a modern-day economist back to 1937, would he or she have made the same mistake?

Commodity Prices and the Mistake of 1937: Would Modern Economists Make the Same Mistake?

Groupon files for IPO
Topic: Markets & Investing 10:47 pm EDT, Jun  2, 2011

Groupon filed for an IPO Thursday planning to raise $750 million reports The New York Times. The filing reveals very fast growth: Shortly after launching in 2008, Groupon notched revenue of $94 million. Two years later, it had swelled to $713 million. The company reported $644.7 million of revenue in the first quarter of 2011 alone, with 83 million subscribers across 43 countries, according to its filing.

A succesful IPO could boost prospects for the many private tech companies that are waiting to go public. But is Groupon a tech company?

Groupon files for IPO

White paper: India in the Super-Cycle
Topic: Markets & Investing 9:55 pm EDT, Jun  2, 2011

The Super-Cycle Report projects that China is likely to overtake the US to become
the world‟s biggest economy over the next decade, while India could become the
world‟s third-largest economy by 2030. Moreover, India is likely to grow faster, on
average, than China over the next two decades. We factor in a trend rate of growth of
6.9% for China, allowing for setbacks along the way, and of 9.3% for India, again
taking into account the business cycle.

Indeed, India has many of the features that will enable it to emerge as a winner in the
super-cycle. We believe the winners will be those countries which have cash,
commodities, or creativity, or a combination of these factors. India does not have an
abundance of cash or commodities, but it has creative potential.


Is India or Canada the place to invest?

White paper: India in the Super-Cycle

PBS and NY Times: Secret History of Credit Cards
Topic: Markets & Investing 12:26 am EDT, May 28, 2011

In "Secret History of the Credit Card," FRONTLINE® and The New York Times join forces to investigate an industry few Americans fully understand. In this one-hour report, correspondent Lowell Bergman uncovers the techniques used by the industry to earn record profits and get consumers to take on more debt.

But other consumers, like actor and author Ben Stein, use plastic purely for convenience. While it would appear that Stein -- who says he charges a small fortune every month on his credit cards -- is the ideal customer, in reality, he is what some in the industry call a "deadbeat." That's because he pays his balance in full every month. The industry's most profitable customers, the ones being sought by creative marketing tactics, are the "revolvers:" the estimated 115 million Americans who carry monthly credit card debt.

Ed Yingling, incoming president of the American Bankers Association, tells FRONTLINE that revolvers are "the sweet spot" of the banking industry. This "sweet spot" continues to grow as the average credit card debt among American households has more than doubled over the past decade. Today, the average family owes roughly $8,000 on their credit cards. This debt has helped generate record profits for the credit card industry -- last year, more than $30 billion before taxes.

Some experts say the profitability of credit cards really began twenty-five years ago, when the banking industry successfully eliminated a critical restriction: the limit on the interest rate a lender can charge a borrower. Deregulation, coupled with a revolution in technology that enables the almost real-time tracking of personal financial information and the emergence of nationwide banking, has facilitated the widening availability of credit cards across the economic spectrum. But for some, the cost of credit is often far greater than it appears.

According to Harvard Law Professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules. "These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print," Warren tells FRONTLINE.

PBS and NY Times: Secret History of Credit Cards

Will it hurt? MacroeconoMic effects of fiscal consolidation
Topic: Markets & Investing 11:15 pm EDT, May 27, 2011

This chapter examines the effects of fiscal consolidation —tax hikes and government spending cuts—on economic activity. Based on a historical analysis of fiscal consolidation in advanced economies, and on simulations of the IMF’s Global Integrated Monetary and Fiscal Model (GIMF), it finds that fiscal consolidation typically reduces output and raises unemployment in the short term. At the same time, interest rate cuts, a fall in the value of the currency, and a rise in net exports usually soften the contractionary impact. Consolidation is more painful when it relies primarily on tax hikes; this occurs largely because central banks typically provide less monetary stimulus during such episodes, particularly when they involve indirect tax hikes that raise inflation. Also, fiscal consolidation is more costly when the perceived risk of sovereign default is low. These findings suggest that budget deficit cuts are likely to be more painful if they occur simultaneously across many countries, and if monetary policy is not in a position to offset them. Over the long term, reducing government debt is likely to raise output, as real interest rates decline and the lighter burden of interest payments permits cuts to distortionary taxes.


Interesting white paper by the IMF.

Will it hurt? MacroeconoMic effects of fiscal consolidation

Time to move into cash
Topic: Markets & Investing 10:51 pm EDT, May 27, 2011

It's not for lack of effort. The Federal Reserve has created more than $2 trillion in new cash to go out and buy assets, including U.S. Treasury debt and mortgage securities, in an effort to get things moving. Short-term interest rates have been near zero since 2008.

The government has spent trillions more on stimulus packages, from then-President George W. Bush's stimulus checks in 2007 to President Barack Obama's $787 billion package to the payroll tax cut approved in December. There was the $700 billion bank bailout. The American International Group (AIG, news) bailout. The automaker bailout. The Bear Stearns dowry to JPMorgan Chase (JPM, news). Cash for Clunkers. Cash for washers. The homebuyer tax credit. The federal takeover of Fannie Mae and Freddie Mac.

Yet through it all the economy has acted like a black hole, sucking in stimulus spending and cheap money and yielding very little in return. Each new effort, which carries ever-greater risk of inciting runaway inflation or a new government debt crisis, falls short. We can't resist the relentless gravitational pull of the Great Recession.

For investors, the advice is simple and echoes the recommendations I've been giving in these pages for months: It's time to get defensive. For most conservative, long-term investors, this means cutting your allocations to equities and bonds and moving into cash.

Time to move into cash

$860 billion tax-cut deal: Cost breakdown
Topic: Markets & Investing 11:16 pm EST, Dec 11, 2010

- Bush tax cuts: $544.3 billion. The package would extend the Bush tax cuts for everyone for two years.

- Unemployment benefits: $56.5 billion. The package would also leave in place for 13 months the option to file for extended federal unemployment benefits -

- Social Security tax break: $111.7 billion. The package would also offer workers a payroll tax holiday worth 2 percentage points next year, so that instead of paying 6.2% on their first $106,800 of wages, they will only have to pay 4.2%.

- Individual tax credits: $8.3 billion. The compromise framework would also extend for two years the increased value of a number of tax credits that benefit low- and middle-income tax filers, such as the earned income tax credit, the child credit and a revamped tax credit for college costs.

- Business tax breaks: $69 billion. The bill contains more than 40 business tax breaks.

- Estate tax: $68 billion. The compromise framework also includes a lower estate tax, which barring any changes would return in 2011 with a $1 million exemption level and a top rate of 55%.

$860 billion tax-cut deal: Cost breakdown

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