President Obama embarked on his highly-anticipated maiden visit
to Asia last week, furthering his efforts at global outreach. The trip
comes as global leaders are reckoning with an unsynchronized exit from economic
policies that have helped end the worst
recession of the post-war era. Policy changes in Asia, particularly among
major U.S. creditors, will be essential to rebalance
global growth: APEC members (including those in the Americas) absorb 55% of
U.S. goods exports and provide a major market for U.S. service exports, while
Asia depends on U.S. consumers and foreign direct investment (FDI) to drive
economic growth. With the trip, Obama aims to renew U.S. political and economic
influence in a region that analysts claim was ignored by the previous
administration, addressing key issues like economic cooperation, climate
change, free trade and the regional balance of power. By spending nine days
abroad as domestic issues like health care and unemployment vie for his
attention, the president acknowledges the growing importance of the U.S.
relationship with a rising Asia.

Obama’s first stop was Japan, a key U.S. ally and the host of a large (and
increasingly contested) U.S. military concentration. Next, Obama stopped in
Singapore, where he attended the APEC meeting. Obama, whose cap-and-trade
legislation is stalled in Congress, was among the world leaders who accepted
that a binding carbon emissions deal was unrealistic, saying the best that
could be hoped for was a “politically binding” deal. On the sidelines of the
APEC meeting, Obama met Russian President Dmitry Medvedev to discuss U.S.-Russia
ties, the new arms control treaty and possible sanctions on Iran and North
Korea. While in Singapore, Obama attended the first U.S.-Association of
Southeast Asian Nations (ASEAN) summit, which was also attended by Myanmar’s
leader, before arriving in China. His final stop will be South Korea, where
talks of disarming North Korea may overshadow discussions on the U.S.-South
Korea trade agreement.

Tensions and Reassurance
in China

Ahead of Obama’s visit
to China, U.S. officials have focused on a new goal of “strategic reassurance”
that China will seek to maintain global stability as the country’s influence
grows. A bilateral deal on climate change would have sent a powerful signal on
this accord. Although U.S. and Chinese leaders signed several agreements on
clean energy initiatives, in part because of job creation goals, neither side
was ready to make any binding commitments on carbon reduction.

Similarly, the U.S. sought Chinese support on Afghanistan, Iran and North
Korea, but no meaningful cooperative agreements have been aired publically.
Over the past year, however, Chinese and U.S. leaders have been meeting more
often than they have during past U.S. administrations, and linkages at all
levels of governments have increased.

Trade and currency
issues dominated the U.S.-China meetings, as they have in past meetings,
though the relevant discussions were brief. The U.S. claimed a weak
renminbi (RMB) would prevent the correction of global imbalances that both
sides seek, but China put the blame on U.S. debt levels. This visit comes as
market actors are increasingly pricing in a renewed gradual appreciation of the
RMB over the next six months, as detailed in the recent RGE Analysis What
Is China’s Exit Strategy? by Adam Wolfe and Rachel Ziemba.

Just before Obama’s arrival, a senior Chinese official criticized the loose
U.S. monetary
policy for the first time. As in their trade meeting in Hangzhou last
month, China and the U.S. pledged to work together to avoid
a trade war as pressure builds in both countries’ export sectors. As the global
economy has begun to stabilize, the number of anti-dumping complaints has
grown. Calm heads may prevail in the end, but, again, no strong commitments
came from Obama’s visit or the meeting of trade leaders on October 29.

China sent a political message by skipping some of the goodwill gestures that
usually accompany a U.S. presidential visit. Ahead of the visit, Chinese
dissidents were reportedly rounded up, a striking contrast to the token
prisoner releases that tended to precede visits from Presidents Clinton and
Bush. Likewise, Obama’s “town hall” meeting in Shanghai was not televised live
across China as past U.S. presidential speeches were. In addition to asserting
China’s desire to level the political playing field, the moves may reflect
insecurity on the part of China’s leadership, stemming in part from concern
that the domestic economic recovery
remains “unstable, unbalanced and not yet solid.” Even if it is better
positioned to resist U.S. pressures, China still has a limited ability to alter
policy in Washington, in part because China’s pursuit of macroeconomic
stability from the dollar peg constrains other policies, including reserve
diversification. U.S. Secretary of Commerce Gary Locke has bluntly defended the
designation of China as a “nonmarket economy” for antidumping cases.

On
Nouriel
Roubini’s Global EconoMonitor, the RGE Analysts
focus on expected growth and inflation dynamics to determine the course of
monetary policy actions in advanced and emerging market economies.  Please read Global
Monetary Policy Outlook.

On
the RGE Analyst’s EconoMonitor,
Katharina Jungen takes the twentieth anniversary of the fall of the Berlin Wall
as an opportunity to review the progress of economic convergence between the
former German Democratic Republic (GDR) and West Germany.  Katharina notes that due to its economy’s
lack of dynamism, not only has the East been lagging behind its western
counterpart, but it is also set to be overtaken by other post-communist
economies.  In order to revive the
catching-up process, which has practically been on hold for the past decade,
Katharina argues that a redirection of financial aid from social security
transfers towards supporting innovation in small firms is key.  Please read Germany,
20 Years On: Goals Reached?

In
Another
Bleak U.S. Labor Market Report, Arpitha Bykere and
Christian Menegatti argue that U.S. job losses remain high despite easing in
the recent months. Amid continued job losses, record low work hours and subdued
labor compensation, consumer spending will remain weak, especially as the
impact of policy stimulus fades. Sluggish hiring will keep the unemployment rate
high for some time and contribute to the slack in the economy.

In
The
Zombies are Coming… Again, Christian Menegatti and Elisa
Parisi-Capone revisit the number and names of zombie banks in the U.S. as of Q2
2009.

In
Revisiting
2009 Predictions for Equity Markets Monika Brown reviews
and analyzes analyst predictions made in January 2009. A divergence in opinion
between the large institutional managers and independent managers is noted.

On
the Finance & Markets Monitor,
Joseph Mason asserts that the discussion draft for financial reform released by
the Senate Banking Committee doesn’t contain much that is worthwhile, and Mason
argues that reform requires serious inquiry and understanding into the causes
of the crisis; otherwise it is just a political exercise in the run-up to
mid-term elections. Read In Crisis
Inevitably Breeds Leviathan.

In
Senate
Bill Would Break-Up TBTF Banks, Barry Ritholtz takes
a look at a bill that is gaining ground in Congress that would “break-up” big
banks, addressing the too big or too interconnected to fail problem.

On
the Peterson Institute for
International Economics Monitor, Anders Aslund
discusses the complaints that the CIS countries are having with Russia
including Russia’s lack of respect for its neighbors’ territorial integrity,
gas policy, trade conflicts, and financial issues.  Russia’s reputation as an unreliable and
unpredictable partner is contributing to its increasing isolation on the world
stage.  See The
Leader of the CIS Is Lonely and Weak.

In
India:
New Letter and Spirit, Arvind Subramanian looks at the
radical views of Jairam Ramesh, minister of state for the environment, as India
struggles with its identity as an international player with the emergence of
the G-20.

On
the Global Macro EconoMonitor,
James Kwak points out that productivity growth, which is often quoted in the
media and is almost always referring to labor productivity, can be all over the
map in the short term and especially during recessions; productivity often
falls during a recession as output falls faster than companies lay off workers
and spikes afterward because output is growing right while companies are laying
off workers.  However, in the long term,
productivity growth depends on thing like improvements in technology and business
processes.  Read Productivity
and Layoffs.

In
If
the Fed is Looking to Inflate Away Problems, What Should Asia Do?
Edward Harrison presents a piece by Andy Xie who suggests that China and Japan
should form a new free trade agreement.

In
Parallels
Between US and Japanese Economies Edward Harrison
presents a clip of Marshall Auerback elaborating on the similarities between
the U.S. and Japanese economies pointing to the misallocation of fiscal
resources, crony capitalism, zombie banks, and low interest rates.

On
the U.S.
EconoMonitor, Fabius Maximus shows how ridiculous it
is that most Americans vote their pocketbooks in elections to Congress and the
Presidency.  See A
Note about the US Economy and the Recent Elections (Yes, We’re Nuts)

In
The
Fed is Already Transparent, Mark Thoma presents a piece by
Anil Kashyap and Frederic Mishkin who are worried that the Ron Paul proposal to
audit the Fed will “cripple policy making.” 
Thoma adds that the people are frustrated that they don’t feel the Fed
is acting on their behalf, and Thoma offers some solutions to make the people
feel that they have more influence.

In
Inflation
Expectations Continue to Inch Higher, James Picerno points
out that it appears that the financial system has stabilized and the battle
against deflation seems to have been won, but that doesn’t make it any easier
to predict precisely how the Fed will act going forward.

Also
on the U.S. EconoMonitor:

Unemployment
Rate Illusion by Edward Harrison

Understatement
of the Year: “Recovery Hampered by Unemployment”
by Barry Ritholtz

On
the Emerging Markets Monitor,
Antonio Carlos Lemgruber recognizes the seriousness of the dollar party and
recommends keeping an eye, as usual, on what is happening in the U.S.  Lemgruber sees these “negative” signs
occurring as soon as the very beginning of 2010.  Read The
Dollar Party.

On
the Asia EconoMonitor,
Anoop Singh wrestles with the mystery of Asian firms that save but don’t invest
and households that hold wealth and don’t consume, which is contributing to
global imbalances and constraining its long-term growth potential.  Singh offers corporate governance and
financial sector development as vital clues, which present interesting policy
implications.  See Asia’s
Corporate Saving Mystery.

In
The
IMF on Asia’s Recovery and its Sustainability, Claus Vistesen
argues that Asian countries “hold little promise in terms of providing a
decisive engine for rebalancing through sustainable growth in domestic demand
which exceed investment rate, and therefore is cautious on the overall
sustainability of the recovery in Asia.

On
the Europe EconoMonitor,
David Smith reports that in the UK, the Bank’s new forecasts are more upbeat
and predict higher inflation, while unemployment figures continued the very
encouraging pattern.  See Bank
Moderately Upbeat – Good Unemployment News by David Smith

In The
Dollar As A Funding Currency, Edward Hugh discusses
carry trades and exit strategies.

Think the worst is over? Wrong. Conditions in the U.S.
labor markets are awful and worsening. While the official unemployment
rate is already 10.2% and another 200,000 jobs were lost in October,
when you include discouraged workers and partially employed workers the
figure is a whopping 17.5%.

While losing 200,000 jobs per month
is better than the 700,000 jobs lost in January, current job losses
still average more than the per month rate of 150,000 during the last
recession.

Also, remember: The last recession ended in November
2001, but job losses continued for more than a year and half until June
of 2003; ditto for the 1990-91 recession.

So we can expect that
job losses will continue until the end of 2010 at the earliest. In
other words, if you are unemployed and looking for work and just
waiting for the economy to turn the corner, you had better hunker down.
All the economic numbers suggest this will take a while. The jobs just
are not coming back.

There’s really just one hope for our
leaders to turn things around: a bold prescription that increases the
fiscal stimulus with another round of labor-intensive, shovel-ready
infrastructure projects, helps fiscally strapped state and local
governments and provides a temporary tax credit to the private sector
to hire more workers. Helping the unemployed just by extending
unemployment benefits is necessary not sufficient; it leads to
persistent unemployment rather than job creation.

The long-term
picture for workers and families is even worse than current job loss
numbers alone would suggest. Now as a way of sharing the pain, many
firms are telling their workers to cut hours, take furloughs and accept
lower wages. Specifically, that fall in hours worked is equivalent to
another 3 million full time jobs lost on top of the 7.5 million jobs
formally lost.

This is very bad news but we must face facts.
Many of the lost jobs are gone forever, including construction jobs,
finance jobs and manufacturing jobs. Recent studies suggest that a
quarter of U.S. jobs are fully out-sourceable over time to other
countries.

Other measures tell the same ugly story: The average
length of unemployment is at an all time high; the ratio of job
applicants to vacancies is 6 to 1; initial claims are down but
continued claims are very high and now millions of unemployed are
resorting to the exceptional extended unemployment benefits programs
and are staying in them longer.

Based on my best judgment, it
is most likely that the unemployment rate will peak close to 11% and
will remain at a very high level for two years or more.

The
weakness in labor markets and the sharp fall in labor income ensure a
weak recovery of private consumption and an anemic recovery of the
economy, and increases the risk of a double dip recession.

As a
result of these terribly weak labor markets, we can expect weak
recovery of consumption and economic growth; larger budget deficits;
greater delinquencies in residential and commercial real estate and
greater fall in home and commercial real estate prices; greater losses
for banks and financial institutions on residential and commercial real
estate mortgages, and in credit cards, auto loans and student loans and
thus a greater rate of failures of banks; and greater protectionist
pressures.

The damage will be extensive and severe unless bold policy action is undertaken now.

Roubini is professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics.

While the United States recently reported 3.5 per cent GDP growth in
the third quarter, suggesting that the most severe recession since the
Great Depression is over, the American economy is actually much weaker
than official data suggest. In fact, official measures of GDP may
grossly overstate growth in the economy, as they don’t capture the fact
that business sentiment among small firms is abysmal and their output
is still falling sharply. Properly corrected for this, third-quarter
GDP may have been 2 per cent rather than 3.5 per cent.

The story of the U.S. is, indeed, one of two economies. There is a
smaller one that is slowly recovering and a larger one that is still in
a deep and persistent downturn.

Consider the following facts. While America’s official unemployment
rate is already 10.2 per cent, the figure jumps to a whopping 17.5 per
cent when discouraged workers and partially employed workers are
included. And, while data from firms suggest that job losses in the
past three months were about 600,000, household surveys, which include
self-employed workers and small entrepreneurs, suggest a number above
two million.

Moreover, the total effect on labour income – the product of jobs
times hours worked times average hourly wages – has been more severe
than that implied by the job losses alone, because many firms are
cutting their workers’ hours, placing them on furlough or lowering
their wages as a way to share the pain.

Many of the lost jobs – in construction, finance, and outsourced
manufacturing and services – are gone forever, and recent studies
suggest that a quarter of U.S. jobs can be fully outsourced over time
to other countries. Thus, a growing proportion of the work force –
often below the radar screen of official statistics – is losing hope of
finding gainful employment, while the unemployment rate (especially for
poor, unskilled workers) will remain high for a much longer period of
time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit
scores and investment-grade firms are not experiencing a credit crunch
at this point, as the former have access to mortgages and consumer
credit while the latter have access to bond and equity markets.

But non-prime borrowers – about one-third of U.S. households – do
not have much access to mortgages and credit cards. They live from
paycheque to paycheque – often a shrinking paycheque, owing to the
decline in hourly wages and hours worked. And the credit crunch for
non-investment-grade firms and smaller firms, which rely mostly on
access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms.
Larger firms – even those with large debt problems – can refinance
their excessive liabilities in or out of court, but an unprecedented
number of small businesses are going bankrupt. The same holds for
households, with millions of weaker and poorer borrowers defaulting on
mortgages, credit cards, auto loans, student loans and other consumer
credit.

Consider also what is happening to private consumption and retail
sales. Recent monthly figures suggest a rise in retail sales. But,
because the official statistics capture mostly sales by larger
retailers and exclude the fall by hundreds of thousands of smaller
stores and businesses that have failed, consumption looks better than
it really is.

And, while higher-income and wealthier households have a buffer of
savings to smooth consumption and avoid having to increase savings,
most lower-income households must save more, as banks and other lenders
cut back on home-equity loans and lower limits on credit cards. As a
result, the household savings rate has risen from zero to 4 per cent of
disposable income. But it must rise further, to 8 per cent, in order to
reduce the high leverage of the household sector.

To be sure, the U.S. government is increasing its budget deficits to
put a floor under demand. But most state and local governments that
have experienced a collapse in tax revenues must sharply retrench
spending by firing policemen, teachers and firefighters while also
cutting welfare benefits and social services for the poor. Many state
and local governments in poorer regions are at risk of bankruptcy
without a massive federal bailout.

Moreover, income and wealth inequality is rising again. Poorer
households are at greater risk of unemployment, falling wages or
reductions in hours worked, all leading to lower labour income, whereas
on Wall Street, outrageous bonuses have returned with a vengeance. With
the stock market rising and home prices still falling, the wealthy are
becoming richer, while the middle class and the poor – whose main
wealth is a house rather than equities – are becoming poorer and being
saddled with an unsustainable debt burden.

So, while the United States may technically be close to the end of a
severe recession, most of America is facing a near-depression. Little
wonder, then, that few Americans believe that what walks like a duck
and quacks like a duck is actually the phoenix of recovery.

Nouriel Roubini is professor of economics at New York University’s Stern School of Business and chairman of RGE Monitor.

Last
week was a busy one for the Federal Reserve (Fed), the European Central Bank
(ECB) and the Bank of England (BoE). Policymaking is tricky when different
asset classes are sending very different signals about the economy. However,
those different signals are themselves a byproduct of policy. In the U.S., bond
markets are discounting a sluggish U-shaped recovery or even a double-dip
recession, while risky markets are signaling a strong V-shaped recovery ahead.

Which is right? While RGE leans towards the
U-shaped camp, we do not expect risky assets to invert their course as long as
the Federal Reserve commits to maintaining “exceptionally low levels
of the federal funds rate for an extended period.”  So the policy dilemma is one of having to
maintain “exceptionally low rates” given the still very
difficult real economic conditions, but with the danger of an increasing
disconnect between risky asset valuations and the economy–which could
eventually snap back and compromise economic and financial stability in the
medium term. While this environment reignites the debate on whether central
banks should target asset prices or not, RGE
maintains that Fed fund hikes are a story for end of 2010 or Q1 2011.

The Bank of England kept its rate on hold at 0.5% for the 8th consecutive month in
November with another hold almost certain in December. As the UK economy failed to pull out of recession in
Q3 2009, a rise in
interest rates is unlikely to occur before Q2 2010; a view supported by
evidence in the money markets. The Monetary Policy Committee did move to
increase the program of quantitative easing, asking the Chancellor of the
Exchequer, Alistair Darling, for an extra £25 billion to be pumped into the
economy, bringing the total amount to £200 billion. With interest rates
remaining at a historically low level and public finances precarious,
quantitative easing has replaced traditional monetary and fiscal policy as the
favoured tool of policy makers. The extra £25 billion is likely to act as the
final push with the Bank of England attempting to revive an economy operating
with spare capacity. It is unlikely that any further increase in quantitative
easing will occur, barring a severe economic shock.

The
ECB, meanwhile, stayed on hold at 1.0% in November. ECB president
Jean-Claude Trichet expressed concern over the excess volatility and strength
of the U.S. dollar. Nonetheless, further rate cuts seem unnecessary as signs of
economic
stabilization and a deceleration of deflation have emerged. Broad money
supply growth continues to decelerate and credit to households and
non-financial businesses is contracting. The ECB will continue conducting the QE operations it
started July 6, but December may be the last tender for its 12-month
refinancing operation. Trichet signaled as much, saying “not all our
liquidity measures will be needed to the same extent as in the past.”

While global monetary policy
easing was synchronized, tightening does not need to be.  Australia embarked on its
rate tightening phase earlier than other developed world central banks. It
raised rates twice, in October and November, by 25 basis points each. Australia
avoided a recession in 2009 thanks to commodity restocking and prompt fiscal
and monetary easing. Australia will likely remain on a gradual easing path,
however, until the strength and sustainability of its recovery becomes clearer.
Extra government subsidies for home purchases sparked a buying boom that raised
Australia’s mortgage debt level to a new high. The expiry of those subsidies at
the end of 2009 and the increases in interest rates could restrain the recovery
of domestic demand. On the other hand, recovering export demand and the
expansion of a Treasury program to buy resident MBS may help offset the decline
in direct support to home buyers.

Following in the footsteps of the Reserve Bank of
Australia, which was the first among advanced economies to hike rates, Norges Bank (Norway’s
central bank) recently increased its key policy rate by 0.25 percentage
points to 1.5%. The executive board’s strategy sets the key policy rate
interval at 1.25% – 2.25% until its meeting in March 2010. Given the Norwegian
economy’s mild downturn and strong recovery prospects, monetary tightening was
expected. Norges Bank cautioned that a stronger krone could slow its expected
pace of rate increases.

In October, the Bank of Japan (BoJ)
adjusted its policy to reflect the modest improvements in credit markets and
the economy. Due to thawing corporate credit markets and very weak demand* at
the BoJ’s special facilities to purchase corporate bonds and commercial paper,
the Bank of Japan decided to allow those programs to expire at the end of 2009
as planned. Further purchases would only distort corporate debt pricing as
liquidity returns to the market. As a safety precaution against potential
disruptions to corporate credit for businesses that cannot access market
funding, the Bank of Japan extended until March 2010 its program to offer unlimited
low interest rate loans to banks, collateralized with corporate debt. However,
at the behest of the Ministry of Finance, the Bank of Japan will keep
purchasing government debt. Like other central banks that engaged heavily in
unconventional easing, the BoJ will roll back its targeted easing programs
before resorting to the blunter tool of rate hikes. The BoJ reiterated its view
that deflation will grip Japan until 2011, hence the policy rate will likely
stay on hold throughout 2010. See Bank of Japan’s Exit from
Monetary Easing: Strategies and Timing.

After having to hike interest rates aggressively in the
2006– 2008 period, most central banks from emerging market economies had to
undo them rapidly from the end of 2008 to Q3 2009, as output gaps widened
significantly and inflation and inflation expectations collapsed as a result of
the global crisis. Moreover, currencies experienced strong appreciating
pressures from the end of Q1 2009 onwards, facilitating the dovish monetary
policy reaction. Now that the worst of the global crisis seems to have past,
macroeconomic policies are loose, and economic activities are healing, central
banks are facing the difficult task of carefully implementing exit strategies,
while avoiding exacerbating appreciative pressures on their currencies and
trying to control asset inflation and bubbles.

Asian central banks will be the first among emerging
markets to tighten monetary policy as capital inflows and
loose policies since late 2008 are raising liquidity and asset inflation. But goods inflation will
remain within the central banks’ target in most countries amid a slow recovery
in domestic demand,
weak credit growth in Asia ex-China, and an output gap. This will delay interest rate hikes
into 2010, especially in the export-dependent economies, and constrain
aggressive tightening until domestic and external demand improve further. Until
then, Asian central banks will continue to fight credit and asset bubbles via
liquidity absorption and regulatory and prudential measures, such as in real
estate.  Countries that are less
export-dependent and have attractive asset markets—India, South Korea and
Indonesia—will be the first ones to hike rates and allow currency appreciation.
In November 2009, Taiwan
banned foreign inflows in time deposits and might resort to further capital
controls. If hot inflows maintain their momentum, other Asian countries might
use enforcement or regulatory measures to manage capital flows.

In Latin America, there
is a marked differentiation on the speed of the economic recovery; however,
most countries will experience slow closing of the output gaps over the next
year.  Moreover, stable if not strong
currencies (BRL, CLP, COP, MXN, and PEN) and limited
upward wage pressures should help in containing probable external supply-side
shocks emerging from commodity prices and limit inflationary pressures sparked
by recovering domestic demand. Although inflation and inflation expectations
will bounce back, central banks will most likely achieve their inflation
targets in 2010. Nevertheless, monetary authorities will start moving away from
a very loose monetary policy stance toward a neutral one in 2010 in order to safeguard
medium-term inflation expectations once the recovery has gained momentum.  In this light, central banks mainly will
target the monetary policy rate. 
However, upward adjustment in other monetary policy instruments (reserve
requirements and margin reserve requirements) will likely be implemented.  Those central banks that have acted the most
aggressively and face potential surprises to the upside in growth and inflation
will initiate the mapping out of excessive accommodation sooner than the
rest. 

Rate hikes in Central and Eastern European (CEE)
countries are expected to lag those in other emerging market regions given the
particularly sharp downturn in the CEE and prospects for a weak recovery. Many
central banks are still in easing mode, amid
economic contractions and easing inflation. Uneven growth prospects across the
region mean monetary policy paths will vary.

Aside from Israel, which in August became the first
country globally to begin raising interest rates, Middle East and Africa will
remain effectively on hold until late in 2010. Most of the GCC countries peg to
the U.S. dollar and thus import U.S. monetary policy. Meanwhile despite the
inflationary impact of a weak dollar, tight domestic credit conditions will
restrain a liquidity surge.

–

 * As of Sept. 30, only 100
billion yen of commercial paper (CP) was offered for the BoJ to purchase – just
3% of the 3 trillion yen allocated by the BoJ for the CP purchasing program.
Only 300 billion yen of corporate bonds was offered for the BoJ to purchase -
just 30% of 1 trillion yen allocated for the corporate bond purchasing program.

On
Nouriel Roubini’s Global EconoMonitor, Nouriel provides
detailed analysis on how the weakness of the dollar along with near-zero
interest rates and quantitative easing are fueling a correlated bubble across global
asset classes, which is getting bigger by the day.  Nouriel provides a number of reasons for why
and how these carry trades can unravel and cautions policy makers that the
bigger the bubble the bigger the crash. 
Please read Mother
of all Carry Trades Faces an Inevitable Bust.

Don’t
miss Nouriel’s CNBC
Interview Discussing Carry Trades and Asset Bubbles.

On
the RGE Analyst’s EconoMonitor, Arpitha Bykere and Elisa
Parisi-Capone analyze the administration’s policies on regulatory reform,
housing sector programs and fiscal stimulus. They also highlight the challenges
for President Obama going forward, including addressing the fiscal deficit and
entitlement burden and passing the healthcare legislation.   Please read One
Year after Obama’s Election: Regulatory and Fiscal Challenges.

In
Too-Big-To-Fail:
Regulatory Reforms of Systemically Important Institutions, Elisa
Parisi-Capone considers the initiatives currently on the table to deal with the
too-big-to-fail problem. The options range from break-up—which is the one
favored by Nouriel
Roubini—to stricter regulation and setting the right incentives. While the
debate goes on among regulators and academics, the European Competition
authority has taken action and ordered the divestment of significant parts of
ING, RBS and Lloyds since their bailout packages were deemed to have given them
an unfair advantage under State Aid rules.

In
Nigerian
Oil: Delta Ceasefire, Political Bottlenecks, Lee Hudson Teslik examines
what the Delta peace initiative and Nigeria’s push for oil industry regulatory
reform will mean for Nigerian output and for international oil companies
operating in the country.

On
the Finance & Markets Monitor, Rick
Bookstaber debates whether innovation promotes economic growth and considers
the impact of financial innovation over the past 10-15 years arguing that “just
because we are able to take some cash flow and turn it into an instrument
doesn’t mean we should.”  Please read Does
Financial Innovation Promote Economic Growth?

In
Please,
Listen to the Lady! Daniel Alpert notes that Sheila Bair, Chairwoman of the
FDIC, continues to prove that she has the best interest of the country and the
banking system at heart as she advocates for important reforms like funding the
proposed resolution fund during fat times.

In
How
Goldman Bet on a Housing Crash, Barry Ritholtz points out the obvious
conflicts of interest in the practice of financial companies that decide to
market a financial product, which they consider to be a loser, to unsuspecting
customers without sharing their real opinion of the product.  But is it criminal?

Also
on the Finance & Markets Monitor:

The
Cruel Basic Mathethematics of Losses by Barry Ritholtz

Uh-Oh:
Economists Say Recovery, Market Gains Solid by Barry Ritholtz

Wood
Warns of Correction, Says “Key Variable in the West is Government Policy”
by Edward Harrison

The
Return of Mixed Results by James Picerno

On
the Peterson Institute for International Economics Monitor, Michael
Mussa, a former student and professor at the University of Chicago, sits down
with Steve Weisman and assesses the influence – for good and for ill – of
economics as espoused at the University of Chicago.  Please read Is
the “Chicago School” to Blame in the Economic Crisis?

In
Latvia,
Lithuania, and the IMF, Anders Aslund compares how the financial crisis has
been handled by these countries, which appear to be facing very similar
conundrums.

On
the Global Macro EconoMonitor, Mark Thoma
presents a piece by Mikhail Gorbachev who claims that the global crisis was
necessary to recognize the organic defects of the present model of western
development, which he believes was imposed on the rest of the world as the only
one possible, and pushes for drastic democratic reform.  Thoma adds that the failure of the
market-based development model as well as the success of countries with
different development models like China has undermined the faith in traditional
market-based development strategies.  See
The
Berlin Wall Had to Fall, But Today’s World is No Fairer.

In
Do
Smart, Hard-Working People Deserve to Make More Money? James Kwak
recognizes that financial success often depends on luck and chance and questions
why the unlucky deserve less.

In
Sustainable
Growth? Tim Duy argues that while the GDP report confirms that the
recession has come to an end, the drivers of the boost are potentially
unsustainable, and thus he isn’t breathing easy yet.

In
The
Hubris of Economics, Barry Ritholtz provides a rational look at some of the
problems with the field of economics.

On
the U.S. EconoMonitor, Robert Reich points out that if the goal is
to help the most Americans in a time of need, perhaps our priorities need to be
refocused.  Read Health
Care Reform is Critically Important, But Getting Americans Back to Work is More
So.

In
Another
Crack in Republic’s Foundations: Not the Size of the Debt, But When it’s Due,
 Fabius Maximus shrewdly explains the
different scenarios that are possible with regards to short-term and long-term
bonds, and how the former makes the solvency of the government that much more
vulnerable.

In
Roubini
Predicts “Mother of All Carry Trade Unwinds”, Yves Smith pushes the
conversation on how the weak dollar is the funding currency for risky carry
trades that are blowing asset bubbles.

Also
on the U.S. EconoMonitor:

Bullish
Data, Recoveries, Crashes and the Psychology of Forecasting Redux by Edward
Harrison

Five
Myths About Our Land of Opportunity by Mark Thoma

On
Revisions and on Conditioning by Menzie Chinn

Tax
Cuts and Recoveries by Mark Thoma

How
Obama Can Convince Congress to Enact a Larger Stimulus, and Why He Must by
Robert Reich

On
the Emerging Markets Monitor, Michael
Pettis is still negative about global imbalances despite positive GDP numbers
coming out of the U.S. because he sees the drivers of growth to be
unsustainable.  He argues that rebalancing
is going to happen one way or another, but pushes for less Chinese investment
in infrastructure and more distribution of wealth to Chinese households,
because it is consumption growth that powers economies over the long term.  Please read What
Rebalancing of Chinese and American Consumption?

On
the Asia EconoMonitor, Anoop Singh examines how it is that Asia has
rebounded sooner and more strongly than the rest of the globe from the economic
slump when the region is so heavily dependent on exports for its growth.  See The
Puzzle of Asia’s Rapid Rebound.

In
Looking
back at Indira Gandhi, Ajay Shah presents a piece that takes a look at
recent history and provides 5 lessons for today’s Congress in India.

On
the Europe EconoMonitor, Simon Johnson reports that pressure from
the EU and voices within the Bank of England have pushed the government to
begin a process to restructure the banking system.  See Britain
To Break Up Biggest Banks.

In
Trouble
in Ireland as Fitch Cuts Debt Two Notches to AA- and Deficits Soar, as the
news gets progressively worse out of Ireland, Edward Harrison asks again
whether Ireland is the next Iceland.

The imposition of capital controls on capital inflows as well as currency
intervention tends to be ineffective in reversing the appreciating trend of the
local currencies, especially if the latter are primarily driven by external
factors. However, capital controls may be helpful in easing volatility and the
pace of the trend itself. The risk is that capital controls are seen as
punitive measures against capital markets. They raise uncertainty about future
policy actions, hurt the credibility of the central bank, and increase the
costs of external funding for local businesses. Overall, policymakers’ actions
to contain the appreciating trend of their countries’ currencies depend on how
fast capital is flowing in, sterilization costs, and monetary policy
flexibility. Consequently, EM countries where currencies and equity markets
have surged over the course of the year are the most likely to impose some sort
of limitations on capital inflows.

On October 20, Brazil
surprised investors with a 2% tax on capital inflows to both equity and bond
markets. Likewise, in March 2008, Brazil used a 1.5% tax on fixed income
inflows only to contain the Brazilian real’s appreciation at the time. The tax
was eventually lifted in October 2008 shortly after the Lehman collapse. This
time around, taxation on equity investment was included to contain short-term
capital flows, while FDI was exempted. Although emerging market currencies
may continue to strengthen against the U.S.
dollar, other EM policymakers may be more reluctant than Brazil’s to
introduce capital controls in an effort to stem the currency appreciation and
protect exporters. Below we examine how countries have been dealing with strong
capital inflows and which country, if any, is likely to be the first to follow
Brazil.

Capital Controls Alone
May Not Be Enough

It is important to recognize that the use of capital controls is not uniform
and neither are the results. In addition, their impact can be subdued by global
conditions. In today’s economy, EM currencies are up against a weakening
dollar. The dollar is down 6.3% YTD as measured by the US Dollar Index and down
14.3% from its March peak. The EM currency rally this year is even stronger
than that of the US Dollar Index with five different currencies gaining over
10% YTD. Only the Argentine
peso has posted a significant loss against the dollar YTD.

Governments are best served implementing measures aimed at smoothing currency
appreciation as opposed to halting or reversing trends. This can be done in
part by identifying and targeting areas of volatility and hence vulnerability.
By addressing areas of greater volatility, countries can smooth currency flows
without endangering macroeconomic stability. The recent tax in Brazil targets
volatile portfolio flows as opposed to FDI. Portfolio investments fled Brazil
following the Lehman collapse only to flow back this year. Meanwhile, FDI has
remained relatively stable.

Given the extraordinary flow into emerging markets, it is unlikely that capital
controls or intervention alone will be able to put the brakes on EM currency
appreciation. Indeed, the Brazilian real gave up 3% against the dollar
following the announcement of the tax before appreciating 3.7% after four days.
That said, Brazil and other governments may find themselves in a position where
they need to tap a greater arsenal if their desire to stem appreciation is
strong. With that in mind, look for central bank intervention to be a greater
theme in the coming months.

Who in the World is
Next?

Latin America:

Most of the largest Latin American countries have experienced strong
appreciation pressures on since the end of Q1 2009; some have responded by
intervening aggressively in FX markets. What other Latin American governments
may come to the table with capital controls similar to Brazil? Through October
26, the Chilean
(CLP) and Colombian
(COP) peso appreciated 19% and 17%, respectively, versus the dollar. The
Peruvian new sol
(PEN) is also a top performing EM currency, gaining nearly 10% this year. Mexico’s
peso is one of the laggards in the region and capital inflows there are recovering
slowly. Moreover, despite positive external factors, uncertainties around
passing the 2010 fiscal budget and reforms in Mexico have kept the local
currency without much investor support. Therefore, Mexico is not a candidate
for any implementation of capital controls.

Chile is no stranger to capital controls, having imposed a 20% unremunerated
reserve requirement on foreign loans from 1991-98. Chile’s foreign exchange
regime is free floating; however, policymakers have intervened in the FX
markets when the currency moved too far from macroeconomic fundamentals, most
recently in 2008. Chilean authorities tend to let the markets know of their
intentions well in advance, and their mechanisms are very transparent in length
and quantity. For instance, until the end of the year, the central bank is
currently selling the U.S. dollar on a daily basis (US$50 million a day) and
the currency is considered to be near its ten-year moving average, in real
terms. Thus, with the Chilean peso currently trading around 530, we believe
Chile is still considerably above a level that would drive the government to
intervene and/or introduce capital controls. As we highlighted in our regional
outlook, RGE does not anticipate any kind of intervention unless the peso falls
well below 500 and closer to the 450 level. Even then, we believe Chile would
prefer intervening in FX markets and/or maintaining copper earnings abroad over
outright capital controls.

Colombia is more likely to step up its actions against currency appreciation.
Already the Colombian government pledged to leave roughly US$500 million in
dividends from the state-oil company Ecopetrol overseas and sell local currency
bonds domestically to compensate. But the government continues to hold off on
implementing capital controls, perhaps acknowledging that such an action should
be a last resort, especially since strong FDI rather than portfolio flows are
driving the Colombian peso’s appreciation. Instead, after its policy meeting on
October 23, the Central Bank of Colombia (Banrep) announced it would spend
roughly US$1.6 billion to purchase dollars and peso-denominated government
bonds. Given that inflation and interest rates are low and the economic
recovery is likely to be slow, sterilizing the intervention is an option rather
than a necessity at this point.

In Peru’s case, the central bank has stepped up the intervention over the last
couple of months in order to contain currency appreciation rather than reverse
it. Similar to Colombia, inflation and interest rates are low in Peru while the
economy is growing well below potential. Therefore, sterilization costs are low
and outright capital controls are not necessary. Moreover, because Peru is a
heavily dollarized economy, managing U.S. dollar flows is key to maintaining
macroeconomic stability.

Asia / Pacific:

Despite a flood of portfolio investments into many of the region’s asset
markets since early 2009, Asia still needs foreign capital to stimulate
investment and finance its current accounts. Therefore, facing a sluggish
export recovery and a pegged Chinese renminbi, most countries have opted to
contain currency
appreciation via verbal and actual interventions to avoid losing
competitiveness. Intervention in the foreign exchange market has led to record
reserve growth of over US$70 billion in Q3 alone in emerging Asia ex-China.
Although most Asian countries are expected to keep intervening amid some
currency appreciation, several countries may impose restrictions on foreign
currency transactions. Given buoyant equity markets, attractive carry trades
and the U.S. dollar weakness, policy measures will not contain the impact of
capital inflows on Asian currencies, meaning that some appreciation from the
least trade-dependent countries is to be expected. Taiwan is the country where
capital controls or new restrictions are most likely to be implemented.

Of developed Asia-Pacific economies, only Japan, Australia and New Zealand have
resorted to verbal intervention so far. Australia views currency strength as a
reflection of its economy’s resilience and is unlikely
to officially intervene, especially after the failed intervention in
October 2008. Monetary
tightening could spark more inflows. Japan will continue
to rely on verbal intervention to dampen yen appreciation, albeit less
frequently than the previous pro-export administration, as a stronger yen will
help rebalance the economy toward domestic demand. Meanwhile, New Zealand
officials are more apprehensive that the kiwi’s
strength may abbreviate the economy’s rebalancing away from debt-fueled
domestic demand. A revival of carry trades that pushes the New Zealand dollar
out of alignment with economic fundamentals could prompt a reprisal of 2007
when the Reserve Bank of New Zealand resorted to currency intervention.

The relatively open Asian Tigers are likewise unlikely to impose capital
controls. Singapore and dollar-pegged Hong
Kong will delay rate hikes and depend on FX intervention to contain
currency appreciation. Taiwan
may take a similar stance, especially since its currency is still competitive
relative to South Korea and Japan. However, the Taiwanese government is
considering the possibility of capital controls in the face of strong portfolio
investment. RGE continues to believe that the Taiwanese government is likely to
stick to intervening in the FX market, further adding to its US$330 billion in
foreign exchange reserves.

Based on the pace of reserve
growth, hot money (short-term portfolio inflows) again began flooding into
China even as domestic
monetary conditions have led to an appreciation of domestic real assets,
especially property. China’s quasi dollar peg suggests inflows will persist.
China never lifted pre-existing capital controls. Rather than impose further
controls on inflows, China is expected to improve enforcement of existing
measures and to continue encouraging capital
outflows, both of government investment vehicles and more recently of
retail investors through the revived Qualified Domestic Institutional
Investment (QDII) program.

Low export dependence, reliance on energy imports, inflation risks and
improving investment will allow South Korea, India and Indonesia to tolerate
some currency appreciation despite continuing with FX intervention. These
countries will be among the first ones in Asia to hike interest rates. But
instead of capital controls per se, South
Korea may use regulatory measures to mediate capital inflows by foreign
investors and domestic borrowers and to check asset bubbles. India
already has capital controls in place but may tighten restrictions on foreign
institutional investors and external borrowings by companies if asset
bubbles become a concern. Indonesia’s
reliance on foreign capital for deficit financing will discourage capital
controls. But in the case of excessive currency appreciation, Indonesia
restrictions on currency transactions are a possibility.

Despite high export dependence, Malaysia and Thailand expect that delayed rate hikes and
less attractive asset markets will allow them to contain currency appreciation
largely by FX intervention. Malaysia maintained most of the capital controls
imposed during the Asian crisis. In Thailand, dampened investor sentiment due
to political instability and past capital controls will keep capital inflows
modest. But Thailand may continue easing
capital outflows to contain currency appreciation.

The Philippines will keep on engaging in competitive
devaluation due to its dependence on remittances to drive economic growth. With
capital controls already in place and a need for foreign capital to finance its
current account deficit and build foreign reserves, the Vietnamese central bank
may instead devalue
and restrict currency transactions to manage its currency.

Europe, the Middle East
& Africa:

The South African Reserve Bank has done little to curb the rand’s
25% gain YTD, resorting only to the occasional verbal intervention. Last week,
the central bank had to issue a statement that it did not plan to “freeze” the
currency. The central bank has allowed the currency to float, resulting in
little change in foreign exchange reserves over the past year, despite an increase
in South Africa’s SDR allocation. With its reliance on foreign capital to
finance the country’s chronic current account deficit, capital controls are
particularly unlikely. In the 2009-10 budget, the finance minister suggested
loosening existing exchange controls. Given the sluggishness of South Africa’s
economic recovery, the South African Reserve Bank will be slower to raise rates
compared to some of its EM counterparts, potentially limiting the rand’s future
climbs.

Russia has been steadily intervening in the FX market, lest the ruble climb too
high. As such, its reserves have grown to US$420 billion by mid-October,
despite the fact that Russia is spending the assets in its sovereign
wealth funds. Prime Minister Putin has insisted that Russia would not
impose controls on capital despite a doubling of Russian equities since the
beginning of the year. In fact, Russian authorities continue to try to lure
back foreign investors to its resource sector to maintain output.

Despite rumors of possible capital controls, the GCC
governments did not impose new restrictions on capital in the wake of the
financial crisis and the domestic credit squeeze. Doing so would have further
impaired the regional
economic union. Instead, government backstopping of the banking system and
fiscal spending helped offset portfolio and direct investment outflows. Many
countries, especially Saudi Arabia, continue to have significant restrictions
on inflows to domestic equities, measures that cushioned asset markets.
However, regulations to encourage direct investment are under consideration in
the UAE, including the possible relaxation of the requirement that Emiratis
maintain a majority stake in any project. As with other less liquid frontier
economies, these countries are still seeking to attract capital, especially
through debt markets, as evidenced by Dubai’s
imminent return to the credit markets.

Nordics:

In contrast with the recent experiences of Brazil and certain Asian countries,
which are taking steps to limit excessive capital inflows, Iceland has been
attempting to stop outflows through strict capital
controls, implemented in the wake of the country’s banking
system collapse in late 2008. Payments related to exports and imports of
goods are allowed, but capital transactions are controlled.
The controls have served a number of purposes. For one, they have allowed the
central bank to lower the policy
rate to 12%, down from the 18% peak in October 2008, without destabilizing
the currency. Two, the controls provided a stable environment to restructure
the island’s failed banks.

The general idea behind the controls was to give the economy time to heal, but
as history has shown, capital controls can at best provide a temporary respite.
Over time, people find ways to circumvent the controls. In August 2009, the
central bank announced plans to gradually remove the controls over the next two
to three years. The danger, of course, is that even when controls are removed,
capital inflows will not return. However, as economist Willem Buiter noted
in February: “The example of Malaysia, which imposed capital controls during
the Asian crisis of 1997 suggests that foreign capital either has a short
memory or can be convinced.”

Global imbalances — roughly defined, the different emphasis the
world’s leading economies place on savings, spending and debt — is a
phrase much used and little acted upon.

Well before the
current financial crisis began, world leaders pledged to address this
disconnect. At an International Monetary Fund meeting in 2007, for
instance, representatives of the United States and the European Union
agreed they should change economic incentives to encourage more savings
and less spending; officials speaking for China, Japan and Germany,
meanwhile, pledged to take steps to encourage spending. At the end of
the day, nothing much happened, and these imbalances helped grease the
skids for the global descent toward the economic abyss.

This
might not be readily apparent from current numbers; in fact, the
financial crisis has contributed to a significant narrowing of global
economic imbalances. Consumers in so-called “deficit countries” —
states like the U.S., Britain, Spain and the countries of Eastern
Europe that have huge trade deficits — are saving more as the crisis
has exposed the dangerous extent of their indebtedness. Meanwhile, in
China and other large export-driven economies, fiscal stimulus spending
and some other policy moves have encouraged more domestic consumption.

The
reduction in the U.S. current account deficit — the broadest measure of
trade in goods and services — is particularly striking and serves as an
example. This reduction holds true across other, less robust economies,
too. Many of the emerging economies of Eastern Europe had easily
financed wide deficits during the boom years. Now they find they are
reducing private consumption in light of the lack of credit.

In
more desperate cases like Ukraine and Kazakhstan, this has necessitated
currency devaluation that boosts the costs of imports. Others,
especially Eastern European countries in line for E.U. membership, have
clung to their currency pegs. This leaves room for adjustment only via
a sharp reduction in domestic demand.

Changing ingrained habits
— whether the tendency is to be too thrifty, or too loose with money —
is never easy. There is a powerful temptation to point at current
trends and argue that rebalancing is taking place naturally. That would
be a big mistake.

All evidence suggests that this rebalancing
is temporary — the result of reactive policy measures among exporters
and retrenchment among the profligate.

China, the world’s
sovereign wealth machine over the past decade, is a case in point. My
colleague, Rachel Ziemba, projects China’s current account surplus will
likely narrow to $350-370 billion depending on the import trajectory,
down from a record $420 billion in 2008. China’s trade surplus was just
under $100 billion in the first half of 2009. A trade surplus of about
$30 billion in the third quarter of this year is expected, which is
well below 2008 levels. Increased spending at home rather than savings
could further reduce the surplus. Yet with China reluctant to allow
currency appreciation, reserve accumulation has resumed at a strong
pace.

Although the export-oriented growth model has been shaken
by the crisis, many countries seem reluctant to recalibrate. The
beginning of inventory restocking has buoyed Asia significantly, as
companies that cut back sharply have now increased output. Avoiding
currency appreciation will exacerbate this trend, adding to reserve
accumulation and distortions.

The most recent I.M.F. estimates
— released in the October 2009 World Economic Outlook — suggest that
imbalances could widen again but remain lower (as a share of G.D.P.)
than their 2006 peak. Yet the dollar values of these imbalances could
be very large.

In the I.M.F.’s forecast, China’s surplus will widen again in 2010, even as a retrenched U.S. consumer remains weak.

So
who offsets the U.S. deficit? The I.M.F. suggests a diffusion of
imbalances, where surpluses of Germany and Japan will remain in
shrinking mode even in 2010, while the deficits of Canada and
Australia, as well as emerging economies like Brazil, will offset the
growth of China’s surplus.

However, the I.M.F. five-year
projections also show a widening current account surplus for the entire
world. This could suggest that some of the underlying export
assumptions are too optimistic given the growth estimates.

Global
imbalances are back on the policy agenda with the G-20 agreeing to
create a peer review of macroeconomic policies including imbalances to
avoid another crisis. The details are limited so far, but focus once
again on an agreement that the U.S. will consume less and save more;
Japan, Germany and China will spend more and will reallocate investment
away from the export sector.

These are the right goals, to be
sure. But a joint communiqué from a nascent international organization
isn’t much to hang the world’s hat upon. The I.M.F. needs teeth,
perhaps along the lines of the W.T.O.’s authority to prod member states
toward “out of court” settlements, in order to enforce these difficult
political and economic goals.

These imbalances represent
serious misallocations of capital in domestic economies that, projected
globally, raise the risks considerably of future financial crises and
asset bubbles.

While imbalances did not cause the current
financial crisis — I believe lax regulation bears a far greater onus —
these imbalances certainly helped create the conditions for this
crisis. Easy money and low long-term interest rates created an
incentive to invest in seemingly-safe high-yield assets. An orderly
unwinding of imbalances might put a lid on global growth during the
adjustment, but is fundamental to achieve sustainable global growth.

Nouriel Roubini is a professor of economics at the Stern School of Business, New York University. 

Oct. 29 (Bloomberg) — The Oracle of Omaha retains his
pre-eminence as a market visionary, outshining a new wave of
financial strategists and the best-known central bankers.

Billionaire investor Warren Buffett, chairman and chief
executive officer of Berkshire Hathaway Inc., is regarded as
the best assessor of financial markets by a plurality of almost
one-fourth of respondents to the quarterly poll of investors,
traders and analysts who subscribe to the Bloomberg terminal.

The closest runner-up, Bill Gross, the founder and co-
chief investment officer of Pacific Investment Management Co.,
is chosen by 16 percent. Billionaire investor George Soros gets
10 percent, followed by Nouriel Roubini, the New York
University professor who in 2006 predicted the financial
crisis, and Marc Faber, publisher of the Gloom, Boom & Doom
Report.

Fewer than 1 in 10 cited Federal Reserve Chairman Ben
Bernanke, despite high marks for his performance as a central
banker. Only 3 percent pick Alan Greenspan, the former Fed
chairman.

“The other people in the list have their merit, but I
think consistency — which does not mean total absence of
mistakes — is the key to rating Buffett,” says poll
respondent Frédéric Bach, 46, a partner and head of fixed-
income investments at London-based Falcon Money Management LLP,
which manages $4 billion. “I would add a non-financial
element: there is some humility in the man, as when he opted
out of tech stocks because he didn’t understand them. Who in
finance nowadays will admit they are wrong, or they don’t
understand something?”

Obama Rating

Investors’ confidence in President Barack Obama and his
economic team dropped sharply during the past three months,
even as the Standard & Poor’s 500 Index rose about 7 percent
and Obama was awarded the Nobel Peace Prize. Among global
investors, 57 percent say they hold a favorable opinion, down
from 73 percent in a July poll.

Among U.S. investors, two-thirds hold an unfavorable
opinion of Obama. Treasury Secretary Timothy Geithner and
Lawrence Summers, head of the National Economic Council, also
get negative grades from U.S. respondents.

The quarterly Bloomberg Global Poll of investors and
analysts in six continents was conducted Oct. 23-27. It is
based on interviews with a random sample of 1,452 Bloomberg
subscribers, representing decision makers in markets, finance
and economics. The poll has a margin of error of plus or minus
2.6 percentage points.

The Bloomberg Global Poll is conducted by Selzer & Co., a
Des Moines, Iowa-based public-opinion research company.

Buffett Missteps

Buffett’s lofty standing follows some recent high-profile
setbacks, among them an investment in Houston-based
ConocoPhillips, the third-largest U.S. oil company, which the
billionaire called a “major mistake,” and the purchase of
shares in two Irish banks that soon afterward plummeted in
value as the financial crisis struck.

Berkshire Hathaway showed a 9.6 percent decline in book
value last year, only the second time the measure has fallen
since Buffett took over in 1965, and the company’s stock price
underperformed the S&P 500 during the year ended Sept. 30.

Still, Buffett also seized advantage of the financial
panic last fall to make big purchases in well-known companies
at depressed prices, extending $8 billion in financing to New
York- based Goldman Sachs Group Inc. and Fairfield,
Connecticut-based General Electric Co. at 10 percent yields
after the Lehman Brothers Holdings Inc. failure froze credit
markets.

Jeff Matthews, author of “Pilgrimage to Warren Buffett’s
Omaha” and founder of the hedge fund Ram Partners LP in
Greenwich, Connecticut, says the long arc of Buffett’s
investing career makes him stand out.

‘One-Hit Wonders’

“There have been a lot of one-hit wonders over the last
40 years,” Matthews says. “Warren Buffett has outlasted them
all.”

Among U.S. investors, Pimco’s Gross rated as highly as
Buffett. Newport Beach, California-based Pimco, the world’s
biggest manager of bond funds with $840 billion in assets, has
called for a “new normal” in the global economy that will
include heightened government regulation, lower consumption,
slower growth and a shrinking global role for the U.S. economy.
Pimco is a unit of Munich-based insurer Allianz SE.

“While not always on-point, he brings a rigorously
analyzed yet pragmatic perspective that yields some value at
any point in time,” says poll respondent Michael Martin,
senior vice president and general counsel of MDAdvantage
Insurance Co. of New Jersey. “The facts, as Gross and his team
have determined, appear to indicate a long and perhaps very
difficult path for this country and others like it.”

International Luster

While Obama has lost some of his international luster, he
continues to be viewed positively outside the U.S. In
interviews, poll respondents cited the turnaround of the U.S.
economy under his leadership.

“The world is facing the worst economic period of its
recent history,” says Francesco Scotto, 36, head of treasury
products for BNP Paribas Fortis in Milan. “Acting on both the
real and the financial economy, the U.S. government helped in
the best possible way the American economy to exit from the
crisis.”

U.S. investors’ highly critical view of the Obama
administration is at odds with the views not only of investors
elsewhere but also the general public at home. Most polls of
Americans have shown only small erosion in Obama’s popularity
over the past three months and the president is viewed
favorably by comfortable margins of the U.S. public.

The Obama policy agenda has a more direct impact on U.S.
investors’ bank balances, says Ann Selzer, president of Selzer
& Co., which conducted the poll.

‘Skin in the Game’

“They have a different kind of skin in the game,” Selzer
says. “They worry about potential government interference in
their ability to make money for themselves and their employers
and their clients. They see higher taxes and controls on
executive pay on the horizon and it can’t possibly make them
happy.”

Bernanke’s leadership of the Fed is held in high esteem
across every region, with a favorable view from 69 percent of
investors worldwide, down slightly from 74 percent in July.

Geithner is viewed positively by 48 percent against 43
percent with a negative opinion.

The worldwide verdict on Summers is negative, with 42
percent rating him unfavorably versus 34 percent favorably.

Click here for additional information on methodology and a
full list of survey questions.

To contact the reporter on this story:
Mike Dorning in Washington at
mdorning@bloomberg.net.