Commentary by William Pesek
Aug. 20 (Bloomberg) -- There's an underappreciated common denominator among embattled leaders in Asia: George W. Bush.
For leaders wondering why they lost popular support, there's plenty of blame to go around. In some cases, it was a sluggish economy. In others, it was scandals or corruption. Inept handling of everything from poverty reduction to dodgy infrastructure to climate change may have fanned discontent.
Yet leaders in nations such as Australia, India, Japan, Pakistan and South Korea also are learning of the perils of cozying up an unpopular U.S. president. They've lost elections, resigned or have high disapproval ratings at least partly because of close ties to Washington.
``Busharraf'' is a case in point. That's what Pakistani columnists, bloggers and students call Pervez Musharraf, who resigned Monday. As president of Pakistan, Musharraf portrayed himself as America's staunchest ally in battling Islamic extremists. Critics like former Prime Minister Nawaz Sharif said Bush had been ``supporting a dictator,'' a stance that made Sharif perhaps the country's most popular politician.
Before Musharraf there was Shinzo Abe of Japan. Abe arguably became Asia's first Bush-buddy casualty when he resigned as prime minister last September. He continued the policy of his predecessor, Junichiro Koizumi, of strengthening ties with the Bush administration.
Howard's End
Koizumi, premier between 2001 and 2006, even stretched Japan's pacifist constitution to send troops to Iraq. It was part of his plan to move Japan closer to the U.S. at the expense of relations in Asia. Abe went further, attempting to change the constitution to allow the country to exert itself militarily. A public backlash ensued, and Abe resigned -- four days after meeting with Bush, as it turned out.
Australia's prime minister was next. John Howard never recovered from suggestions he was Bush's ``deputy sheriff.'' The moniker caused concern in Asia and became increasingly problematic for Howard, especially as the U.S.-led war in Iraq devolved into chaos. A strong economy couldn't save Howard from losing a November election.
South Korean President Lee Myung Bak's agenda has been derailed by his decision to renew beef imports from the U.S. and improve ties with Bush. It sparked the largest street protests in two decades and forced Lee to replace key cabinet ministers. Six months into his presidency, Lee's legislative prospects are highly uncertain.
In Bush's Pocket?
In India, Prime Minister Manmohan Singh's government has been on the brink of collapse. A key problem is a backlash among supporters of his coalition government against an India-U.S. agreement on civilian nuclear-energy cooperation. While rising food and energy costs don't help, Singh faced the first confidence vote in nine years in parliament over his friendship with the U.S.
Is all this a coincidence? Perhaps. None of these leaders are -- or were -- in Bush's pocket. And in some ways, leaders like Singh benefited by building stronger ties with the U.S. India will get access to vital U.S. technology without giving up its entire military nuclear program. Pretty savvy, all things considered.
Yet Bush's Iraq invasion, clumsy diplomacy and relative neglect of Asia since taking office in 2001 have left the U.S. with far less influence in the world's most vibrant region.
That's enabled the U.S.'s emerging Asian rival to score big points. China's spreading influence is part of a bigger global revival of authoritarian powers many believed were defeated with the fall of the Berlin Wall and the collapse of the Soviet Empire.
Focus on Terrorism
Graphic examples abound, from world leaders flocking to Beijing for the Olympics to Russia's military slap at Georgia to Venezuela's policies in Latin America. Part of that phenomenon, says Council on Foreign Relations economist Brad Setser, is that ``we live in a world where autocratic governments increasingly finance democratic governments.''
A diplomatic priority for the next U.S. president -- be it Republican John McCain or Democrat Barack Obama -- is mending ties in Asia.
The Bush administration's focus in Asia has been all terrorism all the time. Asians care plenty about security. Most care just as much about raising living standards. The U.S. Treasury, meanwhile, has become an all-China-all-the-time operation. It's been obsessed with China's currency at the expense of all else in Asia.
The irony is that the world's largest economy has never been more reliant on Asia's money. The Asia-Pacific region holds well over $4 trillion of currency reserves, much of which are in U.S. dollar assets. The U.S. needs that money to keep interest rates from skyrocketing.
`Rogue Nation'
In a December 2004 report, Joseph Quinlan, the New York- based chief market strategist at Bank of America Corp., raised eyebrows warning about the economic fallout from the U.S.'s emerging image as a ``rogue nation.''
Quinlan argued that increased volatility in the dollar would be the market's way of saying: ``No more guns and butter, or wads of foreign cash for a nation deeply enmeshed in the Middle East, heavily indebted at home and seemingly disengaged -- some might say -- from the rest of the world.''
Almost four years and a U.S.-centered credit crisis later, that may indeed be Bush's legacy. A few current and former leaders in Asia may agree.
Aug. 19 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.
``I would prefer to see them credibly and demonstrably privatized,'' Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.
Treasury Secretary Henry Paulson by contrast has tried to keep Fannie Mae and Freddie Mac in their current form as government-sponsored companies owned by shareholders. Lacker's remarks come as a slide in the firms' stocks and increase in their borrowing costs spur speculation the Treasury will intervene.
Lacker said financial-market turmoil shouldn't keep the Fed from raising interest rates to bring down inflation, becoming at least the fourth Fed official to make that point in the past five weeks.
``It is important to withdraw this monetary-policy stimulus in a timely way,'' Lacker said. ``That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see.''
Rate Outlook
Federal funds futures traders expect no change in interest rates through year's end. The Fed has reduced its main rate 3.25 percentage points over the past 11 months to 2 percent.
``I certainly don't think the federal funds rate should be any lower given where we are,'' said Lacker. `Monetary policy is very stimulative.''
Lacker also said he would be surprised to see a large U.S. bank fail. ``I am broadly confident in the ability for commercial banks to weather the storm,'' he said. Still, there is ``substantial uncertainty'' around the losses and writedowns that will result from mortgages originated in 2006 and 2007, which could cause ``other shoes to drop,'' he added.
Lacker's comments on Fannie Mae and Freddie Mac echoed the views by some former Fed officials, led by Greenspan, that the companies' links with the federal government ought to be severed. The firms package mortgages into bonds for sale to investors. They traditionally borrowed more cheaply than private companies because of an implicit government backing.
`Still a Debate'
``It was an unusually straightforward answer for a Fed official,'' David M. Jones, president of DMJ Advisors LLC in Denver and author of four books on the central bank, said in an interview with Bloomberg Television. ``There's still a debate over this issue'' of addressing Fannie Mae and Freddie Mac, he said.
Paulson last month won the authority to inject capital into Fannie Mae and Freddie Mac, in legislation aimed at restoring confidence in the firms. Stocks and bonds issued by the two have since declined amid continued concern they lack sufficient capital.
Fannie Mae dropped 2.3 percent to $6.01 today, down 69 percent since the start of last month. Freddie Mac lost 5 percent to $4.17, a decline of 74 percent over the same period.
``Treasury is monitoring market developments vigilantly,'' spokeswoman Jennifer Zuccarelli said in a statement. ``We are focused on encouraging market stability, mortgage availability and protecting the taxpayers' interests.''
Lacker, 52, heads a district that is home to two of the four biggest U.S. banks, Bank of America Corp. and Wachovia Corp., both based in Charlotte, North Carolina.
Lone Dissent
A former head of research at the Richmond Fed, he alone dissented in rate votes at the Fed in late 2006, advocating higher rates to stem inflation. He votes again in 2009.
The Richmond Fed president warned in June that the Fed, by expanding its financial safety net, may prompt investors to take on excessive risk. Central bankers in March opened the discount window to investment banks and loaned $29 billion against a portfolio of Bear Stearns Cos. securities to facilitate a merger with JPMorgan Chase & Co.
Since Lacker made the June 5 speech in London, the Fed has made available the discount window to Fannie Mae and Freddie Mac and agreed to a change in the law making it easier for the central bank to loan to failed banks under government control. The Fed has also extended the availability of discount window lending to investment banks until January 2009.
Safety Nets
Fed Bank Presidents Gary Stern and Tom Hoenig have also expressed concerns about the expansion of federal safety nets for financial institutions.
``The too-big-to-fail problem has once again gotten worse,'' Stern said in an Aug. 14 speech in Three Forks, Montana.
Lacker said in a separate interview with Bloomberg Radio he was wary of the Fed gaining more regulatory power. Congress, the Treasury Department and the central bank are reviewing regulation in light of the credit crunch. The Treasury has proposed giving the Fed more authority to safeguard market stability.
``Our ability to exercise independent judgment about the level of the policy rate I think is quite important,'' Lacker said. ``I do see some merits to the argument that adding responsibilities could threaten to dilute the independence'' that the Fed needs for monetary policy.
Continued Slump
Lacker said he expects economic growth of about 1 percent over the next year, hampered by the continued slump in housing. Still, economic weakness shouldn't deter the Fed from its focus on inflation, he said. Inflation excluding food and energy prices is likely to rise to about 2.5 percent before moderating, Lacker said in his radio interview.
Lacker said consumers' expectations of inflation are ``elevated'' and show ``fragility.''
``We are still in a fairly risky situation'' on the inflation front, he said.
The Fed can raise rates without impeding a credit market recovery and such a rate increase may occur sooner than many people expect, said Dallas Fed President Richard Fisher, who dissented Federal Open Market Committee votes five times this year, preferring to raise them last month.
Atlanta Fed President Dennis Lockhart said in an Aug. 15 interview he expected that ``the reasonable policy debate will be around holding versus raising rates.'' Philadelphia Fed President Charles Plosser said July 23 that policy makers should act before inflation expectations become ``unhinged.''
Lacker's advocacy for an early rate increase may not prevail on the committee, according to Robert Eisenbeis, chief monetary economist at Cumberland Advisors, and former research director at the Atlanta Fed.
Lacker ``saw prospects for slower growth in the future,'' Eisenbeis said. ``Yet he was also concerned about rising inflation. I think growth is going to be the dominant concern and that's what's going to carry the day for most of the people there.''
Aug. 20 (Bloomberg) -- The dollar traded near a one-week low versus the yen on speculation credit market losses at financial firms will deepen.
The greenback may also weaken against the euro for a third day as U.S. stocks fell and crude oil prices rose, raising concern the nation's economic slowdown will be prolonged. The British pound traded near a two-year low against the dollar on speculation the Bank of England will say today in minutes of its last policy meeting that it expects inflation to slow, adding to the case for interest-rate cuts.
``The present U.S. credit market turmoil won't settle down any time soon,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``Rising oil prices also weigh on the dollar. I am a dollar-bear.''
The dollar traded at 109.86 yen at 10:25 a.m. in Tokyo, from 109.72 in New York yesterday. It's been as low as 109.04 yen in the past week. The U.S. currency was at $1.4767 per euro from $1.4776 yesterday, when it touched $1.4631, the strongest level since Feb. 20.
The euro traded at 162.24 yen from 162.13 yesterday, when it fell to 160.87, the lowest since May 13. The U.S. currency may fall to 109.10 yen and $1.4850 a euro today, Saito forecast.
The pound was at $1.8651 from $1.8670 yesterday. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006.
JPMorgan Chase & Co., the third-largest U.S. bank, predicts the Bank of England will lower its benchmark 5 percent interest rate as early as November, a change from its previous estimate of February 2009.
Relative Strength
The 14-day relative strength index of the euro against the dollar was at 24 today, having been below 30 since Aug. 7. A reading below 30 suggests the euro is due for a rebound.
Crude oil rose for a second day, trading at $115.26 a barrel, on speculation U.S. inventories fell. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they move in lockstep.
The Standard & Poor's 500 Index of U.S. shares dropped 0.9 percent yesterday, completing its biggest two-day slump since June.
Lehman Brothers Holdings Inc., the largest underwriter of mortgage bonds before the subprime market collapsed, may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said Aug. 18. Goldman Sachs Group Inc. said yesterday it's ``increasingly likely'' American International Group Inc., the biggest U.S. insurer by assets, will have to raise more capital.
Fed Rate Outlook
Government reports yesterday heightened concern the Federal Reserve will raise borrowing costs to combat inflation even as the economy slows. U.S. producer prices gained 9.8 percent in July from a year earlier, the biggest advance since 1981, and housing starts fell to an annual rate of 965,000, the lowest since March 1991, the reports showed.
Futures on the Chicago Board of Trade show a 20 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by its Dec. 16 meeting, down from 37 percent odds a week earlier. Policy makers next meet Sept. 16.
The U.S. economy may face a persistent acceleration in inflation as higher food and energy prices prompt companies to pass on cost increases, Dallas Fed President Richard Fisher said yesterday.
`Hawkish Messages'
Richmond Fed President Jeffrey Lacker also said yesterday financial-market turmoil shouldn't keep the Fed from raising interest rates to bring down inflation, becoming at least the fourth Fed official to make that point in the past five weeks.
``While the hawkish messages from several Fed members suggest hikes are a risk, it is hard to see them following through,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a research note today.
The dollar has gained 7.6 percent versus the euro since touching an all-time low of $1.6038 on July 15 and appreciated 1.7 percent this month against the yen as economies in Europe and Japan shrank and crude oil fell more than 20 percent from the record $147.27 a barrel set July 11.
Europe's gross domestic product shrank 0.2 percent in the second quarter, after growing 0.7 percent in the first three months of the year, the European Union's statistics office said last week in Luxembourg. Japan's economy contracted at an annualized 2.4 percent pace, official figures show.
Aug. 20 (Bloomberg) -- Asian stocks declined, sending the region's benchmark index to the lowest since July 2006, on concern U.S. inflation is accelerating and credit-related losses at financial companies will increase.
Toyota Motor Corp., the world's No. 2 automaker, dropped 2 percent, after U.S. producer prices climbed the most since 1981. James Hardie Industries NV, the biggest seller of home siding in the U.S., tumbled 9.4 percent after profit plunged. Mitsubishi UFJ Financial Group Inc. led a decline among banks after JPMorgan Chase & Co. estimated Lehman Brothers Holdings Inc. will post a $4 billion writedown.
``The high uncertainty in the U.S. financial sector is closely tied to housing, consumption and the total economy,'' said Beat Lenherr, who oversees more than $20 billion of assets as Singapore-based chief global strategist at LGT Capital Management. ``We remain cautious to bearish on Asia.''
The MSCI Asia Pacific Index lost 0.4 percent to 122.28 as of 10:29 a.m. in Tokyo, extending yesterday's 1.9 percent slide. Two shares dropped for each one that advanced on the benchmark gauge, which is down 22 percent this year as soaring inflation hurt economic growth amid mounting writedowns and losses at the world's largest financial companies.
Japan's Nikkei 225 Stock Average declined 0.3 percent to 12,828.54. Shares climbed in Australia, Malaysia and Singapore, while falling elsewhere in the region. BHP Billiton Ltd., the world's largest mining company, led an advance among commodity producers after gold, oil and copper prices rebounded.
U.S. stocks fell yesterday, with the Standard & Poor's 500 Index losing 0.9 percent. S&P 500 futures were little changed.
U.S. Inflation
Toyota, which makes three quarters of its sales outside Japan, lost 2.2 percent to 4,810 yen. Samsung Electronics Co., the world's biggest computer-memory maker, dropped 1.4 percent to 556,000 won. Brambles Ltd., the world's biggest supplier of the pallets used to move and store goods in factories, lost 9.4 percent to A$7.72 even after reporting a 29 percent rise in full- year earnings.
U.S. producer prices climbed the most since 1981 in July, rising 9.8 percent compared with the previous year. Accelerating inflation may limit the Federal Reserve's ability to lower interest rates even as a housing recession continues to weigh on growth in the world's largest economy.
James Hardie slumped 3.8 percent to A$4.33, set to close at its lowest since July 18. The company reported a 96 percent decline in profit as demand in the U.S. declined.
U.S. housing starts dropped 11 percent last month, the government said yesterday, to the lowest level in 17 years.
More Credit Losses
Mitsubishi UFJ, Japan's biggest lender by value, fell 2.1 percent to 812 yen. Nomura Holdings Inc., the country's largest brokerage, dropped 1.2 percent to 1,465 yen.
Lehman, which is scheduled to report earnings on Sept. 16, may be forced to write down about $4 billion of its $61 billion in mortgage and asset-backed securities, a JPMorgan analyst wrote in a report. Goldman, Sachs & Co. said yesterday American International Group Inc., the biggest U.S. insurer by assets, may have to raise more capital as losses on credit instruments mount.
Some large financial institutions may fail as the credit crisis worsens, Kenneth Rogoff, former chief economist at the International Monetary Fund and an economist at Harvard University, said in an interview yesterday.
``There is increasing uncertainty in the market, and investors will likely take a wait-and-see attitude,'' Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc., said in an interview with Bloomberg Television in Tokyo.
Shipping lines slumped after the Baltic Dry Index, a measure of shipping costs for commodities, slipped 1 percent yesterday, snapping a four-day winning streak. The gauge has fallen 36 percent from a record high set in May.
Mitsui O.S.K. Lines Ltd., Japan's second-biggest bulk shipper, lost 3.7 percent to 1,246 yen. Kawasaki Kisen Kaisha Ltd., the third biggest, declined 2.7 percent to 765 yen. Hyundai Heavy Industries Co., the world's largest shipbuilder, dropped 3.2 percent to 257,000 won in Seoul.
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