While most people understand that governmental entities are politicized, there are some we like to think maintain enough integrity to serve the public good. We hope, for example, that the Centers for Disease Control would be free of politicized determinations for what to do about swine flu. And we hope that the Food and Drug Administration were more concerned about whether a drug were beneficial than about how the cost of that drug might influence new healthcare legislation.
One such entity we have relied upon for non-politicized information is the National Academy of Sciences (NAS), which Congress has turned to many times over the years to help work through the ramifications of highly complex issues. Unfortunately, the National Academy seems to have lost its way, and is morphing into a climate-alarm propaganda organ of the U.S. government.
There is no lack of evidence that the NAS has gone off the science reservation and into the government’s pocket., science reporter Seth Borenstein wrote:
Ditching its past cautious tone, the nation’s top scientists urged the government Wednesday to take drastic action to raise the cost of using coal and oil to slow global warming.
The NAS specifically called for a carbon tax on fossil fuels or a cap-and-trade system for curbing greenhouse gas emissions, calling global warming an urgent threat.
The academy, which advises the government on scientific matters, said the nation needs to cut the pollution that causes global warming by about 57 percent to 83 percent by 2050. That’s close to President Obama’s goal.
“We really need to get started right away. It’s not opinion, it’s what the science tells you,” said Robert Fri, who chaired one of the three panels producing separate climate reports.
But it gets worse. With a recent publication in the Proceedings of the National Academy of Sciences (PNAS), the NAS seems to have comprehensively studied history and decided the proper role model for their institution is...Joseph McCarthy. The NAS has published a new "study" in the PNAS attempting to boost public trust in catastrophic climate predictions, which have been undermined recently by reports of scientific corruption, partisanship, skullduggery, and worse. Specifically, the "study" seeks to marginalize scientists who have dared to dissent from the "consensus" the United Nations (UN) asserts on climate science.
With such antics, the National Academy of Sciences risks losing its credibility, which is really all it has to offer.
The study, entitled "," examines the publications and other activities related to climate science and the climate policy of 1,372 climate researchers (me included), then sorts those scholars into two bins. In one bin the researchers placed scholars supposedly “convinced by the evidence” (CE) which led the UN’s Intergovernmental Panel on Climate Change (IPCC) to conclude that anthropogenic greenhouse gases have “very likely” been responsible for “most” of the “unequivocal” warming of the Earth’s average global temperature in the second half of the twentieth century.” In the other bin lie those scholars “unconvinced by the evidence (UE).” One qualifies for the “unconvinced group” by having “signed statements strongly dissenting from the views of the IPCC.”
The PNAS study was coauthored by climate-panic rationalizer-in-chief Stephen H. Schneider, the Stanford biologist who famously told Discover Magazine that, in order to prompt action on climate change, “We have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have…each of us has to decide what the right balance is between being effective and being honest.”
Scholars were categorized as ‘unconvinced by the evidence’ if they had done so much as object to a proposed policy by governments or express lack of agreement with some aspect of the IPCC.
My personal objection to the study is that they didn't give me my propers: I'm much more widely published than the PNAS study gives me credit for, and the data they used in judging me doesn’t accurately reflect the reality of what I've published, nor in what quantity I've published it (and I’m sure I’m not alone). Granted, I don’t fit too readily in the simplistic bins they set up in the study: I’m skeptical of computerized climate models, projections of future climate conditions, and most climate policy prescriptions, but I accept the validity of fundamental greenhouse theory.
But setting aside my personal beef, there are fundamental problems with this study-cum-propaganda-poster, namely, the approach used to create its sample of “unconvinced” scientists, and using Google Scholar to rank the scientists in terms of "expertise" and "prominence."
Let's look at the selection process first. The selection process can be found in the "supporting materials" the PNAS study references, and here is how they describe the process by which they picked the scientists worthy of examination:
We compiled these CE researchers comprehensively (i.e., all names listed) from the following lists: IPCC AR4 Working Group I Contributors (coordinating lead authors, lead authors, and contributing authors; 619 names listed), 2007 Bali Declaration (212 signers listed), Canadian Meteorological and Oceanographic Society (CMOS) 2006 statement (120 names listed), CMOS 2008 statement (130 names listed), and 37 signers of open letter protesting The Great Global Warming Swindle film errors. After removing duplicate names across these lists, we had a total of 903 names.
For UE researchers they relied on 12 lists, ranging from the Science and Environmental 1995 Leipzig Declaration (80 names) to the 2009 newspaper ad by the Cato Institute challenging President Obama’s stance on climate change (115 signers), for a total of 472 names.
Someone needs to publicly clean house at the NAS, washing the institution’s hands of public policy pronouncements and renouncing efforts to turn them into a propaganda organ for climate alarmists.
The lists themselves appear, and problems are easy to spot. (Readers who access the lists will notice that the list repository itself has issues. They claim to have 15 lists, but a quick count shows 16.) For example, the various lists and petitions used to compile the names of the unconvinced include researchers skeptical of the underlying science as well as those only skeptical of climate policy recommendations. As a result, scholars were categorized as "unconvinced by the evidence" if they had done so much as object to a proposed policy by governments or express lack of agreement with some aspect of the IPCC. That's how, for example, .—a highly esteemed scientist who believes climate change a potentially catastrophic threat—got thrown into the "unconvinced by the evidence” group.
Or consider the Cato ad mentioned above, of which I was a signatory. That was primarily a policy statement responding to President Obama, who said, "Few challenges facing America and the world are more urgent than combating climate change. The science is beyond dispute and the facts are clear." The Cato advertisement says virtually nothing about the IPCC's verdict on climate science. It simply argues that the signatories were not convinced that the evidence of climate change is cause for alarm (which is a subjective judgment). And even by the IPCC’s own standards, the science is not “beyond dispute." After all, if the "science was beyond dispute," the IPCC would have said that they were "absolutely certain," rather than that it was only "very likely" that mankind’s greenhouse-gas emissions “mostly” caused observed warming.
The National Academy of Sciences seems to have comprehensively studied history and decided the proper role model for their institution is...Joseph McCarthy.
was another case of mixed policy and science, but had little relevance to whether one would be convinced or unconvinced about the current IPCC assessment of climate science. The thrust of the open letter (which I signed) was that the scientific evidence of climate change did not warrant adopting greenhouse-gas controls under the Kyoto Protocol.
Another problem with the methods used in collecting scientists’ names for the study regards timing. The hunt for the unconvinced uses petitions that date back to 1992, well before the IPCC was making statements suggesting high confidence that humanity was changing the climate. A person’s expressed belief about climate science in 1992, based on the data available in 1992, sheds no light at all on whether that person is, today, in the “convinced” or “unconvinced” category as defined by current knowledge. Let’s look at a few examples.
mixed policy judgment and science assessment, reporting on a 1991 survey of scientists which showed "there is no consensus about the cause of the slight warming observed during the past century." At that time, the IPCC had only published its , which did not come close to matching the most recent levels of confidence the IPCC expresses. In fact, the preface to the report’s overview admits that "there are many uncertainties in our predictions particularly with regard to the timing, magnitude and regional patterns of climate change, especially changes in precipitation," and that "these uncertainties are due to our incomplete understanding of sources and sinks of greenhouse gases and the responses of clouds, oceans and polar ice sheets to a change of the radiative forcing caused by increasing greenhouse gas concentrations." Signing a petition in 1992 has little relevance with regard to whether one is "convinced" or "unconvinced" by the data accumulated over the subsequent 18 years (or whether one is still alive, for that matter).
Signing a petition in 1992 has little relevance to whether one is ‘convinced’ or ‘unconvinced’ by the data accumulated over the subsequent 18 years (or whether one is still alive, for that matter).
stated: "There does not exist today a general scientific consensus about the importance of greenhouse warming from rising levels of carbon dioxide. On the contrary, most scientists now accept the fact that actual observations from earth satellites show no climate warming whatsoever." By 1995, the IPCC had only completed its , stating that "the balance of evidence suggests a discernible human influence on climate," and also that "there are still many uncertainties." Again, how does signing a petition that evaluates climate science and policy in 1995 allow one to be categorized as "unconvinced" by data that only became available more than a decade later?
Now, let's consider whether Google Scholar is the right way to rank scientists in terms of expertise or prominence.in the National Post, Google Scholar isn't up to the job:
Does Google Scholar really limit itself to scholars? No. Search “Al Gore” on Google Scholar and you will find some 33,200 Scholar hits, almost 10 times as many as obtained by searching “James Hansen,” a true scientist and easily the best known of those endorsed by Prall as a bona fide believer. Neither does Google Scholar limit itself to “just the scientific literature.” Google Scholar finds articles in newspapers and magazines around the world: 113,000 in the New York Times, 22,000 in Economist, 21,000 in Le Monde, 16,000 in The Guardian.
This latest NAS slide into politicization should send a serious wakeup call. This disease’s progression has become clear. A few years ago, the NAS shamelessly defended the thoroughly demolished "hockey stick" graph which claimed to show that current temperatures lack a historical precedent. Early this year, the NAS issued a blatant call for a specific climate policy, going far beyond serving as an objective voice of scientific explication. And now it has allowed a badly flawed study in its flagship publication that effectively creates a blacklist, in order to delegitimize scientists who might disagree with a vague “consensus” position on climate-change science. With such antics, the NAS risks losing its credibility, which is really all it has to offer. Someone needs to publicly clean house at the NAS, washing the institution’s hands of public policy pronouncements and renouncing efforts to turn them into a propaganda organ for climate alarmists. The alternative will be declining trust in the NAS, and the further erosion of the public’s belief in scientific pronouncements in general.
Kenneth Green is a resident scholar at the.
Monsanto Company, the Missouri-based biotechnology firm, has donated seeds to Haiti to help kickstart food production in the earthquake-ravaged country. In so doing, they’ve stirred up the kind of controversy that seems to follow the company. The 475-ton donation has sparked a storm of protest not only in Haiti but also in the United States. A coalition of Haitian peasant groups organized a protest march in June and have vowed to burn the donated seed.
This is not Monsanto's first rodeo, as we Missourians would say, so the company has made it clear that no genetically modified seeds were included in the donation. This delicacy did not impress the marchers, who protested under banners of "Down with GMO and hybrid seeds." Genetically modified seeds have long been controversial, but it's a surprise to find that hybridization, around since Gregor Mendel's time in the 1800s, can also inspire protest marches. Somehow, it doesn't seem obvious that hybrid broccoli seeds are the 82nd Airborne of cultural imperialism.
To consign Haitians to lives of hunger and poverty, because you disapprove of the kind of ‘industrial’ agriculture practiced in the United States, is immoral.
The peasant groups are indigenous in theory, but not when it comes to money, as they rely on U.S. donors for funding. Corresponding sympathetic demonstrations were held in the United States. Groups marched on the Gates Foundation in Seattle (the group is not properly mortified by biotechnology, hence the protests); protesters burned genetically modified seed in Chicago and organized a march in Missoula, Montana; and the Organic Consumers of America sent out 10,000 emails protesting Monsanto's magnanimity.
Doudou Pierre, whose title is the "national coordinating committee member for the National Haitian Network for Food Sovereignty and Food Security," explains the protests this way: "We're for seeds that have never been touched by multinationals." The idea of local seed is driving the protests, as writer Beverly Bell explains: “Haitian social movements’ concern is not just about the dangers of the chemicals and the possibility of future GMOs imports. They claim that the future of Haiti depends on local production with local food for local consumption, in what is called food sovereignty."
Hybrid seeds will increase yields over open pollinated seeds, whether purchased fertilizer is applied or not. This is why U.S. farmers adopted hybrids a generation before the widespread availability of chemical fertilizers and pesticides.
One in four Haitians is hungry and, even before the earthquake, the average caloric intake in the country was far below United Nations-recommended levels. But that, of course, is of no consequence when compared to the importance of planting seeds untouched by multinational hands. Better starvation than accepting gifts from a company as evil as Monsanto.
Not to worry, as a coalition of church groups in the United States is providing 13,300 machetes and 9,200 hoes for the Haitian peasants. The groups are also supplying local and organic seeds, as many Haitian farmers are too poor to purchase seeds of any kind, even local and organic seeds. By all means, protect the “sovereignty” and integrity of the Haitian food system: hoes, machetes, and local and organic seeds have done such a good job of feeding Haitians in the past.
Hybrid seeds don't breed true (reproduce their characteristics faithfully in their offspring) so farmers usually purchase them each year rather than save their seed and risk a worse crop from the offspring. Hybrids will germinate, however, and the farmer can save the seed if he wants to (not only that, but the seeds have been treated with chemicals to protect them against bacterial disease and fungus, improving germination). This fact undermines the outlandish claims made by the peasant groups and their supporters. According to the critics, purchasing seed is very bad because it might provide a market for seed companies. Supporters of food sovereignty believe farmers ought not buy supplies, but be totally self-sustaining. Importing productive seeds will lead directly to the kind of "industrial" farming found in the United States. Next thing you know, those Haitian farmers will drive gas guzzling, four-wheel-drive pickups and lust after John Deere tractors.
The groups organizing against the gift are quite certain that Haitian farmers can't possibly be trained to handle the seeds safely. That's the worst sort of condescension.
Just like the local drug pusher handing out free samples or cigarette companies slipping teenagers smokes, Monsanto's motives are not perceived as altruistic, but rather as an intrusion into the lives of Haitian peasants, enticing the indigent farmers to trade their future and sovereignty for the temporary fix of evil corporate seeds.
The groups organizing against the gift are quite certain that Haitian farmers can't possibly be trained to handle the seeds safely. That's the worst sort of condescension; the seed treatments are the same as those used widely and safely for decades in the United States. There’s no reason Haitian farmers couldn’t use them as well.
Critics also worry that the hybrid seeds won't grow without fertilizer and chemicals, which the peasant farmers can't afford. Nothing could be further from the truth. Hybrid seeds will increase yields over open-pollinated seeds, whether purchased fertilizer is applied or not. This is why U.S. farmers adopted hybrids a generation before the widespread availability of chemical fertilizers and pesticides. Having said that, an increase in the use of purchased fertilizers by Haitian agriculture would increase output. When people are starving, that is a worthwhile goal.
Somehow, it doesn't seem obvious that hybrid broccoli seeds are the 82nd Airborne of cultural imperialism.
Haiti desperately needs a productive agriculture, and farmers there have been hurt in the past by donations of western food, which can devastate local markets. Monsanto's donation is different. Monsanto is offering tools that can increase the productivity of Haitian agriculture, and the Haitian government has sensibly accepted the gift. If the seeds can avoid national coordinating committee members bearing torches and are actually planted in Haitian fields, yields will improve and hunger will be lessened.
One wonders why U.S. groups are so interested in protecting the existing agriculture in Haiti, which has so clearly failed. To consign Haitians to lives of hunger and poverty, because you disapprove of the kind of "industrial" agriculture practiced in the United States, is immoral. Monsanto has been harshly criticized for its actions, both in the developing world and here in the states, but their shortcomings pale by comparison with the harm that could be done by those who would block progress in Haiti. To saddle hungry Haitians with American romanticism about agriculture is the worst kind of imperialism. Haiti doesn't have that luxury; its people are hungry and need food.
Blake Hurst is a Missouri farmer.
Businesses step up criticism of Obama's agenda
WASHINGTON (Reuters) - Some business groups, upset about budget and regulatory policies they say are costing jobs, are accusing President Barack Obama of pursuing an agenda that is hurting the U.S. economic recovery.
The criticism comes amid a tepid pace of private-sector job creation and the White House is responding by saying a lack of regulations triggered the economic crisis and that a balance is needed to protect Americans.
The issue could give Republicans a potent weapon in the November elections in which they hope to overturn the dominance in the Congress of Obama's Democrats.
The U.S. Chamber of Commerce, a lobby that represents big businesses, is to lay out its concerns with Obama's policies at a "jobs for America" summit Wednesday in Washington. Chamber CEO Tom Donohue is to issue an open letter to Obama and Congress that will urge "immediate action to address the new regulatory stranglehold placed on America's job creators."
Douglas Holtz-Eakin, an economist who was a top adviser to 2008 Republican presidential candidate John McCain, said Obama's agenda has "nothing in it" for the business community.
"We are growing too slowly," said Holtz-Eakin, a former director of the Congressional Budget Office. "Households are broke. Governments have to retrench. The only places to get strong growth are in the business community and in net exports and that's where they have nothing."
Longtime Obama adviser Valerie Jarrett, the White House point person for outreach to the business community and other outside groups, said the administration's agenda is fostering growth, not stifling it.
"The facts are clear that President Obama's policies have been instrumental in bringing back our economy from the brink of the largest economic meltdown since the Great Depression," she told Reuters.
Jarrett said when Obama took office in January 2009, jobs were plummeting by 700,000 and the stock market was in freefall. "We've turned that around and now we're seeing for six straight months positive job growth," she said.
In comments that echoed those of some prominent chief executives and business groups, Holtz-Eakin called Obama's recently passed healthcare plan and proposed legislation to cap carbon emissions examples of regulatory overreach. He also said large budget deficits are spurring uncertainty and worries among businesses about the potential for higher taxes.
Ivan Seidenberg, chief executive of Verizon Communications, in a speech last month said there was a "disconnect" between Washington and the business community that is harming job growth.
"In our judgment, we have reached a point where the negative effects of the proposed policies are simply too significant to ignore," said Seidenberg, who is chairman of the Business Roundtable.
The sweeping financial regulatory reform that is close to passage in Congress is another point of criticism for some groups representing business and finance.
In populist rhetoric that plays well with many middle-class U.S. voters, Obama has labeled executives at big banks "fat cats" and scolded those firms for resisting tough regulations. He also has at times taken a stern tone toward healthcare companies and BP Plc over its Gulf oil spill.
Republicans have seized on such comments to try to hammer Obama with the anti-business accusation and the White House has tried to turn such criticisms against Republicans.
Obama has mocked House Republican leader John Boehner's comparison of the financial reform bill to using a nuclear weapon to kill an ant. Obama has said the remark shows Republicans are out of touch with ordinary Americans.
William Galston, a scholar at the Brookings Institution who was President Bill Clinton's domestic policy adviser, said Obama's agenda is addressing excesses in the private sector that were partly responsible for economy's "near-death" experience during the financial meltdown.
"This represents a new balance and there are some folks in the business community who don't much like it," Galston said. "I can understand that but it doesn't mean that Obama is anti-business. It means he has a different conception of what a modern capitalist economy needs in order to sustain itself."
Businesses last month welcomed Obama's promise at the Group of 20 summit in Toronto to complete a long-stalled free-trade agreement with South Korea. He also has pledged to reinvigorate the effort to ratify trade deals with Colombia and Panama.
At a private G20 luncheon, Obama spoke to leaders about ideas for changing the Doha round of world trade talks.
But businesses have expressed frustration that Obama has not given the issue of trade a lot of attention until recently.
"He's certainly playing catch up in the area of trade," Galston said. "I think that in candid private discussions the administration would probably acknowledge that that ball has not really been moved forward by this administration.
But Galston added, "In fairness, they have had a lot of other things on their plate."
Asked about the trade agenda, Jarrett said Obama considers increasing U.S. exports an urgent priority but that it is going to take time. "Rome wasn't built in a day," she said.
Japan ruling party reels after vote
TOKYO (Reuters) - Japan's ruling party, mauled in Sunday's upper house election, faces an uphill struggle to win new allies to back its policies to cut back huge public debt and probably bitter infighting over whether the premier should quit.
Voters dealt Prime Minister Naoto Kan's Democratic Party of Japan a stinging rebuke in the election, depriving the DPJ and its tiny ally of a majority less than a year after the Democrats swept to power with promises of change.
Kan's Democratic Party of Japan won 44 seats and its partner, the People's New Party, none, media said. That was fewer than the main opposition Liberal Democratic Party's (LDP) 51 seats and far short of Kan's goal of winning 54.
It leaves Kan vulnerable to a challenge from inside his own party, though he said he would stay in his job. Kan is already the fifth prime minister that the world's second-largest economy has had in three years.
"I want to accept the election results sincerely and continue responsible policies with the feeling that this is a new start line," Kan told a news conference. He added he felt responsible for failing to fully explain his call for debate on the sales tax but would continue to call for multi-party talks on the topic.
The DPJ won power in a historic landslide just last year, ousting the long-dominant conservative Liberal Democrats with promises to cut waste and focus spending on consumers.
But public backing nosedived due to indecisive leadership and mishandling of a feud over a U.S. airbase.
Public support for the DPJ rebounded when Kan took over last month, but tumbled almost as quickly after he floated a rise in the sales tax from 5 percent to help rein in debt.
Many voters accept the need for an eventual sales tax rise given a public debt already about twice the size of the $5 trillion economy, but the Democrats failed to convince voters they had a coherent plan to cure the country's economic ills.
"Kan lost the election calling for a sales tax hike," said Koichi Haji, chief economist at NLI Research Institute. "That is a huge setback for fiscal reform. Now the question is whether Kan can stay in power or not."
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Japanese major newspapers said Kan needs to press ahead with his fiscal reform platform despite the election loss.
"If Prime Minister Kan believes higher taxes are necessary for Japan's future, he should dig his heels and call the LDP for talks. He should try to persuade voters, as well," the Asahi newspaper said.
The Democrats still have a dominant grip on the more powerful lower house. But they will need to seek new partners to control the upper chamber, which can block bills, as they struggle to engineer growth and rein in public debt.
Two of Kan's LDP predecessors threw in the towel after less than a year in face of a similar divided parliament.
Japanese shares and government bonds may face initial selling pressure when markets open on Monday.
But longer term investors will eye which smaller parties the Democrats ally with, what policy compromises it makes, and whether that dilutes fiscal reform.
"It's going to be a weak government ruling with a minority in the upper house because I don't think anyone will join the coalition," said Gerry Curtis, a Columbia University professor.
Kan is now at risk of a challenge from party powerbroker Ichiro Ozawa -- a critic of his sales tax hike proposal -- ahead of a September party leadership vote.
Kan said the Democrats would ask opposition parties to cooperate on a policy-by-policy basis rather than invite them into a formal coalition right away.
The leaders of two potential partners, the pro-reform Your Party and the Buddhist-backed New Komeito, swiftly rejected the idea of joining the government anyway, and LDP leader Sadakazu Tanigaki said his party was willing to talk about policies but ruled out any "grand coalition."
Analysts have said that opposition parties would drive hard policy bargains with the Democrats in exchange for any support, raising hopes among some experts that a deal with the Your Party would foster the deregulation many see as vital for growth.
White House: Republicans could win control of House
WASHINGTON (Reuters) - Republicans could win control of the House of Representatives in elections in November, White House spokesman Robert Gibbs acknowledged on Sunday.
"There is no doubt there are enough seats at play that could cause Republicans to gain control, there is no doubt about that," Gibbs told NBC's "Meet the Press" talk show when asked whether the Democrats would maintain their majority in the House.
All 435 seats in the House are up for grabs in the November 2 election as well as 36 of the 100 seats in the Senate.
President Barack Obama will have a tougher time pushing his political agenda through Congress if Republicans make big gains in November and wipe out Democratic majorities in both the Senate and the House.
In the run-up to the vote, Obama is trying to convince impatient Americans that his economic policies are working and that improvements will take time.
"We understand people are frustrated, everybody is frustrated," Gibbs said. "Look, the president is frustrated that we haven't seen greater recovery efforts, but that doesn't stop us from doing what we know is right, instituting the policies that we know will bring the country back," he added.
Obama and his fellow Democrats are grappling with a range of problems and many political analysts see the election as a national referendum on his policies.
The economy is struggling and unemployment has hovered at just below 10 percent. The war in Afghanistan is not going well. And the oil spill in the Gulf of Mexico has prompted criticism that Obama's response was slow, disorganized and too easy on BP Plc.
A Gallup poll released on July 7 showed that 38 percent of independent voters approve of the job Obama is doing, compared with 81 percent of Democratic voters and only 12 percent of Republicans. Obama's overall approval rating is 46 percent.
A year ago, Obama's approval rating among independents was 56 percent.
Money managers see no double-dip
NEW YORK (Reuters) - Mid- and small-capitalization stocks often serve as a leading indicator for the direction of the U.S. economy. So what does it say that they are down roughly 15 to 20 percent?
As the U.S. economy throws up dismal economic data, putting the ominous possibility of a double-dip recession at the top of Wall Street's talking points, money managers are saying that assessment would be premature.
"Right now the market is responding to this fear, and double-dip is in the air... but is it verified in the statistics? And in that case we are saying 'No, there is no double-dip,'" said Milton Ezrati, senior economist and market strategist at Lord Abbett, in Jersey City, New Jersey.
"Particularly in an environment like this it is very dangerous because the market picks up the talk and it will give a lot of false signals," Ezrati said, referring to the influence grim economic data can have on stock markets and vice versa.
Risks of a double-dip have increased, managers admit, as employment and housing have failed to rebound, and, akin to the eternal chicken vs. egg debate, corporate earnings estimates are being revised downward in anticipation of sluggish growth.
"We are in a transition period where small and mid-cap stocks will face headwinds as they face the question of whether earnings projections will be reduced by a more sluggish global economy," said Martin Sass, founder of New York-based investment advisory firm MD Sass.
Sass believes it is premature to declare a double-dip recession is at hand, but notes that earnings estimates are now being revised down rather than up.
In fact, the mean change in aggregate earnings estimates for the third quarter for the S&P SmallCap 600 index .SML fell 1.1 percent in the last 30 days, according to Thomson Reuters StarMine Professional data.
That is still slightly less negative than the 1.4 percent drop in the last 30 days for revisions to S&P 500 .SPX aggregate earnings estimates.
Stocks have tumbled from their late April peak, entering deep into correction territory even after a strong rally on July 7, when most major stock indexes rose over 3 percent.
According to Canadian investment firm Brockhouse Cooper, over the prior five U.S. recessions, small-cap stocks have outperformed large-cap shares by 4.5 percent, on average between the market trough and the end of the recession. In the first year of expansion that outperformance is 13.7 percent.
The S&P 600 SmallCap index is down 16 percent while the S&P 400 MidCap index .MID is off 15 percent from April 26 highs.
That may be worse than the 13 percent drop in the large-cap S&P 500, however, since the March 2009 market trough, mid- and small-cap stocks are up well over 80 percent versus a 58 percent rise in the S&P 500.
"We are not forecasting a double-dip, no, just a slow growth environment. Very slow. We think (small-caps) are going to underperform a little bit, more just because of the relative valuations," said Bernie Williams, the head of USAA's private investment management division based in San Antonio, Texas.
Williams says he sees shares in a trading range, although he remains "cautiously optimistic."
"If earnings come through and we don't double-dip, we could end up in positive territory for the year," he said.
As a result of their run-up, on a valuation basis, the S&P SmallCap 600 .SML has a forward price-to-earnings ratio of 14.24 percent versus the S&P 500's 11.6 percent .SPX. The Russell 2000 index of small-cap shares .RUT is even higher at 15.74 percent, according to Thomson Reuters data.
While valuations may be high in mid- and small-cap stocks, one fund manager sees the correction as a buying opportunity.
Aram Green, co-portfolio manager of the Legg Mason ClearBridge small-cap growth fund, says cash is piling up on corporate balance sheets while firms go through a "digestion phase of assimilating people back into their employment base."
That is perhaps one reason for the lull in hiring, which is feeding into market trepidation.
"I think we are going to need more data points, and I think that is why the market is pulling back. They are waiting for that next set of data points," said Green.
"I like the stock market here. These are very attractive valuations and if there is any sort of digestion period, we are talking about a minimal impact in terms of the earnings power of these companies over the next 12 months. At very attractive valuations we are putting money to work."
Kan Election Loss May Impede Effort to Cut Japan Debt (Update2)
By Sachiko Sakamaki and Takashi Hirokawa
July 12 (Bloomberg) -- Japan’s Prime Minister Naoto Kan lost control of parliament’s upper house, undermining legislative efforts to cut the world’s largest public debt and creating the possibility of a third leadership change in a year.
The ruling Democratic Party of Japan won 44 seats, compared with 51 for the opposition Liberal Democratic Party, according to results compiled by public broadcaster NHK. Your Party, a new group founded by former LDP cabinet minister Yoshimi Watanabe, won 10. Half of the 242 seats in the less powerful of Japan’s two houses of parliament were up for grabs.
Kan, who took office a month ago, stoked voter resentment by calling for a debate on whether to raise the 5 percent sales tax, drawing attention to a national debt that amounts to $80,000 per person. Losing his coalition government’s majority will mean he has to reach out to smaller groups to ensure smooth passage of legislation to bolster growth and social welfare spending.
“The results were far from what we sought,” Kan said in an early morning press conference in Tokyo today. “One major reason was that my remarks on the consumption tax left an abrupt impression to the public and my explanation was insufficient.”
Kan said he wouldn’t step down after failing to meet his goal of winning at least 54 seats in yesterday’s election, adding that he will pursue “policy-based” alliances with other parties. He said he will maintain the coalition with the People’s New Party, which lost all three seats up for re- election, cutting its strength in the chamber by half.
Justice Minister Keiko Chiba was among the DPJ lawmakers who lost their seats.
“This makes it impossible for Mr. Kan to push too much” in confronting Japan’s fiscal problems, said Koichi Nakano, a political science professor at Sophia University in Tokyo. “The issue is not going away, because it’s such a huge problem. Kan’s skills for political survival will be tested to the limit.”
Kan last month released plans to boost the world’s second- largest economy by lowering the corporate tax rate from as high as 40 percent while balancing the budget in 10 years, which won praise from world leaders at the June 26-27 Group of 20 summit in Toronto. Japan is still grappling with 12 years of deflation, and the Nikkei 225 Stock Average dropped 9.1 percent this year.
“The markets won’t like a divided parliament, but that will only somewhat depress foreign investor sentiment because it’s already low,” said Chiwoong Lee, senior economist at Goldman Sachs Group Inc. in Tokyo. “Most parties are calling for cutting corporate taxes, so it will be positive if the DPJ can actually work with them.”
Japan’s biggest business lobby called on all parties to work together to boost the economy and the nation’s finances.
“Policy implementation shouldn’t be stagnated because of the divided parliament,” Hiromasa Yonekura, head of the Japan Business Federation, said in a statement. The group is commonly known as Keidanren.
The DPJ had 54 of its 116 seats at stake and will remain the biggest party in the House of Councillors. It has more than 60 percent of lawmakers in the lower chamber, the House of Representatives, which chooses prime ministers and can overrule the upper house.
Your Party leader Watanabe said that while he isn’t interested in joining Kan’s coalition, he will work with the government “if we have common agendas” on specific issues. Kan said he will maintain an alliance with the PNP.
Kan, 63, became Japan’s fifth leader in four years when he replaced party colleague Yukio Hatoyama, who quit over campaign funding scandals and a broken promise to relocate a U.S. military base from the island of Okinawa. An Asahi newspaper poll last week predicted the DPJ would win fewer than 50 seats and that the LDP would add about six lawmakers.
Jun Azumi, head of the DPJ’s election committee, said on TBS Television that Kan shouldn’t be held responsible for the results.
“Kan will stay in power and the DPJ will have to find a consensus with opposition parties on each piece of legislation until it can form a new coalition,” said Tomoaki Iwai, a political science professor at Nihon University in Tokyo.
Still, failure to reach his goal of maintaining the party’s strength may increase the chances of a challenge when Kan’s term as party leader is up for re-election in September. DPJ power broker Ichiro Ozawa, who quit as the party’s No. 2 official when Hatoyama stepped down, criticized Kan’s sales tax proposal.
The prime minister’s suggestion that the government may have to as much as double the 5 percent consumption tax cut into his popularity. He framed the debate in terms of the need to pay for rising social welfare costs, and said any increase is “at least two to three years off.”
Kan’s approval rating declined to 43 percent from 66 percent after he took office on June 8, the Mainichi newspaper said July 9. Hatoyama, who last year led the party to victory in the more-powerful lower house, shifted spending from public works to households. The DPJ passed legislation to give families a monthly stipend of 13,000 yen ($147) per child and eliminate public high school fees.
“I punished the DPJ and voted for Your Party,” said Ken Fukushi, a 45-year-old company employee in Tokyo. “Spending cuts should take priority over” raising the consumption tax.
One of the few bright spots for the DPJ was the election of two-time Olympic Judo gold medalist Ryoko Tani. The 34-year-old, a political novice, said in announcing her candidacy in May that she intends to compete in the 2012 Summer Olympic Games in London.
Euro Breakup Would Unleash GDP Growth, Capital Economics Says
By Jeffrey Donovan
July 11 (Bloomberg) -- The breakup of the euro area would save the 16-nation region from years of economic stagnation by boosting weaker members’ competitiveness as well as domestic demand in Germany to spark growth, Capital Economics said.
“The threatened breakup of the euro zone, which many see as a potential disaster, would actually open the door to renewed economic growth, not just for weaker members of the zone, but for Europe as a whole,” Capital Economics analysts including Roger Bootle in London said in a report released today.
Greece’s debt crisis has driven down the euro and forced governments from Spain to Italy to embrace austerity measures and cut their deficits, clouding the outlook for recovery from the worst recession in six decades. The International Monetary Fund on July 8 kept its forecast for 1 percent growth this year in the region, which expanded 0.2 percent in the first quarter.
Europe’s weaker economies face “years of economic pain” as they deflate costs and prices to regain competitiveness with Germany, which runs a large trade surplus and restrains domestic demand, Capital Economics said. Italy, Spain, Ireland, Portugal and Greece could quickly narrow the competitiveness gap if they returned to their own currencies, which would depreciate and allow exports to expand, it said.
“This would offer them an escape route from their difficulties through economic growth, rather than depression,” the economists wrote.
A full abandonment of the euro would also help Germany as a restored deutsche mark would appreciate and make the government expand domestic demand to maintain jobs and growth, pushing up the German standard of living, according to the report. That, in turn, would further fuel imports from euro countries, helping to rebalance Europe’s economy.
In a separate report on July 7 by ING Bank NV, economists including Mark Cliffe in London said a euro-area breakup is “thinkable, but unpalatable.” The region’s cumulative loss in economic output in the first two years after a breakup would be “close to 10 percent, dwarfing the fallout caused by the collapse after the demise of Lehman Brothers in September 2008,” according to the report.
Volcker Pushes for Reform, Regretting Past Silence
JUST before the Fourth of July weekend, Paul A. Volcker packed his fishing gear and set off for his annual outing to the Canadian wilds to cast for Atlantic salmon.
Fred R. Conrad/The New York Times
Fred R. Conrad/The New York Times
He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression.
A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus.
“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.”
As the financial overhaul took final shape recently, he worked the phone from his Manhattan office and made periodic visits to Washington, trying to persuade members of Congress to make the legislation more far-reaching. “Constructive advice,” he calls it, emphasizing that he never engaged in lobbying.
For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Like few other policy giants of his generation, Mr. Volcker has been a pivotal figure in the regulatory universe for decades, and as he looks back at his long, storied career he confesses to some regrets, in particular for failing to speak out more forcefully about the dangers of a seismic wave of financial deregulation that began in the 1970s and reached full force in the late 1990s.
Despite his recent efforts to ensure that the financial legislation might correct what he regards as some of the mistakes of the deregulatory years, he’s concerned that it still gives banks too much wiggle room to repeat the behavior that threw the nation into crisis in the first place.
Some analysts share Mr. Volcker’s worries that the proposed changes may ultimately not be enough.
“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation. “But I kind of worry that is not going to happen.”
Hear, hear, says Mr. Volcker.
“People are nervous about the long-term outlook, and they should be,” he says.
AMONG the tools that Mr. Volcker has been able to deploy when regulatory debates heat up is the public support he enjoys in financial and political circles.
He earned that esteem over many years, and is famously credited for making tough-minded choices to tame runaway inflation as Fed chairman from 1979 to 1987, when he served under Presidents Jimmy Carter and Ronald Reagan.
At the age of 82, Mr. Volcker is from a generation of Wall Street personalities who accepted strict financial regulation as a fact of life through much of their careers. In his recent push for more stringent financial regulations than he believed Congress — and the Obama administration, for that matter — were inclined to approve, he lined up public support for a tougher crackdown from other well-known financiers who are roughly his age, including George Soros, Nicholas F. Brady, William H. Donaldson and John C. Bogle.
His most visible contribution to the current regulatory overhaul effort is what has come to be known as the Volcker rule, which in its initial form would have banned commercial banks from engaging in what Wall Street calls proprietary trading — that is, risking their own funds to speculate on potentially volatile products like mortgage-backed securities and credit-default swaps.
Such bets added considerable tinder to the financial conflagration that erupted in 2008. Many went horribly awry, and the federal government used taxpayer money to bail out banks, Wall Street firms and even a major insurer.
“I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had,” says Mr. Volcker, explaining why he first proposed the rule 18 months ago.
Congressional handicappers and Wall Street originally gave the Volcker rule a slim chance of becoming part of the overhaul bill — until, in fact, it got solidly on track to do just that.
Mr. Volcker thinks that Congress has watered down his trading rule — more on that later — but rather than roar in protest, he has resigned himself to the present shape of the Volcker rule as well as the overall legislation.
“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”
The 2,400-page financial overhaul legislation, already passed by the House, is coming up for a vote in the Senate this week.
The Obama administration says it is now satisfied with the broader legislation, and in particular with the Volcker rule in its amended form.
“The Volcker rule was designed to make sure that banks could not engage in proprietary trading or create risks to the system through their investments in hedge funds or private equity,” says Neal S. Wolin, the deputy Treasury secretary. “We accomplished that.”
Some members of Congress who have backed the bill still say that it is not as restrictive as they would like, but that a more sweeping bill — one that also hewed to Mr. Volcker’s original conception — wouldn’t make it through the Senate, where the vote is expected to be close.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, subscribes to that view. He says that there are stronger measures he would have preferred to see in the bill, including the original version of the Volcker rule, but that political reality dictated otherwise.
“I would give the present bill an A-minus,” Mr. Frank says, “when you consider that six months ago people were saying the Volcker rule had no chance.”
Mr. Frank is quick to point out that Mr. Volcker signed off on the compromises that got the Volcker rule into the bill. Mr. Volcker doesn’t dispute that.
“The thing went from what is best to what could be passed,” he says.
THE financial bill has been routinely described in the news media and on Capitol Hill as the most far-reaching regulatory overhaul since the Great Depression, which in some aspects it may be. But it certainly falls short of re-establishing some of the strict boundaries that the earlier laws put in place.
Scott Applewhite/Associated Press
Pablo Martinez Monsivais/Associated Press
Those laws, most notably the Glass-Steagall Act, forbade commercial banks (what are now, for example, Citigroup, JPMorgan Chase and Bank of America) and investment banks (like Goldman Sachs and Morgan Stanley) from mingling plain-vanilla products like savings accounts, mortgages and business loans with the more high-octane, high-risk endeavors of trading.
Such rules managed to keep the banks and the Wall Street investment houses — and the broader economy that depended on them — out of a 2008-style crisis for several decades. But the gradual unwinding of those regulations began in the 1970s as Mr. Volcker rose to prominence, first as president of the Federal Reserve Bank of New York in 1975, and then as Fed chairman.
Mr. Volcker says that most of the deregulation came after he left the Fed. His reluctance to deregulate contributed in part to his departure under pressure from the Reagan administration. His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999.
Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. “It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,” he says of his silence at the time. “But eventually things blew up.”
He also says he failed to anticipate just how wild things would become, post-Glass-Steagall: “Those were the days before credit-default swaps, derivatives, securitization. All of that changed the landscape, and now some adjustment must be made.”
There were other, earlier silences. Starting in the 1970s, ceilings came off the interest rates banks could place on most deposits and loans. A rising inflation rate made the ceilings impractical, and competition from unregulated money market funds was siphoning big chunks of deposits from the banks.
“The lifting of interest-rate ceilings was inevitable,” he says. “I was for doing it more gradually, but it got such a momentum that we moved the limits more abruptly than I wanted to.”
In the wake of those changes, banks were suddenly free to charge more for risky loans, and that encouraged risky lending. The subprime mortgage market grew out of this dynamic, as did the panoply of complex, mortgage-backed securities, credit-default swaps and heart-stopping leverage that finally produced the 2008 crisis.
In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”
THE Volcker rule, in its initial, undiluted form, was an attempt to resurrect the spirit of Glass-Steagall.
The administration initially did not want to separate banks and investment houses, and wanted federal regulation and protections in place for both the Banks of America and the Goldman Sachses of the world. Mr. Volcker disagreed. Let Goldman Sachs and others trade to their hearts’ content, he argued in Congressional testimony last fall, and if they fail they can lose their own money, not get a dime in bailouts from taxpayers, and then be dismantled by the government in an orderly fashion.
Old-fashioned commercial banks that made loans to individuals and businesses were much more essential to the financial system, he argued, and deserved broader federal support than pure Wall Street trading shops.
But in exchange for that support, Mr. Volcker said, commercial banks had to agree to a partial resurrection of Glass-Steagall that corralled their trading activities. His hope is that the trading restrictions will make the nation’s banks embrace the business of commercial and consumer lending more fully and move away from speculative trading.
To encourage that shift, Senator Carl Levin, Democrat of Michigan, and Senator Jeff Merkley, Democrat of Oregon, co-sponsored an amendment to the financial bill that would have incorporated the Volcker rule with all of its original restrictions. Mr. Volcker even had a hand in writing the amendment, so much so that Senator Merkley suggested, only half-jokingly, that it should be called the Merkley-Levin-Volcker amendment.
The White House, after resisting, signed on to the proposal, and so did Congress after much internal wrangling — but the legislation now contains what Mr. Volcker considers an annoying and potentially dangerous loophole.
Instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3 percent of their capital in such funds, so long as the fund is “walled off” from the bank in a separate subsidiary.
Banks won’t be allowed to leverage their investments by lending to a hedge fund; such a loan, if sizable enough, could endanger the bank if the hedge fund should fail. In addition, if regulators discover that a bank is overexposed to a given fund, they are required to intervene and, in some cases, may even be able to shut down the fund or restrict its activities, in order to preserve a bank’s well-being.
But the lending restriction is not as clear-cut as it should be, cautions Senator Merkley.
“We have to get some clarification on that,” he says.
Nor is it clear that a bank wouldn’t try to come to the aid of a hedge fund or a private equity firm in danger of failing if that failure would also cause financial or reputational problems for the bank.
For all of that, Henry Kaufman, a Wall Street economist and a contemporary of Mr. Volcker, wonders how effectively regulators will enforce any of the bill’s numerous mandates. “The legislation is a Rube Goldberg contraption,” he says, “and there are very long timelines before the Volcker rule is fully implemented.”
Whatever warts exist in the Volcker rule, its author says that other positive elements of the larger bill are still worthy and important.
“Don’t take the Volcker rule out of perspective,” he says. “It is one aspect of a broad reform, and it became a big issue because the administration initially disagreed.”
MR. VOLCKER has had a lukewarm relationship with the Obama White House, where the approach to the economy and financial regulation has been dominated by Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, director of the National Economic Council.
Both men were at the center of the deregulatory whirlwind that swept across Wall Street and Washington over the last decade or so, and analysts have considered them to be friendlier to Wall Street and less inclined to pursue tougher regulations than Mr. Volcker would be.
Mr. Volcker supported Mr. Obama in the 2008 presidential election, and the new president named him to lead his Economic Recovery Advisory Board, a group of distinguished outsiders with little real impact on White House policy — until Mr. Volcker publicly proposed the ban on proprietary trading by commercial banks.
After the proposal gained support outside Washington, the president embraced it and dubbed it the Volcker rule. That gave Mr. Volcker more access to the White House and the Treasury on regulatory policy, but people who work with him say that the White House doesn’t regularly seek his input on other issues.
However complicated his relationship with Washington, Mr. Volcker says his personal life has taken a turn for the better. He had been a widower since 1998, until six months ago when he married Anke Dening, his longtime administrator, executive secretary, adviser and constant companion. Ms. Dening, who is German-born and speaks several languages, travels regularly with her husband and often serves as his interpreter.
When it comes to interpreting the financial legislation, Mr. Volcker says he remains less than impressed. “We have to have a regulatory system that reflects today’s problems and tomorrow’s potential problems,” he says. “This bill attempts to do that. Does it do it perfectly? Obviously it does not go as far as I felt it should go.”