[This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]
The 1620s to the 1650s were decades of rule in France by two very secular cardinals. The first was the stern, implacable, cunning, and charismatic Armand Jean du Plessis, Cardinal de Richelieu (1585–1642). A scion of an old family of lesser nobility in Poitou, Richelieu's father, François, had been a particular favorite of Henry III and Henry IV. As a result, young Armand was made bishop of Luçon by Henry IV in 1606. Eight years later, Richelieu attracted the attention of the Queen Mother, Marie de Medici, and became chief adviser in her exile. He was made a cardinal in 1622, and became prime minister in 1624, to remain so until his death 20 years later.
Richelieu's main interest was his participation in the Thirty Years' War (1618–48), which devastated Germany for decades to come. This war symbolized a fundamental shift in European wars from the strictly religious conflicts of the previous century to the political nation-state ambitions of the 17th century. Thus Richelieu, the at-least-nominally Catholic (albeit politique) cardinal of a Catholic country, found himself heading a largely Protestant European coalition against the Catholic Hapsburg of Austria and Spain.
The cardinal's theoretical views were set forth in two books written near the end of his life, his Memoirs on the Reign of Louis XIII and his Political Testament. While his major practical interest had not been domestic or economic affairs, he had helped build up the absolutism of the French state. In his works, he repeated the usual absolutist mercantilist views of the France of his era. France should be self-sufficient in all things, the navy and merchant marine built up, monopolies granted, the idle put to work or locked up in institutions, and luxurious consumption prohibited.
An interesting new variant was Richelieu's candid attitude towards the mass of Frenchmen as simply animals to be prodded or coerced in ways that were optimal for the French state. Thus taxes should not be so high that commerce and industry are discouraged, but neither should they be so low as to leave the public too well-off. For if the people were too comfortable and complacent, it would be impossible to "contain them in the rules of their duty." Richelieu added the revealing comment that "It is necessary to compare them [the people] to mules, who, being accustomed to burdens, are spoiled by a long rest more than by work."
It is clear that in the course of promoting the interests of the nation-state and of his monarch, Richelieu did not neglect his own concerns. A receiver of a modest annual income of 25,000 livres upon his entry into the post of prime minister, by the end of his career in office Cardinal Richelieu was earning some 3 million livres per annum. Apparently, the cardinal had no problem in serving the enrichment of his sovereign and of himself at the same time.
Richelieu's successor was a fascinating character, a Sicilian whose father was a high official attached to the powerful Colonna family. Jules Mazarin (1602–61) was educated in Rome by the Jesuits, and then became a Church official at the University of Alcala in Spain. Returning to Rome to earn his doctorate in law, Mazarin was a captain of infantry, and then a papal diplomat of note. He was made a church canon without ever having been a priest. While serving as papal nuncio to France, he gained the favor of the great Richelieu, who offered Mazarin a high official post if he should become a naturalized French citizen.
It is not many men who emigrate, become a citizen of another land (as Mazarin did in 1639), and then become prime minister of that country only three years later. Mazarin, however, achieved that feat, becoming cardinal (still without being a priest) in 1641, and succeeding Richelieu when the latter died a year later. Mazarin was shrewd enough to court the favor of the queen, so that when Louis XIII died the next year, and the queen became regent, Mazarin could continue in his powerful post. Except for a year or two's hiatus, Mazarin continued as prime minister until his death in 1661.
Mazarin had far less interest in economic affairs than his predecessor, and was no theoretician, devoting himself largely to diplomacy and war. He didn't need much theoretical insight, however, to amass a fortune in high office that put even his predecessor to shame. By the end of his rule, he had accumulated an immense personal fortune of approximately 50 million livres.
One noteworthy work written during Mazarin's term was by a Carmelite monk, Jean Éon, whose religious name was Mathias de Saint-Jean (c. 1600–81). Eon was born in Saint-Malo, in Brittany, and became a friend and adviser of the governor of Brittany, a relative of Richelieu's, Marshal de la Meilleraye. Éon eventually became Carmelite provincial in Touraine, and refused the opportunity to become attorney general of that province.
During Éon's life in Brittany, the Breton merchants became interested in founding a privileged commercial company, and in 1641 a group of merchants, consulting with de la Meilleraye, worked out plans for a large company, centered at Nantes, to be called the Société de la Bourse Commune de Nantes. The company was approved by the council of state in 1646, but it provoked an anonymous pamphlet in opposition. Eon was hired by the city of Nantes, and encouraged by la Meilleraye to write a book in defense of the company. The result was the lengthy Honorable Commerce or Political Considerations (Le Commerce honorable ou considerations politiques) (Nantes, 1647). The book was dedicated to Eon's friend and patron la Meilleraye, whom he extolled as inheriting the mantle of economic leadership of the nation from Richelieu.
Éon's book was a compilation of standard mercantilist doctrines and need not be examined in detail here. He almost rivaled Montchrétien in his hatred for foreigners, and in his wish to drastically curtail their activities in or selling to France. Two of his personal and original contributions were his paean to the sea, shipping, and the seafaring life, and his eulogy to the city of Nantes, its glory and its unique suitability for locating a privileged company.
Vince Miller and the International Libertarian Movement
[This article is transcribed from the Libertarian Tradition podcast episode "Vince Miller and the International Libertarian Movement."]
When the libertarian movement we know today was launched during and just after World War II, the founders were men and women who ranged in age from their 30s to their 60s. They represented, really, two different generations. The first group, born in the 1880s, included Rose Wilder Lane and Isabel Paterson (both born in 1886), as well as Ludwig von Mises (born in 1881). The members of this first group served as mentors and teachers for the members of the second group, who were all born around the turn of the 20th century, and were therefore young enough — or almost young enough — to be the sons and daughters of the members of the first group. Thus Mises was teacher to Friedrich Hayek (born 1899), as Paterson was teacher to Ayn Rand (born 1905). Leonard Read (born 1898) learned from both Lane and Mises, though at a distance, rather than close at hand.
Ayn Rand, the youngest of the founding group, was 38 years old when her individualist novel, The Fountainhead, became one of the founding documents of the new libertarian movement. Rose Wilder Lane and Isabel Paterson were in their late 50s that same year — 1943 — when their books, The Discovery of Freedom and The God of the Machine, became founding documents of the same movement. Friedrich Hayek was 45 a year later, when his book, The Road to Serfdom, became an international bestseller and probably the only book of its type ever to become a Reader's Digest Condensed Book.
Leonard Read was 47 when he opened the doors of the Foundation for Economic Education, the original libertarian think tank, in 1946. The oldest among the founding group, the Austrian economist and social theorist Ludwig von Mises, was 68 when his magnum opus, Human Action, was released by Yale University Press in 1949.
These people grew up in a world without a libertarian movement, as did the generation that followed, the generation of people born in the 1910s and the 1920s. For people like Robert LeFevre (born 1911), Karl Hess (born 1923), Murray Rothbard and Joan Kennedy Taylor (both born in 1926), and Nathaniel Branden (born 1930), there were no libertarian institutions in existence until they had reached high school or college age or had moved into the working world, and new libertarian books were few and far between before then, too.
It's only Americans born during and after World War II who grew up in a world in which, by the time they were old enough to become interested in ideas, there was at least an embryonic libertarian movement already in place to help guide them to the ideas and the people they'd probably be most glad to learn about — a movement that could help make sure they could find the classics of libertarian thought in cheap, reliable editions; a movement that could help make sure new libertarian works of importance were published and made available to as wide an audience as possible. It's only Americans born from about 1939 on who grew up taking some sort of libertarian institutional infrastructure for granted, as something that seemed always to have been there.
The libertarian movement that these war babies and babyboomers grew up taking more or less for granted grew gradually through the 1950s and early 1960s. The Foundation for Economic Education and the William Volker Fund were joined by Robert LeFevre's Freedom School and Rampart Journal, then by the Nathaniel Branden Institute, with its courses on the philosophy of Ayn Rand, and Andrew J. Galambos's Free Enterprise Institute. Thousands of teenaged protolibertarians all over the country had contact of one sort or another with these institutions or their publications; a few made pilgrimages to Colorado and New York City and served summer internships or attended summer seminars, becoming acquainted with the people behind this libertarian infrastructure, meeting other young libertarians from places scattered throughout the United States.
In the 1960s, as this new libertarian generation began percolating through America's college and university campuses, its members found that while New Leftists had a student organization, Students for a Democratic Society (SDS), and young conservatives had a student organization, Young Americans for Freedom (YAF), there was no libertarian student organization.
Some of the libertarians drifted into SDS, where they found plenty of people who agreed with them about the draft and the Vietnam War and the marijuana laws, but few who grasped the importance of the free market. More libertarians drifted into YAF, where there seemed to be plenty of enthusiasm for the free market, as long as it wasn't a free market in marijuana, and where the draft and the Vietnam War were oddly popular among a group who styled themselves as advocates of "freedom."
Neither alliance could hold for long. By 1969, both had unraveled. The libertarians were purged from both organizations at their separate 1969 national conventions in St. Louis. But the larger of the two newly disaffiliated groups — the members of the former Libertarian Caucus of YAF — attended another meeting right there in St. Louis, before they left town. This other meeting was with representatives from the Society for Rational Individualism, a small Objectivist group with aspirations to national significance, headquartered in suburban Washington, DC.
By the end of this meeting, the Society for Rational Individualism had taken on several of the old YAF Libertarian Caucus leaders as directors and transformed itself into the Society for Individual Liberty (SIL), the first libertarian institution established by the first generation of libertarians for whom the libertarian movement was already a fact of life by the time they got old enough to be interested in ideas — what you might call the first generation of modern libertarians.
SIL grew rapidly at first. Brian Doherty reports in his book Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement that within a year of the new organization's founding — that is, by sometime in the late spring of 1970 — there were more than a hundred SIL chapters on college and university campuses across the country. In November, 1971, which Doherty describes as "probably the high point of its draw," SIL "threw conferences in Chicago, New York, and Los Angeles, drawing nearly five hundred in Chicago, slightly fewer at the others."
But decline set in quickly. The end of the draft and US withdrawal from the civil war in Vietnam killed off support on campus for any kind of political agitation — and killed it off with stunning suddenness. SIL had started out building its approach around student activism, but it ended up engaging in a kind of basic libertarian education that was similar in many ways to the kind of thing Leonard Read's Foundation for Economic Education had always tried to do. According to Doherty, during the 1970s and 1980s, "SIL … mailed out tens of thousands of small foldover pamphlets explaining libertarian ideas and positions."
Meanwhile, up in Canada, another story was unfolding. Vincent H. Miller had been born in suburban Toronto late in 1938. Though technically he was born shortly before the outbreak of World War II, he was born late enough that, if he had developed an interest in social and political ideas as a teenager, while he was in high school, there would have been the rudiments of a libertarian movement already in place in the United States to give him guidance. As it turned out, however, Vince Miller was apolitical for the first three decades of his life. He was more interested in running, playing the guitar, and getting rich in business.
Then, in 1971, at the age of 32, he met an actor and former high-school English teacher named Marshall Bruce Evoy. Evoy had been the Nathaniel Branden Institute's official business representative in Toronto in the '60s. In the '70s, he would found the Libertarian Party of Canada and a monthly magazine called the Libertarian Option and would become a fixture at libertarian conventions and gatherings, both in Canada and the United States, playing Patrick Henry (in period costume) delivering his "Give me liberty or give me death!" speech.
I suppose you could say that Evoy took Vince Miller along for this libertarian ride. He gave Vince a copy of The Fountainhead by Ayn Rand; then, once it had worked its predictable magic, he began integrating Vince into his various libertarian projects. He made Vince an editor at the Libertarian Option, got him involved in party politics and encouraged him in his decision to run repeatedly as a Libertarian Party candidate for parliament. Before the '70s were out, Vince had become president of the LP of Canada. He had also taught himself typesetting and offset printing and had gone into business for himself as a printer, competing with the shops he had once patronized, and often found unreliable, when producing libertarian publications. He worked briefly in the late '70s as editor of a libertarian magazine financed by former US Libertarian Party presidential candidate and Rose Wilder Lane-protégé Roger MacBride.
When that project ran out of money, Vince moved on to what turned out to be his best idea yet — a nonprofit organization that would host a series of international libertarian conferences — the conference would be held in a different country each time it took place. This organization could also spread libertarian ideas from the English-speaking world, where they had their largest following, to the rest of the world. It could, for example, arrange for translations of classic libertarian works written in English and their distribution — perhaps even their free distribution — in countries where English was not widely read or spoken.
Vince Miller decided to name the organization the Libertarian International. The first Libertarian International conference took place in 1982 in Switzerland. Over the next few years, subsequent conferences took place in Scandinavia, Paris, Swaziland, and Germany.
In 1989, the Libertarian International merged with the Society for Individual Liberty and became the International Society for Individual Liberty (ISIL). Vince Miller was president of ISIL for the rest of his life — for 19 years all told, until his death two years ago this month in 2008 at the age of 69. Add in his 9 years as president of the Libertarian International, and you see that Vince devoted 28 years, more than half his adult life, to the task of promoting libertarianism to an international audience.
No one who knew him during those years — 1980 to 2008 — is likely to forget him. Vince was genial, good-humored, cheerful, always eager to lend a helping hand — the kind of guy you couldn't help liking, especially when you learned that his dedication to libertarian principle was as pure, as hard core, as you'd find anywhere. He was a gun enthusiast who loved his weekly, Sunday morning visit to the firing range. "Going to church," he called it.
As president of ISIL, he oversaw successful conferences during the '90s and the early years of the new century in Russia, Costa Rica, Lithuania, Mexico, Athens, Rome, Berlin, and New Zealand, among other locations. He worked to introduce thousands of students in other countries to libertarian ideas. He sponsored translation and publication of English-language libertarian classics in former Iron Curtain countries and in other countries where libertarian ideas had made little headway up to that time.
And, true to the SIL tradition, he published and distributed hundreds of thousands of leaflets, brief introductions to the most basic libertarian issues, succinct overviews of those issues, typically printed on both sides of a single 8 1/2 x 11 sheet; and he distributed these leaflets everywhere. He accomplished a lot in the nearly 30 years he devoted to this work, and, as I say, those who knew him will remember him both long and fondly.
But individuals die in time and their memories with them. Vince Miller is far from the first member of the first generation of modern libertarians — the generation of libertarians born between the late '30s and the mid-'50s — to go to his final resting place. And as the rest of us gradually succumb to the inevitable and follow him, though the organization he left behind is still very much with us, Vince's memory will fade. This is inescapable. It could not be otherwise.
Yet, there's a sense in which I, for one, lament the loss. Vince Miller was, after all, one of the most notable of those who have worked over the past 60-odd years to maintain and extend the institutional infrastructure of libertarianism that was first built in the 1940s. Those of us who are glad there is a libertarian movement and are glad to be a part of it — we owe people like Vince Miller a debt of gratitude.
The threat from the internet
It is time for countries to start talking about arms control on the internet
THROUGHOUT history new technologies have revolutionised warfare, sometimes abruptly, sometimes only gradually: think of the chariot, gunpowder, aircraft, radar and nuclear fission. So it has been with information technology. Computers and the internet have transformed economies and given Western armies great advantages, such as the ability to send remotely piloted aircraft across the world to gather intelligence and attack targets. But the spread of digital technology comes at a cost: it exposes armies and societies to digital attack.
The threat is complex, multifaceted and potentially very dangerous. Modern societies are ever more reliant on computer systems linked to the internet, giving enemies more avenues of attack. If power stations, refineries, banks and air-traffic-control systems were brought down, people would lose their lives. Yet there are few, if any, rules in cyberspace of the kind that govern behaviour, even warfare, in other domains. As with nuclear- and conventional-arms control, big countries should start talking about how to reduce the threat from cyberwar, the aim being to restrict attacks before it is too late.
Cyberspace has become the fifth domain of warfare, after land, sea, air and space (see article). Some scenarios imagine the almost instantaneous failure of the systems that keep the modern world turning. As computer networks collapse, factories and chemical plants explode, satellites spin out of control and the financial and power grids fail.
That seems alarmist to many experts. Yet most agree that infiltrating networks is pretty easy for those who have the will, means and the time to spare. Governments know this because they are such enthusiastic hackers themselves. Spies frequently break into computer systems to steal information by the warehouse load, whether it is from Google or defence contractors. Penetrating networks to damage them is not much harder. And, if you take enough care, nobody can prove you did it.
The cyber-attacks on Estonia in 2007 and on Georgia in 2008 (the latter strangely happened to coincide with the advance of Russian troops across the Caucasus) are widely assumed to have been directed by the Kremlin, but they could be traced only to Russian cyber-criminals. Many of the computers used in the attack belonged to innocent Americans whose PCs had been hijacked. Companies suspect China of organising mini-raids to ransack Western know-how: but it could just have easily been Western criminals, computer-hackers showing off or disillusioned former employees. One reason why Western governments have until recently been reticent about cyber-espionage is surely because they are dab hands at it, too.
As with nuclear bombs, the existence of cyber-weapons does not in itself mean they are about to be used. Moreover, an attacker cannot be sure what effect an assault will have on another country, making their deployment highly risky. That is a drawback for sophisticated military machines, but not necessarily for terrorists or the armies of rogue states. And it leaves the dangers of online crime and espionage.
All this makes for dangerous instability. Cyber-weapons are being developed secretly, without discussion of how and when they might be used. Nobody knows their true power, so countries must prepare for the worst. Anonymity adds to the risk that mistakes, misattribution and miscalculation will lead to military escalation—with conventional weapons or cyberarms. The speed with which electronic attacks could be launched gives little time for cool-headed reflection and favours early, even pre-emptive, attack. Even as computerised weapons systems and wired infantry have blown away some of the fog of war from the battlefield, they have covered cyberspace in a thick, menacing blanket of uncertainty.
One response to this growing threat has been military. Iran claims to have the world’s second-largest cyber-army. Russia, Israel and North Korea boast efforts of their own. America has set up its new Cyber Command both to defend its networks and devise attacks on its enemies. NATO is debating the extent to which it should count cyberwar as a form of “armed attack” that would oblige its members to come to the aid of an ally.
But the world needs cyberarms-control as well as cyber- deterrence. America has until recently resisted weapons treaties for cyberspace for fear that they could lead to rigid global regulation of the internet, undermining the dominance of American internet companies, stifling innovation and restricting the openness that underpins the net. Perhaps America also fears that its own cyberwar effort has the most to lose if its well-regarded cyberspies and cyber-warriors are reined in.
Such thinking at last shows signs of changing, and a good thing too. America, as the country most reliant on computers, is probably most vulnerable to cyber-attack. Its conventional military power means that foes will look for asymmetric lines of attack. And the wholesale loss of secrets through espionage risks eroding its economic and military lead.
Hardware and soft war
If cyberarms-control is to America’s advantage, it would be wise to shape such accords while it still has the upper hand in cyberspace. General Keith Alexander, the four-star general who heads Cyber Command, is therefore right to welcome Russia’s longstanding calls for a treaty as a “starting point for international debate”. That said, a START-style treaty may prove impossible to negotiate. Nuclear warheads can be counted and missiles tracked. Cyber-weapons are more like biological agents; they can be made just about anywhere.
So in the meantime countries should agree on more modest accords, or even just informal “rules of the road” that would raise the political cost of cyber-attacks. Perhaps there could be a deal to prevent the crude “denial-of-service” assaults that brought down Estonian and Georgian websites with a mass of bogus requests for information; NATO and the European Union could make it clear that attacks in cyberspace, as in the real world, will provoke a response; the UN or signatories of the Geneva Conventions could declare that cyber-attacks on civilian facilities are, like physical attacks with bomb and bullet, out of bounds in war; rich countries could exert economic pressure on states that do not adopt measures to fight online criminals. Countries should be encouraged to spell out their military policies in cyberspace, as America does for nuclear weapons, missile defence and space. And there could be an international centre to monitor cyber-attacks, or an international “duty to assist” countries under cyber-attack, regardless of the nationality or motive of the attacker—akin to the duty of ships to help mariners in distress.
The internet is not a “commons”, but a network of networks that are mostly privately owned. A lot could also be achieved by greater co-operation between governments and the private sector. But in the end more of the burden for ensuring that ordinary people’s computer systems are not co-opted by criminals or cyber-warriors will end up with the latter—especially the internet-service providers that run the network. They could take more responsibility for identifying infected computers and spotting attacks as they happen.
None of this will eradicate crime, espionage or wars in cyberspace. But it could make the world a little bit safer.
Stimulus Might Avert Error of Optimism: David G. Blanchflower
Commentary by David G. Blanchflower
July 1 (Bloomberg) -- We all seem to know that failing to learn history’s lessons dooms us to repeat them, so you have to wonder why so many smart people seem to make the same economic mistakes.
For the latest example, let’s go back to Jan. 5, 1938, when a famous cartoon was published in the London Evening Standard.
It pictured the residence of Prime Minister Neville Chamberlain at 10 Downing St., emblazoned with the logo, “Downing St. Temple of Sunshine.” A dozen officials stand in front, all half-naked, wrapped in towels, next to a sign saying, “Today’s weather report -- set fair indefinitely.” Walking along Downing Street is a man under an open umbrella who is admonished by the officials -- “the feller ought to be ashamed: encouraging rain.” That man is John Maynard Keynes: written on his umbrella is the phrase, “anti-slump precautions.”
The cartoon followed a letter that Keynes wrote to the Times four days earlier, in which he said that British military spending was the main force keeping up employment, while blaming Franklin Roosevelt for cutting spending and bringing on Round Two of the Great Depression in the U.S.
“Examples abound in all parts of the world where public loan expenditure has improved employment: and I know of no case to the contrary,” Keynes wrote. “Does anyone doubt that employment would decline if public loan expenditure on armaments were to cease tomorrow?”
Keynes’ view ran counter to the so-called Treasury view, expressed by the semi-naked officials in Low’s cartoon. That view held that fiscal policy has essentially no effect on the economy and unemployment, even in the depth of recession. Increased government spending, according to that view, crowds out an equivalent amount of private spending or investment. In short, it has no net impact on the economy.
History proved Keynes correct. In contrast to the U.S., the U.K. didn’t experience a slump at the end of the 1930s, because of the increased level of fiscal stimulus as a result of re- armament spending.
Yet the crowding-out view seemed to be held by a number of the countries at the G-20 summit last weekend, especially by the U.K. and German governments. It appears now that even French President Nicolas Sarkozy is on board and plans to implement draconian austerity measures.
This position stands in contrast to the U.S. view that committing to reduce long-term deficits is appropriate only if it’s not at the price of short-term growth.
It is much more likely that public expenditures, rather than crowding out private spending, are promoting it.
The view of the anti-stimulus crowd is that public spending cuts and tax increases now will somehow quickly return us to steady growth and lots of private-sector hiring. Recovery is under way, the slump is over, so let’s start shrinking the over- reaching state and put an end to all that socialist profligacy. Markets are self-correcting, so we must deliver what the markets want or we will become Greece, it is argued.
It’s not a very convincing argument. Austerity can spook the markets if it compromises growth, as it has in Greece.
In a subsequent letter to Roosevelt in February 1938, Keynes explained that premature curtailment of public-works programs had driven the U.S. back into recession in 1937 because of an “error of optimism.” It seems to me that there is a very real danger that German Chancellor Angela Merkel, U.K. Prime Minister David Cameron, Sarkozy and their underlings are being overly complacent and are also in danger of making a huge error of optimism.
There is a significant probability that these leaders will make the biggest macro-economic mistake since the 1930s, which might push us into what economist Paul Krugman has called the Long Depression, equivalent to the depression that followed the financial panic of 1873.
The signs of weakness are in plain sight. Banks are still not lending, which can compromise growth. Money supply growth is sluggish around the world. There is little or no potential to lower interest rates, which are close to zero almost everywhere except Australia.
Central banks are reluctant to do more quantitative easing, as they remain wary of their effects and there is little room to cut interest rates more. And there is even dangerous talk from some inflation nutters that it is time to start raising rates, which would make matters worse.
It doesn’t look like net trade or investment is going to drive growth, and the consumer is beginning to run scared once more. Consumer confidence last month dropped both in the U.S. and U.K., and the outlook doesn’t seem promising: The index measuring consumer expectations for the next six months in the U.S. fell in May to 71 from 85, while a comparable yardstick in the U.K. declined to 93 from 105. Consumer data in Europe paints a similar picture.
All is not set fair. It’s time for more stimulus, not less.
(David G. Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, is professor of economics at Dartmouth College and the University of Stirling.)
Kagan Says Justices Aren’t Umpires in Departure From Roberts
By Greg Stohr and Laura Litvan
July 1 (Bloomberg) -- Elena Kagan contrasted herself with the U.S. Supreme Court’s Republican appointees as she finished her Senate testimony, saying judges aren’t “robotic” umpires and must interpret the Constitution with an eye toward changing conditions.
In her second and final day answering questions from the panel considering her Supreme Court nomination, Kagan distanced herself from an analogy made by now-Chief Justice John Roberts during his 2005 confirmation hearing, when he likened judges to baseball umpires who simply call balls and strikes.
“The metaphor might suggest to some people that law is a kind of robotic enterprise, that there’s a kind of automatic quality to it,” Kagan said. “Judges do, in many of these cases, have to exercise judgment. They’re not easy calls.”
Kagan also made clear that she doesn’t share the “originalist” approach of Justices Antonin Scalia and Clarence Thomas, who say the Constitution should be interpreted in line with the meaning of its provisions when they were adopted.
Kagan said originalism can’t answer every constitutional question, in part because justices today confront issues that the framers of the Constitution didn’t envision.
“The Constitution does not change, but the court must apply it to changing conditions,” said Kagan, whom President Barack Obama nominated last month to succeed Justice John Paul Stevens, who retired this week.
Kagan finished her testimony yesterday amid words of support from the panel’s Democrats and skepticism from its Republicans. Of the seven Republicans, only Lindsey Graham of South Carolina suggested he might vote for her, telling Kagan, “I think you’ve acquitted yourself very well.”
Senator Pat Leahy of Vermont, the Democratic chairman of the Judiciary Committee, predicted that Kagan will be confirmed. Arizona’s Jon Kyl, a Republican leader, said he doubted his party would try to block a vote.
Kagan’s testimony offered a glimpse at how she might serve as a counterweight to the court’s conservative wing, filling what some progressive scholars and advocates say is a needed role on a court that has rolled back campaign finance regulations, bolstered gun rights and trimmed civil rights laws.
“Kagan has done a terrific job of separating the wheat from the chaff of the conservative portrait of a model judge,” said Doug Kendall, president of the Constitutional Accountability Center, a Washington-based advocate for civil rights, the environment and voting rights. “She will call balls and strikes, but she has added the need for wisdom and good judgment back into the job of being a good justice.”
Senate confirmation of Kagan would for the first time give the high court three female members.
The potential impact of that change at times lurked near the surface of the hearings, as when Republican Senator Tom Coburn of Oklahoma said the country is less free than it was 30 years ago.
Minutes later, Senator Amy Klobuchar, a Minnesota Democrat and one of two women on the 19-member panel, asked Kagan how many women were on the Judiciary Committee and the Supreme Court in 1980. The answer to both questions, Klobuchar said, was zero.
“So as I think about that question about if people were more free in 1980, I think it’s all in the eyes of the beholder,” Klobuchar said.
“I think there’s no question that women have greater opportunities now, although they could be made greater still,” Kagan said.
Kagan took pains not to directly criticize the Roberts court, even for its decision this year striking down federal campaign finance restrictions that she had defended. “I’m sure that everybody up there is acting in good faith,” she said.
She suggested that Roberts’s umpire analogy had value, up to a point. Like umpires, she said, judges “should realize that they’re not the most important people in our democratic system of government.”
Kagan repeatedly declined to discuss issues that she said might come before the court, including gay marriage. On several occasions she said high-profile rulings by the Roberts court, including its decisions this year to overturn corporate campaign spending restrictions and to extend constitutional gun rights nationwide, represented “settled law.”
Kagan said she had “no thought, no agenda, no purpose” to reverse those rulings.
She was more willing than Obama’s first high court nominee, Sonia Sotomayor, to align herself with his suggestion that judges should have “empathy” for the litigants before them. While Sotomayor said she wouldn’t use the president’s standard, Kagan instead tried to add a gloss to it.
“The judge is required to give consideration to each party to try to figure out what the case looks like from that party’s point of view,” she said. “But at the end of the day what the judge does is to apply the law. And as I said, it might be hard sometimes to figure out what the law requires in any given case, but it’s law all the way down.”
Her testimony left most of the panel’s Republicans voicing concern about the type of justice she would become.
Kagan “did distance herself from President Obama’s view that there should be something other than law that decides cases,” said Senator Jon Kyl, a Republican from Arizona. “She was very clear that she intended to decide cases based on the law. But that’s still a fairly general standard.”
Senator Jeff Sessions said he wasn’t sure she would be true to the Constitution. “A combination of record and statements leaves me uneasy,” he said.
Jim Rogers Sees Bond Market Bubble DevelopingANTONIA OPRITA
Bond markets are a bubble waiting to burst because the world economy is facing even worse problems after central banks flooded markets with cash to try to get out of the crisis, famous investor Jim Rogers told CNBC Thursday.
On Wednesday, banks borrowed less money than markets expected from the European Central Bank, in what investors saw as a reassuring sign that Europe's banking system is not as weak as previously feared.
"I don't quite see that myself," Rogers said, adding that the problems are worse now than at the beginning of the crisis. "Markets are looking ahead to more difficulties."
And he said he does not see why investors look at bonds as safe havens.
"I'm watching the bond market, I have no longs and no shorts," Rogers said. "It is a bubble which is developing; it's one of the few bubbles in the world which is developing."
"I think it's going to be a disaster and I plan to be selling them short sometime in the foreseeable future," he added.
Some economists have been calling for more stimulus money to be poured into the economy, but Rogers said this would be bad as it would help only certain categories and will have to be paid for by others.
"The people who receive the money think things are better, and they are better for them, but the rest of us have to pay the price," he warned.
'We Have Inflation Now'
In the US, officials and pundits recently said the bailout of Fannie Mae and Freddie Mac may end up costing taxpayers $1 trillion.
Prices are creeping up all over the world but some governments "lie" about inflation, according to Rogers.
"We have inflation now. Everybody who shops knows there is inflation… prices are going up," he said.
The US and the UK are among governments who "lie" about inflation, while Australia, China and Norway – countries that tightened monetary policy – are facing up to it, he added.
"My investment outlook is I am long commodities and short stocks. I don't own stocks in any place at all," Rogers said.
Geographically, he said he prefers assets in the countries that have the cash, rather than in the ones that have the debt.
"The creditor nations are all in Asia now … I'd rather be invested with the creditors than the debtors," Rogers said.
Food Prices Rising
Printing money has been good for hard assets and food prices "are going through the roof," he added.
"You should all become farmers. Agriculture's been a disaster for 30 years. We have a shortage of farmers now," Rogers said.
He said he is long the US dollar, despite the fact that there are huge negative feelings in the markets about the greenback and currencies are "suspect" everywhere.
"We now know that Greece is bankrupt. We know now that many companies and states in the US have been lying about their finances," Rogers said.
"Governments have poured huge amounts of money in the system… that money has to come from somewhere. This is not over yet. The debts have gone higher," he added.
The recent data on China showed signs of economic cooling as the central bank tightened policy.
"The Chinese government realizes they have problems in real estate and they're trying to solve these problems," he said.
But even though China's economy is in better shape than the euro zone and the US economies, the country can not pull the world out of recession, he added.
Jobless Claims in U.S. Increased Last Week to 472,000 (Update2)
By Bob Willis
July 1 (Bloomberg) -- More Americans unexpectedly applied for jobless benefits last week, a sign the labor market recovery may be slowing.
Initial jobless claims increased by 13,000 to 472,000 in the week ended June 26, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance rose, while those getting emergency benefits dropped after Congress failed to act on extending the legislation.
The jump in applications raises the risk that the turmoil in financial markets brought on by the European debt crisis is leading to additional cutbacks in staff. The Labor Department tomorrow may report the U.S. lost jobs in June for the first month this year, reflecting a drop in temporary federal workers who helped to conduct the decennial census.
“The labor market is not generating employment for anyone, even for people who have been out a long time,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York, who forecast claims at 470,000. “What we’re seeing in the backup of claims is not a particularly healthy story, showing we can’t generate upside momentum in the labor market.”
Economists forecast jobless applications would fall to 455,000 from an initially reported 457,000 for the prior week, according to the median of 46 projections in a Bloomberg survey. Estimates ranged from 440,000 to 475,000.
Stock-index futures extended losses and Treasury securities were little changed after the report. Futures on the Standard & Poor’s 500 Index expiring in September dropped 0.4 percent to 1,022.8 at 8:45 a.m. in New York. The yield on the 10-year Treasury note rose was 2.93 percent, the same as late yesterday.
This is the time of year when states cut back on payrolls in schools, a Labor Department spokesman said. The jump in claims may reflect even larger-than-typical reductions.
Another report today showed job cuts announced by U.S. employers fell in June. Planned firings dropped 47 percent to 39,358 from 74,393 in June 2009, according to figures released by Chicago-based Challenger, Gray & Christmas Inc. It was the third straight month that announced reductions totaled less than 40,000. For the first half of the year, announced job cuts totaled 297,677, the lowest six-month tally since 2000.
Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.
The four-week moving average, a less volatile measure than the weekly figures, climbed to 466,500, the highest level since March, from 463,250 the prior week, today’s report showed.
The number of people continuing to receive jobless benefits increased by 43,000 in the week ended June 19 to 4.62 million.
The continuing claims figure does not include the number of Americans receiving extended or emergency benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments plunged by about 376,000 to 4.92 million in the week ended June 12.
The Labor Department estimates about 3.3 million people will fall off extended-benefit rolls by the end of July if Congress doesn’t pass emergency legislation.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 3.6 percent in the week ended June 19.
Forty states and territories reported a decrease in claims, while 13 reported an increase. These data are also reported with a one-week lag.
The Labor Department tomorrow may report payrolls fell by 125,000 in June, reflecting cuts in temporary census workers as the decennial survey nears completion, economists surveyed by Bloomberg forecast. Private payrolls, which are more revealing of labor-market conditions, probably rose by 110,000 after a 41,000 gain the prior month.
A report yesterday showed companies added 13,000 workers to payrolls in June, the smallest gain since February, according to figures from ADP Employer Services. Economists surveyed had forecast a gain of 60,000, according to a Bloomberg survey median estimate.
The economy lost 8.4 million jobs during the recession that began in December 2007, the biggest employment slump in the post-World War II era. From January through May, company payrolls grew by 495,000 workers.
Federal Reserve policy makers last week reiterated a pledge to keep the benchmark interest at a record low for an “extended period” and signaled the fallout from the European debt crisis poised a risk for economic growth. They acknowledged the labor market was “improving gradually,” even as employers are reluctant to boost hiring.
The timing of the traditional summer auto-plant shutdowns to retool equipment for new models may reduce claims in coming weeks.
General Motors Co. said June 17 most of its U.S. plants will remain open during the traditional shutdowns, a move that economists said could lower claims because some temporarily suspended workers usually apply for benefits.
Factory Growth Weakens From China to Europe, U.S. (Update2)
By Simone Meier
July 1 (Bloomberg) -- Manufacturing growth from China to the euro region and the U.S. slowed in June, suggesting the global export-led recovery is losing strength.
In China, manufacturing growth slowed more than economists forecast, and a gauge of factory output in the 16-member euro region weakened for a second month, two surveys showed. The U.S. Institute for Supply Management’s manufacturing index fell more than economists forecast to 56.2 from 59.7 in May.
Asian, U.S. and European stocks fell on concern that a Chinese economic slowdown combined with deepening budget cuts from Spain to the U.K. may undermine the global recovery. While the Organization for Economic Cooperation and Development on May 26 raised its global growth forecast for this year, it said that a “boom-bust scenario cannot be ruled out” in some countries.
“We expect data to soften from here,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “It’s going to raise some question marks about the outlook, about a double dip. It’s an environment with significant downside risks.”
The MSCI Asia Pacific Index dropped 1 percent today. The Euro STOXX 50 Index was down 1.4 percent at 3:01 p.m. in London. The Standard & Poor’s 500 Index has shed 4.2 percent over the past month, bringing its year-to-date decline to 8.1 percent.
The economy of the OECD’s 30 members will grow 2.7 percent this year instead of a previously projected 1.9 percent, the Paris-based group said on May 26. China may expand more than 11 percent this year compared with growth of 3.2 percent in the U.S. and 3 percent in Japan, according to the OECD. The euro- region economy may expand 1.2 percent, it said.
Limited demand in advanced economies has left the world reliant on emerging markets, led by China, to drive a recovery that Group of 20 leaders this week described as “uneven and fragile.” Signs of a slowdown as the Chinese government clamps down on property speculation and the effects of its stimulus package fade have unsettled investors.
Baosteel Group Corp., China’s second-biggest steelmaker, this week scaled back its growth plans, cutting its target for capacity in 2012 by 38 percent and forecasting a “bumpy, unpredictable and long” global recovery.
China’s economic growth will slow over the second half of this year, which is welcome news “given the slight uptick in inflation recently,” Stephen Roach, Morgan Stanley’s Asia chairman, said in Beijing yesterday. A pace of 8 percent or 9 percent would be “much more sustainable than the overheated growth rate in the first quarter,” he said.
In the U.S., the Tempe, Arizona-based ISM’s gauge dropped beyond the median forecast of 59 in a Bloomberg News survey of 81 economists. More Americans unexpectedly applied for jobless benefits last week, Labor Department figures showed today in Washington.
An index of U.K. manufacturing also declined last month. The gauge by Markit Economics dropped to 57.5 from a 15-year high of 58, signaling slower expansion.
Japan’s Tankan index of manufacturing sentiment climbed more than economists forecast. Bank of Japan board member Yoshihisa Morimoto said in Tokyo today that the economy has yet to achieve a “full-fledged” recovery and there are still “many risk factors” at home and abroad.
In the euro region, a recovery is also showing signs of weakening. German investor confidence plunged in June and euro- region unemployment rose to 10.1 percent in April, the highest in almost 12 years. In France, consumer confidence weakened for a fifth straight month in June.
“Europe has shown signs of life,” Carl-Peter Forster, chief executive officer at Tata Motors Ltd., India’s largest truckmaker and owner of Jaguar, told Bloomberg Television in an interview yesterday. “The recovery is somewhat brittle.”
With households holding back spending and governments cutting budget deficits, European companies have been reliant on exports to boost earnings. The euro has shed 14 percent against the dollar this year, making goods more competitive abroad.
Siemens AG, Europe’s largest engineering company, on June 29 predicted “continued strong profitability” in its third quarter on reviving demand. Pirelli & C. SpA CEO Francesco Gori said on June 24 that the euro’s weakness against the dollar had a “moderately positive” impact on the Italian tiremaker’s second-quarter revenue.
An index of euro-area services, which will be released on July 5, probably declined to 55.4 in June from 56.2 in the previous month. A composite index of manufacturing and services probably fell to 56 from 56.4.
Stocks, Commodities, Dollar Drop on Concern Recovery Is Slowing
By Nikolaj Gammeltoft and Stephen Kirkland
July 1 (Bloomberg) -- Stocks, commodities and the dollar slumped and Treasuries gained as data on manufacturing, jobless claims and home sales fueled concern the economic recovery is faltering.
The Standard & Poor’s 500 Index fell for the fourth straight day, losing 1.4 percent to 1,016.51 at 12:12 p.m., below its lowest close since Sept. 4, 2009. The MSCI World Index of 24 developed nations lost 1.1 percent, approaching a 10-month low. Oil and copper sank at least 3 percent and the 10-year Treasury yield slipped three basis points to 2.91 percent. The euro rallied against the dollar as a Spanish bond sale met targets and pessimism surrounding European banks diminished.
The slide in riskier assets came as reports showed manufacturing growth slowed in China, Europe and the U.S., while American jobless claims unexpectedly rose to 472,000 last week. Pending sales of existing U.S. homes fell at twice the rate economists forecast as the absence of a tax credit hurt demand. The S&P 500 has lost 17 percent from its 2010 high and yesterday completed its first quarterly drop in more than a year.
“It’s a data-dependent market, the leading indicators are turning down and growth is slowing,” said Mike Morcos, senior money manager at Old Second Wealth Management in Aurora, Illinois, which oversees about $1.1 billion. “It now turns out the recovery is weaker than the market thought earlier in the year.”
Financial shares in the S&P 500 slumped 2.2 percent as a group and were the biggest drag on the index among 10 industries after Bank of America Corp. analysts reduced second-quarter earnings estimates for Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc., sending each of their shares down.
Russell 2000 Bear Market
An index of smaller U.S. companies entered a bear market today, with the benchmark Russell 2000 Index extending its slide from a peak in April to more than 20 percent.
Stock returns trailed bonds by the widest margin in nine years during the first six months of 2010 on signs growing government budget deficits may stunt the global economic recovery. A monthly Labor Department report on non-farm payrolls tomorrow is forecast to show the unemployment rate probably rose in June as the U.S. lost jobs for the first time this year.
The extra yield investors demand to hold Treasury 10-year notes over 2-year debt fell to the lowest level since October amid concern the slowing rebound will trigger deflation.
The 10-year note yield stayed below 3 percent for a third day after breaching that level this week for the first time in more than a year. The 2-year yield was little changed at 0.6 percent.
“The information is horrific and expectations for how weak the economy is have been underestimated,” said Thomas Tucci, head of U.S. government bond trading at Royal Bank of Canada in New York, one of 18 firms that trade directly with the Federal Reserve. “The market is defensive because of expectations for non-farm payrolls. Construction numbers, housing numbers and other numbers have all been horrific.”
The euro rallied 1.8 percent to $1.2456 and the yen climbed to a seven-month high versus the dollar. The European Central Bank said it will lend banks 111.2 billion euros ($136.5 billion) for six days to help them cope with the expiration of its landmark 12-month loan today. Banks need to repay 442 billion euros in 12-month loans, the biggest amount ever awarded by the ECB. Banks asked for 131.9 billion euros in three-month loans yesterday, less than economists expected.
Spanish Bond Sale
Spain sold 3.5 billion euros ($4.3 billion) of five-year notes, with demand falling to 1.7 times the amount of securities offered, from 2.35 times at the previous auction on May 6. The notes were sold at an average yield of 3.657 percent, compared with 3.532 percent a May 6 auction. The country’s top credit ranking yesterday was put on review for a possible cut by Moody’s Investors Service, which cited “deteriorating” growth prospects, challenges in meeting deficit targets and the risks posed by higher borrowing costs.
“They did fill it at pretty much the maximum of their guidance, and when you consider the backdrop, you’d have to say that’s encouraging,” Sean Maloney, a fixed-income strategist at Nomura International Plc in London, said of Spain’s bond sale.
Europe, Asian Stocks
More than 11 shares declined for every one that advanced in the Europe’s Stoxx 600 index. Deutsche Bank AG, Germany’s biggest bank, and Credit Agricole SA of France lost at least 3.9 percent. BHP Billiton Ltd., the world’s largest mining company, decreased 3.4 percent in London.
The MSCI Asia Pacific Index lost 0.7 percent. Nissan Motor Co., which gets 13 percent of its revenue in Europe, slid 3.2 percent in Tokyo. China’s Shanghai Composite Index decreased 1 percent. Markets in Hong Kong are closed today for a public holiday.
Crude oil fell the most in almost five months on concern growth in the U.S. and China will slow. Crude for August delivery declined $3.40, or 4.5 percent, to $72.23 a barrel in New York. The contract touched $72.05, the lowest level since June 9.
Copper futures for September delivery dropped 3 percent to $2.8625 a pound on the Comex in New York.
Gold futures for delivery in August fell $27.40, or 2.2 percent, to $1,218.50 an ounce in New York as signs that Europe’s financial industry may be in better shape than investors estimated curbed the appeal of the precious metal as a haven. A close at that price would mark the biggest drop for a most-active contract since Feb. 4.
Obama Pledges to Push for Immigration System Overhaul (Update1)
By Roger Runningen and Nicholas Johnston
July 1 (Bloomberg) -- President Barack Obama said his administration will push for an overhaul of the nation’s immigration laws, saying the system is “fundamentally broken.”
“What we have made clear is that this administration will not just kick the can down the road,” Obama said in a speech at the American University School of International Service in Washington. “Immigration reform is no exception.”
Still, Obama said passing comprehensive reform would be impossible without Republican support. He needs at least 60 votes in the Senate to overcome Republican opposition and ensure a floor vote on legislation. Democrats control 58 seats.
Other major hurdles facing any overhaul effort this year are the midterm elections in November and a congressional agenda crowded with priorities such as confirming Elena Kagan as a Supreme Court justice, passing budget and spending bills, and final action on financial regulation overhaul.
The president has regularly pledged to tighten border security and revamp the nation’s immigration laws to deal with the millions of immigrants in the country illegally. He repeated that pledge in May during a state visit by Mexican President Felipe Calderon and earlier this week in a meeting with immigration groups.
Calderon lobbied Obama for an immigration overhaul after Arizona passed a law cracking down on illegal immigrants. The law prompted nationwide demonstrations in the U.S. on both sides of the issue, and the Justice Department is reviewing the measure and may challenge it in court.
Obama today said the Arizona law has “the potential of violating the rights of innocent American citizens and legal residents, making them subject to possible stops or questioning, because of what they look like, or how they sound.”
He rejected the notion of rounding up illegal immigrants, saying it would be “logistically impossible and wildly expensive.”
Obama said the legal immigration system “is as broken as the borders” because of backlogs and it “takes years” to process applications.
The politics of “who is allowed” in the U.S. has always been controversial, he said. “Our borders have been porous for decades” because we “don’t do a very good job” of tracking who is coming in.
Still, he said, “the 11 million who broke these laws should be held accountable,” adding that the presence of so many undocumented people “makes a mockery of all those who are going through the process legally.”
He said the U.S. has “more boots on the ground” at the border than ever before.
The administration in May announced it would deploy as many as 1,200 National Guard troops and seek $500 million more in funding to help with security measures on the U.S.-Mexico border.
Congressional efforts in 2007 to pass immigration legislation failed because of disagreements over how to treat people who are in the U.S. illegally.
GM, Ford June Sales Trail Estimates as Consumers Shun Purchases
By David Welch and Jeff Green
July 1 (Bloomberg) -- General Motors Co. and Ford Motor Co., the two largest U.S. automakers, reported June sales that fell short of analysts’ estimates as consumers concerned about unemployment and the economy avoided large purchases.
GM’s U.S. sales gained 11 percent, trailing the 16 percent average estimate of six analysts surveyed by Bloomberg. Ford’s deliveries rose 13 percent, less than the six analysts’ 16 percent average projection.
The results show the auto market may be slowing as waning consumer confidence keeps buyers out of showrooms. Industrywide deliveries in June were expected to reach an annualized rate of 11.2 million vehicles, according to the survey. That would be a drop from 11.6 million in May and a gain from last year’s depressed 9.7 million-unit pace.
“Car sales are in line with the consumer confidence numbers that came out, which were a huge disappointment,” said John Wolkonowicz, an analyst with IHS Automotive, a research firm in Lexington, Massachusetts. “Traditionally, June is a good selling month. But there are other overriding circumstances this June that are causing some disappointment.”
The Conference Board said earlier this week that its confidence index slumped to 52.9 this month from a revised 62.7 in May. The private research group’s June figure was less than the lowest forecast of economists surveyed by Bloomberg News.
Annual auto deliveries averaged 16.8 million from 2000 through 2007 and fell to 10.4 million last year, the lowest in 27 years.
Chrysler Group LLC said sales gained 35 percent from a year earlier, topping six analysts’ average estimate for a 33 percent increase.
U.S. auto sales have “flat-lined” since last year’s third quarter as consumers have been unwilling to make big purchases, Mark Fields, Dearborn, Michigan-based Ford’s president of the Americas, said last week.
“Recent economic news continues to point to a slow recovery,” Steve Carlisle, Detroit-based GM’s vice president of global product planning, said today on a conference call. He said GM is maintaining its forecast for the industry to sell 11.5 million to 12 million vehicles this year.
Bonds Beat Stocks by Most Since 2001 as Global Confidence Fades
By John Detrixhe, Whitney Kisling and Pierre Paulden
July 1 (Bloomberg) -- Bond returns are exceeding stock gains by the widest margin in nine years as optimism that greeted the year evaporates and investors around the world question the strength of the economic recovery.
While the MSCI World Index of 24 developed countries fell 9.5 percent including dividends in the first half of 2010, bonds gained 4.2 percent, the Bank of America Merrill Lynch Global Broad Market Index shows, reversing the 5.1 percentage point lead stocks had over debt during the same period in 2009. Growing budget gaps in Greece, Spain and Portugal sent the euro down 15 percent and commodities posted the biggest loss in almost a decade as oil dropped 4.7 percent.
Concerns that Europe would lead the world into the second global recession in three years spurred losses in all 10 Standard & Poor’s 500 Index industries and dragged the Shanghai Composite Index down 26 percent with dividends, data compiled by Bloomberg show. A Labor Department report tomorrow may show the U.S. lost jobs for the first time this year and President Barack Obama said that the nation faces “headwinds” from Europe.
“At the beginning of the year, the consensus was the economy is going to be strong, stocks are going to easily outperform bonds,” said Thanos Bardas, a managing director at Chicago-based Neuberger Berman LLC, which manages about $80 billion in fixed-income assets. Investors didn’t “anticipate the fiscal problems and events that took place in Europe. During the last six months, people have downgraded their growth expectations.”
Federal Reserve Bank of Atlanta President Dennis Lockhart said yesterday that the U.S. economic rebound isn’t strong enough to warrant raising interest rates or shrinking the central bank’s near-record balance sheet. Instability in financial markets poses a “major downside risk” to global growth and “urgent action” is needed to rein in budget deficits, the International Monetary Fund said in a report last month to Group of 20 finance ministers.
The last time bonds beat stocks by this much to start a year was in 2001. In the second half of that year, credit exceeded equities by more than 11 percentage points as the MSCI World Index sank 7.5 percent, data compiled by Bloomberg show. U.S. gross domestic product contracted at a 1.1 percent pace in the third quarter and expanded 1.4 percent in the final three months of 2001.
Economists expect a different scenario this year. The U.S. grew at a 2.7 percent annual rate in the first quarter, according to Commerce Department data released June 25. It’s forecast to expand 3.2 percent in 2010, the biggest increase since 2004, according to the median estimate of 66 economists surveyed by Bloomberg.
The biggest drag continues to be in Europe. Moody’s Investors Service placed Spain’s Aaa credit ranking on review for a possible downgrade yesterday, citing deteriorating growth prospects and challenges in meeting fiscal targets. The rating company cut Greece four grades to junk on June 15, helping send the cost of protecting its debt from default to a record last week, according to CMA DataVision, a price-reporting service of CME Group Inc.
The euro weakened 15 percent against the dollar since Dec. 31, reaching a four-year low of $1.1877 on June 7. Its worst annual performance was a 14 percent decline in 1999, the year it was created.
As concern over Greece’s finances spread to other European countries, investors added $37 billion this year to global bond funds through June 23 while pulling $19.9 million from equity managers, data compiled by Cambridge, Massachusetts-based research firm EPFR Global show. That compares with outflows of $2.49 billion from bond funds and $5.24 billion from stocks during the same period in 2009, EPFR data show.
“People are looking around the world saying equities are really volatile, global economic growth feels like it’s slowing a little bit, meanwhile inflation is coming down and the Fed is on hold indefinitely,” said Michael Collins, senior investment officer at Prudential Investment Management Inc. in Newark, New Jersey, which has about $240 billion of fixed-income assets under management.
Treasuries returned 5.8 percent in the first six months, Bank of America Merrill Lynch indexes show. That’s the biggest rally since 1995, when the Federal Reserve cut interest rates. Denmark, the best performing developed nation for the first six months of this year, has returned 9.2 percent on its sovereign bonds, followed by German bunds with a return of 7.1 percent, according to Bloomberg data.
Those compare with a 6.7 percent loss in the S&P 500 including dividends and a 10 percent retreat in the Euro Stoxx 50 index of countries using the common European currency. China shares posted the biggest decline among major markets as the government raised bank reserve requirements to the highest level in at least three years and curbed real-estate speculation. The MSCI Emerging Markets Index lost 6.1 percent in the first half, beating the MSCI World Index by almost 3.4 percentage points.
“There clearly are concerns in the markets as it relates to sovereign risk, financial regulation and a potential slowing of the economy,” said Tom Farina, who helps manage $188 billion of assets at Deutsche Insurance Asset Management in New York.
Speculation the economy may avoid a recession even as growth slows helped most bonds post gains during the first half. U.S. corporate debt has returned 5.8 percent this year after rising 26 percent in 2009, the largest annual increase since at least 1997, according to Bank of America Merrill Lynch index data. Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, JPMorgan Chase & Co. analysts led by Eric Beinstein in New York wrote last week. Debt fell 2 percent to $2.3 trillion.
“There are still a lot of industrial companies in this country that are doing a great job managing their overall credit quality,” Prudential’s Collins said. “They’re continuing to pay down debt. They’re continuing to shore up their liquidity.”
While U.S. reports showing new-home sales tumbled to a record low after a tax credit expired and American employers hired fewer workers than expected in May suggest the recovery is slowing, Wall Street expects the S&P 500 to rally. The U.S. equity benchmark will rise 23 percent through Dec. 31, according to the average estimate of 13 U.S. strategists.
S&P 500 per-share profit will increase 32 percent in 2010, and 18 percent in 2011, the biggest two-year advance since the period ended in 1995, according to the average of more than 2,000 analysts survey by Bloomberg. The S&P 500 is trading at 12.7 times projected 2010 earnings, 33 percent below the 10-year average of 18.8 times the past four quarters’ profits, according to data compiled by Bloomberg.
“People are making the conclusion that the U.S. and Chinese economies are slowing while Europe has credit problems, so earnings aren’t going to be up to what we had expected and therefore we sell,” said Robert Doll, who helps oversee $3.36 trillion as vice chairman and chief equity strategist at New York-based BlackRock Inc. “I don’t agree with that. I still think the recovery is intact, just at a slower rate.”
Currencies weakened in countries most dependent on commodities after prices for metals, crops and fuel posted the worst first-half return in nine years. The S&P GSCI Total Return Index of 24 raw materials dropped 11 percent, led by declines in sugar, zinc and lead.
The ruble depreciated 3.1 percent against the U.S. dollar while Russia’s Micex Index of stocks in the world’s largest energy exporter slid 4.4 percent. Australia’s currency weakened 5.7 percent versus the U.S. dollar this year.
Oil, Natural Gas
Crude dropped 8.7 percent to $75.63 a barrel since March in its first quarterly decline since the end of 2008. Natural gas futures lost 17 percent in the first half of this year as U.S. inventories rose amid increasing production from shale wells from Texas to Pennsylvania.
As investor appetite for risk diminished, they bought gold and dollars to preserve wealth. The metal climbed 13 percent and reached a record high of $1,266.50 an ounce in New York as investors accumulated a record amount in exchange-traded funds. The Dollar Index, which measures the U.S. currency against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, rose 10 percent this year after dropping 1.5 percent in the same period in 2009.
“Getting out of the worldwide recession was always going to be a long slog,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington, who forecast oil will average $65 a barrel in the third quarter and $70 in the fourth. “It’s always been our view that the second half of 2010 was going to be a tough period.”