Bigger than the Big 5

October 15, 2009 By Manoj Pradhan When Reinhart and Rogoff compared the US financial turmoil favourably to the five biggest financial crises in industrialised countries in recent years, it was still early 2008. Too early, it turns out, with the benefit of hindsight. Since then, the wake of the financial turmoil and its economic ripples have swept beyond the economic fallout seen in the Big 5 (Spain '77, Norway '87, Finland '91, Sweden '91 and Japan '92) and quite easily past the pains of the last four recessions (Last 4) in the US. Comparing the latest crisis and the ensuing recession with its peers of the past reveals some of the potential pitfalls and policy dilemmas that have yet to be successfully negotiated. First, evidence from the past suggests that crises and recessions are generally followed by benign inflation. Second, policymakers in the Big 5 were able to moderate policy because the risks of deflation had abated, while the Fed was able to depend on a robust recovery in the Last 4. Finally, the experience of these episodes emphasises our long-held view that economic recovery leads to a resumption in lending, but credit and output growth are seemingly locked in a symbiotic embrace thereafter and need each other to post a sustainable recovery. None of these relationships can be taken for granted at the present time, which raises the risks associated with the withdrawal of monetary policy. The transitions in past recessions from a resumption of growth to an entrenched recovery were not without risks. Comparisons with the Big 5 and the Last 4 suggest that downside risks to medium-term growth persist for the current recovery from at least two sources. First, credit may not follow the script laid down by history and may show only a flimsy revival, curbing medium-term economic growth. Second, if growth surprises to the upside in the short term and inflation expectations subsequently rise, policymakers may follow the script laid down by history and tighten policy. This would put the fledgling economic recovery at risk. In a previous note, we have highlighted that the risk of such a premature tightening is the one that seems more likely now that downside risks have abated (see "‘Up' With ‘Swing'?", The Global Monetary Analyst, September 16, 2009). Output and inflation have fallen faster than in the past: GDP and inflation have fallen more sharply and by at least as much if not more than previous episodes in the Big 5 and the Last 4. However, unlike previous crises and recessions, the fall in output and inflation has been mirrored across the globe but the recovery from the recession differs widely from region to region. Our global team continues to expect Asia to outperform the rest of the world, while the G10 is likely to post weak growth. Data out of Latin America have recently shown signs of a robust recovery, but the CEEMEA region remains a laggard, as central banks there have not yet completed much-needed policy easing. For a global economy that saw growth dip into negative territory in 2009, the shape of the recovery in the G10 remains a crucial factor. Economic recovery has come earlier than it did for the Big 5: With US and global economic growth rebounding in 2Q09, the recovery from the current financial and economic downturn has taken longer than the average recession in the US but less time than the average recovery in the Big 5. Clearly, the globally synchronised, aggressive monetary and fiscal policy programmes put into place have helped tremendously in cutting down the recovery time. This policy support is expected to stay in place for a considerable period of time, and therein lies the risk that growth could surprise to the upside over the next few quarters. Central bankers are likely to keep monetary accommodation in place for a significant period, and some have even advised markets that rates will remain low for longer (conditional on inflation, of course). Even where policy rates have been raised early (Israel and Australia so far, with Norway expected to follow this month), the increases are unlikely to be uniform all the way back to neutral. QE programmes in the US and the UK have been extended in scope or maturity time and again and still have a way to go before asset purchase targets are achieved. Finally, fiscal policy packages around the world were typically multi-year programmes that will continue to provide stimulus well beyond the recovery. In the US, for example, Recovery.gov reports that only around US$110 billion of the approved package of US$787 billion (22%) has been spent so far. Monetary policy has been much more aggressive than in the Big 5 or Last 4: The aggressive monetary policy response can be seen clearly in policy rates, bond yields and money growth on a comparative basis. Thanks to rate cuts and QE, the fall in policy rates and bond yields has outstripped those seen in the Big 5 and the Last 4, producing significantly easier monetary conditions. Money supply increased in the Big 5 by nearly 15% on average, but this is still less than the 20% (so far) increase in the money supply under the ongoing QE regime. Crucially, policymakers back then curbed the growth in money supply about a year into the turmoil, which is in stark contrast to our expectations for excess reserves and money supply to continue to grow two years after fixed income markets first froze up. The US$420 billion of QE asset purchases yet to come and the wind-down of the SFP programme together set the stage for an increase in excess reserves held by financial institutions at the Fed from US$918 billion now to about US$1.25 trillion by early 2010, according to our Chief US Fixed Income economist, David Greenlaw. We believe that this will provide continued support for M1 growth. M1 is currently growing at 17%, 15% and 26% in the US, Euro Area and the UK (M1 proxy), respectively, suggesting that economic recovery and asset markets will likely continue to benefit from policy tailwinds. Inflation risks are higher this time round: The size of monetary and fiscal packages along with the declining importance of the domestic output gap in determining domestic inflation are sufficient reasons to be watchful for rising inflation as the economic recovery becomes entrenched. Money supply, when allowed to grow and stay large, has resulted in higher inflation on more than one occasion (see "Could Hyperinflation Happen Again?" The Global Monetary Analyst, January 28, 2009). In addition, our empirical work suggests the domestic output gap has become less important in determining domestic inflation (see Global Fixed Income Economics: Inflation Goes Global, July 16, 2007). Even if that view is challenged, the size of the domestic output gap remains a contentious issue. The CBO's measure of potential output puts the output gap at approximately -7%, but our own estimates show that the output gap could be as small as -2% due to a sharp fall in potential output. In his academic work prior to joining the ECB, Governing Council member Athanasios Orphanides underscores this issue by pointing out that the errors in estimating the output gap could be as large as the output gap itself. Less leeway on inflation this time round: Policymakers in the Big 5 were able to pull back the strong monetary stimulus because the risk of inflation had abated, while US policymakers could tighten policy because growth had become entrenched and inflation expectations were beginning to rise (see "Growing Pains", The Global Monetary Analyst, September 23, 2009). This time round, central bankers have to contend with inflation risks from global sources, as well as the difficulty in unwinding sizeable QE programmes and raising rates from nearly zero at the right time and speed to prevent inflation risks from being triggered. With little margin for error, the balancing act carries more risks than ever. Recoveries lead lending, but recoveries also need lending: Comparing GDP growth and credit growth shows a wedge between the recovery paths of the Big 5 and the Last 4 versus a similar gap in credit growth between the Big 5 and Last 4 that could account for at least part of the growth differential. Evidence from individual episodes from the Big 5 and Last 4 shows the relationship between output and credit growth quite clearly. As we have argued before, credit growth resumes only after economic recovery has taken place. However, once economic recovery creates favourable conditions for both lenders and borrowers to re-enter the market, robust growth in credit is likely an important ingredient for a sustained recovery. The path of output and credit growth from past episodes suggests that economic recovery tends to be correlated with lending - at least part of this correlation is likely to result from an improvement in credit growth leading to better economic growth. Thus, while we expect credit growth to pick up as the recovery improves borrowing and lending conditions, the risk of weak credit growth weighing down on economic recovery cannot be ruled out. As such, we have highlighted two sources of downside risks for a sustained G10 and hence global recovery. One is the premature withdrawal of policy support if economic growth surprises to the upside and raises inflation expectations, and the other is the downside risk directly from weak credit growth. These two need not be independent of each other - credit growth would also likely suffer if policy were to be tightened prematurely. A volley of speeches from major central banks has argued time and again that they possess all the tools necessary to withdraw the monetary stimulus when required. There is no doubt that they do. What is yet open to question is whether they will be able to deploy these tools to mop up excess liquidity at the right time and with the right speed. Evidence from major crises and recessions in recent economic history suggests that a benign outlook for inflation and rising inflation expectations have played an important role in determining the timing and extent of withdrawal of monetary stimulus. This time round, the tightrope is thinner and much higher above the ground.

China’s September data suggest that the long-term overcapacity problem is only intensifying

October 16th, 2009 by Michael Pettis.

The release of September trade data earlier this week was pretty interesting, although because of two or three extra working days last month, plus the very big holiday at the beginning of October which might have pushed activity into September, some of the comparisons are misleading. Exports were down 15.2% year-on-year, better than the expected 20-21%. Imports were down 3.5%, much better than the expected 15%. Month-on-month figures showed a rise in both imports and exports. So much ink has been spilled in discussing these numbers that I won’t try to summarize, but it is worth noting that for many analysts the numbers were a very positive surprise. Typical was this Reuters report reprinted in the New York Times: China reported surprisingly strong trade figures on Wednesday, providing fresh evidence that the world’s third-largest economy is firmly on the path to recovery and that global demand is improving too. …Brian Jackson, an economist at Royal Bank of Canada in Hong Kong, said the slower pace of decline was good news for China’s recovery because growth this year has depended too much on the government’s 4 trillion yuan ($585 billion) stimulus package. But even in this article there were hints that the numbers, especially the import numbers, might not be as positive as expected. Commodities were a driving force behind the sharp improvement in imports. China bought a record 64.55 million tons of iron ore in September, up 30 percent from August; imports of copper rose 23 percent. Merrill Lynch’s October 14 research report puts it this way: “Commodity import growth was stunning.” Andrew Batson in an article in today’s Wall Street Journal explains why the high commodity share of imports might not be as positive an indicator of surging demand as the headline numbers suggest: A pickup in China’s metal imports in September is stoking debate about how much of the nation’s commodity intake this year is driven by demand and how much is stockpiling that will soon end. …The trade figures issued Wednesday showed China’s imports of copper rebounding from July and August slowdowns to post a 87% rise from a year earlier. Iron-ore imports also hit a monthly record, at 64.55 million tons in September, up 65% from a year earlier. The gains in imports defied many forecasts that purchases would slow after China took advantage of low prices early this year to build up stocks of many commodities. The data could be a signal that underlying demand for raw materials is stronger than first thought. I read the data differently – not so much as evidence that demand is stronger then we thought but rather that real imports are weaker than we thought. According to the October 14 research report by Mark Williams, of Capital Economics, “We do not expect the trend to last. China’s recovery is being driven by investment, but the recent pace of commodity import growth has been much faster than justified by the rise in current demand. Inventories of many metals have more than doubled since the start of the year (copper inventories are up 500%).” I think I agree with Mark. I already discussed in last week’s entry the recent conversations I have had with chemical and steel analysts and investors who were puzzled by their inability to match China’s imports with any reasonable estimate of the end use of these products. One place where we might see the discrepancy is in a rise in inventories, but although these have been rising, they haven’t been rising fast enough to account for the differences. Are investors stockpiling? It seems that there may be another explanation, and that is stockpiling by private investors. From what I am being told, it seems that a number of wealthy Chinese investors have been speculating directly in commodities, and so some of this inventory buildup is occurring not at the company level but at the investor level. The Wall Street Journal article mentions this possibility: Copper stockpiles also have increased. Royal Bank of Scotland analysts estimate that as much as 900,000 metric tons of unreported copper stocks have built up in China this year. There has been some official purchasing by the State Reserves Bureau, but also a lot of private traders buying imported copper because it could be resold for a higher price domestically. I have no information about how these positions might be financed, if this is true, but I would worry if they were debt financed, and I would worry even more if corporations were financing them indirectly by lending to principles. Shang Ning, the very smart secretary of the PBoC Shadow Committee seminar I run at Peking University, has been trying to figure out ways of indirectly measuring this kind of stockpiling, but frankly we don’t as of yet have any very good ideas. Clearly a lot of policymakers are worried about excess commodity stockpiles. Earlier this week Bloomberg reported on plans to curb steel production. China, the world’s largest steel producer, is working on plans to curb excess capacity as the nation faces “severe oversupply,” according to the nation’s third-largest mill. The government may have detailed plans on how to close obsolete mills, advance mergers and reduce the number of iron ore importers by the end of the year, Deng Qilin, the general manager of Wuhan Iron & Steel Group, said in an interview. …“The government will impose strict measures to effectively close outdated mills and boost consolidation,” Deng, also the chairman of the China Iron and Steel Association, said while attending the World Steel Association annual meeting in Beijing yesterday. “We bigger players will surely benefit from such a move.” There is more than just steel. An article in yesterday’s Xinhua reports the following: The National Development and Reform Commission (NDRC) will mainly redress production overcapacity in six sectors, said Chen Bin, director of the Department of Industry of the NDRC, Thursday. The six sectors include steel, cement, plate glass, coal-chemical industry, polycrystalline silicon and windpower equipment. The NDRC also warns of obvious production overcapacity in sectors like electrolytic aluminum, ship manufacturing and soybean oil extraction, said Chen during an on-line interview on www.gov.cn., the website of China’s central government. He said China would fight serious overcapacity in sectors like steel industry and offer guidance for new-born industries like windpower equipment to avoid low level repetitive construction. China has achieved preliminary progresses in fighting the global economic downturn, but the foundation for economic recovery is not stable yet and overcapacity might lead to bankruptcy, unemployment and bad bank loans if it was not checked in time, he said. Industrial policies create overcapacity I agree with the last paragraph, but otherwise I am pretty skeptical about the fight against overcapacity. According to my model of China’s overcapacity problem, the source of the imbalance is a set of industrial policies that systematically shift income from households to producers, and as long as these policies continue there is little chance of resolving the problem of excess production. I have a longish piece coming out next month as a Carnegie Brief on the Carnegie Endowment website, in which I discuss this as part of a discussion about why I expect a rising US savings rate to lead almost inexorably to trade tensions. Here is the relevant section from the first draft: Although China is still a very poor country, there is no question that Chinese household income has grown substantially over the past few decades, but it has not grown nearly as quickly as GDP. While China’s GDP grew at 11-12% over the 2002-2007 period, for example, MIT economist Yasheng Huang estimates that household income grew at a much lower 9%. If we were able to adjust Huang’s measure to take into account changes in other forms of household wealth – which are described below – growth in household income would have been even lower. This is why consumption has declined as a share of national income, and why China’s total production has exceeded its total consumption by a large and growing amount. This is at the root of China’s high savings rate. Why haven’t Chinese households maintained their share of national income? Largely because the rise in household income was constrained, especially in the last decade, by industrial polices which were aimed at turbo-charging economic growth. These policies systematically forced households implicitly and explicitly to subsidize otherwise-unprofitable investment in infrastructure and manufacturing. Although these policies powered employment and manufacturing growth, they also led to wide and divergent growth rates between production and consumption. These policies included: a.An undervalued currency, which reduces real household wages by raising the cost of imports while subsidizing producers in the tradable goods sector. b.Excessively low interest rates, which force households, who are mostly depositors, to subsidize the borrowing costs of borrowers, who are mostly manufacturers and include very few households, service industry companies or other net consumers. c.A large spread between the deposit rate and the lending rate, which forces households to pay for the recapitalization of banks suffering from non-performing loans made to large manufacturers and state-owned enterprises. d.Sluggish wage growth, perhaps caused in part by restrictions on the ability of workers to organize, which directly subsidizes employers at the cost of households. e.Unraveling social safety nets and weak environmental restrictions, which effectively allow corporations to pass on the social cost to workers and households. f.Other direct manufacturing subsidies, including controlled land and energy prices, which are also indirectly paid for by households By transferring wealth from households to boost the profitability of producers, China’s ability to grow consumption in line with growth in the nation’s GDP was severely hampered. Of course the gap between production and consumption is the savings rate, and as production surged relative to consumption, a necessary corollary was a rising Chinese savings rate. The basic problem, then, is that there are very powerful policies that force a discrepancy in production and consumption growth, and the only way to eliminate overcapacity is by reversing these policies. I am not sure that attempting to address overcapacity by administrative means can succeed, and certainly the track record of other efforts over the past year to address the imbalance doesn’t suggest otherwise. The trade impact In the steel sector here is one consequence of the continued surge in production, according to an article in this week’s Financial Times: The unexpectedly swift recovery in China’s steel production has sparked fears that a glut of exports could puncture steel prices as the global industry struggles to emerge from the economic downturn, rival steelmakers have warned. SK Roongta, chairman of the Steel Authority of India Ltd (Sail), said Chinese over-production was “a point of concern” for the world’s steel producers. During the past year, producer margins have come under severe strain from falls in prices and high input costs. Global output fell more than 20 per cent in the first half of 2009. The head of India’s largest state-owned steel group said that Chinese production accelerated 15 per cent in the past quarter, beating forecasts of just reaching double-digit growth. “We believed that China would grow, but the growth in the past three to four months has certainly been a surprise. I’m not sure this level can be sustained,” he said. “The magnitude of the growth is a surprise; not the growth per se.” Meanwhile on Tuesday in the New York Times the always-perceptive David Barboza spells out very explicitly the implications in a much-discussed article titled “In Recession, China Solidifies its Lead in Global Trade”: With the global recession making consumers and businesses more price-conscious, China is grabbing market share from its export competitors, solidifying a dominance in world trade that many economists say could last long after any economic recovery. …China is winning a larger piece of a shrinking pie. Although world trade declined this year because of the recession, consumers are demanding lower-priced goods and Beijing, determined to keep its export machine humming, is finding a way to deliver. The country’s factories are aggressively reducing prices — allowing China to gain ground in old markets and make inroads in new ones. There are lots of reasons given for why China is able to increase its market share so dramatically, but there is little doubt in my mind that this process will cause rancor and increasing hostility, especially among trade competitors, and the focus will be on policies that continue to subsidize manufacturers. Barboza goes on to say: One reason is the ability of Chinese manufacturers to quickly slash prices by reducing wages and other costs in production zones that often rely on migrant workers. Factory managers here say American buyers are demanding they do just that. …Because China produces a diversified portfolio of low-priced and essential items, analysts say the country’s exports can hold up relatively well in a recession. Few other countries can match what has come to be called the “China Price.” “China has a huge advantage,” says Nicholas R. Lardy, an economist at the Peterson Institute for International Economics in Washington. “They can adjust to market changes very rapidly. They have flexibility in their labor markets. And as consumers trade down the quality ladder, China can benefit.” The expiration of textile quotas in large parts of the world this year has also allowed China to increase its market penetration. But equally important are government policies that support this country’s export sector — from Beijing keeping its currency weak against the dollar to its determination to subsidize exporters through tax credits and billions of dollars in low-interest loans from state-run banks. Although the “wage flexibility” enjoyed by Chinese corporations may seem like a huge advantage, remember my earlier comments about how sluggish household income growth relative to GDP growth is the source of the overcapacity problem (consumption is likely to grow as fast as household income grows). If I am right, it means that measures that can improve China’s export competitiveness are not good for the rebalancing effort if they exacerbate, rather than reverse, the process of transferring income from households to corporations. Lower wages, of course, do just that, and so they cannot be a solution to China’s underlying overcapacity problem except to the extent that they allow China to expel trade competitors. This is not a permanent solution by any means, especially in a world of rising trade tensions. New loans still soaring There are two pieces of related recent news. The first, released on the same date as the trade data, was the PBoC announcement of new loans for the month of September. According to an article Wednesday in Xinhua: China’s new yuan-denominated loans in September rose to 516.7 billion yuan (75.68 billion U.S. dollars) from August’s 410.4 billion yuan, the People’s Bank of China, the central bank, said Wednesday. New yuan-denominated loans in the first nine months stood at 8.67 trillion yuan, 5.19 trillion yuan more than the same period last year. China’s foreign exchange reserve hit a new high of 2.2726 trillion U.S. dollars at the end of September, according to the central bank. China’s monthly new loans had slowed from June’s high of 1.53 trillion yuan to 355.9 billion yuan in July as a result of bank contracting credit and the central bank’s open market operations. The figure rose to 410.4 billion yuan in August and then to September’s 516.7 billion yuan. The broad measure of money supply, M2, which covers cash in circulation and all deposits, was up 29.31 percent from a year earlier to 58.54 trillion yuan at the end of September. The narrow measure of money supply, M1 (cash in circulation plus current corporate deposits), was up 29.51 percent to 20.17 trillion yuan. I think most people were surprised by the September net new loan number, expecting something in the RMB 450 billion range (last September total new lending was RMB 378 billion). Although the current new lending of RMB 517 billion is much lower than the astonishing RMB 963 billion monthly average this year, when you include the net paydown of bill financing in September of RMB 353 billion, the total new medium and long-term financing in September was actually RMB 870 billion. This suggests that in fact September lending was equal to this year’s monthly average (especially if you think of the explosion in bill financing early this year as a form of “anticipated” lending). Regular readers of my blog will know that I have no doubt that this kind of loan expansion can only make the overcapacity problem worse, since either it directly boosts current or future production, or, by leading to a rise in NPLs that will ultimately be paid for by Chinese households, it constrains future consumption growth. Interestingly enough, according to an analysis in Caijing, the share of new loans from the Big 4 was only 21%. This is down substantially from 40% in August, 47% in July, and a whopping 70% in the first six months of 2009. What gives? For one thing, it means that most of the decline in lending from the insane levels of the first half of the year is explained by the decline in lending among the Big 4. It is not so much that new lending is being pushed downward, since the smaller banks are increasing their lending at roughly the same rate as they have all year. Chen Shanshan, an analyst at Bocom International Holdings, said large commercial banks scaled their lending after regulators tightened credit controls at the start of the third quarter. Also, medium-sized banks saw their lending capabilities restrained by the tighter regulatory controls on capital requirements, he said. “Banks are now actively selling loans,” and mostly selling them packaged as syndicated loans, an executive with a large commercial bank told Caijing. I am not sure from this whether they are selling down to other banks or to investor groups. Any color from any of my readers would be much appreciated. As an aside on the reserve numbers, I haven’t done the numbers yet, and I have not had a chance to discuss this with Medley’s Logan Wright, but my initial back-of-the-envelope calculation suggests that hot money inflows may have moderated but are still positive. The second piece of related news was the release yesterday by the US Treasury Department of its semi-annual report on exchange rate policies. “Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 framework,” the report said. “The Treasury remains of the view that the renminbi is undervalued.” While the People’s Daily headline today was “U.S. says China not currency manipulator”, and most of the focus of the article was positive (although it did acknowledge that “it also alleged that the Chinese currency renminbi’s exchange rate showed a ‘lack of flexibility’ in recent period”), the Financial Times article was a little more nuanced: The Obama administration said on Thursday that it had “serious concerns” about the value of the renminbi, but stopped short of accusing China of manipulating its currency in a closely watched report to Congress. The Treasury toughened its language on China in its semi-annual report on exchange rate policies. While acknowledging that Beijing had been important in steadying the global economy, it said recent moves to accumulate more foreign exchange reserves “risk unwinding some of the progress made in reducing imbalances”. But the Treasury did not say China was manipulating its currency, in spite of pressure from US labour groups and scores of legislators who argue that the undervalued renminbi makes China’s exports unfairly cheap . Pressure has built this year as manufacturers suffer huge job losses and the US unemployment rate creeps towards 10 per cent . I am willing to bet that over the next year or two the language gets tougher, not easier. Finally, I saw the following very interesting article on today’s Bloomberg: China’s Ministry of Finance is, for the first time, allowing local governments to use the proceeds of land sales to fund stimulus projects, the China Daily reported, citing a ministry circular. Local governments are required by the end of this month to have provided 1.18 trillion yuan ($173 billion) out of the 4 trillion yuan stimulus plan announced by Premier Wen Jiabao in November, the English-language paper said. Many local governments are finding it difficult to secure funds for projects because of the economic slowdown, the newspaper said.

CIT Amends Restructuring Plan

By KATE HAYWOOD Negotiations between CIT Group, the troubled commercial lender, and a steering committee of bondholders and some aggrieved investors went down to the 11th hour before the company announced a series of amendments to a sweeping debt-exchange and a prepackaged bankruptcy plan. The amended terms of the restructuring plan include, among others: a comprehensive cash sweep mechanism to accelerate the repayment of the new notes; the shortening of maturities by six months for all new notes and junior credit facilities; an increased amount of equity offered to subordinated debt holders reflecting agreements with holders of the majority of its senior and subordinated debt; the inclusion of the notes maturing after 2018 that had previously not been solicited as part of the exchange offer or plan of reorganization; an increase in the coupon on Series B Notes, to 9% from 7%, being issued by CIT Delaware Funding; and provided preferred stock holders contingent value rights in the plan of reorganization, and modified the allocation of common stock in the recapitalization after the exchange offers, as part of an agreement with the United States Department of Treasury. The changes were announced in a statement released about 40 minutes before the midnight deadline. The amendments have been approved by CIT's Board of Directors and the bondholder steering committee. The aim of the debt exchange, announced Oct. 1, is to get holders of about $31 billion in bonds to cut this debt by at least $5.7 billion and to extend the debt maturities. At the same time, CIT is asking bondholders to vote on a prepackaged bankruptcy plan. Under the exchange, owners of CIT's bonds would get new secured debt worth as much as 90 cents on the dollar if they currently own bonds that mature this year, but would end up with less new debt and more equity if they own bonds maturing later. At least two groups of investors were pushing for the company to improve the terms of its debt exchange and what they had been offered in a bankruptcy. Some holders of CIT's longer-dated subordinated bonds were pressing for more equity or a contingent variable payment, to be made depending on how the company performs after restructuring. Also, holders of bonds issued by Delaware Funding, the Canadian unit of CIT were pushing for better terms in a bankruptcy. Under the terms of these bonds, owners are entitled to recover money from the U.S.-based parent company as well as from Canadian assets and could get close to 100 cents on the dollar if CIT files for bankruptcy protection. Typos in the original offering memorandum, which came to light late Thursday night, had threatened to stymie negotiations with owners of CIT's longer-dated junior subordinated bonds. One of the mistakes under discussion concerned how much equity in the restructured entity owners of CIT's 6.10% junior subordinated notes due March 15, 2067, would receive in the restructured entity. The sticking point was how much equity was offered to holders of the junior subordinated bonds in the first place because there was a discrepancy of one-tenth of a percentage point in the offer documents. CIT, one of the largest lenders to thousands of small and medium-size businesses, historically has relied on the capital markets--bonds and short-term debt called commercial paper--for its funding. The credit freeze, however, shut out CIT and other lenders from these markets and CIT has been battles to restructure its debt ever since and stave off bankruptcy. Investors have until 11:59 p.m. EDT on Oct. 29 to tender their bonds under the restructuring plan that was orchestrated by some members of the bondholders' steering committee--Oaktree Capital Management, Centerbridge Partners and Capital Research & Management--in consultation with CIT management. The additional notes maturing after 2018 have an early acceptance date of Oct. 29, 2009 and expiration date of Nov. 13, 2009. CIT shares closed down 5.08% at $1.12. Write to Kate Haywood at kate.haywood@dowjones.com

Deficit of $1.4 Trillion Limits Democrats

By JOHN D. MCKINNON WASHINGTON -- The Treasury said the U.S. ran its biggest budget deficit since World War II, a record that promises to complicate Democrats' efforts to enact their agenda. The Treasury Department reported that the deficit for the 2009 fiscal year ended Sept. 30 came in at about $1.4 trillion, or about 10% of the U.S.'s gross domestic product. From health care to economic recovery to the Afghanistan war, the government's gloomy fiscal condition is constraining Democrats. Deficits also are looming large as a political issue in the 2010 campaign, as voters fret about the long-term consequences of mounting debt. "I don't think I've seen this level of concern since 1992, when Ross Perot said we need to look under the hood and fix the engine," House Majority Leader Steny Hoyer of Maryland said in an interview Friday. "Government, individuals and businesses are all looking at their debt loads and recalculating." The Treasury said government receipts were down 16.6% in 2009, to $2.1 trillion, a result of the recession and stimulus tax breaks. Outlays rose more than 18% to $3.5 trillion, including $113 billion of stimulus outlays. Democrats such as Mr. Hoyer blame the deficit largely on the Bush administration, which inherited budget surpluses, but left office with deficits. But now Democrats find themselves on the defensive over deficits, partly as a result of the $787 billion stimulus they pushed through last winter. On Friday, administration officials defended the stimulus as necessary to pull the economy back from the brink. They also cheered what they called the effects of economic stabilization and recovery, such as lower bailout costs and improving tax receipts, that helped reduce the huge 2009 deficit by 24% from earlier projections. Still, future projections remain higher than many economists believe are sustainable. White House budget director Peter Orszag said in a written statement Friday the administration already is considering proposals for next year's budget "to put our country back on firm fiscal footing." The biggest pressure point so far has been on the health-care overhaul, where President Barack Obama is insisting government costs be limited to $900 billion and fully offset with tax increases or spending cuts. Some freshman Democrats are pushing their party to go further and use the bill to substantially reduce future government spending. Rep. Steve Driehaus, an Ohio freshman, said he brought up deficit concerns as recently as Thursday in an informal meeting at the White House with Chief of Staff Rahm Emanuel. As job losses mount, there's pressure on the party to pass tax and spending measures to accelerate the economic recovery. But Democrats appear reluctant to sign on to big new stimulus measures. Some House leaders also have been less than enthusiastic about Mr. Obama's proposed $250 payments to seniors. Deficits are having an effect, too, on Democrats' thinking on the Afghanistan war. In a bluntly worded statement last week, House Appropriations Committee Chairman David Obey of Wisconsin estimated a big ramp-up ultimately would cost almost $1 trillion. Such a commitment "would devour virtually any other priorities that the president or anyone in Congress had," he wrote. Republicans are making hay with the deficit issue. "This is the No. 1 issue that I talk about," said Frank Guinta, mayor of Manchester, N.H., who's challenging Democratic Rep. Carol Shea-Porter. Write to John D. McKinnon at john.mckinnon@wsj.com

Citigroup Q3 2009

--sale of Simith Barney impacted revenue by $11.1 bil. --set aside tiny amount for credit reserve, compared to >$3 bil in Q2 and in the past --CVA of liability dented > $1 bil revenue. --Citigroup revenues were $20.4 billion, down from $30.0 billion in the prior quarter, which included an $11.1 billion gain from the Smith Barney transaction --Citicorp revenues were $13.0 billion, down from $15.0 billion in the prior quarter. Mainly caused by Credit Value Adjustment of its liabilites. --Citi Holdings revenues were $6.7 billion versus $15.8 billion in the prior quarter, which included the $11.1 billion gain from the Smith Barney transaction. --Citigroup’s credit costs of $9.1 billion included net credit losses of $8.0 billion --Citigroup’s loan loss reserve build for the quarter was $3.1 billion lower than the prior quarter --allowance almost unchanged from 35.9 bil to 35.4 bil in Q3 2009 --nonperforming assets in Q2 2009 was 28.2 bil

世界经济“阳盛阴衰”

2009年3月的美国量化宽松政策及2008年11月中国政府4万亿元人民币刺激经济方案，代表政府制造新需求时代又重新来临，世界经济再次进入“阳盛阴衰”期 　　【《财经网》专栏/专栏作家 曹仁超】10月11日，周日。瑞信资产管理Robert Parker接受CNBC访问时认为，全球股市升幅已有点过分，估计后市有10%-20％跌幅。前克林顿白宫经济顾问鲁宾尼则认为，联储局今年3月至今又制造了另一个泡沫，担心泡沫好快爆破。 否定美股牛市重临论 　　今年5月美国住宅楼价较2006年下跌30％，令全美四分之一家庭变成负资产。2007年美国负债为GDP的 360％（只有60％系联邦政府），令美国2007年GDP中有15％收入其实系用作支付利息，情况较1990年日本更恶劣。鲁宾尼认为，IMF估计美国明年GDP可上升3.1％系天方夜谭，虽然鲁宾尼有“末日博士”称号，但他的警告不能掉以轻心。记得日经平均指数由1992年11月17日15941点反弹到1993年9月3日21281点，不少人认为日股牛市已开始，但我老曹当年担心类似1966年至1982年的美股熊市在日本重演，而认为日本应有长达十六年熊市。当年不少所谓“日股专家”公开挑战我老曹。当年我老曹仍年轻，自信心不足，不敢回应，但今天回望，已知谁对谁错。今天的我，对趋势投资法掌握较1993年多得多。2009年3月道指出现一浪低于一浪后才上升，相信是超级大熊市的反弹多于牛市已开始。趋势投资法系结合基础分析与走势理论而成，如大家对两者认识不深，是很难了解趋势投资法的，正如只有日本人及香港人才了解负资产的威力。 　　今年3月至今美股上升是基于美元弱势，而非经济步入另一繁荣期，此客观环境可否定美股牛市重临论。 　　2008／2009年度美国政府支出升18%，收入减17%，财赤估计达16000亿美元，较2007／2008年度的4550亿美元上升三倍。展望2010年到2019年情况亦无多大改善！日经平均指数自1989年12月29日见38957点到2008年10月见6994点。2004年日本大城市住宅楼价只及1990年时十分之一；商业楼价跌幅更大……自2007年第四季开始美国新增失业人口多达720万人，大大影响美国人的消费能力。2009年3月起的量化宽松政策系牺牲美元汇价去刺激美股上升，但可支持多久（美股已踏入第八个月上升，而靠财金政策支持上升的股市很少能超过九个月）？这次美国经济衰退不系战后任何一次衰退可比，而是美国经济已见顶，并从高峰开始下滑，情况有如1990年日本。未来美国人不再需要盖新房子，而是开始减债，情况与1990年代日本人一样；泡沫时代结束矣！ 从华尔街转向陆家嘴 　　1932年到2007年美股超级大牛市中，亦有不少小熊市；由2007年10月开始的超级大熊市中，同样亦有不少小牛市，我们可利用这些短暂反弹赚钱，不过大趋势系向下，情况有如1900年后的英国。反之，中国经济正在冒起，2008年中国GDP已超过德国，相信2010年超过日本，最后挑战美国，当然前路不会是平坦的，但上述大趋势改不了。2009年起投资大方向是从华尔街转向陆家嘴，或由伦敦来到上海。 　　一天二十四小时可分为白天与黑夜，经济同样有阴阳。以美国经济为例，1933年由已故总统罗斯福提倡“新经济政策”开始，透过政府去制造新需求刺激经济增长，1936年凯恩斯学派更将上述做法推广到全世界，带动全球经济繁荣……但到1966年，无论美国怎样刺激经济，结果亦只带来通胀而非GDP增长，道指则自1966年起不前，进入长达十六年熊市（到1982年8月才见底）。由政府创造新需求去推动经济向上的做法失效，要到1980年里根总统采用供应学派理论，即政府透过减税去减少政府在GDP所占比重，把有限资源让给私人企业，让私人企业增加服务及产品供应，做法同凯恩斯学说刚相反……1982年随着服务及产品供应增加，美国CPI升幅受控，利率开始向下，带来资产价格上升，市民消费增加，一个长达二十五年的经济繁荣期出现。任何事物过犹不及，到2007年因政府对金融业缺乏监管引发次按危机，去年更演变成金融海啸席卷全球，期间无论伯南克如何大幅减息，股市及楼价仍然下跌……因为2007年起美国已进入资产负债表衰退。 　　如果说由政府制造新需求去刺激经济增长系“阳”，到1966年“阳”进入盛极而衰期，渐渐由小政府、大市场主义取代，即“阴”开始盛，到1982年更成为主导，取代由创造需求去推动经济地位。到2007年10月“阴”亦盛极而衰……2009年3月的美国量化宽松政策及2008年11月中国政府4万亿元人民币刺激经济方案，代表政府制造新需求时代又重新来临，世界经济再次进入“阳盛阴衰”期。日本战后经济一直采用大政府主义，在“阳盛阴衰”期，日本经济表现成为全球最出色国家。到八十年代当全球经济进入“阴盛阳衰”期日本仍采用大政府主义。 　　反之，中国自1978年起实施改革开放政策，即中国经济由政府创造新需求带动经济增长转为尊重市场。这次中国经济由“阳转阴”日子较英、美两国还早三年，令过去三十年中国经济成就非凡。到2008年11月，中国政府推出4万亿元人民币刺激经济方案，可以话同全球经济大气候改变完全吻合。如何解释这样巧合？皆因中国国运进入昌盛期，一切决策皆配合大趋势。 　　从大趋势看，西方经济由16世纪开始进入上升周期，到2000年盛极而衰；反之，中国经济由元朝大盛时期到明朝、清朝一直走下坡，直到孙中山先生革命成功，中国国运才开始扭转；至于经济更要到1978年才进入上升周期。明白大趋势，再看各地股市表现，便明白沪深A股由去年11月到今年8月升幅为何那么大；反之，道指要到今年3月才上升。炒股票的人皆知道，最优质股往往最先见顶，然后才轮到二线股。A股由于前景无限，反而最先见顶（8月4日）；美股已进入夕阳无限好，因此亦最迟见顶。A股中的调整浪C可能因美股日后大幅回落而被进一步拖低，这点要小心。至于是哪一天或哪一点？我老曹只系分析员不是先知。五百年西方、五百年东方；五百年大趋势由九个大运组成。美国到2007年已完成西方向上大趋势中的第九个大运；反之，中国2007年才完成向上大趋势中第一个大运，第二个大运则由2009年开始。香港这块福地在过去既受惠于西方，自1982年起又受惠于东方，可以讲左右逢源，得天独厚。 美股反弹正在寻顶 　　美元弱势将进一步减弱美国进口能力，对一直依靠产品出口到美国的企业而言系不利，更何况美国人均财富已由2007年9月的212599美元下降到2009年8月172749美元（政府数字）。联合国今年10月5日公布美国人生活水平由2000年全球排名第五降至2007年第十三，估计到2010年将为二十名之外。 　　今年8月美国CPI较一年前下跌1.5%，如何解释美元汇价下跌、CPI亦跌？答案是需求不足。食有时，睡有时。我老曹相信这次恒生指数由去年10月27日10676点起步，到今年9月17日21929点反弹市已大致上完成，进入上落市。反之，沪深指数超级大牛市，则由去年11月4日1606点起步，到今年8月4日3804点刚完成另一个牛市中的第一期上升周期，进入A、B、C下跌浪，至今调整浪C仍未完成。至于道指这个超级大熊市由2007年10月开始，并在今年3月6日6469点完成超级大熊市中的第一个下跌浪，进入反弹浪（A、B、C），理论上可维持到今年10月才完成。 　　美国升降指数（A/D线）在9月22日出现23个月内新高后回落，代表美股自9月22日起开始寻顶，事前没有人能知道美股这次反弹的顶在哪里（因A/D线可先道指一个月到六个月见顶，上一次A/D线见顶日是2007年6月4日，美股大跌开始是2007年10月6日，两者相差四个月）。去年11月我老曹曾估计港股可反弹前跌幅50％（即由32000点回落到11000点后，可反弹到21000多点），亦在今年3月估计美股可出现相若反弹幅度。不少人将任何升市皆说成“牛市”，而忘记牛市中指数必须创新高。我老曹不将2009年3月美股上升界定为牛市，理由是相信美股在可见未来（十年或以上）指数无法再创新高，情况有如1966年到1982年美股。内地A股未来却是有能力再创新高的！严格地讲，美股熊市早在2000年开始，估计要到2017年才结束（共17年）。美国房地产熊市由2006年开始，结束日子更为遥远。美股最近一个牛市由2002年10月开始（透过减息推动），并在2007年10月结束。2007年10月后无论联储局减息速度或幅度几大，甚至较2001年这次更狠，亦发挥不到作用，上述情况同1990年6月到1994年日本相似。理由是美国同日本一样进入资产负债表衰退期（因资产价格下跌，令企业开始减少负债）！上述行为令减息对经济发生不到刺激作用。到1994年年中日本政府透过大购日圆，将日圆汇价大幅压低，经济才回升。2009年3月美国政府透过量化宽松政策推跌美元后亦生效，一旦美汇止跌回升，就是美股完成反弹的日子！最近金价创新高，令美国政府的弱美元政策又再受压。1994年日本政府成功控制日圆汇价后、日本人开始利差交易，令日本资金向全球流窜，结果炒高了东南亚资产，最终引发1997年亚洲金融风暴。2009年3月美国政府压低美元汇价后亦出现相同情况，美国资金向全球流窜，最后会否引发另一场风暴？此乃后话，请留意未来Fund Flows！ 可燃冰将取代石油地位 　　A股由去年11月4日起步，道指今年3月7日才起步上升，改变过去由美股先行的习惯，反映未来谁才真正主导世界经济（G20正取代G7，中国、印度话事权增加，反之西方国家话事权在减少）。另一阴阳对易已开始。 　　从历史看，政府开支中如超过40％来自财赤，便可引发恶性通胀。2009年美国政府开支估计超过43.3％来自财赤，因此有人担心会引发恶性通胀，我老曹则认为不会，因美国由2008年起进入资产负债表衰退期，企业正忙于减债，情况同九十年代日本近似。此乃我老曹强调这次金价升幅有限的理由。油价又如何？我老曹认为油价高峰在2008年8月147美元一桶，未来石油地位将渐被methane clathrate（或称可燃冰）取代，上述燃料足够人类未来五百年使用。可燃冰系在高压及零下温度时凝固似粘粘的冰，一旦处于正常大气压力及室温下，便变成可燃烧气体。目前所需技术系令上述的“冰”在离开海底后仍保持固体状态，到需用时才变成气体。一百年前标准石油公司发明令汽油在正常气温下不易爆炸的方法后，石油便成为全球最重要燃料。这种可燃冰如出现技术突破，将成为未来人类最清洁的燃料。我老曹认为，石油股宜利用每次上升机会减持。■

Intel Q3 Earning

--Rev: 9389 mil, higher than est 9053 and high end of revised guid 8800-9200. the Q3 revenue is 1.4 bil higher Q2 2009, 0.828 bill lower than Q3 2008. --NI: $1.9 bil. 34 cents, higher than est 28 cents, 15 cents higher than Q2 2009, 2 cents lower from Q3 2008 --drivers: demand for microprocessor and chipset units is up and company cut cost in General Managment and marketing --cons: Inventories were still down, $315 million less sequentially