World Markets and News

» Sinewave - Greenspan Says Central Banks Must Watch Derivatives (Update3)

11/19 20:20
By Michael McKee

Washington, Nov. 19 (Bloomberg) -- Governments must be careful not to over-regulate financial derivatives and central banks should not give the impression they will always bail out institutions if those instruments fail, Federal Reserve Chairman Alan Greenspan said.

Derivatives, such as futures and options, are based on other assets and used to insure against price swings. They have become "central" to global growth because they make it easier to take risks, Greenspan told the Council on Foreign Relations.

At the same time, derivatives' reliance on leverage creates the ``remote'' possibility of a chain reaction of failure, ``a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked,'' he said.

Fed officials feared that could happen following the September 1998 collapse of Long Term Capital Management, a hedge fund which lost $4 billion mainly from wrong bets on differences between bond and futures prices. While the Fed didn't use its lender of last resort power by putting money into the firm, the central bank helped organize a rescue by Wall Street banks and other creditors.

``Such a public subsidy should be reserved for only the rarest of occasions,'' Greenspan said. ``If the owners or managers of private financial institutions were to anticipate being propped up frequently by government support, it would only encourage reckless and irresponsible practices.''

Gauging Risk

The increased use of derivatives has helped lenders better gauge risk because the possibility of default is built into their price, Greenspan said.

In recent months, derivative interest rates have risen on concerns about corporate governance, he said. ``The perceived risk of default of both financial and nonfinancial firms has risen markedly in the wake of company-threatening scandals, though levels remain moderate for both.''

The Fed chairman's text, similar to remarks he delivered in London on Sept. 25, didn't discuss the U.S. economy or monetary policy. On Nov. 6, the central bank voted to lower the U.S. benchmark overnight bank lending rate to a 41-year low of 1.25 percent.

Instead, he expanded on arguments he's made in the past against over-regulation of the derivatives market. Derivatives are measured by notional amount, the value of underlying assets. Their use is growing as a slump in stocks prompts investors to seek returns elsewhere.

$128 Trillion

Derivatives trading outside exchanges grew 15 percent to a record $128 trillion in the first half of the year, driven by contracts pegged to interest rates, the Bank for International Settlements said earlier this month. The market is more than four times global gross domestic product as measured by the World Bank.

The development of derivatives such as securitized bank loans, credit card receivables, and secondary mortgage markets is helping build a ``far more flexible, efficient, and resilient financial system than existed just a quarter-century ago,'' Greenspan said.

For that reason, governments must be careful to ensure they don't stifle risk-taking in regulating derivatives.

``We have the responsibility to prevent major financial market disruption through development and enforcement of prudent regulatory standards,'' Greenspan said. ``But we also have the responsibility to ensure that the regulatory framework permits private-sector institutions to take prudent and appropriate risks, even though such risks will sometimes result in unanticipated bank losses or even bank failures,'' Greenspan said.

Terrorist Attacks

``While regulation must change as financial structures do, such regulatory change must be kept to minimum to avoid fostering uncertainty among innovators and investors,'' Greenspan said.

Over the past year, the U.S. was able to withstand the Sept. 11 terrorist attacks, the ``draining impact of a loss of $8 trillion in stock market wealth'' and a ``sharp contraction'' in capital investment largely because derivatives spread risk, particularly for major banks.

``Importantly, despite significant losses, no major financial institution was driven to default,'' he said.

Derivatives have also made possible the secondary mortgage market that has been ``so critical'' in supporting consumer spending by allowing Americans to refinance their homes, he said. And they kept the collapse of telecommunications companies at the end of the 1990s from cascading into a wider financial crisis, he said.

Because banks and other lenders could mitigate their credit risk, damage from defaults by Enron Corp., Global Crossing Ltd., Railtrack Group Plc, and Swissair Group was limited, Greenspan said.

``In particular, the still relatively small but rapidly growing market in credit derivatives has to date functioned well, with payouts proceeding smoothly for the most part,'' he said. ``Obviously, this market is still too new to have been tested in a widespread down-cycle for credit. But so far, so good.''

Bloomberg.com

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» Sinewave - Brazil's Lula Faces Debt Crunch as Investors Shorten Maturities

11/29 00:14
By Tom Vogel

Sao Paulo, Nov. 29 (Bloomberg) -- Brazil's incoming president, Luiz Inacio Lula da Silva, has to come up with as much as $61 billion to repay debt in the first half of next year to keep his promise not to lead the world's fifth-most-populous country into default.

Investors are demanding ever-shorter maturities before they buy Brazil's bonds, out of concern a Lula-run government may increase spending and default on Brazil's $312 billion in domestic and international debt. In April alone, about $11.4 billion in maturing debt must either be repaid or rolled over.

Lula takes office Jan. 1. His success in persuading investors to commit their money for longer periods will depend on whether he can reconcile his objectives of spending more on the poor with avoiding default, investors said.

``The government's capacity to roll over the debt will depend on his attitudes toward fiscal and pension reform, minimum wage and inflation,'' said Clive Botelho, who manages proprietary trading for Banco Santos SA. For now, ``we are only taking part in auctions for short-term debt'' maturing in the first half of 2003.

Some investors are concerned that Lula will steer Brazil the way of neighboring Argentina, which defaulted on $95 billion of bonds late last year. Investors pulled out of the region; seven of the world's ten worst-performing currencies this year are Latin American, according to Bloomberg's survey of 59 currencies.

A $30 billion loan pledge from the International Monetary Fund that commits Lula to spending controls may not be enough to keep the region's second-biggest economy solvent, economists and analysts said.

Not Buying Debt

Lula ``needs absolutely excellent economic management to skirt a debt disaster,'' said Lisa Schineller, a sovereign debt ratings analyst at Standard & Poor's.

Eduardo Rezende, investment director at Mellon Global Investments in Rio de Janeiro, which holds 6 billion reais ($1.7 billion) of Brazilian bonds, is so concerned about Lula's ability to pay next year he isn't putting any more of his clients' money into the government debt.

``The risk doesn't make up for the return on these investments,'' he said.

Lula has vacillated over the years on whether he would commit not to default. He pledged during his campaign to honor all payments. Now the former union leader, who won the election on promises to spend more on anti-poverty programs, new jobs and higher wages, will face a tight schedule of large debt payments.

``There's not much scope for missteps,'' said Edwin Gutierrez, who helps manage about $1 billion in bonds including Brazilian debt for Deutsche Asset Management Group in London.

Dollar Appreciation

The biggest challenge for Lula is keeping up payments on domestic debt, such as bonds denominated in the local currency, which accounts for about three-quarters of Brazil's total $312 billion of obligations.

The nation's debt load has ballooned to nearly 80 percent of gross domestic product, from 42 percent of GDP in January 1998, a year before the country devalued its currency. Debt costs have grown over the last 12 months largely because more than 90 percent of the bonds issued by the federal government are tied to one of three variables -- the exchange rate, benchmark interest rate or inflation -- all of which are working against the government.

The dollar has appreciated about 36 percent against the Brazilian currency this year and the central bank has raised the benchmark interest rate twice in the last two months to its highest level since June 1999. Inflation is accelerating at its fastest annual pace since January 2000.

Lower Volatility

As a result, 40 percent of Brazil's domestic bonds mature in the next 12 months, up from 25.6 percent at the end of last year. Between January and October, the government boosted payments due next year on domestic debt alone by 47.6 percent to about $53.6 billion. The majority of the holders of the domestic bonds are local banks and pension funds.

``We prefer to forego the high yields in exchange for lower volatility,'' said Eduardo Castro, who manages about 14.5 billion reais ($4.1 billion) in fixed-income for ABN Amro Asset Management in Sao Paulo. He invests in Brazilian Treasury bills that mature mainly in January, February or March.

The only way the government was able to sell longer maturities this week was by offering higher yields after the central bank raised the benchmark interest rate to 22 percent from 21 percent. After the sale of 6.7 billion reais of floating-rate securities, which mature between February and November of next year, Lula's top aide highlighted the return of investors rather than the higher interest rate the government paid.

``I am more optimistic than I was last week,'' Antonio Palocci, the head of Lula's transition team, said following a meeting with central bank President Arminio Fraga. ``We have to be cautious. The president of the central bank also has a cautious outlook, but he has data that is optimistic.''

Capital Flows

The rising price of Brazil's benchmark 8 percent bond maturing in 2014 since Lula won the presidency Oct. 27 underscores a perception among some investors that the government will keep up international debt payments. Brazil's benchmark bond yields about 16 percentage points more than U.S. Treasuries with comparable maturities, nearly double the spread of Venezuela's most-traded bond and about six times Mexico's.

The price of Brazil's benchmark bond is down by about a fifth this year to about 60 cents on the dollar and currently yields about 20 percent, up from about 12 percent in April.

Other factors may undermine Lula's ability to keep paying government debt.

Slower U.S. and European economic growth has shrunk the amount of capital available for investment in developing countries. New lending to emerging markets will drop 74 percent to $9.9 billion this year, compared with 2000, according to the Institute of International Finance. A war in Iraq might also curb capital flows to Brazil as investors become more adverse to risk.

`A Deep Crisis'

Brazil's strategy to shorten maturities is ``just the only available policy response to a severe global risk aversion crisis,'' said Ruggero de Rossi, who oversees $1.5 billion in developing nation bonds, including Brazilian debt, for Oppenheimer Funds Inc. in New York.

However, this strategy is not sustainable for long periods, said Michael Mussa, former director of the department of research at the International Monetary Fund and now a senior fellow with the Institute for International Economics.

``Unless there is a spontaneous substantial further recovery of market sentiment, or something dramatic is done to provoke such a recovery, the Brazilian authorities will soon run out of room for maneuver and a deep crisis will ensue,'' he said.

Bloomberg.com

-- posted by Sinewave

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» Sinewave - Japanese unemployment hits record high

By Bayan Rahman in Tokyo
Published: November 29 2002 8:10 | Last Updated: November 29 2002 8:10

Japan's industrial production fell last month and families cut their spending after unemployment rose to a record high, giving strength to the growing view that Japan's economic recovery may be on the wane.

Production unexpectedly fell 0.3 per cent in October from the previous month, the Ministry of Economy, Trade and Industry (Meti) said on Friday. With the second second consecutive monthly decline, Meti changed its outlook for the index from a "gradual upward trend" to "flat".

The data suggested that industrial production, which has been driven by exports, and the economic recovery , probably peaked between July and September, boding ill for Japan's already high unemployment rate.

Heizo Takenaka, the economy and financial services minister, is expected on Friday to unveil details of a plan to accelerate the disposal of bad loans by commercial banks. The data are likely to increase pressure on the government to provide a social safety net to cope with the possible effects on jobs and corporate bankruptcies from its plan to make Japanese banks tackle their non-performing loans (NPL).

Unemployment in September revisited Japan's post-war high of 5.5 per cent, matching a record high set last December, according to government data on Friday. Although the ratio of job offers to applicants rose slightly to 0.56 - meaning there were 56 offers for every 100 jobseekers - the data showed the labour market remains weak.

Mr Takenaka is expected to announce plans for forcing Japanese banks to assess their borrowers more stringently and to dispose of non-performing loans more quickly. Although removing the bad loans is generally welcomed as a necessary step, there is concern about the initial impact of Mr Takenaka's plans on the economy.

"With the expected faster disposal of NPLs, corporate bankruptcy and involuntary job losses will likely increase," said Takehiro Sato, economist at Morgan Stanley. "Our calculation suggests a ¥29,100bn increase in final NPL disposal would lead to 700,000 more job losses and a 6.5 per cent unemployment rate."

Higher unemployment could undermine consumer spending, which also fell last month. Spending by families of salaried workers fell with the government's household survey showing a 0.7 per cent year on year decline. The drop came after an unexpectedly firm consumption trend earlier this year. Mr Sato said that consumption was unlikely to grow and could suffer a blow from the government's plans to speed up the process of cleaning up Japan's banking system.

The economy was unable to shake off more than three years of deflation with the core consumer price index falling 0.9 per cent in October year on year, the 37th monthly decline.

FT.com

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» Sinewave - Crude Oil Rises as Venezuelans Strike to Oust Hugo Chavez

12/02 12:43
By Mark Shenk

New York, Dec. 2 (Bloomberg) -- Crude oil rose to a one-month high after leaders of a strike in Venezuela said most of the country's workers were taking part in the effort to oust Hugo Chavez, president of OPEC's only member in the Western Hemisphere.

About 82 percent of the country's oil workers joined the strike, union officials said. Traders were also watching Iraq, which has until Dec. 8 to produce an accounting of its arms program. Venezuela and Iraq together produce about 7 percent of the world's oil.

``We could know as early as tonight if they will succeed in overthrowing Chavez,'' said Antonio Szabo, a Venezuelan and president of Houston-based energy consulting company Stone Bond Corp. ``This is a bad time for there to be any disruption in the Western Hemisphere. The U.S. will need Venezuelan barrels if there is any problem in Iraq.''

Crude oil for January delivery was up 50 cents, or 1.9 percent, at $27.39 a barrel at 12:06 p.m. on the New York Mercantile Exchange. Oil rose to $27.44 during the session, the highest price since Nov. 1. Oil has climbed 38 percent this year.

In London, the January Brent crude-oil futures contract was up 49 cents, or 2 percent, at $25.65 a barrel on the International Petroleum Exchange.

The South American producer is among the top four sources of U.S. oil imports and is the third-biggest producer in the Organization of Petroleum Exporting Countries. Venezuelan crude oil accounts for about 9 percent of U.S. consumption.

The strike began at 6 a.m. Caracas time. An eight-day strike by workers and managers in April halted oil exports and led to a coup that deposed Chavez for two days. Chavez's popularity fell during the past year as unemployment rose and inflation quickened. The economy shrank 6.4 percent in the first nine months of the year.

Oil Workers

The success of the strike may rest with the country's oil workers, analysts said. The oil industry accounts for about 30 percent of gross domestic product, half of government spending and 80 percent of exports.

Ali Rodriguez, president of state oil company Petroleos de Venezuela SA, said the company's contingency plan would guarantee oil shipments and production.

United Nations weapons inspectors made a weekend visit to a site considered ``sensitive'' by the Iraqi government as the team monitors Iraq's arms program.

The UN last week resumed inspections in Iraq after a four- year break under a Security Council resolution approved in November that warns of ``serious consequences'' if Iraq fails to cooperate with the inspectors.

U.S. President George W. Bush is skeptical that Iraqi leader Saddam Hussein will fully comply with UN weapons inspectors, White House spokesman Ari Fleischer said.

Bloomberg.com

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» Sinewave - Taiwan Jobless Rate a Record 5.2 Percent Last Year (Update2)

01/22 05:29
By Koh Chin Ling

Taipei, Jan. 22 (Bloomberg) -- Taiwan's unemployment rate rose to a record last year, with manufacturers opting to build factories in China rather than at home.

The jobless rate rose to 5.2 percent from 4.6 percent the previous year, according to the Directorate-General of Budget, Accounting and Statistics. That was in line with a government forecast.

Taiwan companies such as Compal Electronics Inc. and Taiwan Semiconductor Manufacturing Co. are expanding in China, where wages are lower, after the island's government eased restrictions on mainland investment. As local companies invest more in China, fewer new jobs are created in Taiwan, sapping consumer confidence and threatening to slow the local economy's growth.

``China's impact on jobs has become a fixed trend in Taiwan,'' said Joanne Yang, an economist at Yuanta Core Pacific Securities Co. ``In the past two years, especially with the entry of Taiwan into the World Trade Organization, deflationary concerns have gradually increased, so we may find it hard to return to the economic growth rates of 6 percent or 7 percent in the past.''

The government predicts economic growth will pick up to 3.4 percent from an estimated 3.3 percent last year.

Compal Electronics Inc., the world's second-largest maker of notebook computers, said last month it plans to make 70 percent of its laptops in China this year, up from 50 percent in 2002. The shift will improve per-unit gross margins, or sales minus costs of production, by about 2 percentage points, it said.

Taiwan Semiconductor Manufacturing Co., the world's biggest supplier of made-to-order computer chips, today received preliminary government approval to become the first Taiwan chipmaker to open a factory in China.

Government Spending

As corporate investment eases in Taiwan, the government is hoping to take up the slack. President Chen Shui-bian's administration said it plans to increase public works spending by NT$70 billion ($2 billion) this year in an effort to provide work for 75,000 people and lower the jobless rate to 4.5 percent.

Chen Jin-cherng, deputy director of the Bureau of Census at the Directorate-General of Budget, Accounting & Statistics did not comment on the government's targets, saying only he expects the unemployment rate will fall below 5 percent this year.

The seasonally adjusted jobless rate was 5.14 percent in December, little changed from November's five-month high of 5.16 percent and down from a record 5.4 percent a year ago. The number of people out of work fell to 505,000, from 522,000 in November.

The number of people who lost their jobs because of business closures and job cuts rose to 246,000 in December from 243,000 in November, the government said.

Without adjusting for seasonal changes, the jobless rate was 5 percent in December, compared with 5.2 percent in November.

bloomberg.com

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» Sinewave - Venezuela plans to shut forex market -gov't source

Reuters
Tuesday January 21, 10:56 pm ET
By Ana Isabel Martinez

CARACAS, Venezuela, Jan 21 (Reuters) - Venezuela's government, fighting a crippling opposition strike, has approved a temporary closure of the foreign exchange market starting this week as it studies curbs to stem capital flight, a government source told Reuters on Tuesday.

The local bolivar currency has tumbled 28.5 percent since the strike against President Hugo Chavez began on Dec. 2 in the world's No. 5 petroleum exporter.

The opposition strike, now in its 51st day, has choked off the oil production and exports that supply about half of the government's revenues. Strikers are demanding the president resign and call early elections. Chavez has refused and has vowed to beat the shutdown.

The source, who asked not to be identified, said the forex market measure was proposed by Finance Minister Tobias Nobrega and that the government was not planning to devalue the bolivar for the moment.

"The Central Bank board of directors and the government approved Nobrega's proposal which foresees shutting down the exchange market, possibly from tomorrow Wednesday, so they can study exchange restrictions," the source said.

The government source said the forex market closure would seek to prevent large withdrawals of bank deposits by companies and individuals that threaten the local financial system.

Several ministers and central bank officials have repeatedly denied the government plans to introduce currency exchange measures, citing Venezuela's strong international reserves. But traders have said they expected the government to tighten currency controls.

The source said the government still did not have a clear idea of what kind of restrictions it would introduce.

Venezuela has been mired in political and economic turmoil since last year when Chavez survived a brief coup by rebel military officers. Its oil-rich economy contracted sharply last year amid growing political conflict.

FALLING RESERVES, SLIDING BOLIVAR

Venezuela's international reserves have fallen to $11.05 billion, a drop of 7.5 percent this year. The government also holds $2.85 billion in its FIEM rainy-day savings fund.

The Central Bank had been burning through about $70 million to $80 million a day to cover the dollar demand in the exchange market, traders said. Officials have said that figure has at times surpassed $100 million a day.

The Central Bank reference rate for the bolivar (VEBFIX=) closed on Tuesday trading down 5.1 percent at an average of 1,849.50/1,853 bolivars to the dollar. In interbank trading, the bolivar (VEB=) (VEB2=) weakened to an average of 1,908 per dollar, traders said. It fell as low as 1,925 bolivars during Tuesday trading hours.

Rattled by nervous market demand for the U.S. currency, the bolivar has lost more than 24 percent of its value this year. Traders said the Venezuelan currency could fall below 2,000 bolivars this week as the strike stokes tensions.

Traders said earlier on Tuesday the rapid slide of the bolivar could undermine the current exchange rate system, which was introduced in February 2002 when the government floated the currency after dismantling a band system. The last time Venezuela introduced currency controls was under a previous government from June 1994 to April 1996.

Yahoo.com

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» Sinewave - China Jan-Feb Factory Production Grows at Record Pace(Update2)

03/10 20:53
By Chi-Chu Tschang

Beijing, March 11 (Bloomberg) -- China's industrial production in the last two months expanded at the fastest pace on record as manufacturers made more cars, mobile phones and other products to meet the demands of a growing middle class at home and surging orders from the U.S.

Production rose 17.5 percent from a year earlier, the National Bureau of Statistics said. February production rose 19.8 percent from a year earlier, following a 14.8 percent rise in January. The gains for both the first two months and February were the biggest since records began in 1995, economists said.

``Wow!'' said Robert Subbaraman, an economist at Lehman Brothers in Tokyo. ``This is very strong growth, even allowing for the Chinese New Year.''

China is making more products as companies such as General Electric Co., the world's No. 1 maker of power-plant equipment, and Bridgestone Corp., Asia's biggest tiremaker, expand their factories to meet demand in the world's fastest growing major economy. China's per capita disposable income in urban areas rose 13 percent to 7,703 yuan ($930) last year.

As incomes rise, Chinese households are buying more electronic goods, boosting demand for electricity, as well as cars, clothing and other products.

Power

General Electric said last week it won a $900 million contract to supply 13 sets of gas turbines to five electricity producers in China. The turbines, each of which will generate enough power for 300,000 homes, will be assembled in China in partnership with Harbin Power Equipment Co.

As China's power grid expands into its less-developed western regions and more new homes are built, demand for copper, used for wires and pipes, is growing. Jiangxi Copper Co., China's second- largest copper producer, said last week it plans to boost production to 400,000 tons next year from 230,000 tons in 2002.

Bridgestone Corp., Asia's biggest tiremaker, said last month it will invest $99 million in a third factory in China to make passenger car tires. The new factory will be based in Wuxi, Jiangsu province, and will have capacity to make 8,000 radial tires a day for local auto factories, the replacement market and export, the tire maker said.

China's exports rose almost two-fifths from a year earlier in January to $29.8 billion. Last year, the country shipped $326 billion of goods abroad, and about a third of these went to the U.S.

The State Economic and Trade Commission forecasts industrial production will rise about 12 percent from a year earlier in the first quarter of 2003 and a tenth for the full year.

China's industrial production growth since the start of this year was led by factories making telecommunications equipment, computers, electronic equipment and cars, today's report said.

http://quote.bloomberg.com/fgcgi.cgi?pti...

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» Normxxx - ...

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» Normxxx - The Coming Battle Of The Ages

The Coming Battle Of The Ages   full text

By David J. Rothkopf | Sunday, Feb 1, 2004

It doesn't take an advanced degree in political science or a trip to the World Economic Forum in Davos, Switzerland, to recognize that Samuel P. Huntington had it wrong when he wrote "The Clash of Civilizations." All it takes is a look through the daily newspaper to realize that we face a more fundamental problem, one that drives the cultural and political clashes we see at home and abroad, and will fuel even greater conflicts to come. That problem is a clash of generations -- in which the interests of an aging, developed world are pitted against those of a developing world that is young and increasingly frustrated.

Huntington wrote that "clashes of civilizations are the greatest threat to world peace," and that "an international order based on civilizations is the surest safeguard against world war." At first glance, the notion of civilizations in conflict seems irrefutable. For better or worse, the West and our allies seem to be engaged in a war with extremist sects of Islam. Hindu Indians and Muslim Pakistanis continue to do battle. Jewish Israelis and Arab Palestinians remain locked in a death struggle. Asian leaders periodically talk about solving problems with "Asian" solutions that are not geared to "Western" preferences or prejudices.

But look deeper into the terrorism that dominates the news: Terrorists, whether in Afghanistan or Colombia or Indonesia, are united by the fact that the vast majority of them were recruited from places where a burgeoning youth population sees hope as more of a taunt than a promise. And most of them, regardless of their political or military goals, lash out against the "haves," the ones whom they see as denying them opportunities .

If we seek to end terrorism (or to feed the hungry or to offer real security to ensuing generations), we need to understand and resolve those tensions fueled by the clashing interests of the frustrated poor of the south and the more dominant aging populations of the north.

Such a clash should not seem "foreign" to the average American. Here, as in every country, generational issues trigger heated debates. We worry about who's going to foot the bill for our graying population, about whether feckless baby boomers will bequeath a bankrupt country to their kids, and whether streams of young immigrants from developing countries are a threat to workers or a potential boon to society.

Look at the exit polls from New Hampshire and Iowa. In the era of Iraq and the war on terrorism, the top issues on the minds of voters were health care and the economy. Such issues dominate in virtually every country, regardless of culture. The central issue driving Chinese political life is, at its core, not uniquely Chinese in any respect other than scale. It is whether the government can ensure domestic stability by producing sufficient growth to employ the 300 million to 400 million who are unemployed and underemployed. Indians and Nigerian are asking much the same question.

Look at the alliances formed in Cancun during the most recent round of world trade talks: India, Brazil and South Africa, each from a different "civilization" cited by Huntington, united against the European Union and the United States because of a common need for more access to markets and jobs. It is a common scenario, culture taking a back seat to more basic human needs. Culture may offer a convenient rallying cry for those trying to mobilize populations, but it is really just a way to dress up, to ennoble the common demands for the more fundamental requirement of economic justice.

The fault-line issue of our time is about something deeper than belief or allegiance: It is about need. And because the needs of the young in the developing world and of the increasingly aged populations of developed nations are at once so urgent and so divergent, the clash of civilizations makes for issues that transcend culture and cross civilizations, uniting some and dividing others.

Demography is, in fact, destiny: Half the people in the world today are under 24. Of these, nearly nine out of 10 live in the developing world. A billion of them will need jobs in the next decade -- 60 percent of them are in Asia, 15 percent are in Africa. For them, the choices are simple: dignity or desperation, a job or starvation.

For the citizens of the developed world, though richer, the challenges are also daunting. Our populations are older than ever. We live 50 percent longer than people in poor countries. Our median age is twice as high. In Europe today there are four workers for every retiree; in a few decades, there will be only two workers to pay for each retiree. At the same time, the bill for caring for these older citizens will skyrocket. In Italy, Spain, Japan and France, public benefits to the elderly will exceed 27 percent of GDP by 2040.

In the United States alone, the deficit between political promises for the care of the aging and expected funding has been estimated at more than $44 trillion. Health care costs are rising at a double-digit pace. And as populations age, they are requiring more and more expensive chronic care. Furthermore, politicians in these countries are showing zero political will to grapple with these intersecting social, economic and political crises.

This sequence of converging problems creates two perfect storms, one swirling south of the equator, one north. They are dictating global priorities, triggering conflict and setting the terms for national political debates. And if we want to understand our economic capabilities and constraints in the decades ahead -- where growth may lie and deficits may bite -- then we must understand the economic consequences of this demographic divide.

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» Normxxx - The World Turns Ugly

For American Brands, the World Turns Ugly

By Jon D. Markman

The U.S. typically grants foreign countries "most favored nation" trading status unless they're run by man-eating Communists. This signifies that they have normal economic relations with the world's greatest financial power and are subject to the same tariffs and legal treatment as peers when their goods enter the country.

After its unpopular pursuit of the Iraq war, however, not to mention high-profile corporate scandals ranging from Martha Stewart to Tyco, the U.S. now appears to be gaining the status of "least favored nation" around the world as trading partners re-envision their relationships through the prism of animus and distrust rather than amity.

The most recent example came last week when the European Union slapped a record antitrust fine against Microsoft, one of America's leading technology companies, for reasons that seem animated as much by anger and suspicion as by a strict reading of law.

Yet other examples of the international turn of the screw are becoming apparent, and that should worry investors in U.S. multinational-branded manufacturers and retailers such as Coca-Cola, Ford and Starbucks.

Poll: U.S. popularity plunges

Not long ago, market research firm RoperASW conducted a survey of 30,000 people in 30 countries that sought to determine foreigners' opinions of the U.S., and found they had undergone a historic plunge.

According to a report in the magazine American Demographics, the survey found that only 15% of Indonesians, for instance, felt very favorable or somewhat favorable toward the U.S. That's down from 61% who held that view a year ago.

Not surprisingly, Islam-dominated countries had the greatest jump in negative vibes toward things American. But the number of Russians who saw the U.S. in a favorable light also sank 25 percentage points in a year, while the share of French, Germans and Italians with positive feelings toward America fell by 20, 16 and 10 percentage points, respectively. The magazine said the study pointed out that Canadians and the British likewise felt less positive toward the U.S. than in the prior year.

Worse in many ways for American multinationals is the increasing number of global consumers who told surveyers they felt "distant" from American culture: There was an average jump of 2 percentage points from 1999. The strongest increases were in Taiwan (20-point jump), Argentina (17), Thailand (13) and France (10).

Meanwhile, the integrity of American business leaders also has come under attack. RoperASW reports that when survey respondents in foreign countries rank their trust in leading companies worldwide, American organizations now cluster at the bottom of the list.

Even Latin America, long a bulwark of support for U.S. products, has begun turning against American economic might, with resentment over Iraq bubbling over into open criticism of immigration policies and an attempt to block a new hemispheric trade agreement. Brazil's ambassador to the U.S. told The New York Times in January that his country feels "severely penalized" by U.S. restrictions on his country's steel and agricultural products.

Watch the Top Line

In addition to these obvious sources of distrust, there appears to be a growing sense of unease overseas about the growing extension of U.S. military power in their lands. According to a new book by Chalmers Johnson, a University of California-San Diego professor, the Pentagon now occupies 702 bases in 130 countries on every continent but Antarctica.

In the book The Sorrows of Empire, Johnson says Americans do not recognize the extent to which their country has created a global "baseworld" of garrisons that intrude on trading partners' activities through a vast network of soldiers, spies, technicians and civilian contractors.

While such discomfort may make it harder for American manufacturers to sell the stateside sizzle on products such as Nike sneakers to the world's emerging middle classes, it is doubly hard for them to overcome poor publicity when things go wrong.

Coca-Cola discovered this the hard way in early March when it was forced to abandon the scheduled rollout of its Dasani bottled water in continental Europe after a botched launch in the U.K. The company yanked Dasani from British store shelves last week after being pilloried for its revelation that not only was the product merely "enhanced" tap water, but it also contained abnormal amounts of a chemical called bromate that can harm people who consume it regularly over an extended time.

If there has been a deterioration in American companies' overseas income, it will probably be masked in the upcoming earnings season by the extreme weakness in the dollar. When the dollar is cheaper than the euro, yen, rupee or zloty, U.S. goods cost less in foreign countries, boosting sales. So when first-quarter reports start pouring out next month, investors should pay special attention to big companies' international top line, not earnings, for signs of potential deterioration.

Goodwill Seemingly in Short Supply

Of course, it is possible that negative views will not last much longer and that a swing back in favor of U.S. popularity is overdue.

Mark Headley, portfolio manager at the Matthews Funds and an expert on the Chinese, Korean and Japanese markets, says his contacts distinguish between American consumer products and American politics. "Most Asians I talk to hate Bush's policies -- absolute antipathy," he said.

"In South Korea, they think he has made the Korean peninsula more dangerous. In China, they think he has goaded the Taiwanese to be more independent and confrontational. Anywhere there is a Muslim population, they are extremely unhappy with his policies across the board. And in Japan, there are tremendous misgivings about sending troops to a forward deployment for the first time since World War II. But none of this has stopped Chinese accountants or factory managers from buying cool new Motorola phones or stopped the Japanese from eating at McDonald's."

If you go beyond the consumer to the wholesale and distribution level, though, Headley says American companies are losing their "edge of goodwill" when competing against European or Asian companies for contracts ranging from airliners to concrete.

"In Korea and Japan, they have always liked American troops for their stabilizing influence, but that has evaporated," he said. "They now see us as untrustworthy, don't understand our actions and blame us for the breathtaking rise in the price of their most expensive imported product -- Middle Eastern oil."

Headley said the greatest danger is that rising resentment has pushed the moderates in Muslim-dominated democracies to act more anti-American to keep pace with their constituencies.

Companies that might potentially feel the greatest pain would be the ones that currently enjoy the greatest success: Altria Group, maker of Marlboro cigarettes; Coca-Cola; and Procter & Gamble.

In contrast, large-cap companies that could feel the least impact would be ones with the smallest exposure to foreign consumers or wholesale buyers, such as homebuilders, utilities, health-care insurers and specialized retailers.

American companies' loss of international appeal could lead to gains for their European and Asian counterparts. Indeed, if you can visualize a future tipping point of distress -- such as a Pentagon raid on Iran or other aggressive American geopolitical initiatives -- it might even make sense to consider "pairs trades" in which one would go long a foreign multinational such as Toyota Motor and short a U.S. equivalent, such as General Motors.

That may seem extreme, but traders may decide they prefer to drive with world traffic than to follow the Stars and Stripes into harm's way.

-- posted by Normxxx

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