USA Focus

publication date: Mar 7, 2008

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author/source: Drew Hillier (March 2008)

In Association with EuroFinance

It seems like only yesterday when, under the Fed’s previous boss, Alan Greenspan, the principal aim of keeping inflation under control resulted in an expansionary monetary policy which saw asset prices and debts so inflated that Big Alan was still raising rates well into 2000, even as the economy started to deflate from the popping of the dot-com stock bubble. By 2003, of course, Greenspan trimmed rates and stoked the housing bubble, which, by contrast, his successor's final hike of 2006 killed off comprehensively. Ben Bernanke, presumably acting with the spine-tingling visage of Greenspan wagging his finger from the darkness, well-and-truly spooked already jittery economics boffins early in February by repeatedly hitting the rate cut joy button.

IF IN DOUBT – HIT THE JOY BUTTON

As to how far the Fed can go down the rate cutting route, I’m reminded of an apocryphal tale – or maybe it’s true – of a floor trader who, after the great equity market crash of 1987, was asked about how long the selling could last. Well, he said, the market lost 22% of its value that day, so, at the maximum, this could only last a bit over three more days!

Although a somewhat bland statement – it’s absolutely true to sum up the US economy as one which not only has fundamental strengths but also fundamental problems. The US Central Intelligence Agency summarises economic conditions in nearly 200 countries; here is what its 2007 World Factbook says about the home country: Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an ageing population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups.

At the recent World Economic Forum at Davos, Stephen Roach, chairman of Morgan Stanley Asia, (and a notorious "bear") said both the Federal Reserve and the US government were trying to solve the current crisis by "reaching back into the same playbook that created the mess in the first place". Instead of tackling asset bubbles like inflated housing and stock markets head-on, “…they waited until the bubble had burst and then cleaned up afterwards. That's a dangerous way of running the economy," warned Roach.

Equally outspoken, though taking the opposite stance, legendary billionaire investor, George Soros, has gone on record as supporting the US Federal Reserve's surprise interest rate cut, which, he said: “bolstered global stock indexes”, adding "…you do have to rescue markets, otherwise you would go into a depression, as you did in the 1930s."

But the jury’s well and truly out on that, not least because, by all accounts, the Fed’s decision to trim rates twice in just nine days over January – amounting to what many analysts characterise as the most startling exercises in Central Bank economic intervention in living memory – has yet to make life either easier or cheaper for American companies and households alike. In fact, the opposite seems true, as they have faced even higher interest rates over the last few months, says Saxo Bank strategist, Christian Blaabjerg, who adds: “On the short end of curve, interest rate cuts are not having the intended effect. But, it’s a catch 22 situation. If Bernanke cuts rates again, America may face the liquidity trap we saw in Japan through the 1990’s, where the cheaper liquidity and re-financing rates fail to get passed onto consumers, but are instead retained by Banks. Furthermore, Americans are finally spending less on furniture and cars, a fact not to be understated because of all the World’s economies, the U.S. is the most heavily dependent on consumerism, with two-thirds of the country’s GDP generated by consumer spending.”

Bush admits to ecomonic growth fears

Delivering his final State of the Union address, President George W Bush acknowledged the US economy was facing "uncertainty," and urged his fellow Americans to have long-term confidence in the face of slowing economic growth. "At kitchen tables across our country, there is concern about our economic future," he said.

In fact, several opinion polls are showing how most Americans believe the US has entered a recession already, with such – the CBS/NYT poll (conducted between January 9 – 12) – showing the economy and jobs fears outweighed the Iraq war, the latter of which topped the polls for the last few years.

From the bankers’ perspective, asked whether he thought the US economy had slid into outright recession, Giles Keating, Head of the Credit Suisse Global Economics and Strategy Group, opined that, in his view, the more likely probability is “…that we will just see a sharp slowdown without the economy actually going into recession. And indeed, if it were to go into a technical recession, I think it would be of a very technical nature. My colleagues on the Global Economics Strategy Group feel that the corporate sector is looking pretty strong with strong balance sheets. Companies have actually been quite cautious during the expansion years, and that puts them into a very good position when there is a downswing such as the current one. So with regard to recession, there is a rather low probability that we might be getting into something quite deep.”

Concentrating on how the US Government is dealing with what, clearly, constitutes some sort of crisis, Hélène Baudchon, an economist with Credit Agricole S.A., remains in two minds as to whether or not government and Fed intervention will prevent a full-blown US recession. She is, however, certain that government intervention is necessary, though as she says: “What forms it should take is a matter of debate. Several measures are being explored and others may emerge in the future. Their effectiveness remains to be seen, but the US can be expected to do everything in its power, while allowing maximum scope for market forces to operate.”

An example of such anti-recessionary intervention was the move early in February by the US Congress in passing a $167bn economic stimulus plan – including one-off rebates of up to $600 for individuals and $1,200 for couples plus $300 for each child. As well as the tax rebates, those on low incomes, who do not pay income tax, would receive a $300 payout. President George W Bush welcomed the passing of the bill and said it would help stimulate consumer spending. Treasury Secretary Henry Paulson also welcomed the approval, saying: "This package of payments to individuals and incentives for businesses to invest will support our economy as we weather the housing downturn."

Nonetheless, despite the stimulus measures, or maybe because of them, US confidence levels continue dropping to alarming levels, as the weekly ABC Confidence figure registered a new 13-year nadir. With spirits this low, it’s hard to expect great things for retail sales going forward, which Christian Blaabjeg observes: “…will damage economic growth and puts pay to the rather drastic measures we have seen in recent weeks, not just the interest rate cuts, but also the recent Lifeline Plans for stricken homeowners. Quite simply, these measures are still not enough to abate a recession.”

The Saxo Bank strategist is of course referring here not only to the so-called ‘Project Lifeline’ – under which, struggling mortgage payers will be offered 30 days extra to renegotiate their deals – but also to the plan by Bank of America, Citigroup, Countrywide Financial, JP Morgan Chase, Washington Mutual and Wells Fargo, who between them are to offer more help to homeowners struggling with mortgages.

 “The fact that six major banks and mortgage lenders in the U.S. are coming out in aid of homeowners will have a positive affect. But it won’t change any fundamentals, and it won’t be enough to prevent a U.S. recession, but it should boost positive sentiment that will carry over into the American session today,” says Blaabjerg, who adds with a touch of optimism: “But it is the rumours that a conglomerate of banks will aid flailing bond insurers that could really prevent more bad weather, of tsunami-like proportions, for the U.S. and World economy.”

For his part, U.S. Treasury Secretary Henry Paulson said that the Bush administration would continue to monitor capital markets closely and to advocate strong market discipline and robust risk management. "Working through the current stress is our first concern," Paulson said in a prepared statement to the House Committee on Ways and Means, "Through the President's Working Group on Financial Markets, we are also reviewing underlying policy issues because it is just as important to get the long-term policy right."

Paulson, too, seemed to be optimistic about the economic future despite recent financial turmoil. "While we are in a difficult transition period as markets reassess and re-price risk, I have great confidence in our markets. They have recovered from similar stressful periods in the past, and they will again," he said, adding: "The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe our economy will continue to grow, although at a slower pace than we have seen in recent years."

Bend it like Bernanke!

However, Paulson’s optimism seems somewhat at odds to a bearish near-term outlook for the U.S. economy statement delivered mid-February by Ben Bernanke in the Senate before the Committee on Banking, Housing, and Urban Affairs. “…financial markets in the United States and in a number of other industrialized countries have been under considerable strain since late last summer…” said the Fed boss, who concluded: “Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.”

Coming just a day after Bernanke’s gloomy outlook for the US economy, the University of Michigan’s closely-watched index of consumer confidence had fallen over January and February to a 16-year low, as fears gathered pace about a recession and job cuts.

When America sneezes…

Some people call economics 'the dismal science', and perhaps not without good reason; with recent headlines predicting global downturns in the financial markets it may well seem this way! And no one knows where it will end – nor does anyone truly know how US woes play out across the world. What isn’t in much doubt, when the $15 trillion American Economic giant that makes up 25% of the world economy is in trouble, surely everyone should brace themselves for a protracted bout of pneumonia!

As the International Monetary Fund cut its global economic growth forecast from 4.4% to 4.1%, the lowest in five years, January’s Davos gathering of the great and the good certainly demonstrated little doubt over what we should expect: this time round the US suffers a protracted pneumonia, and we can only guess what happens in the rest of the world. The US economy is set for a long recession, a panel of economists at the World Economic Forum warned, adding China and Europe will be hit, though India less so. Adding to the pessimism, Celebrated New York University economist, Nouriel Roubini, predicted a "severe recession" that could last for a whole 12 months. "This time round,” said Roubini, “as the US suffers, we can only guess what happens in the rest of the world," non the less predicting a bursting of housing bubbles in the UK, Ireland, and Spain just for starters.

Wading in for good measure, billionaire investor George Soros has gone on record saying that the current market turmoil is a sign of global influence shifting to the developing world. "I'm not looking for a worldwide recession," said Soros, “but I'm looking for a significant shift of power and influence away from the US in particular and a shift in favour of the developing world, particularly China."

Frances Lunn, general manager at Fulbright Securities in Hong Kong, tends to agree: "It's unbridled pessimism," he days. “There's a real probability that both the US and Europe will go into recession at the same time.

"Everyone is concentrating on a US recession, but Europe is also looking bad. We are in for a bear market now."

Credit Squeeze

Nowhere is market tightening more apparent than the credit squeeze, not least in its impact on the corporate scene the world over. For instance, recent results of KBC Bank’s inaugural Business Barometer Survey – carried out at Finance Director, Treasury and Board Level to garner their views on the changing relationships between banks and corporates, and the availability of credit throughout 2008 – provides a snapshot of where we are in the credit cycle. In summary, while almost half of respondents are confident that reliance on bank credit will remain the same in 08, over a third anticipate increasing reliance to some extent, this is especially the case amongst the FD community (45%).

Commenting of the findings, Cameron Marr, General Manager of KBC, London says: ‘We all have a hunch that things are going to get tougher but this survey definitely puts some scale on things.” In essence, Marr sees a mixed outlook on reliance on bank-supplied credit facilities in the new year – “half anticipate no change, over a third expect greater reliance, and about 1 in 5 predict lesser reliance. The vast majority believe bank-supplied credit will become less available in 2008 – due to recent developments in the financial market, such as credit crunch, general financial insecurity etc.”

EUROFINANCE CONFERENCE, MIAMI

International Cash and Treasury Management
14 - 16 April 2008

The USA, from a developing country of mostly subsistence farmers little more than 200 years ago, became the world's center of manufacturing in the 19th and 20th centuries. For decades, U.S. multinational corporations have sold goods and services to foreign customers through foreign subsidiaries. Increasingly now, multinationals are combining labor, capital, and natural resources from their own units and allied suppliers scattered around the world to capture cost efficiencies at different stages of production and marketing. More and more, foreign trade comprises intermediate goods on their way to further processing. A 2006 report by the National Research Council says that "the volume and range of functions that are being transferred across borders is new. ... The growing ability and willingness of firms to fragment the production process—locating design in one place, parts manufacturing in another place, and assembly in a third place—has implications for U.S. competitiveness, wages, and employment."

With customers in scores of countries, U.S. multinationals now make more than one-fourth of their total sales revenue from subsidiaries outside the United States. Sales by such U.S. foreign affiliates amount to more than three times total U.S. exports of goods and services.

Right on the US doorstep, Latin America is holding its breath on concern that an economic slowdown will dim demand for Latin American exports. Without question, one incontrovertible fact, as we are reminded by Bertrand Delgado, a Latin America economist at IDEAglobal Inc, New York – and as true in Chile as it unquestionably is across markets worldwide – is that “…deteriorating international financial and economic news stoke fears about a global recession, which in turn impacts risk aversion.''

These pressing issues will doubtless figure in the upcoming EuroFinance conference, taking place in Miami from 14 - 16 April 2008.

Miami, Florida “The Gateway of the Americas”

Miami’s importance as an international financial and cultural center has elevated the ‘Magic City’ – as it’s sometimes known – to the status of world city. Because of Miami’s cultural and linguistic ties to North, South, and Central America, as well as the Caribbean, Miami is many times referred to as “The Gateway of the Americas”. Florida’s large Spanish-speaking population and strong economic ties to Latin America also make Miami and the surrounding region an important financial center of the Hispanic world.

Miami is also home to one of the largest, most influential ports in the United States, the Port of Miami – “Cruise and Cargo Capital of the World.” The ongoing construction throughout the city has inspired popular opinion suggesting Miami has become a prime example of “manhattanization”, as exemplified by the Freedom Tower, an historic city landmark and one of the country’s most important financial centers of regional commerce and international business. Because of its proximity to Latin America, Miami serves as the headquarters of Latin American operations for more than 1400 multinational corporations, including AIG, American Airlines, Cisco, Disney, Exxon, FedEx, Kraft Foods, Microsoft, Oracle, SBC Communications, Sony, and Visa International. Furthermore, serveral large companies are headquartered in or around Miami, including but not limited to: Alienware, Bacardi, Brightstar Corporation, Burger King, Carnival Cruise Lines, Espírito Santo Financial Group, Greenberg Traurig, Interval International, Lennar, Norwegian Cruise Lines, Perry Ellis International, Royal Caribbean Cruise Lines, Ryder Systems, Telefonica USA, TeleFutura, Telemundo, U.S. Century Bank, and World Fuel Services. Miami International Airport and the Port of Miami are among the nation’s busiest ports of entry, especially for cargo from South America and the Caribbean. Additionally, downtown Miami has the largest concentration of international banks in the country. Miami was also the host city of the 2003 Free Trade Area of the Americas negotiations, and is one of the leading candidates to become the trading bloc's headquarters.

International Cash and Treasury Management

14 - 16 April 2008
Doral Golf Resort and Spa Miami, USA

Event Summary

This operational and strategic look at true international practices will highlight multiple case studies from both North and Latin American companies, and best practice companies from abroad. This is the only event of its type held in the States, where you can learn from your peers from around the globe and network on the most senior level.

Join top corporate names from the US and overseas as they gather in Miami to share views and practices of their global treasuries. This conference will be chaired and sessions moderated by international experts.

Why attend The International, Miami?

•     Influential experts in treasury bringing you entirely new views
•     Thought-provoking sessions based on research with over 2000 treasurers from around the world – an unrivalled global viewpoint
•     A wide range of industries and company sizes to offer the right experience

Choose the formats that suit you:

•     Interactive sessions
•     General sessions to keep you up-to-date
•     Workshops with hands-on exercises and Q&A
•     Specific streams to help you align your business with the latest direction in treasury

The three-day event, plus post-conference training on Thursday April 17, will cover a plethora of the most pressing treasury elements of the moment, with a line-up of truly world-class speakers, proving in-depth analysis of such frontline treasury and cash management streams as:
•     Building Centres of Excellence
•     Crisis and Volatility Management
•     Technical Excellence
•     The Chine Workshop

Integrating Latin America Into the Global Treasury

Brazil Focus
Latin America’s Place in the Global Economy

Back to Basics

Focus on Strategic Treasury Relationships
Focus on Risk and Liquidity
 
Payments Boot Camp

Kicking Payments into Shape
Global Developments in Payment Systems
SEPA – How to Seize Opportunies in an Unknown Environment

FOR FURTHER INFORMATION ABOUT THE INTERNATIONAL CASH AND TREASURY MANAGEMENT CONFERENCE & TRAINING PROGRAMME, MIAMI, VISIT: www.eurofinance.com/miami