have an element of inflation protection because they can raise prices.
You own shares of all three?
Yes. So if their costs go up, they can raise prices. I also say Coca-Cola (KO, Fortune 500). I don’t know this for a fact, but I would assume Coca-Cola still makes money in Zimbabwe. If you’d had Zimbabwe bonds, you’d have been wiped out.
You’ve described your investment in AIG as one of your biggest mistakes and one that reduced your fund returns during the crisis by 6%. You sold all your shares. Now that the stock is down around 98% from its peak, do you find value in AIG?
One of the most important single considerations in investing in a complex financial institution is that the CEO has to serve as chief risk officer and to understand the nature of the risks being taken. It is very hard for somebody who came into AIG (AIG, Fortune 500) two or three years ago to really have a deep handle on procedure, the reserves, nature and risks to take. And it’s a very complex company. A lot of insurers are down so we spend a lot of time looking at AIG, but our fundamental concern is with the quality of the ongoing insurance business, and we are having a very hard time getting our arms around that which we wouldn’t have had trouble with 10 years ago.
You cut back your position on J.P. Morgan substantially recently. So what’s changed at J.P. Morgan?
We are huge admirers of that entire management team. You know people talk about Jamie Dimon, and Jamie Dimon is one of the best managers I’ve ever met. We’ve had some redemptions so we had to raise money. And in my view, J.P. Morgan (JPM, Fortune 500) had a relatively fuller value than some of the other financials we owned.
The second reason [we sold shares] was the unanimity opinion about the quality of the company. Our feeling was that there is always the risk of the change in perception when everybody thinks it’s great.
The third thing is that J.P. Morgan’s balance sheet is way more complicated than the nature of what makes up Wells Fargo’s balance sheet, or what makes up American Express’s balance sheet.
Okay, so what are you absolutely avoiding now?
That is a big question. I don’t know. I study the way ETFs have exploded, where there are a lot of people that are making a lot of money on ETFs. To me index funds for long-term investors are going to add real value. ETFs where you trade them intraday, or you can rotate sectors — I think these are very dangerous. Even though that doesn’t directly affect the investments that we look at.
A “shift in rhetoric” indicates that China may be on the verge of allowing faster gains by the yuan to damp import costs that may fuel inflation, Capital Economics Ltd. said.
“Several senior policymakers have signaled in the last few days that China will allow the renminbi to strengthen in order to dampen imported price pressures,” said London-based economist Mark Williams, a former adviser on China to the U.K. Treasury. “This would be a significant departure — the exchange rate is usually viewed narrowly as an instrument of trade policy rather than as a monetary policy tool.”
His comments were in an e-mailed note dated yesterday. Renminbi is another term for the currency.
Increased flexibility in the yuan may “ease imported inflation pressures,” Hu Xiaolian, a deputy governor of the central bank, said in a speech transcript released yesterday. The yuan, which touched a 17-year high of 6.5276 against the dollar on April 18, is described by the U.S. as substantially undervalued and a factor in global economic imbalances that could lead to another financial crisis.
“China appears to be on the verge of allowing faster currency appreciation in response to inflation,” Williams said. “ This may not last long if inflation drops back in the second half of the year, as we expect.”
Consumer prices rose 5.4 percent in March from a year earlier, the most in almost three years.
Bets on Appreciation
Yuan forwards strengthened yesterday after a central bank adviser said China will not rule out a one-off revaluation of the currency.
Xia Bin said that while the yuan should appreciate gradually in the long term, and current conditions aren’t conducive to overly fast gains, a one-off revaluation “can’t be ruled out.” His comments were in an online interview on Sina.com.
Twelve-month non-deliverable forwards gained 0.17 percent to 6.3745 per dollar as of 6:27 p.m. in Hong Kong, reflecting bets the yuan will strengthen 2.4 percent in a year from the onshore spot rate, according to data compiled by Bloomberg.
–Paul Panckhurst. Editors: Paul Panckhurst, Ken McCallum.
To contact Bloomberg News staff for this story: Paul Panckhurst at +852-2977-6603 or ppanckhurst@bloomberg.net
A nearly completed new power line could restore electric cooling systems in Japan’s tsunami-crippled nuclear plant, its operator said Thursday, raising hopes of easing the crisis that has threatened a meltdown.
Tokyo Electric Power Co. spokesman Naoki Tsunoda said the new power line to Fukushima Dai-ichi is almost complete. Officials plan to try it “as soon as possible” but he could not say when.
Meanwhile, conditions at the plant appeared to worsen Wednesday, with white smoke pouring from the reactor complex and a dangerous surge in radiation levels forcing workers to retreat for hours from their struggle to cool the overheating reactors.
The chief of the International Atomic Energy Agency said he would go to Japan as soon as possible to assess the danger. He called the situation serious and urged the Japanese government to provide better information to the agency.
The new line would revive electric-powered pumps, allowing the company to maintain a steady water supply to troubled reactors and spent fuel storage ponds, keeping them cool. The company is also trying to repair its existing disabled power line.
The word came as international concern mounted over the deteriorating situation at the Fukushima Dai-ichi plant, where the danger from the reactors has nearly overshadowed the human tragedy of last week’s magnitude 9.0 earthquake and subsequent tsunami that pulverized Japan’s northeastern coast and is feared to have killed more than 10,000 people.
The 180 emergency workers have been working in shifts to manually pump seawater into the reactors because last week’s earthquake and tsunami disabled main and backup power for electric-powered cooling pumps.
Moving to accelerate its growth in electricity operations, PPL Corp. says it will buy the Central Networks electrical networks distribution business of E.On AG in the United Kingdom in a deal worth $6.4 billion.
In a statement released Tuesday by the Allentown-based company, PPL said it would pay $5.6 billion in cash and assume $800 million in existing debt. PPL and Eon. expect to close the deal early next month instant credit report.
E.On’s Central Networks serves 5 million customers in the Midlands area of England.
In December, PPL completed its acquisition of two Kentucky utilities _ Louisville Gas & Electric Co. and Kentucky Utilities Co. _ from E.On for $7.59 billion.
European Central Bank President Jean-Claude Trichet said the central bank isn’t discounting the possibility that the euro-region may face a greater risk of inflation.
“In our own judgment there was a balance between risks of the price stability in the medium run but we did not exclude that the future of this balance is unbalanced on the upside,” Trichet said at a press conference after a meeting of Group of 20 nations in Paris today. He also said that the ECB’s rate- setting policy is independent from unconventional measures.
Trichet last month toughened his tone on inflation as labor unions use strengthening economic growth to justify pay demands and companies pass on higher energy costs. Euro-region inflation in January accelerated to 2.4 percent, the fastest since October 2008, and Volkswagen AG, Germany’s biggest automotive employer, earlier this month agreed to raise compensation for 100,000 workers by 3.2 percent to avert strikes.
The ECB is looking “very, very carefully” at oil prices, Trichet told reporters after the briefing. “No second-round effects,” that “is our motto.”
Crude oil prices have surged 14 percent over the past six months, eroding households’ purchasing power and adding pressure on companies to protect their earnings through price increases. Trichet said that G-20 ministers also “noted inflationary pressures” and that they “were to be taken seriously.”
The Frankfurt-based ECB, which aims to keep annual gains in consumer prices just below 2 percent, in December forecast inflation to average about 1.5 percent in 2012. It will release its latest inflation forecasts next month.
ECB governing council member Axel Weber also noted that “the upward pressure is increasing” on inflation.
“I think this is the best characterization of what we see in Europe,” he told reporters. “I’ve already said in the past that we’re above 2 percent now, with a tendency to increase. I think that the turnaround in inflation developments might not come as soon as we expected in the past. So, clearly, there are risks to the upside.”
Homebuilders have yet to see a turnaround in the housing market after the worst year for new-home sales in a half-century.
The National Association of Home Builders said Tuesday that its index of builder sentiment for February remained unchanged for the fourth straight month at 16. Any reading below 50 indicates negative sentiment about the market. The index hasn’t been above that level since April 2006.
Homebuilders are struggling to compete with millions of foreclosures that are forcing home prices down. Last year was also the worst in more than a decade for sales of existing homes.
Weak sales mean fewer jobs. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the trade group.
“Builders are telling us that some pockets of optimism have begun to emerge, but many prospective purchasers are concerned about selling their existing home in the current market,” said David Crowe, the home builders group’s chief economist.
High unemployment, tighter bank lending standards and uncertainty about home prices have also kept many people from buying homes. Mortgage rates had been at the lowest levels in decades, but have since started to rise.
The housing market is expected to show some signs of life this year but the recovery will likely be uneven. The latest regional data showed builders are becoming more optimistic in the Northeast and South and more grim in the Midwest and West. And while hopes for improved single-family sales now and over the next six months improved, the amount of foot traffic by prospective buyers remained flat.
The online coupon site Groupon.com and the FTD flower company are giving refunds after getting complaints that a Valentine’s Day flower deal wasn’t so sweet.
Groupon customers were offered $20 off a $40 purchase from FTD last week. But some customers found the flowers were priced lower as sale items on FTD’s own website. They complained on the Internet that FTD inflated prices for Groupon customers to make up for the discount.
But FTD President Rob Apatoff says that’s not so. He says it was clear on the sites that the coupon didn’t apply to sale items.
Still, Apatoff says his company will credit the customers’ accounts to give them the lower price because of the confusion. Both companies also say they’ll make full refunds if people aren’t satisfied.
It’s official: the world economy is completely upside down.
What else is one to think as Europe goes hat-in-hand to developing China and feeble Japan? You would think China had better things to do with its cash than shore up a sinking euro zone. The same goes for Japan, where deflation and paralysis may soon deliver the sixth prime minister since September 2007.
Japan plans to buy bonds issued by Europe’s financial-aid fund, joining China in assisting a region battling a fast- spreading debt crisis. And does Europe ever need the help. Bailouts of Greece and Ireland merely pave the way to even bigger ones of Portugal, Spain and, perhaps, Italy.
It’s this last economy that should have officials in Beijing and Tokyo thinking twice about loading up on European debt. Yet here’s something even bigger to consider: what the world really needs isn’t China’s and Japan’s excess cash, but more balanced and sustainable growth in Asia’s main economies.
Europe’s debt woes are just beginning. No matter what the region’s policy makers do, they’re still stuck with a currency they can’t devalue and massive and growing debt loads. Buying Europe’s debt may Band-Aid things over, but China and Japan can’t stop the inevitable worsening of the euro crisis.
Consider this a “We-Are-the-World” moment. Japan, flush with more than $1 trillion of reserves, also is thinking as much about diplomacy as economics. Helping Europe in its time of need will score points for a nation losing power and prestige. Japan’s aid seems more of a me-too gesture to match China than a long-term strategy.
Bad Investment?
It doesn’t seem like a huge risk, either. The European Financial Stability Facility will raise as much as 16.5 billion euros ($21 billion) to help bail out Ireland. It plans to issue between 3 billion and 5 billion euros of AAA-rated bonds later this month, of which Japan may buy more than 1 billion euros. As Europe’s debt mess worsens, though, Japan’s investment may go bad in a hurry.
Rather than tossing money around, Japan should get busy reviving its economy once and for all. It should act boldly to encourage entrepreneurship, learn to live without huge government borrowings and zero interest rates, increase immigration, raise productivity and boost competitiveness.
Japan is doing none of the above, and that’s detrimental to the outlook for world growth. At least Asia’s second-biggest economy isn’t spreading contagion around the globe in the manner of Europe. A few more years of muddling along and avoiding reform, though, could put Japan in dangerous waters.
Pressure Cooker
The nation’s bond market has long been a financial pressure cooker. Even though public debt is twice the size of the economy, 10-year bond yields are less than 1.2 percent. It makes no fundamental sense, even in an economy facing modest deflation. The risk of a Japanese debt meltdown looms. It’s imperative that Japan learns to grow without adding to the debt.
China, meanwhile, should close the checkbook and instead fix imbalances that destabilize markets. The first step is faster yuan appreciation. China shouldn’t do it because the U.S. is demanding action, but because it’s in China’s interest. Surging food and oil prices will exacerbate overheating risks.
Higher borrowing costs and regulatory tweaks aren’t enough. A big yuan revaluation would help officials in Beijing regain control, while raising the international purchasing power of 1.3 billion people. It’s great that China is voicing support for Europe and backing it up with bond purchases. It would be even better if China restructured on its own.
Whither Italy?
China’s financial might is a product of its $2.8 trillion of currency reserves. We’re long past the late 1990s when the International Monetary Fund’s vault contained enough liquidity to save countries from ruin. Should Spain come knocking, bigger benefactors will be needed. Yet Asia’s savings won’t be enough if a key economy like Italy crashes, and it can’t be ruled out.
It’s no longer debatable whether the global financial system is upside down. The shift began with the realization that economies such as China, India and Brazil might eclipse the U.S. in the next 30 or 40 years. It got positively tectonic once the savings of developing nations began shoring up economies viewed as role models less than a decade ago.
Things have gone full-circle now that China, a nation struggling to eradicate poverty, is being looked upon to act like some massive bond insurer for the euro zone. The same goes for Japan, which has more than its fair share of budding crises and too much debt of its own.
You also know things are wildly off-kilter when the West’s financial rot is seeping into the East. Thailand’s 1997 devaluation set in motion a regional crisis that had the Dow Jones Industrial Average plunging several hundred points on single days. Now, the West is returning the favor.
It’s not surprising officials in Europe would look to Asia for help. It is, after all, where the money is. What would help even more is for Japan and China to get their economies in order. Sadly, neither is.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
China agreed to take steps that would counter mounting losses for U.S. software companies from piracy and spur shipments of farm goods, as the two nations sought to ease trade tensions.
“We made measurable progress to open the Chinese market to U.S.-made products,” U.S. Commerce Secretary Gary Locke said yesterday at a news conference ending two days of meetings with China’s Vice Premier Wang Qishan in Washington. “Of course, now we need to ensure full implementation of these promises.”
Trade tensions have increased as China reported a record $153.3 billion of exports for November and some U.S. lawmakers called for legislation on Chinese imports to combat any advantages from what they say is an undervalued yuan. The agreements announced yesterday come ahead of a visit to Washington by Chinese President Hu Jintao next month.
“Today’s promises must be measured not by words on paper, but by tangible progress on the ground,” Myron Brilliant, senior vice president of the U.S. Chamber of Commerce, said in a statement after the announcements. “We urge both governments to quickly agree on metrics in future discussions that will quantify that new efforts are in fact translating into results.”
Trade Deficit
Locke and U.S. Trade Representative Ron Kirk met with Wang and a Chinese delegation in Washington as part of the 21st annual Joint Commission on Commerce and Trade. The U.S. trade deficit with China widened to $201 billion in the first nine months of this year, more than the deficits with the next seven largest trading partners combined.
China is at the same time the U.S.’s third-largest export market with $69.5 billion of sales in 2009. Sales of goods and services by U.S. companies in China reached $98.4 billion, more than a fourfold jump from 2000, according to the U.S.-China Business Council, a Washington-based group that represents companies including Wal-Mart Stores Inc. and Citigroup Inc.
The Chinese government also at the meetings offered fresh pledges on express delivery, wind-turbine equipment and medical- device regulations. The two nations will start work on an agreement to end restrictions on U.S. beef and poultry exports to China, Agriculture Secretary Tom Vilsack said.
Chinese Middle Class
“China’s burgeoning middle-class are discouraged by the appalling food safety records within China and are increasingly looking for food products from overseas,” Guan Anping, chief consultant at Beijing Duebound Law Office and a former Chinese trade official, said by telephone today.
Japan and China imposed restrictions on U.S. beef imports in 2003 after mad-cow disease was found in three U online pay day loans.S. cattle. China began imposing anti-dumping duties on U.S. broiler chicken products in September after the Ministry of Commerce said an investigation showed the American poultry industry received subsidized soybean and corn.
In addition, China has also called on the U.S. to relax export controls on technology products, the official Xinhua News Agency reported, citing Commerce Minister Chen Deming. China aims to achieve a “greater growth” in imports as it maintains export growth, Chen was cited as saying.
A press official with the Ministry of Commerce, who refused to be identified because of the agency’s rules, declined to comment.
U.S. Lawmakers
The U.S.-China trade gap, the drop in American manufacturing employment and the lack of appreciation of the Chinese currency, the yuan, have focused U.S. lawmakers on the commercial relationship. The House of Representatives passed legislation in September aimed at forcing China to raise the value of the yuan.
House Ways and Means Committee Chairman Sander Levin, a Michigan Democrat, and the panel’s incoming Republican chairman, Dave Camp of Michigan, wrote Kirk and Locke on Dec. 9, prodding the administration to get China to accept strong new protections for copyrighted movies, music and software and end discriminatory restrictions on U.S. investors.
The annual meeting “has been an important vehicle for dialogue with China on piracy and other issues,” the lawmakers wrote. “But improved market access results for U.S. companies, as measured by sales, jobs and exports, have been meager.”
Software Piracy
The Business Software Alliance, which represents companies such as Apple Inc. and Microsoft Corp., complains that previous commitments by China to curb piracy haven’t led to a reduction in their losses to unlicensed sales. Before the meeting, the alliance pressed Locke and Kirk to seek from the Chinese a guarantee that U.S. software sales to China would increase 50 percent in two years.
“We will know China has made real progress in reducing piracy only when software companies start seeing substantial increases in sales,” President Richard Holleyman said in an e- mail statement yesterday.
In addition to commitments on software, China agreed to deal with U.S. demands to ease its rules requiring Chinese- developed technologies for government projects and said it would revise an offer to join the government procurement agreement of the World Trade Organization in 2011.
The largest oil refinery in the United States released more than 8 million pounds of illegal pollution in the past five years, violating the federal Clean Air Act thousands of times, according to a lawsuit filed Tuesday by environmental groups in Texas.
The lawsuit against ExxonMobil is the latest by Sierra Club and Environment Texas as part of their campaign to rein in what they call “illegal emissions” by dozens of refineries and chemical plants that operate in the Texas Gulf Coast. In recent months, the groups have reached multimillion-dollar, out-of-court settlements with Shell and Chevron Phillips after filing similar suits.
ExxonMobil denied the allegations and said it would fight the lawsuit. In the past five years, the Exxon refinery in Baytown has produced annual emissions that are 40 percent lower than the limits set by the U.S. Environmental Protection Agency, spokesman Kevin Allexon said in a statement. Since 2003, Exxon has invested nearly $1.3 billion in the Baytown facility to improve environmental performance, he added.
“ExxonMobil works hard to operate within regulatory standards while continuing to make significant improvements in its environmental performance through emissions controls, technology enhancements and process changes,” Allexon said. “We are proud of our investment in _ and improvement of _ environmental performance at the Baytown complex.”
Texas has more oil refineries, chemical plants and coal-fired power plants that any other state and is the nation’s leader in greenhouse gases. The state produces more than 20 percent of the nation’s oil and one-third of the country’s gas is refined along the Texas Gulf Coast.
The Associated Press reported in July that the environmental groups had issued ExxonMobil with a required 60-day notice on their intent to sue cash advance no fax.
The federal lawsuit filed in Houston accuses Exxon of violating emission limits on sulfur dioxide, a component of acid rain; hydrogen sulfide, a toxic, flammable gas characterized by a rotten egg smell; such cancer-causing agents as benzene and butadiene; carbon monoxide; and the smog-causing agent nitrogen oxide.
It says the “emissions events” are usually caused by equipment breakdowns and malfunctions. For example, in October, there were two such events in the same day, according to the lawsuit. The first occurred at 6:10 a.m. when a broken hose caused more than 15,000 pounds of toxic and cancer-causing chemical fumes to be released into the air in just 30 minutes. Later in the afternoon, an underground pipe began leaking, releasing more than 80 pounds of cancer-causing benzene before it was shutdown 28 hours later.
“Air quality in Harris County and especially along the Houston Ship Channel continues to be among the worst in the nation,” Sierra Club chemist Neil Carman said. “Whether you’re talking about high levels of ozone that make it difficult to breathe or about toxic and carcinogenic chemicals, industrial facilities like Exxon’s Baytown plant are major contributors to the problem.”
The legal maneuvers are part of the broader accusations by the environmental groups and the U.S. Environmental Protection Agency that state regulators are not properly monitoring and enforcing federal emissions standards.
State regulators say their rules decrease pollution, but are not so stringent that it becomes too expensive to operate in the state.
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