Thursday, February 28, 2013

Fallen Icons Defy Australia’s 3% Growth Rate

For 117 years, Australians poured Rosella tomato sauce on their meat pies as the company endured world wars, the Great Depression and an end to tariff protection.
What Rosella -- and 86-year-old chocolate maker and retailer Darrell Lea -- couldn’t navigate is the country’s 3 percent growth rate, which has helped drive the nation’s dollar 60 percent higher in the past four years, making some Australian products less competitive at home and abroad.
Rosella’s receiver today said it was unable to find a buyer and will shut the saucemaker, leaving 70 workers without a job. The failure -- along with receiverships at book seller Angus & Robertson, founded in 1884, and Allans Music, in business for 16 decades -- illustrate Australia’s lopsided economy. A mining- investment boom is delivering the quickest growth in the developed world even as it masks other weaknesses.
For John Kumm, Rosella’s plight is personal: His family controlled the business for its first seven decades.
“It’s disappointing that these Australian icons are either disappearing or being severely diluted and undermined,” said Kumm, who spoke before today’s announcement. His great- grandfather Frederick Cato helped found the company in 1895. “We’re used to seeing those things on our shelves and there’s a sense of belongingness.”

Lower Forecasts

Concern about job security has curbed retail spending, which fell in each of the final three months of 2012, the longest decline in 13 years. The central bank last month lowered its economic growth and inflation forecasts as investment outside the mining industry remains elusive, the labor market softens and the strong currency contains prices.
The electorate is seeing the glass as half empty ahead of a Sept. 14 federal election. Just 28 percent of voters said Prime Minister Julia Gillard’s Labor government is best equipped to handle the economy compared with 50 percent for the Tony Abbott- led opposition, according to a Newspoll conducted Feb. 1-3. The latest poll released this week showed her government trailing Abbott’s Liberal-National coalition by 10 percentage points.
While mining, the 15th biggest employer, expanded 9.7 percent in the third quarter from a year earlier, construction and manufacturing, the third- and fourth-largest, shrank.
The Australian dollar’s 60 percent surge in the past four years trails only New Zealand’s kiwi among 16 major currencies, while the benchmark S&P/ASX 200 Index (AS51) has climbed 53 percent over the period. Since Nov. 2, 2010, when the Australian currency reached parity versus the U.S. dollar for the first time since it was freely floated in 1983, the stocks benchmark has climbed 8.5 percent, while the nine-member S&P/ASX 200 Retailing Index (AS51RETL) has slumped 30 percent.

Rising Unemployment

The jobless rate has climbed to 5.4 percent in January from 5.1 percent when Gillard formed a minority government in September 2010. January’s level remains among the lowest in the developed world and compares with 7.9 percent in the U.S. and 11.7 percent in the euro zone.
“We’re slightly ahead of the other advanced economies, but not as much as sometimes people believe,” said Bill Evans, chief economist at Westpac Banking Corp. (WBC), Australia’s second- largest lender. “We’re going through a particularly soft patch at the moment.”
Evans was the first major market economist to call the Reserve Bank of Australia’s shift toward easing policy, when in July 2011 he forecast the next rate move would be lower; He was proven right in November of that year. Doubts over the extent to which the mining boom would drive up wages and prices, and concerns over the currency’s strength, prompted that call, he said in an interview in Sydney yesterday.

Waning Investment

Bob Gregory, a professor at Australian National University in Canberra and former central-bank board member, predicts joblessness will worsen this year. The investment phase of the mining boom, which has been construction-oriented, will wane and government-budget cutbacks will curb infrastructure projects, hurting workers without college educations, he said.
Some blue-collar enclaves in Australian capital cities already have unemployment approaching recession-plagued Spain’s record 26 percent. Three areas in Brisbane and one in Adelaide exceeded 20 percent in September, compared with none a year earlier, according to the most-recent government data that break down the numbers by district. There were 138 areas with joblessness at or above 10 percent, up from 125.

‘Worst Areas’

“Australia’s now going into a downturn in the labor market,” said Gregory, who has studied the nation’s economy for almost half a century and was appointed to the RBA board by then Labor Treasurer Paul Keating in 1985. “When that happens, it’s always the worst areas that experience the problem most, it’s always these outer suburbs.”
Even inner-city areas are showing declines. In central Melbourne, unemployment climbed to 5.2 percent in September from 3.5 percent a year earlier.
Adelaide’s northern suburb of Elizabeth -- home to a General Motors Co. (GM) Holden plant -- had joblessness of 20.3 percent in September. Sandy Fairweather, operations manager for local Christian charity group Anglicare, estimates the number of people without work who need emergency assistance has increased by 50 percent in the past 12 months.
The national data “are definitely not showing what we’re seeing here,” said Fairweather, who has worked with Anglicare for the past 18 years and lives nearby. “It’s gotten tougher because of less employment opportunities.”

Rosella’s Plant

Joblessness in the Sydney residential district of Baulkham Hills south, adjacent to Rosella’s plant, rose to 6.4 percent in September from 5.6 percent a year earlier, government data show.
More than 2.6 million liters (686,847 gallons) of Rosella tomato sauce are sold annually, enough to top 160 million meat pies, the company said in February 2012. Ten months later, Rosella’s parent, The Gourmet Group, went into receivership after profits waned amid increased competition from discounted supermarket brands and the stronger Australian dollar made imported alternatives cheaper.
Angus & Robertson dates back 129 years to a store in Sydney. It published bush poet Banjo Paterson’s “The Man from Snowy River” in 1895; the poem and its author are commemorated on Australia’s A$10 bill. Its most recent parent, Redgroup Retail Pty. Ltd., acquired the region’s Borders book chain in 2008, giving it a total of 260 stores and making it the biggest book retailer in Australia and New Zealand before its failure.

Bankruptcy Filing

The appointment of administrators -- typically the first stage of an Australian bankruptcy -- on Feb. 17, 2011, came less than a day after Borders Group Inc. in the U.S. filed for bankruptcy. More than 500 jobs have since been lost, with Angus & Robertson now an online bookseller.
Australian Music Group Holdings Pty, which traded as Allans Music and Billy Hyde, was the nation’s largest independent music and instrument retailer with almost 30 stores and 500 staff. Allans Music began in the 1850s, while Billy Hyde was a drum manufacturer who opened his first store in 1962. The two merged in 2010.
The company was placed in receivership on Aug. 23 under the control of Ferrier Hodgson Group. The group attributed the downfall to “the decrease in consumer discretionary spending currently being felt by many Australian retailers,” according to an Aug. 23 statement on its website. Efforts to sell the business failed, and it was closed, with the remaining 513 workers losing their jobs, the receiver said Oct. 17.

Chocolate Memories

News of chocolatier Darrell Lea’s receivership prompted even Gillard to reflect on the company’s products.
“Everybody’s probably eaten a lot of their rocky road over the course of their lives,” she said July 10 in Ipswich, Queensland. “I know I have.”
Founded by the Lea family in 1927, Darrell Lea stores harked back to its founding days, with wooden cabinets stacked with sweet treats in 1920s styled packaging.
Darrell Lea Chocolate Shops Pty and Ricci Remond Chocolate Company Pty appointed administrators in July as insolvency neared, weighed by losses at outlets amid the slump in consumer spending, and a dent in exports from the stronger currency.
The company was sold in September after its 27 remaining stores were shut and 418 employees fired. The new owners kept the manufacturing and distribution operations, securing the employment of 83 people, according to a statement from administrator PPB Advisory on Sept. 3. Its brown paper bags of soft liquorice and its “Rocklea Road” bars of marshmallow, chocolate and nuts now are available through licensed outlets.

Weaker Confidence

Gillard on Feb. 17 announced a A$1 billion ($1 billion) program to try to boost innovation and the competitiveness of Australian companies. The government also will provide expanded assistance and better financial access for small and medium- sized businesses and startups. Their confidence and conditions weakened in the three months through December and remain “well- below average levels,” according to a survey from National Australia Bank Ltd., the nation’s largest lender to businesses, released Feb. 18.
“The smaller the business, the worse it is,” said Alan Oster, chief economist at NAB in Melbourne.
A separate NAB survey of 400 companies across nonfarm industries released Feb. 12 showed a decline in employment to the lowest since 2009 and a fall in capacity utilization to the lowest since 2001. The underuse of existing resources means little chance of a pickup in hiring this year, Oster said.

Slashed Target

RBA Governor Glenn Stevens is forecasting rising joblessness and has slashed the overnight cash-rate target by 1.75 percentage points in the past 16 months to 3 percent, matching a half-century low set in 2009.
“I don’t think monetary policy will be enough in the short-term” to turn around the worsening employment outlook, former RBA board member Gregory said. “Unskilled men are going to be particularly adversely affected.”
That’s a bleak prospect for Gillard’s government, which must hold on to Labor’s historic base of blue-collar workers and attract more support from Australia’s mortgage-laden middle class if it’s to reverse its poll slump and win re-election in September. The Newspoll conducted Feb. 22-24 showed Abbott had eclipsed Australia’s first female leader as preferred prime minister for the first time since August.
“The government has a good story to tell in terms of the unemployment rate and the broader economy, but they’re sort of drowned out in the political debate,” as the opposition talks about “the government presiding over a time when great Australian icons have closed down and not doing enough to keep Australian industry afloat,” said Zareh Ghazarian, a politics lecturer at Monash University in Melbourne. “It’s certainly a very potent weapon. Voters feel insecure.”

‘Feel Proud’

When the country expanded 3.1 percent in the third quarter from a year earlier, Treasurer Wayne Swan hailed the result as “faster than every single major advanced economy.” Relatively low unemployment, strong investment, tame inflation and low interest rates are “a combination that Australians can feel proud of and confident about,” he said.
Still, seven of 19 industry groups went backward during the period, according to data compiled by Bloomberg from Australian Bureau of Statistics figures. Construction, Australia’s third- largest employer, shrank 0.5 percent from a year earlier, while manufacturing, the fourth biggest by workers, slid 1.7 percent.
Accommodation and food services shrank 2.1 percent; and the agriculture, forestry and fishing industry contracted 7.3 percent, the worst performer, as crops declined and cattle and wool prices fell. In the six months to November, it lost 31,500 people, while jobs in professional, scientific and technical occupations fell by 26,200.

Shedding Employees

Even the fastest-growing sector -- mining -- is shedding employees. In the six months to November, it lost 13,100 jobs, compared with a gain of 60,000 in the prior 12 months, the most recent government data show.
Companies are cutting costs and deferring projects after commodity prices fell. Annual growth in demand for minerals in China, the biggest metals importer and Australia’s largest trading partner, will decline to 2 percent to 4 percent in the next five years, from as much as 20 percent, Marius Kloppers, chief executive officer at BHP Billiton Ltd. (BHP), said Feb. 24.
Ferrier Hodgson, also The Gourmet Group’s receiver, today said efforts to sell the Rosella business were unsuccessful. The loss of jobs is “disappointing but unavoidable due to the scale of losses the business was sustaining on a weekly basis,” partner and Rosella receiver Jim Sarantinos said in a statement. “We have exhausted all options.”
Kumm said he still felt a connection with Rosella even though it moved out of his family’s hands about half a century ago and he hadn’t been involved with the business.
“When the company originally decided to produce tomato sauce they actually modified my great-grandmother’s home recipe for the product,” said Kumm. “The Rosella name has gone on from the late 1800s and right through depressions and wars.”
(Source: Bloomberg)

Biggest Robusta Harvest at Risk as Vietnam Suffers Drought

The coffee harvest in Vietnam, the biggest grower of the robusta variety, may decline in the 2013- 2014 season as a drought in the country’s top producing region may lead to smaller fruits, potentially boosting prices.
Water levels in reservoirs, rivers and streams in the Central Highlands are much lower due to less rainfall last year, Nguyen Dai Nguong, the head of Dak Lak Meteorology and Hydrology Department, said yesterday. Dry conditions are expected to continue this month as the probability of off-season rains is much less than in previous years, he said. The highlands cover five coffee-growing provinces, including Dak Lak, which alone represents about a third of Vietnam’s total production.
A smaller crop in the country may boost robusta prices for a second year. Rising consumption in Indonesia will cut supplies from the third-largest robusta grower, a Bloomberg survey showed. The global coffee market may swing to a deficit as output drops in Vietnam and Brazil, the top producer of the more expensive arabica variety, according to Hackett Financial Advisors Inc. Arabica beans are brewed by specialty companies including Starbucks Corp. (SBUX), and robusta by Nestle SA (NESN) for instant drinks.
“Looking at low water levels at reservoirs, I can see the risk that the next crop will decline sharply,” Cao Van Tu, chairman of Dak Lak-based Ea Pok Coffee Co., said by phone yesterday. “Insufficient water will hurt the development of fruits and they may be smaller.”

Shrinking Discount

Robusta for May delivery climbed 0.5 percent to close at $2,108 a metric ton on NYSE Liffe in London yesterday, up 9.6 percent this year. That’s after a 6.3 percent rise in 2012 as some roasters increased consumption of the cheaper beans. Arabica for May delivery fell 0.2 percent to $1.432 a pound on ICE Futures U.S. in New York. Robusta’s discount to arabica was 47.58 cents a pound, down 16 percent this year.
Water levels at many reservoirs in Vietnam’s central provinces are only at 20 percent to 50 percent of designed capacity, the government said on its website Feb. 26, warning the drought may hurt rice and coffee crops. Farmers irrigate crops by pumping water from reservoirs and wells before the rainy season starts in May.
Production in the country, where harvesting starts in October, probably dropped 15 percent to 1.41 million tons in 2012-2013 from a record 1.65 million tons a year earlier, according to the median of eight trader and shipper estimates compiled by Bloomberg in a survey published Feb. 1. Farmers may have sold 570,000 tons, or 40 percent of the harvest, less than the 45 percent sold a year earlier, the survey showed.

Price Advance

“The drought will add to farmers’ reasons for holding back coffee sales,” said Tran Tuyen Huan, Ho Chi Minh City-based general director of Asia Commodities Joint-Stock Co. “Any delays like that in the supply chain will certainly impact prices,” he said, referring to the limiting of sales.
Farmers have probably sold 60 percent to 70 percent of the crop, Keith Flury, an analyst at Rabobank International in London, said in an e-mail yesterday.
Beans in Dak Lak climbed 1 percent to 42,300 dong ($2.02) a kilogram (2.2 pounds) yesterday, extending their gains this year to 10 percent, data from the Daklak Trade & Tourism Center show.
The average water level in rivers and streams in the last eight days of February was 0.5 meter to 0.7 meter lower than the same period last year, according to a report today from the meteorology and hydrology department. The average water level in the first 10 days of March is forecast to drop 0.3 meter to 0.5 meter from the same period a year ago, the department said.

Declining Supplies

The drought has prompted early irrigation, which may lead to an early harvest, Ea Pok Coffee’s Tu said. If coffee is harvested in the rainy season, the quality will be affected, he said. Coffee trees in Vietnam usually flower and form fruits between January and March, according to growers.
Exports from Indonesia may total 450,000 tons from a record harvest of 640,000 tons in the year starting April 1, according to the median of seven exporters’ estimates compiled by Bloomberg. Local usage almost doubled in the past decade to 149,400 tons, according to the U.S. Department of Agriculture.
“The Vietnamese are selling less and have less to sell and exports out of Indonesia have not been too strong,” Flury said in the e-mail. “Where is it all going to come from for the next six months?”
The global coffee deficit may be 2 million bags of 60 kilograms (132 pounds) each from an estimated surplus of 9 million bags this season, Shawn Hackett, president of the Boynton Beach, Florida-based company, said Feb. 24. Coffee is the best bet in the soft-commodities segment, he said on Feb. 5.
(Source: Bloomberg)

Banking’s handy revolution

The battle to win bank customers across Asia is not taking place on its high streets or even though its televisions and computer monitors – increasingly it is taking place in the palms of people’s hands.
As the region’s economies grow, become more urban and more middle-class, many industries are skipping stages of technological development that took years – even decades – to pass through in the west. Some banks have woken up to the fact that their industry is not just skipping a bit of history but that the people who should be their customers are coming to financial services from an entirely different starting point.
According to Egidio Zarrella, a partner at KPMG China, the professional services firm, that country’s consumers and banks are leading the way. “They don’t have the legacy systems and practices to overcome,” he says. “They can skip the branch build-out and capture customers straight on to the state-of-the-art platforms.”
Mr Zarrella runs a survey every quarter in which his team downloads all the applications available for smartphones and tablets. “We see banks in China adopting everything from NFC (Near Field Communications) through to collaboration with major [telecommunications companies] for enhanced functionality,” he says.
China alone already accounts for 40 per cent of mobile banking users worldwide, according to industry research by Celent, part of the Oliver Wyman consultancy.
Aside from the brute numbers, Asia’s youthful demographics and rapid adoption of smartphones and other mobile technologies influence the character of the markets. “Asia is leading the way in mobile banking because consumer behaviour is leading the banks, but also because there is much more upside to making an investment [in consumer technology] where you have growth markets and lower branch numbers,” says Kenny Lam, a partner at McKinsey, the consultancy.
It is not just the youth of Asia but the growing wealth of users that is promoting investment, says Aman Narain, Standard Chartered’s Singapore-based global head of digital banking. “Wealth is different in Asia,” he says. “There are more millionaires in their 30s than anywhere else in the world. The way they made their money is different – it is mostly self-made and not inherited – and the way they want to access and use that money is different too.”
For this reason, the apps available for wealthy clients of Asian banks are some of the snazziest around, says Mark James, technology specialist at Oliver Wyman in Asia. “One of the coolest apps I have seen was for the private banking market, where clients want to be able to explore various options trades and play with the data themselves,” he says.
For the wider market the key for banks, as in so many other sectors, is being able to collect and use data – on what consumers earn, what they owe, where and on what they spend their money. “Where there is a real arms race is on the customer analytics front, to deliver a service that is bespoke,” he says. “The predictive capabilities of Amazon around recommendations for books or music are the example to follow.”
Being able to exploit this information requires having what Mr James calls “a single source of truth” – in other words, ensuring that everything a customer does with an institution can be seen in one place.
Jonathan Larsen, global head of retail banking for Citibank, another Asia-based executive, has been making exactly this sort of change – instituting a single IT system first across Asia and now in the US and other markets. The company hopes this will allow it to collect details about clients more easily, while making the customer experience of using a branch, an automated teller machine, an internet terminal or a mobile phone all as similar as possible. “We are moving from a traditional branch to a digitised and self-help model,” he says. “We can then operate off a much smaller footprint and focus the activities of our client outlets on customer acquisition.”
This could play a particularly important role in countries such as China, where it is hard to open branches.
In any case, according to McKinsey, branches matter less. Across the region, the use of mobile and internet for banking overtook branch and telephone use for the first time last year, Mr Lam says.
But in China and Asia more broadly there are other elements at work too. In countries with high crime rates and low use of banks, telecoms companies have enjoyed huge success developing mobile payments services that mean people don’t have to carry cash. In the Philippines, Globe Telecom has been lauded by bodies such as the UN for GCash, a phone-based mobile payments service that lets people do everything from buying their morning coffee or paying their bills to sending or receiving money across international borders. The only thing it does not offer is credit.
At the same time, technology companies are also involved in people’s financial lives from their very first steps. China Construction Bank, one of China’s biggest institutions, recently launched an ecommerce business to sell everything from shoes to smartphones. The point is not so much to exploit a new source of profits but to protect the old ones. The bank is fighting to keep its place “in the value chain”, an executive explained – battling to prevent the loss of consumer data and to maintain low but steady revenues from ordinary transactions that might otherwise be claimed by non-bank competitors such as Alibaba, the internet group that is also offering loans to small businesses.
However, the lack of retail banking history in Asia, and the far smaller number of branches already in place compared with the west, means the introduction of mobile banking is what Juniper Research calls a transformational event.
In the west, mobile services are one more way that people can do their banking and different sections of society will adopt them or not at different speeds. In Asian markets, however, a mobile device might be the first – and often the only – way people can access banking services without having to walk for miles to a branch.
However, Mr Narain says there is so far to go in Asia that there is more than enough room for all types of service. “Our competition in payments and financial services is not each other or the emerging players, our competition is cash,” he says. “The more financial activity that can be converted into digital currency, the bigger the pie for everyone.”

Two Dollar Fallacies: Martin Feldstein

The United States’ current fiscal and monetary policies are unsustainable. The US government’s net debt as a share of GDP has doubled in the past five years, and the ratio is projected to be higher a decade from now, even if the economy has fully recovered and interest rates are in a normal range. An aging US population will cause social benefits to rise rapidly, pushing the debt to more than 100% of GDP and accelerating its rate of increase. Although the Federal Reserve and foreign creditors like China are now financing the increase, their willingness to do so is not unlimited.
Likewise, the Fed’s policy of large-scale asset purchases has increased commercial banks’ excess reserves to unprecedented levels (approaching $2 trillion), and has driven the real interest rate on ten-year Treasury bonds to an unprecedented negative level. As the Fed acknowledges, this will have to stop and be reversed.
While the future evolution of these imbalances remains unclear, the result could eventually be a sharp rise in long-term interest rates and a substantial fall in the dollar’s value, driven mainly by foreign investors’ reluctance to continue expanding their holdings of US debt. American investors, fearing an unwinding of the fiscal and monetary positions, might contribute to these changes by seeking to shift their portfolios to assets of other countries.
While I share these concerns, others frequently rely on two key arguments to dismiss the fear of a run on the dollar: the dollar is a reserve currency, and it carries fewer risks than other currencies. Neither argument is persuasive.
Consider first the claim that the dollar’s status as a reserve currency protects it, because governments around the world need to hold dollars as foreign exchange reserves. The problem is that foreign holdings of dollar securities are no longer primarily “foreign exchange reserves” in the traditional sense.
In earlier decades, countries held dollars because they needed to have a highly liquid and widely accepted currency to bridge the financing gap if their imports exceeded their exports. The obvious candidate for this reserve fund was US Treasury bills.
But, since the late 1990’s, countries like South Korea, Taiwan, and Singapore have accumulated very large volumes of foreign reserves, reflecting both export-driven growth strategies and a desire to avoid a repeat of the speculative currency attacks that triggered the 1997-1998 Asian financial crisis. With each of these countries holding more than $200 billion in foreign-exchange holdings – and China holding more than $3 trillion – these are no longer funds intended to bridge trade-balance shortfalls. They are major national assets that must be invested with attention to yield and risk.
So, although dollar bonds and, increasingly, dollar equities are a large part of these countries’ sovereign wealth accounts, most of the dollar securities that they hold are not needed to finance trade imbalances. Even if these countries want to continue to hold a minimum core of their portfolios in a form that can be used in the traditional foreign-exchange role, most of their portfolios will respond to their perception of different currencies’ risks.
In short, the US no longer has what ValĂ©ry Giscard d’Estaing, as France’s finance minister in the 1960’s, accurately called the “exorbitant privilege” that stemmed from having a reserve currency as its legal tender.
But some argue that, even if the dollar is not protected by being a reserve currency, it is still safer than other currencies. If investors don’t want to hold euros, pounds, or yen, where else can they go?
That argument is also false. Large portfolio investors don’t put all of their funds in a single currency. They diversify their funds among different currencies and different types of financial assets. If they perceive that the dollar and dollar bonds have become riskier, they will want to change the distribution of assets in their portfolios. So, even if the dollar is still regarded as the safest of assets, the demand for dollars will decline if its relative safety is seen to have declined.
When that happens, exchange rates and interest rates can change without assets being sold and new assets bought. If foreign holders of dollar bonds become concerned that the unsustainability of America’s situation will lead to higher interest rates and a weaker dollar, they will want to sell dollar bonds. If that feeling is widespread, the value of the dollar and the price of dollar bonds can both decline without any net change in the holding of these assets.
The dollar’s real trade-weighted value already is more than 25% lower than it was a decade ago, notwithstanding the problems in Europe and in other countries. And, despite a more competitive exchange rate, the US continues to run a large current-account deficit. If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise.
(Source: Project Syndicate)

Top 10 QE Questions : Nouriel Roubini

Most observers regard unconventional monetary policies such as quantitative easing (QE) as necessary to jump-start growth in today’s anemic economies. But questions about the effectiveness and risks of QE have begun to multiply as well. In particular, ten potential costs associated with such policies merit attention.
First, while a purely “Austrian” response (that is, austerity) to bursting asset and credit bubbles may lead to a depression, QE policies that postpone the necessary private- and public-sector deleveraging for too long may create an army of zombies: zombie financial institutions, zombie households and firms, and, in the end, zombie governments. So, somewhere between the Austrian and Keynesian extremes, QE needs to be phased out over time.
Second, repeated QE may become ineffective over time as the channels of transmission to real economic activity become clogged. The bond channel doesn’t work when bond yields are already low; and the credit channel doesn’t work when banks hoard liquidity and velocity collapses. Indeed, those who can borrow (high-grade firms and prime households) don’t want or need to, while those who need to – highly leveraged firms and non-prime households – can’t, owing to the credit crunch.
Moreover, the stock-market channel leading to asset reflation following QE works only in the short run if growth fails to recover. And the reduction in real interest rates via a rise in expected inflation when open-ended QE is implemented risks eventually stoking inflation expectations.
Third, the foreign-exchange channel of QE transmission – the currency weakening implied by monetary easing – is ineffective if several major central banks pursue QE at the same time. When that happens, QE becomes a zero-sum game, because not all currencies can fall, and not all trade balances can improve, simultaneously. The outcome, then, is “QE wars” as proxies for “currency wars.”
Fourth, QE in advanced economies leads to excessive capital flows to emerging markets, which face a difficult policy challenge. Sterilized foreign-exchange intervention keeps domestic interest rates high and feeds the inflows. But unsterilized intervention and/or reducing domestic interest rates creates excessive liquidity that can feed domestic inflation and/or asset and credit bubbles.
At the same time, forgoing intervention and allowing the currency to appreciate erodes external competitiveness, leading to dangerous external deficits. Yet imposing capital controls on inflows is difficult and sometimes leaky. Macroprudential controls on credit growth are useful, but sometimes ineffective in stopping asset bubbles when low interest rates continue to underpin generous liquidity conditions.
Fifth, persistent QE can lead to asset bubbles both where it is implemented and in countries where it spills over. Such bubbles can occur in equity markets, housing markets (Hong Kong, Singapore), commodity markets, bond markets (with talk of a bubble increasing in the United States, Germany, the United Kingdom, and Japan), and credit markets (where spreads in some emerging markets, and on high-yield and high-grade corporate debt, are narrowing excessively).
Although QE may be justified by weak economic and growth fundamentals, keeping rates too low for too long can eventually feed such bubbles. That is what happened in 2000-2006, when the US Federal Reserve aggressively cut the federal funds rate to 1% during the 2001 recession and subsequent weak recovery and then kept rates down, thus fueling credit/housing/subprime bubbles.
Sixth, QE can create moral-hazard problems by weakening governments’ incentive to pursue needed economic reforms. It may also delay needed fiscal austerity if large deficits are monetized, and, by keeping rates too low, prevent the market from imposing discipline.
Seventh, exiting QE is tricky. If exit occurs too slowly and too late, inflation and/or asset/credit bubbles could result. Also, if exit occurs by selling the long-term assets purchased during QE, a sharp increase in interest rates might choke off recovery, resulting in large financial losses for holders of long-term bonds. And, if the exit occurs via a rise in the interest rate on excess reserves (to sterilize the effect of a base-money overhang on credit growth), the ensuing losses for central banks’ balance sheets could be significant.
Eighth, an extended period of negative real interest rates implies a redistribution of income and wealth from creditors and savers toward debtors and borrowers. Of all the forms of adjustment that can lead to deleveraging (growth, savings, orderly debt restructuring, or taxation of wealth), debt monetization (and eventually higher inflation) is the least democratic, and it seriously damages savers and creditors, including pensioners and pension funds.
Ninth, QE and other unconventional monetary policies can have serious unintended consequences. Eventually, excessive inflation may erupt, or credit growth may slow, rather than accelerate, if banks – faced with very low net interest-rate margins – decide that risk relative to reward is insufficient.
Finally, there is a risk of losing sight of any road back to conventional monetary policies. Indeed, some countries are ditching their inflation-targeting regime and moving into uncharted territory, where there may be no anchor for price expectations. The US has moved from QE1 to QE2 and now to QE3, which is potentially unlimited and linked to an unemployment target. Officials are now actively discussing the merit of negative policy rates. And policymakers have moved to a risky credit-easing policy as QE’s effectiveness has waned.
In short, policies are becoming more unconventional, not less, with little clarity about short-term effects, unintended consequences, and long-term impacts. To be sure, QE and other unconventional monetary policies do have important short-term benefits. But if such policies remain in place for too long, their side effects could be severe – and the longer-term costs very high.
(Source: Project Syndicate)

Google fast replacing grandparents as ‘advice guru’

Modern-day kids are increasingly turning to the Internet to solve queries about simple chores rather than seeking advice from their experienced grandparents, a new UK survey has claimed.
Older generations are being replaced by Google, Wikipedia and YouTube with their grandchildren searching online to solve queries about basic chores, researchers found.
Less than one in four grandparents said they have been asked for advice on basic domestic chores such as washing clothes, learning to cook a family recipe or sewing a button.
Just a third of those surveyed said they had been asked “what was it like when you were young?”
Ninety-six per cent said they asked far more questions of their grandparents when they were young, The Telegraph reported.
The survey of 1,500 grandparents found that children are instead increasingly using the Internet to answer simple questions.
It found almost two thirds of grandparents feel their traditional role is becoming less and less important in modern family life.
“Grandparents believe they are being sidelined by Google, YouTube, Wikipedia and the huge resource of advice available on the internet,” said Susan Fermor, of cleaning specialist Dr Beckmann, which commissioned the research.
“They are aware that their grandchildren — already with their noses buried in a laptop, tablet computer or smartphone — find it much easier to search the Internet for instant advice,” Fermor said.
“Previous generations of grandparents haven’t experienced these phenomena because the internet is still very much in its infancy and is less than a generation old in real terms,” Fermor added.
(Source: Business Line)

Indian IT companies like HCL Technologies, TCS pounce on HP deals

In the wild, it is a common strategy for the predator to single out the weakest prey and chase it down for a kill. In the cut-throat market for outsourcing deals, too, it works much the same way, and a wounded Hewlett-Packard is fair game for Indian software companies desperate to win new contracts. "Indian outsourcing companies are aggressively attacking HP, which is a very vulnerable target right now," said Peter Bendor-Samuel, founder and CEO at Everest Group, a Texas-based outsourcing advisory and market research firm.

HP, sitting on plum contracts with the likes of American Express and Bank of America, is vulnerable as these deals worth billions of dollars are coming up for renewal. About $100 billion (Rs 5.4 lakh crore) worth of IT outsourcing deals will expire in 2013, the Everest Group estimates, with 15% of it being with HP. PC maker HP entered IT services with its 2008 buy of EDS for $14 billion, but successive leadership changes in 2010-11, took a toll on investor confidence.
Indian IT companies like HCL Technologies, TCS pounce on HP deals
HP, whose shares have fallen 60% since early 2010, recently wrote down about $8 billion in the value of its services business and is cutting about 29,000 jobs, raising a red flag for clients. Bangalorebased MphasiSBSE -0.65 %, earlier an EDS company, is now part of HP. While every outsourcer in the top tier is competing hard for HP's clients, the most aggressive and successful ones are HCL TechnologiesBSE 0.67 % and Tata Consultancy ServicesBSE 2.14 %, observers said.

So while the success rate for Indian companies in the renewal market is around 30%, TCSBSE 2.14 % and HCL Technologies are winning 60% of the renewals involving HP clients. While the companies declined to comment for this story, those familiar with their functioning said the sales teams are systematically chasing and winning clients from HP.

"Large clients working with HP for last the 5-7 years are seeing relationship fatigue and are ready to work with new vendors," said a senior industry executive, requesting anonymity. "What we are promising instead is more value with lower price, transparency in delivery and flexibility." The fate of HP, which Chief Executive Meg Whitman is looking to rebuild, is neither new nor unique.
In 2009, after India's then fourth-largest software exporter Satyam ComputerBSE 1.54 % was hobbled by an accounting fraud, rivals quickly tried to win over the Hyderabad-based company's most lucrative customers. Among the deals won by the HPEDS combine, a large proportion relates to IT infrastructure, bread-and-butter areas for HCL TechnologiesBSE 0.67 % and TCSBSE 2.14 %.

A concern for HP is that increasingly, clients are seeking flexible engagement models with elements of computing offered as a service, lower costs, and higher value. These are increasingly hard to offer for traditional players that haven't changed with the new market realities. This is creating frustration among clients, making them look for alternative service providers, analysts said.

Using client dissatisfaction to get a foot in the door, Indian players are aggressively pitching newer technology-based solutions to these clients at lower price points. "Everybody loses clients; that is part of the game. But the key is to be able to win new clients to compensate for the ones that you lose, and that is the more worrying sign for HP. We have hardly heard of any large new deals involving HP," said the India head of a large multinational outsourcer.

Some analysts also see signs of HP making a concerted effort to protect its turf. "Quite frankly, it will be a challenging period, but I think HP is taking some right steps to make sure that its existing clients feel secure and comfortable," said Frederic Giron, vice-president and principal analyst at Forrester Research.

"Time will tell." What may work in HP's favour is the fact that transitioning from one service provider to another, especially after several years of engagement, is very difficult. Rachael Stormonth, senior vice-president at US-based outsourcing advisory Nelson Hall, said HP's enterprise services unit has for years suffered from under-investment in corporate functions and in portfolio development.

"The lack of investment in the portfolio has been evident. But HP enterprise services is arguably better positioned in 2013 than it has been in the last few years to contest such deals," she argued.
(Source: Economic Times) 

India Head & Shoulders above rest, says Bob McDonald, CEO of P&G

Bob McDonald, the chairman, president and CEO of P&G remains one of the few global chief executives still brimming with optimism about the India growth story.

Prolonged policy paralysis may have caused several business leaders, both within and outside India, to swing from optimism to unbridled pessimism. But for McDonald and P&G, India ranks among the most important emerging markets to invest in, thanks to a billion-plus population and the quality of local operations. "We have had outstanding year-on-year results.

It's over a billion-dollar business, and has been growing at 20% a year for more than a decade. We are investing over a billion dollars over five years in terms of capital and marketing," says McDonald. Seven new categories were recently added to the India portfolio of the multinational FMCG giant, bringing the total number of segments it operates in to 14. But given that P&G has a global portfolio of 37 categories, there's obviously scope for expansion. The company has five manufacturing plants, of which one is under construction.

"We are going to continue to localise supply and bring in those new categories," says McDonald. P&G will have to contend with a very well-entrenched rival in the country, Hindustan UnileverBSE -2.17 %, which is four times its size in India.

Asked if beating UnileverBSE -2.17 % is on the agenda, McDonald prefers to say, "Our priority is to win with Indian consumers. We would like to see every one of the over billion people here use a P&G product. We reach around 750 million people right now, and that's a large increase — over the past three years, we have added about 25%."

McDonald's confidence about the potential of emerging markets has not always been welcomed since some analysts feel it may have resulted in the consumer giant neglecting its core markets in mature economies. About 32% of P&G's revenues came from emerging markets when McDonald took charge on July 1, 2009, and the company has found it hard to make inroads against well-entrenched competitors such as Unilever.

McDonald succeeded AG Lafly, a legendary leader regarded as one of the most successful in the company's history, under whose watch market capitalisation increased by more than $100 billion and the number of billion-dollar brands doubled. He spearheaded the acquisition of GilletteBSE -0.23 % in 2006.
According to a report published in Fortune earlier this month, McDonald fell far short of his predicted $102-billion annual revenue for 2012, having to settle instead for $83.7 billion. Several reports in international media through mid-2012 indicated there was a call for him to be replaced.

He has been criticised for his vision of 'purpose-driven growth', which critics say is abstract compared with his predecessor's simpler vision that regarded the customer as the boss. He has also been panned for introducing complex efficiency studies aimed at measuring actions of employees to reduce the number of processes.

Asked how he's coping with the pressure, McDonald reaches out for his P&G ID badge and points to the values of the company enlisted there, particularly 'passion for winning'.

"Every one of our employees likes to win and so we put pressure on ourselves. It's a greater motivator (than external pressures)," he says. P&G's twin objectives are to win with the consumers, but just as importantly to win with shareholders. McDonald would like the company to be in the top third of its peer group in total shareholder return.

"It's one of the reasons we increase dividend every year; we've paid it for over 120 years and have increased it for 56 consecutive years. The yield on our dividend is about 3%. You can make more money buying our stock just on our dividends. Within the past few weeks, we have had some all-time high share prices too," he says.

In June 2012, McDonald unveiled the socalled 40/20/10 plan: a sharp focus on 40 of the biggest category and country combinations, 20 biggest innovations and 10 emerging markets. The 40 biggest categories comprises 50% of P&G's sales and 70% of its volumes. Ever since it was implemented, P&G has seen successively better quarters.

"Over the past month or so, we have seen all-time high share prices. Last quarter, we delivered top of our guidance range in terms of top line growth. We also overdelivered expectations on the bottom line in terms of cash flow which allowed us to raise guidance for the year and increase our share repurchase programme," says McDonald.

This has been accompanied by a sharp focus on innovation. Key among these are big change innovations on flagship products such as Tide and Ariel. "One of our (Tide and Ariel) pods cleans better than six of the other brands. It's the most concentrated dose of laundry detergent you can buy — better for the environment, better value and better cleaning," McDonald claims.

There's a special team working on discontinuous innovations that currently fall between P&G's global business units. Research and development has been centrally focussed on nine transformative platform technologies. He describes them as bets so big that none of the individual business units can risk investing in them.

At a more local level, he points to innovations such as the GilletteBSE -0.23 % Guard, a Rs 15 razor developed by and for India, hoping to wean away at least some of the 50% of Indian population who still shave using a double-edged blade.

With products such as the Gillette Guard and Tide Naturals, McDonald hopes to overcome the perception that P&G is lacking in pricewarrior brands — a critical element for success in emerging markets. He admits, "There's more work we need to do. We have (such brands) in some of our categories, but need them in others."
(Source: Economic Times)

Auto Sales Reach Pre-Recession Level on Low Financing

New car buyers, shunned by lenders just four years ago, now are benefiting from historically low interest rates and more-available credit, pacing a U.S. auto market that is hovering near pre-recession levels.
General Motors Co. (GM) and AutoNation Inc. (AN), respectively the top-selling automaker and dealership group in the U.S., are among companies pointing to ample financing for new car and truck purchases pushing sales comfortably past 15 million this year, the highest since 2007.
We have the best financing available for our customers ever,” Mike Jackson, the chief executive officer of Fort Lauderdale, Florida-based AutoNation, told a J.D. Power & Associates conference this month in Orlando, Florida. “I go back to ’08 and ’09, and I couldn’t get the Lord Above financed.”
U.S. light-vehicle sales probably climbed 3.7 percent in February to 1.19 million, the average estimate of 10 analysts in a Bloomberg survey. The annualized industry sales rate, which is adjusted for seasonal trends, may have matched January’s pace of 15.3 million, the average of 15 analysts’ estimates.
“No industry has benefited more from the unfreezing of the credit markets than new and used vehicles,” Tom Webb, chief economist of Manheim Consulting, said this month in a report. “Although the immediate goal of Federal Reserve actions was to lower long-term rates and support the mortgage market, it was auto-financing markets that enjoyed the first boosts.”

Leasing Returns

GM, whose former finance unit needed a bailout because of losses on subprime home mortgages, saw “a number of lenders” completely exit auto leasing during the recession, said Kurt McNeil, vice president of U.S. sales operations. The Detroit- based automaker is now building General Motors Financial Co. and has seen lenders including Ally Financial Inc., the former GM unit, and Wells Fargo & Co. (WFC), expand their offerings to its dealers and customers.
“The availability of consumer credit is plentiful,” McNeil said this month in an interview at a National Automobile Dealers Association convention in Orlando. “More lenders are interested in getting back into various elements of our business. That just fuels opportunity.”
The percentage of new-vehicle sales that were leases has exceeded 20 percent since the beginning of 2010 and has reached about 25 percent the past three months, Kevin Tynan, a senior analyst at Bloomberg Industries, said in a Feb. 25 report.
Banks reported the most common rate for a 48-month new-car loan was 4.82 percent in November, the most-recent reporting period. The rates have dropped from more than 7 percent before the Fed lowered its target interest rate to zero in December 2008 and began large-scale asset purchases to boost growth.

Ford Gaining

Ford Motor Co. (F) probably boosted sales of its cars and light trucks more than any major automaker in February, with an increase of 9.8 percent, the average of 11 estimates. GM probably sold 4.9 percent more vehicles than a year earlier, the average of 11 estimates.
Deliveries of Ford’s Explorer sport-utility vehicle will increase more than 50 percent from a year earlier, Angie Kozleski, a spokeswoman for the Dearborn, Michigan-based company, said in an e-mail.
Rising demand is leading automakers to invest and add workers at U.S. plants. Ford said this month it will spend $200 million to boost production at an Ohio plant of a four-cylinder engine that goes into vehicles including the Explorer. The factory will start production of the engine in late 2014 and add 450 jobs.

Employment Rises

The number of people employed in motor-vehicle and parts manufacturing climbed to 786,500 at the end of 2012, from 653,400 three years earlier, according to the Labor Department.
“Credit availability is a big part of supporting the growth of the auto industry,” Joe Hinrichs, Ford’s president of the Americas, told reporters on Feb. 21 at the company’s engine plant near Cleveland. “Dealers are feeling more optimistic about leasing and credit availability for consumers.”
Volkswagen AG (VOW) may post the second-biggest increase among the largest automakers, with a 9.2 percent gain in combined sales for its Volkswagen and Audi brands, the average of four estimates. Toyota Motor Corp. (7203) deliveries probably rose 8.5 percent, the average of eight estimates.
Ally Financial, formerly known as GMAC Inc. and wholly owned by GM until 2006, probably will lose its lead this year for financing the most new- and used-vehicle sales in the U.S., Bill Muir, the company’s president and head of auto operations, said in an interview. Wells Fargo topped Ally in last year’s third quarter.

‘No Question’

Banks are “awash in deposits” and putting them to use in lending to auto buyers with the best credit, said Michael Carpenter, Ally’s CEO.
“There’s no question, for I think understandable reasons, that the automotive market bounced back first,” Carpenter said in an interview at the NADA convention. “You’re not making a bet on a housing recovery and what’s happening to house prices. You’re making a bet on a loan over four years on a vehicle” that is “indispensable” to millions of Americans.
GM and Chrysler Group LLC are letting deals with Detroit- based Ally expire this year that have guaranteed a minimum percentage of their vehicles sold with so-called subvented loans, those made to consumers at below-market rates. Chrysler this month agreed to form a financing venture with Banco Santander SA. (SAN)
Before settling on Santander, Chrysler received a “number of proposals” from financial companies that weren’t interested in the automaker three or four years ago, Reid Bigland, Chrysler’s U.S. sales chief, said in an interview.

‘Very Attractive’

Credit availability and low interest rates were “tops on the list” of reasons why U.S. auto sales rose 13 percent last year, the biggest annual increase since 1984, Bigland said at the NADA convention. The Auburn Hills, Michigan-based company probably boosted sales by 4.4 percent in February, the average of 11 estimates.
“The returns in the auto business over the last few years have been very attractive,” Trip Hall, president of Capital One Auto Finance, said in an interview. “That’s caused increasing competitive activity in the market, new entrants and players expanding from where they have been in the past.”
Honda Motor Co. (7267) may have increased sales in February by 0.7 percent and Nissan Motor Co. (7201) deliveries probably slipped 3.3 percent, both the average of eight analysts’ estimates.
Analysts estimate that Seoul-based Hyundai Motor Co. (005380) and Kia Motors Corp. (000270) may have combined to sell 5.1 percent fewer vehicles in February compared with a year earlier, the average of six estimates.
(Source: Bloomberg)

Assembly-Line Pizza Draws Hungry Fast-Casual Investors

Maria Shriver has a thing for pizza -- or at least investing in a chain that sells it.
Shriver and other cheesy-pie aficionados, including Boston Red Sox co-owner Tom Werner, Panda Express founder Andrew Cherng and “Alien vs. Predator” producer John Davis, have dropped $3 million into what they think will be the next great fast-casual dining brand: Blaze Pizza.
We love pizza,” Shriver, California’s former first lady, said in an e-mail. “My son and I are really excited to be in the pizza business. We love this concept.”
Investors are looking at chains like Blaze as millennials flock to fast-casual eateries with prices under $10, fare that’s healthier than fast food, speedy service and sleek stores.
While this segment is the fastest-growing among restaurants, few chains are publicly traded for investors to put money into. Everyone is looking for the next Chipotle Mexican Grill Inc. (CMG), which has recently outperformed the dining category and is trading at the third-highest price-to-earnings ratio of all U.S. restaurants with a market capitalization of at least $150 million, according to data compiled by Bloomberg. Chipotle’s price-to-earnings multiple is 35, compared with an average of 24 for all U.S. restaurants, the data show.
Restaurants last year began going public again after a dearth following the recession that ended in June 2009. While many fast-casual chains are still too small for an initial public offering, there may be more of these types of eateries, including Potbelly Sandwich Works, that go public as they expand. Blaze is already talking about a possible IPO in three or four years as it opens locations across the U.S., according to co-founder Rick Wetzel.

Sales Gains

“The idea of being able to go to a restaurant and decide how to make your individual pizza and have it taste good in less than 2 minutes -- that sounded like a good idea,” the Red Sox’s Werner said in a telephone interview.
Wetzel, who along with his wife, Elise, co-founded Blaze, wooed the baseball-team owner at a dinner party at his home last year by serving him some pizza, which Werner called “outstanding.”
Sales at the top 500 U.S. fast-casual restaurants chains, where customers usually order at a counter, increased 8.6 percent, while fast-food revenue rose 3.1 percent, in 2011, the most recent year for which data is available, according to Chicago-based researcher Technomic Inc. Sales at sit-down restaurants, including fine dining, were up 2.8 percent in the same time, the data show.
“There continues to be strength in the fast-casual segment,” said Todd Hooper, a San Francisco-based strategist at consultant Kurt Salmon. “You’re getting good food in a nice environment, but you don’t have to tip.”

IPO Drought

Still, there has been a dearth of limited-service chains going public. While four U.S. restaurant companies completed initial public offerings last year, the most since 2006, when Chipotle began trading, all four chains were sit-down eateries, according to data compiled by Bloomberg.
Institutional investors need to see that the restaurant’s food can be replicated and that it resonates with customers in different areas of the U.S., said Janna Sampson, who helps manage about $3.2 billion, including McDonald’s Corp. and Panera Bread Co. (PNRA) shares, at Oakbrook Investments in Lisle, Illinois.
“You’d really need to see something that makes it different than any other pizza,” Sampson said. “Pizza seems like a tough one because it is done and done.”

Serious Interest

A restaurant needs to have at least 100 units to attract “serious equity-money interest,” she said.
Wetzel said Blaze Pizza, which has just two locations in California -- in Irvine and Pasadena -- can get there. The chain is franchising rapidly and will have 15 stores in cities including New York and Chicago by the end of this year, he said.
Blaze earlier this week signed an agreement with Lessing’s Hospitality Group to open 10 stores in New York City; Long Island and Westchester County, New York; and Connecticut. It also has locations planned for the Midwest in Milwaukee and Madison, Wisconsin.
Wetzel started his soft-pretzel snack eatery Wetzel’s Pretzels in 1994 and has since expanded it to about 300 stores worldwide. He never took it public because the growth opportunity wasn’t there, he said. Not so with Blaze, which can have 1,000 locations, almost all of which will be franchised, he said. The first two locations are each on track for $1.5 million to $2 million in sales a year, he said. Chipotle stores average about $2 million in annual sales, according to a company filing.

Chipotle Concept

Similar to Chipotle restaurants, customers at Blaze move along a service line and dress their 11-inch pizzas with toppings including fresh arugula, gorgonzola cheese and grilled chicken. The trick to adhering to the “fast” in fast-casual -- and cooking pizza faster than Yum! Brands Inc. (YUM)’s Pizza Hut and Domino’s Pizza Inc. (DPZ) stores -- is the 800-degree oven, which bakes the pies in about 120 seconds, Wetzel said.
“It’s Chipotle for pizza,” he said.
Along with its $6.85 pizzas, Blaze sells Caesar and caprini salads as well as beer and wine. While there are no plans yet to expand Blaze overseas, Wetzel has trademarked the name in about 30 countries.
“If these guys want to get to 100 units in the next three or four years, they can do it through franchising,” said Rahul Aggarwal, managing director at Los Angeles-based Brentwood Associates, a private-equity investor in fast-casual chains Zoes Kitchen and Veggie Grill. While most fast-casual restaurants aren’t yet large enough to be public, “you’re going to see that change,” said Aggarwal, who has not invested in Blaze.
Panera and Chipotle are really the only ones that are available for institutional investors on the public market, he said.
“Over the next couple of years, there will be more than just two public companies in the fast-casual space.”
(Source: Bloomberg)