By Stephanie Phang and Ranjeetha Pakiam
Aug. 22 (Bloomberg) -- Malaysia cut fuel prices earlier than planned after inflation accelerated to the fastest pace in more than 26 years in July and threatened to further stoke public discontent against the government.
``The Cabinet decided to hasten the implementation of the new petrol-price adjustments today,'' Prime Minister Abdullah Ahmad Badawi said in a release today. ``This decision was made after taking into account the decline in global oil prices in recent weeks and the increase in the inflation rate in July.''
Consumer prices rose 8.5 percent from a year earlier, after a 7.7 percent gain in June, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad told reporters today in Putrajaya. Economists were expecting a 7.8 percent increase.
Voter anger over rising prices contributed to opposition gains in March elections that deprived Prime Minister Abdullah Ahmad Badawi of his two-thirds majority in parliament. Former deputy premier Anwar Ibrahim will run for a seat in a by-election next week in a bid to return to the legislature for the first time in a decade and oust the government.
``Undoubtedly, inflation is adding to the woes of the government,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``This is not helped by the fact that at least some of the current inflation pressures are perceived to be inflicted by government policies.''
Thousands gathered at a July 6 rally to protest a 41 percent increase in retail gasoline prices the government announced in June to trim subsidies that keep pump costs artificially low. Diesel prices went up 63 percent at the same time, and electricity rates rose in July.
Fuel Prices
Abdullah today announced a 5.6 percent cut in gasoline prices and a 3.1 percent reduction in diesel costs effective tomorrow, bringing forward a plan to start monthly adjustments in September that would fix local gasoline prices at 30 sen (9 U.S. cents) below market rates per liter.
RON97 gasoline will cost 2.55 ringgit a liter tomorrow, down 15 sen, and diesel will be priced at 2.50 ringgit a liter, 8 sen cheaper than the current price. The price of gasoline won't exceed 2.70 ringgit a liter this year, Abdullah said.
The move will have an impact on inflation in the coming months, Shahrir said. The Cabinet sped up the fuel-price cut to help ease the burden of consumers and reduce inflationary pressure, Abdullah said.
The cut in fuel prices will help to ``stabilize'' the inflation rate in August and September and reduce pressure on the central bank to raise interest rates, Ho Woei Chen, an economist at United Overseas Bank Ltd., said in a note after the announcements today.
Monetary Policy
``We now expect Bank Negara Malaysia to maintain its overnight policy rate at 3.5 percent at the August meeting despite the surge in inflation in July,'' Ho said. With the reduction in fuel prices, ``it is even more unlikely that Bank Negara will hike its interest rates after failing to do so earlier.''
Eight of the 12 economists surveyed by Bloomberg News expect the central bank to keep its benchmark interest rate unchanged on Aug. 25.
Bank Negara, which hasn't raised borrowing costs since April 2006, unexpectedly refrained from increasing the overnight policy rate last month, saying its immediate concern is to avoid a ``fundamental economic slowdown'' even as it raised this year's inflation forecast to a range of 5.5 percent to 6 percent. Slowing growth amid a weakening global economy will cause inflation to ease in the second half of 2009, it said.
In keeping the key rate at 3.5 percent, Bank Negara broke with central banks in neighboring Singapore, Thailand, Vietnam, Indonesia and the Philippines, all of whom have tightened monetary policy this year to fight soaring oil and food prices.
To contact the reporters on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net; Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net.
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Friday, August 22, 2008
Liebscher Says ECB to Act as Needed for Stable Prices
By Christian Vits
Aug. 22 (Bloomberg) -- European Central Bank council member Klaus Liebscher said the bank must anchor inflation expectations ``on a low level'' to avoid a wage-price spiral.
``Our central concern is to avoid second-round effects,'' Liebscher said at an event in Vienna today. The ECB ``will do what's needed'' to fight inflation.
The bank is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. It kept interest rates at a seven-year high this month to contain inflation even as evidence of an economic slump mounted.
``The ECB has taken its responsibility'' by raising its benchmark to 4.25 percent in July, Liebscher said. ``Price stability is our mandate and we'll have to guarantee it over the medium term.''
Inflation in the 15-nation euro region held at 4 percent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.
Asked whether he still sticks to July 25 remark that the ECB hasn't ``exhausted its room for maneuver'' on interest rates, Liebscher said ``in principle, I didn't change my point of view. But the colleagues in the governing council decide in every meeting on the basis of the available data and act accordingly.''
In the second quarter, Europe's economy shrunk for the first time since the introduction of the euro almost a decade ago as slowing global growth and soaring costs eroded companies' and consumers' spending power.
Since then, Eonia forward contracts show investors scaled back bets on higher ECB rates. The yield on the March contract was 4.18 percent today, down from 4.61 percent four weeks ago.
To contact the reporter on this story: Christian Vits in Vienna at cvits@bloomberg.net
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Aug. 22 (Bloomberg) -- European Central Bank council member Klaus Liebscher said the bank must anchor inflation expectations ``on a low level'' to avoid a wage-price spiral.
``Our central concern is to avoid second-round effects,'' Liebscher said at an event in Vienna today. The ECB ``will do what's needed'' to fight inflation.
The bank is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. It kept interest rates at a seven-year high this month to contain inflation even as evidence of an economic slump mounted.
``The ECB has taken its responsibility'' by raising its benchmark to 4.25 percent in July, Liebscher said. ``Price stability is our mandate and we'll have to guarantee it over the medium term.''
Inflation in the 15-nation euro region held at 4 percent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.
Asked whether he still sticks to July 25 remark that the ECB hasn't ``exhausted its room for maneuver'' on interest rates, Liebscher said ``in principle, I didn't change my point of view. But the colleagues in the governing council decide in every meeting on the basis of the available data and act accordingly.''
In the second quarter, Europe's economy shrunk for the first time since the introduction of the euro almost a decade ago as slowing global growth and soaring costs eroded companies' and consumers' spending power.
Since then, Eonia forward contracts show investors scaled back bets on higher ECB rates. The yield on the March contract was 4.18 percent today, down from 4.61 percent four weeks ago.
To contact the reporter on this story: Christian Vits in Vienna at cvits@bloomberg.net
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European Industrial Orders Fall, Led by Transport
By Fergal O'Brien
Aug. 22 (Bloomberg) -- European industrial orders fell the most in more than six years in June, led by a drop in transport equipment such as planes and rail cars.
Industrial orders in the 15-nation euro area declined 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office in Luxembourg said today. Excluding transport, orders fell an annual 1.5 percent. Economists expected a 6.3 percent drop in total orders, according to the median of 10 estimates in a Bloomberg survey.
Orders for transport equipment plunged 29.8 percent in June. Such orders ``tend to be very volatile, with a limited immediate impact on production,'' the statistics office said in the report.
European industrial production stagnated in June after falling the most in almost 16 years in May, according to data released Aug. 13. A survey of purchasing managers published yesterday showed the region's manufacturing industry contracted in August as new orders declined for a fifth month.
``One of the key engines of growth for the manufacturing sector in the euro zone -- and in particular Germany -- has been demand for capital goods,'' Kenneth Wattret, an economist at BNP Paribas in London, said in a note to clients. ``Both the orders and output data in recent months have shown a marked loss of momentum in this sector.''
Orders in Germany, Europe's largest economy, unexpectedly fell in June from May, the seventh straight decline, the Economy Ministry in Berlin said Aug. 6. Tognum AG, the Friedrichshafen, Germany-based diesel-engine maker, last week scaled back 2008 sales and margin forecasts after a declining dollar and slowing economic growth led to a drop in second-quarter orders.
Euro-area orders fell 0.3 percent in June from the previous month, according to today's report. Excluding transport, which declined 3.7 percent, industrial orders rose 0.6 percent.
To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.
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Aug. 22 (Bloomberg) -- European industrial orders fell the most in more than six years in June, led by a drop in transport equipment such as planes and rail cars.
Industrial orders in the 15-nation euro area declined 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office in Luxembourg said today. Excluding transport, orders fell an annual 1.5 percent. Economists expected a 6.3 percent drop in total orders, according to the median of 10 estimates in a Bloomberg survey.
Orders for transport equipment plunged 29.8 percent in June. Such orders ``tend to be very volatile, with a limited immediate impact on production,'' the statistics office said in the report.
European industrial production stagnated in June after falling the most in almost 16 years in May, according to data released Aug. 13. A survey of purchasing managers published yesterday showed the region's manufacturing industry contracted in August as new orders declined for a fifth month.
``One of the key engines of growth for the manufacturing sector in the euro zone -- and in particular Germany -- has been demand for capital goods,'' Kenneth Wattret, an economist at BNP Paribas in London, said in a note to clients. ``Both the orders and output data in recent months have shown a marked loss of momentum in this sector.''
Orders in Germany, Europe's largest economy, unexpectedly fell in June from May, the seventh straight decline, the Economy Ministry in Berlin said Aug. 6. Tognum AG, the Friedrichshafen, Germany-based diesel-engine maker, last week scaled back 2008 sales and margin forecasts after a declining dollar and slowing economic growth led to a drop in second-quarter orders.
Euro-area orders fell 0.3 percent in June from the previous month, according to today's report. Excluding transport, which declined 3.7 percent, industrial orders rose 0.6 percent.
To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.
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Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says
By Kevin Hamlin
Aug. 22 (Bloomberg) -- A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.
``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''
Freddie and Fannie shares touched 20-year lows yesterday on speculation that a government bailout will leave the stocks worthless. Treasury Secretary Henry Paulson won approval from the U.S. Congress last month to pump unlimited amounts of capital into the companies in an emergency.
China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.
Industrial & Commercial Bank of China yesterday reported a $2.7 billion holding. Bank of China Ltd. may have $20 billion, according to CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA. CLSA puts the exposure of the six biggest Chinese banks at $30 billion.
`Beyond Imagination'
``The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view.
China's government hasn't commented on Fannie and Freddie.
Yu is ``influential'' among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing.
Investor confidence in Fannie and Freddie has dwindled on speculation that government intervention is inevitable. Washington-based Fannie has fallen 88 percent this year, while Freddie of McLean, Virginia, has slumped 91 percent.
Paulson got the power to make purchases of the two companies' debt or equity in legislation enacted July 30 that was aimed at shoring up confidence in the businesses. He has said the Treasury doesn't expect to use that authority.
The two companies combined account for more than half of the $12 trillion U.S. mortgage market.
To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;
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Aug. 22 (Bloomberg) -- A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.
``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''
Freddie and Fannie shares touched 20-year lows yesterday on speculation that a government bailout will leave the stocks worthless. Treasury Secretary Henry Paulson won approval from the U.S. Congress last month to pump unlimited amounts of capital into the companies in an emergency.
China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.
Industrial & Commercial Bank of China yesterday reported a $2.7 billion holding. Bank of China Ltd. may have $20 billion, according to CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA. CLSA puts the exposure of the six biggest Chinese banks at $30 billion.
`Beyond Imagination'
``The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view.
China's government hasn't commented on Fannie and Freddie.
Yu is ``influential'' among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing.
Investor confidence in Fannie and Freddie has dwindled on speculation that government intervention is inevitable. Washington-based Fannie has fallen 88 percent this year, while Freddie of McLean, Virginia, has slumped 91 percent.
Paulson got the power to make purchases of the two companies' debt or equity in legislation enacted July 30 that was aimed at shoring up confidence in the businesses. He has said the Treasury doesn't expect to use that authority.
The two companies combined account for more than half of the $12 trillion U.S. mortgage market.
To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;
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Belgium's Business Confidence Unexpectedly Increases
By Jurjen van de Pol
Aug. 22 (Bloomberg) -- Belgian business confidence unexpectedly increased in August, led by a rebound in sentiment in the manufacturing industry after the cost of oil and other commodities retreated from record levels.
The business-sentiment index rose to minus 5.9 this month from minus 7.6 in July, the Brussels-based National Bank of Belgium said today in an e-mailed statement. Economists expected a drop to minus 8, according to the median of 16 forecasts in a Bloomberg News survey.
Crude-oil prices have fallen 17 percent since reaching an all-time high above $147 a barrel on July 11, easing raw- material costs for companies across the 15 nations that use the euro. At the same time, the euro's retreat from record levels against the dollar is making European goods more competitive abroad.
``The decline in the oil price and decline in the euro -- that made producers more optimistic,'' said Steven Vanneste, an economist at Fortis Bank in Brussels. Still, ``I don't think we are getting in an optimistic trend,'' he said, noting that ``Belgian firms are confronted with a lot of high input costs.''
While the Belgian economy outpaced the contracting euro region in the second quarter, expanding 0.3 percent from the previous three months, it was the nation's slowest growth in more than three years. The jobless rate increased in July for the first time in 15 months, signaling employers' hesitance to hire after the central bank cut its economic-growth forecast.
German Sentiment
Business sentiment in Germany, Europe's largest economy, probably declined further this month after plunging in July by the most since the Sept. 11 terrorist attacks in 2001. The Munich-based Ifo institute's business climate index fell to 97.2 from 97.5 last month, according to the median estimate of 11 economists in a Bloomberg News survey. The index, which is based on a survey of 7,000 executives, will be released Aug. 26.
The Belgian central bank's gauge of confidence in the manufacturing industry increased to minus 5.6 this month from minus 8.1 in July, today's report showed. Construction sentiment rose for a fourth month, with that indicator increasing to 1.3 from minus 0.6 in the previous month.
Belgian consumer confidence improved for the first time in six months in August as households worried less about economic growth and personal finances, the central bank said two days ago.
To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net
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Aug. 22 (Bloomberg) -- Belgian business confidence unexpectedly increased in August, led by a rebound in sentiment in the manufacturing industry after the cost of oil and other commodities retreated from record levels.
The business-sentiment index rose to minus 5.9 this month from minus 7.6 in July, the Brussels-based National Bank of Belgium said today in an e-mailed statement. Economists expected a drop to minus 8, according to the median of 16 forecasts in a Bloomberg News survey.
Crude-oil prices have fallen 17 percent since reaching an all-time high above $147 a barrel on July 11, easing raw- material costs for companies across the 15 nations that use the euro. At the same time, the euro's retreat from record levels against the dollar is making European goods more competitive abroad.
``The decline in the oil price and decline in the euro -- that made producers more optimistic,'' said Steven Vanneste, an economist at Fortis Bank in Brussels. Still, ``I don't think we are getting in an optimistic trend,'' he said, noting that ``Belgian firms are confronted with a lot of high input costs.''
While the Belgian economy outpaced the contracting euro region in the second quarter, expanding 0.3 percent from the previous three months, it was the nation's slowest growth in more than three years. The jobless rate increased in July for the first time in 15 months, signaling employers' hesitance to hire after the central bank cut its economic-growth forecast.
German Sentiment
Business sentiment in Germany, Europe's largest economy, probably declined further this month after plunging in July by the most since the Sept. 11 terrorist attacks in 2001. The Munich-based Ifo institute's business climate index fell to 97.2 from 97.5 last month, according to the median estimate of 11 economists in a Bloomberg News survey. The index, which is based on a survey of 7,000 executives, will be released Aug. 26.
The Belgian central bank's gauge of confidence in the manufacturing industry increased to minus 5.6 this month from minus 8.1 in July, today's report showed. Construction sentiment rose for a fourth month, with that indicator increasing to 1.3 from minus 0.6 in the previous month.
Belgian consumer confidence improved for the first time in six months in August as households worried less about economic growth and personal finances, the central bank said two days ago.
To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net
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Bernanke Says U.S. Inflation Should Slow Into 2009
By Craig Torres and Scott Lanman
Enlarge Image/Details
Aug. 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said inflation should ease later this year and in 2009, while warning that policy makers will act if price increases don't slow over the ``medium term.''
A recovery in the dollar and declines in commodity prices ``should lead inflation to moderate,'' Bernanke said in a speech to the annual Fed conference in Jackson Hole, Wyoming today. The Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.
The Fed chief said the benchmark interest rate is ``relatively low'' given an increase in price pressures. Financial turmoil has ``not yet subsided,'' and is contributing to weaker economic growth and higher unemployment, he said.
Bernanke said as the central bank deals with the current turmoil, officials must also consider how to overhaul regulations to minimize the risk of future crises. He reiterated his endorsement of the Treasury getting power to resolve failing investment banks, and signaled a need for a new, comprehensive supervision of systemic risk.
Policy makers will ``continue to review'' the Fed's measures to ensure liquidity to determine ``if they are having their intended effects,'' Bernanke said. The central bank has introduced several tools since December to provide liquidity to commercial and investment banks.
Futures Trading
Traders added to bets that the Fed will increase borrowing costs by the end of the year, futures prices show. Odds of at least a quarter point boost in the main rate by the end of December rose to 26 percent from 18 percent yesterday. The highest probability is that the Federal Open Market Committee keeps the rate at 2 percent until next year, the contracts show.
Bernanke ``seems really comfortable with where policy is right now,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``The challenge is how patient is the Fed going to be.''
In his speech to the Kansas City Fed Bank's two-day conference on financial stability, Bernanke again defended the Fed's role in keeping Bear Stearns Cos. from collapse, and said ``the economy could hardly have remained immune from such severe financial disruptions.''
The Fed chairman has tried for the past year to curb a global credit crisis that has led to a higher U.S. jobless rate, slower economic growth and some $505 billion in credit losses at financial firms. Inflation has accelerated, with food and energy costs pushing up consumer prices in the 12 months to July by the most in 17 years.
Fed Powers
Bernanke asked Congress to give the Fed more authority over the U.S. payments system, and to consider devising a way to resolve failing investment banks. He also said regulators must shift their focus and consider how individual banks and brokers may together present large risks to the financial system.
``Making the systemic risk rationale for guidances and reviews'' of financial firms ``more explicit is certainly feasible and would be a useful step toward a more systemic orientation for financial regulation and supervision,'' Bernanke, 54, said to the conference of scholars and central bankers.
Bernanke also called for ``stress tests, not at the firm level as occurs now, but for a range of firms and markets simultaneously.'' Such exams might ``reveal important interactions that are missed by stress tests at the level of the individual firm.'' He said the technical and information requirements regulators need to conduct such tests ``could be daunting.''
Fed Lending
The Fed has opened up lending to nonbanks for the first time since the Great Depression, accepted mortgage debt as collateral for loans and cut the interest rate on its discount window lending. The measures have broadened the Fed's oversight and lender-of-last resort role.
Bernanke opened the discount window to investment banks in March after rescuing Bear Stearns Cos. from bankruptcy. The Fed facilitated the firm's merger with JPMorgan Chase & Co. by loaning against $29 billion of Bear securities. It opened the discount window in July to Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.
``They are in a lot of new lines of business now in terms of lending to entities they didn't use to, in terms of taking credit risk that central banks don't usually have,'' Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Board's Division of Monetary Affairs said before the speech. ``The Federal Reserve is over-extended.''
Central bankers have also reduced the benchmark lending rate 3.25 percentage points since September to 2 percent. They have kept the rate at that level since April even as the consumer price index rose to 5.6 percent in July, the fastest increase on an annual basis in 17 years.
Mortgage Delinquencies
While the Fed has expanded its lending, markets instability has continued and credit has remained scarce. Investors are concerned mortgages delinquencies will increase, leading to greater losses at banks and other financial institutions.
Shares of Fannie Mae have fallen 58 percent this month, while shares of Freddie Mac have fallen 61 percent.
Nearly a quarter of all adjustable rate mortgages to borrowers with weak or limited credit history were delinquent in the first quarter, according to the Mortgage Bankers Association.
Meanwhile, some 463,000 Americans have lost jobs since January, and economists expect annualized rates of growth of just 1.2 percent in the third quarter and 0.45 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netScott Lanman in Washington at slanman@bloomberg.net
Read more...
Enlarge Image/Details
Aug. 22 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said inflation should ease later this year and in 2009, while warning that policy makers will act if price increases don't slow over the ``medium term.''
A recovery in the dollar and declines in commodity prices ``should lead inflation to moderate,'' Bernanke said in a speech to the annual Fed conference in Jackson Hole, Wyoming today. The Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.
The Fed chief said the benchmark interest rate is ``relatively low'' given an increase in price pressures. Financial turmoil has ``not yet subsided,'' and is contributing to weaker economic growth and higher unemployment, he said.
Bernanke said as the central bank deals with the current turmoil, officials must also consider how to overhaul regulations to minimize the risk of future crises. He reiterated his endorsement of the Treasury getting power to resolve failing investment banks, and signaled a need for a new, comprehensive supervision of systemic risk.
Policy makers will ``continue to review'' the Fed's measures to ensure liquidity to determine ``if they are having their intended effects,'' Bernanke said. The central bank has introduced several tools since December to provide liquidity to commercial and investment banks.
Futures Trading
Traders added to bets that the Fed will increase borrowing costs by the end of the year, futures prices show. Odds of at least a quarter point boost in the main rate by the end of December rose to 26 percent from 18 percent yesterday. The highest probability is that the Federal Open Market Committee keeps the rate at 2 percent until next year, the contracts show.
Bernanke ``seems really comfortable with where policy is right now,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``The challenge is how patient is the Fed going to be.''
In his speech to the Kansas City Fed Bank's two-day conference on financial stability, Bernanke again defended the Fed's role in keeping Bear Stearns Cos. from collapse, and said ``the economy could hardly have remained immune from such severe financial disruptions.''
The Fed chairman has tried for the past year to curb a global credit crisis that has led to a higher U.S. jobless rate, slower economic growth and some $505 billion in credit losses at financial firms. Inflation has accelerated, with food and energy costs pushing up consumer prices in the 12 months to July by the most in 17 years.
Fed Powers
Bernanke asked Congress to give the Fed more authority over the U.S. payments system, and to consider devising a way to resolve failing investment banks. He also said regulators must shift their focus and consider how individual banks and brokers may together present large risks to the financial system.
``Making the systemic risk rationale for guidances and reviews'' of financial firms ``more explicit is certainly feasible and would be a useful step toward a more systemic orientation for financial regulation and supervision,'' Bernanke, 54, said to the conference of scholars and central bankers.
Bernanke also called for ``stress tests, not at the firm level as occurs now, but for a range of firms and markets simultaneously.'' Such exams might ``reveal important interactions that are missed by stress tests at the level of the individual firm.'' He said the technical and information requirements regulators need to conduct such tests ``could be daunting.''
Fed Lending
The Fed has opened up lending to nonbanks for the first time since the Great Depression, accepted mortgage debt as collateral for loans and cut the interest rate on its discount window lending. The measures have broadened the Fed's oversight and lender-of-last resort role.
Bernanke opened the discount window to investment banks in March after rescuing Bear Stearns Cos. from bankruptcy. The Fed facilitated the firm's merger with JPMorgan Chase & Co. by loaning against $29 billion of Bear securities. It opened the discount window in July to Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.
``They are in a lot of new lines of business now in terms of lending to entities they didn't use to, in terms of taking credit risk that central banks don't usually have,'' Vincent Reinhart, a resident scholar at the American Enterprise Institute and former director of the Board's Division of Monetary Affairs said before the speech. ``The Federal Reserve is over-extended.''
Central bankers have also reduced the benchmark lending rate 3.25 percentage points since September to 2 percent. They have kept the rate at that level since April even as the consumer price index rose to 5.6 percent in July, the fastest increase on an annual basis in 17 years.
Mortgage Delinquencies
While the Fed has expanded its lending, markets instability has continued and credit has remained scarce. Investors are concerned mortgages delinquencies will increase, leading to greater losses at banks and other financial institutions.
Shares of Fannie Mae have fallen 58 percent this month, while shares of Freddie Mac have fallen 61 percent.
Nearly a quarter of all adjustable rate mortgages to borrowers with weak or limited credit history were delinquent in the first quarter, according to the Mortgage Bankers Association.
Meanwhile, some 463,000 Americans have lost jobs since January, and economists expect annualized rates of growth of just 1.2 percent in the third quarter and 0.45 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.netScott Lanman in Washington at slanman@bloomberg.net
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Taiwan's Economy Expands at Slowest Pace in a Year
By Janet Ong and Chinmei Sung
Aug. 22 (Bloomberg) -- Taiwan's economy grew at the slowest pace in more than a year last quarter as consumer spending cooled and U.S. customers bought fewer laptops, flat-screen televisions and mobile phones.
Gross domestic product rose 4.32 percent from a year ago, down from the first quarter's 6.25 percent gain and less than the median estimate of 4.54 percent in a Bloomberg survey of 14 economists. The statistics bureau today cut its 2008 growth forecast to 4.3 percent from 4.78 percent three months ago.
The report adds to signs that Asia's economies are being hurt by the global economic slowdown, and by soaring fuel and food prices. Easing U.S. demand has cooled sales for Acer Inc. and Taiwan Semiconductor Manufacturing Co., while Marks & Spencer Group Plc said it will close three Taiwan stores as rising living costs damp spending by the island's consumers.
``Downside risks have intensified, and the economy will likely continue decelerating in the second half,'' said Cheng Cheng-mount, chief economist in Taipei for Citigroup Inc. ``We expect policy makers to shift focus from upside inflation risk to downside growth risk in the second half.''
Providing fresh evidence of faltering global growth, the U.K. economy unexpectedly stagnated in the second quarter and European industrial orders fell the most in more than six years in June, reports today showed.
Taiwan's GDP data were released after the close of trading on the stock exchange. The Taiex Index fell 0.1 percent to 6,911.64, its lowest since Aug. 5. The benchmark index slumped 12 percent in the second quarter, the biggest decline in almost six years. The island's dollar dropped for a fifth straight week.
Growth Forecasts
Taiwan's economy will expand 3.04 percent in the third quarter from a year earlier, which would be the weakest pace since the first three months of 2005, the statistics bureau forecast today. Growth will be 3.75 percent in the fourth quarter, it said.
``The economy is facing growing headwinds and will slow sharply over the rest of this year,'' Rob Subbaraman, chief Asia economist at Lehman Brothers Holdings Inc. in Hong Kong, wrote in a report. ``There are growing signs of weakness in the tech sector, the linchpin of the economy. Consumption is weakening.''
Taiwan follows South Korea, Singapore and Japan in reporting a deteriorating economy because of faltering demand in the U.S., the region's largest overseas market.
Japan's economy, Asia's largest, shrank in the second quarter by the most since 2001. Singapore posted the weakest growth in five years and South Korea's economy expanded at the slowest rate in more than a year.
Global, Local Demand
Taiwan Semiconductor, the world's largest custom-chip maker, and computer maker Acer both reported slower sales in the U.S. in the second quarter. Exports are equivalent to about 50 percent of the island's GDP.
As global demand eases, rising living costs and declining share prices have damped confidence and discouraged Taiwanese consumers from spending. Retail sales fell 0.4 percent in June from a year earlier, the first decline since January 2007.
The Taiwan government in July announced subsidies for low- income families to alleviate the impact of rising prices and help bolster domestic demand.
Marks & Spencer last month said it will shut three Taiwan stores it runs with President Chain Store Corp., less than 18 months after the U.K.'s largest clothing retailer entered the market.
Inflation Accelerates
``Consumers were spending less in the second quarter as incomes couldn't keep up with the cost of living,'' Fang Wenyen, an economist at KGI Securities Co. in Taipei, said before the announcement. ``People cut back on consumption as the stock market declined and inflation pushed up prices.''
Inflation accelerated to 4.97 percent in June, the fastest pace in eight months, as fuel and food costs climbed.
Taiwan's statistics bureau raised its forecast for consumer-price inflation over 2008 to 3.74 percent from 3.29 percent. It estimates inflation will be 1.91 percent next year.
The island's central bank raised its benchmark interest rate to a seven-year high of 3.625 percent on June 26 to help damp inflation. That marked the 16th consecutive quarterly increase in borrowing costs.
Citibank's Cheng forecasts the central bank will raise its rate by 12.5 basis points in September and that will be the last increase for the year as policy makers shift their attention to the slowing economy.
To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.net; Chinmei Sung in Taipei at csung4@bloomberg.net.
Read more...
Aug. 22 (Bloomberg) -- Taiwan's economy grew at the slowest pace in more than a year last quarter as consumer spending cooled and U.S. customers bought fewer laptops, flat-screen televisions and mobile phones.
Gross domestic product rose 4.32 percent from a year ago, down from the first quarter's 6.25 percent gain and less than the median estimate of 4.54 percent in a Bloomberg survey of 14 economists. The statistics bureau today cut its 2008 growth forecast to 4.3 percent from 4.78 percent three months ago.
The report adds to signs that Asia's economies are being hurt by the global economic slowdown, and by soaring fuel and food prices. Easing U.S. demand has cooled sales for Acer Inc. and Taiwan Semiconductor Manufacturing Co., while Marks & Spencer Group Plc said it will close three Taiwan stores as rising living costs damp spending by the island's consumers.
``Downside risks have intensified, and the economy will likely continue decelerating in the second half,'' said Cheng Cheng-mount, chief economist in Taipei for Citigroup Inc. ``We expect policy makers to shift focus from upside inflation risk to downside growth risk in the second half.''
Providing fresh evidence of faltering global growth, the U.K. economy unexpectedly stagnated in the second quarter and European industrial orders fell the most in more than six years in June, reports today showed.
Taiwan's GDP data were released after the close of trading on the stock exchange. The Taiex Index fell 0.1 percent to 6,911.64, its lowest since Aug. 5. The benchmark index slumped 12 percent in the second quarter, the biggest decline in almost six years. The island's dollar dropped for a fifth straight week.
Growth Forecasts
Taiwan's economy will expand 3.04 percent in the third quarter from a year earlier, which would be the weakest pace since the first three months of 2005, the statistics bureau forecast today. Growth will be 3.75 percent in the fourth quarter, it said.
``The economy is facing growing headwinds and will slow sharply over the rest of this year,'' Rob Subbaraman, chief Asia economist at Lehman Brothers Holdings Inc. in Hong Kong, wrote in a report. ``There are growing signs of weakness in the tech sector, the linchpin of the economy. Consumption is weakening.''
Taiwan follows South Korea, Singapore and Japan in reporting a deteriorating economy because of faltering demand in the U.S., the region's largest overseas market.
Japan's economy, Asia's largest, shrank in the second quarter by the most since 2001. Singapore posted the weakest growth in five years and South Korea's economy expanded at the slowest rate in more than a year.
Global, Local Demand
Taiwan Semiconductor, the world's largest custom-chip maker, and computer maker Acer both reported slower sales in the U.S. in the second quarter. Exports are equivalent to about 50 percent of the island's GDP.
As global demand eases, rising living costs and declining share prices have damped confidence and discouraged Taiwanese consumers from spending. Retail sales fell 0.4 percent in June from a year earlier, the first decline since January 2007.
The Taiwan government in July announced subsidies for low- income families to alleviate the impact of rising prices and help bolster domestic demand.
Marks & Spencer last month said it will shut three Taiwan stores it runs with President Chain Store Corp., less than 18 months after the U.K.'s largest clothing retailer entered the market.
Inflation Accelerates
``Consumers were spending less in the second quarter as incomes couldn't keep up with the cost of living,'' Fang Wenyen, an economist at KGI Securities Co. in Taipei, said before the announcement. ``People cut back on consumption as the stock market declined and inflation pushed up prices.''
Inflation accelerated to 4.97 percent in June, the fastest pace in eight months, as fuel and food costs climbed.
Taiwan's statistics bureau raised its forecast for consumer-price inflation over 2008 to 3.74 percent from 3.29 percent. It estimates inflation will be 1.91 percent next year.
The island's central bank raised its benchmark interest rate to a seven-year high of 3.625 percent on June 26 to help damp inflation. That marked the 16th consecutive quarterly increase in borrowing costs.
Citibank's Cheng forecasts the central bank will raise its rate by 12.5 basis points in September and that will be the last increase for the year as policy makers shift their attention to the slowing economy.
To contact the reporters on this story: Janet Ong in Taipei at jong3@bloomberg.net; Chinmei Sung in Taipei at csung4@bloomberg.net.
Read more...
Petrobras Has Spent $1 Billion to Drill 20 Pre-Salt Wells
By Jeb Blount and Laura Price
Aug. 22 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, has spent $1 billion since 2005 to drill 20 wells in so-called pre-salt offshore fields.
The cost of drilling wells to a depth of 7,000 meters (23,000 feet) below the ocean service and seabed has fallen from $240 million to $60 million and the time to drill the wells has dropped from a year to an average of 60 days, the Rio de Janeiro-based company said today in a statement.
Petrobras, as the company is known, said oil found in the pre-salt fields is primarily light crude at a grade of 28 degrees on the American Petroleum Institute scale.
To contact the reporters on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net; Laura Price in Sao Paulo at lprice3@bloomberg.net.
Read more...
Aug. 22 (Bloomberg) -- Petroleo Brasileiro SA, Brazil's state-controlled oil company, has spent $1 billion since 2005 to drill 20 wells in so-called pre-salt offshore fields.
The cost of drilling wells to a depth of 7,000 meters (23,000 feet) below the ocean service and seabed has fallen from $240 million to $60 million and the time to drill the wells has dropped from a year to an average of 60 days, the Rio de Janeiro-based company said today in a statement.
Petrobras, as the company is known, said oil found in the pre-salt fields is primarily light crude at a grade of 28 degrees on the American Petroleum Institute scale.
To contact the reporters on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net; Laura Price in Sao Paulo at lprice3@bloomberg.net.
Read more...
Bernanke's Speech on Economy at Jackson Hole Conference
Aug. 22 (Bloomberg) -- The following is a reformatted version of Federal Reserve Chairman Ben S. Bernanke's speech today at the Kansas City Fed's annual conference in Jackson Hole, Wyoming:
Reducing Systemic Risk
In choosing the topic for this year's symposium -- maintaining stability in a changing financial system -- the Federal Reserve Bank of Kansas City staff is, once again, right on target. Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation, in part the product of a global commodity boom, and the result has been one of the most challenging economic and policy environments in memory.
The Federal Reserve's response to this crisis has consisted of three key elements. First, we eased monetary policy substantially, particularly after indications of economic weakness proliferated around the turn of the year. In easing rapidly and proactively, we sought to offset, at least in part, the tightening of credit conditions associated with the crisis and thus to mitigate the effects on the broader economy. By cushioning the first-round economic impact of the financial stress, we hoped also to minimize the risks of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, further damages economic prospects.
In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures. This strategy has been conditioned on our expectation that the prices of oil and other commodities would ultimately stabilize, in part as the result of slowing global growth, and that this outcome, together with well-anchored inflation expectations and increased slack in resource utilization, would foster a return to price stability in the medium run. In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain, not least because of the difficulty of predicting the future course of commodity prices, and we will continue to monitor inflation and inflation expectations closely. The FOMC is committed to achieving medium- term price stability and will act as necessary to attain that objective.
The second element of our response has been to offer liquidity support to the financial markets through a variety of collateralized lending programs. I have discussed these lending facilities and their rationale in some detail on other occasions.1 Briefly, these programs are intended to mitigate what have been, at times, very severe strains in short-term funding markets and, by providing an additional source of financing, to allow banks and other financial institutions to deleverage in a more orderly manner. We have recently extended our special programs for primary dealers beyond the end of the year, based on our assessment that financial conditions remain unusual and exigent. We will continue to review all of our liquidity facilities to determine if they are having their intended effects or require modification.
The third element of our strategy encompasses a range of activities and initiatives undertaken in our role as financial regulator and supervisor, some of which I will describe in more detail later in my remarks. Briefly, these activities include cooperating with other regulators to monitor the health of individual financial institutions; working with the private sector to reduce risks in some key markets; developing new regulations, including new rules to govern mortgage and credit card lending; taking an active part in domestic and international efforts to draw out the lessons of the recent experience; and applying those lessons in our supervisory practices.
Closely related to this third group of activities is a critical question that we as a country now face: how to strengthen our financial system, including our system of financial regulation and supervision, to reduce the frequency and severity of bouts of financial instability in the future. In this regard, some particularly thorny issues are raised by the existence of financial institutions that may be perceived as ``too big to fail'' and the moral hazard issues that may arise when governments intervene in a financial crisis. As you know, in March the Federal Reserve acted to prevent the default of the investment bank Bear Stearns. For reasons that I will discuss shortly, those actions were necessary and justified under the circumstances that prevailed at that time. However, those events also have consequences that must be addressed. In particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of ``too big to fail,'' possibly resulting in excessive risk-taking and yet greater systemic risk in the future. Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system.
As both the nation's central bank and a financial regulator, the Federal Reserve must be well prepared to make constructive contributions to the coming national debate on the future of the financial system and financial regulation. Accordingly, we have set up a number of internal working groups, consisting of governors, Reserve Bank presidents, and staff, to study these and related issues. That work is ongoing, and I do not want to prejudge the outcomes. However, in the remainder of my remarks today I will raise, in a preliminary way, what I see as some promising approaches for reducing systemic risk. I will begin by discussing steps that are already under way to strengthen the financial infrastructure in a manner that should increase the resilience of our financial system. I will then turn to a discussion of regulatory and supervisory practice, with particular attention to whether a more comprehensive, systemwide perspective in financial supervision is warranted. For the most part, I will leave for another occasion the issues of broader structural and statutory change, such as those raised by the Treasury's blueprint for regulatory reform.2
Strengthening the Financial Infrastructure
An effective means of increasing the resilience of the financial system is to strengthen its infrastructure. For my purposes today, I want to construe ``financial infrastructure'' very broadly, to include not only the ``hardware'' components of that infrastructure--the physical systems on which market participants rely for the quick and accurate execution, clearing, and settlement of transactions--but also the associated ``software,'' including the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction. Of course, a robust financial infrastructure has many benefits even in normal times, including lower transactions costs and greater market liquidity. In periods of extreme stress, however, the quality of the financial infrastructure may prove critical. For example, it greatly affects the ability of market participants to quickly determine their own positions and exposures, including exposures to key counterparties, and to adjust their positions as necessary. When positions and exposures cannot be determined rapidly--as was the case, for example, when program trades overwhelmed the system during the 1987 stock market crash--potential outcomes include highly risk-averse behavior by market participants, sharp declines in market liquidity, and high volatility in asset prices. The financial infrastructure also has important effects on how market participants respond to perceived changes in counterparty risk. For example, during a period of heightened stress, participants may be willing to provide liquidity to a market if a strong central counterparty is present but not otherwise.
Considerations of this type were very much in our minds during the Bear Stearns episode in March. The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Many short-term lenders declined to renew their loans, driving Bear to the brink of default.
Although not an extraordinarily large company by many metrics, Bear Stearns was deeply involved in a number of critical markets, including (as I have noted) markets for short-term secured funding as well as those for over-the-counter (OTC) derivatives. One of our concerns was that the infrastructures of those markets and the risk- and liquidity-management practices of market participants would not be adequate to deal in an orderly way with the collapse of a major counterparty. With financial conditions already quite fragile, the sudden, unanticipated failure of Bear Stearns would have led to a sharp unwinding of positions in those markets that could have severely shaken the confidence of market participants. The company's failure could also have cast doubt on the financial conditions of some of Bear Stearns's many counterparties or of companies with similar businesses and funding practices, impairing the ability of those firms to meet their funding needs or to carry out normal transactions. As more firms lost access to funding, the vicious circle of forced selling, increased volatility, and higher haircuts and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions. Largely because of these concerns, the Federal Reserve took actions that facilitated the purchase of Bear Stearns and the assumption of Bear's financial obligations by JPMorgan Chase & Co.
This experience has led me to believe that one of the best ways to protect the financial system against future systemic shocks, including the possible failure of a major counterparty, is by strengthening the financial infrastructure, including both the ``hardware'' and the ``software'' components. The Federal Reserve, in collaboration with the private sector and other regulators, is intensively engaged in such efforts. For example, since September 2005, the Federal Reserve Bank of New York has been leading a joint public-private initiative to improve arrangements for clearing and settling trades in credit default swaps and other OTC derivatives. These efforts include gaining commitments from private-sector participants to automate and standardize the clearing and settlement process, encouraging improved netting and cash settlement arrangements, and supporting the development of a central counterparty for credit default swaps. More generally, although customized derivatives contracts between sophisticated counterparties will continue to be appropriate in many situations, on the margin it appears that a migration of derivatives trading toward more-standardized instruments and the increased use of well-managed central counterparties, either linked to or independent of exchanges, could have a systemic benefit.
The Federal Reserve and other authorities also are focusing on enhancing the resilience of the markets for triparty repurchase agreements (repos). In the triparty repo market, primary dealers and other large banks and broker-dealers obtain very large amounts of secured financing from money funds and other short- term, risk-averse investors. We are encouraging firms to improve their management of liquidity risk and to reduce over time their reliance on triparty repos for overnight financing of less- liquid forms of collateral. In the longer term, we need to ensure that there are robust contingency plans for managing, in an orderly manner, the default of a major participant. We should also explore possible means of reducing this market's dependence on large amounts of intraday credit from the banks that facilitate the settlement of triparty repos. The attainment of these objectives might be facilitated by the introduction of a central counterparty but may also be achievable under the current framework for clearing and settlement.
Of course, like other central banks, the Federal Reserve continues to monitor systemically important payment and settlement systems and to compare their performance with international standards for reliability, efficiency, and safety. Unlike most other central banks, however, the Federal Reserve does not have general statutory authority to oversee these systems. Instead, we rely on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion, to help ensure that the various payment and settlement systems have the necessary procedures and controls in place to manage the risks they face. As part of any larger reform, the Congress should consider granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.
Yet another key component of the software of the financial infrastructure is the set of rules and procedures used to resolve claims on a market participant that has defaulted on its obligations. In the overwhelming majority of cases, the bankruptcy laws and contractual agreements serve this function well. However, in the rare circumstances in which the impending or actual failure of an institution imposes substantial systemic risks, the standard procedures for resolving institutions may be inadequate. In the Bear Stearns case, the government's response was severely complicated by the lack of a clear statutory framework for dealing with such a situation. As I have suggested on other occasions, the Congress may wish to consider whether such a framework should be set up for a defined set of nonbank institutions.3 A possible approach would be to give an agency-- the Treasury seems an appropriate choice--the responsibility and the resources, under carefully specified conditions and in consultation with the appropriate supervisors, to intervene in cases in which an impending default by a major nonbank financial institution is judged to carry significant systemic risks. The implementation of such a resolution scheme does raise a number of complex issues, however, and further study will be needed to develop specific, workable proposals.
A stronger infrastructure would help to reduce systemic risk. Importantly, as my FOMC colleague Gary Stern has pointed out, it would also mitigate moral hazard and the problem of ``too big to fail'' by reducing the range of circumstances in which systemic stability concerns might be expected by markets to prompt government intervention.4 A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.
A Systemwide Approach to Supervisory Oversight
The regulation and supervisory oversight of financial institutions is another critical tool for limiting systemic risk. In general, effective government oversight of individual institutions increases financial resilience and reduces moral hazard by attempting to ensure that all financial firms with access to some sort of federal safety net--including those that creditors may believe are too big to fail--maintain adequate buffers of capital and liquidity and develop comprehensive approaches to risk and liquidity management. Importantly, a well-designed supervisory regime complements rather than supplants market discipline. Indeed, regulation can serve to strengthen market discipline, for example, by mandating a transparent disclosure regime for financial firms.
Going forward, a critical question for regulators and supervisors is what their appropriate ``field of vision'' should be. Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.
At least informally, financial regulation and supervision in the United States already include some macroprudential elements. As one illustration, many of the supervisory guidances issued by federal bank regulators have been motivated, at least in part, by concerns that a particular industry trend posed risks to the stability of the banking system as a whole, not just to individual institutions. For example, following lengthy comment periods, in 2006, the federal banking supervisors issued formal guidance on underwriting and managing the risks of nontraditional mortgages, such as interest-only and negative amortization mortgages, as well as guidance warning banks against excessive concentrations in commercial real estate lending. These guidances likely would not have been issued if the federal regulators had viewed the issues they addressed as being isolated to a few banks. The regulators were concerned not only about individual banks but also about the systemic risks associated with excessive industry-wide concentrations (of commercial real estate or nontraditional mortgages) or an industry-wide pattern of certain practices (for example, in underwriting exotic mortgages). Note that, in warning against excessive concentrations or common exposures across the banking system, regulators need not make a judgment about whether a particular asset class is mispriced--although rapid changes in asset prices or risk premiums may increase the level of concern. Rather, their task is to determine the risks imposed on the system as a whole if common exposures significantly increase the correlation of returns across institutions.
The development of supervisory guidances is a process which often involves soliciting comments from the industry and the public and, where applicable, developing a consensus among the banking regulators. In that respect, the process is not always as nimble as we might like. For that reason, less-formal processes may sometimes be more effective and timely. As a case in point, the Federal Reserve--in close cooperation with other domestic and foreign regulators--regularly conducts so-called horizontal reviews of large financial institutions, focused on specific issues and practices. Recent reviews have considered topics such as leveraged loans, enterprise-wide risk management, and liquidity practices. The lessons learned from these reviews are shared with both the institutions participating in these reviews as well as other institutions for which the information might be beneficial. Like supervisory guidance, these reviews help increase the safety and soundness of individual institutions but they may also identify common weaknesses and risks that may have implications for broader systemic stability. In my view, making the systemic risk rationale for guidances and reviews more explicit is certainly feasible and would be a useful step toward a more systemic orientation for financial regulation and supervision.
A systemwide focus for financial regulation would also increase attention to how the incentives and constraints created by regulations affect behavior, especially risk-taking, through the credit cycle. During a period of economic weakness, for example, a prudential supervisor concerned only with the safety and soundness of a particular institution will tend to push for very conservative lending policies. In contrast, the macroprudential supervisor would recognize that, for the system as a whole, excessively conservative lending policies could prove counterproductive if they contribute to a weaker economic and credit environment. Similarly, risk concentrations that might be acceptable at a single institution in a period of economic expansion could be dangerous if they existed at a large number of institutions simultaneously. I do not have the time today to do justice to the question of the procyclicality of, say, capital regulations and accounting rules. This topic has received a great deal of attention elsewhere and has also engaged the attention of regulators; in particular, the framers of the Basel II capital accord have made significant efforts to measure regulatory capital needs ``through the cycle'' to mitigate procyclicality. However, as we consider ways to strengthen the system for the future in light of what we have learned over the past year, we should critically examine capital regulations, provisioning policies, and other rules applied to financial institutions to determine whether, collectively, they increase the procyclicality of credit extension beyond the point that is best for the system as a whole.
A yet more ambitious approach to macroprudential regulation would involve an attempt by regulators to develop a more fully integrated overview of the entire financial system. In principle, such an approach would appear well justified, as our financial system has become less bank-centered and because activities or risk-taking not permitted to regulated institutions have a way of migrating to other financial firms or markets. Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise. It would likely require at least periodic surveillance and information-gathering from a wide range of nonbank institutions. Increased coordination would be required among the private- and public-sector supervisors of exchanges and other financial markets to keep up to date with evolving practices and products and to try to identify those which may pose risks outside the purview of each individual regulator. International regulatory coordination, already quite extensive, would need to be expanded further.
One might imagine also conducting formal stress tests, not at the firm level as occurs now, but for a range of firms and markets simultaneously. Doing so might reveal important interactions that are missed by stress tests at the level of the individual firm. For example, such an exercise might suggest that a sharp change in asset prices would not only affect the value of a particular firm's holdings but also impair liquidity in key markets, with adverse consequences for the ability of the firm to adjust its risk positions or obtain funding. Systemwide stress tests might also highlight common exposures and ``crowded trades'' that would not be visible in tests confined to one firm. Again, however, we should not underestimate the technical and information requirements of conducting such exercises effectively. Financial markets move swiftly, firms' holdings and exposures change every day, and financial transactions do not respect national boundaries. Thus, the information requirements for conducting truly comprehensive macroprudential surveillance could be daunting indeed.
Macroprudential supervision also presents communication issues. For example, the expectations of the public and of financial market participants would have to be managed carefully, as such an approach would never eliminate financial crises entirely. Indeed, an expectation by financial market participants that financial crises will never occur would create its own form of moral hazard and encourage behavior that would make financial crises more, rather than less, likely.
With all these caveats, I believe that an increased focus on systemwide risks by regulators and supervisors is inevitable and desirable. However, as we proceed in that direction, we would be wise to maintain a realistic appreciation of the difficulties of comprehensive oversight in a financial system as large, diverse, and globalized as ours.
Conclusion
Although we at the Federal Reserve remain focused on addressing the current risks to economic and financial stability, we have also begun thinking about the lessons for the future. I have discussed today two strategies for reducing systemic risk: strengthening the financial infrastructure, broadly construed, and increasing the systemwide focus of financial regulation and supervision. Work on the financial infrastructure is already well under way, and I expect further progress as the public and private sectors cooperate to address common concerns. The adoption of a regulatory and supervisory approach with a heavier macroprudential focus has a strong rationale, but we should be careful about over-promising, as we are still rather far from having the capacity to implement such an approach in a thoroughgoing way. The Federal Reserve will continue to work with the Congress, other regulators, and the private sector to explore this and other strategies to increase financial stability.
When we last met here in Jackson Hole, the nature of the financial crisis and its implications for the economy were just coming into view. A year later, many challenges remain. I look forward to the insights into this experience that will be provided by the papers at this conference.''
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Footnotes
1. See, for example, Ben S. Bernanke (2008), ``Liquidity Provision by the Federal Reserve,'' speech delivered (via satellite) at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13. Return to text
2. See Department of the Treasury (March 2008), Blueprint for a Modernized Financial Regulatory Structure. Return to text
3. Ben S. Bernanke (2008), ``Financial Regulation and Financial Stability,'' speech delivered at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households, Arlington, Va., July 8. Return to text
4. See, for example, Gary H. Stern and Ron J. Feldman (2004), Too Big to Fail: The Hazards of Bank Bailouts (Washington: Brookings Institution Press). Return to text
Read more...
Reducing Systemic Risk
In choosing the topic for this year's symposium -- maintaining stability in a changing financial system -- the Federal Reserve Bank of Kansas City staff is, once again, right on target. Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment. Add to this mix a jump in inflation, in part the product of a global commodity boom, and the result has been one of the most challenging economic and policy environments in memory.
The Federal Reserve's response to this crisis has consisted of three key elements. First, we eased monetary policy substantially, particularly after indications of economic weakness proliferated around the turn of the year. In easing rapidly and proactively, we sought to offset, at least in part, the tightening of credit conditions associated with the crisis and thus to mitigate the effects on the broader economy. By cushioning the first-round economic impact of the financial stress, we hoped also to minimize the risks of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, further damages economic prospects.
In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures. This strategy has been conditioned on our expectation that the prices of oil and other commodities would ultimately stabilize, in part as the result of slowing global growth, and that this outcome, together with well-anchored inflation expectations and increased slack in resource utilization, would foster a return to price stability in the medium run. In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain, not least because of the difficulty of predicting the future course of commodity prices, and we will continue to monitor inflation and inflation expectations closely. The FOMC is committed to achieving medium- term price stability and will act as necessary to attain that objective.
The second element of our response has been to offer liquidity support to the financial markets through a variety of collateralized lending programs. I have discussed these lending facilities and their rationale in some detail on other occasions.1 Briefly, these programs are intended to mitigate what have been, at times, very severe strains in short-term funding markets and, by providing an additional source of financing, to allow banks and other financial institutions to deleverage in a more orderly manner. We have recently extended our special programs for primary dealers beyond the end of the year, based on our assessment that financial conditions remain unusual and exigent. We will continue to review all of our liquidity facilities to determine if they are having their intended effects or require modification.
The third element of our strategy encompasses a range of activities and initiatives undertaken in our role as financial regulator and supervisor, some of which I will describe in more detail later in my remarks. Briefly, these activities include cooperating with other regulators to monitor the health of individual financial institutions; working with the private sector to reduce risks in some key markets; developing new regulations, including new rules to govern mortgage and credit card lending; taking an active part in domestic and international efforts to draw out the lessons of the recent experience; and applying those lessons in our supervisory practices.
Closely related to this third group of activities is a critical question that we as a country now face: how to strengthen our financial system, including our system of financial regulation and supervision, to reduce the frequency and severity of bouts of financial instability in the future. In this regard, some particularly thorny issues are raised by the existence of financial institutions that may be perceived as ``too big to fail'' and the moral hazard issues that may arise when governments intervene in a financial crisis. As you know, in March the Federal Reserve acted to prevent the default of the investment bank Bear Stearns. For reasons that I will discuss shortly, those actions were necessary and justified under the circumstances that prevailed at that time. However, those events also have consequences that must be addressed. In particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of ``too big to fail,'' possibly resulting in excessive risk-taking and yet greater systemic risk in the future. Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system.
As both the nation's central bank and a financial regulator, the Federal Reserve must be well prepared to make constructive contributions to the coming national debate on the future of the financial system and financial regulation. Accordingly, we have set up a number of internal working groups, consisting of governors, Reserve Bank presidents, and staff, to study these and related issues. That work is ongoing, and I do not want to prejudge the outcomes. However, in the remainder of my remarks today I will raise, in a preliminary way, what I see as some promising approaches for reducing systemic risk. I will begin by discussing steps that are already under way to strengthen the financial infrastructure in a manner that should increase the resilience of our financial system. I will then turn to a discussion of regulatory and supervisory practice, with particular attention to whether a more comprehensive, systemwide perspective in financial supervision is warranted. For the most part, I will leave for another occasion the issues of broader structural and statutory change, such as those raised by the Treasury's blueprint for regulatory reform.2
Strengthening the Financial Infrastructure
An effective means of increasing the resilience of the financial system is to strengthen its infrastructure. For my purposes today, I want to construe ``financial infrastructure'' very broadly, to include not only the ``hardware'' components of that infrastructure--the physical systems on which market participants rely for the quick and accurate execution, clearing, and settlement of transactions--but also the associated ``software,'' including the statutory, regulatory, and contractual frameworks and the business practices that govern the actions and obligations of market participants on both sides of each transaction. Of course, a robust financial infrastructure has many benefits even in normal times, including lower transactions costs and greater market liquidity. In periods of extreme stress, however, the quality of the financial infrastructure may prove critical. For example, it greatly affects the ability of market participants to quickly determine their own positions and exposures, including exposures to key counterparties, and to adjust their positions as necessary. When positions and exposures cannot be determined rapidly--as was the case, for example, when program trades overwhelmed the system during the 1987 stock market crash--potential outcomes include highly risk-averse behavior by market participants, sharp declines in market liquidity, and high volatility in asset prices. The financial infrastructure also has important effects on how market participants respond to perceived changes in counterparty risk. For example, during a period of heightened stress, participants may be willing to provide liquidity to a market if a strong central counterparty is present but not otherwise.
Considerations of this type were very much in our minds during the Bear Stearns episode in March. The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Many short-term lenders declined to renew their loans, driving Bear to the brink of default.
Although not an extraordinarily large company by many metrics, Bear Stearns was deeply involved in a number of critical markets, including (as I have noted) markets for short-term secured funding as well as those for over-the-counter (OTC) derivatives. One of our concerns was that the infrastructures of those markets and the risk- and liquidity-management practices of market participants would not be adequate to deal in an orderly way with the collapse of a major counterparty. With financial conditions already quite fragile, the sudden, unanticipated failure of Bear Stearns would have led to a sharp unwinding of positions in those markets that could have severely shaken the confidence of market participants. The company's failure could also have cast doubt on the financial conditions of some of Bear Stearns's many counterparties or of companies with similar businesses and funding practices, impairing the ability of those firms to meet their funding needs or to carry out normal transactions. As more firms lost access to funding, the vicious circle of forced selling, increased volatility, and higher haircuts and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions. Largely because of these concerns, the Federal Reserve took actions that facilitated the purchase of Bear Stearns and the assumption of Bear's financial obligations by JPMorgan Chase & Co.
This experience has led me to believe that one of the best ways to protect the financial system against future systemic shocks, including the possible failure of a major counterparty, is by strengthening the financial infrastructure, including both the ``hardware'' and the ``software'' components. The Federal Reserve, in collaboration with the private sector and other regulators, is intensively engaged in such efforts. For example, since September 2005, the Federal Reserve Bank of New York has been leading a joint public-private initiative to improve arrangements for clearing and settling trades in credit default swaps and other OTC derivatives. These efforts include gaining commitments from private-sector participants to automate and standardize the clearing and settlement process, encouraging improved netting and cash settlement arrangements, and supporting the development of a central counterparty for credit default swaps. More generally, although customized derivatives contracts between sophisticated counterparties will continue to be appropriate in many situations, on the margin it appears that a migration of derivatives trading toward more-standardized instruments and the increased use of well-managed central counterparties, either linked to or independent of exchanges, could have a systemic benefit.
The Federal Reserve and other authorities also are focusing on enhancing the resilience of the markets for triparty repurchase agreements (repos). In the triparty repo market, primary dealers and other large banks and broker-dealers obtain very large amounts of secured financing from money funds and other short- term, risk-averse investors. We are encouraging firms to improve their management of liquidity risk and to reduce over time their reliance on triparty repos for overnight financing of less- liquid forms of collateral. In the longer term, we need to ensure that there are robust contingency plans for managing, in an orderly manner, the default of a major participant. We should also explore possible means of reducing this market's dependence on large amounts of intraday credit from the banks that facilitate the settlement of triparty repos. The attainment of these objectives might be facilitated by the introduction of a central counterparty but may also be achievable under the current framework for clearing and settlement.
Of course, like other central banks, the Federal Reserve continues to monitor systemically important payment and settlement systems and to compare their performance with international standards for reliability, efficiency, and safety. Unlike most other central banks, however, the Federal Reserve does not have general statutory authority to oversee these systems. Instead, we rely on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion, to help ensure that the various payment and settlement systems have the necessary procedures and controls in place to manage the risks they face. As part of any larger reform, the Congress should consider granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.
Yet another key component of the software of the financial infrastructure is the set of rules and procedures used to resolve claims on a market participant that has defaulted on its obligations. In the overwhelming majority of cases, the bankruptcy laws and contractual agreements serve this function well. However, in the rare circumstances in which the impending or actual failure of an institution imposes substantial systemic risks, the standard procedures for resolving institutions may be inadequate. In the Bear Stearns case, the government's response was severely complicated by the lack of a clear statutory framework for dealing with such a situation. As I have suggested on other occasions, the Congress may wish to consider whether such a framework should be set up for a defined set of nonbank institutions.3 A possible approach would be to give an agency-- the Treasury seems an appropriate choice--the responsibility and the resources, under carefully specified conditions and in consultation with the appropriate supervisors, to intervene in cases in which an impending default by a major nonbank financial institution is judged to carry significant systemic risks. The implementation of such a resolution scheme does raise a number of complex issues, however, and further study will be needed to develop specific, workable proposals.
A stronger infrastructure would help to reduce systemic risk. Importantly, as my FOMC colleague Gary Stern has pointed out, it would also mitigate moral hazard and the problem of ``too big to fail'' by reducing the range of circumstances in which systemic stability concerns might be expected by markets to prompt government intervention.4 A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.
A Systemwide Approach to Supervisory Oversight
The regulation and supervisory oversight of financial institutions is another critical tool for limiting systemic risk. In general, effective government oversight of individual institutions increases financial resilience and reduces moral hazard by attempting to ensure that all financial firms with access to some sort of federal safety net--including those that creditors may believe are too big to fail--maintain adequate buffers of capital and liquidity and develop comprehensive approaches to risk and liquidity management. Importantly, a well-designed supervisory regime complements rather than supplants market discipline. Indeed, regulation can serve to strengthen market discipline, for example, by mandating a transparent disclosure regime for financial firms.
Going forward, a critical question for regulators and supervisors is what their appropriate ``field of vision'' should be. Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.
At least informally, financial regulation and supervision in the United States already include some macroprudential elements. As one illustration, many of the supervisory guidances issued by federal bank regulators have been motivated, at least in part, by concerns that a particular industry trend posed risks to the stability of the banking system as a whole, not just to individual institutions. For example, following lengthy comment periods, in 2006, the federal banking supervisors issued formal guidance on underwriting and managing the risks of nontraditional mortgages, such as interest-only and negative amortization mortgages, as well as guidance warning banks against excessive concentrations in commercial real estate lending. These guidances likely would not have been issued if the federal regulators had viewed the issues they addressed as being isolated to a few banks. The regulators were concerned not only about individual banks but also about the systemic risks associated with excessive industry-wide concentrations (of commercial real estate or nontraditional mortgages) or an industry-wide pattern of certain practices (for example, in underwriting exotic mortgages). Note that, in warning against excessive concentrations or common exposures across the banking system, regulators need not make a judgment about whether a particular asset class is mispriced--although rapid changes in asset prices or risk premiums may increase the level of concern. Rather, their task is to determine the risks imposed on the system as a whole if common exposures significantly increase the correlation of returns across institutions.
The development of supervisory guidances is a process which often involves soliciting comments from the industry and the public and, where applicable, developing a consensus among the banking regulators. In that respect, the process is not always as nimble as we might like. For that reason, less-formal processes may sometimes be more effective and timely. As a case in point, the Federal Reserve--in close cooperation with other domestic and foreign regulators--regularly conducts so-called horizontal reviews of large financial institutions, focused on specific issues and practices. Recent reviews have considered topics such as leveraged loans, enterprise-wide risk management, and liquidity practices. The lessons learned from these reviews are shared with both the institutions participating in these reviews as well as other institutions for which the information might be beneficial. Like supervisory guidance, these reviews help increase the safety and soundness of individual institutions but they may also identify common weaknesses and risks that may have implications for broader systemic stability. In my view, making the systemic risk rationale for guidances and reviews more explicit is certainly feasible and would be a useful step toward a more systemic orientation for financial regulation and supervision.
A systemwide focus for financial regulation would also increase attention to how the incentives and constraints created by regulations affect behavior, especially risk-taking, through the credit cycle. During a period of economic weakness, for example, a prudential supervisor concerned only with the safety and soundness of a particular institution will tend to push for very conservative lending policies. In contrast, the macroprudential supervisor would recognize that, for the system as a whole, excessively conservative lending policies could prove counterproductive if they contribute to a weaker economic and credit environment. Similarly, risk concentrations that might be acceptable at a single institution in a period of economic expansion could be dangerous if they existed at a large number of institutions simultaneously. I do not have the time today to do justice to the question of the procyclicality of, say, capital regulations and accounting rules. This topic has received a great deal of attention elsewhere and has also engaged the attention of regulators; in particular, the framers of the Basel II capital accord have made significant efforts to measure regulatory capital needs ``through the cycle'' to mitigate procyclicality. However, as we consider ways to strengthen the system for the future in light of what we have learned over the past year, we should critically examine capital regulations, provisioning policies, and other rules applied to financial institutions to determine whether, collectively, they increase the procyclicality of credit extension beyond the point that is best for the system as a whole.
A yet more ambitious approach to macroprudential regulation would involve an attempt by regulators to develop a more fully integrated overview of the entire financial system. In principle, such an approach would appear well justified, as our financial system has become less bank-centered and because activities or risk-taking not permitted to regulated institutions have a way of migrating to other financial firms or markets. Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise. It would likely require at least periodic surveillance and information-gathering from a wide range of nonbank institutions. Increased coordination would be required among the private- and public-sector supervisors of exchanges and other financial markets to keep up to date with evolving practices and products and to try to identify those which may pose risks outside the purview of each individual regulator. International regulatory coordination, already quite extensive, would need to be expanded further.
One might imagine also conducting formal stress tests, not at the firm level as occurs now, but for a range of firms and markets simultaneously. Doing so might reveal important interactions that are missed by stress tests at the level of the individual firm. For example, such an exercise might suggest that a sharp change in asset prices would not only affect the value of a particular firm's holdings but also impair liquidity in key markets, with adverse consequences for the ability of the firm to adjust its risk positions or obtain funding. Systemwide stress tests might also highlight common exposures and ``crowded trades'' that would not be visible in tests confined to one firm. Again, however, we should not underestimate the technical and information requirements of conducting such exercises effectively. Financial markets move swiftly, firms' holdings and exposures change every day, and financial transactions do not respect national boundaries. Thus, the information requirements for conducting truly comprehensive macroprudential surveillance could be daunting indeed.
Macroprudential supervision also presents communication issues. For example, the expectations of the public and of financial market participants would have to be managed carefully, as such an approach would never eliminate financial crises entirely. Indeed, an expectation by financial market participants that financial crises will never occur would create its own form of moral hazard and encourage behavior that would make financial crises more, rather than less, likely.
With all these caveats, I believe that an increased focus on systemwide risks by regulators and supervisors is inevitable and desirable. However, as we proceed in that direction, we would be wise to maintain a realistic appreciation of the difficulties of comprehensive oversight in a financial system as large, diverse, and globalized as ours.
Conclusion
Although we at the Federal Reserve remain focused on addressing the current risks to economic and financial stability, we have also begun thinking about the lessons for the future. I have discussed today two strategies for reducing systemic risk: strengthening the financial infrastructure, broadly construed, and increasing the systemwide focus of financial regulation and supervision. Work on the financial infrastructure is already well under way, and I expect further progress as the public and private sectors cooperate to address common concerns. The adoption of a regulatory and supervisory approach with a heavier macroprudential focus has a strong rationale, but we should be careful about over-promising, as we are still rather far from having the capacity to implement such an approach in a thoroughgoing way. The Federal Reserve will continue to work with the Congress, other regulators, and the private sector to explore this and other strategies to increase financial stability.
When we last met here in Jackson Hole, the nature of the financial crisis and its implications for the economy were just coming into view. A year later, many challenges remain. I look forward to the insights into this experience that will be provided by the papers at this conference.''
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Footnotes
1. See, for example, Ben S. Bernanke (2008), ``Liquidity Provision by the Federal Reserve,'' speech delivered (via satellite) at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Ga., May 13. Return to text
2. See Department of the Treasury (March 2008), Blueprint for a Modernized Financial Regulatory Structure. Return to text
3. Ben S. Bernanke (2008), ``Financial Regulation and Financial Stability,'' speech delivered at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households, Arlington, Va., July 8. Return to text
4. See, for example, Gary H. Stern and Ron J. Feldman (2004), Too Big to Fail: The Hazards of Bank Bailouts (Washington: Brookings Institution Press). Return to text
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Total to Start Unit at Port Arthur Oil Refinery Today
By Nidaa Bakhsh
Aug. 22 (Bloomberg) -- Total SA, Europe's third-largest oil company, will start a unit at its Port Arthur refinery in Texas today following an ``economic'' shutdown.
The unit, an isomerization plant, will restart around 8 a.m. local time, resulting in flaring, or burning of chemicals into the air, according to a filing with the Texas Commission on Environmental Quality. The emissions event is expected to last until 2 p.m. tomorrow. Isomerization units produce components for gasoline that boost the motor fuel's performance.
Total may flare as much as 8,500 pounds of carbon monoxide from three stacks, the Paris-based company said in the filing. The Port Arthur plant can process 240,000 barrels of oil a day, according to the U.S. Energy department.
All associated units are ``running normally,'' Total said in the filing. Flares are safety devices that prevent pressure from building up within refinery processing units.
Royal Dutch Shell Plc and BP Plc are Europe's two largest oil companies.
To contact the reporter on this story: Nidaa Bakhsh in London at nbakhsh@bloomberg.net
Read more...
Aug. 22 (Bloomberg) -- Total SA, Europe's third-largest oil company, will start a unit at its Port Arthur refinery in Texas today following an ``economic'' shutdown.
The unit, an isomerization plant, will restart around 8 a.m. local time, resulting in flaring, or burning of chemicals into the air, according to a filing with the Texas Commission on Environmental Quality. The emissions event is expected to last until 2 p.m. tomorrow. Isomerization units produce components for gasoline that boost the motor fuel's performance.
Total may flare as much as 8,500 pounds of carbon monoxide from three stacks, the Paris-based company said in the filing. The Port Arthur plant can process 240,000 barrels of oil a day, according to the U.S. Energy department.
All associated units are ``running normally,'' Total said in the filing. Flares are safety devices that prevent pressure from building up within refinery processing units.
Royal Dutch Shell Plc and BP Plc are Europe's two largest oil companies.
To contact the reporter on this story: Nidaa Bakhsh in London at nbakhsh@bloomberg.net
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Natural Gas Declines on Outlook Economy to Weaken, Crude Slumps
By Reg Curren
Aug. 22 (Bloomberg) -- Natural gas in New York fell amid speculation demand will decline as the U.S. economy slows and as crude oil slumped.
Turmoil in world credit markets will continue to hamper the global economy and there's little central banks can do to correct it, analysts said. Crude slipped as the U.S. dollar strengthened and the flow of oil was restored through a Caspian Sea pipeline in Turkey. A rising dollar prompts investors using commodities as an inflation hedge to exit the market.
Gas is ``taking a cue from crude,'' said Tom Orr, director of research at Weeden & Co. in Greenwich, Connecticut. ``There's nothing'' to lift gas today.
Natural gas for September delivery fell 6.9 cents, or 0.8 percent, to $8.184 per million British thermal units at 9:55 a.m. on the New York Mercantile Exchange. Futures have tumbled 40 percent since closing at $13.577 on July 3, a 30-month high. Gas is selling below its 200-day moving average of $9.593.
Crude oil for October delivery fell $2.48, or 2.1 percent, to $118.70 a barrel in New York. Futures reached a record $147.27 on July 11.
In the U.S., borrowing premiums for banks and corporations are at their highest in months, prolonging the drag on growth.
Reports in the last week showing a surge in inflation reinforce expectations that Federal Reserve Chairman Ben S. Bernanke will have to keep U.S. interest rates on hold.
Dollar Declines
The dollar traded at $1.4815 at 9:56 a.m. in New York from $1.4899 yesterday. The U.S. currency has climbed versus the euro since touching an all-time low of $1.6038 on July 15.
Mild weather and higher gas inventory growth are also weighing on gas, Orr said. Moderate weather limits the demand for gas-fired power generation to run air conditioners.
The U.S. Energy Department reported supplies increased for the week ended Aug. 15. Inventories rose 88 billion cubic feet to 2.655 trillion, the department said. Stockpiles are 1 percent above the five-year average of 2.629 billion, according to department data.
Analysts expected supplies to gain 84 billion cubic feet. The average change for this time of year over the past five is an increase of 56 billion.
To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.
Read more...
Aug. 22 (Bloomberg) -- Natural gas in New York fell amid speculation demand will decline as the U.S. economy slows and as crude oil slumped.
Turmoil in world credit markets will continue to hamper the global economy and there's little central banks can do to correct it, analysts said. Crude slipped as the U.S. dollar strengthened and the flow of oil was restored through a Caspian Sea pipeline in Turkey. A rising dollar prompts investors using commodities as an inflation hedge to exit the market.
Gas is ``taking a cue from crude,'' said Tom Orr, director of research at Weeden & Co. in Greenwich, Connecticut. ``There's nothing'' to lift gas today.
Natural gas for September delivery fell 6.9 cents, or 0.8 percent, to $8.184 per million British thermal units at 9:55 a.m. on the New York Mercantile Exchange. Futures have tumbled 40 percent since closing at $13.577 on July 3, a 30-month high. Gas is selling below its 200-day moving average of $9.593.
Crude oil for October delivery fell $2.48, or 2.1 percent, to $118.70 a barrel in New York. Futures reached a record $147.27 on July 11.
In the U.S., borrowing premiums for banks and corporations are at their highest in months, prolonging the drag on growth.
Reports in the last week showing a surge in inflation reinforce expectations that Federal Reserve Chairman Ben S. Bernanke will have to keep U.S. interest rates on hold.
Dollar Declines
The dollar traded at $1.4815 at 9:56 a.m. in New York from $1.4899 yesterday. The U.S. currency has climbed versus the euro since touching an all-time low of $1.6038 on July 15.
Mild weather and higher gas inventory growth are also weighing on gas, Orr said. Moderate weather limits the demand for gas-fired power generation to run air conditioners.
The U.S. Energy Department reported supplies increased for the week ended Aug. 15. Inventories rose 88 billion cubic feet to 2.655 trillion, the department said. Stockpiles are 1 percent above the five-year average of 2.629 billion, according to department data.
Analysts expected supplies to gain 84 billion cubic feet. The average change for this time of year over the past five is an increase of 56 billion.
To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.
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Triodos Seeks to Boost Funds on Windfarms, Energy Efficiency
By Paul Dobson and Mathew Carr
Aug. 22 (Bloomberg) -- Triodos Bank NV, a Dutch lender and investment manager, will likely boost clean technology funds under management by half within three years as it helps finance windfarms and energy efficiency projects.
``The projects are out there,'' James Vaccaro, who manages 40 million pounds ($74 million) of investments in the U.K. for the Zeist-based bank, said in an interview on Aug. 19. ``We would expect very strong growth.''
The bank has about 1 billion euros ($1.5 billion) invested in and loaned to renewable energy and fuel-saving projects, which will grow as it helps build offshore windfarms near Germany and the Netherlands and solar generation in Spain, Vaccaro said. Some projects are profitable because they curb energy consumption, enabling the bank to share the lower fuel and power costs with customers, he said.
The European Union is seeking to curb greenhouse gas emissions by as much as 30 percent by 2020 compared with 1990 levels. Triodos's total assets under management more than doubled in the past five years to 3.3 billion euros as of Dec. 31 after it focused on investments to curb fossil-fuel use, promote healthy eating and benefit culture and the arts, the 2007 annual report said.
``The oil price does not have to be higher for there to be meaningful incentive'' to investment in non-fossil-fuel projects, Vaccaro said.
Triodos's Ampere Equity Fund has this year raised 400 million euros, which the group is starting to invest in about 4,500 megawatts of renewable energy, he said. That's enough for about 4 million homes. Investors included ABP Dutch General Pension Fund and Delta Lloyd Fund Managers.
U.K. Raising
In the U.K., Triodos in July raised 10 million pounds, mainly for windfarms, Vaccaro said. A ``small'' portion of that will likely be invested in tidal-energy projects, he said.
At one U.K. farm, Caton Moor, 10 original turbines were replaced by eight larger, more efficient machines, boosting capacity by seven times, Vaccaro said. The farm now produces enough power for about 10,000 homes.
One of the biggest risks of these projects is that they will be delayed because of poor planning rules or uncertainy over government subsidies, the executive said.
Total funds entrusted to the bank, including deposits and investment funds, rose 17 percent last year, the annual report said. Net profit jumped 46 percent to 9 million euros.
The bank seeks consistent, rather than fast, growth, Vaccaro said today by phone. ``We don't have any exposure to sub-prime'' mortgage markets, he said. ``We are based in the real economy.''
To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net
Read more...
Aug. 22 (Bloomberg) -- Triodos Bank NV, a Dutch lender and investment manager, will likely boost clean technology funds under management by half within three years as it helps finance windfarms and energy efficiency projects.
``The projects are out there,'' James Vaccaro, who manages 40 million pounds ($74 million) of investments in the U.K. for the Zeist-based bank, said in an interview on Aug. 19. ``We would expect very strong growth.''
The bank has about 1 billion euros ($1.5 billion) invested in and loaned to renewable energy and fuel-saving projects, which will grow as it helps build offshore windfarms near Germany and the Netherlands and solar generation in Spain, Vaccaro said. Some projects are profitable because they curb energy consumption, enabling the bank to share the lower fuel and power costs with customers, he said.
The European Union is seeking to curb greenhouse gas emissions by as much as 30 percent by 2020 compared with 1990 levels. Triodos's total assets under management more than doubled in the past five years to 3.3 billion euros as of Dec. 31 after it focused on investments to curb fossil-fuel use, promote healthy eating and benefit culture and the arts, the 2007 annual report said.
``The oil price does not have to be higher for there to be meaningful incentive'' to investment in non-fossil-fuel projects, Vaccaro said.
Triodos's Ampere Equity Fund has this year raised 400 million euros, which the group is starting to invest in about 4,500 megawatts of renewable energy, he said. That's enough for about 4 million homes. Investors included ABP Dutch General Pension Fund and Delta Lloyd Fund Managers.
U.K. Raising
In the U.K., Triodos in July raised 10 million pounds, mainly for windfarms, Vaccaro said. A ``small'' portion of that will likely be invested in tidal-energy projects, he said.
At one U.K. farm, Caton Moor, 10 original turbines were replaced by eight larger, more efficient machines, boosting capacity by seven times, Vaccaro said. The farm now produces enough power for about 10,000 homes.
One of the biggest risks of these projects is that they will be delayed because of poor planning rules or uncertainy over government subsidies, the executive said.
Total funds entrusted to the bank, including deposits and investment funds, rose 17 percent last year, the annual report said. Net profit jumped 46 percent to 9 million euros.
The bank seeks consistent, rather than fast, growth, Vaccaro said today by phone. ``We don't have any exposure to sub-prime'' mortgage markets, he said. ``We are based in the real economy.''
To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net
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Gazprom Falls as Analysts `Shocked' by Spending Plan
By William Mauldin and Greg Walters
Aug. 22 (Bloomberg) -- OAO Gazprom, the world's biggest natural-gas producer, fell in Moscow trading after analysts said they were ``shocked'' by the company's plans to raise its investment budget to more than $40 billion this year.
Gazprom shares fell 7.35 rubles, or 2.9 percent, to 243.01 rubles on the Micex Stock Exchange as of 3:25 p.m. local time, poised for their first decline in three days.
Russia's natural-gas exporter may raise its investment budget for 2008 by about 25 percent, Interfax reported yesterday, citing Deputy Chief Executive Officer Valery Golubev. Gazprom last month already increased the budget for 2008 by 16 percent to a record 822 billion rubles ($33.8 billion). A spokeswoman for Gazprom, who asked not to be identified, said today the company had no comment on the matter.
``We're shocked by the magnitude of the numbers, especially given that the company revised its investment plans only a month ago,'' Troika Dialog analysts Oleg Maximov, Valery Nesterov and Alex Fak wrote in a note to investors today. ``This raises questions about whether the management actually intends to generate any meaningful free cash flow.''
JPMorgan Doubts
JPMorgan Chase & Co.'s Moscow-based analysts said in a note today that they ``doubt'' the ability of Russia's biggest company to invest that amount of money efficiently. The spending signals ``potential value destruction'' for the stock, the bank said in the note.
Gazprom in July said it increased spending in part to accelerate the development of new projects in the Arctic and eastern Russia. The company said it would speed up development of the Bovanenkovskoye field, its first production site on the Arctic Yamal peninsula.
The spending increase ``limits the likelihood of the company returning value to the shareholders in the short term,'' Evgenia Dyshlyuk, oil and gas analyst at Moscow-based Renaissance Capital, said in an e-mail to investors today.
State-run Gazprom, which supplies a quarter of Europe's gas, faces declining output as fields in west Siberia age. The company is being forced to develop fields far from existing infrastructure in the Arctic, eastern Siberia and off Russia's coasts.
Gazprom plans to spend as much as 10 trillion rubles ($411 billion) bringing new gas to market, Sergei Pankratov, Gazprom's deputy head of strategic development, said in Moscow on June 16.
``Gazprom is sticking to its policy of allocating windfall revenue to the investment line of the cash flow statement,'' analysts Artem Konchin and Pavel Sorokin wrote in an e-mailed note to investors today. ``While investors may prefer dividends, we would reserve judgment until the returns on this investment can be assessed.''
To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net. Greg Walters in Moscow gwalters1@bloomberg.net
Read more...
Aug. 22 (Bloomberg) -- OAO Gazprom, the world's biggest natural-gas producer, fell in Moscow trading after analysts said they were ``shocked'' by the company's plans to raise its investment budget to more than $40 billion this year.
Gazprom shares fell 7.35 rubles, or 2.9 percent, to 243.01 rubles on the Micex Stock Exchange as of 3:25 p.m. local time, poised for their first decline in three days.
Russia's natural-gas exporter may raise its investment budget for 2008 by about 25 percent, Interfax reported yesterday, citing Deputy Chief Executive Officer Valery Golubev. Gazprom last month already increased the budget for 2008 by 16 percent to a record 822 billion rubles ($33.8 billion). A spokeswoman for Gazprom, who asked not to be identified, said today the company had no comment on the matter.
``We're shocked by the magnitude of the numbers, especially given that the company revised its investment plans only a month ago,'' Troika Dialog analysts Oleg Maximov, Valery Nesterov and Alex Fak wrote in a note to investors today. ``This raises questions about whether the management actually intends to generate any meaningful free cash flow.''
JPMorgan Doubts
JPMorgan Chase & Co.'s Moscow-based analysts said in a note today that they ``doubt'' the ability of Russia's biggest company to invest that amount of money efficiently. The spending signals ``potential value destruction'' for the stock, the bank said in the note.
Gazprom in July said it increased spending in part to accelerate the development of new projects in the Arctic and eastern Russia. The company said it would speed up development of the Bovanenkovskoye field, its first production site on the Arctic Yamal peninsula.
The spending increase ``limits the likelihood of the company returning value to the shareholders in the short term,'' Evgenia Dyshlyuk, oil and gas analyst at Moscow-based Renaissance Capital, said in an e-mail to investors today.
State-run Gazprom, which supplies a quarter of Europe's gas, faces declining output as fields in west Siberia age. The company is being forced to develop fields far from existing infrastructure in the Arctic, eastern Siberia and off Russia's coasts.
Gazprom plans to spend as much as 10 trillion rubles ($411 billion) bringing new gas to market, Sergei Pankratov, Gazprom's deputy head of strategic development, said in Moscow on June 16.
``Gazprom is sticking to its policy of allocating windfall revenue to the investment line of the cash flow statement,'' analysts Artem Konchin and Pavel Sorokin wrote in an e-mailed note to investors today. ``While investors may prefer dividends, we would reserve judgment until the returns on this investment can be assessed.''
To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net. Greg Walters in Moscow gwalters1@bloomberg.net
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Khodorkovsky to Appeal After Court Denies Parole, Lawyer Says
By Greg Walters
Aug. 22 (Bloomberg) -- Mikhail Khodorkovsky, the imprisoned former chief executive officer of OAO Yukos Oil Co., plans to appeal a court ruling today denying him parole, his lawyer said.
``Frankly speaking, we never had any illusions,'' Yuri Schmidt said by mobile telephone from St. Petersburg. ``We tried to let all of society understand through our statements that freeing Khodorkovsky would be a just and lawful step.''
Khodorkovsky, once Russia's richest man, is serving an eight- year sentence for fraud and tax evasion, while he faces new charges of embezzlement and money-laundering that could add 20 years to his term. The court in the Siberian city of Chita gave Khodorkovsky's legal team 10 days to appeal, Schmidt said.
``I have every right to regain my liberty,'' Khodorkovsky said in a statement posted on his Web site before the ruling. ``I am counting on the implementation of this right.''
The former executive denies the accusations, saying they are politically motivated by his opposition to President Dmitry Medvedev's predecessor, Vladimir Putin, who is now prime minister.
State-run OAO Rosneft now controls most of the former assets of bankrupt Yukos.
To contact the reporter on this story: Greg Walters in Moscow gwalters1@bloomberg.net
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Aug. 22 (Bloomberg) -- Mikhail Khodorkovsky, the imprisoned former chief executive officer of OAO Yukos Oil Co., plans to appeal a court ruling today denying him parole, his lawyer said.
``Frankly speaking, we never had any illusions,'' Yuri Schmidt said by mobile telephone from St. Petersburg. ``We tried to let all of society understand through our statements that freeing Khodorkovsky would be a just and lawful step.''
Khodorkovsky, once Russia's richest man, is serving an eight- year sentence for fraud and tax evasion, while he faces new charges of embezzlement and money-laundering that could add 20 years to his term. The court in the Siberian city of Chita gave Khodorkovsky's legal team 10 days to appeal, Schmidt said.
``I have every right to regain my liberty,'' Khodorkovsky said in a statement posted on his Web site before the ruling. ``I am counting on the implementation of this right.''
The former executive denies the accusations, saying they are politically motivated by his opposition to President Dmitry Medvedev's predecessor, Vladimir Putin, who is now prime minister.
State-run OAO Rosneft now controls most of the former assets of bankrupt Yukos.
To contact the reporter on this story: Greg Walters in Moscow gwalters1@bloomberg.net
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OPEC Supply to Rise in August, PetroLogistics Says
By Grant Smith
Aug. 22 (Bloomberg) -- OPEC's oil supply will probably increase in August by 400,000 barrels a day, or 1.2 percent, as Iran releases crude held in storage, according to preliminary estimates from PetroLogistics Ltd.
The 13 members of the Organization of Petroleum Exporting Countries will provide 32.9 million barrels daily this month, compared with 32.5 million a day in July, PetroLogistics founder Conrad Gerber said by telephone from Geneva. OPEC contributes more than 40 percent of the world's oil.
The increase is ``largely or entirely due to Iranian exports going up in August, as in July they were really down,'' Gerber said. Angola contributed to the increase in August shipments, he added.
Iran, the group's second-largest member, raised supplies to 4 million barrels a day in August from 3.65 million in the previous month, according to PetroLogistics. Angola provided markets with 2.07 million barrels a day in August.
Saudi Arabia, the largest exporter, supplied 9.45 million barrels a day this month compared with 9.47 million last month, after completing its pledge to boost production in a bid to cool prices, Gerber said. Iraqi supplies slipped to 2.32 million barrels a day this month from 2.345 million a day in July.
The 13 members of OPEC, 12 of which are subject to its quota system, will next meet to review production targets in Vienna on Sept. 9 and then in Algeria on Dec. 17. The group has maintained an official output limit of 29.67 million barrels a day this year.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
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Aug. 22 (Bloomberg) -- OPEC's oil supply will probably increase in August by 400,000 barrels a day, or 1.2 percent, as Iran releases crude held in storage, according to preliminary estimates from PetroLogistics Ltd.
The 13 members of the Organization of Petroleum Exporting Countries will provide 32.9 million barrels daily this month, compared with 32.5 million a day in July, PetroLogistics founder Conrad Gerber said by telephone from Geneva. OPEC contributes more than 40 percent of the world's oil.
The increase is ``largely or entirely due to Iranian exports going up in August, as in July they were really down,'' Gerber said. Angola contributed to the increase in August shipments, he added.
Iran, the group's second-largest member, raised supplies to 4 million barrels a day in August from 3.65 million in the previous month, according to PetroLogistics. Angola provided markets with 2.07 million barrels a day in August.
Saudi Arabia, the largest exporter, supplied 9.45 million barrels a day this month compared with 9.47 million last month, after completing its pledge to boost production in a bid to cool prices, Gerber said. Iraqi supplies slipped to 2.32 million barrels a day this month from 2.345 million a day in July.
The 13 members of OPEC, 12 of which are subject to its quota system, will next meet to review production targets in Vienna on Sept. 9 and then in Algeria on Dec. 17. The group has maintained an official output limit of 29.67 million barrels a day this year.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
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Nordic Commodity, ECM Post Top Power Hedge-Fund Gains
By Lars Paulsson
Aug. 22 (Bloomberg) -- Energy Capital Management and Nordic Commodity Funds AB's hedge funds are outperforming the competition in European energy markets, where power prices fell as much as 17 percent last month from a record.
Energy Capital's MMT fund returned 19.2 percent through July, according to a letter to investors, the best result in a Bloomberg survey of 11 funds in Europe's electricity, coal, natural-gas and emissions markets. Alfakraft AB's Alfa Energy Fund posted the biggest drop, at 17.9 percent, according to its Web site.
The plunge in power prices and related commodities since early July ended a four-year surge in electricity costs that enabled funds to provide better returns than stocks and bonds. Coal costs, which affect European power markets, more than doubled in the first half, before sliding 13 percent in July.
``It was difficult to predict the market, with big swings in coal prices and weather patterns,'' said Fredrik Bodecker, managing director of Nordic Commodity Funds in Stockholm, whose Nordic Power Fund rose 16.6 percent through the first seven months of 2008.
German power for delivery in 2009, the benchmark contract, had its biggest price fluctuations in two years in July and was down 6.5 percent yesterday from its record. On July 23, 10-day volatility was as high as 42.8 percent, according to data compiled by Bloomberg. Volatility is a gauge of price swings during a specific period, expressed as an annual percentage.
Nordic Market
In the Nordic market, the most actively traded quarterly power contract slid 8.1 percent on July 2, its biggest one-day decline. The price reached a record a day earlier.
Alfakraft, Nordic Commodity Funds and Norden Absolute Energy Management ASA all target annual returns of 15 percent to 25 percent, while Shepherd Energy aims for 15 percent to 20 percent, according to the funds.
The MMT Energy Fund ``is capable of 30 percent plus returns in a good year,'' according to Energy Capital Management's Web site. Chief Executive Officer Marcel Melis declined to comment.
``It's possible if you've had a lucky streak, but funds with returns of 15 to 20 percent this year will be few and far between,'' said Gary Vasey, general manager for Europe at Utilipoint International Inc., an energy market consultant. Vasey is also founder of New York-based Energy Hedge Fund Center LLC.
Power Funds Beat Others
Gardner Finance AG's PowerMacroIndex, which pools the performance of eight electricity hedge funds, was up 6.55 percent through June, compared with 21.2 percent for all of 2007. Data for the year through July wasn't available.
Power funds are beating the average hedge fund. The typical global hedge fund dropped 3.5 percent this year through July, according to Chicago-based Hedge Fund Research Inc. Last year they gained 10.2 percent. An investment tracking the Standard & Poor's 500 Index declined 13 percent this year through Aug. 20.
Power and utility funds are part of the $70 billion managed by commodity hedge funds, according to Cole Partners Asset Management LLC in Chicago, an investor in the industry.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.
Nordic Commodity's Bodecker plans to increase the Nordic Power Fund at least 10-fold to 200 million to 300 million euros ($446 million) by the end of next year. He may start a second fund for German power, gas, coal and emissions this year, targeting 25 million euros to 30 million euros.
Increased Risks
The Nordic Power Fund posted its biggest gains of 10.38 percent in February and 6.28 percent in June.
``We increased the risks when we started to make money,'' Bodecker said.
Climbing coal costs caused by rising demand in Asia and production bottlenecks in Australia were among the main drivers of European power prices this spring, fund managers said.
``The market has generally been very choppy and difficult,'' Peter Brewer, chief investment officer at PCI Investors Ltd. in London, said in an interview. The company's Cumulus Weather Fund lost 8.8 percent in the six months through June, according to a letter to investors. Brewer declined to comment on the performance.
Coal prices in northwest Europe have tumbled 12 percent since a July 1 record and are up about 80 percent this year.
``They've added a new dimension to the Nordic power market that traders need to take into account,'' said Bengt Lindblad, managing director at Alfakraft in Stockholm. ``Coal and oil prices will continue to be volatile.''
Oil Volatility
Oil prices influence power because of their link to natural gas, the fuel used to generate 20 percent of the European Union's electricity. Crude oil futures on the New York Mercantile Exchange have declined about 17 percent since trading at a record $147.27 a barrel on July 11.
``We expect continued high volatility in the power markets due to the instability of oil,'' Energy Capital Management said in an investor letter detailing July's return of 5.9 percent, its 12th consecutive monthly gain.
To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net
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Aug. 22 (Bloomberg) -- Energy Capital Management and Nordic Commodity Funds AB's hedge funds are outperforming the competition in European energy markets, where power prices fell as much as 17 percent last month from a record.
Energy Capital's MMT fund returned 19.2 percent through July, according to a letter to investors, the best result in a Bloomberg survey of 11 funds in Europe's electricity, coal, natural-gas and emissions markets. Alfakraft AB's Alfa Energy Fund posted the biggest drop, at 17.9 percent, according to its Web site.
The plunge in power prices and related commodities since early July ended a four-year surge in electricity costs that enabled funds to provide better returns than stocks and bonds. Coal costs, which affect European power markets, more than doubled in the first half, before sliding 13 percent in July.
``It was difficult to predict the market, with big swings in coal prices and weather patterns,'' said Fredrik Bodecker, managing director of Nordic Commodity Funds in Stockholm, whose Nordic Power Fund rose 16.6 percent through the first seven months of 2008.
German power for delivery in 2009, the benchmark contract, had its biggest price fluctuations in two years in July and was down 6.5 percent yesterday from its record. On July 23, 10-day volatility was as high as 42.8 percent, according to data compiled by Bloomberg. Volatility is a gauge of price swings during a specific period, expressed as an annual percentage.
Nordic Market
In the Nordic market, the most actively traded quarterly power contract slid 8.1 percent on July 2, its biggest one-day decline. The price reached a record a day earlier.
Alfakraft, Nordic Commodity Funds and Norden Absolute Energy Management ASA all target annual returns of 15 percent to 25 percent, while Shepherd Energy aims for 15 percent to 20 percent, according to the funds.
The MMT Energy Fund ``is capable of 30 percent plus returns in a good year,'' according to Energy Capital Management's Web site. Chief Executive Officer Marcel Melis declined to comment.
``It's possible if you've had a lucky streak, but funds with returns of 15 to 20 percent this year will be few and far between,'' said Gary Vasey, general manager for Europe at Utilipoint International Inc., an energy market consultant. Vasey is also founder of New York-based Energy Hedge Fund Center LLC.
Power Funds Beat Others
Gardner Finance AG's PowerMacroIndex, which pools the performance of eight electricity hedge funds, was up 6.55 percent through June, compared with 21.2 percent for all of 2007. Data for the year through July wasn't available.
Power funds are beating the average hedge fund. The typical global hedge fund dropped 3.5 percent this year through July, according to Chicago-based Hedge Fund Research Inc. Last year they gained 10.2 percent. An investment tracking the Standard & Poor's 500 Index declined 13 percent this year through Aug. 20.
Power and utility funds are part of the $70 billion managed by commodity hedge funds, according to Cole Partners Asset Management LLC in Chicago, an investor in the industry.
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.
Nordic Commodity's Bodecker plans to increase the Nordic Power Fund at least 10-fold to 200 million to 300 million euros ($446 million) by the end of next year. He may start a second fund for German power, gas, coal and emissions this year, targeting 25 million euros to 30 million euros.
Increased Risks
The Nordic Power Fund posted its biggest gains of 10.38 percent in February and 6.28 percent in June.
``We increased the risks when we started to make money,'' Bodecker said.
Climbing coal costs caused by rising demand in Asia and production bottlenecks in Australia were among the main drivers of European power prices this spring, fund managers said.
``The market has generally been very choppy and difficult,'' Peter Brewer, chief investment officer at PCI Investors Ltd. in London, said in an interview. The company's Cumulus Weather Fund lost 8.8 percent in the six months through June, according to a letter to investors. Brewer declined to comment on the performance.
Coal prices in northwest Europe have tumbled 12 percent since a July 1 record and are up about 80 percent this year.
``They've added a new dimension to the Nordic power market that traders need to take into account,'' said Bengt Lindblad, managing director at Alfakraft in Stockholm. ``Coal and oil prices will continue to be volatile.''
Oil Volatility
Oil prices influence power because of their link to natural gas, the fuel used to generate 20 percent of the European Union's electricity. Crude oil futures on the New York Mercantile Exchange have declined about 17 percent since trading at a record $147.27 a barrel on July 11.
``We expect continued high volatility in the power markets due to the instability of oil,'' Energy Capital Management said in an investor letter detailing July's return of 5.9 percent, its 12th consecutive monthly gain.
Fund Name Net Return Through July
MMT Energy Fund 19.18%
Nordic Power Fund 16.6%
Plenum Power Fund 13.36%
Shepherd Energy Fund 6.34%
Norden Absolute Energy Fund 5.93%
Electris Energy Fund 1.76% THROUGH JUNE
Interkraft Energy Fund 2.24%
Valartis European Energy Fund 0.66%
Markedskraft Elexir 0.04%
Cumulus Weather Fund -8.8% THROUGH JUNE
Alfa Energy Fund -17.9%
To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net
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Crude Oil Falls on Stronger Dollar, Caspian Pipeline Restart
By Mark Shenk
Aug. 22 (Bloomberg) -- Crude oil fell for the first time in four days as the U.S. dollar strengthened and Turkey restored flows through a Caspian Sea pipeline.
Energy futures fell as the rising dollar eased demand for commodities as an inflation hedge. The Baku-Tbilisi-Ceyhan pipeline, which moves oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, resumed normal flows today after a fire shut it earlier this month, a Turkish official said.
``The direction of oil is dependent on what the dollar does right now,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``Oil prices were moving higher overnight but changed direction as the dollar rebounded.''
Crude oil for October delivery fell $2.18, or 1.8 percent, to $119.00 a barrel at 10:08 a.m. on the New York Mercantile Exchange. Prices are up 72 percent from a year ago.
Oil, up 4.5 percent this week, is poised for its biggest weekly gain since early June. Futures are down 19 percent from a record $147.27 reached on July 11.
The dollar rose against the euro as traders judged the U.S. currency's first weekly loss since mid-July to be overdone and as a decline in European industrial orders added to signs of a deepening economic slowdown. Dollar-based commodities such as oil and gold are often viewed by investors as a store of value when the currency weakens.
The dollar climbed 0.6 percent to $1.4812 per euro at 9:44 a.m. in New York, from $1.4899 yesterday, when it fell 1 percent, the biggest decline since June.
Caspian Supplies
BP Plc, Europe's second-largest oil company, StatoilHydro ASA and partners cut output at Caspian oil fields following the closure of the 1,768-kilometer (1,100-mile) link on Aug. 5. The pipeline is used to carry oil from Azerbaijan through Georgia to Turkey, where it's loaded onto tankers for U.S. and European markets. BP said loadings are scheduled to begin next week.
``The pipeline's flow has returned to normal levels,'' Akif Sam, a spokesman for the Turkish Energy Ministry, said in a telephone interview.
A Ceyhan loading schedule yesterday showed 24 cargoes totaling 18.2 million barrels, or an average of 868,155 barrels a day, will be exported from Aug. 25 to Sept. 14.
``The volume of oil will be ramped up over the weekend, and if everything is set, loadings will begin on Monday,'' said Murat Lecompte, a spokesman for BP in Istanbul. He said some of the oil would be used to replenish supply depots.
Russian Invasion
The shutdown of the BTC pipeline was followed three days later by Russia's invasion of Georgia, which further disrupted Caspian fuel shipments.
Russian units sent into Georgia will withdraw today beyond a buffer zone south of the breakaway Georgian region of South Ossetia, Anatoly Nogovitsyn, deputy chief of Russia's General Staff, told reporters in Moscow. That means some troops will remain in Georgia proper.
Brent crude oil for October settlement declined $2.28, or 1.9 percent, to $117.888 a barrel on London's ICE Futures Europe exchange.
The Organization of Petroleum Exporting Countries will probably increase oil supply in August by 400,000 barrels a day, or 1.2 percent, as Iran releases crude oil held in storage, according to preliminary estimates from PetroLogistics Ltd. OPEC will next meet to review production targets on Sept. 9 in Vienna.
Gasoline for September delivery fell 7.54 cents, or 2.5 percent, to $2.9698 a gallon in New York.
Pump prices haven't increased since July 19, according to AAA, the nation's largest motorist organization. Regular gasoline, averaged nationwide, fell 1 cent to $3.692 a gallon, AAA said today on its Web site. Prices reached a record $4.114 a gallon on July 17.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
Read more...
Aug. 22 (Bloomberg) -- Crude oil fell for the first time in four days as the U.S. dollar strengthened and Turkey restored flows through a Caspian Sea pipeline.
Energy futures fell as the rising dollar eased demand for commodities as an inflation hedge. The Baku-Tbilisi-Ceyhan pipeline, which moves oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, resumed normal flows today after a fire shut it earlier this month, a Turkish official said.
``The direction of oil is dependent on what the dollar does right now,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``Oil prices were moving higher overnight but changed direction as the dollar rebounded.''
Crude oil for October delivery fell $2.18, or 1.8 percent, to $119.00 a barrel at 10:08 a.m. on the New York Mercantile Exchange. Prices are up 72 percent from a year ago.
Oil, up 4.5 percent this week, is poised for its biggest weekly gain since early June. Futures are down 19 percent from a record $147.27 reached on July 11.
The dollar rose against the euro as traders judged the U.S. currency's first weekly loss since mid-July to be overdone and as a decline in European industrial orders added to signs of a deepening economic slowdown. Dollar-based commodities such as oil and gold are often viewed by investors as a store of value when the currency weakens.
The dollar climbed 0.6 percent to $1.4812 per euro at 9:44 a.m. in New York, from $1.4899 yesterday, when it fell 1 percent, the biggest decline since June.
Caspian Supplies
BP Plc, Europe's second-largest oil company, StatoilHydro ASA and partners cut output at Caspian oil fields following the closure of the 1,768-kilometer (1,100-mile) link on Aug. 5. The pipeline is used to carry oil from Azerbaijan through Georgia to Turkey, where it's loaded onto tankers for U.S. and European markets. BP said loadings are scheduled to begin next week.
``The pipeline's flow has returned to normal levels,'' Akif Sam, a spokesman for the Turkish Energy Ministry, said in a telephone interview.
A Ceyhan loading schedule yesterday showed 24 cargoes totaling 18.2 million barrels, or an average of 868,155 barrels a day, will be exported from Aug. 25 to Sept. 14.
``The volume of oil will be ramped up over the weekend, and if everything is set, loadings will begin on Monday,'' said Murat Lecompte, a spokesman for BP in Istanbul. He said some of the oil would be used to replenish supply depots.
Russian Invasion
The shutdown of the BTC pipeline was followed three days later by Russia's invasion of Georgia, which further disrupted Caspian fuel shipments.
Russian units sent into Georgia will withdraw today beyond a buffer zone south of the breakaway Georgian region of South Ossetia, Anatoly Nogovitsyn, deputy chief of Russia's General Staff, told reporters in Moscow. That means some troops will remain in Georgia proper.
Brent crude oil for October settlement declined $2.28, or 1.9 percent, to $117.888 a barrel on London's ICE Futures Europe exchange.
The Organization of Petroleum Exporting Countries will probably increase oil supply in August by 400,000 barrels a day, or 1.2 percent, as Iran releases crude oil held in storage, according to preliminary estimates from PetroLogistics Ltd. OPEC will next meet to review production targets on Sept. 9 in Vienna.
Gasoline for September delivery fell 7.54 cents, or 2.5 percent, to $2.9698 a gallon in New York.
Pump prices haven't increased since July 19, according to AAA, the nation's largest motorist organization. Regular gasoline, averaged nationwide, fell 1 cent to $3.692 a gallon, AAA said today on its Web site. Prices reached a record $4.114 a gallon on July 17.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.
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U.K. Pound Falls to One-Week Low Against Euro on Slower Growth
By Lukanyo Mnyanda
Aug. 22 (Bloomberg) -- The U.K. pound fell to the lowest level in a week against the euro after a government report showed economic growth stagnated in the second-quarter, strengthening the case for lower interest rates.
The pound also headed for a fifth week of losses against the dollar, the longest losing streak since February 2006, as the Office for National Statistics said U.K. gross domestic product was unchanged from the previous three months. Inflation risks ``have probably eased a little,'' the minutes of the Bank of England's August rate meeting showed this week.
``This is a pretty toxic environment for the pound,'' said Lee Hardman, a currency strategist in London at the Bank of Tokyo-Mitsubishi Ltd. ``There's a risk of a rate cut in November if the data continues to deteriorate.''
The U.K. currency dropped as much as 0.7 percent to 79.89 pence per euro, the lowest level since Aug. 14, and was at 79.74 by 1:36 p.m. in London, from 79.32 yesterday and 78.70 a week ago. It dropped more than 1 percent to $1.8603, from $1.8782 yesterday. The pound may drop below $1.80 in 12 months, Hardman forecast.
Gross domestic product was unchanged from the first quarter, the Office for National Statistics said, compared with a previous estimate for growth of 0.2 percent. Economists had expected a 0.1 percent expansion, according to the median estimate of 34 economists in a Bloomberg News survey. Growth was 1.4 percent from a year earlier, the weakest since 1992.
The report adds to pressure on the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5 percent.
`Support the Market'
Deutsche Bank AG changed its U.K. interest-rate forecast yesterday and said the central bank will lower borrowing costs by 1 percentage point next year. The benchmark rate will be cut to 4 percent in the first three quarters of 2009, George Buckley, the bank's chief U.K. economist, wrote in an e-mailed note.
``The prime focus remains how soon does inflation come off,'' said Simon Derrick, a currency strategist in London at Bank of New York Mellon Corp. ``And how soon can the Bank of England move to get monetary policy down to a level that will help support the market.''
Gilts rose, with the yield on the 10-year bond falling 1 basis point to 4.56 percent. The price of the 5 percent security due March 2018 rose 0.07, or 70 pence per 1,000-pound face amount, to 103.35. The yield on the two-year gilt, which is more sensitive to interest rate changes, fell 1 basis point to 4.57 percent. Bond yields move inversely to prices.
Economy Falters
The U.K. economy faltered after banks choked off credit following the collapse of the U.S. subprime mortgage market. Still, an inflation rate at more than twice its 2 percent target has prevented the Bank of England's from cutting interest rates to revive the economy.
``It's a disappointing outturn,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc, the U.K.'s second largest lender, in a Bloomberg Television interview. ``It raises the risk of an earlier cut in interest rates.''
Morgan Stanley recommended yesterday investors put on trades that benefit from a drop in the pound against the Australian dollar and Swiss franc on speculation the economic slowdown in the U.K. will deepen.
Investors should enter the so-called short positions at 2.1360 Australian dollars per pound and target a decline in the British currency to 2.0400, Sophia Drossos, a New York-based strategist, wrote in a client note. They should also hold on to so-called short positions on the pound versus the franc, with a target of 1.95, she wrote. A short position is a bet the value of a currency or security will fall.
Spreads Narrow
U.K. bonds have outperformed their European counterparts in the past three months as evidence the economic slowdown is deepening persuaded investors to remove wagers on rate increases. The implied yield on the March short-sterling futures contract was at 5.26 percent. It has declined from 5.44 percent at the end of July.
The spread between U.K. government bonds and their German counterparts has narrowed. The 10-year gilt yielded 38 basis points more than the German bund, the smallest gap since July 22. It was at 69 basis points on Feb. 25, the widest this year.
U.K. bonds have returned 4.3 percent in the past two months, compared with 2.9 percent for their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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Aug. 22 (Bloomberg) -- The U.K. pound fell to the lowest level in a week against the euro after a government report showed economic growth stagnated in the second-quarter, strengthening the case for lower interest rates.
The pound also headed for a fifth week of losses against the dollar, the longest losing streak since February 2006, as the Office for National Statistics said U.K. gross domestic product was unchanged from the previous three months. Inflation risks ``have probably eased a little,'' the minutes of the Bank of England's August rate meeting showed this week.
``This is a pretty toxic environment for the pound,'' said Lee Hardman, a currency strategist in London at the Bank of Tokyo-Mitsubishi Ltd. ``There's a risk of a rate cut in November if the data continues to deteriorate.''
The U.K. currency dropped as much as 0.7 percent to 79.89 pence per euro, the lowest level since Aug. 14, and was at 79.74 by 1:36 p.m. in London, from 79.32 yesterday and 78.70 a week ago. It dropped more than 1 percent to $1.8603, from $1.8782 yesterday. The pound may drop below $1.80 in 12 months, Hardman forecast.
Gross domestic product was unchanged from the first quarter, the Office for National Statistics said, compared with a previous estimate for growth of 0.2 percent. Economists had expected a 0.1 percent expansion, according to the median estimate of 34 economists in a Bloomberg News survey. Growth was 1.4 percent from a year earlier, the weakest since 1992.
The report adds to pressure on the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5 percent.
`Support the Market'
Deutsche Bank AG changed its U.K. interest-rate forecast yesterday and said the central bank will lower borrowing costs by 1 percentage point next year. The benchmark rate will be cut to 4 percent in the first three quarters of 2009, George Buckley, the bank's chief U.K. economist, wrote in an e-mailed note.
``The prime focus remains how soon does inflation come off,'' said Simon Derrick, a currency strategist in London at Bank of New York Mellon Corp. ``And how soon can the Bank of England move to get monetary policy down to a level that will help support the market.''
Gilts rose, with the yield on the 10-year bond falling 1 basis point to 4.56 percent. The price of the 5 percent security due March 2018 rose 0.07, or 70 pence per 1,000-pound face amount, to 103.35. The yield on the two-year gilt, which is more sensitive to interest rate changes, fell 1 basis point to 4.57 percent. Bond yields move inversely to prices.
Economy Falters
The U.K. economy faltered after banks choked off credit following the collapse of the U.S. subprime mortgage market. Still, an inflation rate at more than twice its 2 percent target has prevented the Bank of England's from cutting interest rates to revive the economy.
``It's a disappointing outturn,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc, the U.K.'s second largest lender, in a Bloomberg Television interview. ``It raises the risk of an earlier cut in interest rates.''
Morgan Stanley recommended yesterday investors put on trades that benefit from a drop in the pound against the Australian dollar and Swiss franc on speculation the economic slowdown in the U.K. will deepen.
Investors should enter the so-called short positions at 2.1360 Australian dollars per pound and target a decline in the British currency to 2.0400, Sophia Drossos, a New York-based strategist, wrote in a client note. They should also hold on to so-called short positions on the pound versus the franc, with a target of 1.95, she wrote. A short position is a bet the value of a currency or security will fall.
Spreads Narrow
U.K. bonds have outperformed their European counterparts in the past three months as evidence the economic slowdown is deepening persuaded investors to remove wagers on rate increases. The implied yield on the March short-sterling futures contract was at 5.26 percent. It has declined from 5.44 percent at the end of July.
The spread between U.K. government bonds and their German counterparts has narrowed. The 10-year gilt yielded 38 basis points more than the German bund, the smallest gap since July 22. It was at 69 basis points on Feb. 25, the widest this year.
U.K. bonds have returned 4.3 percent in the past two months, compared with 2.9 percent for their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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Yuan Posts Biggest Weekly Gain Since May on Surplus; Bonds Rise
By Judy Chen and Belinda Cao
Aug. 22 (Bloomberg) -- China's yuan completed the biggest weekly gain in three months on speculation officials will seek a stronger currency to curb the trade surplus and deter the U.S. from imposing penalties. Bonds rose.
China needs ``more flexibility'' in the exchange rate to manage its economy amid a global slowdown, John Lipsky, the International Monetary Fund's first deputy managing director, said yesterday in Jackson Hole, Wyoming. This week's advance ends a run of four straight losses and extends the currency's gain this year to 7 percent, more than it rose for all of 2007.
``The yuan will probably regain appreciation after the Olympics,'' said Li Huiyong, an economist at Shenyin Wanguo Research & Consulting Co., part of China's third-largest brokerage firm, in Shanghai. ``The huge trade surplus is the biggest reason for the medium and long-term appreciation.''
The yuan rose 0.5 percent this week to 6.8333 a dollar as of 5:30 p.m. in Shanghai, from 6.8700 late last week, according to the China Foreign Exchange Trade System. That's the biggest weekly advance since May 23. It climbed 0.16 percent today.
China's central bank has managed the yuan's exchange rate against a basket of currencies, including the yen and the euro, since a peg to the dollar was scrapped in 2005. Both currencies rallied more than 1 percent against the dollar yesterday.
Stronger Rate
The People's Bank of China set a stronger reference rate for yuan trading for a fourth straight day. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the daily rate, which was fixed at 6.8357 today.
China's trade surplus expanded 4 percent from a year earlier to $25.3 billion in July, the first increase in four months, according to customs bureau figures released last week. U.S. Treasury Secretary Henry Paulson said this week that U.S. proposals to punish China for depressing the value of the currency might spark an unproductive ``trade war.''
The local currency touched a two-month low of 6.8808 a dollar on Aug. 18 on speculation policy makers would prefer to bolster growth rather than fight inflation on signs a global slowdown crimped demand for the nation's exports. The yuan has declined about 0.2 percent in the past month.
China's economy expanded 10.1 percent in the second quarter from a year earlier, the slowest pace since 2005. Export growth cooled to 17.2 percent in June from a 28.1 percent gain in May, government data show. It accelerated to a 26.9 percent pace last month.
Growth Scare
``A post-Olympics growth scare in China is now more probable than we had thought six months ago,'' Stephen Jen, London-based head of research at Morgan Stanley, wrote in a research report yesterday. ``Such a regional growth scare will provide further support to our call'' for Asian currencies to weaken versus the dollar.
Traders in the forward market have pared bets on how far the yuan will advance. Forward contracts show the yuan will rise 3.1 percent to 6.6250 in a year, compared with around 11 percent appreciation predicted earlier this year.
Standard Bank in London recommended buying the Chinese currency, playing down chances policy makers will shift focus to supporting the economy and citing global calls for appreciation.
``We are skeptical that they will see slower appreciation, or even depreciation, as a way to stimulate growth,'' Steve Barrow, a currency strategist with Standard Bank in London, wrote in a report yesterday. ``The renminbi is a buy.''
Corrected Too Far
Even as the dollar strengthens against major currencies, like the euro, the U.S. Treasury will ``want to keep pressure on China for renminbi appreciation,'' Barrow said. ``It seems so clear to us it has corrected too far in the other direction.''
Barrow said the yuan's annual appreciation of 5 to 10 percent is ``much more appropriate.'' The U.S. is the biggest buyer of China's exports and its trade deficit with the Asian nation ballooned to a record $256 billion last year.
Government bonds gained for a second week after China said inflation slowed in July, spurring speculation consumer prices increases will continue to slow and the central bank won't raise interest rates later this year.
Consumer price increases slowed to 6.3 percent in July, from 7.1 percent a month earlier, the statistics bureau said Aug. 12. The yield on benchmark 10-year bonds dropped 4.4 basis points this week, according to data compiled by the country's biggest debt clearing house. A basis point is 0.01 percentage point.
``The inflation rate may continue to fall later this year,'' said Dong Dezhi, a bond analyst with Bank of China Trading Center in Shanghai. ``Market sentiment is still optimistic.''
The yield on the 4.41 percent bond due June 2018 dropped 3.5 basis points to 4.325 percent in Shanghai, according to the China Interbank Bond Market. The price of the security rose 0.28 per 100 yuan face amount to 100.67.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.
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Aug. 22 (Bloomberg) -- China's yuan completed the biggest weekly gain in three months on speculation officials will seek a stronger currency to curb the trade surplus and deter the U.S. from imposing penalties. Bonds rose.
China needs ``more flexibility'' in the exchange rate to manage its economy amid a global slowdown, John Lipsky, the International Monetary Fund's first deputy managing director, said yesterday in Jackson Hole, Wyoming. This week's advance ends a run of four straight losses and extends the currency's gain this year to 7 percent, more than it rose for all of 2007.
``The yuan will probably regain appreciation after the Olympics,'' said Li Huiyong, an economist at Shenyin Wanguo Research & Consulting Co., part of China's third-largest brokerage firm, in Shanghai. ``The huge trade surplus is the biggest reason for the medium and long-term appreciation.''
The yuan rose 0.5 percent this week to 6.8333 a dollar as of 5:30 p.m. in Shanghai, from 6.8700 late last week, according to the China Foreign Exchange Trade System. That's the biggest weekly advance since May 23. It climbed 0.16 percent today.
China's central bank has managed the yuan's exchange rate against a basket of currencies, including the yen and the euro, since a peg to the dollar was scrapped in 2005. Both currencies rallied more than 1 percent against the dollar yesterday.
Stronger Rate
The People's Bank of China set a stronger reference rate for yuan trading for a fourth straight day. The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the daily rate, which was fixed at 6.8357 today.
China's trade surplus expanded 4 percent from a year earlier to $25.3 billion in July, the first increase in four months, according to customs bureau figures released last week. U.S. Treasury Secretary Henry Paulson said this week that U.S. proposals to punish China for depressing the value of the currency might spark an unproductive ``trade war.''
The local currency touched a two-month low of 6.8808 a dollar on Aug. 18 on speculation policy makers would prefer to bolster growth rather than fight inflation on signs a global slowdown crimped demand for the nation's exports. The yuan has declined about 0.2 percent in the past month.
China's economy expanded 10.1 percent in the second quarter from a year earlier, the slowest pace since 2005. Export growth cooled to 17.2 percent in June from a 28.1 percent gain in May, government data show. It accelerated to a 26.9 percent pace last month.
Growth Scare
``A post-Olympics growth scare in China is now more probable than we had thought six months ago,'' Stephen Jen, London-based head of research at Morgan Stanley, wrote in a research report yesterday. ``Such a regional growth scare will provide further support to our call'' for Asian currencies to weaken versus the dollar.
Traders in the forward market have pared bets on how far the yuan will advance. Forward contracts show the yuan will rise 3.1 percent to 6.6250 in a year, compared with around 11 percent appreciation predicted earlier this year.
Standard Bank in London recommended buying the Chinese currency, playing down chances policy makers will shift focus to supporting the economy and citing global calls for appreciation.
``We are skeptical that they will see slower appreciation, or even depreciation, as a way to stimulate growth,'' Steve Barrow, a currency strategist with Standard Bank in London, wrote in a report yesterday. ``The renminbi is a buy.''
Corrected Too Far
Even as the dollar strengthens against major currencies, like the euro, the U.S. Treasury will ``want to keep pressure on China for renminbi appreciation,'' Barrow said. ``It seems so clear to us it has corrected too far in the other direction.''
Barrow said the yuan's annual appreciation of 5 to 10 percent is ``much more appropriate.'' The U.S. is the biggest buyer of China's exports and its trade deficit with the Asian nation ballooned to a record $256 billion last year.
Government bonds gained for a second week after China said inflation slowed in July, spurring speculation consumer prices increases will continue to slow and the central bank won't raise interest rates later this year.
Consumer price increases slowed to 6.3 percent in July, from 7.1 percent a month earlier, the statistics bureau said Aug. 12. The yield on benchmark 10-year bonds dropped 4.4 basis points this week, according to data compiled by the country's biggest debt clearing house. A basis point is 0.01 percentage point.
``The inflation rate may continue to fall later this year,'' said Dong Dezhi, a bond analyst with Bank of China Trading Center in Shanghai. ``Market sentiment is still optimistic.''
The yield on the 4.41 percent bond due June 2018 dropped 3.5 basis points to 4.325 percent in Shanghai, according to the China Interbank Bond Market. The price of the security rose 0.28 per 100 yuan face amount to 100.67.
To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.
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Dollar Rises Against Euro on Speculation Decline Is Overdone
By Ye Xie and Gavin Finch
Enlarge Image/Details
Aug. 22 (Bloomberg) -- The dollar rose against the euro on speculation the biggest drop since June yesterday was overdone and as a decline in European industrial orders added to evidence of a deepening economic slowdown.
The greenback climbed from a two-week low against the yen after Reuters reported that Korea Development Bank is ``open to'' a purchase of Lehman Brothers Holdings Inc. Federal Reserve Chairman Ben S. Bernanke said falling commodity prices, a stable dollar and slowing growth should limit inflation.
``The recovery of the euro is uninspiring,'' said Alan Ruskin, head of currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The dollar bottoming is in place.''
The dollar climbed 0.6 percent to $1.4815 per euro at 10:20 a.m. in New York, from $1.4899 yesterday, when it fell 1 percent. The U.S. currency rose 1.4 percent to 109.96 yen, from 108.43. It touched 108.14 yesterday, the lowest since Aug. 5. The yen fell 0.8 percent to 162.90 per euro, from 161.57.
The U.S. currency has decreased 0.9 percent against the euro this week, the first drop in six weeks, on concern deepening credit-market losses and a surge in crude oil prices will prolong the U.S. economic slowdown. The dollar has dropped 0.6 percent versus Japan's currency, while the euro has increased 0.4 percent against the yen.
Dollar Index
The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, rose 0.5 percent today to 76.601. It fell 1 percent yesterday, the biggest drop in almost five months.
The pound fell 1 percent to $1.8588 and 0.6 percent to 79.79 pence per euro after a report showed U.K. economic growth stagnated in the second quarter. Sterling dropped for a fifth week against the dollar, declining 0.4 percent, its longest losing streak since February 2006. The pound decreased 1.3 percent versus the euro this week.
Industrial orders in the 15-nation euro area fell 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office said today in Luxembourg. The German economy, Europe's largest, shrank 0.5 percent in the second quarter, the first contraction in four years.
The dollar rose against the yen after Reuters reported that Korea Development Bank may buy stakes in Lehman.
``We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,'' a Korea Development Bank spokesman said, according to Reuters.
Lehman on Report
Lehman spokesman Mark Lane declined to comment on the Reuters report. Korea Development Chief Executive Officer MinEuoo-Sung also declined to comment.
The U.S. currency dropped against the yen yesterday as the Financial Times reported that the South Korean bank and China's Citic Securities Co. abandoned talks to buy a stake in Lehman this month.
Bernanke said in a speech at the Kansas City Fed's two-day conference on financial stability in Jackson, Hole, Wyoming, that dollar stability and price declines in oil and other commodities are ``encouraging.'' Still, the inflation outlook remains ``highly uncertain'' and the Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.
Crude oil for October delivery fell 1.4 percent to $119.49 a barrel. It surged 5.4 percent yesterday, the biggest increase since June 6, and has increased 4.9 percent this week. The euro- dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations based on value changes. A reading of 1 would mean they move in lockstep.
Yen vs. Rand
The yen fell 1.1 percent to 14.32 versus the South African rand and 1.1. percent to 68.08 against Brazil's real today as the possibility of a South Korean acquisition of Lehman Brothers encouraged a resumption of the carry trade, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher.
``Japanese investors are once again buying abroad trying to increase returns, and this is contributing to a downward move in the yen,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the largest French bank. ``The yen is going to remain weak as the outlook for the Japanese economy is deteriorating badly.''
Japanese investors were net buyers of 769.8 billion yen ($7 billion) in foreign assets in the week ended Aug. 16, the Ministry of Finance said yesterday. The BOJ held its target lending rate at 0.5 percent this week, compared with a 4.25 percent benchmark rate in Europe, 13 percent in Brazil and 12 percent in South Africa.
The New Zealand and Australian currencies headed for weekly gains versus the U.S. dollar on bets the biggest jump in commodity prices in 33 years will boost exports. The Reuters/Jefferies CRB Index of 19 commodities has surged 6.3 percent since Aug. 15, the biggest weekly gain since July 1975.
The kiwi increased 1 percent to 71.33 U.S. cents this week and touched 72.17 today, the highest level since Aug. 7. The Aussie rose 0.4 percent to 86.94 U.S. cents this week.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
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Enlarge Image/Details
Aug. 22 (Bloomberg) -- The dollar rose against the euro on speculation the biggest drop since June yesterday was overdone and as a decline in European industrial orders added to evidence of a deepening economic slowdown.
The greenback climbed from a two-week low against the yen after Reuters reported that Korea Development Bank is ``open to'' a purchase of Lehman Brothers Holdings Inc. Federal Reserve Chairman Ben S. Bernanke said falling commodity prices, a stable dollar and slowing growth should limit inflation.
``The recovery of the euro is uninspiring,'' said Alan Ruskin, head of currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The dollar bottoming is in place.''
The dollar climbed 0.6 percent to $1.4815 per euro at 10:20 a.m. in New York, from $1.4899 yesterday, when it fell 1 percent. The U.S. currency rose 1.4 percent to 109.96 yen, from 108.43. It touched 108.14 yesterday, the lowest since Aug. 5. The yen fell 0.8 percent to 162.90 per euro, from 161.57.
The U.S. currency has decreased 0.9 percent against the euro this week, the first drop in six weeks, on concern deepening credit-market losses and a surge in crude oil prices will prolong the U.S. economic slowdown. The dollar has dropped 0.6 percent versus Japan's currency, while the euro has increased 0.4 percent against the yen.
Dollar Index
The ICE futures exchange's Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, rose 0.5 percent today to 76.601. It fell 1 percent yesterday, the biggest drop in almost five months.
The pound fell 1 percent to $1.8588 and 0.6 percent to 79.79 pence per euro after a report showed U.K. economic growth stagnated in the second quarter. Sterling dropped for a fifth week against the dollar, declining 0.4 percent, its longest losing streak since February 2006. The pound decreased 1.3 percent versus the euro this week.
Industrial orders in the 15-nation euro area fell 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office said today in Luxembourg. The German economy, Europe's largest, shrank 0.5 percent in the second quarter, the first contraction in four years.
The dollar rose against the yen after Reuters reported that Korea Development Bank may buy stakes in Lehman.
``We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,'' a Korea Development Bank spokesman said, according to Reuters.
Lehman on Report
Lehman spokesman Mark Lane declined to comment on the Reuters report. Korea Development Chief Executive Officer MinEuoo-Sung also declined to comment.
The U.S. currency dropped against the yen yesterday as the Financial Times reported that the South Korean bank and China's Citic Securities Co. abandoned talks to buy a stake in Lehman this month.
Bernanke said in a speech at the Kansas City Fed's two-day conference on financial stability in Jackson, Hole, Wyoming, that dollar stability and price declines in oil and other commodities are ``encouraging.'' Still, the inflation outlook remains ``highly uncertain'' and the Fed ``is committed to achieving medium-term price stability and will act as necessary to obtain that objective,'' he said.
Crude oil for October delivery fell 1.4 percent to $119.49 a barrel. It surged 5.4 percent yesterday, the biggest increase since June 6, and has increased 4.9 percent this week. The euro- dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations based on value changes. A reading of 1 would mean they move in lockstep.
Yen vs. Rand
The yen fell 1.1 percent to 14.32 versus the South African rand and 1.1. percent to 68.08 against Brazil's real today as the possibility of a South Korean acquisition of Lehman Brothers encouraged a resumption of the carry trade, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher.
``Japanese investors are once again buying abroad trying to increase returns, and this is contributing to a downward move in the yen,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the largest French bank. ``The yen is going to remain weak as the outlook for the Japanese economy is deteriorating badly.''
Japanese investors were net buyers of 769.8 billion yen ($7 billion) in foreign assets in the week ended Aug. 16, the Ministry of Finance said yesterday. The BOJ held its target lending rate at 0.5 percent this week, compared with a 4.25 percent benchmark rate in Europe, 13 percent in Brazil and 12 percent in South Africa.
The New Zealand and Australian currencies headed for weekly gains versus the U.S. dollar on bets the biggest jump in commodity prices in 33 years will boost exports. The Reuters/Jefferies CRB Index of 19 commodities has surged 6.3 percent since Aug. 15, the biggest weekly gain since July 1975.
The kiwi increased 1 percent to 71.33 U.S. cents this week and touched 72.17 today, the highest level since Aug. 7. The Aussie rose 0.4 percent to 86.94 U.S. cents this week.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
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South Africa's Rand Posts Weekly Advance as Commodities Rally
By Garth Theunissen
Aug. 22 (Bloomberg) -- South Africa's rand snapped two weeks of losses against the dollar as gains in gold and platinum boosted revenue prospects for the world's biggest producer of precious metals.
The rand was the best performer of the 16 major currencies monitored by Bloomberg in the past five days as gold headed for its biggest weekly rally in more than two years and platinum ended a five-week losing run. The metals rose with other commodities as a weaker dollar and higher oil prices spurred demand for alternative investments and hedges against inflation.
``Commodities are a strong theme for the rand at the moment,'' said Kay Muller, a currency researcher at Rand Merchant Bank in Johannesburg. ``Strong gains in oil and a weaker dollar are fueling gold and platinum, which is positive for the rand.''
The rand climbed 2.6 percent in the week to 7.6692 per dollar by 3:36 p.m. in Johannesburg, from 7.8707 on Aug. 15. It advanced 1.7 percent from Aug. 15 to 11.3752 per euro.
``Positive momentum has returned to commodities, which along with a dollar correction, is keeping the rand buoyant,'' said Tolga Ediz an emerging-markets currency strategist in London at Lehman Brothers Holdings Inc. ``There's still enough risk appetite to help high-yielding currencies.''
Commodities are poised to advance in the week as the dollar traded near the lowest level in more than two weeks against the yen and was set to drop in the week versus the euro.
Gold climbed 5 percent to $826.60 an ounce, the biggest weekly advance since July 2006. Platinum rose 2.5 percent from Aug. 15 to $1,417.70 an ounce. South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.
Crude oil rose 5.3 percent this week to $119.80 a barrel, set for its biggest weekly increase in almost three months.
Government bonds fell this week, with the yield on South Africa's benchmark 13.5 percent security due September 2015 adding 13 basis points to 9.27 percent. Yields move inversely to bond prices.
To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net
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Aug. 22 (Bloomberg) -- South Africa's rand snapped two weeks of losses against the dollar as gains in gold and platinum boosted revenue prospects for the world's biggest producer of precious metals.
The rand was the best performer of the 16 major currencies monitored by Bloomberg in the past five days as gold headed for its biggest weekly rally in more than two years and platinum ended a five-week losing run. The metals rose with other commodities as a weaker dollar and higher oil prices spurred demand for alternative investments and hedges against inflation.
``Commodities are a strong theme for the rand at the moment,'' said Kay Muller, a currency researcher at Rand Merchant Bank in Johannesburg. ``Strong gains in oil and a weaker dollar are fueling gold and platinum, which is positive for the rand.''
The rand climbed 2.6 percent in the week to 7.6692 per dollar by 3:36 p.m. in Johannesburg, from 7.8707 on Aug. 15. It advanced 1.7 percent from Aug. 15 to 11.3752 per euro.
``Positive momentum has returned to commodities, which along with a dollar correction, is keeping the rand buoyant,'' said Tolga Ediz an emerging-markets currency strategist in London at Lehman Brothers Holdings Inc. ``There's still enough risk appetite to help high-yielding currencies.''
Commodities are poised to advance in the week as the dollar traded near the lowest level in more than two weeks against the yen and was set to drop in the week versus the euro.
Gold climbed 5 percent to $826.60 an ounce, the biggest weekly advance since July 2006. Platinum rose 2.5 percent from Aug. 15 to $1,417.70 an ounce. South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.
Crude oil rose 5.3 percent this week to $119.80 a barrel, set for its biggest weekly increase in almost three months.
Government bonds fell this week, with the yield on South Africa's benchmark 13.5 percent security due September 2015 adding 13 basis points to 9.27 percent. Yields move inversely to bond prices.
To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net
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Taylor Rules Currencies, Not to Be Confused With the Other Guy
By Bo Nielsen
Aug. 22 (Bloomberg) -- Watching the fallout the U.S. subprime crisis has had on currency markets, John Taylor is thrilled. ``If you look at the best years we've ever had, it's when the market was completely haywire,'' he says.
Taylor's International Foreign Exchange Concepts Inc., the biggest currency hedge fund company in the world, is navigating through some of the wildest fluctuations the currency market has seen since the dot-com crash in 2002.
The average size of the dollar's swings against developed- market currencies in the past year has increased 46 percent compared with the prior year, and its moves against emerging-market currencies have increased by 23 percent, as measured by JPMorgan Chase & Co.'s indexes of implied option volatility.
Taylor has profited from the turmoil by using software that tracks trends. Three of FX Concepts' four biggest trading programs rose as much as 11.2 percent after fees this year through July 31, about eight times the returns of the Barclay Currency Trader Index of 145 programs tracked by Fairfield, Iowa-based Barclay Hedge Ltd. A program is a pool of money invested in one or more investment strategies.
The exception is the company's Developed Markets Currency program, which has returned an average of more than 10 percent since its inception in 1989. It declined 5 percent in the first seven months of this year as increasingly erratic price swings made it more difficult for the program's trend-spotting software to find profitable trades.
Randomness
That was especially the case in the so-called majors -- the currencies of the Group of Ten countries, which include the U.S., Japan, Germany and the U.K. ``It's become much harder to make money on the majors,'' Taylor says. ``They are not totally random, but it's damn near.''
Overall, assets under management at FX Concepts have almost tripled to $14.6 billion from $5 billion in 2002 and may swell to $25 billion in the next five years, Taylor says.
In offices seven stories above Manhattan's bustling 34th Street, analysts hunch over their computer screens or meet with customers in conference rooms dubbed Dollar, Euro, Yen and Cable, which is jargon for the British pound. They use software that tracks more than 500 exchange rates against their historical patterns to spot trading opportunities.
Every morning, Taylor's software crunches data going back to the 1970s -- everything from currency and commodity prices to real estate investments -- in order to forecast exchange rates. The predictions help Taylor's team select trades, most of which are made in the option, futures or forward markets.
`Rock 'n' Roll'
The traders are looking for imbalances, particularly among the major currencies, which account for about 90 percent of the world's foreign exchange trading.
``When you have some economies growing strongly and some economies encountering problems, that's when the currency markets rock 'n' roll,'' says Jonathan Clark, 52, vice chairman at FX Concepts.
Taylor's approach to the currency market is different from that of George Soros, who made an infamous wager in 1992 that the British government would withdraw its currency from the European Exchange Rate Mechanism.
Taylor bets only a fraction of his assets each time. His trades usually last a couple of weeks. His models flash when a currency's movements suggest it will continue on the same path and again when the move looks likely to reverse. (Taylor isn't to be confused with John B. Taylor of Stanford University, who invented the Taylor Rule, which central banks use to gauge interest rates vis-a- vis inflation and growth.)
Betting on the Euro
In the year ended in July, one of Taylor's most frequent bets has been on the euro against the dollar. Adjusting to the zigzagging market, he shifted from owning the euro to selling it, to owning it again, up to 15 times in his various funds as the European currency advanced 15.7 percent against the dollar, Taylor says. In trading Aug. 21, the euro stood at $1.4894, up 2 percent against the dollar this year.
Taylor says his models are telling him to continue to bet against the dollar. He predicts the dollar might lose about 40 percent of its value in the next three years against the Federal Reserve's trade-weighted currency index, which measures trade with 38 countries including Canada, China, Mexico and members of the European Union.
The prediction is partly based on his charts of the U.S. real estate cycle, which he says has a major impact on the dollar and will continue to point south for the next couple of years, dragging down the currency with it. He also says the price of a barrel of crude oil might reach $250 in 2011, further eroding the strength of the U.S. economy and the dollar.
Lever for Government
``When markets look ugly, currencies are the one lever that the government has that it can use to jerk its economy around without pissing off its own citizens,'' Taylor says. ``And the U.S. needs to do a lot of maneuvering.'' The government will try to keep the dollar weak, he says, to fuel growth in exports and deflate the value of its debt.
The dollar's fluctuations are especially welcome, Taylor says, because they create more opportunities for trades among the majors, a market that's been slowing in the past few years. Annual returns of Taylor's $4.1 billion Developed Markets Currency program, which was confined to the majors until June, averaged 5.1 percent annually since 2000 net of fees, down from an average of 14.8 percent a year in the 1990s. In July, Taylor added emerging market currencies like the Polish zloty and the Mexican peso to the mix.
Volatility Falls
Even including the turmoil in the past year, the average volatility among the major currencies has fallen 11 percent since the decade began compared with the prior eight years, according to JPMorgan.
That's partly because of the introduction of the euro in January 1999, which reduced the number of trades possible among the majors. Five of the Group of Ten countries -- Belgium, France, Germany, Italy and the Netherlands -- adopted the single currency.
Competition in the foreign exchange markets has also increased. The number of currency programs that are tracked in the Barclay Hedge index has tripled to 145 in the past decade. ``The competition is eroding profits,'' says Stephen Lewis, chief economist at brokerage Monument Securities Ltd. in London. He also says price swings have become more erratic. ``It has become easier to confuse noise with trends,'' he says.
At the same time, daily volume in international currency markets has tripled since 1992 to $3.2 trillion, according to the Bank for International Settlements in Basel, Switzerland.
That's about 11 times the value of the stocks changing hands in the world's equity markets and three times the trading volume of government bonds, according to the New York-based Securities Industry and Financial Markets Association.
George Soros
``It's a very, very liquid, very, very competitive market,'' says Kenneth Rogoff, a former chief economist at the International Monetary Fund in Washington and now professor of economics at Harvard University in Cambridge, Massachusetts.
``Taylor is up there with George Soros,'' says Maxime Tessier, head of foreign exchange at Caisse de Depot et Placement du Quebec, a pension fund that manages about $258 billion from Montreal and is not Taylor's client. ``He's a beautiful example of how someone can be a successful investor in the foreign exchange market.''
Taylor has made his mark without the benefit of a college degree in business or economics. A native of Locust Valley, on Long Island in New York, he attended the private Hill School in Pottstown, Pennsylvania, whose alumni include former Secretary of State James Baker III and Academy Award-winning film director Oliver Stone.
While Taylor graduated from high school at 16 with a perfect 800 score on the math section of the SAT college admissions test, he followed his father's advice not to rush into college. His father entered Massachusetts Institute of Technology at age 15, dropped out during World War II and then ran a small shipyard in Oyster Bay, Long Island, Taylor says.
Studied in Switzerland
The younger Taylor spent a year studying history and Italian at the American School in Switzerland in the village of Montagnola above Lake Lugano. In 1961, he returned to the U.S. and enrolled at Princeton University in Princeton, New Jersey. Between his junior and senior years, Taylor spent a year in Montagnola teaching modern European history at the American School.
He graduated from Princeton in 1966 with a bachelor's degree in romance languages and then began work on a Ph.D. in political science at the University of North Carolina in Chapel Hill.
Taylor's views of the currency markets are still influenced by his studies.
`Game of the World'
``One of the great things about foreign exchange, if you really try to understand what's going on, it's like the game of the world,'' Taylor says in his office, which is lined with books, including Bruce Chadwick's ``George Washington's War,'' a biography of Benjamin Franklin and treatises on the declining role of the U.S. in the world.
Taylor says he sees similarities between the current predicament of the U.S. economy and the French court in 1720, which was nearly bankrupted by John Law, a Scottish economist and notorious gambler who issued too much debt on its behalf.
``All through history, the world has borrowed and borrowed until it realized that it couldn't repay it,'' he says. ``There's nothing different from what we are doing now.''
Taylor got married in graduate school and abandoned his Ph.D. studies in 1969 to take a job at New York-based Chemical Bank, a predecessor to JPMorgan Chase, starting as a European political analyst. His knowledge of the region landed him a job in the foreign exchange department.
Learning About Currencies
He didn't know about currencies or economics when he started, but he was eager to learn, says Roderick Porter, who hired Taylor.
``John is an extremely intelligent, very intense guy,'' says Porter, 63, who served as president of FX Concepts from 1994 to '98. He now helps manage Southern National Bancorp of Virginia Inc. in Charlottesville.
Taylor started his career in currencies at a propitious time. The international foreign exchange market was just about to take off.
In 1971, when the Vietnam War was stretching U.S. finances, President Richard Nixon took the dollar off the gold standard. That led to the collapse of the Bretton Woods system of exchange rates that had tied currencies to the dollar and the price of gold since 1944. As currencies began to float freely against the dollar, demand for foreign exchange services from international companies exploded.
In 1973, Taylor joined First National Bank of Chicago, now part of JPMorgan Chase, then moved to Citibank, now part of Citigroup Inc., a year later. There he led the 100-person foreign exchange consulting group, helping companies protect overseas revenue from changes in exchange rates by creating so-called hedges.
Deutsche Mark Bet
He left in 1978 for GFTA Analytics, a Duesseldorf-based research company that used computer models of historic prices of currencies and commodities to forecast exchange rates. Taylor says he was impressed when the system predicted the dollar's 12 percent surge against the German mark that November.
A year later, Taylor struck out on his own. He hired Frank Mickey, now 56, a Princeton-educated programmer, to help him create a trading model. Taylor didn't know the first thing about computers, and Mickey, who was building satellite communication systems, had never worked with currencies.
Taylor did have experience with creative applications for software, though. While in graduate school, he had taken a University of Utah program designed to monitor patterns of heart rhythms and used it to analyze the ebb and flow of voter sentiment in Italy, he says.
Finding the 'Rhythms'
Applying the same software to the Canadian dollar and four European currencies including the deutsche mark, Taylor and Mickey were able to emulate the historical movements of the exchange rates.
``It was like a blind man feeling his way along the wall,'' Taylor says. ``But you can find the rhythms, the waves in a string of data.''
Taylor also drew on ideas from the 18th-century physicist Jean Fourier, who had invented the mathematics to describe the frequency of heat waves. Taylor used Fourier's formulas to calculate the distance between peaks and troughs of the currency prices, allowing him to forecast exchange rates. The first system they created ran on a computer in Mickey's garage in Bethesda, Maryland.
In 1980, Mickey left to become an independent software consultant and is now working for the National Institutes of Health in Bethesda.
In 1981, Taylor founded FX Concepts in New York to sell his currency forecasts to banks and pension funds. He rented a 300-square- foot (28-square-meter) office behind a marbled glass door in the old Standard Oil Building at 26 Broadway near Wall Street. A couple of desks, a refrigerator and a stool borrowed from Morgan Stanley packed the two small rooms.
Wooing Clark
In 1984, Taylor tried to woo Clark, then head of foreign exchange sales at what is today London-based HSBC Holdings Plc. Clark says he decided to accept an offer from Morgan Stanley instead. He met Taylor in the bar atop the World Trade Center to give him the news. After a couple of drinks, Taylor convinced Clark to join FX Concepts.
Clark, who's worked with Taylor for 24 years now, says he was impressed that Taylor seemed more interested in creating a group of equals at FX Concepts than in making money for himself.
``A lot of guys in our business are totally consumed with the next corporate jet or the next yacht, but that's not what John is about,'' says Clark, who's the second-biggest shareholder in FX Concepts today. ``He has developed an organization that will live beyond him.''
Later, Taylor lent Clark money to buy equity in the company, though Clark declines to say how much. Two-thirds of the company's 62 employees own a 54 percent stake, while Taylor's share has fallen to 31 percent. Taylor earned roughly $15 million last year.
Ship of Fools
When Taylor splurges, he takes five roommates from Princeton sailing on Chesapeake Bay in a chartered 50-foot (15-meter) sailboat they dub Ship of Fools, after a medieval story about a group of deranged passengers clueless of their own direction.
The group includes Charles Gibson, anchor of ABC's World News, and Karl D. Jackson, a professor of Southeast Asia studies at Johns Hopkins University in Washington.
Taylor's fund gained notoriety in 1985, when his models started to flash red on the dollar's five-year rally against the deutsche mark.
On Friday, Feb. 22, he recalls, he sent out a letter alerting his roughly 40 clients that the U.S. currency would peak the following week.
On Tuesday, the dollar started to fall. By April 19, it had dropped 14 percent against the mark.
Plaza Accord
The dollar's decline picked up steam after September 1985, when representatives from the U.S., U.K., Japan, Germany and France met at the Plaza Hotel overlooking New York's Central Park.
In what would be known as the Plaza Accord, they agreed to coordinated dollar selling to push the U.S. currency down. The dollar slid for the next three years, losing almost half of its value against the mark and the yen.
Taylor's correct prediction about the dollar helped attract more clients, so that by the start of 1987, he had 300 customers buying his research. The call also persuaded him that he could use his models to do more than hedge, he says.
He founded the Developed Markets Currency program in 1989 to invest in currency markets. His first big investor was Eastman Kodak Co.'s pension fund, which still has about $1 billion in his funds, he says.
Institutional investors now make up about 65 percent of FX Concepts' assets under management. Hedge funds account for about 25 percent. Taylor charges a management fee of about 1.5 percent and takes 20 percent of profits.
Hemophilia Research
While Taylor was seeking institutional investors, a blood test found that the baby his second wife, Joyce, was expecting would be born with hemophilia. Joyce's father had died from the genetic disorder, which prevents blood from clotting properly.
In 1990, Taylor founded the Coalition for Hemophilia B to provide information about the ailment and to pressure the U.S. Food and Drug Administration to allow new types of medicine into the market.
Frustrated with the lack of progress in Washington, Taylor also co-founded Inspiration Biopharmaceuticals Inc. in 2004 with Scott Martin, an oil executive and father of a hemophilia patient. The Laguna Niguel, California-based company has two drugs for hemophilia B in the pipeline and signed a $35 million agreement in January with Celtic Pharmaceuticals Holdings LP, a Hamilton, Bermuda-based private equity company, to market the drugs.
Taylor holds two patents for drug delivery methods in the company.
Taylor's son is now a 19-year-old sophomore at Princeton. Taylor also has a daughter from his first marriage, Louise, 30, who is a lobbyist in Washington.
Taylor's Best Year
Taylor's most successful year was 1992, when the maneuverings by George Soros rocked the markets by attacking the pound. The resulting turbulence played right into Taylor's models, pushing returns to 43 percent that year, he says.
In 1994, when coordinated central bank intervention almost cut currency fluctuations in half, the Developed Markets Currency program had its worst year ever, losing 19 percent. The program's annual returns averaged 14.5 percent until 1999, when the euro was introduced. Annual returns fell to 0.2 percent that year and in 2001.
Taylor responded to the declining returns by hiring more researchers, doubling the size of the company to 42 employees in 2000 from 20 in 1990. He also decided to change his strategy so that it didn't rely on trends alone.
The research department had been slow to adjust, arguing that returns would come back eventually, Clark says. At a meeting with researchers in December 2001, Taylor snapped. He banged his fist on the table, shouting that he wanted new models immediately, Clark remembers.
Brazilian Real
A couple of months later, researchers finished software to bet on the carry trade, so that FX Concepts could borrow low-interest- rate currencies such as the yen and use the money to buy high- interest-rate currencies like the Brazilian real.
The aim is to benefit from the difference in yields as well as potential currency gains. Taylor also began to trade options, which give the buyer the right to sell or buy a specific quantity of currency by a specific date at a specific price, taking advantage of inefficiencies in their pricing. The new strategies now account for up to 40 percent of trades on any given day, he says.
He also launched new funds in 2001 and '02, increasing his universe to more than 30 currencies -- including those in emerging markets like Brazil and Turkey that tend to fluctuate more than the majors -- and ventured into commodities, stocks and fixed-income securities.
The new funds are among his best performers. The $3.5 billion Multi-Strategy Program was up 10.7 percent in the first seven months and 13.1 percent annually since its inception in 2002.
`Shown in the Results'
The $3 billion Global Currency Program was up 11.3 percent through July and 15.3 percent annually since inception. The annual returns are ranked first and second since January 2002 among the programs holding more than $100 million, according to Barclay Hedge.
``The improvements they've made -- it has shown in the results,'' says Annette St. Urbain, chief executive officer of the $2.2 billion San Joaquin County Employees' Retirement Association in Stockton, California, which has invested $187.5 million with FX Concepts.
When it comes to trading the major currencies, making profits has been tougher. ``We're frustrated,'' says Ryan O'Grady, director of investment research and a 15-year veteran at FX Concepts. ``We're still struggling.'' If Taylor's bearish prediction about the dollar proves true, there may be enough turmoil to change that in the years ahead.
To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net
Read more...
Aug. 22 (Bloomberg) -- Watching the fallout the U.S. subprime crisis has had on currency markets, John Taylor is thrilled. ``If you look at the best years we've ever had, it's when the market was completely haywire,'' he says.
Taylor's International Foreign Exchange Concepts Inc., the biggest currency hedge fund company in the world, is navigating through some of the wildest fluctuations the currency market has seen since the dot-com crash in 2002.
The average size of the dollar's swings against developed- market currencies in the past year has increased 46 percent compared with the prior year, and its moves against emerging-market currencies have increased by 23 percent, as measured by JPMorgan Chase & Co.'s indexes of implied option volatility.
Taylor has profited from the turmoil by using software that tracks trends. Three of FX Concepts' four biggest trading programs rose as much as 11.2 percent after fees this year through July 31, about eight times the returns of the Barclay Currency Trader Index of 145 programs tracked by Fairfield, Iowa-based Barclay Hedge Ltd. A program is a pool of money invested in one or more investment strategies.
The exception is the company's Developed Markets Currency program, which has returned an average of more than 10 percent since its inception in 1989. It declined 5 percent in the first seven months of this year as increasingly erratic price swings made it more difficult for the program's trend-spotting software to find profitable trades.
Randomness
That was especially the case in the so-called majors -- the currencies of the Group of Ten countries, which include the U.S., Japan, Germany and the U.K. ``It's become much harder to make money on the majors,'' Taylor says. ``They are not totally random, but it's damn near.''
Overall, assets under management at FX Concepts have almost tripled to $14.6 billion from $5 billion in 2002 and may swell to $25 billion in the next five years, Taylor says.
In offices seven stories above Manhattan's bustling 34th Street, analysts hunch over their computer screens or meet with customers in conference rooms dubbed Dollar, Euro, Yen and Cable, which is jargon for the British pound. They use software that tracks more than 500 exchange rates against their historical patterns to spot trading opportunities.
Every morning, Taylor's software crunches data going back to the 1970s -- everything from currency and commodity prices to real estate investments -- in order to forecast exchange rates. The predictions help Taylor's team select trades, most of which are made in the option, futures or forward markets.
`Rock 'n' Roll'
The traders are looking for imbalances, particularly among the major currencies, which account for about 90 percent of the world's foreign exchange trading.
``When you have some economies growing strongly and some economies encountering problems, that's when the currency markets rock 'n' roll,'' says Jonathan Clark, 52, vice chairman at FX Concepts.
Taylor's approach to the currency market is different from that of George Soros, who made an infamous wager in 1992 that the British government would withdraw its currency from the European Exchange Rate Mechanism.
Taylor bets only a fraction of his assets each time. His trades usually last a couple of weeks. His models flash when a currency's movements suggest it will continue on the same path and again when the move looks likely to reverse. (Taylor isn't to be confused with John B. Taylor of Stanford University, who invented the Taylor Rule, which central banks use to gauge interest rates vis-a- vis inflation and growth.)
Betting on the Euro
In the year ended in July, one of Taylor's most frequent bets has been on the euro against the dollar. Adjusting to the zigzagging market, he shifted from owning the euro to selling it, to owning it again, up to 15 times in his various funds as the European currency advanced 15.7 percent against the dollar, Taylor says. In trading Aug. 21, the euro stood at $1.4894, up 2 percent against the dollar this year.
Taylor says his models are telling him to continue to bet against the dollar. He predicts the dollar might lose about 40 percent of its value in the next three years against the Federal Reserve's trade-weighted currency index, which measures trade with 38 countries including Canada, China, Mexico and members of the European Union.
The prediction is partly based on his charts of the U.S. real estate cycle, which he says has a major impact on the dollar and will continue to point south for the next couple of years, dragging down the currency with it. He also says the price of a barrel of crude oil might reach $250 in 2011, further eroding the strength of the U.S. economy and the dollar.
Lever for Government
``When markets look ugly, currencies are the one lever that the government has that it can use to jerk its economy around without pissing off its own citizens,'' Taylor says. ``And the U.S. needs to do a lot of maneuvering.'' The government will try to keep the dollar weak, he says, to fuel growth in exports and deflate the value of its debt.
The dollar's fluctuations are especially welcome, Taylor says, because they create more opportunities for trades among the majors, a market that's been slowing in the past few years. Annual returns of Taylor's $4.1 billion Developed Markets Currency program, which was confined to the majors until June, averaged 5.1 percent annually since 2000 net of fees, down from an average of 14.8 percent a year in the 1990s. In July, Taylor added emerging market currencies like the Polish zloty and the Mexican peso to the mix.
Volatility Falls
Even including the turmoil in the past year, the average volatility among the major currencies has fallen 11 percent since the decade began compared with the prior eight years, according to JPMorgan.
That's partly because of the introduction of the euro in January 1999, which reduced the number of trades possible among the majors. Five of the Group of Ten countries -- Belgium, France, Germany, Italy and the Netherlands -- adopted the single currency.
Competition in the foreign exchange markets has also increased. The number of currency programs that are tracked in the Barclay Hedge index has tripled to 145 in the past decade. ``The competition is eroding profits,'' says Stephen Lewis, chief economist at brokerage Monument Securities Ltd. in London. He also says price swings have become more erratic. ``It has become easier to confuse noise with trends,'' he says.
At the same time, daily volume in international currency markets has tripled since 1992 to $3.2 trillion, according to the Bank for International Settlements in Basel, Switzerland.
That's about 11 times the value of the stocks changing hands in the world's equity markets and three times the trading volume of government bonds, according to the New York-based Securities Industry and Financial Markets Association.
George Soros
``It's a very, very liquid, very, very competitive market,'' says Kenneth Rogoff, a former chief economist at the International Monetary Fund in Washington and now professor of economics at Harvard University in Cambridge, Massachusetts.
``Taylor is up there with George Soros,'' says Maxime Tessier, head of foreign exchange at Caisse de Depot et Placement du Quebec, a pension fund that manages about $258 billion from Montreal and is not Taylor's client. ``He's a beautiful example of how someone can be a successful investor in the foreign exchange market.''
Taylor has made his mark without the benefit of a college degree in business or economics. A native of Locust Valley, on Long Island in New York, he attended the private Hill School in Pottstown, Pennsylvania, whose alumni include former Secretary of State James Baker III and Academy Award-winning film director Oliver Stone.
While Taylor graduated from high school at 16 with a perfect 800 score on the math section of the SAT college admissions test, he followed his father's advice not to rush into college. His father entered Massachusetts Institute of Technology at age 15, dropped out during World War II and then ran a small shipyard in Oyster Bay, Long Island, Taylor says.
Studied in Switzerland
The younger Taylor spent a year studying history and Italian at the American School in Switzerland in the village of Montagnola above Lake Lugano. In 1961, he returned to the U.S. and enrolled at Princeton University in Princeton, New Jersey. Between his junior and senior years, Taylor spent a year in Montagnola teaching modern European history at the American School.
He graduated from Princeton in 1966 with a bachelor's degree in romance languages and then began work on a Ph.D. in political science at the University of North Carolina in Chapel Hill.
Taylor's views of the currency markets are still influenced by his studies.
`Game of the World'
``One of the great things about foreign exchange, if you really try to understand what's going on, it's like the game of the world,'' Taylor says in his office, which is lined with books, including Bruce Chadwick's ``George Washington's War,'' a biography of Benjamin Franklin and treatises on the declining role of the U.S. in the world.
Taylor says he sees similarities between the current predicament of the U.S. economy and the French court in 1720, which was nearly bankrupted by John Law, a Scottish economist and notorious gambler who issued too much debt on its behalf.
``All through history, the world has borrowed and borrowed until it realized that it couldn't repay it,'' he says. ``There's nothing different from what we are doing now.''
Taylor got married in graduate school and abandoned his Ph.D. studies in 1969 to take a job at New York-based Chemical Bank, a predecessor to JPMorgan Chase, starting as a European political analyst. His knowledge of the region landed him a job in the foreign exchange department.
Learning About Currencies
He didn't know about currencies or economics when he started, but he was eager to learn, says Roderick Porter, who hired Taylor.
``John is an extremely intelligent, very intense guy,'' says Porter, 63, who served as president of FX Concepts from 1994 to '98. He now helps manage Southern National Bancorp of Virginia Inc. in Charlottesville.
Taylor started his career in currencies at a propitious time. The international foreign exchange market was just about to take off.
In 1971, when the Vietnam War was stretching U.S. finances, President Richard Nixon took the dollar off the gold standard. That led to the collapse of the Bretton Woods system of exchange rates that had tied currencies to the dollar and the price of gold since 1944. As currencies began to float freely against the dollar, demand for foreign exchange services from international companies exploded.
In 1973, Taylor joined First National Bank of Chicago, now part of JPMorgan Chase, then moved to Citibank, now part of Citigroup Inc., a year later. There he led the 100-person foreign exchange consulting group, helping companies protect overseas revenue from changes in exchange rates by creating so-called hedges.
Deutsche Mark Bet
He left in 1978 for GFTA Analytics, a Duesseldorf-based research company that used computer models of historic prices of currencies and commodities to forecast exchange rates. Taylor says he was impressed when the system predicted the dollar's 12 percent surge against the German mark that November.
A year later, Taylor struck out on his own. He hired Frank Mickey, now 56, a Princeton-educated programmer, to help him create a trading model. Taylor didn't know the first thing about computers, and Mickey, who was building satellite communication systems, had never worked with currencies.
Taylor did have experience with creative applications for software, though. While in graduate school, he had taken a University of Utah program designed to monitor patterns of heart rhythms and used it to analyze the ebb and flow of voter sentiment in Italy, he says.
Finding the 'Rhythms'
Applying the same software to the Canadian dollar and four European currencies including the deutsche mark, Taylor and Mickey were able to emulate the historical movements of the exchange rates.
``It was like a blind man feeling his way along the wall,'' Taylor says. ``But you can find the rhythms, the waves in a string of data.''
Taylor also drew on ideas from the 18th-century physicist Jean Fourier, who had invented the mathematics to describe the frequency of heat waves. Taylor used Fourier's formulas to calculate the distance between peaks and troughs of the currency prices, allowing him to forecast exchange rates. The first system they created ran on a computer in Mickey's garage in Bethesda, Maryland.
In 1980, Mickey left to become an independent software consultant and is now working for the National Institutes of Health in Bethesda.
In 1981, Taylor founded FX Concepts in New York to sell his currency forecasts to banks and pension funds. He rented a 300-square- foot (28-square-meter) office behind a marbled glass door in the old Standard Oil Building at 26 Broadway near Wall Street. A couple of desks, a refrigerator and a stool borrowed from Morgan Stanley packed the two small rooms.
Wooing Clark
In 1984, Taylor tried to woo Clark, then head of foreign exchange sales at what is today London-based HSBC Holdings Plc. Clark says he decided to accept an offer from Morgan Stanley instead. He met Taylor in the bar atop the World Trade Center to give him the news. After a couple of drinks, Taylor convinced Clark to join FX Concepts.
Clark, who's worked with Taylor for 24 years now, says he was impressed that Taylor seemed more interested in creating a group of equals at FX Concepts than in making money for himself.
``A lot of guys in our business are totally consumed with the next corporate jet or the next yacht, but that's not what John is about,'' says Clark, who's the second-biggest shareholder in FX Concepts today. ``He has developed an organization that will live beyond him.''
Later, Taylor lent Clark money to buy equity in the company, though Clark declines to say how much. Two-thirds of the company's 62 employees own a 54 percent stake, while Taylor's share has fallen to 31 percent. Taylor earned roughly $15 million last year.
Ship of Fools
When Taylor splurges, he takes five roommates from Princeton sailing on Chesapeake Bay in a chartered 50-foot (15-meter) sailboat they dub Ship of Fools, after a medieval story about a group of deranged passengers clueless of their own direction.
The group includes Charles Gibson, anchor of ABC's World News, and Karl D. Jackson, a professor of Southeast Asia studies at Johns Hopkins University in Washington.
Taylor's fund gained notoriety in 1985, when his models started to flash red on the dollar's five-year rally against the deutsche mark.
On Friday, Feb. 22, he recalls, he sent out a letter alerting his roughly 40 clients that the U.S. currency would peak the following week.
On Tuesday, the dollar started to fall. By April 19, it had dropped 14 percent against the mark.
Plaza Accord
The dollar's decline picked up steam after September 1985, when representatives from the U.S., U.K., Japan, Germany and France met at the Plaza Hotel overlooking New York's Central Park.
In what would be known as the Plaza Accord, they agreed to coordinated dollar selling to push the U.S. currency down. The dollar slid for the next three years, losing almost half of its value against the mark and the yen.
Taylor's correct prediction about the dollar helped attract more clients, so that by the start of 1987, he had 300 customers buying his research. The call also persuaded him that he could use his models to do more than hedge, he says.
He founded the Developed Markets Currency program in 1989 to invest in currency markets. His first big investor was Eastman Kodak Co.'s pension fund, which still has about $1 billion in his funds, he says.
Institutional investors now make up about 65 percent of FX Concepts' assets under management. Hedge funds account for about 25 percent. Taylor charges a management fee of about 1.5 percent and takes 20 percent of profits.
Hemophilia Research
While Taylor was seeking institutional investors, a blood test found that the baby his second wife, Joyce, was expecting would be born with hemophilia. Joyce's father had died from the genetic disorder, which prevents blood from clotting properly.
In 1990, Taylor founded the Coalition for Hemophilia B to provide information about the ailment and to pressure the U.S. Food and Drug Administration to allow new types of medicine into the market.
Frustrated with the lack of progress in Washington, Taylor also co-founded Inspiration Biopharmaceuticals Inc. in 2004 with Scott Martin, an oil executive and father of a hemophilia patient. The Laguna Niguel, California-based company has two drugs for hemophilia B in the pipeline and signed a $35 million agreement in January with Celtic Pharmaceuticals Holdings LP, a Hamilton, Bermuda-based private equity company, to market the drugs.
Taylor holds two patents for drug delivery methods in the company.
Taylor's son is now a 19-year-old sophomore at Princeton. Taylor also has a daughter from his first marriage, Louise, 30, who is a lobbyist in Washington.
Taylor's Best Year
Taylor's most successful year was 1992, when the maneuverings by George Soros rocked the markets by attacking the pound. The resulting turbulence played right into Taylor's models, pushing returns to 43 percent that year, he says.
In 1994, when coordinated central bank intervention almost cut currency fluctuations in half, the Developed Markets Currency program had its worst year ever, losing 19 percent. The program's annual returns averaged 14.5 percent until 1999, when the euro was introduced. Annual returns fell to 0.2 percent that year and in 2001.
Taylor responded to the declining returns by hiring more researchers, doubling the size of the company to 42 employees in 2000 from 20 in 1990. He also decided to change his strategy so that it didn't rely on trends alone.
The research department had been slow to adjust, arguing that returns would come back eventually, Clark says. At a meeting with researchers in December 2001, Taylor snapped. He banged his fist on the table, shouting that he wanted new models immediately, Clark remembers.
Brazilian Real
A couple of months later, researchers finished software to bet on the carry trade, so that FX Concepts could borrow low-interest- rate currencies such as the yen and use the money to buy high- interest-rate currencies like the Brazilian real.
The aim is to benefit from the difference in yields as well as potential currency gains. Taylor also began to trade options, which give the buyer the right to sell or buy a specific quantity of currency by a specific date at a specific price, taking advantage of inefficiencies in their pricing. The new strategies now account for up to 40 percent of trades on any given day, he says.
He also launched new funds in 2001 and '02, increasing his universe to more than 30 currencies -- including those in emerging markets like Brazil and Turkey that tend to fluctuate more than the majors -- and ventured into commodities, stocks and fixed-income securities.
The new funds are among his best performers. The $3.5 billion Multi-Strategy Program was up 10.7 percent in the first seven months and 13.1 percent annually since its inception in 2002.
`Shown in the Results'
The $3 billion Global Currency Program was up 11.3 percent through July and 15.3 percent annually since inception. The annual returns are ranked first and second since January 2002 among the programs holding more than $100 million, according to Barclay Hedge.
``The improvements they've made -- it has shown in the results,'' says Annette St. Urbain, chief executive officer of the $2.2 billion San Joaquin County Employees' Retirement Association in Stockton, California, which has invested $187.5 million with FX Concepts.
When it comes to trading the major currencies, making profits has been tougher. ``We're frustrated,'' says Ryan O'Grady, director of investment research and a 15-year veteran at FX Concepts. ``We're still struggling.'' If Taylor's bearish prediction about the dollar proves true, there may be enough turmoil to change that in the years ahead.
To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net
Read more...
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