Free Lunches Pushing U.S. to Insolvency, Columbia’s Mundell Says

By Allison Bennett and Tom Keene - Mar 20, 2012 11:39 PM GMT+0700

Political competition for votes and lack of fiscal discipline are pushing the world’s largest economy toward solvency issues, according to the Nobel Prize- winning economist Robert Mundell.

“The public is looking for free lunches, and the political competition for votes makes the politicians offer them free lunches,” Mundell, a professor of economics at Columbia University, said on Bloomberg Radio interview with Tom Keene and Ken Prewitt. “That’s what gets us in to the difficulties of insolvency.”

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Robert Mundell, Nobel Prize winning economist. Photographer: Forbes Conrad/Bloomberg

The U.S. plans to finance a budget deficit forecast to exceed $1 trillion for a fourth year, and outstanding U.S. marketable debt expanded to $10 trillion in February.

Even as the jobless rate has fallen from a high of 10 percent in October 2009 to 8.3 percent in February, it remains almost 2 percent above the average of the past decade and the central bank has called unemployment “persistent.”

“You could have fiscal stimulus back in the day of Keynes, when the government was a small proportion of gross domestic product and there was no insolvency problem,” he said, referring to British economist John Maynard Keynes. “You can’t just issue more bonds to pay for deficits and expect it to solve the employment problem.”

The euro area is forecast to have fiscal spending of 3.3 percent of GDP in 2012, compared to 7.1 percent in the U.S. this year.

“The United States is not in as bad a situation as Europe,” he said, “but it’s getting that way.”

‘Political Glue’

As the International Monetary Fund said Greece may require additional funding or a third debt restructuring, the odds of the fiscal union breaking up by the end of 2013 have reached 36.5 percent, based on bets made at Intrade.com. Mundell, often referred to as the father of the common currency, sees a different outcome.

“It’s political glue inside Europe to keep it together -- the euro is the best thing going for it since the creation of the common market,” he said. “The end game is going to be deeper integration in Europe and more centralization of the fiscal authority.”

To contact the reporter on this story: Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions

By Indira A.R. Lakshmanan - Mar 21, 2012 4:11 AM GMT+0700

The Obama administration won’t impose sanctions on Japan and 10 European Union nations that have “significantly” cut back their imports of Iranian oil this year, Secretary of State Hillary Clinton said.

The U.S. didn’t grant exemptions today to China (CCCIIQIR), the top importer of Iranian crude in the first half of last year, or to India and South Korea, the No. 3 and No. 4 buyers, according to the U.S. Department of Energy.

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March 21 (Bloomberg) -- Robert Kaplan, chief geopolitical analyst at Stratfor Global Intelligence and previously an adviser to former U.S. Secretary of Defense Robert Gates, talks about tension between Western nations and Iran over the Middle Eastern nation's nuclear ambitions. Kaplan also discusses the outlook for the North Korean regime. He speaks with Susan Li from the Credit Suisse Asian Investment Conference in Hong Kong on Bloomberg Television's "First Up." (Source: Bloomberg)

Under a U.S. law enacted Dec. 31, countries have until June 28 to demonstrate that they have “significantly reduced” the volume of their Iranian crude purchases or their banks and other institutions financing oil trade with Iran may be cut off from the U.S. financial system. The European countries exempted are Belgium, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain, and the United Kingdom -- the only EU nations that purchased Iranian oil in the past year.

The 10 EU nations and Japan have taken actions that “were not easy,” Clinton said in a statement today. “They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs.”

Today’s decision means Japan, which was the No. 2 importer of Iranian oil after China in the first half of last year, according to the U.S. Department of Energy, may continue buying some Iranian oil after U.S. sanctions take effect on June 28, without exposing Japanese banks to penalties.

Pressuring Iran

Under the sanctions law, the president must cut off the U.S. bank accounts of any foreign financial institution that transacts petroleum-related business with Iran’s central bank -- unless its country receives an exemption for reducing Iranian oil imports.

The sanctions are part of a coordinated campaign by the U.S. and the EU to ratchet up economic pressure on Iran to abandon any illicit aspects of its nuclear program. Iran is the No. 2 producer in the Organization of Petroleum Exporting Countries, and earns more than half of its government revenue from oil sales, according to the International Monetary Fund.

The European Union decided two months ago to bar Iranian oil imports effective July 1.

A U.S. official who spoke on condition of anonymity because he wasn’t authorized to be quoted said the administration announced today’s exemptions to signal that the EU and Japan are being rewarded for their efforts in the hope that other countries will follow suit before the June 28 deadline.

Japan managed to cut its imports of Iranian oil by 15 percent to 22 percent in the second half of last year, according to public data, during a difficult time when it was reeling from an earthquake and subsequent nuclear disaster, and its energy needs were high, the official said.

‘Sanctions Are Working’

Senator Bob Menendez, a New Jersey Democrat and co-author of the sanctions law enacted Dec. 31, said he supports the decision and applauds “the actions of our friends and allies in the EU and Japan for their forthright and expedient action” in reducing purchases of Iranian oil.

“The sanctions are working,” Menendez said in an interview. “Since President Obama signed the National Defense Authorization Act on December 31, we have seen Iran’s currency plummet and oil shipments in February fell to a 10-year low.”

Mark Dubowitz, executive director of the Foundation for Defense of Democracies in Washington, said in an interview the action “begins to reduce some of the uncertainty in oil markets over how the administration will apply oil market sanctions.”

“It gives Japan, in particular, which needs to keep buying Iranian oil, a clear pathway to continue those purchases without putting their financial institutions at risk,” said Dubowitz, who has advised the administration and Congress on sanctions. “It also establishes an early precedent that puts pressure on South Korea, India, China, Turkey, South Africa and other major buyers of Iranian oil to also comply with US law.”

To contact the reporter on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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Pentagon’s Iran Buildup Call for Adding Laser Weapons

By Tony Capaccio - Mar 20, 2012 12:06 AM GMT+0700

The U.S. Central Command plans to bolster military capabilities against Iran by fielding new laser target-trackers for machine guns, enhanced sensors for underwater vehicles, improved protection against drone attacks and upgrades of U-2 spy planes.

The Tampa, Florida-based command, which is responsible for U.S. forces in the Persian Gulf region, also wants to shift $5.5 million in previously approved funds to buy Gatling guns for Navy coastal patrol craft, according to budget documents.

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A U.S. Air Force U-2 Dragon Lady takes off from an undisclosed location in Southwest Asia. Source: U.S. Air Force

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March 19 (Bloomberg) -- Jonathan Schanzer, vice president of research at the Foundation for Defense of Democracies, talks about Iran's reaction to the severing of a key link between the world financial system and Iranian banks subject to European Union sanctions. Schanzer speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

Iranian officials have periodically threatened this year to block the Strait of Hormuz, through which 20 percent of the world’s daily oil transits, in retaliation for Western sanctions aimed at slowing its nuclear program. The U.S. Navy would move to stop any Iranian attempt to lay mines in the Strait or Gulf as an “act of war,” the services’s top Gulf commander, Vice Admiral Mark Fox, has said.

The Central Command’s intentions are spelled out in two “reprogramming” requests that Pentagon Comptroller Robert Hale sent Congress last month. The four congressional defense committees have approved the requests to move defense funds, which were to go to other programs, and the changes are being implemented, according to the comptroller’s website.

“There’s no significant area where I’ve got to come in and say, we’ve got a big problem here.” Central Command commander General James Mattis told the House Armed Services Committee on March 7. “They’re just areas I want to make certain we maintain our edge.”

Faster Than Anticipated

In a “couple of cases,” Iran improved capabilities “faster than we anticipated,” he said.

The Command requested the additional funds because “our growing reliance on our maritime forces requires an ability to project power against asymmetric threats, particularly in the confined and crowded sea lanes” of the Strait of Hormuz and the Persian Gulf, Major David Nevers, spokesman for the Central Command, said in an e-mailed statement.

Funds were shifted from Pentagon biological and chemical weapons defensive programs and Navy and Air Force shipbuilding, satellite and aircraft programs deemed to have excess funds or experiencing delays.

Congress approved a $28 million shift to provide six U-2 spy planes with upgraded satellite links that increase their capability to “provide real-time, high bandwidth video feeds to ships, ground forces and command and control centers,” according to the reprogramming documents.

Air Combat Command spokeswoman Kelly Sanders declined to discuss the upgrade, citing its classification.

Anti-Radar Missile

Congress also backed the shift of $10 million to increase funding for a joint Navy-National Reconnaissance Office program to equip the service’s new anti-radar missile -- the Advanced Anti-Radiation Guided Missile made by Alliant Techsystems Inc. (ATK) - - with a “Special Target Engagement” capability that includes a broadcast receiver.

The National Reconnaissance Office is the spy agency that manages U.S. intelligence satellites.

An additional $4.8 million was approved for integrating new sensors on a Navy underwater vehicle “for very shallow water- mine countermeasures missions,” according to the documents.

The Central Command also won congressional approval to shift $3.7 million to developing a defense against drone attacks. The system will cover “vulnerable areas below typical air-defense radar coverage areas,” according to the documents.

Iran’s Drones

Iran “has an active program and two families of reconnaissance, target and lethal” drones, an April 2010 Pentagon report on Iran’s military capabilities found.

Congress also approved plans to accelerate installation on coastal patrol craft of the “MK 38 Mod 2” system, which includes the laser-tracker for precision aiming of machine guns. Lawmakers rejected the planned source of $4 million in funds so the Comptroller is looking to other sources, a document said.

As described by BAE Systems Plc (BA/) and subcontractor Boeing Co. (BA), the tactical laser system “brings high precision accuracy against surface and air targets such as small boats and unmanned aerial systems. The system also provides the ability to deliver different levels of laser energy, depending on the target and mission objectives.”

Iran has increased the number of small, fast patrol vessels, some of which have been outfitted with large warheads for a suicide run at U.S. vessels, Fox told reporters last month.

Iran’s Subs, Speedboats

The Pentagon’s 2010 assessment of Iran’s military power listed four midget submarines, 80 patrol craft and 18 guided missile patrol boats under control of the Islamic Revolutionary Guard Corps navy. The Corps also “controls hundreds of small patrol boats,” it said.

The Guard navy since the 1990s has purchased Italian-made speedboats and has been making them domestically, according a 2009 report by the U.S. Office of Naval Intelligence.

It also has Chinese-built C-14 missile boats and North Korean-made “semi-submersible” vessels that can carry two torpedoes.

The planned Central Command improvements are in addition to deploying four additional mine-sweeping vessels and four more MH-53 helicopters within three months, doubling U.S. counter- mine capabilities, Admiral Jonathan Greenert, the chief of naval operations, told reporters on March 16.

Greenert said he determined new capabilities were warranted after making a trip the Gulf and a carrier transit through the Strait of Hormuz. He likened the improvements to giving vessels a “hunting rifle” or a “sawed-off shotgun” if needed in the Strait’s narrow waters.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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U.S. Stocks Fall as Commodities Decline on China Concern

By Rita Nazareth - Mar 21, 2012 3:56 AM GMT+0700

U.S. stocks declined, snapping a three-day advance for the Standard & Poor’s 500 Index, as commodities fell on concern about a Chinese economic slowdown.

Industrial and commodity shares slumped as China raised fuel prices by the most in two years and BHP Billiton Ltd. said the nation’s steel production is slowing. Caterpillar Inc. and Alcoa Inc. (AA) dropped more than 1.5 percent. Adobe Systems Inc. (ADBE) sank 3.9 percent as its profit forecast missed some estimates. Bank of America Corp. jumped 2.9 percent. Tiffany & Co. (TIF) surged 6.7 percent after forecasting profit that beat projections.

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March 20 (Bloomberg) -- Bloomberg's Pimm Fox and Deborah Kostroun report on the performance of the U.S. equity market today. U.S. stocks declined, snapping a three-day advance for the Standard & Poor’s 500 Index, as commodities fell on concern about a Chinese economic slowdown. (Source: Bloomberg)

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March 20 (Bloomberg) -- David Kelly, chief market strategist for JPMorgan Funds, discusses investment strategy and the outlook for financial markets. He speaks with Betty Liu, Dominic Chu and Josh Lipton on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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March 21 (Bloomberg) -- Brian Barish, president of Cambiar Investors LLC in Denver, talks about U.S. stocks and investment strategy. Stocks in the U.S. declined, snapping a three-day advance for the Standard & Poor’s 500 Index, as commodities fell on concern about a Chinese economic slowdown. Barish speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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March 20 (Bloomberg) -- Xia Bin, a researcher with China's State Council's Development Research Center and a former adviser to the nation's central bank, talks about the country's economic outlook. Xia said China won't see a steep slowdown in its economy in part because many local governments are still targeting annual growth above 10 percent. He spoke with Bloomberg's Susan Li in Hong Kong at the Credit Suisse Asian Investment Conference. (Translated excerpt. Source: Bloomberg)

The S&P 500 retreated 0.3 percent to 1,405.52 at 4 p.m. New York time, after the benchmark measure yesterday advanced to the highest level since May 2008. (SPX) The Dow Jones Industrial Average declined 68.94 points, or 0.5 percent, to 13,170.19 today. The Russell 2000 Index of small companies slumped 1 percent to 829.24. About 6.2 billion shares changed hands on U.S. exchanges, or 6.5 percent below the three-month average.

“A Chinese slowdown is inevitable,” said Peter Jankovskis, who helps manage about $2.9 billion at Oakbrook Investments in Lisle, Illinois. “It’s possible that will take some of the heat out of commodities. Yet China is not the only growth story out there. China will continue to be an important player, but the U.S. economy seems to have found its legs.”

Equities fell as China is raising fuel prices for the second time in less than six weeks. The nation’s vehicle sales may miss industry forecasts this year as economic growth slows, an official from the China Association of Automobile Manufacturers said. BHP Billiton (RIO), the world’s biggest mining company, said China’s steel production is slowing. In the U.S., housing starts hovered in February near a three-year high.

$3.6 Trillion

The S&P 500 has rallied 12 percent this year amid better than estimated economic and corporate data. More than $3.6 trillion was restored to U.S. equity values since last year’s low for the benchmark gauge in October. The rally drove the index to about 14.6 times reported earnings yesterday, the highest valuation level since July.

Companies most dependent on economic growth had the biggest declines in the S&P 500. The Dow Jones Transportation Average retreated 1.3 percent. A gauge of homebuilders in S&P indexes dropped 1 percent as 10 of its 11 stocks fell.

Measures of industrial and commodity shares in the S&P 500 dropped more than 0.5 percent. Caterpillar (CAT), the world’s biggest maker of construction and mining-equipment, slumped 2.6 percent to $110.76. Alcoa Inc., the largest U.S. aluminum producer, slid 1.5 percent to $10.44. Peabody Energy Corp. (BTU), the biggest U.S. coal producer, declined 5.4 percent to $31.64.

Adobe, Disney

Adobe sank 3.9 percent to $33.16. Excluding some costs, profit will be 57 cents to 61 cents a share in the second quarter, Adobe said. The midpoint of that range -- 59 cents -- missed the 60 cents predicted by analysts, according to data compiled by Bloomberg.

Walt Disney Co. (DIS) dropped 0.5 percent to $43.24. The world’s largest entertainment company said the box-office disappointment “John Carter” will post a loss of about $200 million, possibly the biggest ever for a single film.

A rally in financial companies helped the S&P 500 trim a decline of as much as 0.9 percent. The KBW Bank Index (BKX) added 0.4 percent. Bank of America rallied 2.9 percent, the most in the Dow, to $9.81. Morgan Stanley (MS) gained 1.7 percent to $20.41.

Jefferies Group Inc. (JEF) climbed 2.3 percent to $19.49. The investment bank that surged by almost half during the fiscal first quarter reported a profit decline that was smaller than analysts estimated as net revenue climbed to a record.

Tiffany Surges

Tiffany surged 6.7 percent to $73.27. The company is benefiting from stock-market gains that have prompted luxury consumers to resume jewelry purchases, a turnabout from January, when the retailer said weak spending from U.S. customers had slowed holiday sales.

Apple Inc. (AAPL) added 0.8 percent to a record $605.96. The Cupertino, California-based technology provider yesterday disclosed plans to pay a dividend and buy back $10 billion of stock.

Barton Biggs, the hedge-fund manager who increased bets on equities before the S&P 500 rallied this year, is getting more bullish.

“I’ve been gradually increasing and I’m up to 90 percent now,” said Biggs, referring to the proportion of his fund that benefits from higher share prices. He spoke in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “There is an awful lot of money that is out of stocks and in very low- yielding fixed-income instruments. I think the odds are that money is going to migrate back.”

Net Long

Biggs, the founder of the Traxis Partners LP, said last month that his net-long position, a gauge of bullish versus bearish investments, in stocks is about 75 percent, up from 65 percent in January.

Treasuries rebounded today following the longest drop since 2006, with yields on 10-year notes falling to 2.36 percent. U.S. stocks posted the best returns when 10-year Treasury yields rose to close to 4 percent, according to a study by S&P that tracked market performance since 1953.

The S&P 500 advanced 1.7 percent a month on average during periods when 10-year yields climbed to a range of 3 percent to 4 percent, according to data compiled by New York-based S&P. That’s the best performance among six categories of rising yields studied by the firm. Stocks began to fall when yields exceeded 6 percent, the study found.

While rising yields tend to boost borrowing costs for companies and act as “a depressant in intrinsic value calculations,” they can also suggest a strengthening economy and prompt investors to switch to equities, according to Sam Stovall, S&P’s chief equity strategist.

“The ‘sweet spot’ for equity prices appears to be a rising rate environment between 3 percent and 4 percent, as a growing economy reduces unemployment while increasing corporate earnings, yet does not trigger growth-slowing efforts by the central bank,” Stovall wrote in a report yesterday.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Buffett Rule Tax Bill Would Raise $47 Billion Over 10 Years

By Richard Rubin - Mar 21, 2012 8:35 AM GMT+0700

Implementing a “Buffett rule” to require a minimum 30 percent tax rate for the highest U.S. earners would raise $47 billion over the next decade, according to a government projection.

The estimate for the proposal backed by President Barack Obama comes from the Joint Committee on Taxation, Congress’s scorekeepers. Lawmakers updated the projection late today to reflect different assumptions about how taxpayers would adjust their capital gains realizations from an earlier $31 billion version.

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Warren Buffett in Omaha. Photographer: Nati Harnik/AP Photo

“The president’s so-called Buffett rule is a dog that just won’t hunt,” Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, said in a statement, adding that the proposal would have little effect on reducing the federal budget deficit. “It was designed for no other reason than politics. There is no economic rationale for it.”

The $47 billion would have covered about half the cost of the 10-month extension of a payroll tax cut that Congress enacted last month. In a broader context, the Congressional Budget Office estimates that Obama’s 2013 budget plan would expand the deficit by $6.4 trillion over the next decade. The bill would reduce that by 0.7 percent.

At the request of the Republican staff on the Finance Committee, the Joint Committee on Taxation analyzed a bill written by Senator Sheldon Whitehouse, a Rhode Island Democrat.

Minimum Rate

The proposal would require a minimum rate for taxpayers with adjusted gross income exceeding $1 million. The bill would phase in the tax so that it would fully affect taxpayers with incomes exceeding $2 million, and it would allow charitable contributions to be deducted.

“No matter how you slice it, that’s real money that could help bring down our deficit,” Whitehouse said in a statement today. “Most important: It’s simply the right thing to do.”

Obama has said he sees the Buffett rule as a guideline for a tax-code overhaul. His budget didn’t include a specific proposal like Whitehouse’s.

The so-called rule is named for billionaire Warren Buffett, who says tax rates on investment income should be raised.

Expiring Rates

Under current law, wages and other ordinary income are taxed at a top rate of 35 percent and capital gains and dividends are taxed at a top rate of 15 percent.

The Joint Committee on Taxation analyzed the bill under a scenario in which expiring income-tax cuts would be allowed to lapse. Under that scenario, wages and dividends would be taxed at a top rate of 39.6 percent, capital gains would be taxed at a top rate of 20 percent and a 3.8 percent tax on unearned income would be in effect.

Continuing current tax policy beyond this year, as many Republicans want, would prevent those rates from going up and keep the effective tax rates of more high-income taxpayers under the 30 percent mark. Under that scenario, which isn’t part of today’s estimate, the bill would raise more money for the government.

The bill is S. 2059.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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Apple’s IPad ‘Significantly Hotter,’ Consumer Reports Says

By Sarah Frier and Adam Satariano - Mar 21, 2012 3:28 AM GMT+0700

Apple Inc. (AAPL)’s new iPad runs “significantly hotter” than the earlier model when conducting processor-intensive tasks such as playing graphics-heavy games, according to Consumer Reports, which tested the device.

The newest version of the market-leading tablet computer ran as hot as 116 degrees Fahrenheit (47 degrees Celsius), the magazine said on its website. Consumer Reports, published by the consumer-watchdog group Consumers Union, used a thermal-imaging camera to record the temperature while playing the action game “Infinity Blade II.”

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The Apple iPad, released for sale on March 16, 2012, is shown here deconstructed. Photographer: Courtesy ifixit

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March 20 (Bloomberg) -- Paul Reynolds, electronics editor for Consumer Reports, talks about the magazine's temperature test of Apple Inc.'s new iPad. The newest iPad runs “significantly hotter” than the earlier model when conducting processor-intensive tasks such as playing graphics-heavy games, Consumer Reports said on its website. Reynolds and Cory Johnson speak with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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A new iPad at a store in London on March 16, 2012. Photographer: Chris Ratcliffe/Bloomberg

Even with the increased temperature, Consumer Reports said the device wasn’t uncomfortable to hold.

“When it was at its hottest, it felt very warm but not especially uncomfortable if held for a brief period,” the magazine said on its website.

Consumer Reports isn’t the only reviewer to note the heating issue. Websites such as Engadget have cited a study by Dutch site Tweakers.net, which found the tablet runs hotter by 10 degrees Fahrenheit. Some consumers in online discussions have cited high temperatures with the iPad.

The new device operates “well within our thermal specifications,” Trudy Muller, a spokeswoman for Cupertino, California-based Apple, said in a statement. “If customers have any concerns they should contact AppleCare.”

Consumer Reports didn’t notice the higher temperature in its initial examination of the new iPad, a process that included testing with games such as “Infinity Blade II.” In the March 16 review, the magazine praised the device, saying it was “shaping up to be the best tablet we’ve ever tested.”

Consumer Reports didn’t say whether the heating issue would determine whether it would recommend the device. When Apple released the iPhone 4, the magazine declined to recommend it, saying it dropped calls when gripped a certain way. After initially playing down the matter, which became known as “Antennagate,” Apple gave out free cases and issued a software update designed to fix the glitch.

To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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