bizzXceleration: Performance, Value and Profit

Int'l  Economic  Outlook

Global Confidence Slumps as Economy Engulfed by Markets Crisis, Oil Prices Confidence in the global economy deteriorated this month from Asia to the U.S. as the oil price rose to a record and the financial crisis deepened, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 10.3 from 21 in June as sentiment toward the U.S., German, Japanese, French and U.K. economies weakened. That was the lowest reading since the survey began in November. Participants in Asia replaced those in Western Europe as the least optimistic. ``We're starting to approach that tipping point when the oil price is really going to impact economies,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam who participated in the survey. ``We're much more pessimistic about the global economy.'' The oil price has almost doubled over the past year, reaching a record above $147 a barrel last week. That's hurting consumers and companies and fanning inflation enough to force central banks to raise interest rates. With the U.S. housing recession eroding confidence in financial institutions such as Fannie Mae and Freddie Mac, global stocks have tumbled into a bear market. The survey was conducted between July 7 and July 11 and collated the responses of 5,450 Bloomberg users from Tokyo to New York. The index of Asian confidence in the world economy fell to 7 from 19.4. Respondents in Japan reported that the world's second- largest economy was in worse shape than a month ago and predicted the country's stocks to fall during the rest of this year.

• U.K.'s Darling Says Global Economic Slump `More Profound' Than Predicted

Europe looks no longer immune to U.S. economic storm Europe, which held the world's economic storms at bay for the last year, has finally succumbed. Spain, Ireland and Denmark are either in, or on the brink, of a recession. Italy is stagnating. France is weakening fast. And Germany, the sturdy locomotive of European growth, is suddenly faltering - dashing most residual hopes that Europe could escape the upheaval in the United States. On Tuesday, an influential poll of German investors by the Center for European Economic Research in Mannheim found that confidence has plummeted to its lowest level since the survey was started in 1991. Shares in Spain swooned after that country's housing crisis claimed its first big casualty: a property developer that filed for protection from creditors. And in Britain, the inflation rate surged - as it has elsewhere in Europe - to 3.8 percent because of soaring prices for food and fuel. "We've seen a sea change in Europe," said Thomas Mayer, the chief European economist at Deutsche Bank in London. "All the bad news around the world has finally come to us." While most economists had predicted that Europe would suffer fallout from the financial market chaos and the broader American malaise, the speed of the deterioration has surprised the soothsayers.

• Fears of recession grow as Britain stops spending The quantity of goods sold in shops across the UK plummeted by 3.9% during June, the biggest monthly drop since 1986
• U.K. Economy Grew 0.2% in Second Quarter, Matching Slowest Pace Since 2001

Japan's Jobless Rate Rises to Highest Since 2006; Household Spending Falls Japan's unemployment rate rose to the highest in almost two years in June and household spending fell, adding to signs that the economy's longest postwar expansion may be coming to an end. The jobless rate climbed to 4.1 percent, the statistics bureau said today in Tokyo. Economists estimated the rate would stay at 4 percent. Household spending declined 1.8 percent from a year earlier, the fourth monthly drop, the bureau said. More women entered the labor market or sought higher paying jobs to supplement household incomes squeezed by the fastest inflation in a decade, the government said. Weakening consumer spending and exports probably caused the world's second-largest economy to contract last quarter. The economy may slip into a recession as higher prices weigh on the expansion, Bank of Japan Deputy Governor Kiyohiko Nishimura said in an interview with the Mainichi newspaper published today. The central bank cut its assessment of the economy this month, saying it's slowing ``further'' because of weak business investment and consumer spending. The risk of a recession will prevent the bank from raising the benchmark interest rate from 0.5 percent this year, economists say. 

 Cortefiel Plummeting LBO Loans Signal Defaults Across Europe in Retailing If there is any doubt European shoppers are following their U.S. counterparts into a recession, look no further than retailers' debt. Chain stores, led by Madrid-based Cortefiel SA and Fat Face Ltd. in London, are the worst performers among the region's 140 billion euros ($220 billion) of leveraged-buyout loans, according to Markit Group Ltd. and Standard & Poor's data. The Spanish company's 1.4 billion euros of loans are trading at less than half of face value, the lowest for a European company that hasn't defaulted, data from Frankfurt-based Dresdner Kleinwort show. ``We're going into a consumer-led slowdown, which is just now starting to show its signs,'' said London-based Pilar Gomez- Bravo, who is in charge of credit funds for Europe at Lehman Brothers Asset Management. ``Retailers have yet to go through the worst part of the economic cycle.'' LBO firm-owned retailers, which have taken on more debt than competitors, are suffering as consumer confidence plunges to a record low in France and to the worst since 1990 in the U.K. Spain may be in a recession and France and the U.K. could follow this year, according to Bank of America Corp. senior economist Gilles Moec in London. ``We've been surprised at the speed at which the indicators have pointed to a downturn,'' Moec said. Corporate defaults are likely to quadruple to 2.7 percent of high-risk, high-yield debt by year-end and reach 4.8 percent within a year, according to Moody's Investors Service.

Emerging Economy Outlook 

China's Economic Growth Cools to 10.1%, Adding Pressure to Slow Yuan Gains China's economy grew at the slowest pace since 2005 in the second quarter, prompting speculation the government will slow the yuan's gains to protect export jobs. Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending. Consumer prices rose 7.1 percent in June, slowing from 7.7 percent in May, the statistics bureau said today in Beijing. The yuan fell 0.2 percent against the dollar, paring a 7 percent advance this year that made it Asia's best performer. Some Chinese officials are pressing for slower currency appreciation to protect jobs as cooling global demand threatens to trigger a slump in shipments from the world's fastest-growing major economy.

• China's Growth Pace Slows (WSJ) China's rapid growth continued to slow in the second quarter as exports eased. GDP expanded 10.1% from a year earlier, slowing from the first quarter's 10.6% increase.
• China's Zhou Seeks Policy `Continuity, Stability' as Economists See Shift

Progress in emerging markets is at risk The global credit crisis has made the financial sector vulnerable to populist attacks. The greatest casualty may be financial development. In developed countries there is a sober search under way for appropriate regulatory and supervisory responses to the lessons learnt from the crisis. But in poorer countries politicians are unwilling to leave regulation to the regulators. The problems in the financial sector in the US allow populists in emerging markets not just to retread their critiques of financial markets but also to hold free enterprise and trade guilty by association. These critics have a point, although it is misdirected. The world is still struggling to understand how to regulate sophisticated financial systems, but it has learnt more about how to manage less sophisticated ones. As a result, the achievements of emerging market financial systems over the past decade have been impressive. Since the Asian and Russian crises, financial regulation and supervision, as well as corporate governance and transparency, have all improved. Governments have made tremendous advances in managing their finances, while central banks have charted more independent policy. These advances help explain why we have not so far seen more collateral damage in emerging markets. Indeed, the correct response in emerging markets to the global crisis should be to accelerate reforms that strengthen the financial and regulatory infrastructure, while taking care to avoid, as far as possible, the misaligned incentives that lie at the root of the crisis. Instead, important reforms are being reversed. In India, politically motivated mass loan waivers, which ruined credit culture in the past, are reappearing. A recent European Bank for Reconstruction and Development/World Bank survey showed deep distrust of many market institutions, including banks, and widespread nostalgia for the debilitating instruments of central planning in many countries of the former Soviet Union.

• East Asia's Economies to Grow 7.6% in 2008, Slowest in 5 Years, ADB Says

Asia Nixonomics Means No Exit From Subsidies-Driven `Noxious' Stagflation Asian governments from India to Malaysia, clinging to budget-busting fuel subsidies, may end up paying an even higher price: saddling their economies with an extended period of stagflation. Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash. Inflation has already reached decade highs throughout the continent and played a role in destabilizing politics. The result will be a combination of slower annual growth, amounting to 7.6 percent in 2008, and accelerating inflation of about 6.3 percent in East Asia, which excludes Japan and the Indian subcontinent, according to a July 22 report from the Asian Development Bank. The region averaged 8.4 percent gross domestic product growth and 3.2 percent inflation in 2004-2007, according to ADB figures. The consequences for Asia ``may prove more socially and politically noxious'' than the currency crisis of the late 1990s, says Uwe Parpart, chief Asia economist and strategist for Cantor Fitzgerald Hong Kong Capital Markets. Unlike the region's rapid recovery in 1997-98, ``there is no V-shaped exit from inflation, only a long and painful one,'' he says.

Rupee, Won, Lira Rally Dies as Inflation Hits Emerging Market Currencies The five-year rally in emerging- market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, say DWS Investments and Morgan Stanley. The 26 developing-country currencies tracked by Bloomberg returned an average 0.92 percent in the past three months, down from 1.63 percent in the first quarter, 8.2 percent for all of 2007, and 30 percent annually since 2003. For the first time in seven years, investors are less bullish on emerging-market stocks than on U.S. equities, a Merrill Lynch & Co. survey showed last week. Confidence in the Indian rupee is weakening after inflation accelerated at the fastest pace in 13 years, stoked by soaring food and energy prices. South Korea's won will drop this year by the most since 2000, while Turkey's lira will reverse its biggest gain since at least 1972, the median estimates of strategists surveyed by Bloomberg show. ``There are some countries that suffer from weak institutions, where central banks have not been proactively fighting inflation and sentiment has deteriorated,'' said Nicolas Schlotthauer, a fund manager in Frankfurt at DWS Investments, which oversees about $400 billion. Schlotthauer said he expects the Indonesian rupiah and the Philippine and Colombian pesos to underperform emerging-market assets. Food and energy prices account for more than 40 percent of inflation in India, Thailand and Turkey, compared with about 25 percent in the U.S., according to Morgan Stanley. Inflation exceeds targets in at least 19 emerging economies.

Dollar Bulls Might Just Meet Godot This Time: Michael R. Sesit The long vigil in expectation of a dollar rebound during the past few years at times resembled ``Waiting for Godot,'' Samuel Beckett's 1953 play about the futility, despair and frustrations of a couple of tramps who spend two days waiting for a man who never shows up. The dollar should prove to be more reliable. It will be buoyed by improving U.S. trade, receding oil prices, a narrower interest-rate gap between the U.S. and Europe, and the detrimental global effects of a slowing American economy. The dollar fell to a record $1.6038 to the euro on July 15. Such news makes for sexy headlines, but more significant is that, apart from the occasional surge up or down, the U.S. currency has traded mostly within a narrow range of $1.54 and $1.58 to the euro since March 31. Such stability is evidence that the market is starting to take seriously Treasury and Federal Reserve assertions about wanting a stronger dollar and that the currency is bottoming out against the euro. The dollar's resilience is also a sign that Europe's high- flying common currency may be tiring. The ECB is being squeezed by the same accelerating-inflation/slowing-growth vice that besets the Fed.

• Taylor rules, exchange rates, and the speculation about the dollar/euro rate

Trade Disruptions

WTO trade crawl forward, held down by industrial products Crucial WTO trade talks inched forward in overnight talks but rich and poor countries now face a race against time to resolve their differences to resolve the seven-year round.Negotiators say talks on the industrial products sector were slowing progress, and many issues remained unresolved.Argentine negotiator Nestor Stancanelli said before heading into Thursday's talks that "big differences" remained, particularly in industrial products. Emerging and developed countries have slipped into a familiar pattern of demanding new moves from each other, with the success of this week's high-profile gathering hinging on whether they can find common ground. The round began in the Qatari capital Doha seven as developed and developing nations refused to give ground over subsidies and tariffs for farm and industrial products.years ago with the aim of helping poor countries take advantage of the freer global flow of goods and services, but has since been delayed by

WTO talks risk collapse as US battles China, India The world's largest commercial powers came into crucial talks on a new global trade pact pledging to assume the shared responsibility needed for solving planetary problems from climate change to food and energy prices. But they are close to letting an arcane dispute over a seldom-used safeguard on farm imports spoil a trade deal worth billions of dollars to the global economy. With huge question marks remaining on provisions to open up farm and industrial markets, the World Trade Organization's leading members on Monday were sharply divided over an issue worth practically nothing to the global economy. A number of trade officials described the debate pitting the United States against China and India as one of principle -- and not just hard economics. While farm import safeguards currently exist in rich and poor countries, they are rarely used. The dispute over the current proposals concerns the threshold for when developing nations could spike their tariffs, and how high those taxes could rise. Shark accused China and India of insisting on allowances to raise farm tariffs above even their current levels. That violates the spirit of the trade round, the U.S. and other agricultural exporters argue, because it is supposed to help poorer countries develop their economies by boosting their exports of farm produce.But China and India were not alone. Faced with rising food prices, a number of developing nations have sought wide loopholes against opening up their farm markets -- either by blocking certain strategic products such as rice or grains or through rules that would allow them to raise tariffs sharply if faced with a sudden flood of imports.

Trade Talks Collapse as US Feuds With China, India Trade officials said Tuesday that a high-level summit to salvage a global trade pact collapsed, after the United States, China and India failed to compromise on farm import rules. Trade officials from two developed and one emerging country told The Associated Press that a meeting of seven commercial powers broke up without agreement at the World Trade Organization on Tuesday. … a U.S. dispute with China and India over farm import safeguards had effectively ended any hope of a breakthrough.A number of trade officials described the debate pitting the United States against China and India as one of principle -- and not just hard economics. Others blamed a lack of courage for the standoff. The issue concerned a "special safeguard" developing countries led by China and India have demanded to deal with a sudden surge of imports or drop in prices. While farm import safeguards currently exist in rich and poor countries, they are rarely used. The dispute over the current proposals concerns the threshold for when developing nations could spike their tariffs, and how high those taxes could rise. The United States had accused the two emerging powers of insisting on allowances to raise farm tariffs above even their current levels. That violates the spirit of the trade round, the U.S. and other agricultural exporters argued, because it is supposed to help poorer countries develop their economies by boosting their exports of farm produce.

Shooting Ourselves in the Food Images of people rioting in many countries to protest high prices are vivid reminders of the ongoing food crisis. Rising food prices are eroding the real income of people all over the world, undoing some of the last decade's progress in combating poverty. More than 100 million people in developing countries are now at risk of once again falling below the poverty line. Global grain prices have more than doubled since early 2006, with over half the jump in prices occurring this year. Record food and oil prices are coupled for the first time in 35 years, threatening to end the golden period of low inflation that has been enjoyed practically worldwide for the past several years. The specter of stagflation haunts us as the cost of food and oil continue to rise, and we have yet to glimpse any light at the end of the tunnel of the current financial mess.

Oil/Energy Situation

Rerun of China Oil Binge Unlikely Here's one reason for "oil bears" to be optimistic: History in China isn't likely to repeat itself. In 2004, China was swept by severe shortages of electricity, as supply from its coal-fired power plants couldn't meet demand. Thousands of factories rushed to fill the tanks of diesel-powered backup generators in an effort to secure power to keep their production lines open. The result: China's oil consumption in 2004 jumped 16%, an unexpected surge that helped fuel a run in global oil prices. This year, China is facing an electricity shortfall that officials predict will be at least as big as the one that rocked global oil markets four years ago. But analysts say China won't go on another big oil-buying binge, thanks largely to already-rising prices and a crimp in the spending power of Chinese manufacturers. What happens with China's oil demand could have a big impact on the share prices of oil producers -- not to mention on the global economy. China is the world's second-largest oil consumer after the U.S., and its oil demand is among the fastest growing in the world; the country is likely to use an average of eight million barrels a day this year, 25% more than it consumed in 2004. That rapid growth has been widely cited as a main cause of the explosion in crude-oil prices over the past several years.

Has All the Easy Oil Been Found? With gasoline and oil costing once-unthinkable barrels of cash, the notion that things in our petroleum-addicted world soon will get worse -- maybe much, much worse -- is spreading fast. But behind today's oil mania lies a deeper dread: that the world has found all the easy-to-reach oil, and the daily supply of the essential black goo will fall further and further behind escalating global demand. The day-to-day cost of oil reflects a sharply weaker dollar, market speculation and geopolitical events such as unrest in Nigeria and other oil-exporting countries. At the same time, producers are barely slaking the world's energy thirst, and the market increasingly is fixated on the long-term supply picture. Adding to the angst, several industry heavyweights caution that above-ground issues -- including instability among oil-producing nations and shortages of drilling rigs and engineers -- threaten to impose a "practical peak" on oil output that could be just as wrenching as the geologic peak envisioned by Hirsch and others. In five years, demand for oil may exceed 94 million barrels a day and continue rising, spurred by growth in China and India, the International Energy Agency estimates. Experts put daily global production at between 82 million and 86 million barrels, and even the most optimistic oil authorities can't see production keeping up with demand without a big boost from unconventional sources such as Canada's vast oil sands or U.S. oil shale. Getting crude from such sources is more difficult, expensive and environmentally harmful. Supply-Demand Imbalances graphic, Resources: Peak oil websites

The Real Question: Should Oil Be Cheap? Expensive oil hurts, but there's a business case to be made for a floor under the price of crude. Obviously, the soaring cost of energy is causing plenty of pain for Americans, especially at a time when they're being hammered by declining house values and rising food prices. The pain isn't about to ease, either. That will kick in this fall and winter, with dramatic increases in the prices of heating oil, natural gas, and even electricity. But Amite Foundry's resurgence is just one of countless examples of a deeper truth: Expensive energy, in many ways, is good. Why? When the price of oil goes up, people will use less, find substitutes, and develop new supplies. Those effects are just basic economics. Things are so painful now, many economists say, because of the past two decades of cheap oil. Prices stayed low in part because they didn't reflect the full cost of extras such as pollution, so there was little incentive to use energy more wisely. If those extras had been counted, the country would be better prepared for both today's soaring prices and the day that global oil production begins to decline. That's why there is growing interest, from both the left and right, in a policy that uses taxes to put a floor under the price of oil. Above a certain level—say $90—there would be no tax. But if the world market price dropped below that, taxes would kick in to make U.S. users pay the target amount. Expensive energy is a powerful medicine. It may hurt when taken, but it brings long-term cures for a host of ills. It compels companies and people to put fewer miles on the car, ditch the SUV, or install more efficient heating

Vast Oil, Natural Gas Reserves Estimated in Arctic Some 90 billion barrels of oil and a third of the world's undiscovered natural gas lie beneath an area north of the Arctic Circle, government scientists estimate in the largest-ever survey of the energy resources there. The U.S. Geological Survey, which announced the findings Wednesday, called the region, which includes parts of the United States, Russia and Canada, "the largest unexplored prospective area for petroleum remaining on Earth." All told, the area accounts for about a fifth of the world's recoverable oil and natural gas reserves, the USGS says: 13 percent of the oil, 30 percent of natural gas and 20 percent of natural gas liquids. At today's current consumption rate of 86 million barrels a day, the yet-to-be-tapped oil in the Arctic would supply global demand for three years. Pursuing it is sure to be controversial with environmental groups that want to protect the pristine wilderness and the area's endangered species. The oil is considered "technically recoverable" using existing technology, but the survey did not consider the cost of overcoming obstacles to drilling, such as permanent sea ice or deep ocean waters. Melting caused by global warming has opened up some areas that were previously considered too difficult to reach. Oil companies have already spent billions to secure leases to explore some of the uncharted waters.

Governance and Geo-Politics

BP Losing 23% of Production Looms as Russians Assail Investment The dispute that has come to symbolize the challenges of producing oil in an era of high prices and short supplies boiled over in May. That's when BP Plc, the world's third-largest oil company by sales, faced off in a private meeting with its billionaire partners in a 50-50 Russian joint venture called TNK-BP Ltd. at the beachfront Four Seasons Hotel near Limassol, Cyprus.

TNK-BP: something rotten in the state of Russia With its tail between its legs, Britain's biggest company is being all but chased out of Russia. BP will try to put a brave face on the retreat of Bob Dudley, still nominally chief executive of TNK-BP, to the safety of St James's Square. But it does not look good. When you wish to assert your authority, the best way to conduct business is not by e-mail from an office thousands of miles away. If BP is to avoid a de facto transfer of management authority to Messrs Fridman, Khan, Vekselberg and Blavatnik, the partners in the AAR consortium, it will need to manufacture a settlement and it is likely to prove expensive. The consortium's actions, if not its words, suggest that its motivation in gaining control of TNK-BP is financial, rather than a keen interest in the oil-bearing sedimentary basins of Siberia. The Russian partners have attempted to cut the joint venture's capital investment in favour of higher dividends. It seems that the argument is not about control of the helm, but control of the cash box. BP's problem is that it is struggling to keep control of its investment in a country where the law enforcement system is spinning out of control. Mr Dudley's retreat comes as another foreign investor has exposed evidence of the extraordinary grip that official corruption has taken on Russia. HSBC and Hermitage Capital, the fund-management group run by Bill Browder, have alleged that senior officials in Russia's Interior Ministry stole $230 million from the Russian Treasury in an elaborate scam involving bogus documents and fabricated court cases. 

Russia's Treatment of Browder Highlights Corruption: NYT Link William F. Browder was one of the most prominent foreign investors here, a corporate provocateur who brought the tactics of Wall Street shareholder activists to the free-for-all of post-Soviet capitalism. Until, that is, the Kremlin expelled him in 2005. Mr. Browder then focused on protecting his billions of dollars of stakes in major Kremlin-controlled companies like Gazprom, and on fighting to return to a land where he had deep and unusual family ties. His downfall offers a study in how the Kremlin wields power in the Putin era. The rule of law is subject to its wishes, and those out of favor are easy prey.  Mr. Browder’s case points to the official corruption that afflicts Russia, and the Kremlin’s unwillingness to adopt serious measures to combat it by bolstering the independence of the police and courts. The Kremlin may be reluctant to do so because it wants Russia’s wealth to accrue to those loyal to the leadership. Mr. Browder does not know exactly why the Kremlin turned against him. But the Kremlin was consolidating control over prized companies like Gazprom and appeared to be chafing at criticism from outside shareholders. Once things went bad, Mr. Browder had no recourse. The police confiscated vital documents from his lawyer’s office in Moscow. He discovered that his holding companies had been stolen from him and re-registered in the name of a convicted murderer in a provincial city. Whoever was behind the scheme took over much of Mr. Browder’s corporate structure in Russia, but failed to get at his investors’ money. Even so, in recent weeks, Mr. Browder said he had learned that his former holding companies had been used to embezzle $230 million from the Russian treasury.