BRIEF

Economics 11.12.10
news & commentary
Friday

most read on bloomberg

1. G-20 Backs Gradual Currency Moves
2. G-20 Leaders Hold Talks on Ireland
3. Ireland Default Predicted in Global Poll
4. G-20 Grinds Towards Accord
5. FSB to Focus on Shadow Banking Rules
6. Trichet Is Buyer of Only Resort
7. IMF Looms as Irish Try to Avoid Bailout
8. Germany’s Economic Growth Slowed
9. Hong Kong May Post 6.1% Expansion
10. Yuan Leads Asia Gains on Inflation
data reports (new york time)
time EVENT Survey PRIOR
2:00 GE GDP s.a. (QOQ) 0.80% 2.20%
3:00 SP Consumer Price Index (MoM) 0.80% 0.10%
3:30 HK GDP (YoY) 6.10% 6.50%
5:00 EC Euro-Zone GDP s.a. (QoQ) 0.50% 1.00%
5:00 EC Euro-Zone Ind. Prod. (MoM) 0.20% 1.00%
6:00 BZ Retail Sales (MoM) 0.00% 2.00%
TBA PO GDP (QoQ) -0.10% 0.30%
9:55 US U. of Michigan Confidence 69 67.7
13:00 AR Wholesale Price Index (MoM) - 0.90%
14:00 AR Consumer Price Index (MoM) 0.80% 0.70%
economic-events calendar
TIME
TBA AR 2010 Ibero American Summit
5:00 SA Central Bank of Mauritius Inflation Rates
5:00 IT Sept. Public Finance Supplement
6:00 HU Hungary Central Bank VP Karvalits
7:30 PO ECB’s Carlos Costa at Conference
TBA US G20 Summit in Seoul, Korea
8:35 US Fed’s Tarullo on Financial Reform
14:00 EC ECB’s Gonzalez-Paramo in Lugo, Spain
16:35 US Fed’s Raskin on Mortgage Servicing
top
TOP currency
CURRENCYperformers
PERFORMERS
One day spot return in percent
G-20 Warning System, Consumer Optimism
■■G-20 WATCH: G- 20 leaders endorsed gradual changes in
first word daybook: currency values and agreed to develop early warning indicators
Beth Mellor to head off economic turmoil. They also said emerging markets
facing capital inflows can take regulatory steps to cope. President
Obama made one of his strongest attacks on China's currency
policy. A crisis-resolution mechanism for Ireland was discussed, with European finance
ministers saying a new system to handle future debt crises won’t apply to outstanding debt
and may include ways for bondholders to share the burden.
■■ ECONOMY: Investors are looking more to China, Brazil and India than developed
countries, a poll showed. The U.S. was in fourth place in offering the most opportunity in a
quarterly Bloomberg Global Poll of 1,030 investors, analysts and traders. U.S. consumers’
outlooks probably improved in November for the first time in three months, economists said.
The University of Michigan preliminary sentiment index may have risen to 69 from a
final reading of 67.7 in October. 9.55 a.m.
■■ COMPANIES: Mizuho Financial will buy 2 percent in BlackRock Inc. for $500 million.
■■ MARKETS: U.S. 30-year bonds surged as the spread between five- and 30-year rates
widened to a record. U.S. corporate bonds due in 15 years or more have lost 2.5% since
Fed plan announced. Irish government bonds gained for the first day in almost three
weeks. Brazilian dollar bonds are underperforming emerging-market debt by the most
since October 2009. The yuan yesterday was at the strongest since 1993 against the dollar.
big picture joseph brusuelas, bloomberg Economist
U.S. Outlook: A 2% Economy Until Housing Is Addressed
Rising external demand for cheaper U.S. Until the housing market is fixed, the U.S. will
goods and services and a three-week run remain a 2 percent economy.
of better-than-expected data have modestly The primary drivers of growth at the mo-
brightened the economic outlook. Growth ment are manufacturing and robust external
from trade alone, though, won't be enough to demand for domestically produced goods
propel output back to the magic 3 percent lev- and services. This is likely to become even
el at which employment gains become robust more pronounced as the dollar depreciates in
enough to cut the unemployment rate. the second half of the year, stoking demand
The slumping housing market, deleveraging from abroad for raw materials, agricultural
by consumers and tight credit likely will com- products and finished manufactured goods.
bine to offset modest growth in employment Most other indicators remain weak. Employ-
and capital expenditures by large companies. ment conditions are still dreary, even though
continued on next page

Keene’s
Euro 0.42
Japanese Yen 0.40
Paul Sheard, Nomura International’s
global chief economist, talks about an

Corner
Danish Krone 0.38
Swedish Krona 0.28 overheating China and the outlook for
Swiss Franc 0.12
the G-20.
Mexican Peso
Norwegian Krone
0.07
0.06 Back Page
South African Rand –0.05
Brazilian Real –0.31
British Pound –0.35
 11.12.10 Bloomberg Brief | ECONOMICS 2

big picture joseph brusuelas

continued from page 1

the surprise 159,000 increase in pri-

vate sector hiring in October is one Spending Beyond Our Means
10
of the more positive data points in the
second half of 2010. 8
Even should that data point evolve
into a trend, the growth in the labor 6
force would be consistent with sta-
bilization of the unemployment rate 4
between 9.5 percent and 10 percent.
That’s hardly cause for celebration as 2

small firms remain reluctant to hire and

0
spending by consumers continues to
outpace gains in income. In Septem-
-2
ber, personal expenditures increased Personal Income (Y/Y Percentage Change)
3.7 percent while personal income Personal Expenditures (Y/Y Percentage Change)
-4
rose by 3.1 percent. The savings rate 2000 2002 2004 2006 2008 2010
fell to 5.3 percent from 5.6 percent in Source: Bloomberg
August.
The holiday shopping season plays
a major role in shaping growth in the Risk of Wage Deflation
fourth quarter. Companies increased 3.5

non-manufacturing retail and auto in- 4.5

ventories by $115 billion in the third 4.5

quarter and $92.2 billion in September 3.5

5.5
alone in anticipation of an increase in
consumer outlays. Tight credit and 2.5
6.5
the trends in income aren’t consistent
with this level of spending unless con- 1.5
7.5
sumers further draw down savings.
Should consumers not make more 8.5
0.5
purchases, retailers will likely have
to move to aggressive discounting 9.5 -0.5
to avoid a dreary 2010 holiday. Their Unemployment Rate (LHS, Lagged 3-Months)
next step would be to pare back on 10.5
Average Hourly Earnings (RHS, Y/Y % Change)
-1.5
inventories, posing a risk to growth in Oct-90 Oct-92 Oct-94 Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10
the first quarter of 2011. Source: Bloomberg

All of this appears to be part of an

adjustment in the rate of consumption
to closer to 2 percent. During the pre-
vious economic expansion and over
the last quarter-century, this rate av-
eraged 2.9 percent, constituting near
70 percent over overall GDP in com-
parison to 67 percent of GDP now.
The adjustment to a rate of consump-
tion closer to two percent represents
a challenge for an economy not firing
on all cylinders.
Then there is the pace of consum-
er deleveraging, a defining feature
of the recovery. Every dollar that a
consumer puts towards cutting debt
is a dollar that doesn’t go to con-
sumption or growth. Deleveraging
quickened in the third quarter, with
mortgage debt down 3.8 percent
versus 1.1 percent in the second
quarter and household debt falling
2.4 percent versus 1.6 percent.
The housing market continues to
be the primary headwind prevent-
ing a greater economic recovery, as
effective policies for addressing the
housing mess still haven’t been put
into place. The Obama administra-
tion’s $75 billion Home Affordability
Modification Program hasn’t come
near to meeting its goals, converting
about 300,000 trial modifications into
permanent loans versus the 3 mil-
lion to 4 million targeted at the outset
of the program. While the Fed has
had some success in narrowing risk
spreads and stimulating economic
growth, monetary policy continues
to struggle to improve the situation of
beleaguered homeowners in a mean-
ingful way. Banks remain reluctant to
lend to consumers still burdened by
elevated levels of debt. According to
Fed Chairman Ben Bernanke, about
one-third of homeowners do not have
enough home equity to qualify for re-
financing and take advantage of the
Fed’s efforts.
The Fed will need help from its fiscal
counterparts to better tackle housing.
The divided federal government that
resulted from the recent U.S. election
may mean that assistance won’t be
forthcoming any time soon.
Demand for goods from abroad,
outlays on equipment and software
by firms and a modest rate of con-
sumption may be enough to support
growth of 2 percent or a bit more. For
the economy to return to full strength,
more of its pistons will need to come
back online.
 11.12.10 Bloomberg Brief | ECONOMICS 3
overnight BY bloomberg news
Global Equity Performance
Daily Percentage Change of the Global Equity Markets
-8,0% -4,0% -2,0% -1,0% -0,5% -0,25%
Europe
■■ The euro-area economy grew 0.4
percent in the third quarter from the
second, when it expanded 1 percent.
Industrial output fell 0.9 percent in
September from August.
–8.0% –4.0 –2.0 –1.0 –0.5
■■ German economic growth slowed
in the third quarter to 0.7 percent from
the previous period, when it surged
a record 2.3 percent. From a year
earlier, output rose 3.9 percent.
■■ The French economy grew 0.4
percent in the third quarter, slowing
political watch
Obama Raps Yuan Policy
President Barack Obama made
one of his strongest attacks on
China’s policy of undervaluing its
currency, minutes after he and other
leaders ended a summit that failed
to agree on a remedy for distorted
trade and investment. "It is under-
valued," Obama said of the yuan
in Seoul. "And China spends enor-
mous amounts of money interven-
ing in the market to keep it underval-
ued." G-20 leaders clashed during
the two-day gathering over whether
Chinese or U.S. policies are more to
blame for economic imbalances that
endanger the global recovery.
0% 0,25% 0,5% 1,0% 2,0% 4,0% 8,0%
from a 0.7 percent pace in the previ-
ous three months.
■■ Italy’s economy grew 0.2 percent
in the third quarter from the second,
when it expanded 0.4 percent. Output
–0.25 0.0 0.25 0.5 1.0 2.0 4.0 8.0%
rose 1 percent on the year.
■■ Other third-quarter GDP reports
show Romania shrank an annual 2.5
percent, Slovakia grew 3.7 percent
on the year, Czech output acceler-
ated to 3 percent, Hungary expanded
1.6 percent and Austrian GDP rose
2.4 percent.
BY bloomberg news
Defense Budget Fight
A proposal by leaders of a federal
deficit-reduction panel, suggesting
as much as $100 billion in defense
cuts in 2015, contradicts the goals
of Defense Secretary Robert Gates
and faces a fight in Congress. The
proposed defense cuts, offered by
deficit panel co-chairmen Erskine
Bowles and Alan Simpson, re-
flect lawmakers’ need to rein in
defense spending as part of restor-
ing fiscal balance and may provide
political cover for Republicans who
say military spending shouldn’t be
exempt in the national debate, ana-
lysts said.
■■ The Dutch economy shrank
0.1 percent on the quarter and Por-
tuguese growth accelerated
to 0.4 percent.
■■ Greek unemployment rose to
12.2 percent in August from 12 per-
cent in July, the highest since monthly
data was first reported in 2004.
■■ The U.K. consumer confidence
index fell 1 point in October to 52, the
lowest since March 2009.
■■ Spain’s underlying inflation rate
was 1.1 percent in October, matching
the 1.1 percent rate in September.
Asia
■■ India’s industrial production rose
4.4 percent in September from a re-
vised 6.9 percent increase in August,
■■ The Philippine credit rating was
raised at S&P for the first time in 13
years by one level to BB from BB-.
■■ Hong Kong’s economy expanded
6.8 percent in the third quarter from a
year earlier after growing 6.5 percent
in the previous three months.
■■ Bank Negara Malaysia kept its
benchmark overnight policy rate
unchanged at 2.75 percent.
Suu Kyi Freedom
Aung San Suu Kyi, symbol of a
48-year struggle for democracy in
Myanmar, may be freed from house
arrest tomorrow, a week after a party
backed by the military junta claimed
a landslide election victory. Suu Kyi,
who has been detained for 15 of the
past 21 years, is due to be released
on Nov. 13, according to the terms
of her house arrest. The junta hasn’t
said publicly whether it will free the
65-year-old Nobel Peace Prize lau-
reate. Suu Kyi’s release may trigger
a review of U.S. and European sanc-
tions against the regime for human
rights abuses.
 11.12.10 Bloomberg Brief | ECONOMICS 4
newsmakers
BY bloomberg news
Russian President Dmitry Medvedev said
the threat of a global currency war was "sig-
nificantly reduced" after the G-20 summit.
Brazilian Finance Minister Guido Mantega
said the "war" became "more explicit" and
it's "almost inevitable" the world will move to
replace the dollar as a reserve currency.
Elton M. Hyder has been elected to the
Federal Reserve Bank of Dallas board of
directors. Hyder is president and CEO of
EMH Corp. and C&E F.L. Partnership.
Mingchun Sun was named managing
director and China research head at Daiwa
Securities Group Inc. Sun is a former No-
mura Holdings Inc. economist.
Finance Minister Elena Salgado said
there’s “no risk” to Spain’s ability to sell
debt, Efe newswire reported.
Signs of Overheating in China Michael McDonough , Bloomberg Economist
New data out of China indicates that
additional monetary tightening will likely be
more severe, and come sooner, than inves-
tors had anticipated.
Consumer prices rose by 4.4 percent
on an annual basis in October, above the
consensus estimate of 4 percent and the
country's inflation target ceiling of 3 per-
cent. New yuan loans came in well above
expectations at 587.7 billion, compared to
a consensus forecast of 450 billion.
Households withdrew 700.3 billion yuan
in deposits in October as real deposit
rates remain negative. Equity and prop-
erty markets rose 8.7 percent and 8.6
percent, respectively, in October on an
annual basis — making it likely that much
of the withdrawals wound up in these more
speculative sectors.
All of this argues strongly for more strin-
gent tightening by Chinese policy makers
in the months ahead. Some steps are
already being taken, as Chinese authori-
ties announced on Wednesday a series
of hikes to the country’s required reserve
ratio, which will take it to 18.5 percent for
Get the World. In Brief. Bloomberg Briefs.
FACE
Neal Soss of Credit Suisse expects Uni-
versity of Michigan Consumer Sentiment
to rise to 75 from 67.7.
Nobel laureate Joseph Stiglitz said Ireland
is in a “dismal” position and there is little
chance measures to reduce the budget and
bail out banks will succeed.
Ireland Energy Minister Eamon Ryan said
his country won’t need a bailout.
Societe Generale strategists Kit Juckes,
Vincent Chaigneau and Benoit Anne said
investors should buy the pound against
the dollar on the reduced prospect of asset
purchases by the Bank of England.
Persistent Lending Growth Likely to Spur More Tightening
2500
Chinese New Loans (ls)
Chinese CPI y/y (rs)
2000
1500
1000
500
0 0
-500
2004 2005 2006
Source: PBOC & Bloomberg
some of the country's largest banks.
Other measures that are likely coming
include additional reserve requirement
hikes and a series of benchmark rate
increases to mop up liquidity and gradu-
ally move real rates into positive territory,
OFF
James Shugg of Westpac Banking fore-
casts a decline to 66. The median forecast
is for an increase in sentiment to 69, ac-
cording to a Bloomberg survey.
Qu Hongbin, co-head of Asian economic
research at HSBC, said China will raise
interest rates by 25 basis points before the
end of this year.
Mexico central bank Governor Agustin
Carstens said the bank will act if needed
to protect the Mexican economy and peso,
even by cutting interest rates.
Shin Hyun Song, South Korea’s presiden-
tial adviser for international economy, said
the nation may raise taxes or introducing
bank levies to control capital inflows.
10
8
6
4
2
-2
2007 2008 2009 2010
increasing investors' incentives to save
via traditional deposit accounts.
The magnitude of the government’s
measures may place pressure on Chinese
equities soon as investors begin to price in
a more aggressive tightening.
www.bloomberg.com/brief
11.12.10 Bloomberg Brief | ECONOMICS 5

FX WATCH David Powell, bloomberg economist

Interest-Rate Differential, Debt Crisis to Weigh on Euro

T
he dollar has rebounded versus after a better-than-expected non-farm value of the euro versus the dollar as
the euro, driven by a reassess- payrolls report last Friday. Additional well. The daily correlation between that
ment of the U.S. interest-rate momentum may have come from the spread and the exchange rate over the
outlook and a Franco-German dec- narrower-than-expected trade deficit last three months now stands at 0.93.
laration that private creditors should in September, which may have con- The interest-rate differential may
share the financial burden of future tributed 0.2 percentage point to third- continue to move in favor of the dollar.
bailouts. Both forces are likely to fuel quarter economic growth, according to Investors are not pricing in a rise in
additional gains for the dollar against Bloomberg estimates. the Federal Funds rate over the next
the euro over the next few weeks. The changed outlook for the U.S. 12 months. That appears realistic. By
The dollar has been boosted by ex- economy has dragged down the dif- contrast, the market expects about
pectations of higher interest rates in the ference between the two-year swap 38 basis points of tightening from the
U.S. The two-year swap rate has risen rate in the euro-area and the U.S. by European Central Bank in the next
about 17 basis points in the last week about 12 basis points, pulling down the year. That may prove difficult as the
economy slows.
The composite euro-area PMI sur-
Dollar Rises With Expectations of Higher Rates in U.S. vey has declined for three months to
1.50 1.30 53.8 from a high of 56.7 in July. Three
consecutive declines normally signal a
1.10
1.45 turn in the business cycle. The expec-
0.90 tations component of the ZEW survey,
1.40 correlated with euro-area growth three
0.70
quarters ahead, fell to minus 7.2 in No-
1.35 0.50 vember from a peak of 53 in April. The
0.30
biggest risk to the interest-rate out-
1.30
looks for the euro area and the U.S. is
0.10 that investors reduce expectations for
1.25
-0.10 monetary tightening in the euro area.
1.20 EUR/USD (lhs) The sovereign debt crisis in Eu-
-0.30 rope is also weighing on the euro.
2-Yr Euro-Zone - U.S. Swap Rate Differential (%, rhs)
1.15 -0.50 The three-month rolling correlation
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 between the euro (versus the dollar)
Source: Bloomberg and the difference between five-year
Greek and German sovereign bonds
has increased to minus 0.67 from
close to zero in mid October. During
that period, the spread has widened
EUR/USD Driven by Rising Greek Sovereign Yield by 345 basis points. The risk premium
1.00 has risen as a result of the Franco-
0.80 German declaration on October 18
0.60 that there should be “adequate partic-
0.40 ipation of private creditors” when the
framework is created for future bail-
0.20
outs. The new mechanism will come
0.00 into effect in 2013. Holders of Greek
-0.20 bonds that mature after 2012 may
-0.40 face losses if Greece restructures its
3-Month Rolling Correlation Between EUR/USD & Greek
-0.60 - German 5-Year Sovereign Yield Spread
sovereign debt.
-0.80
The uncertainty is likely to con-
tinue weighing on the euro at least
-1.00
until EU President Herman Van
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
Rompuy presents his proposals for
Source: Bloomberg reform in December.
11.12.10 Bloomberg Brief | ECONOMICS 6
orange book Passing Costs Along Remains Difficult
richard
yamarone
Bloomberg Economist
This week’s crop of conference calls excerpts
featured more complaints about higher priced
commodities and discussion of whether or
not the increases might be passed along to
customers. As consumers continue to seek
value, one food retailer, Whole Foods, talked
about how hard it can be to pass through
higher prices on inputs.
Two similar sounding companies —
Cisco (Internet equipment provider) and
Sysco (food service provider) — found
the economic situation “bumpy” and
“tenuous,” respectively.
Whole Foods Market [WFMI] Earn-
ings Call 11/3/10: “We’re going to
have to see what the marketplace is
at that time, and what the marketplace
will actually allow to take place in
terms of pass-through.” “It’s hard to
know, because we saw this past year
where the meat suppliers started to
raise their prices, and it didn’t stick.
The consumers wouldn’t accept it. And
eventually as soon as beef prices went
up a little bit, consumers switched
away from it. So meat prices eventually
came back down a little bit.”
Sysco [SYY] Earnings Call 11/8/10:
“While the pace of the macroeconomic
recovery remains sluggish and restau-
rant traffic patterns continue to be un-
der pressure, recent data suggests the
industry is slowly recovering.” “The last
component of the gross margin decline
relates to the significant rate of infla-
tion in the meat, dairy, and seafood
categories which together approached
10 percent. While we typically are
able to pass through modest levels of
price inflation on a timely basis, it is
more difficult in the short-term to pass
through double-digit price increases
to our customers without negatively
‘‘
impacting their business.”
Dean Foods [DF] Earnings Call
11/9/10: “The pricing pressures on The Great Recession
the core dairy business that began
last year continued through the third was remarkable
quarter. To attract customers in a tough
climate, retailers have priced gallons of in both its
private label milk at deep discounts.”
harrowing drop
Cisco Systems [CSCO] Earnings
Call 11/11/10: “We had solid orders
on the way down
growth in the mid-teens or better in the and in its reliance
U.S. federal public sector, and also the
emerging markets public sector. We did
see challenges, for example, in the U.S.
state government business, down in
‘‘
on emerging markets
on the way up.
Q1 approximately 25 percent year over
year from an orders perspective. And to
give you an idea of how rapid a change
this was, the state government busi-
ness was down 48 percent from Q4 to
Q1 from an orders perspective.” continue to expect that the economic
recovery will be gradual and uneven,
Brinker International [EAT] Earnings with the Spirits and Golf markets likely
Call 10/27/10: “Additionally, given the to grow in the low single-digit range for
prolonged nature of this current eco- the full year and the likelihood that our
nomic slowdown, it is unlikely that the Home products market will be relative-
consumer will soon forget the effects ly flat.” “We still have some headwinds
on their pocketbook.” with foreclosures and some inventory
we need to get through out there,
Goodyear Tire [GT] Earnings Call price stabilization’s critical as well. So
10/28/10: “Year-to-date, North America we are looking at the fourth quarter to
tire is slightly above breakeven and its
be down in the same range roughly
third quarter segment operating income
that the third quarter was. So, you
surpassed the prior year despite signifi-
cant raw material headwinds.” “The big- know, low single digits.”
gest question you may have is whether
we can offset the historic increases we Starwood Hotels [HOT] Earnings
have an experiencing. And my answer Call 10/28/10: “The Great Recession
to you is absolutely we can.” was remarkable in both its harrowing
drop on the way down and in its reli-
ance on emerging markets on the way
Raytheon [RTN] Earnings Call
up. Nonetheless, the lodging recovery
10/28/10: “Our customers in the U.S.
is following similar patterns to prior
are dealing with challenges. What cycles. The strength of gateway cities
I’m hearing from the Department of
is spreading to secondary markets.
Defense leadership is that the depart- Luxury, thought to be dead by some, is
ment needs to continue to invest in alive and growing.”
capabilities to defeat threats to national
security. At the same time, economic
conditions require an increased focus
on controlling costs on both sides.”
To see Orange Book postings
Fortune Brands [FB] Earnings Call on the Bloomberg terminal
10/28/10: “As we look ahead, we type NI ORANGEBOOK <GO>
11.12.10 Bloomberg Brief | ECONOMICS 7
news of note
G-20 Back Gradual Currency Moves, Trade Monitoring
Group of 20 leaders agreed to
develop early-warning indicators
to head off economic turmoil as
emergency talks on Ireland’s debt
reminded them the recovery from the
global financial crisis remains fragile.
Finance ministers from the G-20
will work next year on a set of so-
called indicative guidelines designed
to identify large economic imbal-
ances and actions needed to fix
them, according to a joint statement
released as the Seoul summit came
to a close.
“Uneven growth and widening im-
balances are fueling the temptation
to diverge from global solutions into
uncoordinated actions,” the leaders
said in the statement. “Uncoordinated
policy actions will only lead to worse
outcomes for all.”
The agreement may shift the focus
away from the U.S.-China dispute
over the value of the yuan because it
puts pressure on all G-20 nations to
work to limit their trade and savings
imbalances, Morgan Stanley non-
executive Asia Chairman Stephen
Roach said.
“It really gives the G-20 a far
more workable framework to ad-
dress the broad subject of imbal-
ances,” Roach said in an interview.
“This is a far more reliable alterna-
tive than to try to resolve a multi-
lateral problem through a bilateral
currency” dispute.
A U.S. government official said the
meeting also produced a consensus
that exchange-rate changes are to
happen gradually. The American
official, speaking to reporters on
condition of anonymity, said the U.S.
was encouraged by progress on the
Chinese currency.
Global leaders, including U.S.
President Barack Obama and
Chinese President Hu Jintao, met
as global markets were giving a re-
minder of the financial crisis that led
to the first G-20 meeting in Novem-
ber 2008.
— Tony Czuczka and Michael Forsythe
G-20 Leaders Hold Talks on gang Schaeuble said individual EU
Ireland Debt Burden countries must decide for themselves
whether to seek aid.
Group of 20 leaders discussed Ire- The premium investors charge to
land’s debt crisis, which has driven hold Irish debt over German bunds
bond yields to records and weak- climbed to a record yesterday and
ened the euro on concern the Euro- the euro fell to a six- week low
pean Union will need to step in with against the dollar today. Yields on
a bailout. 10-year Irish bonds added 31 basis
Finance ministers from Germany, points to 9.07 percent.
France and the U.K. are monitoring Bailing out Ireland’s financial
developments and will probably issue system could cost as much as 50
a joint statement later today, said Stef- billion euros ($68 billion) under a
fen Seibert, a spokesman for German “stress case” scenario compiled by
Chancellor Angela Merkel. G-20 lead- the finance ministry and central bank.
ers spent a considerable time discuss- The euro fell to $1.3612 as of 1:12
ing Europe’s debt woes, said a U.S. of- p.m. in Tokyo, and recovered to $1.36
ficial who participated in the meetings at 9:34 a.m. in London.
in Seoul and spoke to White House A majority of 1,030 global inves-
reporters on condition of anonymity. tors predict that Ireland will default
“Preparations are in place” for on its sovereign debt, with 51%
any aid request by European Union saying default is likely and 42%
countries facing a debt crisis, Merkel saying it’s unlikely, according to a
told reporters in the Korean capital. Bloomberg poll.
— Tony Czuczka and David Lynch
German Finance Minister Wolf-
Around the Web New research and commentary on the Web
G-20 leaders said in a communique that they will work towards
more market-determined exchange-rate systems and will refrain
from “competitive devaluation.” The International Monetary Fund
critiqued the G-20 process, saying it has made “limited progress”
toward external rebalancing.
http://www.seoulsummit.kr/filedown.g20?boardDTO.boardfile_
seq=201011120000003808
http://www.imf.org/external/np/g20/pdf/111210.pdf
Andreas Fuchs and Nils-Hendrik Klann of the University of Gottin-
gen discuss the credibility of China’s threats of economic retaliation
after the Nobel Peace Prize was awarded to human rights activist
Liu Xiaobo on VoxEU. They write that receiving the Dalai Lama can
decrease exports to China by up to 8.1 percent.
http://www.voxeu.org/index.php?q=node/5768f
Modeled Behavior names the world’s most powerful economist — literally.
http://modeledbehavior.com/2010/11/10/the-worlds-most-powerful-economist/
11.12.10 Bloomberg Brief | ECONOMICS 8

TRENDS
Britons’ Average Economic Output Fell Most in 60 Years in 2009

Britons’ average economic output

slumped the most in 60 years in U.K Real Disposable Income Per Head,
2009 as the U.K.’s worst recession Gross GDP Per Head
255.0
on record eliminated jobs and curbed
spending, the Office for National Sta- 235.0

tistics said yesterday. Gross domestic 215.0

product per person tumbled 5.5 per-
cent from a year earlier, the biggest
drop since 1949, the statistics office
said in a report.
Even so, household disposable
income per person increased by 1.2
percent, helped by falling mortgage-
interest costs, the ONS said.
The U.K. recession, which lasted for
six quarters and ended late last year,
wiped out more than 6 percent of the
economy and 600,000 jobs, making it
the most severe since records began
in 1955. Britons are now bracing
themselves for the deepest govern-
ment spending cuts since World
War II, which will lead to the loss of
almost half a million public-sector
jobs in the next four years.
195.0
175.0
Household income
155.0 GDP
135.0
115.0
95.0
75.0
Source: Office for National Statistics
Household net wealth rose 7.3 per- cession, the statistics office said.
cent to 117,000 pounds ($188,500) Total household debt as a percent-
per person in 2009, the ONS said. age of household disposable income
That’s still below a peak of 128,000 declined to 161 percent in 2009
pounds in 2007 as a result of the from 169 percent a year earlier, the
drop in house prices during the re- ONS said.
— Scott Hamilton

Market Indicators
BOND MARKET 10-YEAR YIELD 1-DAY CHANGE IN BP YTD CHANGE IN BP CURRENCY MARKET LAST VS. USD 1-DAY% CHANGE YTD% CHANGE
U.S. 2.66% 1.8 –117.4 Swedish Krona 6.8155 –0.28% –4.82%
Euro-Area 2.49% 5.0 –90.2 Czech Koruna 17.9365 –0.47% –2.86%
Germany 2.49% 5.0 –90.2 Hungarian Forint 201.0300 –0.78% 6.37%
France 2.94% 4.7 –64.9 Polish Zloty 2.8597 –0.55% –0.11%
U.K. 3.17% 1.5 –84.5 Russia Ruble 30.7334 0.32% 2.33%
Switzerland 1.50% 2.7 –40.0 S. Africa Rand 6.9404 0.03% –6.19%
Norway 3.25% 0.0 –89.5 Turkish Lira (000) 1432275.0000 –0.31% –4.59%
Sweden 2.81% 3.4 –48.6 Brazil Real 1.7200 0.25% –1.40%
Turkey 8.15% 0.0 –268.0 Mexican Peso 12.2539 –0.05% –6.40%
S. Africa 7.97% 2.8 –119.2 Chinese Renminbi 6.6383 0.23% –2.77%
Canada 2.97% –0.6 –64.3 Hong Kong Dollar 7.7514 0.01% –0.04%
Brazil Indian Rupee 44.8300 1.17% –3.64%
Mexico 6.21% 2.1 –179.9 Indonesian Rupiah 8928.0000 0.28% –5.06%
Australia 5.34% 0.3 –30.2 Singapore Dollar 1.2937 0.34% –7.92%
New Zealand 5.42% 2.7 –39.3 S. Korea Won 1127.8400 1.83% –3.11%
Japan 1.00% –0.7 –29.2 Taiwan Dollar 17.6900 0.06% 23.71%
Hong Kong 2.24% 0.7 –34.2 COMMODITY MARKET LAST VALUE 1-DAY CHANGE 1-DAY% CHANGE
Singapore 2.11% 9.0 –55.0 Crude Oil (Brent) 87.29 –1.52 –1.71%
CURRENCY MARKET LAST VS. USD 1-DAY% CHANGE YTD% CHANGE Gasoline (NYM) 223.57 –0.05 –0.02%
Euro 1.3723 0.41% –4.18% Natural Gas (NYM) 3.93 –0.12 –2.94%
Japanese Yen 82.1500 –0.41% –11.69% Gold (CMX) 1403.30 4.00 0.29%
British Pound 1.6067 –0.35% –0.64% Silver (CMX) 27.41 0.54 2.01%
Swiss Franc 0.9741 –0.11% –5.90% Copper (LME) 8670.00 –160.00 –1.81%
Canadian Dollar 1.0109 0.76% –4.02% Aluminum (LME) 2455.00 –2.00 –0.08%
Australian Dollar 0.9908 –0.71% 10.37% UBS-Bloomberg Cmdty 1277.82 –22.47 –1.73%
New Zealand Dollar 0.7764 –0.50% 7.42% Goldman Sachs Cmdty 592.83 –9.59 –1.59%
Danish Krone 5.4319 –0.39% 4.52% CRB Index 314.85 –2.26 –0.71%
Norwegian Krone 5.9253 –0.09% 2.28% Baltic Dry Index 2366.00 –88.00 –3.59%
 11.12.10 Bloomberg Brief | ECONOMICS 9
Keene’s
Corner
Tom Keene and Ken Prewitt talk to Paul Sheard,
global chief economist at Nomura International, on
too much growth in China, and too little in the U.S.
Q: Let’s start with Chinese inflation.
Should we be concerned about 4.4 per-
cent Chinese inflation?
A: We should be a little bit concerned that
we’re starting to see signs of overheating
in China. And suppose that overheating
gets out of hand, obviously the authorities
will have to continue to tighten policy in
various ways. And the concern there would
be not that the Chinese are able to cool
the economy down a little bit — that would
be a good thing — but they prove to be too
successful and really sort of start to rein in
investment. The Chinese economy is very,
very investment-intensive. China’s a big
contributor to global growth, and anything
that really slowed that train down or derailed
it would be quite devastating shock to the
global economy.
Q: We talk about an output gap in the
United States where we’re underper-
forming. Do they have an output gap
going the other way? If they do 8 or 9
percent economic growth, is that too
much for them?
A: Nobody knows what potential growth is
in China. If you look at the last decade or
so, people have been constantly surprised
by how strong growth is. If the Chinese
thought they were going to grow at 7 or 8
percent, they grew at 10 to 12 percent. At
some point, definitely growth has to slow
down in China. And the challenge will be
to make that more of a soft landing than
a hard landing. Hard landing in China is
something, frankly speaking, the global
economy in its still fragile state cannot re-
ally withstand.
Q: A story crossing the Bloomberg; the
European Union renewed tariffs against
China on a chemical used by plastic
bottle makers like Coca-Cola saying
the levies limit the risk of a surge in
imports. Will we be seeing more of this
kind of thing?
A: I think you probably will. The question is
whether these protectionist actions will be
more than a kind of irritation and people
letting off a bit of steam. I think the thresh-
old to a fully-fledged global trade war or
U.S.-China, Euro-China kind of trade wars
is quite high.
Q: Does the U.S. worry about global
growth or does the rest of the globe
worry about U.S. growth?
A: Well, I think it’s a bit of both, but when we
look at the U.S. fundamentally — and I think
Mr. Bernanke at the Fed has shown this
from the last week or so — they really have
to focus primarily on the domestic condi-
tions rather than taking into account all of
the ramifications of the global economy.
Q: You’re our international view today.
Give us an update on Europe. What have
we learned in the last 24 hours about
Ireland, Portugal and Greece?
A: Bondholders obviously don’t want to
be left holding the bag. Politicians on the
other hand, increasingly I think are worried
particularly in Germany and France how
they’re going to be able to sell a bailout
of bondholders to their own taxpayers.
So there’s a little bit of a standoff going
on here. The problem is if the financial
markets get a whiff of any suggestion that
they’re going to be half left holding the can
here, they can always head for the exit.
And that’s really what gives you the escala-
tion in risk premium in spreads, et cetera.
So I think it’s still a very fragile, precarious
situation in Europe.
Q: What are you looking for out of the
G-20 meeting?
A: Not a heck of a lot really. Unless you’re in
a fully-fledged crisis, you don’t usually get
very concrete big policy moves. At the mo-
ment politicians have been playing more to
their domestic audiences rather than to the
theme of global coordination.
Q: Will we see austerity in the
United States?
A: I don’t think we’ll see austerity in the way
that we’re seeing it in Europe, or even in the
U.K. for that matter. I think policymakers in
the U.S. have got a better sense of the fact
that this is not the time to be imposing fiscal
austerity. The economy is still pretty fragile.
Q: So QE2’s going to work?
A: To a certain extent. I think the views
around QE and QE2 are a little bit extreme.
Today’s guests:
Arthur Levitt, former SEC chairman; Louise Yamada
on market technicals; Jonathan Tisch, CEO of Loews
Corp.; NBC's David Gregory; Marc Porter of Christie's;
Dolly Lenz of Prudential Douglas Elliman; Fox's Bret
Baier; Harry Davis, interim dean of the University of
Chicago Booth School of Business
On Air
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