December 8, 2023

As Summers’s Odds Rise, Stimulus Easing Is Seen

The jitters even have some analysts betting that a Summers nomination could lead to slower economic growth, less job creation and higher interest rates than if the president named Janet L. Yellen, the Fed’s vice chairwoman.

Businesses raising money and people buying homes and cars all have faced higher interest rates in recent months as the Fed’s campaign to suppress borrowing costs has faltered. The rise in rates reflects optimism that the economy is gaining strength, and an expectation that the Fed will begin to pull back later this year. But a wide range of financial analysts also see evidence of a Summers effect.

Many investors expected that Ms. Yellen would be nominated to replace Ben S. Bernanke as head of the central bank, a choice that would have sent a clear message of continuity. Instead, investors are now trying to anticipate how Mr. Summers might change the Fed.

The unease is the product of a little information and a lot of speculation. Mr. Summers, a Harvard University economist who served for two years as Mr. Obama’s primary economic adviser, has said little about monetary policy in recent years. Investors are left parsing a handful of comments in which he has expressed some doubts on the benefits and concern about the consequences of the Fed’s policies.

“People don’t know what Larry might do,” said Mohamed El-Erian, chief executive of Pimco, the giant bond fund manager. “There’s a lack of a lot of information on Larry’s views. We don’t have enough information to make an assessment, just some second- and thirdhand accounts.”

Some doubts always attend the arrival of a new Fed chairman, but the consequences are particularly freighted at the moment because the Fed’s effectiveness increasingly depends on its ability to reduce uncertainty among investors. The central bank floored its traditional gas pedal five years ago when it pushed short-term interest rates to zero. It has since focused on further reducing long-term interest rates — which determine the cost of most kinds of borrowing — largely by convincing investors that short-term rates will remain near zero.

The sense of uncertainty is heightened by the fact that as many as five of the Fed’s seven governors may be replaced in the next year.

One governor, Elizabeth A. Duke, stepped down at the end of August. A second governor, Sarah Bloom Raskin, has been nominated to serve as deputy Treasury secretary. Mr. Bernanke’s term ends in January, as does the term of a fourth governor, Jerome H. Powell — although Mr. Obama could choose to reappoint Mr. Powell, a Republican who joined the Fed only in May last year and is said to be open to a longer stay. If Ms. Yellen is passed over by Mr. Obama, she, too, could choose to leave even before her term as vice chairwoman ends in October 2014.

Mr. Obama said last month that he would not announce his choice for the Fed’s top spot until the fall, and that he was considering at least three candidates: Mr. Summers, Ms. Yellen and the former Fed vice chairman Donald L. Kohn. But the president’s top economic advisers uniformly support the selection of Mr. Summers. They regard him as a creative thinker and an experienced crisis manager, qualities they value in particular because they expect the Fed may confront difficult choices as it begins to retreat from its six-year-old stimulus campaign.

They also insist that Mr. Summers supports the Fed’s efforts to revive the economy and would continue those efforts.

But Mr. Summers has criticized the Fed’s purchases of Treasury securities and mortgage-backed securities, warning that bond-buying on such a scale could distort financial markets. He said it was “less efficacious for the real economy than most people suppose.” As a result, many investors suspect he would seek to end those purchases more quickly than Ms. Yellen.

Julia Coronado, chief North America economist at BNP Paribas, said last week that the yield on the benchmark 10-year Treasury note already had started to rise as investors price in a Summers nomination. She added that the yield could eventually rise half a percentage point more than if the president nominated Ms. Yellen instead. Ms. Coronado estimated that this Summers effect would reduce domestic economic growth by 0.5 to 0.75 percentage point over the next two years, which could reduce job creation by 350,000 to 500,000 jobs.

A Summers nomination, she wrote, “would come at a cost of higher market volatility and interest rates, and a less buoyant economic recovery.”

Leadership changes at the Fed tend to unsettle financial markets more than changes in leadership at other major central banks, according to a 2007 study by Kenneth N. Kuttner, an economist at Williams College, and Adam S. Posen, president of the Peterson Institute for International Economics. That is partly because the Fed is the closest thing to a global central bank. But it also reflects the outsize role of the Fed chairman, who is less constrained than other central bankers in making policy.

Mr. Bernanke has sought to reduce the chairman’s role, most notably by adopting a 2 percent inflation objective. The Fed also has sought to lock in the course of near-term policy by announcing its intent to hold short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent. But Mr. Posen said that the market turbulence of recent months showed that investors still thought the choice of chairman would determine the course of policy. “This is one of the reasons I don’t believe that forward guidance works,” he wrote in an e-mail, referring to the Fed’s declaration of intentions regarding short-term rates. “There is no way it can be binding on a new chairperson.”

Historically, new Fed chairmen have been able to settle the doubts of investors by acting quickly after taking office.

In the week after President George W. Bush announced Mr. Bernanke’s nomination in October 2005, the yield on the 10-year Treasury note rose to 4.57 percent from 4.39 percent as buyers demanded increased compensation against the risk of higher inflation. Bond yields also rose after Alan Greenspan was nominated as Fed chairman in 1987. Both men moved almost immediately to raise interest rates and bond yields receded.

But Mr. Summers would have no comparable opportunity. The most obvious way to show his commitment to the Fed’s stimulus campaign, at least in the short term, would be to do nothing. “The only thing he can do,” said Ms. Coronado, “is to show more patience.”

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As Asia Slows Down, Investors May Still Want to Dive In

Stock funds that specialize in Asia, excluding Japan, were up 2.3 percent in the period, according to Morningstar’s database, compared with again of 4.8 percent for Europe funds and a 10.6 percent for funds concentrating on American stocks.

Investment advisers attribute the performance to both a concern that developments around the world, and in Asia itself, will undermine the strong economic progress for which the region is known, and to a general sense of unease and desire to limit risk. But the weakness is likely to be short-lived, in their view, and they encourage investors to consider using it to buy good companies at reasonable prices.

“Expectations of growth have slowed, and that has really caused valuations to decrease,” said Nicholas Kaiser, chief investment officer at Saturna Capital. “We’ve seen the slowdown, but we don’t think it’s a major problem. It’s a buying opportunity.”

The deceleration in some of the largest Asian economies is no mere accident, but rather has been engineered by the authorities to try to curb inflation. Samuel Stewart Jr., manager of the Wasatch World Innovators fund, pointed out that the region was not hit as hard as other parts of the world during the 2008 recession. When global growth took off again, Asia took off especially quickly — maybe too quickly.

Asian economies “have done so well that governments are starting to tap on the brakes,” he said. “India and China are trying to slow their economies down, and it’s working.”

That is not the only source of potentially slower growth that is unsettling investors. Another is the same set of events, especially the latest flare-ups of European financial woes, that have depressed other markets.

“People are starting to worry about a recession in Europe,” Mr. Stewart said. “That won’t do any good for any country trying to export there.”

Worry, more than any tangible economic impact, may be what is depressing Asian markets. The region, which contains mainly emerging economies, is susceptible to strong capital inflows and outflows based on greed and fear — and fear has appeared ascendant of late.

“Short term, investors are looking at Asia in a classic risk-on, risk-off kind of way,” said Robert Horrocks, chief investment officer at Matthews International Capital Management.

For patient investors, Mr. Horrocks sees a lot to recommend about Asia — particularly the youth and aspirations of many of its people. They create a demand for products and services and provide a work force with the vitality to provide them.

“Look at the demographics,” he said. “There are younger countries like Indonesia, the Philippines, Vietnam and India. People want to buy their first house and their first car, and they want to have their first holiday abroad.”

As for “businesses that we would be happy owning for a decade,” he looks at industries that tend to cater to Asian consumers and have a small number of strong competitors — areas like telecommunications, consumer staples and fast food. He prefers them to the exporters of cheap goods (“the guys making garden furniture for Walmart”) that fit a stereotype of corporate Asia.

Mr. Kaiser offers a similar assessment of the region and its people.

“Living standards have a long way to rise, and they’re hungry entrepreneurs,” he said. “These are things we don’t find in much of the rest of the world, things we’re attracted to. We’re increasing exposure because of the long-term growth outlook.”

Mr. Kaiser finds countries in the Association of Southeast Asian Nations, including Malaysia, Indonesia and Thailand, especially appealing for their “young and cheap labor, raw materials, rising populations and the chance for very big increases” in economic output that can drive much growth.

He is also a fan of the consumer theme and favors companies that could benefit from the quest for a better quality of life. An example is KPJ Healthcare, a hospital chain in Malaysia. A more back-to-basics selection is PT Semen Gresik, a large Indonesian cement company.

MR. STEWART and his Wasatch colleagues favor investing in Indonesian growth through Jasa Marga, a toll road operator, and Ace Hardware Indonesia, a familiar name in what for many is an unfamiliar place. He also likes financial services stocks, including Security Bank in the Philippines and PT Bank Tabungan Pensiunan Nasional in Indonesia.

For all of Asia’s promise, some fund managers are reluctant to buy now. Edward Chancellor, a member of the asset allocation team at GMO, acknowledged that “valuations are not trying, to say the least,” but he expressed misgivings about economic and political conditions in China, the region’s dominant economy. “I would argue that China has had a credit bubble the last three or four years,” Mr. Chancellor said, noting that debt levels, as a proportion of economic growth, have risen substantially.

He also highlighted the reputation of the Chinese leadership for compelling banks and other businesses, state-owned and private alike, to engage in activities that meet some grander social purpose than the benefit of shareholders.

“I think China’s problems will continue to be a source of concern,” he warned. “It’s quite questionable whether China can be an engine of global growth going forward, and that has large repercussions for the region.”

Mr. Horrocks accepts that “banks are not efficient allocators of capital in China,” but he glimpses a more widespread overhaul in the way business is done. “There has been very robust productivity growth and innovation,” he said.

He advises concentrating on such developments rather than short-term impediments to economic progress and healthy investment returns.

“Asia has good, solid fundamentals and well-developed capital markets,” he said. “Over periods of six to 12 months, it’s susceptible to risk-on, risk-off movements. The key is to focus on long-term factors. Look after those things and the growth will look after itself.”

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New Unease for Europe’s Rescue Plan

After marathon talks in Brussels during the weekend, Chancellor Angela Merkel of Germany, President Nicolas Sarkozy of France and other leaders returned to their respective capitals while high-level aides remained to work on issues like debt relief for Greece and measures to strengthen European banks.

But one of the most concrete results of the weekend talks — a plan to compel banks to bolster their emergency reserves — disappointed expectations and suggested that Mrs. Merkel and Mr. Sarkozy were still hesitant to commit resources to a problem that threatens not only the survival of the euro but the world economy.

Banks would be required to raise their reserves by about 100 billion euros ($139 billion) for the euro area as a whole. That sum is at the low end of analysts’ estimates and is well below what many analysts consider adequate to remove doubts about the creditworthiness of European banks and to restore their access to international money markets.

“The key to re-establishing confidence is to reassure markets you have dealt with the weak links,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “It seems the parameters they have agreed on do not accomplish that.”

Mr. Véron said the standards applied appeared to be so lenient that even the troubled French-Belgian bank Dexia would not be required to raise more capital, if it were not already the focus of its second government rescue in three years.

The tentative plan would give banks until June 30 to increase their reserves, which they could achieve by selling new shares, retaining profits or selling assets. But taxpayer support would be required for weaker banks.

In response to criticism that the time span was too long, some officials in Brussels were arguing to move the deadline to the end of the first quarter.

The recapitalization plan seems to be based on the costs of a default by Greece, but investors have already shifted their focus to Italy and the risk that Rome’s dysfunctional politics could endanger the country’s ability to service its debt.

Prime Minister Silvio Berlusconi did little to ease the discomfort as he struggled Monday to persuade his own allies to support pro-growth measures that he first promised in August. During the weekend, Mrs. Merkel and Mr. Sarkozy were openly disdainful of Mr. Berlusconi’s progress so far.

The amount being discussed for the recapitalization plan is not enough to reassure investors about the risks emanating from Italy, said Jon Peace, an analyst in London for Nomura. “We’re going to need potentially much more capital to provide that comfort.”

If there were a positive message to emerge from the meeting, it was the acknowledgment by European leaders that the crisis required a battery of measures, including bank recapitalization.

“The Europeans have now come to the conclusion that something needs to be done about the capital of the banks, and they should do it well, consistently and in a coordinated fashion without missing the target,” said an official who has participated in the talks, who spoke on the condition of anonymity because the discussions were continuing and confidential.

Talks with banking industry representatives in Brussels were also continuing about a steeper devaluation of Greek debt, perhaps as much as 60 percent, to a level the country has a chance of repaying. But banks, which had agreed earlier to a 21 percent “haircut,” seemed to be taking a hard line.

One of the main negotiators for the banking industry warned of dire consequences if banks were forced to accept losses against their will.

“Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default, would isolate the Greek economy from international capital markets for many years and would impose a harsh burden on the Greek people as well as European taxpayers,” said Charles H. Dallara, managing director of the Institute of International Finance, a banking group.

“It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth,” Mr. Dallara said in a statement.

Liz Alderman reported from Paris. Stephen Castle contributed reporting from Brussels and Gaia Pianigiani from Rome.

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Unease About Greece Grows as S.&P. Downgrades Its Debt Again

Standard Poor’s downgraded Greece’s debt once again, and Moody’s Investors Service put its rating on review for downgrade, compounding pressure on the government as it seeks to come up with a solution shy of a debt restructuring, including privatizing state enterprises, though there is resistance to that step.

Analysts and investors said they did not see how Greece could get its debt under control when output is slumping and there is little sign that efforts to restructure the economy are bearing fruit.

“Austerity is fine, but what you really need is investment and growth, and we just don’t see that,” said Jonathan Lemco, a sovereign credit analyst at Vanguard, the mutual fund company.

S. P. lowered its rating to B from BB –, reducing Greece to the same creditworthiness as Belarus, the lowest-rated countries in Europe. In a statement, S. P. noted increasing sentiment among governments in favor of giving Greece more time to repay 80 billion euros ($115 billion) in loans from the European Commission. But the commission would probably insist that private bondholders also accept slower repayment, S. P. said.

Even if creditors eventually get all of their money back, S. P. said, “such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt.”

The Greek government accused S. P. of responding to market and news media speculation.

“There have been no new negative developments or decisions since the last rating action by the agency just over a month ago,” the Ministry of Finance said in a statement. The downgrade “therefore is not justified.”

European political leaders as well as the European Central Bank have ruled out any kind of restructuring of Greek debt, saying it would undermine confidence in other countries like Portugal and Ireland and potentially create panic in financial markets. The strategy so far has been to play for time, in hopes that the economies of Greece, Portugal and Ireland will recover and make it easier for them to cope with their debts.

In Greece, the government is under pressure from its foreign creditors to raise money by privatizing state enterprises, but it is facing fierce opposition from powerful labor unions and critics within the governing Socialist party itself.

A program that is expected to go before Parliament next week is ambitious. It would authorize the selling of stakes in three utilities, the Greek railway, the racetrack and the national lottery. Also up for sale or lease are assets like disused facilities built for the 2004 Olympic Games and the site of the capital’s former airport, which the government of Qatar has expressed an interest in developing.

In all, the government hopes to raise 50 billion euros ($72 billion) by 2015 to help avert a default, although many analysts consider that figure to be overly optimistic. By pressing ahead, the government is seeking to demonstrate its resolve in meeting the terms of its bailout.

Indeed, representatives of the International Monetary Fund and the European Union are back in Athens to decide whether to release the next installment of the emergency loan package, estimated to be 12 billion euros. The fact that the Greek budget deficit for 2010 was revised upward, to 10.5 percent of gross domestic product from an estimated 9.5 percent, suggests that inspectors will be particularly strict this time.

Greek officials acknowledge in private that they may miss fiscal targets set by the I.M.F. because of a deeper-than-expected economic slump. In 2013, Greece will be required to raise as much as 30 billion euros ($43 billion) from the debt markets.

The government insists the privatizations will not be derailed.

“Commentators have doubted the Greek government’s resolve at every juncture of the crisis, and in each case the government has proven them wrong,” George Petalotis, a spokesman for the government, said in a statement.

The Greek labor unions, however, are determined to stop the sales, fearing that private ownership will lead to job cuts. They are lining up a barrage of protests, starting with a one-day general strike on Wednesday.

At the front line is Genop, the union representing workers at the Public Power Corporation, the state electricity company. Genop has threatened rolling strikes that could cause prolonged power reductions across the country just as the summer tourist season begins.

Niki Kitsantonis reported from Athens, and Jack Ewing from Frankfurt.

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Wealth Matters: Net Worth, Self-Worth and How We Look at Money

This is one of the findings of a new academic study, “Money Beliefs and Financial Behaviors: Development of the Klontz Money Script Inventory,” published in the current issue of The Journal of Financial Therapy.

The study, conducted mainly by Brad Klontz, a research associate professor at Kansas State University, and Sonya L. Britt, an assistant professor there, comes at a time of high financial anxiety among most Americans. The jobless rate continues to be high. And houses, the asset that made so many people feel rich before the recession, have yet to regain their value. In fact, according to the Standard Poor’s Case-Shiller Home Price Index, home prices in 20 metropolitan areas, after some modest gains, fell again in February. For those whose net worth is largely tied to the value of their houses, it could take a long time for their nest eggs to rebound, even if jobs do come back.

Amid this financial unease, Mr. Klontz said he set out to test observations he had been gathering in his practice as a clinical psychologist in Kapaa, Hawaii, for over a decade. He found that some people were under stress about having too little money while others were anxious about losing what they had or felt guilty for having so much. Some people immediately disliked anyone with money, while others would spend their money immediately without regard to the future.

The Klontz study asked 422 people about 72 money-related beliefs and then analyzed correlations among the answers. This produced four broad categories that Mr. Klontz called “money scripts”: money avoidance, money worship, money status and money vigilance. How does he define them?

Those who are in the money avoidance camp share beliefs that make them distance themselves from money. Mr. Klontz said this group may be worried about abusing credit cards. They may believe that they do not deserve to have money and may sabotage their own financial well-being. People in this group tend to have low incomes and net worth. They also tend to be younger.

People who fall into the money worship camp would seem to be the opposite, but their behaviors are equally destructive. They believe that an increase in income or a windfall will make everything better and love the status derived from the things that money can buy. This belief also lands people in debt because they use whatever credit they have to buy things that will impress others.

“They believe money will solve all of your problems,” Mr. Klontz said. “This is the money belief pattern that afflicts the majority of Americans.”

Anxiety about money status occurs when people’s self-worth is linked to their net worth. These people often take bigger financial risks because they want to have the stories of big gains to impress their friends. (Don’t expect them to tell you when those big bets do not pay off.)

The only affliction that did not have an overwhelmingly negative impact on people’s financial future was money vigilance. People with this disorder do not like to share information about their income or wealth, but they also do not spend foolishly. Still, excessive wariness about spending can keep these people from enjoying the benefits of what money can buy. On the other hand, while they did not necessarily have higher incomes, they paid off their credit card bills each month.

“Maybe some anxiety and vigilance around money is good for your bottom line,” Mr. Klontz said.

Not surprisingly, the four money scripts illustrate problems that have less to do with money than with what money represents. But what may be surprising is that the study found few links between who held what belief and their family background, race, gender, education level or income.

The majority of the people rated their highest level of education as either a college or graduate degree. Their income was equally divided into four categories, from less than $30,000 a year to more than $100,000. And their childhood economic status was generally middle class, with only a few reporting that they grew up poor or wealthy. In fact, the only link to family background came from the group that fixated on money as a way to gain status: mostly, they grew up poor.

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