Wednesday, March 30, 2011
The words of Bill Gross....The PIMCO FUND.
Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden. Perhaps we could, if it was only $9.1 trillion, as shown in Chart 2. That would be 65% of GDP and well within reasonable ranges for sovereign debt burdens. But that is not the reality. As others, such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown much better and for far longer than I, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.
If so, and if the USA were a corporation, then it would probably have a negative net worth of $35-40 trillion once our “assets” were properly accounted for, as pointed out by Mary Meeker and endorsed by luminaries such as Paul Volcker and Michael Bloomberg in a recent piece titled “USA Inc.” However approximate and subjective that number is, no lender would lend to such a corporation. Because if that company had a printing press much like the U.S. with an official “reserve currency” seal of approval affixed to every dollar bill, that lender/saver would have to know that the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar– currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain.
If I were sitting before Congress – at a safe olfactory distance – and giving testimony on our current debt crisis, I would pithily say something like this:
“I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.Our clients, who represent unions, cities, U.S. and global pension funds, foundations, as well as Main Street citizens, do not want to be shortchanged or have their pockets picked. It is incumbent, therefore, in order to preserve the integrity of the U.S. Treasury market along with its favorable global interest rates, and to promote a stable U.S. economy, that entitlement spending be reduced, and that future liabilities be addressed in terms of healthcare and Social Security cost containment. You must attack entitlements and make ‘debt’ a four-letter word.”
Property Taxes UP while Housing Values DOWN...= REVOLT
Could Declining House Values Spark the Next Taxpayer Rebellion?
You might think property taxes have declined 30%, paralleling declines in housing values. But nope--property tax revenues have shot up 27% just since 2006.
Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%). Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s.
So though U.S. housing continues losing value--U.S. home prices declined in January, continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes--property tax revenues continue their inexorable rise.
I've plotted out the total national property tax revenues on a chart of the Case-Shiller home-price index.
Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%). Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s.
So though U.S. housing continues losing value--U.S. home prices declined in January, continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes--property tax revenues continue their inexorable rise.
I've plotted out the total national property tax revenues on a chart of the Case-Shiller home-price index.
According to the Bureau of Labor Statistics inflation measures, if property taxes had risen along with inflation, the total property tax revenues nationally would have risen from $210 billion in 1996--more or less about the start of housing's decade-long bubble--to $296 billion in 2011.
But property taxes totaled $476 billion in 2009, a solid 60% ($180 billion) above inflation.
So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times. Here is a chart of California's systemic gap between revenues and expenditures. Please note that the apparent alignment of revenues and expenditures in 2010-11 is entirely illusory: the budget gap is $26 billion or perhaps more, once the fantasy accounting is removed.
But property taxes totaled $476 billion in 2009, a solid 60% ($180 billion) above inflation.
So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times. Here is a chart of California's systemic gap between revenues and expenditures. Please note that the apparent alignment of revenues and expenditures in 2010-11 is entirely illusory: the budget gap is $26 billion or perhaps more, once the fantasy accounting is removed.
And here is a chart of house prices in a classic symmetrical post-bubble deflation. I've drawn a target which is drawn from the reversion-to-the-mean model that the majority of bubbles track: prices don't just retrace to the starting lift-off point, they overshoot to a level below that initial line.
As I reported in House Values Fall 30%, But Property Taxes Keep Rising (December 22, 2010), the nation's state and local governments will collect an estimated $476 billion in property taxes in 2010--about 90% of state income tax revenues of $250 billion and sales tax revenues of $286 billion combined.
A decade ago, property taxes were roughly equivalent to sales taxes. In 2000, property taxes totaled $247 billion and sales taxes came in at $223 billion-- a differential of roughly 10%. Sales taxes have increased by 28% since 2000-- roughly in line with the rise in consumer prices.
State income taxes have risen nationally from $217 billion in 2000 to $250 billion in 2010, after peaking at $303 billion in 2008, just as the global financial meltdown began. That's a rise of $33 billion, or 15%--actually less than inflation (27% from 2000 to 2010).
Add all this up and we can see that local governments have become far more dependent on property tax revenues than they were in 2000. Thanks to stiff increases in junk fees and taxes of all kinds, state and local government revenue has climbed back to its pre-recession height of $1.29 trillion, roughly equal to the $1.32 trillion collected in 2008. In terms of total tax revenue, the recession is over--yet the gap between expenditures and revenues continues to widen in most states and local governments.
As their properties continue sliding in value, devastating their net worth, do you reckon the average homeowner might start resenting the rapid rise of the taxes they pay for the privilege of owning real estate?
Imagine if your income taxes rose by 27% even as your income declined by 30%.
The ultimate tax hostage is the property owner. The business owner can pull up stakes and leave, the wage earner can transfer or get another job elsewhere, and the consumer can restrict his/her consumption to lower the burden of sales taxes, but the property owner is the perfect tax donkey because the transaction costs of selling are so prohibitive.
With some 11 million homeowners owing more on their mortgage than their house is worth, i.e. they are underwater, then selling is no longer an option unless the bank accepts a short-sale--something the lenders are loathe to do.
Given that there's about 48 million mortgaged homes now, then those 11 million represent about 23% of all homeowners.
How long will property owners keep swallowing significantly higher property taxes even as the value of their real estate continues declining? It's an open question. I suspect the answer won't be known until some invisible breaking point is reached, and voters simply rebel against higher taxes while their own net worth and incomes stagnate.
Just because there is little visible resistance to sharply higher property taxes (and other taxes and junk fees as well, of course) doesn't mean resistance isn't building below the surface, unreported by a financial media obsessed with the S&P 500 as the only metric of wealth and prosperity and unnoticed by state and local governments obsessed with stripmining more tax revenues by any means at hand.
The tax donkey is already weighed down with a heavy load, and it won't take much more than a double-dip recession, higher prices for essentials and declining home values to snap the pack animal's weakened back.
The rising S&P 500 looks good as propaganda, but for most Americans, that's about as edible and nourishing as an iPad.
A decade ago, property taxes were roughly equivalent to sales taxes. In 2000, property taxes totaled $247 billion and sales taxes came in at $223 billion-- a differential of roughly 10%. Sales taxes have increased by 28% since 2000-- roughly in line with the rise in consumer prices.
State income taxes have risen nationally from $217 billion in 2000 to $250 billion in 2010, after peaking at $303 billion in 2008, just as the global financial meltdown began. That's a rise of $33 billion, or 15%--actually less than inflation (27% from 2000 to 2010).
Add all this up and we can see that local governments have become far more dependent on property tax revenues than they were in 2000. Thanks to stiff increases in junk fees and taxes of all kinds, state and local government revenue has climbed back to its pre-recession height of $1.29 trillion, roughly equal to the $1.32 trillion collected in 2008. In terms of total tax revenue, the recession is over--yet the gap between expenditures and revenues continues to widen in most states and local governments.
As their properties continue sliding in value, devastating their net worth, do you reckon the average homeowner might start resenting the rapid rise of the taxes they pay for the privilege of owning real estate?
Imagine if your income taxes rose by 27% even as your income declined by 30%.
The ultimate tax hostage is the property owner. The business owner can pull up stakes and leave, the wage earner can transfer or get another job elsewhere, and the consumer can restrict his/her consumption to lower the burden of sales taxes, but the property owner is the perfect tax donkey because the transaction costs of selling are so prohibitive.
With some 11 million homeowners owing more on their mortgage than their house is worth, i.e. they are underwater, then selling is no longer an option unless the bank accepts a short-sale--something the lenders are loathe to do.
Given that there's about 48 million mortgaged homes now, then those 11 million represent about 23% of all homeowners.
How long will property owners keep swallowing significantly higher property taxes even as the value of their real estate continues declining? It's an open question. I suspect the answer won't be known until some invisible breaking point is reached, and voters simply rebel against higher taxes while their own net worth and incomes stagnate.
Just because there is little visible resistance to sharply higher property taxes (and other taxes and junk fees as well, of course) doesn't mean resistance isn't building below the surface, unreported by a financial media obsessed with the S&P 500 as the only metric of wealth and prosperity and unnoticed by state and local governments obsessed with stripmining more tax revenues by any means at hand.
The tax donkey is already weighed down with a heavy load, and it won't take much more than a double-dip recession, higher prices for essentials and declining home values to snap the pack animal's weakened back.
The rising S&P 500 looks good as propaganda, but for most Americans, that's about as edible and nourishing as an iPad.
Monday, March 21, 2011
Washington Post Article on Public Pension Fund Fiasco in CA
Costa Mesa, CA - March 16: Gant Corum(cq), a municipal mechanic in Orange county, is facing the loss of his job as the city council has begun a study to privatize many municipal services, March, 16, 2011 in Costa Mesa, CA. He has just arrived home from work and is taking the family dogs out for a walk with wife, China and their 3-week old daughter Caroline. Dogs are Guiness, left, and Jack, right. (Photo by Bill O'Leary/The Washington Post)
By Peter Whoriskey
Sunday, Mar 20, 2011
Sunday, Mar 20, 2011
Nearly half the city workers in Costa Mesa received layoff notices last week. Street sweepers. Firefighters. Mechanics. Payroll clerks. Animal control workers. In all, about 210 of the city’s 472 employees, many of whom have worked there for decades. On Thursday, as the notices were being handed out, one maintenance worker committed suicide by jumping from the city hall roof.
“It’s like they decided to blow up the city,” said Billy Folsom, 58, a mechanic who got a pink slip. “It’s devastating.”
The cutbacks are necessary because the escalating costs of providing pensions for police, firefighters and other unionized employees are draining the city’s revenue, city leaders say.
Within three years, city projections show, more than one of every five tax dollars will be spent on employees’ retirement benefits, which were made far more generous in the years before the stock market crashed in 2008.
“Just do the math — this is unsustainable,” said Jim Righeimer, the city’s recently elected mayor pro tem. He campaigned on the pension issue, eliciting anger and a counter-campaign from the city’s police and firefighters. “Under these kinds of burdens, we can’t do everything the city needs to do.”
The public pension fight
The financial follies of the boom years — by banks that lent too easily, by home buyers who bought places they couldn’t afford, by consumers who didn’t save — became obvious shortly after the recession.
But many states and cities may have overextended themselves as well, and the risks they undertook are now playing out in the public pension shortfalls provoking political battles across the nation.
Republican efforts to roll back public employee benefits and bargaining rights has triggered mass protests in places such as Wisconsin, Indiana and Ohio. But in Costa Mesa, where conservatives dominate city politics, the offensive against public worker compensation has gone further.
During the boom, many state and local governments promised their employees better pensions. Some employees were allowed to retire earlier. Others received a larger portion of their final pay. Financially, it was easy to do; the stock market was soaring, lifting pension fund balances.
Between 1998 and 2008, the last year for which figures are available, total pension payments by state and local governments rose twice as fast as their payrolls, according to census figures.
But now that the recession has led to steep drops in pension funds, those promises to past and present employees may be much harder to keep. Dozens of state and local pension funds around the country are now considered seriously underfunded. By 2009, about 58 percent of state and local pension funds were less than 80 percent funded, a standard benchmark of pension soundness, according to the Center for Retirement Research at Boston College.
The shortfalls have had far-reaching political ramifications. Already, some politicians ideologically opposed to public employee unions have attributed the problems to their greed and political influence. Now members of those unions are on the defensive.
“What angers a lot of us is that we’re being blamed for the economic situation,” said Jason Pyle, 38, a fire department captain who earned $160,000 in base, overtime and certification pay in 2010, according to city records. Pyle, who has been with the department for 14 years, could retire at age 54 with 90 percent of his base salary and some other forms of pay. “They’re marginalizing what we actually do — like everything I’ve done in my life now has no meaning.”
He called the city’s approach to the problem — the layoff notices — “a scorched-earth policy.”
Indeed, in few places has the rhetoric over the unions and the “ticking pension bomb” been as strident as it is in California — or, more specifically, this coastal bastion of conservatism where the battle erupted most clearly during Righeimer’s fall campaign.
Righeimer, 52, an Orange County developer, has long fought against unions. In the mid-1990s, after forming a political action group, he ran afoul of teachers unions while pushing for vouchers and a back-to-basics approach to education. Then, in 1997, he pushed a ballot measure to prohibit labor unions from using their members’ dues for political purposes without the permission of each member, each year.
Not surprisingly, when he declared his intention to run for City Council in this city of 116,000, he blamed the city’s budget shortfalls on the union-negotiated compensation for police, firefighters and other city employees.
In his view, governments have been too generous with public employee unions that have wide influence over local elections.
First, he and other critics note, the unions can be a major source of funding in local races. Righeimer’s campaign spent $70,000 for the November election, according to city records; the Costa Mesa police and fire unions, meanwhile, spent $101,000 in a campaign to discredit him. (Righeimer won the post of mayor pro tem, similar to a vice mayor.)
Second, he notes, many candidates compete to win the endorsement of police and firefighters.
“Everyone wants to get their endorsement,” he said. “They fight crime, save people’s lives, all these good things. The people really go for that.”
The unions note that their candidates have frequently lost. But when it comes to gaining richer pension benefits, they have often won.
After the state allowed richer pensions for many workers in 1999, many localities, including Costa Mesa, quickly followed suit. Today, police and firefighters in the city can retire at 50 with as much as 90 percent of their base salary and some other forms of pay. It was, in part, the tenor of the times, some said.
“After 9/11 happened, they were national heroes,” said Scott Baugh, chairman of the Republican Party of Orange County and a Righeimer ally. “Wouldn’t it be great to give a million dollars to every hero? It would be, but it is really unsustainable.”
Earlier this year, a bipartisan commission looking into pensions in California warned that “the retirement promises that elected officials made to public employees over the last decade are not affordable. . . . Pension costs will crush government.”
Pensions, by the numbers
According to city figures, for every dollar the city pays a police officer or firefighter, it must also set aside more than 40 cents to fund the employee’s pension. For every dollar paid a general employee, it must set aside 27 cents.
The average Costa Mesa police officer earned $105,000 in base overtime and certification pay in 2010, according to city records. The average firefighter earned $109,000 in base, overtime and certification pay last year.
City Council members say the rising costs of pensions compelled them to issue the layoff notices. The idea is to outsource many of the functions of city government to private firms or other governments. Firefighting, for example, could be contracted out to Orange County at a savings of millions of dollars. Private firms could take up payroll services and street sweeping. Police services are not currently slated for outsourcing.
Among those receiving pink slips Thursday was city building technician Huy Pham, 27. About an hour later, Pham plunged to his death from the top of the city’s Civic Center.
“We’re trying to understand the circumstances that led to it,” Lt. Bryan Glass said, according to the Associated Press. Relatives and others said Pham had not seemed suicidal anytime recently, the AP reported.
Although union leaders acknowledge the burden the rising costs of pensions has placed on the city, they note that they have offered to close the gap. Last year, the police and firefighters agreed to contribute 5 percent and 6 percent of their pay, respectively, to fund pensions. General employees agreed to raise their pension contributions by 4 percent.
“For three years we’ve given them every concession they’ve needed,” said Folsom, the city mechanic. He made $68,000 last year, according to city records. “We worked it out. This time, they’re just giving us the pink slips.”
Pyle, of the fire department, said the union was willing to make more concessions. He even called the City Council’s vote to raise pension benefits “a bad decision” because of its financial implications.
But the firefighters and police are angry, too, because they feel that their role in the city has been unfairly minimized by those seeking to restrict their compensation.
“If you agree to being spit on, bit, or have blood or fecal matter carrying the AIDS virus or hepatitis thrown at you, or have someone attempt to stab you with a knife or use your own sidearm to kill you, or simply run you down with a car, then the risk and dangers of a 30-year career in law enforcement justify an appropriate retirement,” said Jason Chamness, a police officer who earned $108,000 in base, overtime and certification pay last year and the president of the Costa Mesa police officers association.
But Righeimer says he is only asking the tough question.
“These are good, hardworking people, and to characterize them any differently is wrong,” Righeimer said. “The issue is . . . so how much?”
“It’s like they decided to blow up the city,” said Billy Folsom, 58, a mechanic who got a pink slip. “It’s devastating.”
The cutbacks are necessary because the escalating costs of providing pensions for police, firefighters and other unionized employees are draining the city’s revenue, city leaders say.
Within three years, city projections show, more than one of every five tax dollars will be spent on employees’ retirement benefits, which were made far more generous in the years before the stock market crashed in 2008.
“Just do the math — this is unsustainable,” said Jim Righeimer, the city’s recently elected mayor pro tem. He campaigned on the pension issue, eliciting anger and a counter-campaign from the city’s police and firefighters. “Under these kinds of burdens, we can’t do everything the city needs to do.”
The public pension fight
The financial follies of the boom years — by banks that lent too easily, by home buyers who bought places they couldn’t afford, by consumers who didn’t save — became obvious shortly after the recession.
But many states and cities may have overextended themselves as well, and the risks they undertook are now playing out in the public pension shortfalls provoking political battles across the nation.
Republican efforts to roll back public employee benefits and bargaining rights has triggered mass protests in places such as Wisconsin, Indiana and Ohio. But in Costa Mesa, where conservatives dominate city politics, the offensive against public worker compensation has gone further.
During the boom, many state and local governments promised their employees better pensions. Some employees were allowed to retire earlier. Others received a larger portion of their final pay. Financially, it was easy to do; the stock market was soaring, lifting pension fund balances.
Between 1998 and 2008, the last year for which figures are available, total pension payments by state and local governments rose twice as fast as their payrolls, according to census figures.
But now that the recession has led to steep drops in pension funds, those promises to past and present employees may be much harder to keep. Dozens of state and local pension funds around the country are now considered seriously underfunded. By 2009, about 58 percent of state and local pension funds were less than 80 percent funded, a standard benchmark of pension soundness, according to the Center for Retirement Research at Boston College.
The shortfalls have had far-reaching political ramifications. Already, some politicians ideologically opposed to public employee unions have attributed the problems to their greed and political influence. Now members of those unions are on the defensive.
“What angers a lot of us is that we’re being blamed for the economic situation,” said Jason Pyle, 38, a fire department captain who earned $160,000 in base, overtime and certification pay in 2010, according to city records. Pyle, who has been with the department for 14 years, could retire at age 54 with 90 percent of his base salary and some other forms of pay. “They’re marginalizing what we actually do — like everything I’ve done in my life now has no meaning.”
He called the city’s approach to the problem — the layoff notices — “a scorched-earth policy.”
Indeed, in few places has the rhetoric over the unions and the “ticking pension bomb” been as strident as it is in California — or, more specifically, this coastal bastion of conservatism where the battle erupted most clearly during Righeimer’s fall campaign.
Righeimer, 52, an Orange County developer, has long fought against unions. In the mid-1990s, after forming a political action group, he ran afoul of teachers unions while pushing for vouchers and a back-to-basics approach to education. Then, in 1997, he pushed a ballot measure to prohibit labor unions from using their members’ dues for political purposes without the permission of each member, each year.
Not surprisingly, when he declared his intention to run for City Council in this city of 116,000, he blamed the city’s budget shortfalls on the union-negotiated compensation for police, firefighters and other city employees.
In his view, governments have been too generous with public employee unions that have wide influence over local elections.
First, he and other critics note, the unions can be a major source of funding in local races. Righeimer’s campaign spent $70,000 for the November election, according to city records; the Costa Mesa police and fire unions, meanwhile, spent $101,000 in a campaign to discredit him. (Righeimer won the post of mayor pro tem, similar to a vice mayor.)
Second, he notes, many candidates compete to win the endorsement of police and firefighters.
“Everyone wants to get their endorsement,” he said. “They fight crime, save people’s lives, all these good things. The people really go for that.”
The unions note that their candidates have frequently lost. But when it comes to gaining richer pension benefits, they have often won.
After the state allowed richer pensions for many workers in 1999, many localities, including Costa Mesa, quickly followed suit. Today, police and firefighters in the city can retire at 50 with as much as 90 percent of their base salary and some other forms of pay. It was, in part, the tenor of the times, some said.
“After 9/11 happened, they were national heroes,” said Scott Baugh, chairman of the Republican Party of Orange County and a Righeimer ally. “Wouldn’t it be great to give a million dollars to every hero? It would be, but it is really unsustainable.”
Earlier this year, a bipartisan commission looking into pensions in California warned that “the retirement promises that elected officials made to public employees over the last decade are not affordable. . . . Pension costs will crush government.”
Pensions, by the numbers
According to city figures, for every dollar the city pays a police officer or firefighter, it must also set aside more than 40 cents to fund the employee’s pension. For every dollar paid a general employee, it must set aside 27 cents.
The average Costa Mesa police officer earned $105,000 in base overtime and certification pay in 2010, according to city records. The average firefighter earned $109,000 in base, overtime and certification pay last year.
City Council members say the rising costs of pensions compelled them to issue the layoff notices. The idea is to outsource many of the functions of city government to private firms or other governments. Firefighting, for example, could be contracted out to Orange County at a savings of millions of dollars. Private firms could take up payroll services and street sweeping. Police services are not currently slated for outsourcing.
Among those receiving pink slips Thursday was city building technician Huy Pham, 27. About an hour later, Pham plunged to his death from the top of the city’s Civic Center.
“We’re trying to understand the circumstances that led to it,” Lt. Bryan Glass said, according to the Associated Press. Relatives and others said Pham had not seemed suicidal anytime recently, the AP reported.
Although union leaders acknowledge the burden the rising costs of pensions has placed on the city, they note that they have offered to close the gap. Last year, the police and firefighters agreed to contribute 5 percent and 6 percent of their pay, respectively, to fund pensions. General employees agreed to raise their pension contributions by 4 percent.
“For three years we’ve given them every concession they’ve needed,” said Folsom, the city mechanic. He made $68,000 last year, according to city records. “We worked it out. This time, they’re just giving us the pink slips.”
Pyle, of the fire department, said the union was willing to make more concessions. He even called the City Council’s vote to raise pension benefits “a bad decision” because of its financial implications.
But the firefighters and police are angry, too, because they feel that their role in the city has been unfairly minimized by those seeking to restrict their compensation.
“If you agree to being spit on, bit, or have blood or fecal matter carrying the AIDS virus or hepatitis thrown at you, or have someone attempt to stab you with a knife or use your own sidearm to kill you, or simply run you down with a car, then the risk and dangers of a 30-year career in law enforcement justify an appropriate retirement,” said Jason Chamness, a police officer who earned $108,000 in base, overtime and certification pay last year and the president of the Costa Mesa police officers association.
But Righeimer says he is only asking the tough question.
“These are good, hardworking people, and to characterize them any differently is wrong,” Righeimer said. “The issue is . . . so how much?”
Tuesday, March 15, 2011
The MIT endorsed paper saying Japanese Reactors are "All safe".
I repeat, there was and will *not* be any significant release of radioactivity from the damaged Japanese reactors.
By "significant" I mean a level of radiation of more than what you would receive on - say - a long distance flight, or drinking a glass of beer that comes from certain areas with high levels of natural background radiation.
I have been reading every news release on the incident since the earthquake. There has not been one single report that was accurate and free of errors (and part of that problem is also a weakness in the Japanese crisis communication). By “not free of errors” I do not refer to tendentious anti-nuclear journalism – that is quite normal these days. By “not free of errors” I mean blatant errors regarding physics and natural law, as well as gross misinterpretation of facts, due to an obvious lack of fundamental and basic understanding of the way nuclear reactors are build and operated. I have read a 3 page report on CNNwhere every single paragraph contained an error.
We will have to cover some fundamentals, before we get into what is going on.
The plants at Fukushima are so called Boiling Water Reactors, or BWR for short. Boiling Water Reactors are similar to a pressure cooker. The nuclear fuel heats water, the water boils and creates steam, the steam then drives turbines that create the electricity, and the steam is then cooled and condensed back to water, and the water send back to be heated by the nuclear fuel. The pressure cooker operates at about 250 °C.
The nuclear fuel is uranium oxide. Uranium oxide is a ceramic with a very high melting point of about 3000 °C. The fuel is manufactured in pellets (think little cylinders the size of Lego bricks). Those pieces are then put into a long tube made of Zircaloy with a melting point of 2200 °C, and sealed tight. The assembly is called a fuel rod. These fuel rods are then put together to form larger packages, and a number of these packages are then put into the reactor. All these packages together are referred to as “the core”.
The Zircaloy casing is the first containment. It separates the radioactive fuel from the rest of the world. The core is then placed in the “pressure vessels”. That is the pressure cooker we talked about before.
The pressure vessels is the second containment. This is one sturdy piece of a pot, designed to safely contain the core for temperatures several hundred °C. That covers the scenarios where cooling can be restored at some point.
The entire “hardware” of the nuclear reactor – the pressure vessel and all pipes, pumps, coolant (water) reserves, are then encased in the third containment. The third containment is a hermetically (air tight) sealed, very thick bubble of the strongest steel. The third containment is designed, built and tested for one single purpose: To contain, indefinitely, a complete core meltdown. For that purpose, a large and thick concrete basin is cast under the pressure vessel (the second containment), which is filled with graphite, all inside the third containment. This is the so-called "core catcher". If the core melts and the pressure vessel bursts (and eventually melts), it will catch the molten fuel and everything else. It is built in such a way that the nuclear fuel will be spread out, so it can cool down.
This third containment is then surrounded by the reactor building. The reactor building is an outer shell that is supposed to keep the weather out, but nothing in. (this is the part that was damaged in the explosion, but more to that later).
Fundamentals of nuclear reactions: The uranium fuel generates heat by nuclear fission. Big uranium atoms are split into smaller atoms. That generates heat plus neutrons (one of the particles that forms an atom). When the neutron hits another uranium atom, that splits, generating more neutrons and so on. That is called the nuclear chain reaction.
Now, just packing a lot of fuel rods next to each other would quickly lead to overheating and after about 45 minutes to a melting of the fuel rods. It is worth mentioning at this point that the nuclear fuel in a reactor can *never* cause a nuclear explosion the type of a nuclear bomb. Building a nuclear bomb is actually quite difficult (ask Iran).
In Chernobyl, the explosion was caused by excessive pressure buildup, hydrogen explosion and rupture of all containments, propelling molten core material into the environment (a “dirty bomb”). Why that did not and will not happen in Japan, further below.
In order to control the nuclear chain reaction, the reactor operators use so-called “moderator rods”. The moderator rods absorb the neutrons and kill the chain reaction instantaneously. A nuclear reactor is built in such a way, that when operating normally, you take out all the moderator rods. The coolant water then takes away the heat (and converts it into steam and electricity) at the same rate as the core produces it. And you have a lot of leeway around the standard operating point of 250°C. The challenge is that after inserting the rods and stopping the chain reaction, the core still keeps producing heat. The uranium “stopped” the chain reaction. But a number of intermediate radioactive elements are created by the uranium during its fission process, most notably Cesium and Iodine isotopes, i.e. radioactive versions of these elements that will eventually split up into smaller atoms and not be radioactive anymore. Those elements keep decaying and producing heat. Because they are not regenerated any longer from the uranium (the uranium stopped decaying after the moderator rods were put in), they get less and less, and so the core cools down over a matter of days, until those intermediate radioactive elements are used up. This residual heat is causing the headaches right now.
So the first “type” of radioactive material is the uranium in the fuel rods, plus the intermediate radioactive elements that the uranium splits into, also inside the fuel rod (Cesium and Iodine). There is a second type of radioactive material created, outside the fuel rods.
The big main difference up front: Those radioactive materials have a very short half-life, that means that they decay very fast and split into non-radioactive materials. By fast I mean seconds. So if these radioactive materials are released into the environment, yes, radioactivity was released, but no, it is not dangerous, at all. Why? By the time you spelled “R-A-D-I-O-N-U-C-L-I-D-E”, they will be harmless, because they will have split up into non radioactive elements. Those radioactive elements are N-16, the radioactive isotope (or version) of nitrogen (air). The others are noble gases such as Xenon. But where do they come from? When the uranium splits, it generates a neutron (see above). Most of these neutrons will hit other uranium atoms and keep the nuclear chain reaction going. But some will leave the fuel rod and hit the water molecules, or the air that is in the water. Then, a non-radioactive element can “capture” the neutron. It becomes radioactive. As described above, it will quickly (seconds) get rid again of the neutron to return to its former beautiful self.
This second “type” of radiation is very important when we talk about the radioactivity being released into the environment later on.
What happened at Fukushima I will try to summarize the main facts.
The earthquake that hit Japan was 7 times more powerful than the worst earthquake the nuclear power plant was built for (the Richter scale works logarithmically; the difference between the 8.2 that the plants were built for and the 8.9 that happened is 7 times, not 0.7). So the first hooray for Japanese engineering, everything held up.
When the earthquake hit with 8.9, the nuclear reactors all went into automatic shutdown. Within seconds after the earthquake started, the moderator rods had been inserted into the core and nuclear chain reaction of the uranium stopped. Now, the cooling system has to carry away the residual heat. The residual heat load is about 3% of the heat load under normal operating conditions. The earthquake destroyed the external power supply of the nuclear reactor. That is one of the most serious accidents for a nuclear power plant, and accordingly, a “plant black out” receives a lot of attention when designing backup systems. The power is needed to keep the coolant pumps working. Since the power plant had been shut down, it cannot produce any electricity by itself any more.
Things were going well for an hour. One set of multiple sets of emergency Diesel power generators kicked in and provided the electricity that was needed. Then the Tsunami came, much bigger than people had expected when building the power plant (see above, factor 7). The tsunami took out all multiple sets of backup Diesel generators.
When designing a nuclear power plant, engineers follow a philosophy called “Defense of Depth”. That means that you first build everything to withstand the worst catastrophe you can imagine, and then design the plant in such a way that it can still handle one system failure (that you thought could never happen) after the other. A tsunami taking out all backup power in one swift strike is such a scenario.
The last line of defense is putting everything into the third containment (see above), that will keep everything, whatever the mess, moderator rods in our out, core molten or not, inside the reactor. When the diesel generators were gone, the reactor operators switched to emergency battery power. The batteries were designed as one of the backups to the backups, to provide power for cooling the core for 8 hours. And they did. Within the 8 hours, another power source had to be found and connected to the power plant. The power grid was down due to the earthquake.
The diesel generators were destroyed by the tsunami. So mobile diesel generators were trucked in. This is where things started to go seriously wrong. The external power generators could not be connected to the power plant (the plugs did not fit). So after the batteries ran out, the residual heat could not be carried away any more.
At this point the plant operators begin to follow emergency procedures that are in place for a “loss of cooling event”. It is again a step along the “Depth of Defense” lines. The power to the cooling systems should never have failed completely, but it did, so they “retreat” to the next line of defense. All of this, however shocking it seems to us, is part of the day-to-day training you go through as an operator, right through to managing a core meltdown. It was at this stage that people started to talk about core meltdown. Because at the end of the day, if cooling cannot be restored, the core will eventually melt (after hours or days), and the last line of defense, the core catcher and third containment, would come into play.
But the goal at this stage was to manage the core while it was heating up, and ensure that the first containment (the Zircaloy tubes that contains the nuclear fuel), as well as the second containment (our pressure cooker) remain intact and operational for as long as possible, to give the engineers time to fix the cooling systems. Because cooling the core is such a big deal, the reactor has a number of cooling systems, each in multiple versions (the reactor water cleanup system, the decay heat removal, the reactor core isolating cooling, the standby liquid cooling system, and the emergency core cooling system). Which one failed when or did not fail is not clear at this point in time.
So imagine our pressure cooker on the stove, heat on low, but on. The operators use whatever cooling system capacity they have to get rid of as much heat as possible, but the pressure starts building up. The priority now is to maintain integrity of the first containment (keep temperature of the fuel rods below 2200°C), as well as the second containment, the pressure cooker. In order to maintain integrity of the pressure cooker (the second containment), the pressure has to be released from time to time. Because the ability to do that in an emergency is so important, the reactor has 11 pressure release valves. The operators now started venting steam from time to time to control the pressure. The temperature at this stage was about 550°C. This is when the reports about “radiation leakage” starting coming in.
I believe I explained above why venting the steam is theoretically the same as releasing radiation into the environment, but why it was and is not dangerous. The radioactive nitrogen as well as the noble gases do not pose a threat to human health. At some stage during this venting, the explosion occurred. The explosion took place outside of the third containment (our “last line of defense”), and the reactor building. Remember that the reactor building has no function in keeping the radioactivity contained.
It is not entirely clear yet what has happened, but this is the likely scenario: The operators decided to vent the steam from the pressure vessel not directly into the environment, but into the space between the third containment and the reactor building (to give the radioactivity in the steam more time to subside). The problem is that at the high temperatures that the core had reached at this stage, water molecules can “disassociate” into oxygen and hydrogen – an explosive mixture. And it did explode, outside the third containment, damaging the reactor building around. It was that sort of explosion, but inside the pressure vessel (because it was badly designed and not managed properly by the operators) that lead to the explosion of Chernobyl. This was never a risk at Fukushima.
The problem of hydrogen-oxygen formation is one of the biggies when you design a power plant (if you are not Soviet, that is), so the reactor is build and operated in a way it cannot happen inside the containment. It happened outside, which was not intended but a possible scenario and OK, because it did not pose a risk for the containment. So the pressure was under control, as steam was vented.
Now, if you keep boiling your pot, the problem is that the water level will keep falling and falling. The core is covered by several meters of water in order to allow for some time to pass (hours, days) before it gets exposed. Once the rods start to be exposed at the top, the exposed parts will reach the critical temperature of 2200 °C after about 45 minutes. This is when the first containment, the Zircaloy tube, would fail. And this started to happen. The cooling could not be restored before there was some (very limited, but still) damage to the casing of some of the fuel. The nuclear material itself was still intact, but the surrounding Zircaloy shell had started melting.
What happened now is that some of the byproducts of the uranium decay - radioactive Cesium and Iodine - started to mix with the steam. The big problem, uranium, was still under control, because the uranium oxide rods were good until 3000 °C. It is confirmed that a very small amount of Cesium and Iodine was measured in the steam that was released into the atmosphere. It seems this was the “go signal” for a major plan B. The small amounts of Cesium that were measured told the operators that the first containment on one of the rods somewhere was about to give.
The Plan A had been to restore one of the regular cooling systems to the core. Why that failed is unclear. One plausible explanation is that the tsunami also took away / polluted all the clean water needed for the regular cooling systems. The water used in the cooling system is very clean, demineralized (like distilled) water. The reason to use pure water is the above mentioned activation by the neutrons from the Uranium: Pure water does not get activated much, so stays practically radioactive-free. Dirt or salt in the water will absorb the neutrons quicker, becoming more radioactive. This has no effect whatsoever on the core - it does not care what it is cooled by. But it makes life more difficult for the operators and mechanics when they have to deal with activated (i.e. slightly radioactive) water.
But Plan A had failed - cooling systems down or additional clean water unavailable - so Plan B came into effect. This is what it looks like happened: In order to prevent a core meltdown, the operators started to use sea water to cool the core. I am not quite sure if they flooded our pressure cooker with it (the second containment), or if they flooded the third containment, immersing the pressure cooker. But that is not relevant for us. The point is that the nuclear fuel has now been cooled down. Because the chain reaction has been stopped a long time ago, there is only very little residual heat being produced now.
The large amount of cooling water that has been used is sufficient to take up that heat. Because it is a lot of water, the core does not produce sufficient heat any more to produce any significant pressure. Also, boric acid has been added to the seawater. Boric acid is "liquid control rod". Whatever decay is still going on, the Boron will capture the neutrons and further speed up the cooling down of the core.
The plant came close to a core meltdown. Here is the worst-case scenario that was avoided: If the seawater could not have been used for treatment, the operators would have continued to vent the water steam to avoid pressure buildup. The third containment would then have been completely sealed to allow the core meltdown to happen without releasing radioactive material. After the meltdown, there would have been a waiting period for the intermediate radioactive materials to decay inside the reactor, and all radioactive particles to settle on a surface inside the containment. The cooling system would have been restored eventually, and the molten core cooled to a manageable temperature. The containment would have been cleaned up on the inside. Then a messy job of removing the molten core from the containment would have begun, packing the (now solid again) fuel bit by bit into transportation containers to be shipped to processing plants. Depending on the damage, the block of the plant would then either be repaired or dismantled.
Monday, March 14, 2011
As Treasury Cash Drops To Just $14.2 Billion, And No Bond Auctions Until Next Week, Is America About To Run Out Of Cash?
nd so the US Treasury has hit the proverbial paycheck to paycheck sustenance level. After burning $12.8 billion (without a change in gross debt) in cash today alone, and $75 billion in the month of March so far, primarily driven by a back end-loaded tax refund calendar, according to the Daily Treasury Statement, today's cash balance dropped to the scary level of just $14.2 billion. Without the benefit of incremental funding, this is the same amount that the Treasury burns on a good day! In other words, we take back what we said about the US Treasury existing paycheck to paycheck - Geithner now has to scramble to find funding on a day to day basis. If tomorrow operating outflows surpass $14.2 billion (and, again, the amount was $12.8 billion today) the world's "greatest" country (i.e. banana republic) runs out of cash, period. And as the following schedule indicates, there are no Long-Term bond issuances until next week (and the Bill issues are merely funding of rolling issues), we have some trouble seeing how the US Treasury will fund itself for the balance of the week...
And the forward issuance calendar: remember, this is where the bulk of money for deficit funding comes from there days.
On the other side of the ledger, total debt was $14.164 trillion, with $50 billion left in the liquidating SFP account. That means there are just two more 56-Day CMB maturities left before the credit ceiling gimmick expires. Once that happens, and in the absence of any clarity on the debt ceiling debacle, America may soon grind to a halt as the incremental debt capacity is hit in just over a month.
Friday, March 11, 2011
Wednesday, March 9, 2011
BUY THE MARKET!!! Says Laszlo Birinyi....let's see what he says in a month or two
Birinyi Buys as Biggest Bull Rally Since `55 Hits Third Year
By - Mar 9, 2011 10:08 AM ET
Birinyi Associates Inc. founder Laszlo Birinyi. Photographer: Jin Lee/Bloomberg
March 9 (Bloomberg) -- Laszlo Birinyi, president and founder of research and money management firm Birinyi Associates Inc., and Michael Holland, who oversees more than $4 billion as chairman of Holland & Co., talk about the outlook for the U.S. stock market, investment strategy for equities and some of their stock picks. Birinyi and Holland, speaking with Tom Keene on Bloomberg Television's "Surveillance Midday," also discuss the impact of the media on markets during the financial crisis. (Source: Bloomberg)
March 9 (Bloomberg) -- Barton Biggs, managing partner at hedge fund Traxis Partners LP, talks about the performance of U.S. stocks since the financial crisis, the outlook for equities and investment strategy. Biggs, who purchased stocks before the S&P 500's 95 percent advance through yesterday, talks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)
The money managers who picked the global stock market bottom say now is no time to sell as the biggest equity rally since 1955 starts its third year.
Laszlo Birinyi, who told clients to buy as the Standard & Poor’s500 Index fell to a 12-year low of 676.53 on March 9, 2009, says gains that added about $28 trillion to global share values will outlast previous increases as investors who missed the first phase play catch-up. Valuations are still below historical averages, said Barton Biggs, the hedge-fund manager who purchased stocks before the S&P 500’s 95 percent advance through yesterday.
Rallies in equities, corporate debt and commodities illustrate how the more than $12 trillion pumped into the financial system by governments and central banks is spurring a recovery from the worst global recession since the 1930s. While bears say prices will fall once stimulus ends, billionaire Kenneth Fisher and Byron Wien of Blackstone Group LP (BX) are betting on stocks whose profits are most tied to economic growth.
“These kinds of strong beginnings lead to long and durable bull markets,” Birinyi, who founded Westport, Connecticut-based research and money management firm Birinyi Associates Inc. in 1989 after a decade on the trading desk at Salomon Brothers, said in a March 7 phone interview. “While there will be corrections and while there will be pauses, we’re still of the view that this is a bull market that we expect to go on for several years.”
Previous Bull Markets
Even after almost doubling in 24 months, the S&P 500’s two- year return is 36 percentage points below the average bull- market gain of 131 percent since 1962, according to data compiled by Bloomberg and Birinyi Associates. The 730-day rally without a decline of 20 percent or more compares with an average duration of 1,407 days, the data show.
The S&P 500 fell 0.4 percent to 1,316.06 at 10 a.m. in New York, while the Dow Jones Industrial Average declined 0.3 percent to 12,178.24.
Genworth Financial Inc. (GNW), the Richmond, Virginia-based mortgage guarantor and life insurer, increased the most in the S&P 500 since the market’s bottom, climbing more than 14-fold. General Growth Properties Inc. (GGP), the Chicago-based mall owner, led the MSCI All-Country World Index of 45 developed and emerging markets, rising 5,174 percent, data compiled by Bloomberg show.
Profit Growth
The two-year advance is the biggest for the S&P 500 since the rally following the end of the Korean War and the election of President Dwight D. Eisenhower, according to data compiled by Bloomberg and S&P. The index has risen in 18 of 24 months, data compiled by Bloomberg show.
Five straight quarters of U.S. profit growth and the biggest yearly increase since 1988 have held down valuations, data compiled by Bloomberg show. The U.S. benchmark index is trading at 15.5 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks. The S&P 500’s earnings yield, or annual income divided by the index price, is 2.96 percentage points higher than the payout on 10-year Treasuries, the widest gap at the two-year point of any bull market since 1962, the data show.
“I don’t think valuations are stretched,” Biggs, who oversees $1.4 billion as managing partner of New York-based Traxis Partners LP, said in a March 7 phone interview. “The next move in the S&P 500 is more likely to be up than down, and that move could be 10 percent to 15 percent.”
Fed Rates
When Biggs bought shares in March 2009, the purchases were a contrarian bet driven by what he said was the highest level of bearish sentiment ever. Lehman Brothers Holdings Inc. had collapsed six months earlier, Warren Buffett, the chairman of Berkshire Hathaway Inc., said the economy was in “shambles” and New York University’s Nouriel Roubini, who foresaw the crisis, said the S&P 500 may fall to 600.
Stocks surged as record-low Federal Reserve interest rates, along with a $787 billion stimulus bill signed into law by U.S. President Barack Obama and his administration’s plan to rid banks of toxic assets, boosted investor confidence. Buying shares is a “potentially good deal” for long-term investors, Obama said six days before the slump ended.
Now Biggs is counting on economic and profit growth to spur gains. Citigroup Inc.’s Economic Surprise Index for the U.S., a gauge of how much reports are exceeding the median economist estimates in Bloomberg News surveys, surged to a record last week as manufacturing growth topped forecasts and the jobless rate unexpectedly fell to an almost two-year low.
‘Major Expansion’
S&P 500 companies will boost earnings by 17 percent during the next 12 months to a record $99.57 a share, according to analyst estimates compiled by Bloomberg. Profits in the MSCI All-Country Index may climb 20 percent, analyst forecasts show.
“We’re in a major expansion globally,” according to Fisher, who oversees $44 billion at Woodside, California-based Fisher Investments Inc. and said in September 2009 that the rally in equities was too big to reverse. “Corporate earnings are great.”
The S&P 500’s annualized appreciation since the 2009 low is 43 percent, compared with predictions for a “new normal” of below-average returns by Mohamed El-Erian and Bill Gross, the co-chief investment officers at Pacific Investment Management Co., which oversees the world’s largest bond fund in Newport Beach, California. Pimco said in May 2009 that financial assets would trail historical averages because of government deficits and increased regulation.
Sell Warnings
“Today, markets are reacting to a tug of war,” El-Erian said in an e-mail to Bloomberg News yesterday. “On the one hand, improving endogenous growth dynamics in the U.S. and coreEurope, and particularly Germany. And, on the other hand, headwinds including high and volatile oil prices, complex policy challenges, budget uncertainties and Europe’s peripheral debt crisis.”
For analysts who warned investors to sell before the credit crisis that sent the S&P 500 down as much as 57 percent starting in 2007, the rally proved harder to anticipate. David Rosenberg of Gluskin Sheff & Associates Inc., ranked the No. 2 economist by Institutional Investor magazine in 2008, and Roubini stuck to bearish forecasts. Now, they say the end of stimulus spending and rising oil may threaten returns.
Rosenberg, based in Toronto, said in March 2009 that the S&P 500 was at risk of falling to 600 by October of that year. Instead, it climbed 53 percent to 1,036.19 on Oct. 30. Three days before the index reached its 2010 low, Rosenberg saw a pattern that he said would bring more stock losses and cited the outlook for earnings and “heightened uncertainty” about the economy. The U.S. expanded at 2.6 percent and 2.8 percent annual rates in the third and fourth quarters, respectively, while S&P 500 earnings exceeded estimates in both periods.
No Straight Line
“Nothing moves in a straight line,” Rosenberg said yesterday in an e-mailed response to questions from Bloomberg News. The economic expansion is already reflected in stock prices, and the market will probably fall once the Fed stops buying assets, he said. It’s “time to take risk off the table,” he said.
Declines in bearish bets and data showing more hedge funds are speculating stocks will rise than at any time since 2007 may be signs that the pool of buyers for equities is being depleted.
A gauge compiled by TrimTabs Investment Research and BarclayHedge Ltd. measuring how heavily hedge funds are invested in stocks rose to 33 percent in January, the last month data are available, compared with an average of 29 percent since 2000. Shares borrowed and sold to profit from declines dropped four straight months to 3.3 percent of all stock at the end of January, according to data compiled by NYSE Euronext.
Keep Falling
Roubini said on March 9, 2009, that it was “highly likely” the S&P 500 would fall to 600 in 2009 and that the recession would last into 2010, even if the U.S. did “everything right with fiscal and monetary policy.” The world’s largest economy stopped contracting in June 2009, according to the National Bureau of Economic Research. The economist called for slower growth in October 2010, when he said GDP growth could slow to 1 percent by the end of last year as stimulus becomes a “fiscal drag.” The expansion was almost three times that rate during the final three months of 2010.
Some developed economies may slide back into recession if oil surges to $140 a barrel, Roubini, chairman of Roubini Global Economics LLC in New York, told reporters in Dubai yesterday. The 52-year-old economist also said the European Central Bank may raise interest rates “too soon,” curbing growth and hurting indebted nations including Greece that face record borrowing costs.
Corporate Bonds
The recovery turned a $1,000 investment in the MSCI All- Country World Index into about $2,097, including dividends, according to Bloomberg data. That compares with $1,593 for commodities, $1,277 for global corporate bonds and $1,044 for Treasuries, according to indexes compiled by Standard & Poor’s, Goldman Sachs Group Inc. (GS) and Bank of America Merrill Lynch.
U.S. investment-grade debt performed better than bonds from other nations, returning 35 percent over the same period, while speculative-grade credit almost matched the S&P 500, rising more than 90 percent since March 9, 2009.
“Over the past few years anything associated with risk has done phenomenally well,” said William Cunningham, co-head of global active portfolio management and head of global fixed income research at Boston-based State Street Global Advisors, which oversees almost $2 trillion. With interest rates likely to rise, “fixed income will deliver less than equities going forward,” he said.
‘Passing the Baton’
Fed Chairman Ben S. Bernanke has remained committed to the central bank’s plan of purchasing $600 billion of assets through June and said March 2 that he hasn’t ruled out an expansion of the program. There’s a 90 percent chance the Fed will keep its target for the overnight lending rate between banks in a range of zero to 0.25 percent at its June meeting, compared with an 87 percent chance a month ago, according to CME Group Inc. (CME)futures.
“The government is slowly passing the baton to the real economy, and we’re moving from government stimulus to a self- sustaining growth,” said Robert Doll, chief equity strategist for fundamental equities at New York-based BlackRock Inc. (BLK), the world’s biggest money manager with $3.6 trillion.
The leaders of the equity bull market are shifting as the U.S. economic expansion accelerates and investors become more willing to risk money on companies where weaker economic growth or earnings increases have pushed down valuations.
Equity Funds
The MSCI All-Country World Index’s 100 worst-performing stocks of 2010 have risen 5.7 percent as a group this year, while last year’s best performers fell 0.2 percent, according to data compiled by Bloomberg. U.S. stocks are beating developing- nation shares after the S&P 500 climbed 5.1 percent so far in 2011, compared with a 1.4 percent drop in the MSCI Emerging Markets Index.
Investors have added about $24 billion to U.S. equity funds this year, while pulling more than $16 billion from emerging markets, according to data and estimates compiled by the Investment Company Institute and EPFR Global.
Biggs is placing his biggest bet on American companies, with about 55 percent of his holdings in the country, and Doll said U.S. shares are likely to beat equities in other nations. Both favor stocks that rally most during economic expansions, including commodity producers and technology companies.
Apple Inc. (AAPL), the world’s most valuable technology company, is Birinyi’s biggest holding. The Cupertino, California-based maker of iPads and iPhones will boost net income 53 percent this year, according to the average analyst estimate compiled by Bloomberg. The shares have advanced 10 percent since Dec. 31, rebounding from a 2.3 percent drop on Jan. 18 after Chief Executive Officer Steve Jobs said he would take a medical leave of absence.
“This is going to be a good year for the stock market,” said Wien, the vice chairman of Blackstone Advisory Partners. “The real growth in the U.S. economy is going to be favorable. I don’t think valuations are excessive.”
To contact the reporters on this story: Michael Patterson in London atmpatterson10@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net
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