December 2008 Archives

Here's what the 10-year Treasury Inflation Protected Security is forecasting will be the expected inflation rate: 0.34%.

The rush to buy TIPS may be exaggerating the long-term forecast. Still, it's a strikingly number.

The recession has been offically dated back to December 2007. The average post World War 11 recession is 11 months, with the longest downturn 18 months. This recession is nowhere near over, however.

Here's what David Rosenberg, North American economist for Merrill Lynch, had to say yesterday. He's smart. It's a depressing set of insights:

1) Expect the worst recession in the post-WWII era

First, this is going to be the worst recession in the post-World War II era, in our view. The ECRI leading indicator hit a record low for the fifth week in a row - down to - 29.2 as of the November 21st week versus -28.2 the week before. This index, which leads real GDP by two quarters with a 70% historical correlation, is getting further and further away from the prior all-time low of -19.8 that defined the worst recession of the post-WWII era and saw a six-quarter consumer recession coincide with a 45% peak-to-trough decline in the stock market. Perhaps the fact that this bear market is proving to be even more severe is symptomatic of an economic downturn that will also prove to be deeper and more prolonged. After the flurry of data released just before Thanksgiving, we are now tracking close to a 4.5% QoQ annualized fall in real GDP in 4Q. This would be the largest pullback since the 1982 recession, and we see a similar contraction in the first quarter of 2009.

2) Capex is in a steep decline

Second, capex is in a very steep decline right now. Durable goods orders dropped 6.2% in October, the third decline in a row. Over that time frame, orders have plunged at a 39% annual rate, which is unprecedented. The retrenchment has spread to the tech sector, where order books were expanding at a 7% annualized rate over the three months to June. Currently, that same three-month trend has swung to a negative 13% annualized rate.

3) Consumer spending down sharply; savings rate is soaring

Third, consumer spending fell 1% in October, which was a near-record decline. This, in fact, was the fourth straight monthly decline, which is unprecedented. The savings rate is soaring; it leapt to 2.4% from 1.0% in September, in a sign of heightened risk aversion and cash preservation, and is a shift that we believe should be seen as secular, not merely cyclical.

This was a conclusion that came through loud and clear in the Conference Board's Consumer Confidence Index, principally in the spending intention components of the survey. Auto buying plans dropped for the third month in a row to a record low in October while home-buying plans fell to their lowest level since the 1982 recession. Consumer plans to buy a major appliance fell to a 14-year low as well - down for three months in a row. During this four-month period of unprecedented consumer retrenchment from July to October, spending on discretionary items collapsed at an average annual rate of 18%. Even spending on groceries has declined 6%, toiletries are off by 6% and utilities are down 3%. So, even some of the classic staples are being curtailed.

The only areas that have posted increases in spending over this unprecedented four-month decline in spending have been pharmaceuticals (+7%), telecom services (+3%), medical care services (+5%) and mass transit (+26%) - all other forms of transportation, from rail to bus to air fell at a 19% annual rate.

4) Obama planning a $700 billion fiscal package

Fourth, we learned this week that President-elect Obama's economics team is planning a fiscal package as big as $700 billion over the next two years. We are going to wait for the details to see how this is going to impact our base case macro forecast. Suffice it to say that the cornerstone of the stimulus this time around will likely be infrastructure, not tax rebates. The key for investors is where these outlays will be concentrated, which, in turn, means identifying the areas of the capital stock that have been the most underinvested in recent years. After sifting through the data, we believe that the prime candidates will be hospitals, waste management services and passenger transit.

5) Housing market is not close to bottoming out

Fifth, we learned that the housing market is nowhere close to bottoming out. New home sales dropped 5.3% in November to a 433k annualized rate - the worst since the 1982 recession. Even though sales are now down 69% from the July 2005 bubble peak of 1.39 million units, we believe builders have not been aggressive enough in curbing production because the most critical variable of all, the unsold inventory backlog, rose to 11.1 months' supply from 10.9 in September.

Need to see inventory backlog drop to 8 months' supply

The reality is that even though single-family starts have dropped to 26-year lows of 531,000, they are still running 23% above the prevailing level of new home sales. The worst the inventory-sales ratio ever got in the early 1990s real estate meltdown was 9.4 months' supply. We are currently 18% above that level and almost 40% higher than the 8 months' supply we would need to see before calling an end to the housing deflation phase.

Another 15-20% decline in home prices likely from here

As we saw last week, the Case-Shiller index fell 1.85% MoM or at a 20% annual rate. All 20 cities were down both sequentially and YoY. Home prices are now down a remarkable 22% from the 2007 peaks. With the unsold inventory sitting at the third highest level of the past three decades and mortgage approvals for new home purchases falling to their lowest level in nine years, we believe the laws of supply and demand point to a further 15-20% decline from here. So, of all the things that happened last week in the market, retailing stocks up 17%, the bank stocks up 26%, tech up 9%, the one development that probably has the greatest chance of being reversed is the 60% surge we saw in the homebuilding group.

6) Fed has switched December meeting to a two-day affair

Sixth, we learned that the Fed is going to make the December FOMC meeting a two-day affair instead of one (December 15-16). The market is already sniffing out a 50 basis point rate cut. However, now that the Fed has de facto embarked on the process of quantitative easing, perhaps the need for a two day meeting is to iron out a more aggressive plan to revive the credit markets and the economy. The only areas that have posted increases in spending over this unprecedented four-month decline in spending have been pharmaceuticals (+7%), telecom services (+3%), medical care services (+5%) and mass transit (+26%) - all other forms of transportation, from rail to bus to air fell at a 19% annual rate.

As Chairman Bernanke suggested in several speeches he gave back in 2002 and 2003, one of the deflation-fighting strategies would likely involve Fed action to nurture lower rates at the longer end of the yield curve. Perhaps this prospect is behind the rally in the 10-year note yield and long bond to cycle lows. This would fit in very well with our ongoing strategy of focusing on equity sectors that have income-generating characteristics like utilities, health care and telecom services; these sectors also screen very well in a negative nominal GDP growth environment.

The U.S. has long been an unequal society, but we always had strong upward mobility. Yet now the latest reserach suggests that we have less upward mobility--and greater inequality--than Europe. Most worrisome, the odds of staying poor if you are born poor in the U.S. are higher than in Europe.

We have become less hospitable to immigrants, the steriods of economic growth over the past several decades.

And now this depressing news on the college front: "Other countries are outpacing the United States in providing access to college, eroding an educational advantage the nation has enjoyed for decades, according to a study released today by the National Center for Public Policy and Higher Education. it's getting harder and harder to pay for college," writes the Washington Post

What's going on when it comes to college? We're borrowing to much to pay for college. To be sure, parents and students have long complained about the high and rising cost of a college education. But they paid the tab. The reason: A college sheepskin was worth the cost in salary earned in the job market.

But this time around may be different.

The past three decades loans have become more important for paying for college. Students and their parents funded a college tuition bubble with borrowed money. And I think the term "bubble" is right.

Two-thirds of college students finish school with debt, up from less than half in 1993. Now, with the securitized student loan market largely dead, the student loan business is in trouble. Compounding the financial stress on lenders is a new law limiting federal subsidies to them. The borrowing boom is going bust.

Default rates are high: Recent research explodes the widespread myth that student loan default rates are low. To be sure, the federal Dept. of Education has announced for years that the default rate was a modest 4% to 5%. Problem is, the federal agency only looks at the first two years of debt repayments. Longer term studies find far more dire results. For instance, reaching back into the 1990s and following students over the subsequent decade, students with loans totaling $15,000 or more had nearly triple the default rate of those with $5,000 or less in loans--19% versus 7%--according to the Education Sector, an independent Washington D.C. think tank. The white student default rates is about 7% and the African-American rate some 39%. A study by the National Center for Education Statistics came up with similar results.

Here's the rub: The real earnings gap in constant dollars between a worker with a college sheepskin and her peer with a high school diploma increased by a mere real $1,033 for women from 1995 to 2005, and only $3,500 for men from 1995 to 2005--about $100 a year and $350 a year respectively. That's hardly a reassuring return on education for a generation that has taken on unprecedented debt burdens. Over the past decade the average student loan debt burden has jumped 50%, after adjusting for inflation. Put somewhat differently, the wages adjusted for inflation of colleges graduates is down over the past five years where, after adjusting for inflation, the real cost of debt has gone up.

Parent's aren't seeing wage increases. Borrowing against home equity to pay for college is out. Student loan burdens are too great. Students aren't doing well when they graduate. The economy is in recession. Student defaults are up.

The bubble has burst. The relinace on loans has gone too far.

Economist Oliver Hart of Harvard University and Luigi Zingales, professor of finance at the University of Chicago graduate school of business have a thoughtful piece in today's Wall Street Journal. (a subscription is required.) They are distressed by the current Administration and they're proposing two principles for government intervention in the market.

We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at minimum cost to taxpayers.

How do these principles apply to the present crisis? First, the market economy provides mechanisms for dealing with difficult times. Take bankruptcy. It is often viewed as a kind of death, but this is misleading. Bankruptcy is an opportunity for a company (or individual) to make a fresh start....

Thye wonder why not let Bear Stearns, AIG, Citigroup Geeneral Motors and other troubled companies go into bankruptcy. If there are systemic financial problems that emerge from the fling of Chapter 11 help the third parties rather than the distressed company itself.

In other words, instead of bailing out AIG and its creditors, it would have been better for the government to guarantee AIG's obligations to J.P. Morgan and those who bought insurance from AIG....

They then look at the housing market. Forget propping up home prices. Yes, lots of people made a financial mistake betting on home prices. But that's the nature of the beast. However, there is a role for government:

Where there is arguably a market failure is in mortgage renegotiations. Many mortgages are securitized, and the lenders are dispersed and cannot easily alter the terms of the mortgage. It is unlikely that the present situation was anticipated when the loan contracts were written. Government initiatives at facilitating renegotiation therefore make a lot of sense.

The case for long-term care insurance is compelling. It's the product that is difficult to understand and evaluate. Now, the question is whether the policy will be there when needed. According to today's Wall Street Journal:

A major insurer has dumped a chunk of its long-term-care policies into an independent trust, putting tens of thousands of policyholders at risk of reduced benefits or big premium increases.

The trust will pay claims from a pool of funds transferred to it from Conseco, including $175 million in capital. But A.M. Best Co., the insurance-rating firm, warns that the trust may need to raise rates and reduce benefits and has no access to additional capital. If the trust were to become insolvent, some policyholders might ultimately have to rely on the Pennsylvania state guaranty association to pay any claims, up to limits set by state laws, other experts said.

Yes, these are troubled policies written a while ago, and there have been industry improvements in the meantime. And it looks like this solution was making the best of a bad situation, and there is still some value there. Still, some 8 million Americans own long-term care policies. long-term care insurance is expensive and complicated. Yet it's a product people need when they are frail and vulnerable. The article notes:

The Conseco action comes at a time of growing concerns about whether many long-term-care policies will pay off when needed, or will require drastic premium increases. Now, the industry's underpricing woes are being exacerbated by the financial crisis. Insurance-company investments have done poorly, and in some instances the insurers are having trouble raising more capital to meet the reserve and capital demands of state regulators

Everyone knows that this is an insurance product to research very carefully before buying. But that counsel is more important than ever.

Peter Coy of Business Week is gloomy on the job outlook. I hope he's wrong, but I think he's right.

November Job Losses Could Be Worst in 28 Years
New figures may show 300,000 layoffs for the month, and possibly 400,000
By Peter Coy

The U.S. economy is bleeding jobs faster than it has since the early 1980s, and perhaps since the mid-'70s. Economic forecasters are now projecting that on Dec. 5, the government will announce the loss of more than 300,000 jobs in November--possibly more than 400,000. December is shaping up to be a bad month as well. The rate of layoffs should slow next year as economic stimulus begins to kick in, but modest monthly declines could continue well into 2010. "Let's get real. These numbers are horrible," says Ellen Zentner, senior U.S. economist for Bank of Tokyo-Mitsubishi UFJ in New York....

We'll learn more when the job numbers come out tomorrow.

Read it and weep.

This is much worse than expected. Employers cut 533,000 jobs in November. That's the most in 34 years. The unemployment rate is to 6.7%, a 15 year high. And here's the figure to really focus on: The broadest measure of unemployment--the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons--as a percent of the civilian is at an astounding 12.5%.

The job losses were widespread. The few brightspots--which has been true throughout the recession--is government, education and health services.

Some quick implications: The opposition to a bailout of Detroit will weaken.

The size of the fiscal stimulus plan when the new Administration comes to power has gone up.

President-elect Obama is having his first hundred days before he is sworn in. By the time late January rolls around the plan will be in place.

Doing some research... and here are some more worrisome numbers.

Looking more closely at the broadest measure of unemployment: The 12.5% figure is up from 8.4% a year earlier. In other words, the unemployed and under-employed and marginally employed stands at 19.3 million workers versus 12.9 million employees a year ago. (The number of unemployed at the official unemployment rate of 6.7% is 10.3 million.)

Also looking at some figures compiled by the Commonwealth Fund. This stood out to me: 41% of working age adults or 72 million people reported having problems in 2007 paying their medical bills or were paying off accrued medical debt. Low and moderate income families were especially hard hit with more than half of adults with incomes under $40,000 reported medical bills problems in 2007.

When it comes to medical bills it's a safe forecast that the figures deteriorated from the abysmal 2007 numbers in 2008. Imagine how terrible the experience will be next year for the average working family without a major healthcare initiative from Washington in 2009?

Ben Bernanke is one of the truly great scholars of the Great Depression. Bernanke doing a terrific job fighting the great depression of the 1930s. He's not repeating the mistakes of the central bank back in the dark days of the 1930s. I don't have an answer, but what if that isn;t the right set of solutions for the crisis of 2008?

To say that this is the greatest financial crisis since the great depression isn't the same as sayng that we are ack in the great depression era.

Conservative think tank scholars are peddling a potted history how the New Dea made the depression worse at worst or was ineffectual at best. It isn't good scholarship, and economic historians are getting tired ripping apart the bad histories. (Just ask Brad Delong, economist at the University of Caifornia, Berekley. Mark Thoma at the University of Oregon, Barry Eichengreen of Berkeley, Paul Krugman, and so on.). To some extent we are refighting the legacy of the New Deal.

It's fascinating. But again it's the right historic analogy.

John Maynard Keynes was a genius, and he is always worth reading. His essays are astonishing for their insight and breadth of knowledge. Political leaders should have listened to him. In many respects, Keynes helped save civilization. His isights on fiscal policy still resonate today. He is the economic of economic crisis. (And I love reading his Essays in Persuasion.)

But Keynes wasn't the right scholar for the 1970s (although some of my favorite essays on inflation and deflation--such as the ones in Essays in Persuasion--were written by Keynes.) Milton Friedman was an exceptional scholar and a prolific marketer of ideas. And there here are good reasons why his ideas came to the fore in the difficult economic times of the 1970s.

So, what is the right set of ideas for our time. I feel that University of Chicago economist uigi Zingales is heading in the right direction. He has been putting forward a persusive set of essays that our bankruptcy system can handle much of the fallout. He isn't denying that there is a crisis. He takes it very seriously. Nor is he writing the nonsense that its all the fault of the Comunity Reinvestment Act, Fannie and Freddie, and Barney Frank. But Zingales is challenging the stop-the-great-depression solutions that have been used so far. (He co-authored a terrific book, Savings Capitalism from the Capitalists; I don't think we'd be in this mess if some of the ideas taken up in the book were taken up by political elites.)

Chapter 11 works for companies. I think we should go back to the pre-2005 changes in bankruptcy law, with a modification alowing bankruptcy judges to cram down mortgages.

Clearly, I don't have an answer. But I am concerned that so much intellectual firepower is being spent reliving the Great Depression and the New Deal.

Here's another concern. The first modern super-lobbyist was Tommy "the Cork" Corcoran. He was vital to the political sucesses of the New Deal. He was tough and smart. And then, recognizing that power had shifted to Washington, he became a lobbyist. Several decades later we end up the K-Street project and Jack Abramoff, the disgraced and disgraceful lobbyist. My concern is that Abramoff is only a prelude to much worse, hard as that is to believe. Not right away. But the amount of money and power flowing into Washington is huge. Any CEO with half a brain will boost corporate spending on Washington lobbyists.

My latest musings at Business Week:

Viewpoint December 5, 2008

Want Real Stimulus? Try Universal Health Care

Health-care reform would put one of the most productive sectors in the U.S. to work to shore up the nation's economy, says BW contributing editor Chris Farrell
By Chris Farrell

The economy is in a tailspin. The latest salvo of grim tidings came courtesy of the Labor Dept.'s Dec. 5 employment report: U.S. employers slashed 533,000 jobs in November (BusinessWeek.com, 12/05/08), the largest monthly decline in more than three decades. The unemployment rate now stands at 6.7% and the ranks of the jobless have increased by 2.7 million since December. The broadest measure of unemployment (a figure that includes the unemployed, employees laboring part-time, and others barely working) stands at a dismaying 12.5%, or 19.3 million workers, up from 8.4% a year ago, or 12.9 million workers.

Considering all the actions being taken by the U.S. Treasury and Federal Reserve to shore up the economy, the risk that a disinflationary recession deepens into a deflationary depression remains remote. But it isn't inconceivable.

The New Stimulus Package

To stave off an unwelcome reprise of the 1930s, the incoming Obama Administration and Congress are preparing a large fiscal stimulus package for the New Year. The centerpiece of the new Administration's initiative to get the economy going again was unveiled in news reports Dec. 6: The largest public works initiative since the creation of the national highway system in the late 1950s.

President-elect Obama highlighted the main components of the planned government investment in infrastructure: A massive effort to make public buildings more energy-efficient; more roads and bridges; upgrading school buildings; extending the information superhighway; and medical care electronic record keeping. It's increasingly apparent that the Detroit automakers will also get government money to stay alive.

Yet major health-care reform--specifically, universal health care--should top the list. Forget any suggestion that reform is too expensive or that it would take too long to have an impact. Wrong, on both counts. A bold embrace of universal health care offers policymakers the chance at a fiscal triple-play: Universal coverage would stimulate the economy, it would boost the financial security of ordinary Americans, and it would break the health-care reform log-jam.

Rx for a Healthy Economy

To paraphrase and update a famous quote about General Motors (GM), what's good for health-care reform is good for the economy. (It would certainly be good for General Motors, too.)

The case for long-term reform is compelling. The problems associated with America's badly frayed health-care system are well known. The country spends a world-beating 16% of gross domestic product on health, yet in international comparisons it lags behind a number of key measures. For instance, the U.S. ranks 29th in infant mortality and 48th in life expectancy. The number of people without health insurance was 38 million in 2007, and that number is guaranteed to have risen in the meantime with the recession that began a year ago. With universal health care, everyone under age 65 would be covered by a qualified health insurance company or through a government-sponsored program. (Those over 65 already have a version of universal coverage through Medicare.)

Universal coverage would boost the economy in the short term. The reason is that the financial side of the health-care equation is deteriorating rapidly for the average American family. Some 41% of working-age adults--72 million people--had trouble paying their medical bills or were paying off accrued medical debt from the past year. (That's up from 34%, or 58 million people, in 2005.) Taken altogether, in 2007 an estimated 116 million people, or two-thirds of working-age adults, were either uninsured for a time, faced steep out-of-pocket medical costs relative to their incomes, had difficulties paying their medical bills, or didn't get the care they needed because of cost, according to the Commonwealth Fund Biennial Health Insurance Survey.

Targeting fiscal stimulus toward universal coverage would help ordinary workers rather than Wall Street tycoons. It would also relieve a major source of economic insecurity for anyone handed a pink slip during the recession.

Funding Health Care

For quick implementation, the initial system largely would take bigger and better advantage of existing programs. How much would it cost? Depending on the details, it would take somewhere between $100 billion and $200 billion to require that insurance companies abandon any screening based on preexisting conditions, fund tax credits for employers and workers, open up Medicare to younger folks, boost enrollment in State Children's Health Insurance Plans, and jump-start other initiatives to get everyone under the universal coverage umbrella.

Dean Baker, an economist and co-director of the Center for Economic & Policy Research has come up with a universal coverage package that would cost $160 billion a year. The main components of his idea: $120 billion in tax credits to employers who cover workers for the first time in 2009 and 2010, a credit for employers that increase their existing coverage, and another $40 billion to reduce the health-care burden on Medicare beneficiaries. (He would also open up Medicare to employers and individuals.)

What's more, rising health-care spending is not quite the devil it's often made out to be. The medical industry is among the nation's most globally competitive sectors. Health care is also a big U.S. employer, with 13.4 million workers. Indeed, even as most industries shrink their payrolls health care has created jobs. For instance, in November health-care employment grew by 34,000 and over the past 12 months the industry has added 369,000 jobs.

The Time Is Now

To be sure, this kind of universal health care isn't good enough for the long haul. It doesn't go far enough to create incentives for health-care efficiencies, let alone establish a stable source of funding. But once the economy recovers, Washington can debate how to create a more cost-effective and cost-efficient health-care system. Hopefully, any long-term solution will sever the link between health insurance and employment. It makes no sense that because a company's profits are down during a recession that a family's health-care coverage is at risk.

The country has toyed with some kind of national health policy six times over the past 100 years. A key plank in Theodore Roosevelt's losing Presidential campaign of 1912 was national health insurance. President Harry Truman tried again after World War II with his "Fair Deal." President Clinton's health-care initiative early in his first term collapsed. The current crisis offers another opportunity to reform the unwieldy, expensive apparatus at last--and give much needed relief to the beleaguered U.S. economy in the process.

Is the U.S. taxpayer really going to bail out an investment by one of the leading private equity firms? The very politically connected private equity firm Cerebus owns Chrysler, and its seeking its share of the Detroit bailout. It's an empire built on debt. here's how a recent New York Times story put it: "But if they fail Cerberus and its partners could lose their daring bets on Detroit. Without a bailout Cerberus could lose about $2 billion and suffer a stinging blow to its reputation. With one it might eventually profit from its troubled deals."

Seems to me that the Cerebus investors should get wiped out first, no?

Why are we bailing out the auto companies? Why not just bailout the workers? In other words, lets take the money and give it to the workers. They can use it to retrain, move to another part of the country, get more education. We live in an economy where the real value is human capital. The workers, the employees, these are also the people we care about. Left to its own devices the Detroit auto industry will shink. Ford will probably survive. Maybe a slimmed down GM. Someone will buy the Jeep brandname. The consumer will continue to have a lot of choice.

Of course, letting this process unfold has been harsh on many workers and it would get even worse. That's why Washington should send it money to the workers. The economy will benefit short-term and long-term from an investment in protecting and educating and moving the workers. But Washington doesn't have to get involved with Detroit auto industry management or try to decide what will the the autos of the future.

It's human capital that needs a helping hand, not the company, not management, not the board of directors, not shareholders and not the private equity investors. Invest in people, not place.

From Paul Krugman's Nobel lecture. Good advice for anyone trying to think through a problem:

My rules for research:

4. Simplify, simplify

The slides of his talk are well worth going through, especially since he uses the U.S. auto industry as an example in his lecture. Thanks to Tyler Cowen of Marginal Revolution for the pointer.

The producer price index (PPI) for finished goods fell by 2.2% in November, according to the Labor Department. That follows the record drop of 2.8% in October. The PPI is up a mere 0.4% from a year ago. Also on the price front, the Labor Department reported yesterday a record drop in import prices for November.

Prices aren't falling for good reasons, such as technological and organizational efficincies. No, demand is falling sharply. The recession here and abroad is getting worse, and the risk that deflationary pressures are taking root in the global economy rising.

The Fed will cut its benchmark interest rate sharply when it meets next week.

How scared is the Fed that the economy has fallen off a cliff? It seems very, very scared by lowering its benchmark interest rate to between 0% and 0.25%.

It's a good move, especially in light of the steep drop in employment, another plunge in housing, and the sharp declines in the CPI and PPI.

I know that Ben Bernanke is getting a bad rap for trying lots of stuff, but its the right approach.

Here are some scary numbers, courtesy of David Rosenberg, economist at Merrill Lynch:

Households have lost over $7 trillion in terms of net worth in the year ending 3Q, and it looks like this wealth destruction will top $10 trillion when the 4Q Fed flow­of-funds data come out (that already exceeds the entire $4 trillion loss during the tech wreck).

Deflation is still a fear, but the downward price pressure is growing. David Rosenberg, economist at Merrill Lynch, highlights changes in the labor market are worrisome:

As a sign of how consumers are delaying their purchases in anticipation of even lower prices, only 47% of shoppers have completed their holiday activity versus 53% a year ago. We regard this as evidence th at deflation expectations are creeping in.

And one of the conditions for deflation is, of course, wage flexibility, and everywhere we look, we see an increasing number of companies cutting back on their wage bills. FedEx is just one example - slashing wages for 35,000 employees by 5% (that is 16% of the company's workforce), including a 20% base pay cut for its Chairman and CEO (plus no company contributions to 401k plans in 2009). We also see that Nortel, Eastman Chemical, Newell Rubbermaid, Agilent Technologies, Atlas World Group, and AK Steel Holding have all cut wages and salaries in the past few weeks. According to Watson Wyatt Worldwide, another 6% of companies also plan to cut wages and benefits and 23% intend to reduce the size of their staff in 2009. Also have a look at the front page of "In Need of Cash, More Companies Cut 401(k) Match" - again, the labor market is definitely deflating. Not only that, but these cuts to 401(k) contributions are going to accelerate the process towards rising personal savings rates in coming quarters and years - again, a highly deflationary development and we are not sure that there is an appropriate response to this given that the savings rate is already at rock bottom levels of around 2%.