From Volume 4, Issue Number 21 of EIR Online, Published May 24, 2005

U.S. Economic/Financial News

Rohatyn Moots End of Private Equity Boom

In an interview with the German financial daily Handelsblatt May 18, investment bank Lazard Freres' Felix Rohatyn, when asked why private equity funds play such a big role at present, replied: "The boom is based on the fact that these groups can borrow without limits at extremely low expenses. The reason for that is the monetary policy of the Federal Reserve, which is still very liberal. That's why there are so many debt-funded takeovers. That is not a sound process. I think this boom will not last."

Plunge in Foreign Buys of U.S. Bonds Worries Wall Street

Foreign purchases of U.S. securities fell "sharply" in March, the Wall Street Journal reported May 17. While the data on these transactions is voluntary, and therefore somewhat suspect, the figures for March nevertheless created enough of a stir to make headlines in the Journal.

The Treasury International Capital System, or TICS, tracks institutional purchasers, and registered a net drop in March. Apparently, the glitch in the curve was caused when Norway unexpectedly sold $17 billion worth of bonds to an unidentified private purchaser. TICS surmised that it was a hedge fund that made the big buy, based on the location of the buyer, which was somewhere in the Caribbean Islands. All this is very suspect, and comes on the heels of statements made by Asian countries, that they would be decreasing their holdings of US Treasuries. The question in the Journal is: Was the Norway sale an isolated event, or a "harbinger"? The one they don't ask, is, if the purchaser were a hedge fund, was it buying the bonds to stabilize its own portfolio from recent loses, or taking a "position" on the U.S., expecting some upcoming shift in the economy here?

U.S. Household Debt Making Headlines

The ballooning of U.S. household debt was covered in a feature article in the Wall Street Journal May 17. Although the story is largely anecdotal, the figures are clear: For the last 15 years, household income rose 11%; household spending was up 30%; and household debt soared by a whopping 80%. That means that the debt-load for the average household has nearly doubled, from about $50,000 in 1990, to nearly $100,000 today. The state of Utah is featured, because for years, its conservative residents shied away from debt, but no longer. Stories relate young couples buying homes, running up credit cards, paying them off with home equity until that runs out, then watching the debt continue to build. Often, people were only trying to maintain a living standard they were accustomed to as children.

The Journal was undecided as to whether this "relatively benign" situation can continue. Interest rates are rising, wage growth is still "sluggish," but the one "danger" they see: What if housing prices stall—or decline? Not so long ago, that might have been called the $64,000 question. Today, it must be well over $1 million.

Financial Institutions Told: Re-Evaluate Lending Criteria

Obviously concerned about the out-of-control household-debt situation (see above), no fewer than five Federal regulatory agencies have issued a joint statement to lenders, the Wall Street Journal reported May 17. These included the Federal Reserve, the Federal Deposit Insurance Corporation, the national Credit Union Administration and the Offices of the Comptroller of the Currency, and Thrift Supervision in the U.S. Treasury. Obviously, somebody's worried.

The agencies recommended that banks, thrifts, and credit unions all perform "stress tests" to evaluate the risk level of their portfolios. The cumulative debt level of U.S. households last year was $881 billion in home-equity loans, up 80% from the year 2000. Fifty-five percent of loans are held by banks, 14% by thrifts, 7% by credit unions, leaving over 20% in the hands of private finance companies.

U.S. Wholesale Prices Rose in April: Labor Dept.

A U.S. Labor Department report showed the producer price index increased by 0.6% in April, reflecting more expensive energy and automobiles. The increase in wholesale prices came on top of an even larger advance in March, of 0.7%. Excluding energy and food prices, "core" wholesale prices rose 0.3% in April. That was up from a tiny 0.1% advance in March, and represented the largest increase since January.

In another report, the Federal Reserve said industrial production at the nation's factories, mines, and utilities fell 0.2% in April, after nudging up 0.1% in March. April's decline was the largest since September. Factory production was flat in April, especially restrained by cutbacks in auto production.

'Highway' Bill Would Fund Mass Transit, High-Speed Rail, Maglev

A $295 billion funding bill for transportation was passed by the U.S. Senate on May 17 by a vote of 89 to 11. The bill, S. 732, is usually dubbed the "highways" bill, as the overwhelming majority of the funds—$234 billion—is designated for highway programs. The Senate bill is $11 billion higher than President Bush is willing to spend, and so he's threatened a veto. The U.S. House of Representatives bill, H.R. 3, was passed about a month ago and authorizes $283.9 billion, exactly the number Bush has agreed to. With the Senate's passage, both bills will now go to a conference committee to work out the differences before a final bill can be sent to the President.

A quick review of the multi-hundred-page bills shows that each designates some monies, albeit minuscule by comparison, for rail, high-speed rail, and even maglev. In the House version, $800 million is to be spent on high-speed rail-corridor development and technology over six years; $95 million over five years for magnetic levitation propulsion trains; and $3.9 billion over six years to design and construct 34 earmarked light commuter-rail projects, along with another $638 million for analysis and preliminary engineering for another 196 earmarked light rail projects. The Senate version also authorizes funds for rail, high-speed rail and maglev.

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