From Volume 4, Issue Number 29 of EIR Online, Published July 19, 2005

U.S. Economic/Financial News

Senior SEC Official Warns of Hedge Fund Danger

The U.S. Securities and Exchange Commission is carefully watching the massive amount of leverage, or borrowed money, hedge funds are using to magnify returns on bets, a senior SEC official said July 12. "We have potential huge bets being made, and if they are wrong, we have a serious domino effect," Roel C Campos, SEC commissioner, told a Managed Funds Association symposium held in London. Some funds borrow two to three times their capital, he said.

Yet, he insisted on opposing regulation. "I do not advocate our agency establishing some regulation over leverage," he said.

Magazine Highlights 13 'Riskiest Housing Markets'

Kiplinger's Personal Finance magazine announced July 13 that it has produced a study highlighting what it called the 13 "riskiest housing markets" in the U.S., citing speculation-driven price growth and job losses, in its forthcoming August issue. Nationwide, the median price of an existing home has sharply risen 10% in the past year; 37 areas saw prices jump by at least 15%.

Nearly one-fourth of home purchases over the past year were speculative investments, which are concentrated in a few local areas. Speculators, the article notes, are quick to sell at any hint of a drop in prices.

Boston leads the threatened pack, with a 53% chance that housing prices will fall over the next two years. The city has lost 200,000 jobs since 2000, while housing prices remain high, with a median home price of $398,000. In California, a bursting bubble is looming for Los Angeles, San Francisco and Sacramento, where 40% risks of decline are forecasted. Also on the riskiest list are Providence; Detroit; New York; Minneapolis-St. Paul; Denver; Washington; Fort Lauderdale; Miami; and Tampa-St. Petersburg. The list was based on private mortgage insurance company PMI Group's index of risk.

General Motors Forced To Help Its Supplier

Itself facing bankruptcy, the world's largest automaker, General Motors, has agreed to keep buying car parts from bankrupt Tower Automotive, and will pay at least part of what it owes the world's largest maker of vehicle frames. GM also agreed to buy some of Tower's assets, under agreement filed in U.S. Bankruptcy Court in New York. Five days earlier, bankrupt Collins & Aikman won approval for a $82.5-million loan from automakers including GM, and received approval to increase prices by 15%.

Michigan Tool-and-Die Firms 'Under Siege'

Michigan's estimated 1,300 tool-and-die shops are so threatened by the blowout of the auto industry that the State Legislature has offered extraordinary help. Under a revision of state legislation passed last year, Michigan now grants sweeping tax relief to tool-and-die companies which are located in a so-called "Renaissance Recovery Zone," have fewer than 50 employees, and agree to collaborate with other small machine-tool firms. Shop owners warn that they would go out of business without state intervention.

"Our business is under siege," declared the president of Direct Tooling Group, a manufacturer of sheet metal stamping dies, primarily for the auto industry.

Commercial Banks Are Top Holders of Junk

The top underwriters of junk bonds used to be boutique Wall Street firms and brokerage companies, but now the big commercial banks are the kings of risky high-yield corporate securities, according to a report in the Wall Street Journal on July 14. Bank of America's Banc of America Securities was the top underwriter of speculative-grade-rated debt in the first half of the year, followed by JP Morgan Chase. Some $49.6 billion of new junk bonds were issued in the first six months of 2005.

Globalization Killing Asparagus Growers

The closing of the last remaining asparagus canning plant in Washington State, reported July 11, effectively ends the state's once-thriving processed asparagus industry, devastated by free-trade/globalization insanity. Worse, ripple effects likely will hit the nation's entire fresh asparagus industry in 2006, as growers scramble to find a new market for their crops, warns Alan Schreiber, executive director of the Washington Asparagus Commission. Last year, Seneca Foods Corp. announced the permanent closing of its plant in Dayton—a facility which processed as much as half of the entire U.S. harvest in 2005.

Already, Del Monte Foods shut down its plant in 2003. In what one asparagus grower has called a "disaster waiting to happen," growers who had contracts with Seneca now likely will be forced to risk prices that would not cover the costs of production.

Washington, the nation's second-biggest producer of asparagus behind California, has seen harvests tumble by about 60% since 1991, when a Federal law exempted certain agricultural imports from tariffs, including asparagus. The state had a record-high 32,000 acres producing asparagus in 1991, before passage of the Andean Trade Preference Act, but just 12,500 acres remained at the beginning of 2005—and could fall by an another 2,500 acres by next year.

U.S. Trade Deficit Hit $55 Billion in May

The U.S. imported $162.2 billion in goods and services in May, while exporting $106.9 billion, yielding a deficit of $55.3 billion, according to the report by the U.S. Department of Commerce issued July 13. That figure was down $1.6 billion from April, but up $6.6 billion from a year earlier. Through May, the trade deficit is running at an annualized rate of $682 billion, 10% higher than last year's record deficit of $617.6 billion.

Democrat Exposes Fraud of 'Recovery' Claim

Chiding the Bush Administration's "spinning" of the newly revised deficit numbers as a positive boon to a 'turnaround' in the economy, Democratic Whip Rep. Steny Hoyer (Md) issued a press release on July 13 entitled, "We Are Not on the Road to Recovery, We Are on a Crash Course with Fiscal Disaster." The key points he made were:

* "This year's deficit will still be the third highest ever" in U.S. history.

* "The White House masks the true size of the deficit by using the Social Security surplus ($173 billion in 2005)." This Hoyer hits for Republicans' failed promise not to spend the surplus—which by law they are not supposed to do anyway—and then rebukes their "shell game" to "use the Social Security surplus to privatize the program rather than pay for the guaranteed benefits already promised to retirees. If that Republican scheme was enacted it would increase the deficit by $1.1 trillion over the next ten years."

* "It should also anger every American that interest on the debt is the fastest-growing area of spending," and that more money will be spent on paying interest on debt over ten years than on "providing health care through the Medicaid program...."

Some Republicans are not buying Bush's spin of the numbers. Senator Jim DeMint (SC) called the deficit numbers "misleading" because "Congress is raiding Social Security to mask the true size of the deficit," which he reportedly says is closer to $400 billion than to the $333 billion Bush's OMB claims.

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