In this issue:

Federal Reserve Declares It's Run Out of 'Patience'

'Hedge Funds Are an Accident Waiting To Happen'

Planned U.S. Job Cuts Rise to Over 1 Million for Year

Warren Buffett Fears Derivatives Disaster

Wal-Mart Hits Another Wall, This Time in Chicago

California Hit by New Energy Emergency


From Volume 3, Issue Number 19 of Electronic Intelligence Weekly, Published May 11, 2004

U.S. Economic/Financial News

Federal Reserve Declares It's Run Out of 'Patience'

On May 4, the Federal Open Market Committee voted unanimously to keep the federal funds rate at 1%, the lowest level in 45 years. In a shift, however, the Fed's policy-makers deleted its pledge to be "patient" before raising rates, signalling future increases. In its statement, the Fed changed its stance on the interest rate charged to banks on overnight loans, saying "accommodation can be removed at a pace that is likely to be measured."

The Fed claimed that the economy is expanding at a "solid rate," with "somewhat higher" inflation. Inflation expectations now seem to be "well-contained," it said, in a shift from its statement in March, when it had said price increases were expected to stay low.

'Hedge Funds Are an Accident Waiting To Happen'

So said Securities and Exchange Commission chairman William Donaldson, when he addressed the annual conference of the Society of Business Editors and Writers in Ft. Worth, Texas, on May 2. Donaldson noted that it is not just the institutions and wealthy individuals who are at risk if hedge funds encounter problems, since "There's not a pension fund in the country that's not using hedge funds." "This is an $800-billion industry on its way to $1 trillion; it's growing like a weed," he said. "We don't know what's going on in that industry."

Planned U.S. Job Cuts Rise to Over 1 Million for Year

U.S. employers announced 72,184 planned job cuts in April, up from a ten-month low of 68,034 job cuts in March, according to outplacement firm Challenger, Gray & Christmas. The April figure was down 51% from the level in April 2003, which was the second-largest job-cut month of the year. From January through April, employers have announced 335,024 job cuts.

But, over the past 12 months, 1,069,256 planned job cuts have been announced by employers, said Challenger. Since January 2001, a whopping 4,995,149 job cuts have been announced.

In April, the biggest number of planned job cuts were in government and non-profit sectors.

Warren Buffett Fears Derivatives Disaster

At the annual shareholder meeting of his Berkshire Hathaway fund over the first weekend of May, the so-called second richest man on the planet pointed to the risks posed by the huge amounts of financial derivatives. Warren Buffett cited the example of mortgage giant Freddie Mac. Despite having intelligent board members, being chartered by the U.S. Congress, and being followed by dozens of Wall Street analysts, Freddie Mac failed to get a hold on the complexity of derivatives transactions, Buffett said.

"With an auditor present, they managed to misstate earnings by $6 billion. A lot of mischief can happen with derivatives." They are so complex that many chief executive officers he knows personally, just can't figure them out. "I know the people that run these companies, and they don't have their minds around what is happening.... Some time in the next 10 years, you will have a huge problem that will either be caused by or accentuated by people's activities in derivatives."

Buffett's Berkshire Hathaway itself ran into deep derivatives problems in 1998 after taking over the insurance firm General Re.

Wal-Mart Hits Another Wall, This Time in Chicago

After Wal-Mart got shut out of Inglewood, Calif. last month, when a popular referendum turned against the discount chain, the Chicago City Council decided May 5 to postpone a vote on rezoning which would have allowed Wal-Mart to open two stores in the city. It seems Wal-Mart is having trouble with urban areas (as opposed to suburbs and rural sites), due to the still lingering strength of labor in the cities. There is a huge fight in the city, with some of the poorest areas voting with Wal-Mart, desperate for jobs, while labor and others are fighting to save the pay scales of the rest of the city from the Wal-Mart beast. A vote is expected in the next month.

Meanwhile, competition from Wal-Mart is widely held to be responsible for the financial difficulties of the Jacksonville, Fla.-based Winn-Dixie grocery store chain, which announced last week that it plans to close or sell 156 stores, and close three distribution centers and several manufacturing operations next year, threatening the jobs of 10,000 workers.

On May 4, Vice President Dick Cheney and his wife Lynne did their best to support Wal-Mart, during a rally in its headquarters in Bentonville, Ark. Cheney calling the job-eating slave-labor giant the great example of success in the U.S. economy, and praised the firm for being "generous." One suspects he was talking about Wal-Mart's contributions to the Republican Party, which make up over 80% of its PAC contributions. He certainly wasn't referring to wages and benefits to Wal-Mart's employees.

California Hit by New Energy Emergency

More than a month before the start of summer, the California Independent System Operator (ISO) on April 30 had to ask businesses in the southern part of the state to voluntarily shut off their power, during a declared transmission emergency. As temperatures reached triple digits, total demand on the statewide system reached its highest level this year, which, at 40,451 megawatts (MW) was 3,000 MW higher than forecast. (Most forecasts are notoriously low-ball figures, based on "normal" weather, even though weather is never "normal.")

The problem was not a shortage of generating capacity, but the inability to transport the electricity to where it was needed. It was bottlenecks in the infamous Path 15 north-south transmission corridor that caused blackouts in northern California three years ago. The ISO issued its own forecast a few weeks ago, warning that supplies would be tight this year, if the state faced a record demand for power.

Meanwhile, Governator Schwarzenegger is proposing the partial return of deregulation to the electricity sector, to allow large industrial users to bypass the state's utilities and buy power from the cheapest marketer. This will leave the pay-off of the utilities' multibillion-dollar debts, accrued during deregulation, and the rising price of power due to rising natural gas prices, to the individual consumer.

All rights reserved © 2004 EIRNS