U.S. Economic/Financial News

Leaked Ford Document Outlines 'Way Southward' to Mexico

While Ford plans to close plants and eliminate tens of thousands of jobs in the U.S., the automaker is preparing to invest up to $9.2 billion in Mexico over a six-year period from 2006-2012, including building a new assembly plant. This is according to a confidential, 28-page document turned over to the Oakland Press (June 14) by a Ford employee; and obtained by the Detroit Free Press (June 15). Part of the document had been prepared for a presentation in early April to officials from the Mexican government.

"The Way Forward—Mexico [offers an] opportunity to further leverage Ford of Mexico cost advantage and location to reduce corporate fixed costs," the confidential document said. "Mexico is ready—[a] fast and reliable solution and an established organization with proven capabilities to build from. We will leverage our global scale like never before and Mexico is a key partner as we're targetting lower fixed costs, better quality and speed to deliver our Way Forward plants," the document stated.

A second source familiar with Ford operations vouched for the authenticity of the documents, which suggest that the automaker's new investment could potentially create as many as 150,000 new jobs in Mexico within the next decade.

The documents indicate that Ford plans to build a new $1.4-billion, 280,000-square-foot assembly plant; revitalize its assembly plant in Cuautitlan; invest an additional $1 billion in the Hermosillo Stamping and Assembly plant; and raise its purchases of Mexican-made components by 300%.

It also took note of political sensitivities, saying that announcement of any expansion in Mexico would have to come after the just-concluded UAW convention.

Maryland Takes Steps To Put Toothpaste Back in the Tube

During a special one-day session of the Maryland legislature June 14 that ran late into the night, the General Assembly and Senate voted overwhelmingly to turn back the statute of the state's 1999 electricity deregulation law that would have allowed a 72% increase in rates to take effect on July 1. Until now, the rate has been capped, during which time "competition" was supposed to have developed, to keep rates down.

Instead, natural gas prices to utilities have tripled, coal prices have risen, and under deregulation, there is no state control over either prices or profits. The two Democratically-controlled state houses voted to allow a more gradual increase, starting at 15% this summer. While a temporary palliative, this does not solve the systemic problem.

Republican Gov. Robert Ehrlich is threatening to veto the bill, which veto would be overridden, or to let it become law without his signature, as a way of registering his disapproval.

Investors in Denial, Re: 'Multiple Asset Bubble'

Morgan Stanley's chief economist Stephen Roach, in his weekly commentary June 12, said investors attending their annual conference on the French Riviera cited as the most serious issue, the state of the global liquidity cycle. Yet, two areas still in favor were commodities and emerging markets—"the same risky assets that have the most to lose in a liquidity-withdrawal scenario." The Federal Reserve, by signalling another rise in interest rates, could finally be turning its attention to the "increasingly dangerous excesses of a very powerful liquidity cycle." Combined with recent monetary tightenings by ECB and other central banks, this would reduce "the flow of high-octane fuel that has fed the multiple asset bubble syndrome of the past seven years."

But Roach worries about rebalancing. "There is, indeed, an eerie similarity between today's world and many of the preconditions that brought an earlier era of globalization to a sickening end." Even if the Fed does raise interest rates further, Roach says, "there is always a chance it's too late—that America's imbalances are so advanced, the only way out is the dreaded hard landing."

House Increases Amtrak Funding; High-Speed Rail Mooted

On June 13, the full House of Representatives' floor debate on a bipartisan amendment to increase Amtrak funding for the next fiscal year to $1.1 billion introduced by Reps. Steven LaTourette (R-Ohio) and James Oberstar (D-Minn) won—with 71 Republicans voting in favor.

Of the six Republicans and four Democrats who rose to support the amendment, two argued for high-speed rail development, subsidized by government, i.e., not private, funding. Rep. Joe Schwarnbz (R-Mich) rebuked his colleagues for years of neglect to passenger rail development, charging, "the United States [has] the worst in all of the industrialized world." He argued the "degradation of Amtrak" goes on "apace," and this must stop as "we need to have a modern, efficient dependable" rail system subsidized by government as it is worldwide. This, he said, "is the cost of keeping our economy going." Then Rep. Mike Castle (R-Del) insisted "we should be working on a comprehensive strategy to make Amtrak the best high-speed rail system in the world."

Now the Amtrak funding fight goes to the Senate. Last year the Senate and House rejected Bush's "zero" funding level, awarding $1.3 billion to Amtrak. This year even the Bush Administration Transportation Department Inspector General testified that a minimum of $1.4 billion is critical to just keep the system running and to upgrade badly deteriorated infrastructure.

Companies' Stock Buybacks Rise Dramatically

Companies, pushed by cash-strapped hedge funds, are spending record amounts repurchasing their own stock, the Wall Street Journal reported June 12. According to Standard & Poors, stock buyback activity by S&P 500 companies in the first quarter of 2006 has jumped 22.1% compared to the level in the first quarter of 2005, and up a whopping 55.2% in the past 12 months. These companies spent $100.2 billion on stock buybacks—the second-highest level ever—during January-March; in the year ended March 31, they spent a record $367 billion. Repurchasing stock was done not only to boost companies' earnings per share, thereby covering up poor operating financial results. Hedge funds, hit by falling stock markets, the Journal notes, are pushing share buybacks to offset losses on their bets.

Treasury: No Guarantee for Fannie, Freddie Bailouts

Treasury Undersecretary Emil Henry said the markets don't yet understand that the government is not going to bail out Fannie Mae and Freddie Mac, the semi-privatized mortgage lending agencies, which are now de facto bankrupt, according to MarketWatch June 15.

In a speech to the real estate roundtable, Henry said that Fannie and Freddie's $2.25 billion guaranteed line of credit with the Treasury is "insignificant and virtually meaningless in the context of outstanding debt obligations of $766 billion for Fannie Mae and $749 billion for Freddie Mac; not to mention the additional $2.6 trillion of mortgage-backed securities they guarantee."

Fannie Mae, created in 1938 under the New Deal, and turned into a publicly held entity in 1968, is the second-largest borrower after the federal government and the second-largest financial institution after Citicorp. Henry's statement is thus a provocation to a housing bubble collapse, the financial equivalent of "bring it on."

Henry hinted that the Treasury would use its debt approval authority to rein in the two institutions, even as legislation is still stalled in Congress. He called the situation "the most significant domestic finance policy issue in the coming months."

U.S. Emergency Medical System in Dangerous Crisis

The nation's emergency medical system is in a dangerous state of crisis, because as a whole, it is "overburdened, underfunded, and badly fragmented," the Institute of Medicine of the National Academies reported June 14. These conclusions are contained in three reports on the Future of Emergency Care prepared after a two-year investigation. "As a result, ambulances are turned away from emergency departments once every minute on average, and patients in many areas may wait hours or even days for a hospital bed. Moreover, the system is ill-prepared to handle surges from disasters such as hurricanes, bombings, or disease outbreaks," according to the Academies' press release.

The findings concerning overcrowding of emergency departments ("EDs") and trauma centers note that ED visits increased by 26% between 1993 and 2003, but the number of EDs declined in the same period by 425, while the number of hospital beds declined by 198,000. Further, patients get backed up in the ED because there aren't enough in-patient beds, and are often "boarded" in the ED for 48 hours or more until a bed becomes available.