Interview: Economic cycle research
>> welcome back. the u.s. trade deficit widened to $59 billion from $58 billion last month. import prices had a big jump in september. now excluding oil, import prices rose 1.2%. that’s the largest on record since 1989. our guest says that is a bad sign if you want the fed to stop raising rates. anirvan banerji with the economic cycle research is with us in the studio. you say import prices―this news on import prices is bad. cow explain that.
>> sure. the one-month jump which is a record is ahead. what is more ominous is the fact that import prices, even excluding oil has been trending up since 2004 and rather aggressively. the most aggressive since 10 years ago. and why it’s important is it’s a period of rising import prices that you see the fed undertake a series of rate hikes. that was true in 1994-1995 and again now. it wasn’t true in the late 1990’s with import prices falling for four years. the fed keeping rates low. so when you have these rising import prices reinforcing domestic investment pressure, that’s when you have to watch out. the fed has to counter those inflationary pressures coming from abroad as well as domestically.
>> the fed may counter by raising rates still more?
>> that’s what they have traditionally done.
>> what do you think is fueling all of this?
>> well, it’s obviously a combination of what used to be a weaker dollar. also you have economies overseas that are getting stronger at the margin. even japan and europe are beginning to get stronger than before. while china is rolling ahead of eupbd kwrafplt the u.s. economy is on an even keel and going ahead so you have all of these resources being soaked up worldwide pretty rapidly. that leads to rising import prices.
>> we had the trade numbers today also. any surprises there?
>> no, i think that came in pretty close to expectations. you had both imports and exports at record highs. but that is par for the course. it shows that the u.s. economy as of august was expanding nicely. but so were the overseas economies.
>> do you see the trade balance more of a product of strong u.s. demand? or kind of maybe luke warm overseas economies?
>> well, it’s a bit of both. it’s become a structural issue now. at this point if you want the deficit to go down significantly on a sustained basis, you have to have exports grow almost twice as fast as imports. that’s not in the cards. it’s a structural issue more than a temporary issue.
>> we have c.p.i. coming out tomorrow. where do you see the numbers and how much of a role do you think the numbers play in our economy?
>> well, it’s important to tell you what happened last month in terms of inflation. but in the light of the import price numbers, i understand that some people are saying that tomorrow’s c.p.i. numbers i expect higher than what people expect. i’m not sure what that means. in any case, i think that is something―that’s looking backward at what happened. what the fed has to do is look ahead a year or two. the c.p.i. is not going to tell them much about that.
>> you say then the fed―do you think the fed actually considers the month to month indicators and how much of a role do you think that plays in policy?
>> i think the month to month gyrations are not important. it’s what they add up to over a period of time. i think what you see is that inflation as measured by the c c.p.i. has been trending up for a while now. that is a confirmation of the buildup in cyclical inflationary pressures we have been seeing.
>> where do you stand on the inflation growth debate? what do you see as more of an issue for our economy?
>> no question of inflation. on a cyclical basis, the clear and present danger is not recessionary but inflation. that is why you have seen the fed raising rates. that is why you have seen in recent weeks since the beginning of september the long bond yields go up. today they touched 4.5%. that’s clearly the market telling you that it’s inflation, not growth.
>> we talked about the imports. what about exports. do you think the dollar’s appreciation will have an impact on exports?
>> at margin a little bit maybe. but i think the bigger issue here may be that foreign economies including economies like europe and japan which has been rather lackluster may be picking up a little ahead of steam. that might help u.s. exports.
>> thank you very much. anirvan banerji of the economic cycle research. ok. when we continue, the u.s.-china trade balance continues to widen. when we come back, our “chart of the day” takes a closer look at that. a most persistent trend.
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Listen Interview: Chairman of M & A.
>> welcome back. this is “after the bell.” i’m derek davis. let us recap the day on wall street. stocks ened mixed with the dow jones industrial average down less than a point to 10,216. s&p 500 index down less than a point to 1,176. the high tech heavy nasdaq up nine points to 2,047. we had some deal making today. buyout firm bain capital agreed to acquire c.r.c. health group for $720 million. c.r.c. provides drug and alcohol treatment centers in more than 20 states. the deal is expected to close next year and adds to bain’s list of more than 25 health care investments. private equity firms have announced more than $215 billion worth of takeovers this year. that’s almost―that’s up almost 50% from a year ago. now speaking of deals, know the first of nine months with 2005 behind us, a recap of merger activity. find out what we can expect for the fourth quarter of next year. joining us now is lou bevilacqua of cadwalader, wickersham & taft. m anne a dog pretty well, globally and abroad, is that right?
>> it’s been an excellent year. we see macrofactors lining up to continue to have a good year going from now into the end of the year and into 2006.
>> with the fourth quarter upon us, what trends do you expect going forward?
>> i think we’ll see continued activity by the private equity firms. the b aeurbgs n transaction you mentioned is a good example. there’s lots of money on the equity side from the private equity firms. lots of money available for debt financing. there’s an awful lot of transactions being driven by people who decided they’ll take lower yields on returns to get something done.
>> with the bain capital merger we just talked about, is that indicative of what we may see in the health care industry?
>> i think there’s a general trend today with the baby boomers getting holder and myself in that group to use the health care system more aggressively. health care is obviously a growth area for this country and consequently it’s a target area for the acquisition moguls.
>> you are saying that―how about financial institutions? let’s talk about that. do you see trends there?
>> i think financial institutions as well. you have a very flat yield curve right now between the short-term and long-term rates. that’s bound to change. as rates climb, there tends to be opportunities in the financial institutions. i think you’ll see consolidation in the insurance industry, in the banks. not necessarily the mega banks but in the regional bank areas and that will also expand between the united states and overseas. i think you will see transactions for u.s. financial institutions are looking to china, india and some other foreign countries. ao rue saying we’ll see activity in financial institutions but no blockbuster bank deal as soon as
>> i think the large deals will be cross border as opposed to additional domestic deals.
>> why is that, do you think?
>> you run into issues with the size of the deal that has already been done. there’s a limited number of additional candidates that may be appropriate in the united states. the huge market available in china and india and other countries seems to be more attractive from a financial point of view.
>> i aou mentioned the fed and the fed made it clear that it will keep raising rates. do you think that will lead to more companies doing business elsewhere?
>> no. i think the issue on the fed raising rates, although short-term rates have gone up. we continue to have a flat yield curve. long-term rates will stay very low. consequently there’s plenty of activity in the united states. with growth in the united states as far as earnings, it has been a robust series of earnings reports in the last several months. i think we’ll continue to see a lot of activity in the united states. there’s also a trend today for very aggressive and innovative financing. security is a big part of m&a. you take the assets, whether royalties of software or royalties on drugs, and effectively secure advertise those into special vehicles creating a unique and aggressive opportunity for bert financing of transactions.
>> it appears that junk bond investors are more skittish about default rates. some are balking at helping companies with financial deals. do you see that affecting m&a at all?
>> well, the problem with the high yield right now is as prices are getting a lot of pressure. prices are high because of competition which requires obviously more financing in order to make the necessary returns. the high yield market is under a lot of pressure. i don’t think that the default rates will be increasing. i think until the interest rate on the bond starts to climb up a bit―and at moment because of the flat yield curve they’re not high enough―there will be pressure not to use the high yield as much. there is also competition from a different type of finance. you get second lien types of loans as well as securtization.
>> the junk bond market has been closed to some of the lowest rated companies. what will bring it back if anything?
>> prices coming down. if prices don’t come down, i don’t think you will seat lowest rated companies being able to finance.
>> great. thank you very much. lou bevilacqua, chairman of m&a. we zero in on today’s trade balance report. will fed officials take any hints from the big jump in import prices. our next guest says yes. find out his reasons.
