Monday, February 21, 2011

Obama touts tech agenda in Oregon

President Barack Obama paid a quick West Coast sales call for his education and high-tech agenda, dining with industry royalty at a private meeting in Silicon Valley before touring a state-of-the-art semiconductor plant in Oregon.

After visiting with a group of science fair students and peering at the image of atoms seen through an electron magnoscope, Obama renewed the theme sounded in his State of the Union address, with a nod toward his recent focus on deficit reduction.

"Even as we have to live within our means, we can't sacrifice investments in our future," Obama told several hundred guests and employees gathered at Intel Corp.'s suburban Portland, Ore., campus Friday. "If we want the next technological breakthrough that leads to the next Intel to happen here in the United States — not in China, not in Germany — then we have to invest in America's research and technology, in the work of our scientists and engineers."

Obama has pushed for increased spending on education, high-speed Internet, high-speed rail and green technologies — even as other federal programs are slashed or frozen — as a way to create jobs and better position the U.S. for competition in an increasingly globalized economy. Republicans call "investment" a euphemism for expanding the size and heft of government and have called for drastic budget cuts.

Obama found a friendly audience in Oregon, a Democratic stronghold, and an unlikely host in Intel Chief Executive Paul Otellini, who contributed to Obama's Republican opponent, Sen. John McCain of Arizona, in 2008 and has been critical of the president's economic and health care policies.

The relationship has thawed as Obama endorsed an extension of the research and development tax credit — a legislative priority forIntel and other tech firms — and taken other steps to reach out to business leaders. On Friday, Obama named Otellini to his Council on Jobs and Competitiveness, an economic advisory group.

Otellini, for his part, announced after the tour that Intel would build a $5 billion manufacturing facility in the Phoenix suburb of Chandler. The Arizona facility will create thousands of new jobs and will be the most advanced high-volume semiconductor factory in the world, he said.

Speaking to reporters aboard Air Force One, White House press secretary Jay Carney acknowledged Otellini's past criticism. "The president wants to hear from a lot of different voices," Carney said en route to Portland, Obama's only other West Coast appearance Friday.

"The point is not to collect people who agree with him on every issue and every policy decision he's made," Carney said, "but to create an environment, a council ... where ideas, good ideas, can be generated for going forward on job creation."

Before heading to Oregon, Obama dined Thursday night at the Woodside, Calif., home of venture capitalist John Doerr, a major Democratic donor. The private meeting included several marquee names from the tech industry, including Apple Inc. Chief Executive Steve Jobs, Google Inc. CEO Eric Schmidt, Facebook Inc. founder Mark Zuckerberg and Yahoo Inc. CEO Carol Bartz.

Carney said the president and business leaders discussed Obama's proposals to spur investment and hiring, as well as ways to encourage children to study math, science and engineering.

Sunday, February 13, 2011

Geithner Tells Obama Debt Expense to Rise to Record

Barack Obama may lose the advantage of low borrowing costs as the U.S. Treasury Department says what it pays to service the national debt is poised to triple amid record budget deficits.

Interest expense will rise to 3.1 percent of gross domestic product by 2016, from 1.3 percent in 2010 with the government forecast to run cumulative deficits of more than $4 trillion through the end of 2015, according to page 23 of a 24-page presentation made to a 13-member committee of bond dealers and investors that meet quarterly with Treasury officials.

While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration's adjusted 2011 budget.

"It's a slow train wreck coming and we all know it's going to happen," said Bret Barker, an interest-rate analyst at Los Angeles-based TCW Group Inc., which manages about $115 billion in assets. "It's just a question of whether we want to deal with it. There are huge structural changes that have to go on with this economy."

The amount of marketable U.S. government debt outstanding has risen to $8.96 trillion from $5.8 trillion at the end of 2008, according to the Treasury Department. Debt-service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 from about 12 percent in last year's deficit, according to the budget projections.

Budget Proposal

That compares with 69 percent for Portugal, whose bonds have plummeted on speculation it may need to be bailed out by the European Union and International Monetary Fund.

Forecasts of higher interest expenses raises the pressure on Obama to plan for trimming the deficit. The President, who has called for a five-year freeze on discretionary spending other than national security, is scheduled to release his proposed fiscal 2012 budget today as his administration and Congress negotiate boosting the $14.3 trillion debt ceiling.

"If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe," Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. "Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living."

Yield Forecasts

Treasuries lost 2.67 percent last quarter, even after reinvested interest, and are down 1.54 percent this year, Bank of America Merrill Lynch index data show. Yields rose last week to an average of 2.19 percent for all maturities from 2010's low of 1.30 percent on Nov. 4.

The yield on benchmark 10-year Treasury note will climb to 4.25 by the end of the second quarter of 2012, from 3.63 percent last week, according to the median estimate of 51 economists and strategists surveyed by Bloomberg News. The rate was 3.64 percent as of 2:08 p.m. today in Tokyo. The economy will grow 3.2 percent in 2011, the fastest pace since 2004, according to another poll.

"People are starting to come to the conclusion that you've got a self-sustaining recovery going on here," said Thomas Girard who helps manage $133 billion in fixed income at New York Life Investment Management in New York. "When interest rates start to go back up because of the normal business cycle, debt service costs have the potential to just skyrocket. Every day that we don't address this in a meaningful way it gets more and more dangerous."

'Kind of Disruption'

While yields on the benchmark 10-year note are up, they remain below the average of 4.14 percent over the past decade as Europe's debt crisis bolsters investor demand for safer assets, Bank of America Merrill Lynch index data show.

"The market is still giving the U.S. government the benefit of the doubt," said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. "What we're concerned with is whether the budget will only be corrected after the market has tested them. Will we need some kind of disruption within the bond market before they'll actually do anything."

Still, U.S. spending on debt service accounts for 1.7 percent of its GDP compared with 2.5 percent for Germany, 2.6 percent for the United Kingdom and a median of 1.2 percent for AAA rated sovereign issuers, according to a study by Standard & Poor's published Dec. 24. Among AA rated nations, China's ratio is 0.4 percent, while Japan's is 2.9 percent, and for BBB rated countries, Mexico devotes 1.7 percent of its output to debt service and Brazil 5.2 percent, the report shows.

Auction Demand

Demand for Treasuries remains close to record levels at government debt auctions. Investors bid $3.04 for each dollar of bonds sold in the government's $178 billion of auctions last month, the most since September, according to data compiled by Bloomberg. Indirect bidders, a group that includes foreign central banks, bought a record 71 percent, or $17 billion of the $24 billion in 10-year notes offered on Feb. 9.

Foreign holdings of Treasuries have increased 18 percent to $4.35 trillion through November. China, the largest overseas holder, has increased its stake by 0.1 percent to $895.6 billion, and Japan, the second largest, boosted its by 14.6 percent to $877.2 billion.

'Killing Itself'

"China cannot dump Treasuries without killing itself," said Michael Cheah, who oversees $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. "They're holding Treasuries as a means to an end," said Cheah, who worked at the Singapore Monetary Authority from 1982 through 1999, and now teaches finance classes at New York University and at Chinese universities. "It's part of what's needed to promote exports."

At least some of the increase in interest expense is related to an effort by the Treasury to extend the average maturity of its debt when rates are relatively low by selling more long-term bonds, which have higher yields than short-term notes. The average life of the U.S. debt is 59 months, up from 49.4 months in March 2009. That was the lowest since 1984.

The U.S. produced four budget surpluses from 1998 through 2001, the first since 1969, as the expanding economy, declining rates and a boom in stock prices combined to swell tax receipts.

Tax cuts in 2001 and 2003, the strain of the Sept. 11 terror attacks, the cost of funding wars in Afghanistan and Iraq, the collapse in home prices and the subsequent recession and financial crisis has led to the three largest deficits in dollar terms on record, totaling $3.17 trillion the past three years.

'Demonstrates Confidence'

The U.S. needs to manage its spending decisions "in a way that demonstrates confidence to investors so we can bring down our long-term fiscal deficits, because if we don't do that, it's going to hurt future growth," Treasury Secretary Timothy F. Geithner said in Washington on Feb. 9.

The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, expressed concern in the Feb. 1 report that the U.S. is exposing itself to the risk that demand erodes unless it cultivates more domestic demand.

"A more diversified debt holder base would prepare the Treasury for a potential decline in foreign participation," the report said.

Foreign investors held 49.7 percent of the $8.75 trillion of public Treasury debt outstanding as of November, down from as high as 55.7 percent in April 2008 after the collapse of Bear Stearns Cos., according to Treasury data.

Potential Demand

The committee projects there may be $2.4 trillion in latent demand for Treasuries from banks, insurance companies and pension funds as well as individual investors. New securities with maturities as long as 100 years, as well as callable Treasuries or bonds whose principal is linked to the growth of the economy might entice potential lenders, the report said.

"They are opening up a can of worms with the idea of all these other instruments," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. "They should try to keep the Treasury issuance as simple as possible. The more issuance you have in particular issue, the more people will trade them -- whether it be domestic or foreign investors."

White House Budget Director Jacob Lew said the Obama administration's 2012 budget would save $1.1 trillion over the next 10 years by cutting programs to rein in a deficit that may reach a record $1.5 trillion this year.

"We have to start living within our means," Lew said yesterday on CNN's "State of the Union" program.

Still, about $4.5 trillion, or 63 percent of the $7.2 trillion in public Treasury coupon debt, needs to be refinanced by 2016. That gives the government a narrowing window as growing interest expense will curtail its ability to spend.

"There is roll-over risk," said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. "It's a vicious cycle."

Monday, February 7, 2011

Obama appoints Pawlenty's pastor

President Obama has named Tim Pawlenty’s pastor, Leith Anderson, who is also the president of the National Association of Evangelicals, to his council on Faith-Based and Neighborhood Partnerships.

Anderson has been a senior pastor at Wooddale Church in Minnesota, one of the largest evangelical churches in the country, since 1977. He is known as a moderate evangelical leader and since taking the helm of the NAE in 2006 has steered the organization toward more moderate political engagement.

They issued statements of support for the START Treaty ratification last year, supported Obama’s push for comprehensive immigration reform and the DREAM Act, and issued a report on 18 issues in which NAE and Obama concur.

As Pawlenty seemingly prepares to launch a bid against Obama in 2012, he will likely be up against another evangelical candidate in the Republican primaries, Mike Huckabee. Meanwhile, Obama has continuously fought against widespread misconceptions that he is not a Christian.

“Every day I read a poll [about Obama’s religion] I think it’s odd,” Anderson told POLITICO last year, coming to Obama’s defense. “I read all these polls and my mind always flashes back to Jay Leno and ‘Jaywalking,’” referring to the comedian’s routine that pokes fun at Americans’ ignorance of seemingly basic facts.

Tuesday, February 1, 2011

Obama to sign nuclear treaty documents Wednesday

President Barack Obama is pushing a key foreign policy goal, a nuclear arms treaty with Russia, closer to completion. 

He was signing documents Wednesday for the New START treaty, a cornerstone of U.S. efforts to "reset" ties with Russia. 

The agreement limits each country to 1,550 strategic warheads, down from 2,200. It also re-establishes a monitoring system that ended in December 2009 with the expiration of an earlier arms deal.

Russian President Dmitry Medvedev (dih-MEE'-tree med-VYEH'-dyev) signed the papers last week after the treaty cleared parliament. The U.S. Senate approved the pact in late December after Obama lobbied hard for passage. 

Ratification becomes final when both sides exchange the signed papers. 

Obama is scheduled to sign the documents in the Oval Office in the presence of news photographers only.