On the last leg of his four-nation tour in Asia, U.S. President Barack Obama revived the issue of a still-pending free-trade agreement signed in 2007 with South Korea (KORUS FTA), but an auto trade imbalance will continue to be a major obstacle to Congressional approval.

At a news conference in Seoul, President Obama and Korean President Lee Myung-bak, both showed willingness to renegotiate elements of the deal and to have both countries ratify it as soon as possible.

“I am a strong believer that both countries can benefit from expanding our trade ties,” President Obama said. “I have told President Lee and his team that I am committed to seeing the two countries work together to move this agreement forward.”

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That could be easier said than done, especially for Capitol Hill democrats that rely on support from labor unions.

“Before we move forward with the U.S.-Korea Free Trade Agreement, I feel it necessary to remind my colleagues in Congress that the draft agreement allows Korean discriminatory treatment of imported U.S. automobiles to perpetuate,” said U.S. Rep. John Dingell, D-MI today (Friday).

Certain Korean cars are among the bestsellers here, he said, while U.S. automakers have “grave difficulties accessing the market.”

Those difficulties can be attributed to an 8% duty on U.S. auto exports to Korea as well as taxes on engine displacement, both of which would be removed under the trade agreement.

Despite this, officials in both Washington and Detroit say the deal doesn’t address certain non-tariff barriers, which are preventing more American cars from entering Korea, a report in The Korea Herald says.

Kim Do-hoon, an economist at the Korea Institute for Industrial Economics and Trade (KIET) argues the deal addresses all U.S. concerns, including Seoul’s safety and environmental standards as well as the removal of the duty on autos.

The opposition to the deal stems from Korea’s domestic auto tax laws on larger cars, which are typically American, Kim says. Korea’s auto registration tax and special consumption tax are on the rise as a measure to contain the growing demand for bigger cars by Korean consumers.

“Our auto taxation system is of a domestic issue and not deliberately aimed at being a non-tariff barrier, so it could be that this is acting as a misunderstanding,” Kim said. “This is a domestic issue, a policy-related measure aimed at encouraging consumption of smaller cars to reflect our national challenges, whether it be environmental or traffic-related. I don’t think the U.S. should mistake our local taxation regulations as an intentional means by the Korean government to prevent American automakers from making business here.”

When it comes to autos, there’s a huge trade imbalance between the United States and Korea. In 2008, U.S. auto exports of 7,000 to Korea represented just 1% of Korean imports.

However, many analysts believe this imbalance is being dictated by the market not trade barriers.

“The Korean government has opened up the domestic car market to the fullest satisfaction of the U.S. in the FTA,” KIET’s Kim said. “There is no more to open up in this sector, so I think it is only fair to say that the auto issue is more of a subject of political rhetoric for the Obama administration aimed at catering to the sensitive labor group.”

It is not clear whether further negotiation on autos is an option.

“If automobiles are a problem, we are in a position to discuss them again,” President Lee said yesterday (Thursday) during a joint news conference with President Obama.

However, one official from the Korean president’s office speaking to The Herald on the condition of the anonymity says a deal is a deal.

“If we rewrite the document, that is a renegotiation. It is the government’s policy that the agreement not be changed.”

Korean Trade Minister Kim Jong-hoon appeared to clarify the Korean president’s remarks, saying “it just means if they say there are problems, we are willing to listen. But I believe most of the problems [the United States] prepare and bring to us, if they do, will be those that can be addressed by simple explanations,” he added.

News and Related Story Links:

• Wikipedia:
  South Korea President Lee Myung-bak
• The New York Times:
  South Korea Trade Pact is Revived by Obama
• The Korea Herald:
  Seoul Rules Out U.S. FTA Revision
• Los Angeles Times:
  A “Grand Bargain” for North Korea

Concerned with accelerating inflows of so-called “hot money,” more emerging market nations are considering new capital controls to keep their currencies from appreciating and prevent asset bubbles from becoming a problem.

Loose monetary policy in the United States and Europe has flooded fast-growing Asian economies where Western investors are seeking higher yields. India, Taiwan, South Korea, Hong Kong, and Indonesia are among the regions investigating options to combat the rapid inflows of foreign capital that are driving up stock prices, and threatening their export sectors by forcing their currencies to appreciate.

“With interest rates exceptionally low and with abundant liquidity around the world, Hong Kong faces the potential risk next year that asset prices may go up sharply and become increasingly disconnected from economic fundamentals,” the Hong Kong Monetary Authority said on its Web site.

Hong Kong attracted a record $73 billion (HK$567.5 billion) in foreign inflows between Oct. 1, 2008 and Nov. 13, 2009, according to the Hong Kong Monetary Authority (HKMA). That has driven a 57% surge in Hong Kong stock prices and a near-30% in property values.

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Foreign investors have plowed more than $15.5 billion (732.5 billion rupees) into India’s stock market this year, helping push it 75% higher. The rupee has surged about 4.7% against the dollar as a result and further increases could stymie the nation’s exports.

Meanwhile about $15.5 billion (NT$500 billion) in foreign funds has poured into Taiwan dollar accounts – five times more than what the nation’s central bank considers acceptable.

Some emerging market nations have already taken action. Brazil last month imposed a 2% tax on foreign investment in the country’s stocks and bonds, hoping to halt the appreciation of its currency, the real.

Additionally, Brazil’s Finance Ministry said Tuesday that it will soon start taxing the issuance of depositary receipts in international markets, in a bid to prevent companies from selling shares abroad instead of locally. The Bovespa Index has surged 136% this year in dollar terms.

China, too, has taken measures to alleviate the pressure hot money has put on its currency. In October, the central government – for the first time in 17 months – allowed mutual fund companies to resume purchases of foreign assets through its Qualified Domestic Institutional Investors (QDII) program.

E Fund Management Co. Ltd., China’s fifth-largest mutual fund company, and the smaller China Merchants Fund Management Co. Ltd. both obtained investment quotas from the State Administration of Foreign Exchange (SAFE). SAFE approved $1 billion in investment for E Fund and $500 million for China Merchants. That means both funds are now free to invest in offshore markets such as stocks and bonds.

And on Friday, SAFE issued another $1 billion quota to Bosera Fund Management Co. under the QDII program.

While the quotas aren’t particularly large they provide an outlet for hot money inflows as well as the government’s massive trade imbalance.

China’s foreign exchange reserves rose by $141 billion in the third quarter to $2.27 trillion in September. Combined with the trail of hot money that has followed the economy’s recovery, China’s forex holdings are pressuring the yuan to rise.

Analysts say that measures like the ones taken by Brazil and China are just the beginning.

“I think this is going to be one of the big trends in Asia… There is a very strong risk that other countries start to jump on the bandwagon and try these things out,” Richard Kelly, a senior economist at TD Securities Inc., told The Globe and Mail .

News and Related Links:

• The Globe and Mail:
  Emerging economies hit brakes on ‘hot money’

• Money Morning:
  Tax on Foreign Investment Won’t Dent Brazil’s Currency

• Money Morning:
  China Encouraging Overseas Investment to Take the Pressure Off of Its Currency

In a visit to Japan in the early 1990s, U.S. President George H.W. Bush threw up over the Japanese prime minister. When President Barack Obama visited Japan last weekend, he offered an effusive bow to the Emperor Akihito.

Politically, U.S.-Japanese relations have improved dramatically during that two-decade stretch.

Yet investor regard for Japan has gone the opposite way. Twenty years ago – in the midst of the Japanese stock-and-real-estate bubble – U.S. and other world investors were kowtowing to Japanese investments – and banging their heads on the floor in the process.

Today those same investors are much more likely to throw up in the direction of those Japanese investments.

The up-chuck response to Japanese investment is a reasonable one, given that country’s stock-market performance since 1990. After all, the Nikkei 225 share index is down more than 75% from its January 1990 peak. If my broker had locked me into Japanese stocks for the last 20 years I’d probably beat him about the head with the performance report, too.

As Japan fans have been saying for the last decade, the market is a much better buy with the Nikkei at 9,000 than it was when the index was at 39,000. Needless to say, that hasn’t enhanced Japan-backers’ credibility as the market has meandered around without a trend, performing similarly to Wall Street during the period overall, but without the excitement of hitting all-time highs even in 2007.

Japan’s stock market will only recover when Japan’s economy shows some signs of real growth. The good news, however, is that real growth may be resuming. Japan’s third-quarter gross domestic product (GDP) rose at a 4.8% annual rate, after revised growth of 2.7% in the second quarter. That puts it well ahead of the U.S. recovery, and means that Japan is outpacing the rebounds of most of the European Union, the other comparably rich bloc of countries.

Japan’s recession was very different than those suffered by the United States, Great Britain or most European countries. It had already suffered a banking meltdown during the 1990s, and had experienced no significant real estate bubble this decade. Thus, the only new bad debts in the Japanese banking system were the few it picked up from dabbling in the U.S. and British housing markets – investments that were foolish, but not significant in terms of the Japanese economy as a whole. Even Nomura Securities (NYSE ADR: NMR) – the most dedicated unprofitable dabbler in Western markets – scored a notable success in October 2007, when it wrote off its entire participation in the U.S. subprime-mortgage market. That write-off gave it one bad quarter, but left the remainder of its operations in good shape.

Even during its recession, Japan has had a better productivity performance than the United States or Germany, its principal rich-country rivals. From 1990 to 2008, Japan’s labor productivity increased by 39.7%, just fractionally better than the United States at 39.1% and significantly ahead of Germany’s 32.6%.

Thus, while the 1990s and 2000s were for most of the time an era of U.S. economic triumphalism and Japanese despair, neither was really warranted. During the 2008-2009 downturn, Japan’s principal problem was an export decline that reached 50% at its nadir – because of the yen’s strength against the dollar and most of the other major trading currencies.

In the period since March, Japanese exports have rebounded nicely. But unlike its U.S. counterpart, Japan continues to enjoy a balance-of-payments surplus and a strong yen.

The new Democratic Party of Japan government – led by Yukio Hatoyama and elected on Aug. 30 – is pledged to shift Japan’s priorities away from exports and infrastructure spending and towards the domestic economy. The government has already cancelled a substantial chunk of the previous government’s heavy infrastructure program and has pledged to introduce monthly allowances of about $300 per child to families with children. That will increase domestic spending, and should helpfully reorient the Japanese economy towards the small business sector.

Japan’s major problem is the government deficit and the debt that accompanies it. Its public debt is now 200% of GDP, although that ratio will come down if GDP improves strongly. The DPJ finance minister, Hirohisa Fujii, is pledged to substantial budget savings, and the rebound in GDP should reduce the pressure for more “stimulus.” Then you have to remember that with its high savings rate and payments surplus, Japan’s government debt is owned primarily by the Japanese people. So in this area, too, Japan is better-placed than many other countries.

With other East Asian countries – notably China, South Korea and Taiwan – rebounding nicely, Japan is poised to show good growth in 2010, far better than the Economist’s estimate of 1.5% GDP growth.  The wise investor will thus keep a portion of their money in Japan, concentrated in domestically oriented companies – it is, after all, still the world’s second-largest nominal economy.

[Editor's Note: Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps - half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).

During the stock-market rebound that started in mid-March, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.

Experts are taking notice. And so should you.

Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and specially designated "Alpha-Bulldog" stocks into winning portfolios.

To find out more about The Permanent Wealth Investor, please just click here.]

News and Related Story Links:

• Money Morning News Analysis:
  Landslide Election Victory in Japan Will Lead to an Avalanche of Future Profits For Global Investors.
• Wikipedia:
  Emperor Akihito.
• WhiteHouse.gov:
  George H.W. Bush.
• Wikipedia:
  Hirohisa Fujii.
• WhiteHouse.gov:
  Barack Obama.
• Wikipedia:
  Yukio Hatoyama.
• The Los Angeles Times:
  How low will he go? Obama gives Japan’s Emperor Akihito a wow bow.
• Wikipedia:
  Democratic Party of Japan.
• Money Morning News Analysis:
  Japan’s Economic Growth Accelerates, but Deficit Raises Concerns.
• Library of Economics and Liberty:
  Balance of Payments.
• Money Morning Special Report:
  Eight Ways to Profit From Japan’s Game-Changing Election.
• Money Morning News Analysis:
  Land of Rising Debt: Falling Tax Revenue Forces Japan to Sell More Bonds.

• AOL LLC Chief Executive Tim Armstrong told employees yesterday (Thursday) that he will ask for 2,500 volunteers, about one-third of the company’s workforce, to be laid off, The Wall Street Journal reported. The voluntary layoff program, which is part of an effort to trim some $300 million in annual costs, will begin on Dec. 4 and run through Dec. 11. AOL said the layoffs would result in restructuring charges of up to $200 million, which it announced last week

• U.S. Treasury Secretary Timothy Geithner yesterday (Thursday) fended off a Republican congressman’s demand that he resign, Bloomberg News reported. Geithner was asked to step down from his post by U.S. Rep. Kevin Brady, R-TX, who said the public “has lost all confidence in [Geithner's] ability to the do the job.” Geithner responded by blaming Republican leadership and the administration of George W. Bush for much of today’s financial crisis. “I can’t take responsibility for the legacy of crises you bequeathed the country,” he said, noting that by virtually “any measure” the economy is “substantially stronger today than when [President Barack Obama} took office.”

• Benchmark crude for December yesterday (Thursday) slid $2.12, or 2.66%, to settle at $77.46 a barrel on the New York Mercantile Exchange (NYMEX). The decline followed a similar slide in U.S. equities that drove the Dow Jones Industrial Average down 93.87 points, or 0.9%, and the Standard & Poor’s 500 Index down 14.9 points, or 1.34%.

• The Conference Board’s Leading Economic Index climbed 0.3% to 103.8 in October, the highest level since September 2007. “The data indicate that economic recovery is finally setting in. We can expect slow growth through the first half of 2010,” Conference Board economist Ken Goldstein said in a statement.

• U.S. President Barack Obama yesterday (Thursday) said that world powers could deploy new sanctions against Iran “within weeks,” as the Middle Eastern nation had failed to embrace a deal that would ship roughly 75% of its low-enriched uranium to Russia and France for conversion into a power source. “Iran has taken weeks now and has not shown its willingness to say yes to this proposal,” the president said at a joint news conference with South Korean President Lee Myung-bak in Seoul. “Our expectation is that, over the next several weeks, we will be developing a package of potential steps that we could take, that would indicate our seriousness to Iran.”

• DirecTV Group Inc. (Nasdaq: DTV) Chairman John Malone told Bloomberg News that he won’t rule out a possible takeover by AT&T Inc. (NYSE: T) or Verizon Communications Inc. (NYSE: VZ). “Our relationship will continue to broaden and intensify,” said Malone. “It may lead to some more ownership-oriented relationship, or it may not.” DirecTV has about 18 million customers, more than six times Verizon’s FiOS TV service and 10 times AT&T’s U-Verse TV service.

With a possible buyout of General Electric Co.’s (NYSE: GE) NBC Universal Inc. in the works, Comcast Corp. (Nasdaq: CMCSA) is adapting to a changing technological landscape.

Comcast, the United States’ largest cable television provider, is hoping to avoid becoming the next newspaper or record company by expanding its role from an entertainment medium to a content provider.

“The world of cable delivery is about to change,” Forrester Research (Nasdaq: FORR) analyst James McQuivey told the Los Angeles Times. “Cable companies for years have made their living by selling consumers hundreds of television channels bundled together. But the future is going to be very different, and cable companies instead will be selling an ‘entertainment experience.’”

While Comcast is now a major player in the Internet service provider (ISP) business as well as telephone service, more than half of its revenue comes from its cable TV customers. But factors working against Comcast include:

• More Competition: No longer limited to satellite TV providers, telephone companies continue to widen their reach through fiber-optic cable.
• Higher fees for content: The fees Comcast pays for programs from TV networks are on the rise.

The likely Comcast-NBC deal would give the cable provider a 51% stake in NBC, while GE would retain a 49% stake and contribute roughly $12 billion in debt to the new company, according to The New York Times. GE would eventually sell its ownership interest over a period of several years. The two companies agreed to value NBC at about $30 billion, Bloomberg News reported.

Paris-based Vivendi SA, which owns 20% of NBC, has no intention of being a part of the new entity, Vivendi Chief Financial Officer Philippe Capron said at a Morgan Stanley (NYSE: MS) conference in Barcelona.

Vivendi is seen as the last obstacle for GE to strike a deal with Comcast, and Vivendi is asking GE for a higher price for its stake and certain deal protections, two people familiar with the matter told The Wall Street Journal.

Competition Likely to Change Comcast’s Business Model

More than 54% of Comcast’s top line comes from its TV customers, who are fleeing.

Rate increases have helped offset 10 consecutive quarters of net subscriber losses, but Comcast can only raise rates so many times before it alienates its customer base.

When the market decides it can no longer bear Comcast’s rate increases, the company will likely turn to advertising revenue, which currently represents just 3.6% of sales. A deal with NBC Universal brings to the table more ad revenue from its 11 networks -including Bravo, USA Network and MSNBC – aligning the Comcast-NBC with media giants like Viacom Inc. (NYSE: VIA) and The Walt Disney Corp. (NYSE: DIS).

There are also Comcast’s interactive, targeted ads a la Google Inc. (Nasdaq: GOOG), which generated just $15 million in sales in the third quarter. So far, these ads reach only a few subscribers in isolated areas across the country.

“But the big number,” Chief Operating Officer Stephen Burke said of interactive ads earlier this month, “will be generated when the industry gets together and allows a national advertiser the ability to advertise across the country.”

Cable operators like Comcast once had entire regions to themselves. But in the mid-1990s companies like The DirecTV Group (Nasdaq: DTV) and Dish Network Corp (Nasdaq: DISH) – with much-smaller dishes to mount than what was previously available – made it easy for consumers to switch to satellite TV.

From 2007 to 2008, DirecTV grew its subscriber base 4.6% while Comcast’s shrank 0.8%. DirecTV now has 18 million TV subscribers to Comcast’s 23.7 million.

Comcast and its satellite rivals saw new challengers with fiber-optic TV and Internet service, particularly Verizon Communications Inc.’s (NYSE: VZ) FiOS. Similar to the dawn of cable, Verizon’s biggest challenge is burying the cables in neighborhoods (cable companies use copper-based coaxial cables versus FiOS’ fiber-optic cables, so they can’t share wires). As it installs more fiber in neighborhoods, Verizon is becoming more of a threat to Comcast.

Both providers use their market penetration – or how many customers they have out of the total amount of wired homes – as a key measurement for growth. Comcast was wired in 51 million U.S. homes at the end of the third quarter and saw its video penetration fall by two percentage points to 46.5%, compared to 48.5% in the same period a year ago.

Verizon FiOS TV, while available in far fewer homes – 10.9 million – is penetrating the number of wired homes fast, with a 24.7% penetration in the third quarter compared to 19.7% in the same quarter last year.

Because the number of wired homes grew by almost 2% in the past year, Comcast’s market penetration on the surface looks flat. But that’s not the case.

Comcast actually lost TV customers, going from 24.4 million subscribers in third-quarter 2008 to 23.7 million in this year’s comparable quarter – a loss of roughly 700,000. Verizon’s FiOS TV, which started in Texas in 2005, now has 2.7 million subscribers.

Comcast’s penetration of homes that can receive its Internet service is growing, but at a slower rate than Verizon’s. Of the 50.8 million homes wired for Comcast Internet, penetration was 30.9% in the third quarter versus 29.5% a year ago. Verizon’s FiOS equivalent jumped to a penetration of 28.5% of the 11.5 million wired homes in the third quarter, compared to 24.2% in the same period last year.

Why Rent When You Can Buy?

Carrying cable channels like MTV, Comedy Central and the Disney Channel doesn’t come cheap, and it’s getting more expensive for Comcast as content providers try to make up for ad dollars lost to the recession.

Broadcast networks such as Fox and CBS intend to charge for their over-the-air channels that they once transmitted for free, putting pressure on cable companies’ bottom line.

“Comcast’s fear is that it will become more difficult to pass those price hikes on to viewers because of the increased competition,” Jason Bazinet, a media analyst with Citigroup Global (NYSE: C) told the LA Times.

“If you are [Comcast Chief Executive Officer] Brian Roberts, buying a content company is a hedge against these rising programming costs,” he said.

This would enable Comcast to help set the prices itself.

“For Comcast,” Bazinet noted, “you would be collecting as many checks as you are cutting them.”

Buying NBC would also make Comcast a bigger player in the sports arena; it already owns nine regional networks as well as the cable channel Versus. NBC brings to the table the NFL, NCAA football, the PGA and the Olympics. The deal would put Comcast in the same space as Disney’s ESPN, according to Bazinet.

News and Related Story Links:

• Los Angeles Times:
  Comcast Aspires to Be A Major Global Communications Player
  
• The New York Times:
  Comcast Said to Be Close to Gaining NBC Universal
• Bloomberg News:
  Comcast, GE Said to Agree to Value NBC at $30 Billion
• The Wall Street Journal:
  Vivendi, GE Iron Out Terms for NBC Universal Stake

The Organization for Economic Cooperation and Development (OECD) more than doubled its 2010 forecast for developed nations, saying that strong growth in Asia – particularly China – would help pull the “more feeble” West out of its financial malaise.

After predicting in June that the combined economy of its 30 member nations would grow 0.7% in 2010, the OECD raised its forecast for developed economies to grow 1.9% next year and 2.5% in 2011. Economic output will contract by 3.5% this year, the Paris-based organization said today.

“We now have the numbers that support a recovery in motion,” Jorgen Elmeskov, the OECD’s acting chief economist, told Bloomberg News. “It’s still a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors.”

The OECD cautioned that the recovery is still fragile in developed nations, while pointing to China as the main catalyst for a global rebound.

“The upturn in the major non-OECD economies, especially in Asia and particularly China, is now a well-established source of strength for the more feeble OECD recovery,” said the OECD, whose only two Asian members are Japan and South Korea.

U.S. gross domestic product (GDP) should expand by 2.5% in 2010 and eurozone growth will accelerate to 0.9%, the group said. In June, the OECD had projected 0.9% growth for the United States and flat growth for the eurozone. The OECD said Japan should expect GDP growth of 1.8% in 2010 instead of 0.7%.

That compares to 10.2% GDP growth in China.

The OECD also released its first 2011 forecasts, suggesting 2.8% growth for the United States, 1.7% growth for the eurozone, 2% growth for Japan, and 9.3% growth for China.

“Outside of the OECD, things are more buoyant, especially in Asia,” Elmeskov told Bloomberg. “The non-OECD countries weren’t affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies.”

These growth rates are far from guaranteed, however, as unemployment and growing debt presents a serious threat. The OECD said unemployment in its 30-nation bloc would increase by 21 million by the end of 2010, compared to 2007. Gross debt among developed countries may exceed their total GDP by 2011. Debt currently equates to 90% of the nations’ total GDP.

Because the recovery is inherently weak, the U.S. Federal Reserve and other policymakers should keep monetary policy loose. The group’s projects assume that the Fed and European Central Bank (ECB) will keep their interest rates unchanged for most of next year.

The Fed has set its benchmark Federal Funds Rate to a record-low range of 0%-0.25% and the ECB’s rate stands at a record-low 1%. Policymakers should maintain these rates despite the risks that asset bubbles will form, Elmeskov said.

“We are talking about a risk here, not something that is happening,” Elmeskov said. “One can say that given where we are there’s little alternative to very low rates but we need to be aware that they could imply the risk of bubbles forming.”

News and Related Links:

• OECD:
  OECD Economic Outlook No. 86, November 2009
• OECD:
  Recovery still too timid to halt rising unemployment, says OECD Economic Outlook
• Bloomberg News:
  OECD Doubles 2010 Growth Forecast, Recovery to Widen
• Reuters:
  Asia helps feeble West in global recovery -OECD

In a warning that focuses on the need to contain the soaring federal deficit, U.S. President Barack Obama yesterday (Wednesday) said that a continued accumulation of government debt could be enough to blunt the recovery and then drop the U.S. economy into a “double-dip” recession.

It was President Obama’s most-severe warning yet about the dangers of growing budget deficits at a time when the U.S. unemployment rate is at 10.2% and climbing. The comments were made to Fox News during an interview granted in Beijing during the president’s nine-day trip through Asia.

“I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” President Obama told Fox News interviewer Major Garrett.

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A “double-dip” recession occurs when an economy emerges from one downturn, only to sputter, stall and quickly drop back into another recession.

Challenge Facing Obama

The Obama administration faces the unenviable task of somehow transforming the nascent U.S. economic rebound into a full-blown and lasting economic recovery, while at the same time finding a way to engineer a long-term and lasting reduction in the nation’s massive budget deficits, analysts say.

The budget deficit – and the damage the debt is inflicting on the U.S. dollar – is almost certain to be a topic of conversation when President Obama meets with China’s government leaders. President Obama was in Beijing as part of an Asian tour that was scheduled to address global economic challenges.

In a candid interview, President Obama said his administration is trying to balance the need to rev up the economy – without adding to the budget shortfalls created as the nation’s leaders try to “prime the pump” after one of the worst financial crises in history. The president said that he’s still considering additional tax incentives for businesses as a way of reversign the surging jobless rate.

“There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we’re taking a look at those,” President Obama told Fox News.

Money Morning Sees Little “Double-Dip” Risk

In a news-analysis story published earlier this month, Money Morning Contributing Writer Jon Markman said that a new research report concluded that the odds of a double-dip recession occurring right now are very low. That means that a drop back into recessionary conditions looks less and less likely even as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.

Deutsche Bank AG (NYSE: DB) economists – who conducted the research – reviewed U.S. economic history all the way back to the 1850s, and found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending. And that’s out of 33 recessions that have taken place since 1854.

Indeed, when these double-dip downturns do occur, they happen under circumstances quite different from today’s situation, Markman wrote.

Two of the three double-dips happened in the years prior to World War II – in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.

U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volcker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession while dealing a death blow to inflation.

With deflation just as likely as inflation at the moment, a repeat of the 1980s just isn’t in the cards, as the Fed is set to keep rates at very low levels until the end of 2010, Markman said.

In the leadoff story to its ongoing “Outlook 2010” economic-forecasting series which debuted this week, Money Morning concluded that the U.S. economy would dodge the double-dip downturn that has been the focus of so much fear since the Bush and Obama administrations launched their financial counterattacks on the worst financial crisis since the Great Depression.

However, Money Morning also found that economic forecasters are reluctant to predict a sharp economic rebound for 2010. In fact, as opposed to a classic “V-shaped” economic recovery that would accelerate as the year goes on, many economists are predicting that the rate of growth will slow as the New Year unfolds.

[ Editor's Note : To read Money Morning 's “Outlook 2010” story on the U.S. economy, please click here. The story is accessible free of charge.]

News and Related Story Links :

• Reuters:
  Obama: Too much debt could fuel double-dip recession
• FoxNews:
  Obama Calls Israeli Settlement Building in East Jerusalem ‘Dangerous’
• NPR:
  Obama Warns Of ‘Double-Dip Recession’; Says Afghan Decision Is Weeks Away
• Investopedia:
  Double-Dip Recession
• Money Morning “Outlook 2010” Annual Economic Forecasting Series (U.S. Economy Part I of II):
  U.S. Economy Will Dodge a Double-Dip Downturn, But Won’t Escape Unemployment Woes During 2010 Jobless Recovery
• Money Morning Week Ahead Column:
  Investors Needn’t Fear a Double-Dip Recession
• Wikipedia:
  Paul A. Volcker
• WhiteHouse.gov:
  Jimmy Carter

U.S. Rep: Give Regulators Power to Break Up Financial Giants; GM IPO Could Come in Q4 2010, Official Says; Fed May Not Increase Interest Rates Until 2012; Wells Fargo to Buy Back $1.3 Billion in Auction Debt; GE Says Appliance and Lighting Businesses Improving; October Housing Starts Miss Estimates; DirecTV Hires Pepsi Exec as New CEO; AMD to Pay Off $1 Billion in Debt;

• U.S. Rep. Paul Kanjorski, D-PA, chairman of the House Capital Markets Subcommittee revealed a proposal that would empower regulators to break up financial firms that pose a risk to the nation’s economy. Kanjorski’s plan took the form as an amendment to a bill in the House Financial Services Committee that proposed new powers for regulators to police, take over, restructure and close firms that are a “systematic risk.” Targeted at the 50 largest U.S. financial firms, the amendment would require the Financial Services Oversight Council to evaluate several factors in determining whether to take action, such as size, exposure, leverage and relationships.

• The U.S. government wants the eventual initial public offering (IPO) of General Motors Co. (NYSE: GRM) on a fast track and it could come as soon as the fourth quarter of next year, Reuters reports. "Private markets would like to see us exit this investment, and I think they will be more comfortable if we’re on a sustained path out the door than if they think we’re going to try to market time it to maximize return," Ron Bloom, head of the government’s autos task force told the news agency in an interview.

• Policymakers may not raise key interest rates until early 2012, according to U.S. Federal Reserve Bank of St. Louis President James Bullard. “If you look at the last two recessions, in each case the FOMC waited two and a half to three years before we started our tightening campaign,” Bullard said yesterday (Wednesday) in a speech in St. Louis. “If we took that as a benchmark, that would put us in the first half of 2012.”

• Wells Fargo & Co. (NYSE: WFC) agreed to repay roughly $1.3 billion to brokerage clients whose funds were frozen last year as the auction-rate securities market collapsed, the North American Securities Administrators Association (NASAA) said yesterday (Wednesday). The San Francisco-based bank also will pay a $1.9 million fine and reimburse investors that sold their holdings at a discount after the market collapsed.

• Revenue and profit growth for General Electric Co.’s (NYSE: GE) consumer and industrial division are slowly improving, unit President James Campbell said yesterday (Wednesday) at an Oppenheimer Holdings Inc. (NYSE: OPY) conference in New York. Campbell expects the unit, which includes GE’s appliance and lighting businesses, to show “slight” revenue growth in 2010 and “positive operating profit.”

• Housing starts in the United States fell 10.6% in October to a seasonally adjusted rate of 529,000, the Commerce Department said. That’s lower than the expected annual rate rise of 600,000 according to a media forecast of 77 economists polled by Bloomberg News.  

• The DirecTV Group Inc. (Nasdaq: DTV) named PepsiCo Inc.’s (NYSE: PEP) Michael White its next chief executive officer. White was vice chairman and CEO of Pepsi’s its international unit, and is credited by Pepsi CEO Indra Noovi as helping boost sales abroad to almost $20 billion — more than double the amount when he took the helm of that division in 2003.

• Advanced Micro Devices Inc. (NYSE: AMD) is using a $1.25 billion settlement it received from rival Intel Corp. (Nasdaq: INTC) and a new $500 million bond offering to pay off $1 billion in debt, it said yesterday (Wednesday). AMD will put the cash toward buying back $1 billion in 5.75% notes that mature in 2012.

By Jason Simpkins
Managing Editor
Money Morning

Gold has surged 60% in the past 12months and it’s not letting up. The “yellow metal” is continuing that scorching surge into the last part of the year, establishing new highs on a near-daily basis. In fact, gold established yet another record price yesterday (Wednesday) when it peaked at $1,153.40 an ounce on the New York Mercantile Exchange (NYMEX).

And the records are going to keep on coming.

With the U.S. dollar in a freefall and global gold demand rising, analysts say the precious metal will likely continue its bullish trend through at least the first half of 2010. It could rise as high as $2,000 an ounce, which would represent a 73% gain from current record levels.

“Everything is pointing to the price of gold going higher,” Mike Sander, an investment adviser at Seattle-based Sander Capital Advisors, wrote in an e-mailed report.

And “a whopping budget deficit continuing to balloon, a Federal Reserve in no place of raising rates, and central banks all over the world diversifying away from the dollar,” will be the main catalysts for gold’s continued rise, he said.

Indeed, the U.S. Federal Reserve’s loose monetary policy has put the dollar under duress. The central bank has pumped more than $2 trillion into the U.S. economy since the financial crisis began more than two years ago. It has lowered its benchmark Federal Funds rate to a record-low range of 0%-0.25% and it has stepped up purchases of U.S. Treasuries and mortgage-backed securities.

More recently, the return of investor risk appetite and the widespread belief that the Fed will have to keep its stimulus measures in place as the U.S. economy struggles out of a long and deep recession have put downward pressure on the greenback.

The dollar tumbled about 20% against the euro in the past year, and the Dollar Index – which measures the greenback against the euro and five other currencies – fell to a 15-month low of 74.679 on Monday and was retesting that low as of Wednesday.

With the dollar in freefall, central banks and hedge funds have sought shelter in hard assets, particularly gold. That’s a big reason why gold has experienced such a remarkable run this year.

“You have to consider the amount of money sloshing around the world right now – China’s $2.2 trillion in reserves, India’s $285 billion in reserves, all of the money in central banks throughout the Middle East,” said Martin Hutchinson, a contributing editor for Money Morning and a veteran banker with more than two decades experience in the international marketplace. “If all of the serious money charges into gold and gold really gets going, you’ll see a tremendous spike in prices.”

Concludes Hutchinson: “I believe the price of gold will hit $2,000 an ounce next year.”

Such steep run-ups have happened before. From 1978 to 1980, for instance, gold soared from $185 an ounce to $850 an ounce, Hutchinson recalls. Interest rates were about 10% at that time. Credit is much easier to get today.

“Right now, the cost of borrowing money and investing in gold is virtually zero,” Hutchinson said.

How Global Demand Will Drive Gold to $2,000

Indeed, the bull-run in gold is already well underway, and it’s picking up steam.

Prices actually began their most recent rally when the International Monetary Fund (IMF) earlier this month revealed that it sold 200 metric tons of gold to the Reserve Bank of India (RBI) from Oct. 19 to Oct. 30.

The RBI paid $6.7 billion for the 200 metric tons of the yellow metal – the equivalent of about 8% of the world’s annual mine production.

The move surprised many analysts, as India for the past 15 years had largely neglected its gold reserves.

India’s gold holdings peaked at 20% of its foreign exchange reserves – all the way back in 1994. Since that time, India’s gold holdings had fallen:
Indeed, prior to the central bank purchase, India’s gold holdings had dropped to just 3.6% of the nation’s estimated $285.5 billion in foreign reserves.

Little wonder that last month’s gold purchase nearly doubled India’s holdings, which now stand at 558 metric tons, or 6.2% of the nation’s forex reserves.

India’s gold holdings as a percentage of foreign reserves are now higher than even China’s. The People’s Bank of China (BOC) holds about 1,054 metric tons of gold, equal to roughly 2% of its $2.3 trillion in foreign currency reserves.

Asia’s third-largest economy now has the world’s 10th-largest gold reserve, behind Russia, which has about 568 metric tons.

“Our Reserve Bank decided to buy some gold. I think about 400 tonnes. That’s normally something we do from time to time. The IMF wanted to sell gold and we wanted to buy gold,” Pranab Mukherjee, India’s finance minister, said in an interview with the Financial Times.

However, analysts have been far less flippant about the purchase.

Timothy Green, the author of “The Ages of Gold,” described India’s purchase to Bloomberg News as “the biggest single central-bank purchase that we know about for at least 30 years in such a short period.”

“The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s,” he said.

Analysts believe India’s highly publicized purchase – which was made when prices were near record highs – will spawn a chain reaction in which other countries and investors ramp up their gold purchases.

“This is a landmark trade,” Jonathan Spall, a director at Barclays Capital (NYSE ADR: BCS) and a gold specialist, told the FT. “Central banks are conservative institutions and India’s move is a sign for other central banks and sovereign wealth funds that were contemplating buying gold.”

The IMF said in September that it would sell 403.3 metric tons of the metal to shore up its finances and increase its ability to lend at reduced rates to low-income countries.

And with 203.3 metric tons still on sale at the IMF, don’t be surprised if China decides to bulk up on gold, too. China, the world’s sixth-largest holder of gold, has increased its yellow-metal reserves by 76% since 2003. But the 1,054 metric tons it now holds is equal in value to just 2% of its world-record $2.3 trillion in total reserves.

“It is but a matter of time until China and the IMF announce much of the same,” Dennis Gartman, an economist and the editor of The Gartman Letter, told Bloomberg.

Worldwide demand for gold is clearly on the upswing. However, just as that’s happening, supply and production of the precious metal are falling.

Annual worldwide mine production of gold has decreased by nearly 8% since 2001, even as the price of gold has tripled.

Meanwhile, investment demand for gold remained very strong – surging 46% in the second quarter of 2009 from a year ago, according to the World Gold Council.

“Everyone who says that gold will hit $2,000 in five years is wrong,” said Money Morning’s Hutchinson. “It will be back down in 5 years. If it’s going to $2,000 it will get there next year.”

“It will turn around when [central banks] start taking monetary policy seriously, and they won’t do that in a hurry,” he added. “Gold’s bull run is a bubble, just like all the other bubbles.  Except this is more of a bang than a bubble, because it’s taking place so quickly.”

Four Ways to Play Gold

1. Market Vectors Gold Miners ETF (NYSE: GDX): Gold miners benefit disproportionately from a rise in the price of gold, because their production costs are fixed. This means that miners are a more-leveraged way to play gold than the metal itself, particularly since surging speculative demand can increase mining companies’ Price/Earnings (P/E) ratios.
2. SPDR Gold Shares ETF (NYSE: GLD): GLD holds more than 1,000 ounces of gold, and has a market capitalization of $39 billion. As an investment, GLD is more convenient than buying gold bars directly. The fund’s share price fluctuates in concert with the price of gold.
3. Barrick Gold Corp. (NYSE: ABX): Barrick is the largest and financially strongest gold producer, with a market capitalization of $43 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa.
4. Yamana Gold Inc. (NYSE: AUY): A growing gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, Yamana is expanding both production and reserves (currently 19.4 million ounces) with operations in Canada and Latin America. Its expansion magnifies the likely potential benefit from an increase in gold prices.

[Editor’s Note: Money Morning’s “Outlook 2010” series has already provided readers with a forecast for the U.S. economy in the New Year. Coming up next week will be a report on the outlook for the banking sector. Watch for future installments addressing the economic outlook for oil prices, the high-tech sector, retailing, foreign investments and other key topics.]

News and Related Story Links:

• Money Morning “Outlook 2010” Economic Forecasting Series (U.S. Economy Part I):
  U.S. Economy Will Dodge a Double-Dip Downturn, But Won’t Escape Unemployment Woes During 2010 Jobless Recovery.
• Money Morning “Outlook 2010” Economic Forecasting Series (U.S. Economy Part II):
  When Stimulus Spending Winds Down, Will U.S. Businesses Step in For Tapped-Out Consumers?
• Money Morning: News Analysis:
  Gold to Continue its Record Run as Central Banks Stock Up.
• Money Morning Special Investment Report:
  Five Ways to Ride the Commodities Bull.
• Money Morning News Analysis:
  Who’s Benefiting from the Dollar’s Demise?
• Money Morning News:
  Gold Prices Soar to 18-Month High on Dollar Weakness, Inflation Fears.
• Money Morning:
  The “Golden Staircase” Points to Record Prices for Gold.
• Bloomberg News:
  Gold Rises to Record on Dollar, Central-Bank Buying Speculation.
• Financial Times:
  India flexes its foreign reserve muscles.
• MarketSkeptics.com:
  Foreign Exchange Reserves Explained.
• Wikipedia:
  Pranab Mukherjee.
• Financial Times:
  Gold extends record high on India purchase.
• Bloomberg News:
  Gold Climbs to Record as India’s Central Bank Buys IMF Bullion.
• Money Morning:
  The Three Triggers of the Global Gold Bubble.
• Money Morning Research Report:
  As Junior Miners Cash in on Soaring Inflation and Growing Global Demand, So Can You.
• International Monetary Fund:
  Official Web Site.
• Money Morning News Analysis:
  Gold to Continue its Record Run as Central Banks Stock Up.
• Wikipedia:
  Mortgage-Backed Security.
• Money Morning Outlook 2008 Economic Forecasting Series:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the “Next Wall Street”.
• World Gold Council:
  Official Web Site.
• Investopedia:
  Price/Earnings Ratios.
• The New York Times:
  Fed to Begin Buying Mortgage-Backed Securities.

By Kent Moors, Ph.D.
Contributing Editor
Money Morning

A new fuel technology – unveiled just two weeks ago – is about to revolutionize the energy business.

I saw it firsthand.

General Electric Co. (NYSE: GE) asked me to present “The Future of Natural Gas” at the company’s Gas Turbine Symposium in Greenville, S.C. That’s where GE revealed a new generation of its market-leading turbine technology.

Most of GE’s major North American power-production end users attended the event. And the proceedings were simulcast to GE research centers in Munich, Bangalore, and Shanghai.

They made a fuss about this new technology for a reason: A change is coming to electricity production – a big one. The power-plant managers, technicians and government observers at the symposium knew this.

A confluence of market conditions, technical advances and politics right now is ushering in the next generation of power stations. The low price of natural gas – combined with the unlocking of unconventional gas production in the United States – is one reason. But the ongoing concerns over the role played by carbon emission caps and trade provisions in pending legislation may be a more pressing consideration.

The U.S. Senate is reviewing the Clean Energy Jobs and American Power Act, better known as the “Climate Bill.” It will no doubt impact coal-powered generation. That, of course, makes gas turbines a more significant energy option.

And GE knows turbines.

Indeed, its turbine center in Greenville is the largest in the world. And the “integrated gasification combined-cycle” (IGCC) technology GE is making now is changing everything.

It’s even creating opportunities for other businesses – companies developing, fabricating and servicing/supplying turbines. They’re becoming compelling targets for investors.

First, here’s why GE’s technology is so significant…

The Energy is Clean and Powerful

IGCC technology is a product of GE’s “ecomagination” overture.

It takes low-value fuel – coal, petroleum coke, extra-heavy oil or bitumen (also called orimulsion), biomass or even municipal waste – and turns it into a high-hydrogen-content gas. The gas is then used as fuel in a turbine system to generate power.

The transition removes fuel sources having a high carbon footprint and replaces them with a less environmentally suspect source of power.
This is huge, since most people in the industry see the writing on the wall.

While coal and natural gas each provide about 23% of total current U.S. energy, coal is under greater pressure as carbon emissions face greater scrutiny by lawmakers.

With the U.N. Copenhagen energy summit approaching next month, there may just be enough political pressure from the White House for the passage of the Climate Bill. Yet even if there is a delay in the legislation, carbon concerns will remain. Coal-state senators are busy trying to grandfather existing coal power plants at home under whatever provisions emerge in the law – another clear indication higher carbon accountability is on the horizon.    
That’s great news for the IGCC market, of course, which GE’s been in for two decades now. Business is picking up – big time.

On Oct. 29, the company announced the signing of a technical agreement for a new 250-megawatt IGCC power plant in Kern County, Calif., near Bakersfield. The plant will be built by a joint venture of the BP PLC (NYSE ADR: BP) Alternative Energy division and the hydrogen project unit of international mining major Rio Tinto PLC (NYSE ADR: RTP). It is also the first of five worldwide to result from a 2007 joint venture between GE and BP.
Expect more of these ventures globally as environmentally friendly technologies obtain political support.

The new plant will join IGCC facilities GE already built in California (Coolwater in Barstow) and Florida (Polk in Tampa). The company is also providing the technology for the Duke Energy Corp. (NYSE: DUK) plant in Edwardsport, Ind., which will be the largest IGCC facility in the world upon reaching commercial operation in 2012.

In total, GE has constructed some 70 gasification facilities of various types worldwide – so far. About 40 of these are already separating carbon using available commercial technology. 

This market will be growing quickly.

A Range of New Investment Options

While I was in Greenville, I had a chance to see the new gas turbine technologies in development and review operations at the GE manufacturing and testing plants. I also discussed the technical breakthroughs and challenges with GE’s top turbine executives.

We are just beginning to see some of the potential for this new direction in power production. And it is going to bring with it a range of new investment options.

First, in addition to a more positive environmental impact, there are profitable secondary applications resulting from IGCC and related gas turbine uses. For example, the Kern County plant will capture 90% of its carbon emissions and pipe them to enhance recovery at nearby oil fields. Word is, this plant will be the first in a new generation of IGCC applications to generate additional revenue streams from the carbon capture and sequestration process. The carbon dioxide will increase production (and therefore profitability) at what are now mature crude oil extraction sites.

Second, the new IGCC applications will spawn a number of new spin-off opportunities. The process significantly reduces emissions such as sulfur dioxide, nitrous oxide, mercury and particulate matter, while at the same time decreasing water consumption by as much as 30% in comparison to conventional coal-powered plants. Each of these advances will provide markets for a range of new, smaller, more-focused, technically based service, application and new product providers. What used to be waste is now a value-added product stream.

Third, the increasing market presence will assist companies in addition to GE and the electricity providers. New targeted applications are quickly developing in support of the transition to IGCC and other turbine applications. Providing services and parts (the so-called “aftermarket”) is currently controlled by the big boys – GE and its main turbine-producing competitors: Pratt & Whitney [a division of United Technologies Corp. (NYSE: UTX)], Rolls-Royce Group PLC (OTC ADR: RYCEY) and Siemens AG (NYSE ADR: SI).

However, several smaller companies will profit from the turbine breakthroughs.

At the head of this list are upstarts like Gas Turbine Efficiency PLC (PINK: GTBEF). It’s an Orlando-based company specializing in customer products and services for the entire line of GE gas turbines, including the Frame 7EA and newly unveiled 7FA lines – certain to be the center for an expansion of turbine usage worldwide.

Another is Dynamic Turbine LLC of Norcross, Ga. The company makes turbine blades, already approaching a $4 billon-a-year parts-and-services market to the turbine industry. Currently a privately held company, my sources tell me Dynamic Turbine is likely to expand into an integrated outfit by acquiring a recently closed foundry outside Phoenix. That will require a working capital infusion, which means an initial public offering (IPO) or private placement.  

This is rapidly developing into an exciting “next stage” in energy. Now that the technology is available – and companies are employing it – there’s considerable upside potential. All the way from product development to service and support.

[Editor’s Note: Dr. Kent Moors, now a regular contributor to Money Morning, is the executive managing partner of Risk Management Associates International LLP, a full-service global management consulting and executive training firm. He is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment, as well as new techniques in energy risk management.

Dr. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states and the premiers of two Canadian provinces, a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured television and radio commentator in North America, Europe and Russia. He has appeared on ABC, BBC, Bloomberg TV, CBS, CNN, NBC,  Russian RTV, and regularly on Fox Business Network. ]

News and Related Story Links:

• Money Morning Q&A With Kent Moors:
  A Money Morning Interview: The Future of Energy.
• Money Morning Special Investment Report:
  Marcellus Shale Gas: The Energy Sector’s Next Major Profit Play.
• GEReports Video:Powering Up Production (Turbine Technology).
• Money Morning Special Report:Two Ways to Profit From the Obama Administration’s Energy Dilemma.
• Senate.gov:
  Clean Energy Jobs and American Power Act.
• Wikipedia:
  Integrated Gasification Combined-Cycle” (IGCC) Technology.
• General Electric:
  “Ecomagination.”
• Wikipedia:
  Orimulsion.
• Copehagen/Cop15:
  A Copenhagen deal will change the investment pattern.
• Wikipedia:
  Biomass.
• BP PLC:Alternative Energy Business.
• Wikipedia:
  Initial Public Offering.
• GE News:
  GE Technology Selected for IGCC Project in Southern California.
• Gasification.org:What is Gasification?
• Dynamic Turbine LLC:
  Official Web Site.
• Investopedia:Private Placement.