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Tuesday, July 3, 2012

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Economic Events of the Week

Tuesday – Factory Orders, Motor Vehicle Sales
Wednesday – Markets Closed For 4th of July
Thursday – Jobless Claims
Friday – Employment Situation

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Story of the Day
A Strategy to Undo ObamaCare (Keith Hennessey in The Wall Street Journal)

Washington Update
Lobbyists Face Crunch Time Ahead of House Farm Bill's Release (The Hill)
Romney Camp Sides with Obama that Health Insurance Mandate is Not Tax (The Washington Post)

Market Talk
Factory Slump Reaches U.S. (The Wall Street Journal)
U.S. Economic Outlook: Potential for Growth, Vulnerability to Policy Mistakes (PIMCO)

Editorials & Opinions
How Departures From Economic Freedom Can Affect Freedom In General (John Taylor's Blog)
European Divisions Continue to Thwart Economic Moves (The Washington Post Editorial)
Rigged Rates, Rigged Markets (The New York Times Editorial)

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Story of the Day

A Strategy to Undo ObamaCare (Keith Hennessey in The Wall Street Journal)

Now that the Supreme Court has ruled ObamaCare's individual mandate constitutional, the direction of American health policy is in the hands of voters. So how do we get from here to "repeal and replace"? Step one is electing Mitt Romney as president, along with Republican House and Senate majorities. Without a Republican sweep, the law will remain in place. But a President Romney does not need 60 Republican senators to repeal core elements of ObamaCare. Democrats lost their 60th senate vote in early 2010 after Scott Brown took Edward Kennedy's seat. To bypass a Senate GOP filibuster and enact portions of ObamaCare, they used a special legislative procedure called reconciliation. Reconciliation allows a bill to pass the Senate in a limited time period, with limited amendments, and with only 51 votes; filibusters are not permitted. In 2010, Democrats split their health-policy changes into two bills, one of which they enacted through this fast-track process. In 2013, a Republican majority could use the same reconciliation process to repeal those changes.


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Washington Update

Lobbyists Face Crunch Time Ahead of House Farm Bill's Release (The Hill)

Lobbyists on the farm bill are facing crunch time this week, even with lawmakers in both chambers out of town. Staff for the House Agriculture Committee are putting the finishing touches on a five-year farm bill that would set the nation on a track to spend at least $900 billion on farm subsidies and food stamps over the next decade. K Street is eagerly expecting a draft summary to circulate Thursday or Friday. House Agriculture Committee Chairman Frank Lucas (R-Okla.) is proceeding with a July 11 markup of the measure, despite the leadership scheduling a health care repeal vote for that day. Lucas expects the committee to need at least three days to finish because of the large number of amendments. Lobbyists for farm groups and other interests are using the week ahead of the markup for a final chance to influence the bill’s shape.

Romney Camp Sides with Obama that Health Insurance Mandate is Not Tax (The Washington Post)

Mitt Romney’s presidential campaign on Monday rejected a Republican attack on the Affordable Care Act, repudiating a contention made in last week’s Supreme Court decision that the law’s requirement that individuals carry medical coverage amounts to a tax. The Romney team’s refusal to invoke the word “tax” with regard to the individual mandate puts the candidate at odds with others in his party at a moment when Republicans are attempting to capi­tal­ize on the Supreme Court’s decision, which deemed President Obama’s health-care law constitutional. Some Republican-led states are trying to thwart the legislation’s effort to cover the poor. In an interview Monday on MSNBC, Romney campaign senior adviser Eric Fehrnstrom said the former Massachusetts governor “disagrees with the court’s ruling that the mandate was a tax.” Although disappointing to conservatives, the justices’ decision contained what they regard as two silver linings: the potential to fuel political opposition to the law and a path to undermine its substance. First, in ruling that Congress has the ability under its taxation power to fine people who choose not to have health coverage, the court undercut Obama’s credibility on how to define that provision. The president had insisted repeatedly that it is not a tax.


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Market Talk

Factory Slump Reaches U.S. (The Wall Street Journal)

The global economic slowdown has finally caught up with American manufacturers. The U.S. factory sector shrank in June for the first time since July 2009—the first month of the economic recovery—the Institute for Supply Management said Monday. Exports fell, and new orders, which gauge future factory activity, dropped at their fastest pace since the post-9/11 plunge in October 2001. The report is the strongest evidence yet that Europe's troubles and slowing growth in China are hurting American factories, one of the biggest drivers of the U.S. recovery. Separate reports have shown U.S. exports fell in April for the first time since November, and last week the government revised downward its estimate of export growth in the first quarter. The darkening outlook for U.S. factories comes amid new signs that the rest of the world is losing momentum, too. Manufacturing activity in the euro zone continued its monthslong decline in June, with even the region's biggest economy, Germany, contracting at its fastest pace in three years. Manufacturing also slowed in China, the world's second-biggest economy, and South Korea's and Taiwan's manufacturing industries fell into contraction. "This is probably the most definitive piece of proof that the European and global economic downturn is impacting the U.S. economy," said Michael Feroli, a J.P. Morgan economist. "We're starting to feel the infection now."

U.S. Economic Outlook: Potential for Growth, Vulnerability to Policy Mistakes (PIMCO)

The future of the U.S. economy may be in the hands of politicians. In the following interview, portfolio manager Saumil Parikh discusses the long-term outlook for the economy, weighing some positive fundamentals against the need for political solutions to challenges that could derail growth. He also outlines potential risks and strategies for investors. Q: What is the outlook for the U.S.?  Parikh: “The secular outlook for the U.S. is finely balanced. There are very early signs of improvement in the housing market, and although it is a smaller portion of the economy today than before the 2008 crash, housing could still be a substantial tailwind for U.S. economic growth over the next three to five years. Another plus is the shift in U.S. energy supply from imported oil to domestic oil and natural gas. This trend is somewhat significant over the near term and, we believe, will become much more significant over time as some of the hurdles in capital expenditures, deployment technology and regulation of domestic energy are overcome. These two factors could boost U.S. economic growth by about half a percentage point a year over the next three to five years compared to the past. However, the U.S. economy still faces significant headwinds from over-indebtedness, large imbalances, growing inequality and policy incrementalism – and these headwinds could hinder employment growth.”


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Editorials & Opinions

How Departures From Economic Freedom Can Affect Freedom In General (John Taylor's Blog)

In a recent speech at Stanford former Wells Fargo Chairman and CEO Dick Kovacevich told the full story of how he was forced to take TARP funds even though Wells Fargo did not need or want the funds. The forcing event took place in October 2008 at a now well-known meeting at the U.S. Treasury with Hank Paulson, Ben Bernanke, as well as several other heads of major financial institutions. In his speech, Kovacevich first described how he and the other bankers were told at that meeting that they had to accept the funds. He then paused and said to the Stanford audience: “You might ask why didn’t I just say no, and not accept TARP funds.” He then explained: “As my comments were heading in that direction, Hank Paulson turned to Chairman Bernanke, who was sitting next to him and said ‘Your primary regulator is sitting right here. If you refuse to accept these TARP funds, he will declare you capital deficient Monday morning.’ This was being said when we were a triple A rated bank. ‘Is this America?’ I said to myself.”

European Divisions Continue to Thwart Economic Moves (The Washington Post Editorial)

Americans have been justifiably transfixed by the outcome of the historic health-care case at the Supreme Court. But when it comes to the near-term economic and political outlook for the country, the ruling was not necessarily the most important event of the last few days. That honor may belong instead to the summit meeting of European leaders in Brussels. With unemployment in the 17 nations that use the euro as a common currency now at 11.1 percent, and the risk of global spillover effects mounting, the whole world’s prosperity depends on the ability of Europe’s fractious governments to manage the crisis and forge a long-term solution. Alas, the meeting ended Friday with what was, by now, a familiar blend of tantalizing promises and ominously unresolved questions. First, the hopeful part: At the urging of France and Italy, Germany agreed to assure investors who buy Spain’s sovereign debt that they will get paid back on equal terms with the backers of European bailout funds — that is, Germany and its taxpayers. In addition, German Chancellor Angela Merkel allowed the $633 billion bailout fund known as the European Stability Mechanism to capitalize Spain’s troubled banks directly, rather than through the Spanish government. Finally, the Europeans agreed to set up a continent-wide bank supervision authority by the end of 2013, which also could help restore confidence in shaky financial institutions. Spain’s debt crisis represents the most critical short-term threat to Europe’s economic stability, and, taken together, these steps should help that country access the capital market at lower cost. Many expect the European Central Bank to cut interest rates later this week to help spur growth, as a reward of sorts for what was agreed.

Rigged Rates, Rigged Markets (The New York Times Editorial)

Marcus Agius, the chairman of Barclays, resigned on Monday, saying “the buck stops with me.” His was the first departure since the British bank agreed last week to pay $450 million to settlefindings that, from 2005 to 2009, it had tried to rig benchmark interest rates to benefit its own bottom line. Mr. Agius was right to go and the bank’s chief executive, Robert Diamond Jr., should follow him out the door. But the investigations cannot stop there. The rates in question — the London interbank offered rate, or Libor, and the Euro interbank offered rate, or Euribor — are used to determine the borrowing rates for consumers and companies, including some $10 trillion in mortgages, student loans and credit cards. The rates are also linked to an estimated $700 trillion market in derivatives, which banks buy and sell on a daily basis. If these rates are rigged, markets are rigged — against bank customers, like everyday borrowers, and against parties on the other side of a bank’s derivatives deals, like pension funds. Barclays is only one of more than a dozen big banks that provide information used to set the daily rate for Libor and Euribor. The settlement, struck with regulators in Washington and London and with the Department of Justice, indicates that the bank did not act alone. It shows that unnamed managers and traders of Barclays in London, New York and Tokyo colluded with or prevailed upon bank employees who provide the benchmark data to make false reports. The aim was to bolster Barclays’s trading positions and to aid or counteract other banks’ attempts at manipulation.


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