INDIANS are coming

“Last Friday, India and the United States agreed to sign a historic agreement on scientific collaboration. This agreement has been fought over for ten years. But now, according to Indian science and technology minister Kapil Sibal, the pact covering healthcare, biotechnology and nanotechnology will be signed when he visits Washington in October.

“The US and India have never been the best of friends. In fact, annual trade between India and the US stands at a paltry US$22 billion. The new pact that’ll be signed in October has the potential to increase this number several times over. What exactly will it mean for US investors?

“The agreement will have the United States help India set up a body similar to the US Food and Drug Administration. This means that any drugs approved in India will win automatic acceptance in the US market. Can you imagine how effective drug development will become if the FDA has a cheap, streamlined sister organization in India? This will see US companies farming out drug trials to India - and benefiting from a whopping 50% cost savings! That alone could be enough to launch India into the portfolio of every American investor.

“Look at India’s demographics, on the other hand, and it’s easy to see why Indian investments are so explosive. India is the fifth-largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the second-largest GDP among emerging nations. An amazing 25% of the people in the world under the age of 25 live in India. In fact, 50% of India’s total population is under 25 and 80% is under 45. This means India has a middle class that exceeds the population of the USA!

“That’s why both DeHaemer and I think that India’s exploding population of low-cost, high-IQ, English-speaking brainpower will without question have a far-reaching effect on your investment dollars. Case in point: Business Week reports that there are now more IT engineers in Bangalore (150,000) than in Silicon Valley (120,000)! Whether you regard the trend as disruptive or beneficial, one thing is clear: American companies that have shifted work to India have cut costs by 40% to 60% - affecting everything from your iPod to your Yellow Pages.”

Intervention in US Stock Market

-A major Canadian financial management firm that a year ago published a compilation of evidence of central bank manipulation of the gold price has just done the same in regard to the U.S. stock market and has reached a similar conclusion.

The new report is titled "Move Over, Adam Smith: The Visible Hand of Uncle Sam," and has been published by Sprott Asset Management of Toronto. It was written by the firm's president, John P. Embry, and his assistant, Andrew Hepburn, and concludes that the U.S. government has intervened to support the stock market so many times that "what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market."

"There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors. Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field. It is most unfair that the immensely powerful have been further ensconced in their perched positions and thus effectively insulated from the competitive market forces ostensibly present in our society.

The Next Fed Chair is.........

• Martin Feldstein. An economics professor at Harvard University and president of the National Bureau of Economic Research, he advised Bush when the Texas governor ran for president in 2000.
• R. Glenn Hubbard. Dean of Columbia University's graduate school of business and an economics professor, he was Bush's chief economic adviser from 2001 to 2003.
• Ben Bernanke: A former Fed board member, he recently became Bush's top economist.

Also discussed for a post-Greenspan era are Donald Kohn, a member of the Fed board; Roger Ferguson, vice chairman of the Fed board; John Taylor, an economics professor at Stanford University; and Larry Lindsey, former economic adviser to Bush and ex-member of the Fed.

Real Estate Bubble OR NOT?

The housing industry has replaced the auto industry as the driving force in the U.S. economy. Bureau of Labor Statistics data compiled for me by Diana Furchtgott-Roth, a colleague at the Hudson Institute, show that the housing and related industries now account for 4.8 million jobs, some 60 percent more than the once-mighty auto industry. Whereas the auto industry has desperately shed 60,000 jobs in the past 4 years so as to reduce its future pension and health care costs, points out Furchtgott-Roth, the housing industry has created almost 600,000 jobs in the construction and financial services.

In one sense, the industry consists of a series of very local markets. As any prospective home buyer knows, the street on which a house is located, much less the neighborhood or the town, can importantly affect the value of that house. So when Federal Reserve Board chairman Alan Greenspan says that there is "froth" on some markets, he is careful to point out that we have never had a nationwide collapse in home prices, at least not since the Great Depression.

Indeed, the housing industry is no longer insulated from the globalization trends that characterize other markets. Investors from Germany to Abu Dhabi to China to Australia (our friends from Down Under have replaced Germany as the leading investors in U.S. commercial real estate) are pouring money into mortgage-backed securities, providing lenders here with still more money to lend to prospective home buyers, many of whom have substandard credit ratings. Meanwhile, proof that housing markets around the world are connected by the common forces of interest rates and job growth can be seen by looking at prices around the world. The Economist reports that the 13.0 percent rise in prices in the United States between the third quarters of 2003 and 2004 was topped by increases in Spain (17.2 percent), New Zealand (16.4 percent), France (14.7 percent), and Britain (13.8 percent).

In America, rising rates will almost certainly take some of the froth off the housing boom in some markets. Buy-and-flip investors, whose purchases "seem to have charged some regional markets with speculative fervor," to quote Greenspan, are likely to begin to unload properties bought when "up" seemed the only direction in which prices might move. And the use of what the Fed chairman calls "interest-only loans and ... more-exotic forms of adjustable-rate mortgages ... may leave some mortgagors vulnerable to adverse events" when some $1 trillion of the nation's mortgage debt--12 percent of the total--switches to adjustable payments in 2007, up from $80 billion, or 1 percent, at present. Which is why the Chairman used his valedictory to his fellow central bankers, gathered in Jackson Hole last weekend, to include house prices among the "economic imbalances" that he fears might upend his successor.

After all, Goldman Sachs reports, "Relative to per-capita GDP, a typical home in San Francisco now costs much more than one in London."

Derivatives Accounting Hurts Freddie Mac Earnings

Freddie Mac reported yesterday that its profit plummeted by 60 percent during the first half of this year, to $1.6 billion from $4.1 billion in the comparable period last year.

"Our balance sheet is in great shape," Chief Financial Officer Martin F. Baumann said yesterday during a conference call with analysts.

Baumann said the $2.5 billion drop in profit was partly due to a decline in interest income. But he said it was also the result of Freddie Mac's stricter use of generally accepted accounting principals, or GAAP, which forces the company to book temporary and often wide swings in the value of its derivatives on its income statement, without respect to how its core business is performing. Derivatives are complex financial instruments used to protect against changing interest rates, and are integral to Freddie Mac's mortgage business.

Because of the way the principles treat derivatives, "GAAP doesn't really translate our business very well," Baumann said in an interview.

Freddie Mac officials already offer additional numbers, calculated using what they call a "fair value" methodology. By that measure, the company is still not doing as well as it was last year. The fair value grew $1.1 billion during the first half of 2005, compared to $2.5 billion for the same period a year earlier. The decline was partly due to losses on derivatives.

But the company's share of the secondary mortgage market grew to 45 percent for the first six months of 2005, up from 41 percent for the same period in 2004. The company yesterday said it was projecting that a main driver of profits, the retained portfolio, which contains mostly mortgages and mortgage-backed securities, would grow about 5 percent for the year. As of June 30, 2005, the retained portfolio stood at $673.9 billion, up from $664.5 billion at the end of 2004.