Walmart the Demon

My hat is off to the unions and Wal-Mart's competitors. Through a relentless media campaign, they have achieved something I would have thought nearly impossible. They have managed to convince a majority of Americans (assuming the poll is well done) that a company that has lowered prices throughout the retail sector, employs a million people and that has created tremendous wealth through the innovative use of technology is actually a bad thing. Lenin must be laughing in his grave. Bastiat and the rest of us can only cry.

That's from Brian Roberts.

Walmart's Exploitation

Brian Roberts hits the nail on the head:

I know it's hard to believe. But Wal-Mart employees work there voluntarily. About a million every day. A million every day! Incredible. And when Wal-Mart opens a new store, people throng the doors for the opportunity to work there.

Why? Why would people line up to be exploited? Two answers come to mind. The first is these pitiful fools don't know any better. They actually think it's a good idea to work at a large, profitable corporation that exploits them paying them low wages with meager benefits. The second possibility is that for most or all of the people who work at Wal-Mart, working there is actually a good deal. Working there is as good or better than their next best alternative. There may actually be a few who actually believe that it's a good idea to work at a profitable corporation because it raises the odds that your job will still be there tomorrow.

Another Mission Accomplished

Ok, not really accomplished. Just ended. Thankfully:

Brace yourself for a mind-bog of sheer cynicism. The discombobulation begins Wednesday, when President George W. Bush is expected to proclaim, in a major speech at the U.S. Naval Academy, that the Iraqi security forces—which only a few months ago were said to have just one battalion capable of fighting on its own—have suddenly made uncanny progress in combat readiness. Expect soon after (if not during the speech itself) the thing that Bush and Vice President Dick Cheney have, just this month, denounced as near-treason—a timetable for withdrawal of American troops.

And so it appears (assuming the forecasts about the speech are true) that the White House is as cynical about this war as its cynical critics have charged it with being. For several months now, many of these critics have predicted that, once the Iraqis passed their constitution and elected a new government, President Bush would declare his mission complete and begin to pull out—this, despite his public pledge to "stay the course" until the insurgents were defeated.

This theory explains Bush's insistence that the Iraqis draft and ratify the constitution on schedule—even though the rush resulted in a seriously flawed document that's more likely to fracture the country than to unite it. For if the pullout can get under way in the opening weeks of 2006, then the war might be nullified as an issue by the time of our own elections.

The political beauty of this scenario is that, even if Iraq remains mired in chaos or seems to be hurtling toward civil war, nobody in Congress is going to call for a halt, much less a reversal, of the withdrawal. The Republicans will fall in line; many of them have been nervous that the war's perpetuation, with its rising toll and dim horizons, might cost them their seats. And who among the Democrats will choose to outflank Bush on his right wing and advocate—as some were doing not so long ago—keeping the troops in Iraq for another five or 10 years or even boosting their numbers. (The question is so rhetorical, it doesn't warrant a question mark.)

In short, Bush could pull a win-win-win out of this shift. He could pre-empt the Democrats' main line of attack against his administration, stave off the prospect of (from the GOP's perspective) disastrous elections in 2006 and '08, and, as a result, bolster his presidency's otherwise dwindling authority within his own party and among the general population.

The signs are clear, in any case, that a substantial withdrawal—or redeployment—is at hand. Top U.S. military officers have been privately warning for some time that current troop levels in Iraq cannot be sustained for another year or two without straining the Army to the breaking point. Rep. John Murtha's agenda-altering Nov. 17 call for an immediate redeployment was not only a genuine cri de coeur but also, quite explicitly, a public assertion of the military's institutional interests—and an acknowledgment of Congress' electoral interests.

Murtha wasn't merely advocating redeployment; he was practically announcing it. As he told Tim Russert on the Nov. 20 Meet the Press, "There's nobody that talks to people in the Pentagon more than I do. … We're going to be out of there very quickly, and it's going to be close to the plan that I'm presenting right now."

Lobbies

The lobbyist population in [Washington DC] has more than doubled, to 35,000, in five years.

D.C. once had a prosaic private sector, dominated by what locals called "the three A's": attorneys, accountants, and (trade) associations. The new boom has been driven by what might be called "the three C's": conservatives, computers, and crises.

So says Fortune (subscription required).

GM and the Big "B" Word

From the Financial Times:

Rick Wagoner, chairman and chief executive of General Motors, robustly rejected claims that the world's largest carmaker could be heading for bankruptcy as he tried to reassure staff worried by dire Wall St predictions.

In a letter to GM's 325,000 employees, Mr Wagoner said it was "just plain wrong" to talk of GM filing for Chapter 11 bankruptcy protection from creditors. "I'd like to just set the record straight here and now," he wrote. "There is absolutely no plan, strategy or intention for GM to file for bankruptcy." The letter follows a sharp fall in GM's shares and bonds on fears of a strike at bankrupt parts maker Delphi, which is its biggest supplier. The shares hit an 18-year low of $20.80 early yesterday, close to their 1987 low of $20.44, before recovering to $21.67.

Delphi supplies parts to every north American-built GM vehicle, and some analysts say GM would burn through its $19.2bn (£11.2bn) cash pile and be forced into bankruptcy by a three-month strike. In the letter, Mr Wagoner points to GM's "robust" balance sheet and liquidity and sticks to this year's plan to revamp the US business, which involves new vehicles, cost-cuts, changes to sales and marketing and a $1bn-a-year healthcare reduction deal with unions that was approved last Friday.

"The large losses at GM North America are unsustainable, for sure, and require a comprehensive strategy to address them, a strategy that must be implemented promptly and effectively, to get our US business profitable again," he wrote.

GM lost $4.1bn in its North American automotive division in the first nine months of this year.

Mr Wagoner's decision to stick to the existing plan is unlikely to reassure investors, who have been factoring in a probability of about 22 per cent of GM defaulting on its bonds in the next year.

He also makes no mention of the effect of Delphi's bankruptcy, which GM has estimated could cost it up to $12bn. In addition, Delphi executives have said they want GM to contribute to the cost of its restructuring.

Earlier this week the United Auto Workers union, which represents workers at both GM and Delphi, flatly rejected a revised pay proposal from Delphi, heightening fears that talks will break down and spark a strike. Delphi's new proposal raised average wages for its 35,000 US blue-collar workers from $10 an hour to $12.50, with benefits taking the total package to $21 an hour. But this is still a big cut, compared with the $65 an hour it pays now.

If a deal is not reached by mid-December, Delphi has said it will ask the bankruptcy court judge to annul its worker contracts in mid-January, allowing a strike.

Yield Curve: Recession Ahead?

The yield curve is almost flat, and could very well become inverted. What does it mean?

The U.S. economy has been on an impressive run, logging its most stable stretch of expansion ever. But the bond market is signaling trouble ahead.

Even as long-term interest rates have risen to levels not seen in many months, the Federal Reserve has driven short-term borrowing rates up even faster, closing the gap between short and long rates in a trend known as a flattening yield curve. Meanwhile, the prices of certain mortgage bonds have fallen, pushing their yields up.

This, investors and economists say, is the bond market's way of saying that the Fed's efforts to fight inflation could take a toll on overstretched homeowners and tip the economy into recession -- though the bond set does have a history of predicting recessions more often than they occur.

"What that's telling you is that the Fed is going to be successful in popping the real-estate bubble," says Robert Smith, who manages about $1.4 billion in bond investments as chief investment officer at Smith Affiliated Capital Corp. in New York.

After steepening in the wake of Hurricane Katrina, the yield curve has started flattening quickly. The difference in yield between two-year and 10-year Treasury notes -- a popular measure of the curve -- tightened to less than 0.09 percentage point in midday New York trading yesterday. That compares with a low of about 0.11 percentage point before Katrina hit and a historical average of 0.75 percentage point. If the trend continues, as many market professionals expect it to do, short rates could rise above long rates in what is called an inverted yield curve, an event that typically precedes economic recessions.

Various factors are contributing to the convergence of long and short interest rates, including demand for long-term U.S. securities from foreigners and pension funds and investors' belief in the Fed's ability to keep inflation at bay down the road. Much of yesterday's yield-curve flattening came after Ben Bernanke, the nominee to succeed Alan Greenspan as Fed chairman, said in congressional testimony that he will be vigilant on inflation, sparking a rally in the benchmark 10-year Treasury note that pushed its yield down to 4.565%, compared with 4.610% Monday.

Some economists, including soon-to-retire Mr. Greenspan, believe the multitude of factors affecting the yield curve has rendered it an unreliable predictor of economic activity. Others, however, believe that the curve isn't only a reliable predictor of where the economy is headed but a catalyst. This camp believes the Fed -- which has increased its short-term interest-rate target to 4% from 1% in the past 16 months and is expected to go to 4.75% by May -- is underestimating the effect its rate increases will have on the economy.

"In the past three decades, the Fed has tightened eight times and inverted the curve five of those times," says David Rosenberg, chief U.S. economist at Merrill Lynch & Co. in New York. "And of those five, all landed the economy in recession a year later."

While the economy continues to chug along at a moderate-growth pace, doomsayers argue that the Fed's rate increases eventually will tip the balance for consumers, who have taken on an unprecedented amount of floating-rate mortgage and home-equity debt.

In recent years, rising house prices have allowed consumers to finance big-ticket purchases by borrowing against the value of their homes. As short-term rates rise and the housing market cools, homeowners will face a double whammy: The payments on floating-rate mortgages will rise, while home prices might stop rising or even fall as higher mortgage rates keep new buyers out of the market.

Shades of Grey

For wearing so many grey shirts, President W. seems only to think in terms of black and white:

With Mr. Bush politically weakened, the Democrats emboldened and public support for the war ebbing, the White House is building two main lines of defense. It is asserting that many Democrats saw the same threat from Iraq as the administration did. And it is pointing to two government studies that it says found no evidence that prewar intelligence, while admittedly flawed, had been twisted by political pressure.

The first is giving the White House some political protection, though not enough to deter Democratic attacks. The second addresses only part of the issue, because neither study directly addressed the broader question: whether the administration presented that intelligence to Congress, the nation and the world in a way that overstated what the intelligence said about the threat posed by Mr. Hussein's weapons programs and any links to terrorism.

On Monday, at a stop in Alaska en route to Japan, Mr. Bush again said that the Democratic criticism was irresponsible and that "investigations of the intelligence on Iraq have concluded that only one person manipulated evidence and misled the world - and that person was Saddam Hussein."

But what Mr. Bush left unaddressed was the question of how his administration used that intelligence, which was full of caveats, subtleties and contradiction, to make the case for war.

Instead of admitting a huge mistake, W. says, "Hey, everyone else screwed up too!"

Except for the vast majority of the people throughout the world, who didn't cave into political pressure from the White House. The Democrats are not clear of blame, but accountability must start at the source of the problem.

More Hat, Less Cattle

Sinking approval ratings. Top vice presidential aide indicted. Chaos in Iraq. Tax and spend budget deficits. Supreme Court nominee cronyism. Disasterous response to Katrina.

Times are tough.

The response?

Get out the 2001 Playbook.

Instead of attacking Iraq based on twisted intelligence, attack the intelligence of us all based on twisted Iraqi facts:

President Bush on Friday sharply criticized Democrats who have accused him of misleading the nation about the threat from Iraq's weapons programs, calling their criticism "deeply irresponsible" and suggesting that they are undermining the war effort.

In a Veterans Day speech at an Army depot here, Mr. Bush made his most aggressive effort to date to counter the charge that he had justified taking the United States to war by twisting or exaggerating prewar intelligence. That line of attack has deepened his political woes by helping to sow doubts about his credibility and integrity at a time when public support for the war is ebbing.

"Some Democrats and antiwar critics are now claiming we manipulated the intelligence and misled the American people about why we went to war," he said.

Wage Gouging

They call it price gouging when businesses increase their prices, so I guess it's wage gouging when businesses have to pay higher salaries to attract workers in Katrina-ravaged Baton Rouge:

BATON ROUGE, Nov. 4 - Burger King is offering a $6,000 signing bonus to anyone who agrees to work for a year at one of its New Orleans outlets. Rally's, a local restaurant chain, has nearly doubled its pay for new employees to $10 an hour.

On any given day, contractors and business owners pass out fliers in downtown New Orleans promising $17 to $20 an hour, plus benefits, for people willing to swing a sledgehammer or cart away stinking debris from homes and businesses devastated by Hurricane Katrina. Canal Street, once a crowded boulevard of commerce, now resembles a sparsely populated open-air job fair.

Ten weeks after Katrina, government officials and business leaders worry that a scarcity of able-bodied workers is hampering the area's recovery. In their desperation, they are using a variety of tactics to attract workers.

"I'd say I'm paying two to three times as much as I would in normal circumstances," said Iggie Perrin, the president of Southern Electronics, a supplier in New Orleans, who has offered as much as $30 an hour when seeking salvage workers on Canal Street.

I'm waiting for the Congressional hearings on wage-gouging.

Price Gouging

Here's an interesting article on gasoline price gouging:

Oil Company Execs Defend Huge Profits in Senate Hearings Investigating High Fuel Prices

WASHINGTON (AP) -- Oil executives sought to justify their huge profits under tough questioning Wednesday, but they found little sympathy from senators who said their constituents are suffering from high energy prices.

"Your sacrifice appears to be nothing," Sen. Barbara Boxer, D-Calif., told the executives, citing multimillion-dollar bonuses the officials are receiving amid soaring prices at gasoline pumps and predictions of more of the same for winter heating bills.

I doubt the oil execs are expecting sympathy, and the need for them to force their shareholders to sacrifice is a curiosity.

There is a "growing suspicion that oil companies are taking unfair advantage," said Sen. Pete Domenici, R-N.M. "The oil companies owe the American people an explanation."

No, they only owe an explanation to the owners of their companies, to whom they owe a fiduciary responsibility. I have to wonder what Senators Boxer and Domenici have done to offer their sacrifices and explanations as to how the federal government so horribly botched rescue attempts.

The executives represented five major companies that, along with their global parent corporations, earned more than $32.8 billion during the July-September quarter. Consumers, meanwhile, saw gasoline prices soar beyond $3 a gallon in the aftermath of supply disruptions caused by Hurricanes Katrina and Rita.

Lee Raymond, chairman of Exxon Mobil Corp., acknowledged the high gasoline and home heating prices "have put a strain on Americans' household budgets," but he defended his company's profits. Petroleum earnings "go up and down" from year to year and are in line with other industries when compared with the industry's enormous revenues.

It would be a mistake, said Raymond, for the government to impose "punitive measures hastily crafted in response to short-term market fluctuations." They would probably result in less investment by the industry in refineries and other oil projects, he said.

This is pretty simple: a company knows ahead of time that if it invests too successfully, it will lose much of its profits. Incentives matter, and our government is thinking of taking away incentives for future oil exploration and refinement.

Exxon Mobil, the world's largest publicly traded oil company, earned nearly $10 billion in the third quarter. Raymond was joined at the witness table by the chief executives of Chevron Corp., ConocoPhillips, BPAmerica Inc., which is a division of BP PLC, and Shell Oil Co., a division of Royal Dutch Shell PLC.

But senators pressed the executives to explain why gasoline prices jumped so sharply in the aftermath of Hurricane Katrina, when prices at the pump in some areas soared by $1 a gallon or more overnight.

Sen. Bill Nelson, D-Fla., asked why the industry didn't freeze prices, as it did after the Sept. 11, 2001, terrorist attacks.

"We had to respond to the market," replied Chevron chairman David O'Reilly.

Raymond said that after Sept. 11 "the industry wasn't concerned about whether there was adequate supply," as it was after this year's Gulf storms. By keeping prices higher, adequate supplies were assured, he maintained.

Senators are comparing a supply shock (Katrina) to a terrorist attack on a financial building. Why?

Democrats said that during the storm some Exxon Mobil gas station operators complained the company had raised the wholesale price of its gas by 24 cents a gallon in 24 hours.

Raymond said his company had issued guidelines "to minimize the increase in price" but added, "If we kept the price too low we would quickly run out (of fuel) at the service stations."

"It was a tough balancing act," said Raymond, who said Exxon Mobil was not price gouging.

This is an impressive response from the markets: a hit to refining capacity reverberated almost instantaneously through the channels. Can you imagine the headlines if government had the power it wants: "Three months after Katrina, House and Senate members met today to decide on the proper price of gas, while millions of Americans waited hours in line at stations and barrels ofgasoline were being traded illegally on Ebay."

A number of Democrats have called for windfall profits taxes on the industry. Other senators, including Majority Leader Bill Frist, R-Tenn., have said it may be time to enact a federal law on price gouging.

Some Republican and Democratic lawmakers have suggested that the oil companies should funnel some of their earnings to supplement a federal program that helps low-income households pay heating bills.

That brought a cool reception from the executives.

"As an industry we feel it is not a good precedent to fund a government program," said James Mulva, chairman of ConocoPhillips.

The head of the Federal Trade Commission said a federal price-gouging law "likely will do more harm than good."

Here's the real beauty with today's market:

"While no consumers like price increases, in fact, price increases lower demand and help make the shortage shorter-lived than it otherwise would have been," FTC Chairman Deborah Platt Majoras told the hearing.

Of course, this is met with even more lunacy:

"That's an astounding theory of consumer protection," replied Sen. Ron Wyden, D-Ore.

Some theory.

Majoras said the FTC recently formally demanded documents and other data from many of the major oil companies in connection with investigations into pricing activities after Hurricane Katrina and into whether companies have manipulated prices by reducing refinery capacity. The refinery investigation was directed by the energy law passed last summer, with a report due to Congress in the spring.

Mulva of ConocoPhillips said, "We are ready open our records" to dispute allegations of price gouging. ConocoPhillips earned $3.8 billion in the third quarter, an 89 percent increase over a year earlier. But Mulva said that represents only a 7.7 percent profit margin.

"We do not consider that a windfall," he said Mulva.

Chevron's O'Reilly attributed the high energy prices to tight supplies even before the hurricanes struck. He said his company is "investing aggressively in the development of new energy supplies."

Shell earned $9 billion in the third quarter, said John Hofmeister, president of Shell Oil Co., but he said the company's investment in U.S. operations over the last five years was equal to its income from U.S. sales.

"We respectfully request that Congress do no harm by distorting markets or seeking punitive taxes on an industry working hard to respond to high prices and supply shortfalls," said Hofmeister.

Anyone who thinks the government can work its magic better than the market is nuts. As a Wall Street Journal article concludes:

Gas-station owners say such problems are rare, and that more vigorous anti-gouging laws would end up unfairly punishing the middleman. "I've heard a lot of rhetoric, vitriol and excitement," says Greg Scott, a lawyer for the Society of Independent Gasoline Marketers of America. He's made several trips to Capitol Hill to argue that most of his members are not among the gougers, but victims who were "squeezed almost to nothing" by fast-rising wholesale prices. "I have yet to have somebody put in front of me an example of a retailer who hasn't priced his product by a price that isn't justified by the marketplace," he says.

Oil companies argue that there's a slippery slope between anti-gouging regulations and more intrusive government attempts to control the market. "Once you go this route, it becomes hideously complex," says Ed Murphy, director of refining and marketing for the American Petroleum Institute. Regulations that prevent needed price adjustments during shortages, he said, can "quickly deteriorate into price controls" and result in spreading shortages as gas stations shut down or sell out.

Demographics and Housing

Justin Lahart (WSJ, $) hits the nail on the head:

The demographic wave that the U.S. housing market is supposed to be riding may not be there anymore.

The managers of U.S. home-building companies love to tell the story of immigrants creating a powerful demand dynamic for new homes. The population is growing, yet America is building only as many houses as it was 30 years ago. No wonder home prices have surged.

But in the wake of restrictions on immigration following the Sept. 11, 2001, attacks, the flow of immigrants into the U.S. has fallen sharply. In a recent paper, Jeffrey Passel and Roberto Suro of the Pew Hispanic Center found that all migration into the U.S. last year was 24% below the peak it hit in 2000.

That drop could have consequences for the housing market, which yesterday was rattled by Toll Brothers Inc.'s disappointing outlook and 14% drop in its share price. Harvard's Joint Center for Housing Studies reckons that the foreign-born have been directly responsible for one-third of the U.S. households formed over the past decade. (Not all households are homeowners.) Goldman Sachs economist Sara Aronchick makes the further point that a higher share of today's immigrants are unauthorized, making them less likely to be homebuyers.

Meantime, another source of demand -- children of baby boomers -- may not be so strong either. The number of households whose heads are 25 years to 44 years old has stagnated in recent years, notes Merrill Lynch economist David Rosenberg, and is now at its lowest level since 1995.

Home-ownership growth among 25- to 44-year-olds was strongest in the 1970s, peaking in 1980. That increase was due not just to baby boomers coming into their own, but also to a rising divorce rate: Split-up couples form new households. Since 1981, the divorce rate has fallen.

If immigrants and echo boomers aren't behind the pickup in housing demand, there must be other things at work. Perhaps it is the boomers themselves -- buying second homes, often for investment purposes. And then there are the throngs of speculators who have been active in the hottest markets.

Demand from these second-home and speculative buyers, who have no real need to be in the market, may be far more sensitive to rising rates than demand from the average home buyer.

For Whom the Bell Tolls

The housing peak may have just passed (WSJ, $):

Toll Brothers Inc. cut its earnings guidance for the current fiscal year, citing softening market conditions.

The Horsham, Pa., luxury home builder said contracts, or orders, rose only 1% in its fiscal fourth quarter ended Oct. 31. In a note, UBS analyst Margaret Whelan said she expected a 22% increase.

Orders fell 10% in the Mid-Atlantic, 5% in the Midwest, and 50% in the West.

I find this compelling in a few ways:

1 - To have three areas of the country slipping at once dispels a lot of the talk of the housing bulls. For the last few years, they have admitted that certain hot markets may be overvalued, but that much of the country was ripe for decades of strong demand.

2 - Bob Toll was the subject of a lengthy NY Times Magazine article a few weeks ago ("Chasing Ground", October 30, 2005, $ now required), in which he as characteriscally bullish on housing. Known for being very close to the local markets, it is ironic that he was still promoting the housing market's strength at the point where his local markets were beginning to roll over.

3 - When I shorted a number of homebuilders this summer, I avoided Toll for a couple of reasons. I perceived Bob Toll to have a better handle on his business than most homebuilding executives. Toll builds high-end homes (highest median sales price of any of the national builders), and these should be somewhat more immune to an economic slowdown. Finally, Toll has less concentration in the hottest markets than a lot of builders. Either these notions were completely wrong, and TOL was the top candidate to short, or these thoughts were (and are) still on the money, which doesn't bode well for the other homebuilders. I remain short Pulte, Centex and Hovnanian.

Note that the stocks of the other national homebuilders fell on Toll's news yesterday, but not as far as Toll's.

2005 Elections

This says it all:

The elections capped a season of political turmoil for the Republican governing majority, which has been buffeted by Hurricane Katrina, the war in Iraq, soaring energy prices, scandal on Capitol Hill and, most recently, the indictment of I. Lewis Libby Jr., who was chief of staff for Vice President Dick Cheney.

The national mood remains dark. A new poll by the Pew Research Center, released on Tuesday, showed Mr. Bush with an approval rating of 36 percent, the lowest of his presidency; his approval rating among independents had dropped to 29 percent, from 47 percent in January, and he was also losing support among Republican moderates and liberals.

But Republicans note that voters have yet to turn to Congressional Democrats as a compelling alternative. The Pew survey found that voters were unhappy with both Republican and Democratic leaders.

People are finally realizing that both parties have deserted them.

Tax and Spend

From the NY Times:

The Senate's top Republican tax writer unveiled a bill on Tuesday that would provide $70 billion in tax cuts, including $7 billion for the Gulf Coast areas damaged by Hurricane Katrina.

The bill, sponsored by Senator Charles E. Grassley, chairman of the Senate Finance Committee, fell short of what President Bush and Republican leaders had been seeking and it could be blocked by Democrats and moderate Republicans.

The bill would extend several of Mr. Bush's biggest tax cuts, including those on stock dividends and capital gains, but the extension would be for only one year, from the end of 2008 to the end of 2009.

The bill would also temporarily extend tax breaks for college tuition, for capital investments by small business and for investment in research. In addition, it would prevent for one year an expansion of the alternative minimum tax that, if left unchanged, would increase taxes for millions of families next year.

Mr. Grassley plans to take up the measure in committee on Thursday and hopes to push it through the Senate before Thanksgiving. But he has been struggling to line up enough votes to win approval in his own committee.

Democrats on the committee have vowed to vote against the measure, arguing that there is no reason to extend tax cuts for investors and businesses because budget deficits are expected to climb sharply again next year.

But Mr. Grassley's most specific obstacle has been Senator Olympia J. Snowe, Republican of Maine, who objects to an extension of the tax cut in dividends.

Low Risk Premium

What are the causes of the low risk premium over the last 2 years or so?

It's a sign of a major global investment phenomenon: There's an unprecedented wave of capital flowing around the world, with all of its owners anxiously searching for a better return. World pension, insurance and mutual funds have $46 trillion at their disposal, up almost a third from 2000. In the same period global central-bank reserves have doubled to $4 trillion, and other gauges of available capital have risen as well. Meanwhile, world central banks have kept short-term interest rates low, even after the Federal Reserve's latest quarter-point boost. That means investors who put their cash in safe money-market paper can net only a modest margin above inflation.

The result is that global investors are diving into a wide range of riskier assets: emerging countries' stocks and bonds; real estate and real-estate-backed debt; commodity funds; fine art; private-equity funds, which buy stakes in nonpublic companies; and the investment contracts called derivatives, including a kind structured to permit the sophisticated to take huge bond risks.

For good measure, many investors use today's low interest rates to borrow money to amplify their bets. This "leverage," in effect, thus enlarges the already overflowing pool of investment capital. As these markets draw more investors, whose buying pushes up their price, prospects rise that a reversal could cause widespread pain.

Where does this global flood of cash come from? Ben Bernanke, the economist just nominated to head the Fed, last March identified what he called a "global savings glut," which he said helps explain the relatively low level of long-term inflation-adjusted interest rates in the world.

That there should be such a glut when U.S. consumers save none of their current income and their federal government borrows heavily might seem paradoxical. But plenty of others do save and accumulate cash to invest, including U.S. corporations. Companies' profits are near record levels, yet their expansion plans are muted, partly a hangover from the expansion excesses of the late-1990s stock-market bubble. So they have lots of money seeking a home.

Abroad, meanwhile, many families' saving habits are the mirror image of Americans' free-spending ways. European and Japanese workers save far bigger shares of their incomes, and Chinese households a stunning 25%. In all, China is expected to have about $116 billion to invest abroad this year, much of which goes into U.S. bonds.

"People talk about a wall of money everywhere," says Peter Fisher, a former Federal Reserve and Treasury official who's now a managing director at BlackRock, a New York investment company. "Bankers talk about too much money chasing deals. Private-equity funds talk of money chasing them. And buyers of corporate and asset-backed debt seem to come at the bond market from all directions."

Policy makers increasingly see worrisome consequences of this global cash surplus. As the price of an asset rises, the income it throws off -- a stock's dividend, a bond's coupon, a building's rent -- automatically declines as a percentage of the asset's value. This means investors are demanding less compensation than usual for taking on the risk inherent in owning the assets. In the lingo of economics, the "risk premium" is low today.

There are some sound reasons why it should be low. World economic growth has been unusually stable and predictable for several years. The U.S. economy grew at a 3.8% annual rate in the third quarter, the eighth straight quarter at about that pace -- the least volatile two-year stretch of growth on record. U.S. inflation did hit a 14-year high in September, but it remains low when energy prices are excluded. And the financial system hasn't seen the threat of a serious blowup since the 1998 Russian default and collapse of the Long Term Capital Management hedge fund, or private investment pool.

But the concern is that, historically, very low risk premiums often presage a broad market decline that pushes down stock prices and pushes up what everyone must pay to borrow, hurting economic growth. "History has not dealt kindly with the aftermath of protracted periods of low risk premiums," Fed Chairman Alan Greenspan noted in August.

As investors pile into riskier assets and their prices rise, they generate impressive returns for those who own them and attract still more investors. Cautious money managers who play it safe and stay on the sidelines run the risk of showing embarrassing low returns, and losing clients. Most choose to stay in the game.

Investors' quest for higher returns can present a dangerous quandary, says Jim Sarni, who invests for pension funds and insurance companies at a firm called Payden & Rygel in Los Angeles. "It makes you continue to invest in higher-yield instruments despite the fact that spreads are narrow" -- that is, their return above safe instruments is small. "So it becomes this vicious cycle," Mr. Sarni says. "It is a global game of chicken."

High stock market valuations, even higher real estate prices, increased use of synthetic bonds and other derivatives, the list continues. Where does it end?

Some economists and policy makers say that risk premiums are bound to rise, which means many asset prices, from corporate bonds to real estate, would likely fall. No one is sure what the trigger would be. It's often something unexpected that investors haven't incorporated in their forecasts. It could be that although many companies today are highly profitable and able to service their debts with little trouble, rising oil prices could hold back global growth and impair corporate creditworthiness. Witness the recent bankruptcy filings of auto-parts maker Delphi Corp., Northwest Airlines and Delta Air Lines, all of which burned holders of their securities.

If the world's central banks boost short-term interest rates more sharply than expected to ward off inflation, investors might start selling some of their riskier assets in favor of newly attractive short-term instruments. The Fed has recently stepped up its anti-inflation rhetoric, and the European and Japanese central banks have indicated they may raise interest rates in the coming year.

At the same time, corporations might revive expansion plans and become big borrowers again, pushing up long-term interest rates. Rising risk premiums, and thus falling asset prices, could then become self-reinforcing as leveraged investors unwind their positions to limit losses, driving asset prices down further and triggering still more selling.

Under this scenario, the pain could spread to Main Street if newly risk-averse lenders demanded higher rates for mortgages. Rapidly rising mortgage rates could weaken housing prices. "Significantly lower asset prices would erode the large net worth of highly indebted households," says the IMF's Mr. Häusler. "They would cut back on their consumption, especially if their savings rate is zero or close to zero, reinforcing downward economic and financial trends."

Yet the evidence to date is that a rise from today's low risk premiums is more likely to be gradual and easily absorbed by the financial markets and national economies. When the debt of General Motors Corp. and Ford Motor Co. was downgraded to "junk" last spring, the moves caused pain among many hedge funds, but no broader contagion.

Mr. Häusler suggests that pension funds' growing ownership of risky assets might even make such assets less vulnerable to sudden changes of sentiment. The reason is that the funds have long investment horizons, and might not dump assets as readily as other investors would.

Knives and Scissors

Wall Street Journal online poll: Should airline passengers be allowed to carry pocket knives and scissors?

After 2118 votes, 42% said yes, 58% no.

It's been 4 years, but most people apparently still think 9/11 hijackers were largely successful because of their toe-nail clippers.

The planes were overtaken because of the passenger's mentality (cede control, and we land safely), which was based on many consistent hijacking stories over the years. Once this history changed--quickly, and irrevocably, after the 2nd plane crashed into the Towers--this mentality changed drastically, and passengers aboard all subsequent planes will not be taken over without a large degree of brute force--well beyond 5 men with scissors. The folks aboard the plane that crashed in Pennsylvania realized this within minutes. Most WSJ voters apparently do not.

Halloween Magic

It's magic. Almost as if the whole Harriet Miers debacle never happened, President Bush has rapidly retreated from his judicial preferences of last month. The urgency of filling Sandra Day O'Connor's seat with another woman has been erased; the importance of balancing the too-scholarly court with a practicing attorney has evaporated; and the need to put an outsider onto the court is long forgotten. Suddenly George Bush's vision for what the high court most needs maps perfectly with that of the movement conservatives who sank the Miers nomination. Never has a pander felt so good.

Magi, indeed.

The People's Take on Bush's War

Given enough time, many Americans come to realize the truth about Mr. Bush's war:

According to a CNN/USA Today/Gallup poll conducted in late September, just 32% of those surveyed approved of the president's handling of the conflict in Iraq.

Of course, Mr. Bush won't change his tune:

In his speech, Mr Bush conceded that Iraq was falling into the hands of al-Qaeda militants, and stressed that was why the US needed to stay put.

"Those who think we can cut our losses and leave now are under a dangerous illusion."

But sentiment is changing:

According to the recent CNN/USA Today/Gallup poll, 59% of those surveyed now consider the US-led invasion of Iraq in 2003 a mistake and 63% of respondents said they wanted to see some or all US troops withdrawn.

Microsoft Offers Antivirus Service

Microsot decides to take on McAfee, Symantec, etc:

Microsoft on Thursday unveiled its first antivirus, antispyware software designed for corporate networks, which will go into beta by year-end and will ship in 2006.

If Microsoft did a sufficient job of securing the Windows OS and Internet Explorer browser, these probrams wouldn't be neded. Looks like they are filling the market that their ineptitdude has created. Gotta love it!