THE OPPENHEIMER REPORT

Democrats' anti-free-trade rhetoric a mistake

By ANDRES OPPENHEIMER

Santiago, Chile -- Sens. Hillary Clinton and Barack Obama, who seem to be competing over who is the fiercest critic of the U.S. free trade deals with Mexico and other Latin American countries, should pay a visit to this South American capital. It would only take them a few minutes to realize how wrong they are.

They would only need to walk out of their hotels and look at the traffic on the streets to see the Jeep Cherokees, Ford Explorers and other U.S.-made cars that have become increasingly visible in Chile since the Jan. 1, 2004, start of the U.S.-Chile free trade agreement.

''These days, every self-respecting businessman in this country thinks he has to buy a [U.S.-imported] Jeep Cherokee for his wife,'' former President Ricardo Lagos, who negotiated the U.S.-Chile free trade agreement, joked in an interview earlier this week.

``You see a lot of American cars that you never saw before.''

You would never know that from listening to Obama and Clinton these days. In recent weeks, especially since the Democratic primary elections in economically strained Ohio, both have stepped up their criticism of free trade agreements.

Obama's official website says that ''he will stand firm'' against free trade agreements ''that undermine our economic security,'' and will seek to ''amend'' the 1994 free trade agreement with Mexico. Clinton, who voted for the free trade deal with Chile in 2003 and later criticized it, says on her website that she will ''fix'' the North American Free Trade Agreement or NAFTA, and take a ''timeout'' from new trade agreements until she comes up with a ''pro-worker, pro-American'' trade policy.

But as seen from this part of the world, that's populist baloney. NAFTA, the Central American free trade agreement and the deal with Chile, while hurting isolated industries, have been overall success stories for all countries involved.

U.S. exports to Mexico have risen by 228 percent since NAFTA's approval, opening new opportunities for dozens of U.S. industries, according to U.S. government figures.

Mexico's exports have risen by 428 percent, mostly by shipping parts that have allowed U.S. industries to be more competitive worldwide, as well as finished products that have helped bring down costs to American consumers.

Perhaps more importantly, if it hadn't been for NAFTA and the U.S. free trade deal with Central America, America's closest neighbors would have been much more vulnerable to economic crises and political chaos, which would have significantly increased illegal immigration and threats of a disruption of oil supplies to the U.S. market. And, by the way, the U.S. trade deficit with Mexico is minuscule compared to that of America with China.

In Chile's case, U.S. exports to this country have almost tripled to $7.3 billion since the trade deal went into effect four years ago, while Chilean exports to the United States more than doubled to $8.7 billion over the same period, according to Chilean and U.S. government numbers.

In fact, the U.S. trade deficit with Chile has gone down in recent years.

Judging from the type of goods the United States is exporting to Chile, it's mostly products that create well-paying jobs in the United States. U.S. exports of car parts to Chile grew by 45 percent in 2006, and U.S. exports of cars rose by 23 percent that year, according to the latest Chilean government figures.

''It has been a healthy export market, producing good quality jobs for American workers,'' says Paul Simons, U.S. ambassador to Chile.

``And if we hadn't signed this deal, probably our market share in Chile would have continued to decline. Now, it's picking up.''

Chile has signed free trade agreements with more than 50 countries, including China, Japan, South Korea and Mexico in recent years. If the United States had not signed a free trade agreement with Chile, its industries could not have competed with other countries that have preferential access to the Chilean market, Simons added.

My opinion: Clinton and Obama should know better. As former president Lagos, a lifelong Socialist Party member, told me, ``Our Democratic friends are making a big mistake. Instead of defending jobs that are destined to disappear in the United States, they should focus on training U.S. workers to do more sophisticated and better-paid jobs.''

Right now, the Democratic hopefuls are fooling voters, and themselves, with their anti-free trade rhetoric.

Bear Stearns

No picnic

From The Economist print edition

JPMorgan Chase quintuples its bid for its battered rival. Now for the hard part

THE dramatic $2-a-share rescue of Bear Stearns was, almost everyone agreed at the time, the best way out of an awful situation. Bear was going for a song, but that was better than bankruptcy, which might have caused global markets to collapse. The only aggrieved parties were Bear's shareholders and employees—but they had got it into the mess in the first place.

And yet, a week later on March 24th, JPMorgan Chase raised its offer fivefold and other elements of the deal, brokered by the Federal Reserve, were amended. The world's bankers heaved a sigh of relief at the improved terms—so did many at Bear. But why the reprieve?

For sure, nobody knows precisely what Bear is worth, so stuffed is it with hard-to-value, illiquid mortgage securities and other nasties. That explains how a respectable firm like Lazard, Bear's adviser, could in the space of a few days endorse both the $2 and $10 bids in fairness opinions.

Dimon geezer

The main reason for improving the offer, however, was to overcome disaffection among Bear's employees and shareholders, who had threatened to torpedo the deal. In offering more, Jamie Dimon, JPMorgan's boss, hopes to recast himself not as a plunderer but as a pragmatist focused on people as well as price.

Other things needed revisiting, too. The original deal had been cobbled together in such a hurry that key clauses were mangled. One sloppy sentence appeared to require JPMorgan to continue guaranteeing Bear's trades even if its shareholders voted down the takeover. But the bigger problem, according to a JPMorgan executive, was that the guarantee would fall away if Bear's board recommended a rival bid. Unlikely though that was, it unnerved some of Bear's biggest trading partners, who continued to pull away last week. The higher bid was a price deemed worth paying to stop the exodus.

The higher price looks a bit more like the kind of rescue for shareholders that the Fed had wanted to avoid, fearing accusations of a bail-out. In exchange, it will no longer be responsible for all $30 billion of Bear's least liquid assets; JPMorgan has agreed to bear the first $1 billion of losses. But the Fed (and thus the taxpayer) could still end up losing billions. Upcoming congressional hearings on the deal are likely to be stormy. The Fed, however, will stick to its line that, however imperfect the rescue, letting Bear die would have been much worse. “It has been messy, but bear in mind it was done in the fog of war,” says Roy Smith, a finance professor at New York University's Stern School.

As well as giving Bear's shareholders more money, the revised deal does give JPMorgan a lot more certainty that it will be completed. The bank gets 39.5% of Bear straight away through an issue of new shares. Sympathetic Bear directors own around 6% more, bringing it close to the simple majority needed.

But much litigation looms. Already, several class-action and other suits have been filed against Bear and its board. Executives could be in the line of fire too, since they assured shareholders that the bank was fine just before it almost went belly-up. JPMorgan has set aside $6 billion for legal and other merger-related costs.

With perhaps half of Bear's 14,000 employees facing redundancy, many feel they have nothing to lose by kicking up a fuss. JPMorgan is stepping up efforts to win over those it wants to keep—it has offered star brokers signing bonuses of up to 100% of the annual revenue they generate. Some, however, are being offered double that to decamp to rivals. Mr Dimon has appealed to other firms not to poach.

Bear offers some attractive franchises, for instance in prime brokerage, clearing and energy. But not everyone is convinced these are worth the effort. Prime brokerage has been haemorrhaging clients to Goldman Sachs and others. Morale at other businesses is said to be rock-bottom. So JPMorgan may not be getting a bargain after all, reckons Dick Bove of Punk Ziegel. He points out that the total cost of the deal, adding in the $6 billion charge (but excluding the new share issue), is around $65 per share. Hardly a snip.

The assumption that JPMorgan is strong enough to absorb Bear may also be tested soon. Certainly, the bank is in better shape than its arch-rival Citigroup, having largely avoided the most toxic subprime securities. But its mix of businesses suggests plenty of pain to come.

The bank is heavily exposed to rising corporate defaults. It is also big in home-equity loans, which are souring at an alarming rate. More importantly, it is a giant in the over-the-counter derivatives market, and number one by a long way in credit-default swaps. With such a large derivatives book, the bank can withstand losses of only 15 basis points (hundredths of a percentage point) across its positions before eating through its regulatory risk-based capital, according to Institutional Risk Analytics (IRA), a research firm. These positions are, like those of America's housing giants, Freddie Mac and Fannie Mae, too big to hedge effectively, IRA says. It also calculates that JPMorgan needs almost five times its current capital to cover its economic risks.

The bank hotly disputes this. It points out that its actual exposure to derivatives, at $67 billion, is a mere thousandth of the notional value of the trades. But this is still a big number. And the backdrop remains bleak: this week Goldman put banks' eventual credit losses at an eye-watering $460 billion. Mr Dimon is likely to face some worrying distractions as he integrates what is left of Bear.

Britain and America

Anglo-Saxon attitudes

Our polls show the two may have less in common than they think

WHEN the half-American Lieutenant Winston Churchill stood up in a ballroom at the Waldorf Astoria in 1900 to tell New York about the Boer war, Mark Twain was the man who introduced him. No fan of either Britain's imperial war in South Africa or America's against Spain at about the same time, the writer spoke of the links between their two countries. “We have always been kin: kin in blood, kin in religion, kin in representative government, kin in ideals, kin in just and lofty purposes; and now we are kin in sin, the harmony is complete, the blend is perfect, like Mr Churchill himself, whom I now have the honour to present to you.”

A century and an unpopular joint invasion of Iraq later, George Bush and Gordon Brown spoke in similar vein at a Camp David press conference in July 2007. The president said the ties between Britain and America represented his country's “most important bilateral relationship...primarily because we think the same, we believe in freedom and justice as fundamentals of life.” Not to be outdone in diplomatic boilerplate, Britain's new prime minister spoke of “shared values...the belief in the dignity of the individual, the freedom and liberty that we can bring to the world...”

But are these Anglo-American values really so different from those that Britain shares with other rich democracies? On a state visit to London this week, Nicolas Sarkozy, France's president, sought to rouse his hosts to a sense of their mission within Europe and to a “nouvelle fraternité franco-britannique”. He too spoke of common values, and, perhaps more tellingly, of shared tastes in books and music. His message was that of course both countries should work with America, but that theirs was a separate, and a shared, calling.

To turn over the supposed Anglo-American common ground more carefully, The Economist commissioned pollsters at YouGov in Britain and Polimetrix in America—supported by additional funds from the Hoover Institution, a California think-tank—to find out what people in both places thought about a number of social, political and economic matters. A thousand people in each country were consulted between March 7th and 11th. The full results, published here, present a nuanced picture of attitudes on both sides of the Atlantic. Broadly, however, the differences between the two countries look more striking than the similarities.

Like most west Europeans, Britons tend to have more left-wing views than Americans, but the first chart shows that this is often by a surprising margin. (“Left” and “right” are harder to locate than they were: here “left” implies a big-state, secular, socially liberal, internationalist and green outlook; right, the reverse.) The data are derived by subtracting left-wing answers from right-wing ones, for each country and for each main political grouping within each country. A net minus rating suggests predominantly left-wing views and a positive rating suggests a preponderance of right-wing views. The specific questions underlying this summary are set out in charts on the next two pages.

The gap between Britain and America is widest on religion: no surprise there, as Britain is famously a post-Christian society and Americans are, if anything, rediscovering the faith of their fathers. But the difference in views is so wide that even British Conservatives are a great deal more secular than American Democrats are. The two are a bit closer on social values (abortion, homosexuality and so forth), and they overlap on ideology (mainly, how active the state should be), with Britain's Tories to the right of America's Democrats.

They overlap again on how free their countries should be to intervene militarily (both the Tories and Labour are more hawkish than the Democrats). Britons are more international than the Americans, keener on free trade and globalisation. Views coincide most nearly on climate change—ironically, the area where the two governments have been least in step.

These are, of course, average figures: there are plenty of American atheists and Britons who hate the state. But the chart shows another thing too. On five of the six groups of issues selected, American opinion is far more polarised than British (only nationalism seems to unite America's left and right). Gone are the days when it was British politics that embraced political extremes and Americans looked on bemused. The gap between Republicans and Democrats is almost always far greater than that between Tories and (usually) Liberal Democrats. And that is another interesting discovery: Lib Dem supporters are to the left of Labour on every broad category except the role of the state.

Such nuggets abound. Americans have a wider anti-big-business streak. Britons are cooler on multiculturalism (perhaps because they see more of it at home). Britons are more willing than Americans to curb civil liberties in pursuit of security. Americans are less keen not only on the United Nations (no surprise) but also on NATO—and more enthusiastic about the “special relationship” with Britain. If the British could choose their leader from a host of recent Anglo-American greats, they would pick Bill Clinton before Tony Blair. So would Americans, even if they may turn down his wife. Of the current presidential candidates, British Tories would vote for Barack Obama; Labour supporters prefer Hillary Clinton by a narrow margin.

Other questions elicit the more similar views that one would expect. People in both places are worried about the economic future but still bullish on chances for bright kids from poor families. They feel much the same about the death penalty: between a quarter and a fifth are opposed, the same proportion are in favour, and around half would support it in some circumstances. Neither group is conspicuously thrilled by the idea of a Muslim president or prime minister.

Special, but not exclusive

This is all fascinating stuff for policy wonks, and readers are enthusiastically referred to our website for more of the same. But do the differences we found matter?

They might, for the world order is changing and its components are up for review. Few agree on the nature, let alone the future, of the special relationship between Britain and America—a phrase coined by Churchill, sadder and wiser after the second world war had marked the end of one empire and the emergence of a mightier superpower. To some who expected Britain to be Greece to America's Rome, a counsellor in the weighty business of keeping order in the world, its former colony's best friend in Europe and brother in arms around the globe, reality has been a bit of a let-down. Things haven't happened quite like that, nor could they have done, given the great and growing disparity of military and economic power. But for much of the past half-century, and certainly for the past quarter, Britain and America have mostly presented a common front on security and foreign affairs and more besides.

No British premier bet more heavily on the special relationship than Mr Brown's predecessor. Mr Blair flogged doggedly around the world to advance America's aims in Afghanistan after terrorists pulled off the worst attack on mainland America since Mr Blair's political forebears lost the battle for New Orleans in 1815. He paid a heavy price for committing British troops to Iraq alongside Mr Bush's, losing popularity at home and influence in Europe.

Click to enlarge

But the notion of a distinct Anglo-American community of ideas and values goes beyond the whiff of now-defunct cordite. Free-market economics and globalisation itself are often seen by others as essentially Anglo-Saxon constructs. When the French voted against the proposed European Union constitution in 2005, it was because, some said, it risked enshrining elements of the cut-and-thrust capitalism that is rampant in both Britain and America. They preferred the continental model of social protection and cohesion, even at the cost of slower growth, to the precariousness and inequality of those countries' thriving economies.

Walter Russell Mead, an American observer of foreign affairs, maintains that America and Britain act together so often not because they set out deliberately to do so but because they frequently reach similar conclusions on their own. “The family resemblance is so strong that even our most casual acquaintances can see that we are related,” he writes in “God and Gold”, a good recent book. Ronald Reagan confessed to a feeling of “homecoming” when he addressed Parliament in 1982. Many Britons travelling in America find it more familiar than one would expect just from speaking the same language and bathing from birth in Hollywood's offerings.

So some sort of Anglo-Saxon particularity appears to exist; and complacent, even triumphant, America and Britain have urged on the rest of the world their own prescriptions: lightly-regulated capitalism red in tooth and claw at home, and military intervention where needed to promote democracy around the world. Both seem rather less than winning strategies these days. War in Iraq and Afghanistan has so far created more problems that it has solved. America's current economic woes look likely to find their worst reflection in Britain, thanks to the sophistication of global high finance in which British and American firms dominate. China and India are coming up fast as economic powers; resource-rich Russia is throwing its weight around again; and the EU, with a new operating treaty within its grasp, is emerging as a more coherent force.

Domestic political changes too are altering the old equation. Labour, in power for over a decade, is trailing the Conservative Party in the polls. Mr Bush is more likely than not to cede the Oval Office to a Democrat next year. And Mr Sarkozy is proposing a more active role for himself as partner to both Britain and America.

So what next for the Anglo-Saxon alliance? In their fundamental attitudes—regarding religion, society, the role of the state—Britons are more similar to their western European neighbours (and Canadians) than they are to the United States. In foreign affairs and security matters, however, they usually stand somewhere between the two. Even though use of the term is said to be discouraged at the British Embassy in Washington, it is certainly too soon to write off the special relationship.

Two research outfits in Washington, DC, the Pew Research Centre and the German Marshall Fund, conduct regular surveys on global attitudes. Andrew Kohut, the president of the Pew Research Centre, points out that, although enthusiasm for America has slipped since 2000, a majority of people in Britain, unlike those in the rest of the big countries in his survey, still give America a favourable rating overall: 51%, compared with 39% of French people and 30% of Germans. Americans are far warmer towards Britons (and Canadians) than towards their other allies.

In the deep divide over the use of military force that has marked America's relations with Europe since the start of the Iraq war, Britain, again, is western Europe's outlier. In polling for its 2007 Transatlantic Trends report, the German Marshall Fund found that whereas 74% of Americans believed that war is sometimes necessary to obtain justice, around 66% of Europeans thought the opposite. Britain echoed America: 59% agreed that military action may be justified in such circumstances.

But John K. Glenn, who heads the project, believes that America and Europe are nonetheless converging on some issues, principally on the threats that face them. Europeans are more alarmed than they were about Islamist fundamentalism, for example, and America is waking up to global warming. And he notes that on some questions about the use of force France is as close to America as Britain is. Welcome to London, Mr Sarkozy.

Google

The case of the missing clicks

What does it mean when people click on Google’s ads less often?

DID Google, the world’s largest web-search engine, peak last November 6th, when its share price hit an all-time high of $742? Some people on Wall Street seem to think so. They now value the firm at around 40% less. Part of the blame belongs to the general turmoil in the stockmarket. But the bigger part, investors fear, is that Google, at the ripe old age of nine, might already be over the hill.

The scare started when comScore, a research firm, reported in late February that Google’s “paid clicks” had decreased by 7% during January, and were flat compared with the same month a year earlier. In other words, surfers who searched the web via Google itself, or who visited websites that belong to Google’s advertising network, clicked slightly less frequently on the little text advertisements that Google often places on these pages. The idea that this disappointment was some sort of seasonal blip faded on March 26th when comScore reported that the numbers for February were no better. The search engine seems to have stalled.

Alas, as so often in the nebulous business of online advertising, the devil is hiding somewhere underneath the numbers, and probably planning some mischief. The first possibility is that web users performed fewer web searches, leading to fewer results pages, ads and clicks. This turns out not to be the explanation. Web searches on Google grew in January, faster than on rival search engines, and dipped only slightly in February, but again less than on rival engines. Google’s market share of searches also continues to grow. This means that the ratio of paid clicks to searches dropped even faster than the number of paid clicks: it was down by 16% in the month of January.

Perhaps America’s foreclosure crisis and fear of recession among consumers have caused a downturn in advertising? That is possible, but unlikely, at least so far. eMarketer, another research firm, projects that online advertising in America will grow by 23% this year, economic troubles notwithstanding, because the measurability of the medium is too compelling for marketers to ignore. More to the point, users of rival search engines such as Yahoo! or MSN actually clicked more often on search ads during January and February. For the explanation to be economic, consumers using Google would therefore have to be more worried than those using other search engines. This makes no sense.

According to comScore, the likeliest explanation is instead that Google itself is to blame—by, paradoxically, increasing the quality of its ads. Google does this in two ways. First, it offers fewer ads on each results page, and often none at all. This reduces visual clutter and pleases both users and any remaining advertisers. Second, Google seems to be trying harder to weed out those advertisers who bid low in the auctions it conducts for advertising slots linked to particular keywords. Low bids indicate that advertisers do not expect the ads to generate much business. With less space devoted to ads, and only higher-bidding advertisers getting through, there are fewer ads to click on.

But would users not click just as often, or even more often, on those remaining ads, since they are now presumably easier to see and more relevant? Perhaps not. From Google’s point of view, a perfect system in an ideal world would result in each ad not only being clicked each time but also leading to a sale by the advertiser. Google interprets lots of clicking without subsequent purchasing to mean that its ads are not very good.

So if the drop in paid clicks turns out to coincide with more conversions into actual sales, Google’s revenue for each individual click ought to shoot up, since the marketers would see this as a direct cost of sales and would be prepared to pay more. That in turn might mean that aggregate revenue growth for Google could still be healthy. In a nutshell, this is what drove Google’s revenue last year: it grew by 56% on the back of a 21% increase in revenue per paid click. Since Google does not disclose its revenue per click, however, Wall Street won’t know whether the click data are good news or bad until April 17th, when Google reports on its first quarter. Until then, the case of the mysterious missing clicks remains unsolved.

Liquidity Won't Fend Off Cannibal Banks

Commentary by Mark Gilbert

April 3 (Bloomberg) -- U.S. and U.K. regulators are wasting their time threatening traders who profit from speculation about the deteriorating health of the financial community. The gossips aren't to blame for the demise of Bear Stearns Cos., and they won't be at fault when the next firm goes bang, either.

Brokers, futures traders, collateral managers and compliance officers are ranking their counterparties from strongest to weakest, and choosing to stop doing business with whichever company comes bottom. If the same name gets crossed out on every list, it spells game over for the loser -- deserved or not.

The Federal Reserve's decision to fund the shotgun nuptials between JPMorgan Chase & Co. and Bear Stearns to the tune of $29 billion is as puzzling as it is troubling. What right did the U.S. central bank have to arrange a private sale? Why wasn't there a collective Wall Street solution? And why didn't any competitors challenge JPMorgan's status as sole buyer?

If Bear Stearns was such a bargain at the initial bid of about $2 -- real-estate agents valued its 45-story Manhattan headquarters at six times more than JPMorgan was shelling out for the entire firm -- where was the line of competing suitors hammering on the Fed's windows offering pricier dowries of $3, or $4, or $5?

Even at the revised cost of about $10 a share, analysts are applauding the deal-making prowess of JPMorgan Chief Executive Officer Jamie Dimon, even though none of his peers seems inclined to offer the Bear Stearns shareholders and employees an alternative path to salvation.

`Off The Table'

The Fed's decision last month to expand the list of firms it is willing to lend to ``takes the liquidity issue for the entire industry off the table,'' Richard Fuld, CEO of Lehman Brothers Holdings Inc., said on March 17.

Really? If liquidity is no longer a concern, why did Lehman need to raise $4 billion in a stock sale this week? Why is UBS AG planning to tap its shareholders for a cash infusion of 15 billion Swiss francs ($14.8 billion), in addition to the 13 billion francs it already snagged from investors in Singapore and the Middle East?

Banks can protest all they like about how secure their access to funds is on a given day; recent events have shown just how fast confidence and liquidity can evaporate. Fed Chairman Ben Bernanke said yesterday that ``the financing we did for Bear Stearns is a one-time event. It's never happened before and I hope it never happens again.''

Banks Smell Blood

Investigating who was spreading speculation to bet on a share-price decline is pointless. Why wouldn't you sell shares of New York-based Lehman or Edinburgh-based HBOS Plc, after seeing how swiftly the banking system can turn cannibal when it smells blood?

The origins of the current market crisis can be traced back to last year, when two Bear Stearns hedge funds blew up. Requests for help fell on deaf ears, with Merrill seizing $850 million of bonds that were collateral for money it had lent to the funds.

Enlightened self-interest suggested that the lenders should quietly prop up the funds. Instead, the fire sales of distressed securities meant investors started to realize for the first time that values in the market didn't match the grades assigned by the rating companies.

The seeds of the downfall of Bear Stearns, though, may have been sown a decade earlier. In his 2001 book ``When Genius Failed,'' Roger Lowenstein details the Fed's crucial 1998 meeting to convince Wall Street that it should shoulder the financial burden of keeping Long-Term Capital Management LP afloat or risk financial meltdown.

Paragons of Enterprise

James Cayne, the CEO of Bear Stearns, told his peers -- including Philip Purcell of Morgan Stanley and Herbert Allison of Merrill Lynch -- that his company wouldn't join the 14 securities firms paying for the rescue.

``In unison, the CEOs demanded an explanation,'' Lowenstein writes. ``This only made Cayne more resolute. Bear had enough exposure as a clearing agent, Cayne said. He wouldn't say more. Suddenly these paragons of individual enterprise seethed with communitarian fervor. Purcell of Morgan Stanley turned beet red. He fumed, `It's not acceptable that a major Wall Street firm isn't participating!' It was as if Bear were breaking a silent code; it would pay a price in the future, Allison vowed.''

If the LTCM debacle was happening today, recent experience suggests the Fed would have to use taxpayers' money to shore up the system. Wall Street currently prefers cannibalism to cooperation -- remember the failure of the Super-SIV plan?

$19 Billion Writedown

Equity investors have taken heart this week from the capital-raising plans of Lehman and UBS, as well as the latter's $19 billion writedown of the value of its debt securities. Once again, they are falling for the falsehood that the bad news is behind us. Only two days ago, Deutsche Bank AG said ``conditions have become significantly more challenging during the last few weeks.''

Banks are engaged in a beggar-thy-neighbor fight for survival. The correct number of banks to go bust in a crisis isn't zero, and it probably isn't one, either. As Suffolk, Virginia-based economist Dennis Gartman is fond of reminding readers of his newsletter, there is never only one cockroach.

Germany's Biggest Mosque Spurs Fear of `Islamization' of Europe

April 3 (Bloomberg) -- The twin spires of Germany's largest Gothic cathedral will soon be joined on the Cologne skyline by the minarets of the country's biggest mosque.

The $23 million Ehrenfeld Central Mosque, scheduled to be completed in about two years, will help bring Islam out of the back streets and reduce the influence of radicals, Mayor Fritz Schramma says. Others see the building as a symbol of Islamic extremism and further evidence that Cologne's 120,000 Muslims, more than half of them Turkish immigrants, refuse to integrate.

``I pray at the little chapel next to the Cologne Cathedral, and my prayer doesn't become more valuable if I pray in the big cathedral,'' said Laszlu Reischl, 56, a taxi driver. ``I don't understand why they insist on building a big mosque.''

The controversy reflects Germany's struggle over almost five decades to incorporate its largest ethnic minority. Tensions were revived in February when Turkish Prime Minister Recep Tayyip Erdogan told Turks at a Cologne rally that ``assimilation is a crime against humanity.'' Some lawmakers who oppose mostly Muslim Turkey's bid to join the European Union accused him of preaching Turkish nationalism on German soil.

Cologne has Germany's highest concentration of Muslims, at 12 percent of the population. The new mosque will be built in the immigrant district of Ehrenfeld, about two miles from the 13th- century Cologne Cathedral.

The 53,800-square-foot building will fit 1,200 worshippers. It will replace a converted pharmaceutical warehouse that has housed the mosque since 1984 and holds about half as many people. Many spill into the parking lot during Friday prayers.

Permanently Here

``When our fathers came here, they rented the least expensive place to pray,'' says Mehmet Gunet, legal adviser to the Cologne-based Turkish Islamic Union for Religious Affairs. ``We are permanently here and we want more beautiful prayer houses.''

German architect Paul Boehm, who has worked on local churches, won a contest to design the mosque. The building consists of curved concrete walls connected to a central dome by glass to convey openness and transparency.

The two 55-meter (180 feet) minarets will be about a third as high as the cathedral spires. The complex will also house offices, restaurants and shops.

``We want to show that Muslims can live in peace in a society,'' Gunet says. ``We are coming out of hidden places and saying, `We are here, you can come and look in.'''

`Parallel Society'

The Islamic Union, a group of Imams and theologians appointed by the Turkish government's Religious Affairs authority, is awaiting final planning approval and expects construction to begin in June.

Opposition to the mosque has been spearheaded by the Pro Cologne citizens initiative, which holds five seats in the town parliament. Over the past two years, the group has circulated petitions and leaflets and held rallies against the project.

The mosque will allow local Turks to slip further into a ``parallel society,'' where many don't even speak German, says Manfred Rouhs, a Pro Cologne representative.

``It's a symbol of Islamization in Europe and the failure of integration,'' Rouhs says. ``It's a danger to our European way of living.''

About 60 percent of Cologne residents oppose a large mosque with minarets, according to a July survey by Koelner Stadt- Anzeiger, the city's biggest newspaper.

Headscarf Hairdresser

Turks first came to Germany in the 1960s, when they were invited in to help ease a postwar labor shortage. There are about 3 million ethnic Turks in Germany today.

On Ehrenfeld's main shopping street, some Turkish stores offer special services, such as the hairdresser with private rooms for women with headscarves. A barber provides Turkish tea fresh from the samovar, an urn traditionally used to heat water.

Uneasiness about the mosque reflects Germany's ``Islamophobia, racism and xenophobia,'' says Mehmet Yildirim, general secretary of the Islamic Union.

``This society didn't have much of a relationship with different cultures and religions in the past, and they have prejudices and worries,'' Yildirim says.

Mayor Schramma says the mosque will help build trust and public acceptance of Islam.

``What Erdogan meant was assimilation by force, and we don't have that here in Germany,'' he says. ``We want to end the separation, but it must not come from the top down.''

Speak German

The Islamic Union has been open to negotiation, agreeing to reduce the size of the prayer area, to conduct the prayer call through indoor speakers, and to offer half of the shops to German business owners, Schramma says.

``The next step is that the language in the mosque in time will be German,'' the mayor says. ``The second- and third- generation, which were born here, should be ready to accept that as their mother language.''

Claus Moskopp, 52, an Ehrenfeld florist, points out that the minarets won't even be as high as the nearby 243-meter Deutsche Telekom AG tower.

``We had this mosque here as it is for a long time and no one said anything, but minarets bother people,'' he says. ``It doesn't bother me because the minarets will match the city landscape.''

U.S. Economy: Services Industries Contract, Jobless Claims Rise

April 3 (Bloomberg) -- Service industries in the U.S. contracted for a third month in March and claims for unemployment benefits unexpectedly jumped last week, reinforcing speculation the economy is shrinking.

The Institute for Supply Management's non-manufacturing index was 49.6 in March, higher than economists had forecast, up from 49.3 in February. A reading of 50 is the dividing line between growth and contraction. The Labor Department said the number of Americans filing first-time unemployment benefit claims rose to 407,000 last week, the most since September 2005.

``All of this is reflective of an economy that has essentially stalled,'' said David Resler, chief economist at Nomura Securities International Inc. in New York, who forecast an ISM reading of 49. ``A lot more companies are in a hiring freeze. The service sector is basically dead in the water.''

Treasuries climbed as investors bet that the Federal Reserve will keep lowering interest rates to restore growth later in the year, and stocks declined. Fed Chairman Ben S. Bernanke yesterday acknowledged for the first time that a recession is possible this year as homebuilding declines and spending slows.

Economists forecast the ISM index would fall to 48.5, according to the median of 69 projections in a Bloomberg News survey. Estimates ranged from 46 to 52.5. The measure reached a record low of 44.6 in January.

The last time the ISM services index was less than 50 for at least three consecutive months was in 2001-2002 as the economy was emerging from a recession.

Stocks Drop

The Standard & Poor's 500 index was down 0.3 percent at 1,363.5 at 11:12 a.m. in New York. The yield on the benchmark 10-year note fell to 3.56 percent from 3.60 percent late yesterday.

Initial jobless claims climbed by 38,000 in the week that ended March 29, the Labor Department said in Washington. The number of people remaining on benefit rolls jumped by 97,000 to 2.937 million, the highest level since July 2004, in the week ended March 22, Labor said.

Last week's initial claims may have been pushed higher as some state unemployment offices processed a backlog from the previous week, which included the Good Friday holiday, a Labor Department spokesman said.

The ISM report showed an employment gauge was unchanged at 46.9 for a second month in March. The index for non- manufacturing businesses activity rose to 52.2 from 50.8 the prior month. Measures of new orders and prices also increased.

Manufacturing Contracts

Manufacturing in the U.S. contracted less than forecast in March, as gains in exports helped offset declines in orders, the purchasers' group said earlier this week. Its factory index increased to 48.6 from 48.3 in February.

``The economy is weak, but not gaining momentum to the downside,'' Alan Levenson, chief economist at T. Rowe Price Group Inc. in Baltimore, said in an interview with Bloomberg Radio. The weakness ``is mostly closely related to the housing sector.''

The U.S. economy has slowed to a ``virtual standstill,'' hurting global growth prospects, and financial market strains are the biggest threat to the outlook, the International Monetary Fund's chief economist Simon Johnson said in a statement released today in Washington.

Johnson said market conditions, higher energy prices, ``softer'' labor markets, and a weak housing market ``conspire to weigh heavily on the economy in the near term.''

Payroll Forecast

A report from Labor tomorrow is projected to show the U.S. lost jobs for a third straight month in March and the unemployment rate rose to 5 percent from 4.8 percent, according to economists surveyed by Bloomberg News.

A cooling job market, tight credit conditions and the deepening slump in housing have shaken consumer confidence and hurt spending. Retail sales fell 0.6 percent in February, according to figures from the Commerce Department.

The slowdown continued in March. The International Council of Shopping Centers and UBS Securities LLC on April 1 lowered March chain-store sales estimates for a second time in as many weeks as purchases of clothing waned.

Sales at stores open at least a year will probably fall or be little changed for the month, the group said, after rising just 0.5 percent last week from a year earlier. The increase was the smallest since April 2003.

Automakers sold cars and light trucks at an average 15.2 million annual pace from January through March, the weakest three months in almost a decade.

Worse to Come

``I'd like to be able to tell you the worst is behind us, but I can't really say that,'' Ford Motor Co. marketing chief Jim Farley said on a conference call this week. ``Our sense is the second quarter may be the worst sales period of the year.''

Bernanke, testifying before the Joint Economic Committee of Congress yesterday, said ``it now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.''

Slowdowns in spending and business investment indicate the economy grew at a 0.1 percent pace in the first three months of the year, following a 0.6 percent rate of expansion in the fourth quarter, according to last month's Bloomberg survey.

Economists at Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc. and UBS Securities LLC are among those saying the economy is already in a recession.