January 22, 2015
Free trade appears to be among President Barack Obama's top policy initiatives in 2015 considering the early, high-priority placement in Tuesday's State of the Union address. And with a sound-bite-dominated midterm election now behind federal lawmakers, cooperation may emerge from key Republicans in both houses of the U.S. Congress.
Obama appears keen on finishing out the Trans-Atlantic Agreement (TAA), involving the United States and European Union, and the multilateral Trans-Pacific Partnership (TPP), comprised of several emerging economies in the Asia-Pacific region as well as Chile, Canada, Mexico and Japan. The latter agreement appears far closer to completion despite more recent obstacles, such as the perception that the U.S. and Japan are being greedy in the negotiations. Obama believes the TPP could be completed soon if Congress approves trade promotion authority (TPA). One year ago, a pair of Republican lawmakers introduced legislation to reauthorize presidential TPA, which would provide the Obama Administration with fast-track procedures that would apply to any negotiated trade deal as long as it satisfies criteria established by Congress, including consultations with lawmakers.
"Give me trade promotion authority to promote deals in Europe and Asia," Obama said. "Iâ€™ll be the first to admit that past trade deals haven't lived up to the hype. But 95% of the world's customers live outside our borders ... Small businesses need to sell more products overseas."
Those hopeful for easing of exporting conditions may be encouraged by what appears to be growing Republican support in recent weeks and months. Even the GOP's official rebuttal given by Sen. Joni Ernst (R-IA) hinted at tepid support for cooperation on trade. Some lawmakers did not sing the same tune on the campaign trail because, despite evidence to the contrary, many voters equate Free Trade Agreements (FTAs) with losing job opportunities to foreign markets (often because of campaign rhetoric and pandering from candidates in both parties).
However, the president may have bigger problems selling FTA promotion within his own party. Far-left Democrats characterize these deals, especially ones involving many nations, as detrimental to the position of the American worker. In addition, their attention is shifting toward potential contenders for the party's presidential candidate in the 2016 election and, thus, may be increasingly unwilling to support an effort embraced by those further to the right than themselves for the benefit of a soon-to-be lame duck.
The TPP and TAA likely will be the last attempts at FTAs involving the U.S. for the next several years. The administration has not embraced the idea of pacts with individual countriesâ€”notably, it took Obama nearly three years into his presidency to sign bilateral agreements with Panama, Colombia and South Korea, which were left over from the Bush Administration. All were widely seen as worthy of support. Federal representatives at NACM and FCIB events in recent years also confirmed that the present administration overwhelmingly favors multilateral talks.
- Brian Shappell, CBA, CICP, NACM managing editor
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President Barack Obama's proposed cyber security legislation, which he promoted the week of January 12 and briefly broached in Tuesday's State of the Union address, includes one of four bills similar in essence to the Cyber Intelligence Sharing and Protection Act (CISPA). It's strikingly similar to House of Representatives legislation Obama threatened to veto last year, said Jim Wise, NACMâ€™s Washington lobbyist and Pace, LLPâ€™s managing partner. Obamaâ€™s proposal, however, addresses some of the privacy concerns, Wise said. "Companies would have to redact personally identifiable information, for instance, and comply with certain privacy restrictions.
The bill that could most affect NACM members is the National Data Breach Reporting measure, called the Personal Data Notification and Protection Act, which the administration has updated since its initial proposal in 2011. "Security breach reporting laws require businesses that have suffered a cyber attack to notify customers if personal information has been compromised," Wise said. "While this generally would not impact our members, it does have the potential to do so in those instances where our members need to secure a personal guarantee in the extension of business credit."
The administration claims its proposal will help businesses, as there are currently 46 state laws on this type of reporting, with different requirements and reporting timelines. Wise believes one federal standard could help NACM members whose companies operate in multiple states. "It depends on what those requirements look like, however, and this is not yet clear," Wise said, specifically pointing out areas such as consequences for failing to report and levels of specific cyber security sophistication.
U.S. Senate Majority Leader Mitch McConnell (R-KY) has said cyber security is one area of possible agreement with the White House. "So, unlike many of the president's major policy initiatives rolled out in the last few years, this package of proposed legislation may actually go somewhere in Congress," Wise said.
Meanwhile, CISPA (H.R. 234) has already been reintroduced in the 114th Congress. It is identical to the version that U.S. House of Representatives lawmakers passed in 2013 and earned a veto threat from the president because of privacy concerns. The bill, sponsored by Rep. Dutch Ruppersberger (D-MD), encourages corporations that may be victims of cybercrime to share information with the government and with other companies possibly implicated in the cyber threat.
"Privacy advocates maintain that the vague language allows the government to access anyone's personal information with any instance of cybercrime," Wise said. "Opponents of the bill also point out that corporations are not limited in their use of the data after it has been accessed and shared following a cybercrime, and companies also have immunity as long as they are determined to have acted 'in good faith.' Supporters point out that corporations are not inclined to share data with the government about cyber attacks without the certainty of immunity."
- Diana Mota, NACM associate editor
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A market bubble appears to be forming in bank- and financial institution-based credit that could trigger a spike in bankruptcy filings within the next couple of years, according to Ed Altman, PhD, inventor of the famed bankruptcy prediction Z-Score model and instructor at the upcoming summer session of NACM's Graduate School of Credit and Financial Management (GSCFM). That is likely to result in a cooling of credit released by financial institutions, putting increased burden on trade creditors.
Altman, the Max L. Heine professor of finance and director of the credit and debt markets research program at the Salomon Center of New York University's Stern School of Business, wrote of the theory in an article that will be published in the March edition of NACM's Business Credit magazine. Altman and co-author Brenda Kuehne, a research associate within NYUâ€™s Stern School of Business, posed and analyzed the following questions:
- Are we in the midst of an inflating credit bubble?
- If so, when is it likely to burst?
- Contrarily, are we experiencing an extended period of opportunistic debt financing?
"The evidence we have compiled leads us to conclude that, indeed, a bubble is building; but it is not likely to explode dramatically, with a significant increase in defaults, until at least late 2015 or, more likely, in 2016-2017," the duo wrote. "Fear, however, of a potential crisis in credit and equity markets may contribute to periods of negative price movements in these and other asset classes before the bubble actually bursts." Altman and Kuehne added that a below-average default rate should be maintained at least through fall, but the period thereafter will be problematic. The current "benign" credit cycle will approach seven years in length this year, which would rival the record in modern high-yield bond history. In short, the cycle is unsustainable and will end soon, according to their research.
Altman predicts the default rate could surge to 3.3% for the year, more than a full percentage point above that of 2014. Also challenging companies' solvency will be the inevitable increases by the Federal Reserve to the target range for the federal funds rate, which has long been held near 0% to help stimulate the post-recession economy. With the chilling effect both factors could have on lending from banks and other financial institutions, trade creditors likely will be asked to fill those gaps and extend more credit to their customers, Altman told NACM.
"Yes, there will be more pressure, but firms have more reason to support marginal firms to support the business and profit margin on their products," Altman told NACM this week.
- Brian Shappell, CBA, CICP, NACM managing editor
For the first time, Altman will serve as an instructor at NACM's Graduate School of Credit and Financial Management, both in the traditional GSCFM program (second year) and GSCFMâ€™s International program. Both start on June 22 on the campus of Dartmouth College in New Hampshire. For more information or to apply, click the preceding links.
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The global economy in 2015 is expected to experience accelerating growth, though unevenly among regions, said Jan Hatzius, Goldman Sachs' economist of Global Investment Research during its video forecast presentation this week.
Overall, the world economy should grow at about 3.5%, up from 3% over the last three years, with U.S. recovery driving the growth. The U.S. economy will continue to grow at about 3%, supported by strong recovery across all major areas for private-domestic demand. "The consumer is looking pretty good, home building we think still has quite a bit of upside, and capital spending is also settled into a nice groove," Hatzius said. The economist described spillovers from the dollar's appreciation and some weaker growth numbers in other markets as marginal negatives, ones being offset by the drop in oil prices. "Thatâ€™s an important positive for growth," Hatzius said of the oil price decline.
Japan and Europe will continue to grow at a slower rate, in the 1% range. These are somewhat better numbers than were seen during the last couple of quarters of 2014. Currency depreciation and oil prices will help both regions. Europe is still in the early stages of the post-bubble, post-crisis adjustment, and Japan's postponement of the second stage of its consumption tax increase until 2017 will help its economy, Hatzius said.
Economies in emerging countries will create a mixed picture. While commodity producers are going to have a tougher time as prices drop, commodity importers will benefit. Authorities in China are expected to manage a deceleration in growth, but the firm's economists are concerned that the drop could last for years.
- Diana Mota, NACM associate editor
Visit NACM's Knowledge & Learning Center to view Goldman Sachsâ€™ 2015 Outlook: Global Economy video as well as some of its other economic forecasts and much more.
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Tensions between the International Longshore and Warehouse Union (ILWU) and port operators through the Pacific Maritime Association may be approaching their most dangerous levels since a costly 2002 work shutdown. A repeat of this could scuttle the domestic economy enough to cause a first quarter contraction, according to NACM Economist Chris Kuehl, PhD, and at a time when the United States and struggling economics increasingly dependent on its improving economic growth (European Union, most emerging economies) can ill afford it.
Recent federal mediation in ongoing disputes among port players on the U.S. West Coast appear to be backfiring, driving the parties further apart. Several organizations, including the Association of Oregon Counties, renewed public pleas to the Obama Administration this week to increase its involvement in quelling the tensions, as the Bush Administration did in 2002. Then, a 10-day work stoppage cost West Coast ports upward of $1 billion per day, and that was before nearly as many U.S. businesses felt compelled to sell products outside of the country. The financial impact could be double in 2015 because businesses have sought more buyers, in B2B and retail, outside of the U.S. due to changes inspired by the "Great Recession" domestically and increased trade support programs promoted by the Obama Administration with the stated goal of doubling American exporting activity.
"A work stoppage now would have a profound impact on the U.S. economy and could even throw the quarter into a recession, as the winter weather did last year at this time," Kuehl said of a potential shutdown. "The dispute has been going on for six months, and the union members have been working without a contract throughout. It was only a couple of months ago that analysts thought there had been sufficient progress made, but it now appears that the two sides are further apart than ever."
Problems in the shipping industry are numerous and include the presence of larger-sized ships, more ships arriving in ports daily, out-of-date technology compared with overseas ports, shortages of key equipment and greater demands on port workers without increases in staffing.
For its part, the greater business community continues to stay somewhat neutral, with the belief that problems can be worked out without too much brinksmanship. But maintaining that patience and optimism grows more difficult virtually every day as rhetoric escalates. And itâ€™s not merely talk that is a concern for the business community anymoreâ€”productivity declined noticeably in recent weeks and longshoremen at Seattle's port reportedly walked off the job for about a half-day on Tuesday in protest.
"Most of them remember the damage that was done in 2002 when the operators locked the union out for 10 days due to the fact that union workers had been staging drastic work slowdowns," Kuehl said of the business community. "That same pattern is emerging now."
- Brian Shappell, CBA, CICP, NACM managing editor
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The U.S. Supreme Court heard oral arguments on January 14 in the case of Wellness International Network, Limited v. Richard Sharif, which asks the court to resolve a conflict between the Seventh Circuit and other courts of appeals over the bankruptcy courtâ€™s ability to decide routine property ownership issues.
This will be the third time justices will address the constitutional limits which Article III imposes on the bankruptcy court's jurisdiction. Wellness asked the bankruptcy court to decide what property became part of the Sharif's bankruptcy estate on the day that he filed. The case presents two points for the Supreme Court to address:
- If the issue is whether or not property in the debtor's possession is property of the estate, then this is a "core" issue and the bankruptcy court has jurisdiction
- If the issue is actually whether or not the bankruptcy court can determine a state law issue over the ownership of this property, then this is not a "core" issue and under Stern v. Marshall, the bankruptcy court would not have jurisdiction.
The court will also decide whether of not litigants may consent to bankruptcy court jurisdiction and, if so, whether or not implied consent is sufficient instead of actual written consent. If justices agree on the outcome, free of dissents or concurrences, and if it's a short opinion, a decision could come in as early as eight weeks. Otherwise, it could be as late as June before the court makes some announcement.
This issue was first brought to the court's attention in 2011 in the matter of Stern, where it determined that a final decision on a state law counterclaim was not within the power of the bankruptcy court. And in the spring, Executive Benefits Insurance Agency v. Arkison accepted the process by which the district courts supervise the adjudicative proceedings of the bankruptcy courts.
- Wanda Borges, Esq., principal member at Borges & Associates, LLC, and Diana Mota, NACM associate editor
For more information and future updates about Wellness International Network, Limited v. Richard Sharif, visit NACMs Credit Real-Time blog.
To view past eNews issues or to visit the NACM Archives, click here.