Saturday, October 9, 2010

Today's Best Reads

1--The Employment Report: Why Is the Stock Market Rising?, Mark Thoma, CBS Moneywatch

Excerpt: The unemployment rate remained at 9.6%, nonfarm payroll employment fell by 95,000, government employment fell by 159,000, and private sector employment was up 64,000. The 64,000 increase, however, is far short of the 100,000-150,000 we need per month just to keep up with population growth, and we need even more job growth than that to reabsorb the millions who are presently unemployed. Job growth of several hundred thousand per month is needed. The 64,000 we saw last month is far from sufficient.

And there is more bad news. The broader unemployment rate, U6, which includes discouraged workers, involuntary part-time workers, and underemployed workers, increased to 17.1%. (Job's report confirms that the Fed will have to help with QE2)

2--The Oil Problem, The Economist

Excerpt: A weaker dollar does mean that Americans face higher prices at the pump. But the story of rising commodity prices, and rising prices for oil in particular, is about more than central bank action. The new issue of The Economist addresses the recent jump in crude:

According to Goldman Sachs, world demand in the first eight months of the year was 2.7m bpd higher than in the same period in 2009. On October 6th WTI rose above $83 a barrel, a five-month high, and retreated only slightly after reports of a surprising increase in American stockpiles.

In 2011 the fundamentals of supply and demand are likely to exert more upward pressure on prices. Francisco Blanch of Bank of America Merrill Lynch reckons that global demand is set to expand by 1.4m bpd as growth in developing countries offsets a decline in demand from sluggish rich countries. As a result he expects prices to hit $100 next year and to average $85 a barrel over the course of 2011.

The thing to understand about prices for many commodities, and for oil especially, is that they've been held down over the last two years by slow growth in emerging markets and enormous slack in the rich world. The impact of monetary easing on the level of the dollar and therefore on the price Americans pay for oil is secondary to the impact of global growth (some of which will be do to reflationary efforts by central banks) on fundamentals.

3--Where is the foreclosure mess leading?, Felix Salmon, Reuters

Excerpt: The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:

1. Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one’s going to want to buy them except at extremely deep discounts until the mess is cleared up.
2. Mortgage servicers will go from being assets to being liabilities, and banks which own mortgage servicers could find themselves on the hook for substantial losses.
3. The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.
4. The “shadow inventory” of houses which aren’t on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level. (More bleak news for housing)

4--Dollar's Fall Roils World, Wall Street Journal

Excerpt: The relentless rise of currencies from the Japanese yen to the Australian dollar is threatening to derail economic recoveries and global cooperation. In the six weeks since the Federal Reserve began discussing the prospect of further easing monetary policy, the dollar has fallen 7% against a basket of currencies.

The falling dollar complicates monetary policy for emerging economies. A good portion of the money heading to places like Brazil is from investors looking to earn higher bond yields than they can in the U.S., Europe and Japan, where interest rates are at rock bottom.

Meanwhile, many emerging markets are contending with incipient inflation. But raising rates to combat inflation would only attract more investors and magnify the currency issue.

5--Welcome to the anti-stimulus, Ezra Klein, Washington Post

Excerpt: The good news: The private sector gained 64,000 jobs in September. The bad news? The public sector lost 159,000. And they weren't all census jobs, either. Local governments fired 76,000 workers. In other words, this is the first jobs report in recent months that isn't driven by census layoffs. If there were no census jobs at all, the report would still be negative.

In other words, welcome to the anti-stimulus....The government is now impeding an economic recovery.

6--What Does Cutting-Edge Macroeconomics Tell Us About Economic Policy for the Recovery?, Bradford Delong, Grasping reality with both hands

In a Minskyite downturn like the current one, the only cure is what Economist editor Walter Bagehot set out in 1868.

The government must lend freely.....It must meet the demand for safe assets by--as long and as much as it can--expanding the supply of financial assets that the market perceives as safe. Quantitative easing policies by which the central bank adds to the stock of its own safe liabilities that the private sector van hold by buying up risky assets. Small increases in the inflation target to diminish demand for safe assets by levying a small inflation tax on them. Treasury and central bank guarantees of risky private assets to transform them into safe ones. Public recapitalizations of banks with impaired capital to make their liabilities safe assets. Pulling infrastructure spending forward into the present and pushing taxes back into the future, and so increasing the supply of safe assets by having the government issue more of it's own safe debt. All of these have a place.

All of these have a place, that is, until the swelling of the liability side of the government's balance sheet cracks its status as a safe debtor whose promises-to-pay are credible. Then you find that you have not increased but decreased the supply of safe assets to the market, and made the problem worse and not better.

That can happen. Think Austria in 1931. Think Greece today. Think Argentina about once a decade since 1890.....Until we see actual, real signs that expansions of government balance sheets are impairing investor confidence in government promises-to-pay, it seems to me that it would be extremely foolish not to continue to attempt to boost production and employment by expanding government balance sheets. I want to see the money that stimulative policies are impairing confidence--and not just listen to arguments that stimulative policies ought to be impairing confidence. (DeLong--Brilliant, as always)

7--Foreclosure Fraud For Dummies, 1: The Chains and the Stakes, Rortybomb

Excerpt: The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold. This is very 101 level, and will include a reading list of blog posts and articles at each stage to help provide depth.

8--Bank of America suspends foreclosures in all states--naked capitalism

Excerpt: We have been saying for some time that the affidavit problem that has led GMAC, Bank of America, and JP Morgan to suspend foreclosures in 23 judicial states could not be limited to these states. The robo signing of affidavits was clearly done across all sorts of court actions. As we indicated, the bogus affidavits are used in all foreclosures in judicial states; they aver various things about the plaintiff’s indebtedness, including the plaintiff’s ownership of the debt that are integral to the process. Providing an improper affidavit is considered to be a fraud on the court.

But the same fraud takes place in non-judicial states whenever a foreclosure is contested (which happens routinely in bankruptcy cases). So the false affidavit situation affects all states, just in much bigger numbers in judicial states.

Even more important, as we have stressed, the affidavit abuses are mere symptoms of much deeper problems with the mortgage securitizations. (Yikes)

9--Pakistan’s Convoy Halt Forces US to Reduce Tensions, Gareth Porter,

Excerpt: By continuing its halt in NATO convoys headed for Afghanistan through the Torkham border crossing into a second week, Pakistan’s military leadership has brought an end to the unilateral attacks in Pakistan pushed by Gen. David Petraeus and forced Washington to make a new accommodation.

And it may make it impossible for Petraeus to make the argument in the future that the United States can succeed in Afghanistan, given the refusal of Pakistan to budge on the issue.

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