Wednesday, November 10, 2010

Today's Links

1--QE will create asset bubbles in emerging markets but "do not expect much impact on the real economy" says Bank of Japan governor, Bloomberg

Excerpt: Deflation continues in Japan, with consumer prices excluding fresh food falling for the 19th straight month in September. BOJ board members are forecasting inflation below the 1 percent increase they consider as stable in the three years through March 2013.

Lessons learned when they conducted quantitative easing themselves may be behind BOJ officials’ lack of enthusiasm about resuming the policy, Aida said. Between 2001 and 2006 the central bank sought to ease monetary conditions by injecting cash into bank reserves, at its peak targeting 35 trillion yen in reserves.

The funds that the BOJ pumped in during that era inflated asset prices in other markets, as traders borrowed yen cheaply to buy overseas assets, in a process known as a yen-carry trade, Aida said. .

“I’m aware that monetary easing in advanced economies has a big impact on emerging economies as well as on financial markets, including commodity markets,” Shirakawa said at a news conference on Nov. 5 following a policy board meeting....

“Governor Shirakawa probably mentioned the risks of excess liquidity bubbles as a warning aimed at the BOJ itself as well as other central banks, signaling that going on an easing spree should be avoided,” said Iwashita, chief market economist at Nikko Cordial Securities in Tokyo.

“Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,” Zhu said. The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”

“However, we do not expect much impact on the real economy,” the two wrote. “BOJ Governor Shirakawa himself has acknowledged that copious fund supply and extensive easing have failed to boost funding demand, but the BOJ nevertheless feels it has to give heed to what it can do.”

2--Brazil's Finance Minister blasts dollar,before G-20 summit, Bloomberg

Excerpt: Brazilian Finance Minister Guido Mantega said today that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency...“Today the volume of transactions done in U.S. dollars surpasses by a long way the economic importance of the U.S.,” Mantega told reporters today in Seoul.

“The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble,” Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, told Bloomberg...

China, the world’s biggest holder of foreign exchange, yesterday took steps to stem capital inflows that threaten to drive up stock and property prices and today raised bank reserve requirements. South Korea may revive a 14 percent tax on domestic Treasury and central bank bonds held by foreigners as early as January to curb foreign-exchange volatility, a ruling party lawmaker said today....

If the Fed didn’t do the extra quantitative easing and “the U.S. economy went back into a double dip and shrank 2 percent, say in 2011, is the dollar going to go up? Is that going to help anyone?”

3--The Great Recession responsible for "a permanent change in how people shop", Yahoo Finance

Excerpt: PARAMUS, N.J. (AP) -- The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb through racks filled with second-hand clothes, shoes, blankets and dishes.

A few years ago, opening a Goodwill store here wouldn't have made sense. Paramus is one of the biggest ZIP codes in the country for retail sales. Shoppers have their pick of hundreds of respected names like Macy's and Lord &Taylor along this busy highway strip.

But in the wake of the Great Recession, the stigma attached to certain consumer behavior has fallen away. What some people once thought of as lowbrow, they now accept -- even consider a frugal badge of honor.....Thrift and consignment stores are thriving, so much so that some high-end retail stores are carving out space for second-hand goods as a way to offset weak sales of their full-price merchandise.

This behavioral shift is pronounced at the nation's supermarkets. Store-branded groceries now make up 22 percent of total sales, up from 20 percent before the recession, according to The Nielsen Co. The private-label business is worth $500 billion a year, so even a 2 percentage point change means $10 billion.

"We are seeing a permanent change in how people shop, and we have to respond to that," says Tom Patrolia, who has owned the store for 24 years.

4--Get Ready for China's Big Development Switch, Caixin online

Excerpt: China's recently released a draft plan for the next five years is nothing short of full-blown strategy for transforming the nation's development model. In a first for the government's planning process, the 12th Five-Year Plan for the 2011-2015 period outlines specific steps designed to raise consumption levels and make China a leading consumer market.

One message is clear: The Chinese government wants to foster a national transformation from "world's factory" to "world's market."

Can China effectively change its development model? The answer will determine whether the nation can indeed rise to the top among global consumer markets and, indeed, whether the next five-year plan works.

China cannot afford to delay the scheduled change from an "extensive" resource- and export-driven growth model to an "intensive" model that's driven by technological advancement and efficiency. ...

Size is only one of many factors that determine whether a market leads the world. More important are a market's depth and breadth, which it turn depend on a nation's integrated development. This is why a responsible government should focus on employment, fair allocation of resources, education and public services. (China turns into a "nation of consumers" overnight is mostly a pipedream)

5--Demand for Loans Remains Weak, Mixed News about Underwriting Standards, Daily Global Commentary

Excerpt: The Fed's Senior Loan Officer Survey results of October indicate that demand for commercial and industrial loans from large and medium sized firms was weaker compared with the third quarter survey (see chart 1). A larger percentage of bankers indicated weaker demand from small firms. This information is discouraging because stronger economic growth in the months ahead is tied to a likely pickup in loan demand. Reduced financing needs for inventories and accounts receivables, decline in investment of plant and equipment, and an increase in internal funds were the reasons cited for a lack of loan demand.

On the household side, a small fraction of bankers had tightened standards on both prime and nontraditional mortgage loans, with smaller banks accounting for the tightening of standards for prime mortgage loans. Both large and small banks indicated they tightened underwriting standards for nontraditional loans. .....Demand for consumer loans remains on the weak side (see chart 4) and the willingness to lend to consumers edged down to 20% in the fourth quarter from 22.6% in the prior quarter.

6--John Maynard Keynes, (From the archives) Robert Skidelsky, New York Times

Excerpt: Keynes created an economics whose starting point was that not all future events could be reduced to measurable risk. There was a residue of genuine uncertainty, and this made disaster an ever-present possibility, not a once-in-a-lifetime “shock.” Investment was more an act of faith than a scientific calculation of probabilities. And in this fact lay the possibility of huge systemic mistakes.

His basic question was: How do rational people behave under conditions of uncertainty? The answer he gave was profound and extends far beyond economics. People fall back on “conventions,” which give them the assurance that they are doing the right thing. The chief of these are the assumptions that the future will be like the past (witness all the financial models that assumed housing prices wouldn’t fall) and that current prices correctly sum up “future prospects.” Above all, we run with the crowd. ...

The “desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. . . . The possession of actual money lulls our disquietude; and the premium we require to make us part with money is a measure of the degree of our disquietude.” The same reliance on “conventional” thinking that leads investors to spend profligately at certain times leads them to be highly cautious at others. Even a relatively weak dollar may, at moments of high uncertainty, seem more “secure” than any other asset.

It is this flight into cash that makes interest-rate policy an uncertain agent of recovery. If managers of banks and companies hold pessimistic views about the future, they will raise the price they charge for “giving up liquidity,” even though the central bank might be flooding the economy with cash. That is why Keynes did not think cutting the central bank’s interest rate would necessarily — and certainly not quickly — lower the interest rates charged on different types of loans.

7--Ireland totters towards default, Wall Street Journal

Excerpt: Ireland's commercial-property bust has knocked the country's banks to their knees. Now the lenders are bracing for another blow: losses on home loans....
problems in the residential-mortgage arena are starting to crop up, fueling fears that a second wave of losses could hit even Ireland's healthiest banks. Those fears are one reason why jittery investors punished shares of Irish banks. An index of Irish financial stocks fell 5.3%, and shares in Bank of Ireland, one of the country's biggest mortgage lenders, tumbled 5.6% in Dublin....

In a foreboding sign, nearly 200,000 Irish mortgages—about one of every four outstanding home loans—is expected to be "underwater" by the end of the year, according an estimate made earlier this year by David Duffy, a research officer at the Economic and Social Research Institute in Dublin. That means the outstanding loan balance will be greater than the underlying value of the home, increasing the odds that borrowers will default. If the house-price decline becomes even more calamitous, Mr. Duffy said in a March paper, some 350,000 homeowners could be underwater...

Residential-mortgage debt soared from about €49 billion in late 2003 to €113 billion in March 2010, or from about $69 billion to about $159 billion, according to Ireland's central bank.

8--Inflation Delusions, Paul Krugman, New York Times

Excerpt:...I thought it would interesting to see how much the price of groceries has diverged from other measures of inflation, in particular the core inflation whose logic, no matter how often explained, never seems to get across....

What we see is that grocery prices have tended to rise faster than inflation as measured by the core CPI, but not by all that much: over the past 10 years the grocery inflation rate has been about half a point faster than the core inflation rate. If you look at more recent data, what you see is that grocery prices have bounced around; if you’re asking about the one-year inflation rate, grocery prices have risen somewhat faster than the core rate, but over the past two years grocery prices are actually down.

9-- A bird's-eye view of Deleveraging in the USA--all in one chart (via Free Exchange)

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