Wednesday, November 24, 2010

Today's Links

1--Ireland: The Rise & the Crash, Ian Jack, The New York Review of Books

Excerpt: In 2006, at the height of the boom, construction accounted for almost a quarter of Ireland’s GDP and occupied a fifth of the workforce. Thousands of workers came from the poorer regions of Europe to meet the demand; Ireland, one of the great historical sources of emigration, became a net importer of labor. The migrants rented houses built by an earlier wave of migrants, while they built more houses that their employers hoped would be occupied by the next wave. The increase in debt was terrifying, or should have been (the taoiseach or prime minister, Bertie Ahern, cheerfully remarked, “The boom is getting boomier”). Bank lending for construction and real estate rose from €5.5 billion in 1999 to €96.2 billion in 2007—an increase of 1,730 percent—while house prices doubled in the six years to 2006. Estates for commuters now spread a long way out from Dublin. It cost more to service a mortgage on a house in a muddy field two hours’ drive from the city’s center, remote from shops and schools, than to pay rent for similar accommodation in a desirable part of the city. And on such mortgages the average Dublin couple spent a third of its income.

There had been warnings. As early as August 2000, well before the peak, a report from the IMF concluded that there hadn’t been “a single experience of price inflation on the scale of Ireland’s which did not end in prices falling.” In 2006, Professor Morgan Kelly of University College Dublin said there could be no “soft landing” for property values that had risen so much more steeply than incomes. Nobody wanted to listen. Prime Minister Ahern mocked Kelly as a moaner, and the press tended to take Ahern’s side. More remarkable, as O’Toole writes, was how few mainstream economists came to Kelly’s defense:

Every historically literate economist knew for sure that the Irish property boom was going to crash…. Yet the overwhelming majority of Irish economists either contented themselves with timid and carefully couched murmurs of unease, or, in the case of most of those who worked for stockbrokers, banks, and building societies and who dominated media discussion of the issue, joined in the reassurances about soft landings....

The dead beast, in short, was the price Ireland paid for its haste and greed. All across the country empty houses stand as its memorial, waiting among the poor fields for tenants and new beginnings. (a great read)

2--SETTING THE RECORD STRAIGHT … AGAIN, Breakfast with Rosie, David Rosenberg, Gluskin Sheff

The equity market certainly did turn in a surprisingly vigorous rally in the past few months but it would be a mistake to relate this to any real fundamental improvement in the economic backdrop. As we will likely see in today’s FOMC minutes, the Fed is yet again going to take a knife to its growth and inflation forecast as it has done with regularity over the past eight months.

To be sure, the double-dip has been avoided for now, but what is interesting is that nobody really believed in that scenario back in the summer, nor was any Wall Street research department calling for such even though for a time the risks were rising. The bottom in the equity market rally came, not on a piece of data towards the end of August, but on the back of the comments from Ben Bernanke in Jackson Hole that another round of quantitative easing was coming our way. This is why the rally ended, not on any particular piece of economic data, but right after the FOMC meeting a few weeks ago — a classic case of buying the rumour and then selling the fact. This is how markets often work since so much perception and psychology is involved.

For all the talk of economic improvement, the number of data points that were positive since the market bottomed in late August has been exactly equal to the number of negative data points....

Compensation per hour is declining and unit labour costs have fallen nearly 2% in the past year, which has been a major underpinning for profit margins, to be sure. How long the productivity miracle can last is anyone’s guess, but the excess slack in the labour market will linger on. What kept the consumer alive through all this was the massive help from Uncle Sam, but that is now coming to an end, which in turn will have some negative impact on domestic demand and revenue growth for the business sector. So, the combination of strong ex-U.S. growth and sustained solid productivity gains are going to be needed more than ever in order for the string of profits-surpassing-expectations to be extended into 2011.

So, yes, profits have come in just fine despite one of the weakest recoveries on record, but to some extent, much of this has already been priced in.

3--What the Republicans really want, John Berry, The Fiscal Times

Just before the mid-term elections, Senate Minority Leader Mitch McConnell candidly told the National Journal, "The single most important thing we want to achieve is for President Obama to be a one-term president." If that means doing nothing to help 15 million Americans searching for work who can't find it, too bad. If that means blocking ratification of a nuclear arms control treaty with Russia that's wholeheartedly backed by all the top U.S. military leaders as needed for national security, so be it. If that means stone-walling efforts to stimulate the economy with business tax cuts, or blocking extension of expiring jobless benefits, that's the way the cookie crumbles. If that means changing the law to direct the Federal Reserve to stop paying attention to unemployment and focus solely on inflation in its monetary policy decisions, we’ll ignore the fact that core inflation is the lowest in half a century.

In short, congressional Republicans don't want conditions in the United States to improve on any front before the 2012 elections. It's also clear they have no intention of cooperating with the president on any of the myriad problems facing the country. This was particularly evident when McConnell and John Boehner, incoming speaker of the newly Republican House of Representatives, said they were too busy to meet with Obama at the White House.

4--Yuan begins trading against the rouble, China Daily

Excerpt: China started allowing the yuan to trade against the Russian rouble in the interbank market from Monday as policymakers promote the currency's use in global trade and finance.

The move will help "facilitate bilateral trade between China and Russia and help develop yuan trade settlements," according to a statement published on the website of the China Foreign Exchange Trade System (CFETS), a subsidiary of the People's Bank of China.

"The pace of internationalizing the yuan is accelerating," said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp, the country's second-largest lender.

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was "worried" about holdings of assets denominated in the greenback. Purchases of US currency to contain yuan gains contributed to a $194 billion increase in the nation's foreign-exchange reserves in the third quarter, boosting the total to a record $2.65 trillion.

5--Ireland's Cowen May Be Asked to Resign by Own Party, Bloomberg

Excerpt: Irish Prime Minister Brian Cowen may be asked to resign by some members of his Fianna Fail party as the parliament prepares to pass the country’s 2011 budget, a lawmaker in the party said.

“Tonight I’ll be telling him that I’ve lost confidence in you, the public has lost confidence in you and for the sake of the country and the party, give us an indication when you will resign and let us select somebody to lead us into the next election,” Noel O’Flynn told Bloomberg News in Dublin today. “Several members will stand up and ask him to go after the budget” on Dec. 7.

6--Bankers dictate brutal cuts as part of EU-IMF bailout of Ireland, WSWS

Excerpt: The Irish government, led by Brian Cowen, has now conceded to the concerted international campaign. Of the €90 billion total, €15 billion is to go immediately to restock Irish banks, with the remainder earmarked to cover Ireland’s annual budget deficit of €19 billion for the next three years. Most of this will find its way into the coffers of the banks and ultimately to the international financial institutions that hold Ireland’s debts.

According to a report on the BBC web site, the deal does not require Ireland’s senior creditors to take any losses....

The bailouts of Greece and now Ireland mean effectively that both countries have yielded control of their economies and budgetary policy to non-elected experts from the European Union and the IMF....

Over the past year Ireland has already introduced the most comprehensive package of social and welfare cuts in Western Europe. As a result, wage levels in the country have already plummeted by 20 percent. Now the EU and IMF are demanding another round of draconian measures, which will have devastating consequences for the Irish population.

7--CoreLogic: Shadow Housing Inventory pushes total unsold inventory to 6.3 million units, Calculated Risk

Excerpt: CoreLogic estimates shadow inventory, sometimes called pending supply, by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.

According to CoreLogic, the visible supply of unsold inventory was 4.2 million units in August 2010, the same as the previous year. The visible inventory measures the unsold inventory of new and existing homes that were on the market. The visible months’ supply increased to 15 months in August, up from 11 months a year earlier due to the decline in sales during the last few months.

The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago. Although it can vary and it depends on the market and real estate cycle, typically a reading of six to seven months is considered normal so the current total months’ supply is roughly three times the normal rate.
Mark Fleming, chief economist for CoreLogic commented, “The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

8--With New Power, GOP goes after Elizabeth Warren, Wall Street Journal

Excerpt: House Republican lawmakers fired the opening salvo Monday in a war they plan against the Consumer Financial Protection Bureau created by this year's overhaul of financial regulations....

The lawmakers wrote that the agency warrants "rigorous" oversight by the inspectors general because it will play a significant role in credit availability for consumers and small businesses. GOP lawmakers have also sent letters to regulators on the legal bills incurred by former executives of government-controlled mortgage finance giants Fannie Mae and Freddie Mac and the economic impact of the financial-overhaul rules being written by the Securities and Exchange Commission.

The letters are the strongest signals yet of how the new House Republican majority plans to use its oversight powers to hobble elements of the Obama agenda...

Among the issues the inspectors general have been asked to investigate is the power Ms. Warren enjoys in her temporary post, as well as how much authority the bureau has to write rules before it has a full-time director.

9--FOMC Minutes: Fed Is Now Openly Targeting A (Much) Lower Dollar, zero hedge

Excerpt: "Several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation—an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy’s slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets.....

Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate." (The Fed knew that QE would weaken dollar)

No comments:

Post a Comment