Tuesday, December 21, 2010

Today's links

1--Inflation is rising, The Big Picture

Excerpt: Market inflation signals stat update: The prospect of higher inflation continues to join the rise in equity prices. Since Aug 26th, the CRB index is up by 23.7% and the S&P 500 is up by 19.8%. With this, the debate over whether the rise in nominal interest rates are more a response to improving growth instead of inflation has been growing but here’s evidence that its more the latter than the former. Since Aug 26th, the implied inflation rate in the 5 yr TIPS (highest since May today) is up by 67 bps while the nominal 5 yr Treasury yield is up by just 59 bps. The impact is less so looking out 10 years but inflation still makes up a big chunk of the move. The 10 yr implied rate is up by 77 bps while the nominal rate is up by 87 bps.

2--Analysis: Decline in home prices impacting small business borrowing, Calculated Risk

Excerpt: From Mark Schweitzer and Scott Shane at the Cleveland Fed: The Effect of Falling Home Prices on Small Business Borrowing

The researchers analyze small business borrowing, and note that homes equity borrowing is an "important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances."

Here is their conclusion:
Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.

While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses...

3--Moody's: Commercial Real Estate Prices increase in October, Calculated Risk

Excerpt: Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 1.3% in October. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices and make the index very volatile....

According to Moody's, CRE prices are about 42% below the peak in 2007.

It is important to remember that the number of transactions is very low and there are a large percentage of distressed sales.

4--State budget nightmare, Economist's View

Excerpt: Nicholas Johnson of the CBPP sets the record straight on state finances:

Some Right, Some Wrong in “60 Minutes” Story on State Budgets, CBPP: Last night’s CBS "60 Minutes" piece on state budgets made some important points but also — through some big mistakes and omissions — gave a deeply misleading impression of the state budget situation.

Here’s what it got right:

As correspondent Steve oft put it, “The ‘great recession’ wrecked [states’] economies and shriveled their income.” State revenues are about 12 percent below pre-recession levels, after adjusting for inflation, yet the cost of basic services like education and health care — the two largest areas of state and local spending — is rising.

The real pain from states’ current fiscal problems has been visited on the most vulnerable people, from low-income families needing medical care in Arizona to recipients of mental-health assistance in Illinois. That’s because states are required to balance their budgets — they cannot borrow to cover operating expenses. States have responded to the loss of revenues, in part, by cutting health care services and payments to nonprofits that serve the needy.

Fiscal year 2012 (which will begin next July 1 in most states) will be the most challenging year yet for state budgets. States have largely drawn down their reserves, revenues are still depressed, and emergency aid from the federal government (hardly the “bailout” CBS suggested, but rather a way to keep more people working and protect a fragile economic recovery) is expiring.

5--Congress Threatens to Sow the Seeds of Our Next Banking Crisis, William Black, Huffington Post

Excerpt: I wrote recently about the Bank of England sowing the seeds of their next banking crisis by deciding to reduce bank examinations. Spencer Bachus (R. Ala.), the incoming Chair of the House Financial Services Committee, told the Birmingham News: "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."...

These comments share several characteristics. First, they demonstrate that many people in positions of power have not only learned the necessary lessons from the ongoing crisis -- they have learned the worst possible lessons. Second, the comments reprise disastrous approaches that allowed the crisis to occur. Third, the comments represent the continuing triumph of ideology over facts. Fourth, the comments rely on false dichotomies that are the enemy of reasoning and good policy...

As regulators, we do "serve the [honest] banks" by taking away the ability of the cheaters to prosper -- when we regulate effectively. The OCC and the OTS did zero criminal referrals during the current crisis. We did thousands as regulators during the S&L debacle. We prioritized the most severe frauds (the large control frauds) and made the support of criminal prosecutions a top agency priority. The result was over 1000 priority felony convictions of S&L elites. Without the regulators' expertise the FBI cannot possibly stop an "epidemic" of mortgage (FBI House testimony, September 2004). In the ongoing crisis, the Department of Justice, denied regulatory support and relying instead on the Mortgage Bankers Association - the trade association of the "perps" -- has secured zero convictions of any senior officers of the large lenders specializing in nonprime lending/securitization.

Effective regulations and regulators are not the enemy of private markets or private market discipline, but rather one of the essential requirements for efficient, honest markets in a modern economy.

6--Losing Hope About a Recovery, Catherine Rampell, New York times

Excerpt: When will the economy begin to recover? The National Bureau of Economic Research’s Business Cycle Dating Committee says the recovery began in June 2009, but unemployed Americans beg to differ:...(must see chart)

That pie chart is from a new report from Rutgers’s Heldrich Center for Workforce Development, which has periodically resurveyed the same group of American workers who were unemployed at some point in the year after the financial crisis hit (and many of whom are still unemployed). In November 2010, the center asked these workers when the economy would “begin to recover.”

As you can see, 13 percent of these respondents said the economy would begin to recover more than five years from now, and another 15 percent said it would “never” begin to recover.

Of course, for corporations seeing record profits, things don’t look so bad. In today’s two-track economy, the state of the recovery is truly in the eye of the beholder.

7--Notes On Government Employment, Paul Krugman, New York Times

Excerpt: .... what we’ve seen under Obama is a small rise in federal employment, swamped by a larger fall in state and local employment — reflecting the budget woes of the states, and the inadequacy of federal aid in the slump. So you see a small rise if you look only at the feds, but a decline if you look at the overall picture.

Second, most government workers are at the local level, and most of the rest are state workers; the federal government is a small piece of the total. And if you look at what they do, a lot of them are teachers; many of the rest are firefighters, police, and other occupations we sort of like.

Third, why has government employment grown over time? Because, um, we have a growing population....And bear in mind, again, that the representative government employee isn’t a bureaucrat trampling on your liberty; he or she is a schoolteacher.

8--Hard Currencies, Soft Heads, Paul Krugman, New York Times

Excerpt: Oh, wow: it seems that European hard-money types really are proposing Latvia as a model for Ireland to emulate. The line goes like this: sure, Iceland has begun to recover, but so have Latvia and Estonia, even though they held their currencies firm....

The Baltics have done much worse than Iceland. And the employment numbers are just part of it. Iceland, as even the IMF says, has been able to “preserve the Nordic social model”; there has been a lot of distress, but not much extreme hardship. Meanwhile, the impact on Baltic society has been devastating.

Now it’s true that the Baltic countries have been able to maintain their fixed exchange rates. And this is crucial because ….?

Anyway, the idea that a country suffering a 25 percent fall in GDP, a 20 percent fall in employment, and mass emigration can be hailed as a policy triumph boggles the mind.

9--Homebuilder Group Breaks Above 200-DMA, bespokeinvest.com

Excerpt: The S&P 1500 Homebuilder group is surging 4% today, and it is currently trading well above its 200-day moving average, which it hasn't been above since early 2010. As shown below, the group has also broken out of the sideways trading range it has been in over the last six months in a big way today.....(Hmmmm--This looks fishy. Have the terms for the next homeowner bailout been worked out?)

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