Thursday, February 10, 2011

Today's links

1--Ben Bernanke's '70s Show, Alan Meltzer, Wall Street Journal

Excerpt: In the 1970s, despite rising inflation, members of the Federal Reserve's policy committee repeatedly chose to lower interest rates to reduce unemployment. Their Phillips Curve models, which charted an inverse relationship between unemployment and inflation, told them that inflation could wait and be addressed at a more opportune time. They were flummoxed when inflation and unemployment rose together throughout the decade.

In 1979, shortly after becoming Fed chairman, Paul Volcker told a Sunday talk-show audience that reducing inflation was the best way to reduce unemployment. He abandoned the faulty Phillips Curve thinking that unemployment was the enemy of inflation. And he told the Fed's staff that while he thought highly of their work, he did not find their inflation forecasts useful. Instead of focusing on near-term output and employment, he changed the Fed's policy to put more emphasis on the longer-term reduction of inflation. That required a persistent policy that President Reagan supported even in the severe 1982 recession.

We know the result: Inflation came down and stayed down. The Volcker disinflation ushered in two decades of low inflation and relatively steady growth, punctuated by a few short, mild recessions. And as Mr. Volcker predicted, the unemployment rate fell after the inflation rate fell. The dollar strengthened....

Commodity and some materials prices have increased dramatically in the past year. Countries everywhere face higher inflation. Despite the many problems in the euro area, the dollar has depreciated against the euro, a weak currency with many problems, suggesting that holders expect additional dollar weakness. Imports will cost more.

I believe it is foolhardy to expect businesses to absorb all the cost increases by holding prices unchanged. And loan demand has started to pick up, increasing the amount of money in circulation. It is a big mistake to expect that the U.S. will escape the inflation that is now rising throughout the world.

2--Banks Reach Out to Small Firms, Ruth Simon, Wall Street Journal

Excerpt: Banks and borrowers are having a hard time igniting a rebound in small-business lending, which is lagging behind recent increases in loans to other types of companies and consumers.

Last week, the Federal Reserve said 10% of large U.S. banks reported easing loan terms for small businesses in the past three months, compared with nearly 20% for medium-size or large companies....

The number of small-business loans and lines of credit made in the third quarter are down more than 70% from their pre-crisis peaks, according to Equifax Inc. and Small Business Financial Exchange, which declined to provide specific numbers. The data were collected from roughly 380 banks, credit-card companies, credit unions and other lenders.

Much of the holdup in small-business lending is caused by the continuing struggles of many entrepreneurs to overcome weak sales and uncertainty about the future, says William Dennis, a senior fellow with the NFIB Research Foundation, part of the small-business trade group.

3--Yield on 'Junk' Approaching All-Time Low, Wall Street Journal

Excerpt: The average junk-bond yield fell below 7% for the first time in more nearly six years, moving within striking distance of its all-time low, as bond buyers are willing to take on more risk in order to boost returns.

Investors have bid up the average price for high-yield bonds to 103.6 cents per dollar of face value, according to a benchmark Merrill Lynch index. That has caused the average yield, which moves inversely to price, to fall to 6.976%, closing in on its all-time low of 6.863% in December 2004.

As recently as December 2008, the average junk bond traded for 55.4 cents per dollar of face value and yielded 22.1%, according to the Merrill Lynch High Yield Master II index.

Yields under 7% are more commonly associated with investment-grade bonds, but investment-grade bonds currently yield only 4.89% on average, according to J.P. Morgan. That is because market forces are squeezing the premium that high-grade bonds enjoy over Treasurys, and the Federal Reserve is suppressing short-term rates on Treasury securities to spur job growth.

The quest for yield is extending a terrific run for junk bonds. They are already up 2.57% so far this year, following returns of 15.2% in 2010 and 57.5% in 2009, according to the Merrill index. Money continues to pour into junk bonds, with high-yield mutual funds recording $5.4 billion of net inflows since early December, according to Lipper FMI, a unit of Thomson Reuters.

Bank loans, a kindred market to high-yield bonds, have seen even greater inflows, of $6.7 billion, in that time. Similarly elevated flows into emerging markets have caused countries such as Brazil to adopt measures aimed at curbing inflation, which can result from torrents of incoming capital.

The cash influx into junk bonds has driven up prices and caused yields to drop over the past two months, even though yields on underlying Treasurys have risen sharply during that time. Risk premiums—the extra yield investors demand to own junk bonds compared to risk-free Treasurys—have fallen to 4.68 percentage points over Treasurys from 6.22 in early December, according to the Merrill index....

If investors are spooked by these concerns, they aren't showing it yet. They increased their net investment in investment-grade bond mutual funds by $1.2 billion this week, J.P. Morgan research showed. That was the fifth consecutive week of gains; the increased demand illustrates why spreads are narrowing.

"These narrowing spreads tell me that improving long-term global economic fundamentals are trumping short-term uncertainties," said Margie Patel, a senior portfolio manager at Wells Fargo Investments in Boston....

Issuers continue to take advantage of elevated demand and falling yields, with $34 million of new high-yield bonds being sold in January, according to Dealogic. Six of the past 12 months have now recorded more than $30 billion in issuance, a threshold that had only been reached once before 2010.

4--Obama Plans to Rescue States With Debt Burdens, New York Times

Excerpt: President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans....

The states are in a tough spot. Many entered the recession with too little money in their unemployment trust funds, and they quickly ran through what little they had as unemployment rose and remained stubbornly high month after month.

With their own trust funds depleted, 30 states borrowed $42 billion from the federal government to continue paying unemployment benefits.

The federal stimulus act gave states a break on the interest for those loans for nearly two years, but that grace period ended Dec. 31. That has left hard-hit states, which have already laid off employees, cut services and raised taxes, facing an estimated $1.3 billion in interest payments to Washington due this fall.

Even more worrisome, to some states, is that current law would effectively raise taxes on employers by about $21 per worker in nearly half the states so they could start paying down their debt, which states worry would put pressure on businesses that have already been reluctant to hire in the downturn.

5---NYSE Volume: Lowest Of The Year, zero hedge

Excerpt: And while the market grinds up for the 8th day in a row, the bad news for the brokers is getting acute. To wit: NYSE volume today was the lowest so far in 2011. With nearly half the quarter in the books, stock trading is persisting at the same Q4 levels that forced banks to announce a plunge in trading-related commissions. As we noted back in August, the only way for stock volume to surge is for a concerted selling event, which is the only time stock volume is beyond the good old vapor we have grown to love and expect each and every day there is an increasingly meaningless meltup in the stock market. And if we are correct about a transition from a QE2 surreality to an (in)visible hand free market occurring some time in April/May, stock volume will continue becoming progressively smaller until they finally spike in roughly three months.

6--ABC Consumer Comfort Index Plunges To Year Lows On Surging Gas Prices, zero hedge

Excerpt: From the ABC Consumer Comfort index: "Soaring gasoline prices slammed consumer sentiment into reverse this week, threatening the slow recovery in economic views that’s been under way. With gas now at record high for a February in Energy Department data back to 1990, the weekly Consumer Comfort Index dropped by an unusually steep 5 points to -46 on its scale of -100 to +100. It’s dropped that far only 36 times in more than 1,300 weeks of ongoing polling since late 1985; this shift erases an equally unusual 5-point gain in early January...After reaching -40 Jan. 9, the CCI is now at its low for the year, and its lowest since Nov. 21....

It’s likely no coincidence that the change in sentiment follows the federal government’s report yesterday that gas has jumped to an average $3.13 a gallon, up steadily from $2.74 six months ago, $2.65 a year ago and $1.89 two years ago this month.

7--BlackRock Scared We Are Going Back To "Ponzi Finance Excesses" Of 2007, zero hedge

Excerpt: “There’s some crap getting done,” David Jacob, an executive managing director at credit-rating company S&P, said today during a panel discussion at the American Securitization Forum trade group’s annual meeting in Orlando, Florida. “It’s surprising to me this early in the cycle that some of that could be happening.”....

"It’s been surprising how quickly investors have returned to accepting transactions with numerous AAA rated classes, said Blewitt, co-head of securitized assets at BlackRock, the world’s largest money manager. Some bond buyers may not be scrutinizing offering documents closely enough to find “hidden” dangers, he said. “I don’t think we’re going back to the Ponzi finance excesses that we had in 2006 and 2007 just yet, but when I get a little bit scared is when I see the old game of, ‘These are not your droids, look over there, not over here." Blewitt is right: the current round of 'Ponzi finance excesses' is like nothing ever seen before.

8--Crisis in Egypt; Counter-revolution brought to you by...., Pepe Escobar, Asia Times

Excerpt: It comes across almost casually as Robert Springborg, professor of national security affairs at the US Naval Postgraduate School, tells Reuters, "The military will engineer a succession. The West - the US and the EU [European Union] - are working to that end. We are working closely with the military ... to ensure a continuation of a dominant role of the military in the society, the polity and the economy." Translation; erase the people to ensure "stability"....

Historically, what Washington always really feared is Arab nationalism, not crackpot self-made jihadis. Arab nationalism is intrinsically, viscerally, opposed to the 1979 Camp David peace accords, which have neutralized Egypt and left Israel with a free iron hand to proceed with its slow strangulation of Palestine; for As'ad Abu Khalil of the Angry Arab website, every Middle East expert who worked on the accords "helped construct a monstrous dictatorship in Egypt".

Former Israeli peace negotiator Daniel Levy, now with the New America Foundation, spells it out further for the New York Times, "The Israelis are saying, apres Mubarak, le deluge ... The problem for America is, you can balance being the carrier for the Israeli agenda with Arab autocrats, but with Arab democracies, you can't do that.".....

What's definitely more revealing is what the Arab world itself considers to be a threat. An August 2010 Brookings poll showed that only 10% of Arabs regard Iran as a threat; instead they consider the US (77%), and even more Israel (88%) as the major threats.

9--For-Profit College Recruiters Taught To Use 'Pain,' 'Fear,' Internal Documents Show, Huffington Post

Excerpt: Newly-released internal training documents from several for-profit colleges illustrate a culture that encourages recruiters to increase enrollment by focusing on emotions such as "pain" and "fear" to attract low-income students who are struggling with adverse personal and financial circumstances.

The documents, obtained by a Senate oversight committee, shed light on the high-pressure recruiting tactics employed by some for-profit schools to increase enrollment numbers and the profits that come from federal student-aid dollars.

"Remind them of what things will be like if they don't continue forward and earn their degrees," reads one document obtained from ITT Technical Institute, a for-profit school with more than 100 campuses across the country. "Poke the pain a bit and remind them who else is depending on them and their commitment to a better future."...

A similar document from Kaplan University encourages recruiters to "Keep digging until you uncover their pain, fears and dreams" and to "Get to their emotions and you will create the urgency!"

The internal training guides shed light on recruitment methods that have long been criticized by student-advocacy groups as preying on uninformed, uneducated students who may have little chance of success once admitted to the schools....

A Senate report released last year found extremely high turnover rates for students in the for-profit sector: 57 percent of students had withdrawn within a year, according to an analysis of students at 16 large for-profit schools between July 2008 and June 2009....

Students at for-profit schools represent less than 15 percent of college enrollments nationwide, but take in a quarter of federal student-aid dollars and account for nearly half of all student loan defaults, according to data released last week by the Department of Education. A quarter of all students enrolled at for-profit schools defaulted on student loans within three years -- more than twice the rate of students at public nonprofit colleges.

Numerous corporations that own for-profit colleges -- including the Apollo Group, which owns University of Phoenix, and Corinthian Colleges Inc., which runs the Everest College chain -- derive more than 85 percent of their revenue from federal student aid.

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