Thursday, March 3, 2011

Today's links

1---Debt Market Rebounds From the Crisis, and So Does Risk, New York Times

Excerpt: Debt is back.

High-yield debt interest rates are low and companies are rushing to borrow. But the revival of the debt market raises questions about whether Wall Street is repeating the same mistakes as before the financial crisis and whether regulators will be effective this time around.

Since Jan. 1, companies have issued $38 billion worth of high-yield debt, a 60 percent increase over last year, according to Dealogic. Interest rates have declined sharply and high-yield debt now yields about 8.5 percent, compared with 10.6 percent in 2009, according to Thomson Reuters.....

So have the banks learned anything from the crisis?

In some ways, yes. During the financial crisis, banks became stuck with hundreds of billions in debt that was unsellable in part because it contained cov-lite terms. It appears that banks are now demanding “flex terms” that permit them to add back in maintenance covenants if the debt cannot be sold....

And this is why regulation will be so important to prevent a repeat of the crisis. The Basel III accords, when they take effect, will require banks to hold more capital, meaning more conservative lending. But banks can still securitize and sell this debt once the C.L.O. market inevitably revives.

The Dodd-Frank Act seeks to deal with this problem by requiring that banks keep at least 5 percent of any asset securitized. The idea is to ensure that banks do not again water down standards, by keeping their skin in the game.

The banks have protested, saying that this will slow down the “animal spirits” and constrain lending. Recent developments show that when the market heats up, the banks have little leverage. Money pours in and the private equity firms and other borrowers do only what comes naturally — borrow more on easier terms. The result can be overleverage during the bad times.

If anything, the return to precrisis leverage levels and the strength that borrowers are already exerting in negotiations show that last year’s financial overhaul may not be enough. Even though banks are acting more carefully, one wonders what will happen five years from now. It may be time to give regulators stronger tools to cap leverage and place even higher capital and asset retention requirements.

2---Fed's Bernanke: Budget cuts could trim 200,000 jobs, Reuters

Excerpt: Federal Reserve Chairman Ben Bernanke said on Wednesday a Republican spending cut plan would not cause a big dent to U.S. economic growth, but could cost around 200,000 jobs.

Bernanke said that a $60 billion cut along the lines being pursued by Republican in the House of Representatives would likely trim growth by around two-tenths of a percentage point in the first year and one-tenth in the next year.

"That would translate into a couple of hundred thousand jobs. So it's not trivial," he said in response to questions from members of the House Financial Services Committee.

3---The Greatest Recovery, Mark Provost, Dollars and Sense

Excerpt: According to a recent CNN poll, three out of four Americans believe the recession is not over. Unemployment has not been this high for this long in most Americans’ lifetime. By every measure, the U.S. economy is failing to recover from the Great Recession.

Every measure except one.

In the last 18-20 months, corporate profits climbed at the fastest pace on record. Non-financial companies are reporting the highest free cash flow (profits after dividends and capital expenditures) in a half-century. Profit margins at S&P 500 companies are now above 9%, approaching uncharted territory. Joseph Lavorgna, chief U.S. economist of Deutsche Bank, stresses, “Not only are we seeing a tremendous V-shaped recovery in corporate profits, but we are in fact seeing the biggest corporate profit recovery ever.”

The Obama recovery is turning the traditional formula on its head; corporate profits have not been a leading indicator of economic recovery, but a lagging indicator of Main St. impoverishment. The Greatest Recovery in corporate profits and the Great Recession are two sides of the same coin.

Worker-advocacy group Change to Win released the results of a recent survey which found that wage stagnation ranks as the most common impact of the Great Recession. Workers will believe in the recovery narrative when they see a raise in their paychecks. For now, productivity gains are going straight to their employers’ bottom line. Andrew Sum, professor of economics at Northeastern University, concludes that the current expansion “has seen the most lopsided gains in corporate profits relative to real wages in our history.”

4--Bankruptcy Filings Ticked Up Last Month, Wall Street Journal

Excerpt: Consumer bankruptcy filings ticked up in February, but so far the rise has slowed from 2010.

The number of personal bankruptcy filings rose 11% to 102,686 in February compared to a month earlier, the American Bankruptcy Institute and the National Bankruptcy Research Center said Tuesday.

“Though consumers are striving to reduce their debt burden, high unemployment and a still-poor housing sector continue to fuel new bankruptcies,” Samuel J. Gerdano, the American Bankruptcy Institute’s executive director.

Compared to the same time a year ago, however, personal bankruptcies fell 8%. While it’s still early, data for the first couple months of the year could indicate that consumers won’t have a repeat performance of the surge in filings in 2010. More than 1.6 million consumer bankruptcy filings were reported last year — the highest level in five years.

A more tempered pace of filings is partly from consumers saving more and paying down their debts. It’s also because less credit has been available, which makes it harder for Americans to incur new debts.

5--When Will the Fed Tighten? Bernanke Elaborates, Wall Street Journal

Excerpt: In his semiannual testimony to Congress, Federal Reserve Chairman Ben Bernanke elaborated a little bit on what would provoke the Fed to start tightening monetary policy.

In short, it won’t happen until he’s more confident that the recovery can stand on its own, that employment is clearly rising in a sustainable way and that inflation is on its way to stabilizing around 2%.

“Once we see the economy is in a self-sustaining recovery and employment is beginning to improve and labor markets are improving and inflation is stable and approaching 2% or so … at that point we’ll begin withdrawing,” the Fed chairman said. He added that will be long before the unemployment rate has fallen back toward its longer run trend of 5% or 6%. He also said he’s well aware of the risk that the Fed will act too slowly and allow inflation to get out of control, something he intends to avoid....

If all goes according to the Fed’s forecast, by then the economy will have clocked a few more quarters of growth in excess of 3.5% by then, and unemployment will have continued to drop.

6--Behind the Numbers: PCE Inflation Update, January 2011, FRB of Dallas

Excerpt: For a second consecutive month, the headline PCE price index posted an annualized rate of increase in excess of 3.0 percent, coming in at 3.5 percent for January, following an annualized gain of 3.3 percent in December. Energy prices—particularly prices for gasoline and other motor fuel—accounted for much of the month-to-month increase in the index. In contrast to prior months, food prices also made a noticeable contribution to the headline rate in January.

The 12-month headline rate held steady at 1.2 percent. Over the past six months, the headline index has averaged an annualized inflation rate of 2.2 percent, up from an average rate of just 0.4 percent over the first half of last year. The acceleration can be traced primarily to energy prices, which fell at an average annualized rate of 10 percent over the first half of 2010 and have since increased at an average annualized rate of nearly 30 percent.

Core PCE posted a 1.5 percent annualized gain in January, up from a 0.4 percent rate in December. January’s 1.5 percent is the fastest one-month rate of increase in the core since March of last year, when the monthly core readings were, by and large, drifting downward. The 12-month core rate remained at 0.8 percent, while the six-month core rate ticked up from 0.5 percent in December to 0.7 percent in January....

A hefty increase in core goods prices—following an unusually large decline the previous month—helped boost January’s core rate...The uptick in the six-month core rate, while small, at least represents a step in the direction of the trimmed mean, for which the six-month inflation rate has been steadily creeping up, from a low of 0.7 percent in the middle of last year to this month’s 1.1 percent. Other inflation gauges that rely on trimming—like the Cleveland Fed’s median CPI and trimmed mean CPI—have also shown a noticeable upward drift at the six-month horizon.....

Gasoline Accounts for Bulk of Headline Increase, More Gains in Pipeline
Energy prices, as noted above, accounted for much of January’s headline inflation rate—in fact, gasoline and other motor fuel accounted for about 1.6 annualized percentage points of January’s 3.5 percent headline rate. The price index for gasoline and other motor fuel increased about 3.9 percent at a monthly rate or roughly 58 percent at an annualized rate in January....

Price Gains Robust Across Food Categories

Food price increases have made headlines around the world in recent months, but until now, have not shown up in any significant way in U.S. consumer price indexes. As of the latest PCE release, that pattern might be changing. The index for food—which consists of food and beverages purchased for off-premises consumption—increased at an 8.2 percent annualized rate in January, its fastest rate of increase since July 2008....

January’s Core Rate Reflects Rapid Growth in Goods Prices
For the past several months, core goods prices have fallen at a rather healthy clip, relative to recent historical patterns, declining at an average annualized rate of about 1.6 percent since last September. This has helped hold down the overall core inflation rate and, likely, contributed to the difference in signals coming from the core and the trimmed mean. As we stated in last month’s Inflation Update, noting the modest pickup in the trimmed mean rate over the past several months, “both the core and trimmed mean suggest that underlying inflation is quite low and is lower now than it was in the middle of 2010. They disagree on whether that trajectory is still pointed downward.”

7---Fed’s Dudley: Unwise to Overreact to Commodity Inflation, Wall Street Journal

Excerpt: The economy is unlikely to mount strong enough growth to change the path of monetary policy over coming months, although rising commodity prices argue for increased inflation vigilance, a top Federal Reserve official said Monday.

“The economic outlook has improved considerably,” and “a wide range of indicators show a broadening and strengthening of demand and production,” Federal Reserve Bank of New York President William Dudley said.

That said, “we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability,” the official noted, adding that “faster progress toward these objectives would be very welcome and need not require an early change in the stance of monetary policy.”

Dudley also said, “Barring a sustained period of economic growth so strong that the economy’s substantial excess slack is quickly exhausted or a noteworthy rise in inflation expectations, the outlook implies that short-term interest rates are likely to remain unusually low for an extended period.”...

Dudley described a fairly benign inflation environment. “Core inflation is now stabilizing” and “slack in our economy is still very large, and this will continue to be a factor that acts to dampen price pressures.” He added, “Inflation expectations are well-anchored today and we intend to keep it that way.”

That said, the central banker warned the commodity situation bears watching. Prices there are “rising rapidly” and “some of this pressure could feed into core inflation.” Even so, “it would be unwise for the Federal Reserve to overreact to recent commodity price pressures” because some of the recent gains are likely to be temporary, and commodities represent a relatively small part of overall U.S. inflation measures.

8--China Owns a Lot More U.S. Debt Than Previously Thought, Wall Street Journal

Excerpt: A major upward revision of the U.S. Treasury Department‘s assessment of China’s holdings of U.S. securities last year shows the U.S. is far more indebted to the emerging power than originally thought....

China’s holdings in the month of June 2010 were revised up 32%, around $268 billion, from the previous estimate to $1.112 trillion. The U.K., however, saw a downward revision of almost the exact amount, to $94.5 billion from a previous estimate of $363.7 billion.

Treasury used the revised assessment to help inform a new baseline for the following months, so the department also revised upward its estimate of December holdings by China. Last month, Treasury reported that the biggest buyer of U.S. debt held $891.6 billion at the end of 2010. But now, Treasury says China held $1.160 trillion in Treasury securities such as agency debt, bonds and notes.

“It certainly suggests the Chinese are not divesting, or apt to divest, from the U.S. as they earlier asserted,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. “The Chinese position is perhaps more reflective of the status quo than following through on their commitment to rebalance their forex reserves,” he said.

There had been concerns that China might be slimming its U.S. debt-holdings, a prospect that could hike the cost of borrowing for a nation with a $14 trillion national debt.

Including equity and asset-backed securities, China held $1.611 trillion in U.S. securities assets, up from $1.464 trillion in June 2009.

9--Mark Zandi: GOP Spending Plan Would Cost 700,000 Jobs, Grasping reality with both hands

Excerpt: GOP spending plan would cost 700,000 jobs, new report says: A Republican plan to sharply cut federal spending this year would destroy 700,000 jobs through 2012, according to an independent economic analysis set for release Monday. The report, by Moody's Analytics chief economist Mark Zandi, offers fresh ammunition to Democrats seeking block the Republican plan, which would terminate dozens of programs and slash federal appropriations by $61 billion over the next seven months.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year.

His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year...


10--The price of food is at the heart of this wave of revolutions, Telegraph

Excerpt: Nowhere is immune to this wave of rebellion because globalisation is a fact; all the world's markets are intricately interlinked, and woe in one place quickly translates into fury in another. Twenty years ago, things were more manageable. When grain production collapsed in the Soviet Union during the 1980s and what had been one of the world's greatest grain exporters became a net importer, the resulting surges of anger brought down the whole Communist system within a couple of years – but stopped there. Today there are no such firebreaks, and thanks to digital communications, events happen much faster.

Why are all these revolutions happening now? Plenty of answers have been offered: the emergence of huge urban populations with college degrees but no prospect of work; the accumulation of decades of resentment at rulers who are "authoritarian familial kleptocracies delivering little to their people", as Peter Bergen of the New America Foundation put it; the subversive role of Facebook and Twitter, fatally undermining the state's systems of thought control. ...

The first warnings of what was to come appeared in the form of a briefing paper on the website of the UN's Food and Agriculture Organisation in December. "Recent bouts of extreme price volatility in global agricultural markets," it said, "portend rising and more frequent threats to world food security. There is emerging consensus that the global food system is becoming more vulnerable and susceptible to episodes of extreme price volatility. As markets are increasingly integrated in the world economy, shocks in the international arena can now transpire and propagate to domestic markets much quicker than before."

The "shocks" all occurred a long way from Cairo and Tunis. They included fires in Russia last autumn which wiped out hundreds of thousands of acres of grain; heavy rains in Canada, destroying the wheat crop there; hot, dry weather in Argentina which destroyed the soybean crop; the Australian floods which ruined the wheat harvest. The Middle East accounts for one-third of worldwide wheat imports. The combined effect of these far-flung agricultural problems was to bump up the food price index by 32 per cent in the second half of 2010.

The FAO likens "extreme price volatility" to great natural disasters – major earthquakes, tsunamis, catastrophic cyclones. "Historically, bouts of such extreme volatility... have been rare," they say. "To draw the analogy with natural disasters, they typically have a low possibility of occurrence but bring with them extremely high risks and potential costs to society."...

For the poor of the Middle East, the price shocks at the start of this year were like experiencing a second killer earthquake in three years – but unlike with an earthquake, there was someone you could blame. So angry were the food price protesters in Tunisia that, after Mohamed Bouazizi set fire to himself, President Zine el-Abidine Ben Ali declared a state of emergency and promised to reduce the price of food. But it was too little, too late: by mid-January he was gone.

Tunisia's turmoil, warned The Washington Post as the toppled president flew off into exile, "has economists worried that we may be seeing the beginning of a second wave of global food riots". As we know now, it turned out somewhat differently. Food riots in 2008, revolutions in 2011 – what, where, who is next?

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