Tuesday, March 29, 2011

Today's links

1--Income Gains Not Lifting All Boats, Kelly Evans, Wall Street Journal

Excerpt: Stronger income growth isn't yet broad enough to overcome lingering economic decay.

The Commerce Department on Monday is due with figures expected to show personal incomes, before tax and unadjusted for inflation, rising about 5% in February from a year earlier. That is an encouraging start; this time last year the increase was below 3%. Yet a closer look shows a troubling decline in wage-based income over the years and offers less reason for cheer.

Consider that back in 1970, wages, salaries and employee benefits accounted for about three-quarters of total U.S. personal income as measured by Commerce. Dividend, interest and rental income contributed about 14%, while government-backed benefits, including disability, unemployment and welfare, were less than 8% of the total.

That changed in the ensuing decades as government programs expanded, the population aged and wealth disparities increased. By 2005, salaries, wages and benefits were about 67% of the total. In 2010, they dropped to 64%. Meanwhile, the shares of total income from dividend, interest and rental income and, especially, government benefit payments increased.

So any headline income growth today would be more welcome if the underlying sources of those gains were getting healthier, too. Specifically, that means a drop in the share of government-backed payments from roughly 18% today back toward the single-digit levels four decades ago, with wage income picking up the slack.

Unfortunately, the dwindling share of wage income fits with the broader erosion of the U.S. middle class. Roughly 40% of consumer spending these days is generated by the upper fifth of households. UniCredit economist Harm Bandholz notes that the share of U.S. consumption financed by labor income has steadily declined to about 61% today from 85% in 1970.

And other recent events only make things worse. Rising gas prices already have offset about 60% of the benefit from this year's payroll tax cut, according to Barclays Capital, and generally fall hardest on those who can least afford them. Rising stock prices and dividend growth support overall incomes and spending, though that is again to the benefit of better-off households.

It's clear by now that the financial crisis did little to check widening income inequality in the U.S. And for those at the bottom, the recession continues.

2--A Housing Market Cycle Different From Others, Floyd Norris, New York Times

Excerpt: The sales rate for existing homes — about 4.9 million over the last 12 months — is virtually the same as in mid-1999. Yet sales of newly built single-family homes have plunged to the lowest levels seen since the government began collecting statistics on such sales in 1963. The Census Bureau reported this week that only 17,000 new homes were sold in February, for an annual rate of 250,000 after taking seasonal factors into account. Both of those numbers are the lowest on record.

The February sales pace was undoubtedly depressed by harsh weather in the Northeast, and a rebound in March or April is possible. But the total number of homes sold over the 12-month period — 349,000 — is lower than in any comparable period.

As a result, this cycle has been very different from previous ones. Home sales plunged in the early 1980s, when a combination of severe recession and high interest rates devastated the housing business, and they also suffered in 1990 and 1991, another recessionary period. But in each of those recessions, sales of new and existing homes declined at about the same pace.

It was decreased demand that hurt sales in previous downturns. Now demand is down, in part because some would-be buyers cannot qualify for mortgages that would have been available during the boom. But oversupply is also a major problem now.

Too many houses were built in many areas during the boom, and now housing starts have plunged, as can be seen in the bottom chart. There are fewer newly built homes available, and in some areas, buyers complain that builders have not been willing to cut prices to meet the prices available on used homes in the same area.

But there is a large number of used homes available. The National Association of Realtors estimates that almost two of every five used homes sold in February were on the market because the previous owner was in trouble. It says 26 percent of sales were from foreclosures, and an additional 13 percent were “short sales,” in which the lender agrees to allow the homeowner to sell the home for less than the outstanding balance of the loan. Sellers often have little say in the timing of such sales, and are in a poor bargaining position.

The percentage of forced sales rose to nearly half of all sales in early 2009, at the height of the credit crisis, but fell to around 30 percent as the economy began to improve and banks imposed moratoriums on foreclosures. Now it is on the rise again, producing new pressures on prices and increased competition for home builders still trying to sell homes built in more optimistic times.

3--Maestro Nurtures a New Too-Big-to Fail Crisis, Simon Johnson, Bloomberg

Excerpt: In the last decade of his watch, combined assets in the largest six bank holding companies rose from 17 percent of U.S. gross domestic product to more than 50 percent (this measure now stands at 62 percent). As Fed chairman, Greenspan presided over the demise of the last vestiges of restrictions on megabanks. The Fed implicitly blessed the build-up of concentrated risks in the form of over-the-counter derivatives such as credit-default swaps, which figured in the failures of both Bear Stearns Cos. and Lehman Brothers Holdings Inc.

This wasn’t all the Fed’s doing. The Securities and Exchange Commission was also complicit and the Treasury Department, under Robert Rubin and Larry Summers, in some instances led the charge. But Greenspan was a leading proponent of the view that if someone powerful in finance wanted to do something, that must be OK. This isn’t a view that anyone generally holds for other sectors. Even pro-business advocates say excessive concentration in one industry is bad for society and for business....

The heyday of the real free-market Greenspan was in the first months of the credit crisis in 2008. “If they’re too big to fail, they’re too big,” was his catchphrase. At that moment, he cut through the fog of crisis and articulated an impressively bipartisan view.

Many thinkers, such as Allan Meltzer (from the right) and Joseph Stiglitz (from the left), agreed with Greenspan on this and probably only this. Kansas City Federal Reserve President Thomas Hoenig and Democratic Senator Sherrod Brown were also in accord. Eugene Fama, a finance professor at the University of Chicago and the father of the efficient-markets doctrine, said on CNBC last year that “too big to fail” is “perverting activities and incentives,” giving big financial firms “a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside.”

4--CEOs Tap Record Cash for Dividends as M&A Picks Up, Bloomberg

Excerpt: U.S. executives are starting to spend the record $940 billion in cash they built up after the credit crisis, just in time for annual shareholder meetings.

Takeovers topped $256 billion this quarter, the most since the collapse of Lehman Brothers Holdings Inc. in September 2008, according to data compiled by Bloomberg. Standard & Poor’s 500 Index companies authorized 38 percent more buybacks in 2011 than a year earlier and dividends may increase to a record $31.07 a share in 2013, data compiled by Birinyi Associates Inc. and Bloomberg show.

Chief executive officers are looking for ways to increase investor returns after posting the biggest gain in profits since 1988 by relying on near-zero Federal Reserve interest rates and cost cuts that have kept the unemployment rate near a 26-year high. More than 139 companies in the U.S. equity benchmark index are preparing for shareholder meetings in the next two months after the S&P 500 almost doubled in the past two years and as profits approach a record.

“Shareholders have raised the bar,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $45 billion. “Companies are going to have to find ways to generate more return,” he said. “The idea of sitting on idle cash in a zero interest rate environment is increasingly viewed as a nonviable option.”...

Companies in the S&P 500 have been piling up money for two years as per-share profit jumped 36 percent in 2010, the most in more than two decades, data compiled by Bloomberg show. The world’s largest economy is forecast to expand 3.1 percent this year, the fastest annual pace since 2005, based on the median estimate from 68 economists surveyed by Bloomberg....

Companies including Limited Brands Inc., owner of the Victoria’s Secret chain, are relying on debt to reward shareholders. The drop in borrowing costs to a three-year low has given executives the incentive to sell bonds and use the proceeds to repurchase stock and pay dividends.... “Companies can do some long-term damage to themselves by levering up to buy back stock just because they’re bullish on their stock when the market isn’t. Sometimes the market has it right and companies have it wrong.”

S&P 500 companies have approved $149.8 billion in share repurchases in the past three months, exceeding the $125 billion for all of 2009 and the $108.3 billion announced during the first three months of 2010, data from Westport, Connecticut- based Birinyi Associates show....

“Having this much cash on the balance sheet earning essentially nothing is hurting companies’ numbers, it’s hurting their return on equity, it’s hurting their ability to provide income in the long run for investors,” said David Kelly, who helps oversee about $445 billion as chief market strategist for JPMorgan Funds in New York. “If they can’t find something better to do with it than leave it as cash, the best thing is to return it to shareholders.”

5--Companies Lift Spending as U.S. Productivity Bypasses Jobs, Bloomberg

Excerpt: Corporate investment will rise 11 percent this year as sales pick up, following a 15 percent gain in 2010, according to “Man vs. Machine,” a Feb. 2 report from Bank of America Merrill Lynch. Employment will grow just 1.7 percent, after a 0.7 percent increase last year, the study projects.

Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases are powerful spurs for capital spending, says Neil Dutta, the Bank of America economist who wrote the report. The job market lacks such drivers and will form a “mediocre” underpinning for household spending, the biggest part of gross domestic product, he said.

“Machines have the upper hand,” Dutta said in a telephone interview from New York. “You see this huge pickup in capital spending, but there isn’t a meaningful increase in employment; it’s being grudgingly pulled along. The consumer is not going to perform the way people expect.”

The Institute for Supply Management’s manufacturing index has risen for seven consecutive months, surging in February to the highest level since May 2004. While the labor market is “improving gradually,” unemployment remains “elevated,” according to the Federal Reserve. The jobless rate may hold at 8.9 percent in March for a second month, the lowest since April 2009, based on the median forecast in a Bloomberg News survey ahead of Labor Department figures due April 1....

Even if payrolls rise more than economists’ median estimates of 195,000 this month, that’s “nowhere near the kind of growth we need to see,” said Heidi Shierholz, an economist at the Washington-based Economic Policy Institute. “We’re still near the bottom of a very deep jobs hole from which we’re just starting to climb out.” More than 8 million positions were cut as a result of the recession that began in December 2007....

Rising Productivity

This helps explain why productivity last year climbed 3.9 percent, the most since 2002, while labor costs fell 1.5 percent after a 1.6 percent drop in 2009, the first back-to-back declines since 1962-63, government data showed.

“At this point, productivity growth is bad news for employment, though in the long term it’s good for the economy,” Shierholz said. “The need to do more to create jobs is an open and shut case, but politically, it’s not going to happen.” The debate in Congress has shifted to the deficit, so “the job- market recovery is going to be a long slog.” ...

While the tax bill President Barack Obama signed Dec. 17 allows businesses to write off 100 percent of some purchases in 2011, there’s no similar incentive to speed up hiring. The Fed’s commitment to keep its benchmark interest rate near zero for an extended period also facilitates lower-cost financing for machines.

The administration’s goal to double overseas sales of American-made goods is another plus for investment over hiring, Dutta said, since the U.S. export sector is capital intensive rather than labor intensive....

rising sales are causing companies to rebuild inventories after slashing them by a record amount during the recession, which ended June 2009. There’s plenty of room to expand: Machinery and software assets are growing at the slowest pace since World War II, and capital expenses as a share of GDP still are below pre-slump levels.

6--Woes deepen over radioactive water at nuke plant, sea contamination, Kyodo News

Excerpt: Adding to the woes is the increasing level of contamination in the sea near the plant, although Nishiyama reiterated there is no need for health concerns so far because fishing would not be conducted in the evacuation-designated area within 20 kilometers of the plant and radioactive materials ''will be significantly diluted'' by the time they are consumed by marine species and then by people.

Radioactive iodine-131 at a concentration 1,850.5 times the legal limit was detected in a seawater sample taken Saturday around 330 meters south of the plant, near a drainage outlet of the four troubled reactors, compared with 1,250.8 times the limit found Friday, the agency said.

Nishiyama told a press conference in the morning that he cannot deny the possibility that radioactive materials are continuing to be released into the sea. He said later that the water found at the basement of the turbine buildings is unlikely to have flowed into the sea, causing contamination.

OSAKA: The operator of Japan's Fukushima nuclear plant has detected radioactive iodine 1,150 times the legal limit in water 30 metres (100 feet) from reactors 5 and 6, the nuclear safety agency said Monday....

On Sunday, levels of radioactive iodine some 1,850 times the legal limit were reported a few hundred metres (yards) offshore, up from 1,250 times the limit on Saturday, but officials ruled out an immediate threat to marine life or to seafood safety.

7--Personal income grows in February, Calculated Risk

Excerpt: The BEA released the Personal Income and Outlays report for January:

Personal income increased $38.1 billion, or 0.3 percent ... Personal consumption expenditures (PCE) increased $69.1 billion, or 0.7 percent.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, in contrast to a decrease of less than 0.1 percent in January.

8-- American Thought Police, Paul Krugman, New York Times

Excerpt: Recently William Cronon, a historian who teaches at the University of Wisconsin, decided to weigh in on his state’s political turmoil. He started a blog... Then he published an opinion piece in The Times, suggesting that Wisconsin’s Republican governor has turned his back on the state’s long tradition of “neighborliness, decency and mutual respect.”

So what was the G.O.P.’s response? A demand for copies of all e-mails sent to or from Mr. Cronon’s university mail account containing any of a wide range of terms, including the word “Republican” and the names of a number of Republican politicians ...

The Cronon affair, then, is one more indicator of just how reflexively vindictive, how un-American, one of our two great political parties has become.

The demand for Mr. Cronon’s correspondence has obvious parallels with the ongoing smear campaign against climate science and climate scientists, which has lately relied heavily on supposedly damaging quotations found in e-mail records. ...

9--Stocks Shining as Bonds Lose Luster, Wall Street Journal

Excerpt: The U.S. stock market has powered back in the face of major global uncertainty. It may have bond investors to thank for that.

Money managers and advisers say there has been a steady undercurrent of cash heading out of bonds and into equities. While there remains unease about U.S. fiscal policy, with the Federal Reserve having pinned interest rates essentially at zero for so long, investors are capitulating and moving into stocks.

"We're in the early innings of a big asset allocation shift," says Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.

That, some suggest, is what helped stocks rally last week despite spreading political turmoil in the Middle East, sustained higher oil prices, the ongoing nuclear crisis in Japan and looming problems for Portugal....

By pumping cash into the financial system, the Fed was aiming to force investors to move into riskier investments, such as stocks, that could eventually feed through into the broader economy.

"It's a desire of the Fed to push money out of shorter-term riskless instruments and into riskier things, like stocks," says G. Scott Clemons, chief investment strategist for Brown Brothers Harriman.

According to the ICI, the amount of money in money-market funds has come down steadily over the past four weeks, from $2.75 trillion at the beginning of March to $2.73 trillion last week. Much of that money is likely to be flowing into the equity markets, say those who watch fund flows.

After a 24% jump in the Dow between the end of August and mid-February, many investors were waiting for a pullback before jumping into stocks.

For some, that point came in mid-March and, in particular, on March 16, when the Dow fell by as much as 300 points amid fears of a nuclear meltdown in Japan. In the days since, the market has moved higher as investors bet the worst was over in Japan and the Middle East. They also figured those events would have relatively little impact on the U.S. economy.

10--Libya. The Observer debate: Is it right to be intervening in Libya's struggle for freedom?, Dennis Kucinich, The Observer

Excerpt: On November 2, 2010 France and Great Britain signed a mutual defence treaty , which included joint participation in "Southern Mistral" (www.southern-mistral.cdaoa.fr), a series of war games outlined in the bilateral agreement. Southern Mistral involved a long-range conventional air attack, called Southern Storm, against a dictatorship in a fictitious southern country called Southland. The joint military air strike was authorised by a pretend United Nations Security Council Resolution. The "Composite Air Operations" were planned for the period of 21-25 March, 2011. On 20 March, 2011, the United States joined France and Great Britain in an air attack against Gaddafi's Libya, pursuant to UN Security Council resolution 1973.

Have the scheduled war games simply been postponed, or are they actually under way after months of planning, under the name of Operation Odyssey Dawn? Were opposition forces in Libya informed by the US, the UK or France about the existence of Southern Mistral/Southern Storm, which may have encouraged them to violence leading to greater repression and a humanitarian crisis? In short was this war against Gaddafi's Libya planned or a spontaneous response to the great suffering which Gaddafi was visiting upon his opposition?

Members of the United States Congress are wondering how much planning time it took for our own government, in concert with the UK and France, to line up 10 votes in the Security Council and gain the support of the Arab League and Nato, and then launch an attack on Libya without observing the constitutional requirement of congressional authorisation....

This war is wrong on so many fronts. The initial stated purpose, protecting Libyan civilians, will soon evaporate as it becomes clear that the war has accelerated casualties and enlarged a humanitarian crisis. Debates over the morality of intervention will give way to a desperate search for answers as to how and when do we get out, and how and why did we get in.

11--Like The Phoenix, U.S. Finance Profits Soar, Wall Street Journal

Excerpt: Not too long ago, during the depths of the global crisis, the finance industry was on the brink of collapse. How times have changed.

Friday’s revisions to U.S. gross domestic product contained news on fourth-quarter profits. Top-line, or pretax, operating profits economywide hit a record high at the end of 2010. All of the gain was in the financial sector.

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

The profit resurgence also calls into questions the lobbying going on in Washington about financial reform. Banks and Wall Street firms argue that any new regulation will hold down their profits. That’s because some profits now accruing to the finance sector will shift to others.

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