Friday, March 11, 2011

Weekend links

1--Dow Drops Most Since August, Dollar, Treasuries Gain, Bloomberg

Excerpt: Stocks slid, dragging the Dow Jones Industrial Average to its biggest drop since August, while the dollar and Treasuries rose as American jobless claims increased, export growth slowed in China and Spain’s credit rating was cut.

The Dow lost 202.79 points, or 1.7 percent, to 12,013.44 for its biggest decline on a closing basis since Aug. 11. The Standard & Poor’s 500 Index retreated 1.7 percent to 1,297.53 at 10:14 a.m. in New York. The Stoxx Europe 600 Index sank 1.3 percent to 277.43, below its lowest close of the year. The Dollar Index, which tracks the currency against six major peers, rose 0.6 percent. Copper reached a two-month low and Treasuries gained for a second day. The euro slid 0.6 percent to $1.3820.

First-time U.S. jobless claims and the American trade deficit topped economists’ estimates last week, China’s export growth was the slowest since 2009 in February from a year earlier, while German exports dropped 1 percent in January from December. The Bank of Korea raised borrowing costs after inflation exceeded its target. Moody’s cut Spain’s rating by one level to Aa2, saying the government underestimated the cost of shoring up its banking industry.

“The recent data is showing some cracks in the global recovery as if we’ve hit a slowing patch,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati. “The negative news that we’ve seen lately is finally starting to push stocks lower. It’s not the end of the bull market, more like a normal correction.”

2--Americans in Poll Lack Confidence in Economic Recovery, Bloomberg

Excerpt: Only 1 American in 7 has faith a lasting economic recovery has taken hold and a plurality say they are personally worse off than they were two years ago.

Almost half of the respondents in a Bloomberg National Poll conducted March 4-7 believe the U.S. is in a “fragile” rebound and could fall back into recession. More than a third of the country believes the U.S. never emerged from recession.

Sixty-three percent of Americans say the nation is on the wrong track, compared with 66 percent who said so in December, which was the lowest in the national mood in the one and a half years the Bloomberg poll has been conducted.

The gloomy outlook contradicts economic data showing an economy on the mend, including six quarters of economic growth, a 95 percent rise in the Standard & Poor’s 500 index over the past two years and job growth last month of 192,000. The National Bureau of Economic Research officially dated the end of the recession to June 2009.

Almost half of poll respondents say they are personally worse off than they were two years ago, when the country was losing 796,000 jobs a month and the economy was shrinking at a 4.9 percent annual rate. The stock market hit its post-financial crisis low two years ago yesterday.

“There seems to be something of a disconnect between what people are feeling and what people are doing,” says J. Ann Selzer, whose Des Moines, Iowa-based firm, Selzer & Co., conducted the poll.

3--Inflation in Asia Strikes at Core, Wall Street Journal

Excerpt: Fears are growing that Asia's recent troubles with inflation could go deeper than initially expected as countries bump up against labor shortages and other problems commonly seen in times of too-fast growth.

Inflation concerns in Asia have grown in the past few months, but have focused on rising food costs exacerbated by bad weather and, more recently, higher oil prices amid political tensions in the Middle East.

But unease is now growing around so-called core inflation, which typically excludes volatile elements such as energy and food, and which has also been rising in much of the region....

One of the biggest problems, though, is a shortage of low-cost labor. The labor market is so tight that some employees are now able to command 30% pay raises if they switch jobs, says Chris Lee, a manager at SG Recruiters Group, a recruiting firm in Singapore. Restaurant managers are getting up to 2,500 Singapore dollars (US$1,970) a month, compared with S$1,800 a month a year or so ago, he says, and many restaurants are raising prices as a result.

"It's a job-seeker's market," he says. "The job market will definitely be getting tighter over time and there will be shortages of workers in most industries in the years ahead," he predicts.

4--CoreLogic: House Prices declined 2.5% in January, Prices at New Post-bubble low, Calculated Risk

Excerpt: From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Decline for Sixth Straight Month

CoreLogic ... January Home Price Index (HPI) which shows that home prices in the U.S. declined for the sixth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.7 percent in January 2011 compared to January 2010 after declining by 4.7 percent in December 2010 compared to December 2009. Excluding distressed sales, year-over-year prices declined by 1.6 percent in January 2011 compared to January 2010 and by 3.2 percent in December 2010 compared to December 2009. Distressed sales include short sales and real estate owned (REO) transactions.

The January data shows home prices continuing to slide. Mark Fleming, chief economist with CoreLogic, said, “A number of factors continue to dampen any recovery in the housing market. Negative equity, which limits the mobility of homeowners, weak demand and the overhang of shadow inventory all continue to exert downward pressure on housing prices. We are looking out for renewed demand in the coming months as the spring buying season gets underway to hopefully reduce the downward pressure....

This is the sixth straight month of year-over-year declines, and the seventh straight month of month-to-month declines. The index is now 1.6% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

5--Republican Wisconsin senators bypass Democrats in vote on collective bargaining, Washington Post

Excerpt: Republicans in the Wisconsin Senate voted Wednesday night to strip nearly all collective bargaining rights from public workers after discovering a way to bypass the chamber’s missing Democrats….

The Senate requires a quorum to take up any measures that spend money. But Republicans on Wednesday split from the legislation the proposal to curtail union rights, which spends no money, and a special conference committee of state lawmakers approved the bill a short time later.

The lone Democrat present on the conference committee, Rep. Tony Barca, shouted that the surprise meeting was a violation of the state’s open meetings law but Republicans voted over his objections. The Senate then convened within minutes and passed it without discussion or debate.

Spectators in the gallery screamed “You are cowards.”

Before the sudden votes, Democratic Sens. Bob Jauch said if Republicans “chose to ram this bill through in this fashion, it will be to their political peril. They’re changing the rules. They will inflame a very frustrated public.”

6--Social justice and democratic stability, Dan Little, Economist's View

Excerpt: One thing I find interesting about the sustained demonstrations and protests in Madison, Wisconsin is the fact that people on the streets do not seem to be chiefly motivated by personal material interests. Rather, the passion and the sustainability of the protests against Governor Walker's plans seem to derive from an outrage felt by many people in Wisconsin and throughout the country, that the Governor's effort is really an attempt to reduce people's rights -- in this case, the right to come together as a group of workers to bargain together. ...

So when the Governor attempts to eliminate the right to collective bargaining for public employees, he offends the sense of justice of many citizens in Wisconsin and elsewhere -- whether or not they are directly affected, whether or not they themselves are members of unions. ... It's morally offensive in the way that state efforts to roll back voting rights would be offensive. And this moral offensiveness can be a powerful motivator of collective resistance. ...

Egyptians, Tunisians, and Libyans interviewed on the BBC talk more frequently about the outrage of dictatorship and arbitrary state power than they do about material demands. ... This is an insight that James Scott expressed a generation ago in The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia, and E. P. Thompson a generation before that in Customs in Common, in the theory of the moral economy. In its essence, the theory holds that the fact of sustained violation of a person's moral expectations of the society around him or her is a decisive factor in collective mobilization in many historical circumstances. Later theorists of political activism have downplayed the idea of moral outrage, preferring more material motivations based on self-interest. But the current round of activism and protest around the globe seems to point back in the direction of these more normative motivations -- combined, of course, with material interests. So it is worth reexamining the idea that a society that badly offends the sense of justice of segments of its population is likely to stimulate resistance. ...

So what moral expectations do American citizens have about how society ought to work? Several things seem fairly clear. Americans care about equality of opportunity. We are deeply rankled by the idea that the good opportunities in society are somehow captured by an elite of any sort. Second is the idea of equal treatment of all citizens by the institutions of the state. ... And third, we are very sensitive about the inviolability of our rights -- our right to vote, right to go where we want, right to speak our minds and associate with whomever we want to.

What Americans don't yet seem to have is a specific moral sensitivity to extreme inequalities of income and wealth. The fact of the accelerating concentration of income at the top doesn't seem to produce the moral outrage in the US that perhaps it would in France or Germany. ...

It is intriguing to have widely separated examples of social mobilization going on right now. Surely there are sociologists and political scientists working ... to interview leaders and followers in Egypt, Madison, or Benghazi trying to sort out the motivations and social networks through which these movements arose and solidified. As a theoretically informed prediction, it seems likely that moral motivations like resentment of arbitrary power, violations of strongly held rights, and persistent status inequalities will be found to have played a role.

7--What will Saudi Arabia do?, James Hamilton, Econbrowser

Excerpt: But Saudi oil production looks quite different over the last few years, as highlighted in more detail in Figure 4. The kingdom's production actually declined between 2005 and 2007. Although it subsequently increased, at the peak of oil prices in July of 2008 Saudi production was essentially only back to where it had been in 2005. The failure of Saudi production to increase between 2005 and 2008 in the face of booming demand for oil from the newly industrialized economies was in my opinion a key reason for the dramatic increase in oil prices over that period.

Subsequent to the 2008 peak in oil prices, the Saudis cut production, consistent with their historical role of moderating the extent of price declines. Saudi Oil Minister Ali al-Naimi claims that the kingdom currently has 3.5 mb/d excess capacity, though many analysts have expressed doubts about those claims.

An increase of a million barrels per day in Saudi production relative to reported November levels, some of which may have in fact already been implemented, would put them back up to where they were in July of 2008. If all of Libyan production gets knocked out, we'd need 1.8 mb/d to replace it. If the Saudis weren't able or willing to go above those production levels in 2008 when oil was selling for over $140 a barrel, why would you expect them to do so now with West Texas only at $106?

My answer is, I don't.

8--Chasing shadows, FT Alphaville

Excerpt: Why the rapid rise and continuing popularity? (of shadow banking)

Starting from first principles, Krieger focuses on a basic function of finance, which banks and some non-banks both perform: “the transformation of long-term risky assets into very short-term liabilities.” This is risky, of course, because sudden requests for full withdrawals cannot be met. See: exhibit 03-2008, Bear Stearns.

She then points out that the nonbank system of financial intermediation is able to thrive because it has some form of liquidity and credit support from the official sector. In other words, in violation of its defining characteristic.

And the more it relies on the banks, the more systemic risk it tends to carry. Thus, to reduce fragility in the sector one can either act indirectly (via Basel III type provisions on the official sector) or directly, via the shadow institutions themselves....

While recognising there are no magic bullets here, Krieger says more needs to be done directly and there are three items left on the regulatory to-do list:

First, we must ensure that short-term liquidity is provided in a risk-sensitive fashion.

Second, we must ensure that maturity transformation and the puts, largely provided by the traditional banking system, are understood and priced properly—so that shadow investors bear the full ex ante economic costs; banks must be required to hold adequate capital and liquidity against these puts and ultimately pass the costs along the intermediary chain.

And third, we must consider private resolution mechanisms for runs on shadow institutions.

9--Food-Price Spikes to Occur More Frequently?, Wall Street journal

Excerpt: While developed nations should be relatively insulated from the inflationary impact of food price increases, the future won’t be easy, Deutsche Bank warns.

“Food prices are likely to start falling later in 2011 but will remain high for the rest of this decade,” the firm wrote in a research note. “We expect spikes in food prices to occur with increasing frequency, mostly due to weather disruption and climate change.”

10--Families Slice Debt to Lowest in 6 Years, Wall Street Journal

Excerpt: U.S. families—by defaulting on their loans and scrimping on expenses—shouldered a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to start spending more.

Total U.S. household debt, including mortgages and credit cards, fell for the second straight year in 2010 to $13.4 trillion, the Federal Reserve reported Thursday. That came to 116% of disposable income, down from a peak debt burden of 130% in 2007, and the lowest level since the fourth quarter of 2004.

With the help of rising stock prices, the decrease in debts put average household net worth at $505,000 at the end of 2010, up 5.1% from 2009, though still well below a peak of $595,000 in the second quarter of 2007, before housing prices plunged.

But any solace from the improving debt numbers has been tempered by worries over rising commodity prices, Chinese trade and the threat to Middle East oil supplies.

The Dow Jones Industrial Average skidded 228.46, or 1.87%, to 11984.61 on Thursday, after new data on Chinese trade raised concerns that Beijing's export growth might be slowing and unrest broke out in eastern Saudi Arabia.

The shrinking debt burden, though, brings U.S. consumers, whose purchases make up about one-sixth of global demand, closer to the point where they can make a big contribution to the world-wide recovery.

You've seen a steady improvement in household balance sheets" in the U.S., said Joseph Carson, an economist at AllianceBernstein in New York. "That should set the stage for better consumer spending in the year ahead." He expects consumer spending to grow at an inflation-adjusted rate of 2.8% in 2011, up from 1.8% last year.

Defaults on mortgages and credit cards played a large role in bringing down household debt, underscoring the extent of the financial distress still afflicting U.S. families. Commercial banks wrote off $118 billion in mortgage, credit-card and other consumer debt in 2010, the Fed said. That's over half the total $208.8 billion drop in household debt, which also includes new mortgages and credit cards.

People are also fixing their finances the hard way, by boosting the portion of their income that they use to pay down debt. The personal savings rate averaged 5.8% in 2010, up from a low of 1.4% in 2005, and back to a level last seen in the early 1990s.

Meanwhile, getting new loans is difficult as banks pull back on risk, and the private securitization markets that used to support mortgage lending remain largely closed.

But consumer debt, such as auto and student loans, has started growing again in recent months, suggesting that people might be getting in the mood to borrow again.

Even as U.S. households reduce their debt, the country's overall obligations are rising, with weak tax revenues and efforts to stimulate the economy translating into large budget deficits. Total U.S. nonfinancial debt rose 4.8% to $36.3 trillion, driven largely by a 20% increase in federal debt. Debts of nonfarm, nonfinancial companies rose 5.4% as companies took advantage of low interest rates, but much of that money went to boost their cash coffers, which grew to $1.9 trillion.

Many consumers still have a long way to go to get their finances in order. Some economists believe a healthy household-debt-to-disposable-income ratio would be 100% or lower.

Tougher bankruptcy rules have made it difficult for some consumers to shed their debts, and a weak job market has left millions without much income to spend.

As of January, wage and salary income stood at $20,953 a person in the U.S., up 2.89% from a year earlier, but still 3.69% below its previous peak in March 2008, according to the Commerce Department.

11--Household Worth in U.S. Rises by $2.1 Trillion, Fed Says, Bloomberg

Excerpt: Household wealth in the U.S. climbed by $2.1 trillion in the fourth quarter of 2010 as share prices rose and families rebuilt finances tattered by the recession.

Net worth for households and non-profit groups increased at a 16.6 percent annual pace to $56.8 trillion after rising at a 9.1 percent rate in the previous three months, the Washington- based Federal Reserve said today in its Flow of Funds report. American households also cut debt for an 11th consecutive quarter.

“We’re continuing this slow, grinding process of working down the degree of leverage in the household sector,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It was a big quarter for the stock market, so household net worth shot up, and that’s certainly a plus.”

The 10.2 percent increase in the Standard & Poor’s 500 Index last quarter helped boost household wealth that remains about $9 trillion below pre-recession levels. Declining home values and unemployment near 9 percent are prompting Americans to increase savings and cut debt, curbing spending now while building a foundation for future growth.

The value of corporate equities owned by American households increased by $1 trillion in the fourth quarter, today’s report showed, as the Fed’s planned purchases of $600 billion in Treasuries through June pushed investors into riskier assets....

Corporate Profits

Corporate profits have risen every quarter since the first three months of 2009 and were up 2.8 percent from July through September. Through March 8, 68 percent of S&P 500 companies reporting fourth-quarter earnings had positive surprises, according to Bloomberg data.

Today’s Fed report showed companies had $1.9 trillion in cash and other liquid assets at the end of the fourth quarter, a record.

Household credit fell at a 0.6 percent rate in the fourth quarter. Mortgage borrowing fell at a 1.3 percent pace, reflecting rising defaults and less lending, while other forms of consumer credit rose 2 percent.

12--Irish Banks Seek to Delay ‘Evil Day’ as Loan Losses Rise, Bloomberg

Excerpt: Ireland is suffering after a decade-long real estate boom collapsed in 2007. Already, the state has bought 72.3 billion euros of risky commercial property loans from the banks, at an average discount of 58 percent. Irish house prices, which quadrupled in the decade to 2007, have since plunged more than a third. Unemployment has tripled to 13.5 percent over the same period. ...

More than 300,000 households, or about 40 percent of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute in Dublin, who estimates that house prices will fall by as much as half from peak to trough.

Morgan Kelly, a University College Dublin economics professor dubbed “Doctor Doom” for his bleak assessments of Ireland’s housing market, wrote in the Irish Times on Nov. 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.” Kelly declined to be interviewed....

Ireland has bolstered its banks with 46.3 billion euros of additional capital over the past two years. The nation was forced to agree to an 85 billion-euro bailout on Nov. 28, led by the European Union and the International Monetary Fund. That package includes 10 billion euros to recapitalize the banks up- front and a further 25 billion euros of “contingency” capital to be used if required....

Household debt soared from 48 percent of disposable income in 1995 to 176 percent in 2009, catapulting Irish consumers into fourth place in 2008 in an international league table of personal indebtedness from 17th place in 1995, according to Ireland’s Law Reform Commission....Irish mortgages account for more than a third of about 270 billion euros of loans that remain with the nation’s so-called viable lenders -- Allied Irish Banks Plc (ALBK), Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Building Society

13---Fed Recovery Flawed as Companies Get Credit Consumers Don't, Bloomberg

Excerpt: The consumer loan market, particularly housing, remains a challenge for borrowers. Total U.S. consumer credit outstanding was $2.4 trillion in January, or 6.6 percent below its July 2008 level, the Fed said in a March 7 report. Total housing debt has declined by $536 billion since 2008 to $10.1 trillion, Fed data show. The median price of an existing U.S. home has dropped 13 percent since June to $158,800, bringing its decline since July 2006 to 31 percent, according to the Chicago-based National Association of Realtors. About 10.8 million homes were worth less than the debt owed on them in the third quarter, research firm CoreLogic Inc. said in a Dec. 13 report.
Junk Market Rally

By contrast, the least creditworthy corporations have been able to borrow record amounts at the cheapest rates ever. Junk- rated companies sold an unprecedented $287.6 billion in bonds in 2010 and are setting an even faster pace of issuance this year. Claire’s Stores Inc., the costume jewelry retailer that had debt that was almost 10 times its earnings last year, sold $450 million of bonds last month that Moody’s Investors Service gave its third-lowest rating.

The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated, and is forecast to expand 3.2 percent this year, according to the median estimate of 66 economists in a Bloomberg survey.

Household purchases account for about 70 percent of the U.S. economy, making the consumer the single biggest driver of any economic recovery. Those consumers “stumbled at bit” at the start of this year, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a February note.

While the economy expanded and companies are beginning to spend more, the improvements haven’t driven the nation’s unemployment rate below 8.9 percent for almost two years and the Conference Board’s gauge of consumer confidence is still 37 percent below the level reached in July 2007.

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