Tuesday, April 5, 2011

Today's links

1--Radioactivity in sea up 7.5 million times, Japan Times

Excerpt: Marine life contamination well beyond Japan feared....Radioactive iodine-131 readings taken from seawater near the water intake of the Fukushima No. 1 nuclear plant's No. 2 reactor reached 7.5 million times the legal limit, Tokyo Electric Power Co. admitted Tuesday.

The sample that yielded the high reading was taken Saturday, before Tepco announced Monday it would start releasing radioactive water into the sea, and experts fear the contamination may spread well beyond Japan's shores to affect seafood overseas.

The unstoppable radioactive discharge into the Pacific has prompted experts to sound the alarm, as cesium, which has a much longer half-life than iodine, is expected to concentrate in the upper food chain....

"All of Japan's sea products will probably be labeled unsafe and other nations will blame Japan if radiation is detected in their marine products," Yamamoto said.

2--Bernanke Says Fed Will Act If Inflation More Than ‘Transitory’, Bloomberg

Excerpt: Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a “transitory” boost in U.S. inflation and that the central bank would act if he’s proven incorrect.

“So long as inflation expectations remain stable and well anchored” and commodity-price increases slow, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said today in response to audience questions after a speech in Stone Mountain, Georgia....

The Commerce Department reported last week that the Fed’s preferred price gauge, the personal consumption expenditures index, excluding food and energy, increased 0.9 percent in February from a year earlier. Including all items, prices rose 1.6 percent.

3--Asian Central Banks Aim to Weaken Currencies, Wall Street Journal

Excerpt: Central banks in South Korea, Malaysia and Indonesia appeared to intervene in the foreign-exchange market Monday, continuing the fight to slow the rise in their currencies as better risk appetite bolsters purchases of the region's assets.

Big trade surpluses, world-beating economic growth and low interest rates in the U.S. and Europe have pushed a wall of capital into Asia-Pacific economies, driving up currencies to levels that worry the authorities in many export-reliant economies.

Several central banks responded in recent weeks by selling their currencies for dollars in a bid to tame the rises and keep their economies competitive with those of their neighbors. They are looking over their shoulders at China, where a tightly contained rise in the yuan is putting other Asian exporters at a competitive disadvantage.

Beijing has let the yuan rise 4.4% against the dollar since unpegging the local currency from the U.S. dollar in July. In the same period, the Korean won has climbed 11%, the Malaysian ringgit 7.8% and the Indonesian rupiah 5.6%.

South Korea, Malaysia and Thailand appeared to intervene Thursday, while banks thought to be agents of the Monetary Authority of Singapore have also been seen selling the Singapore dollar.

4--China Raises Interest Rates to Counter Inflation Pressure, Bloomberg

Excerpt: China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy.

The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People’s Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent.

The move comes as a surprise to some, after Credit Suisse Group AG, Morgan Stanley and Bank of America-Merrill Lynch said officials may pause in tightening. While Japan’s disaster and Europe’s debt woes are clouding the global outlook, Premier Wen Jiabao’s government is more focused on the estimated 5 percent jump in consumer prices last month, said analyst Shen Jianguang.....

Chinese officials may be on guard against increased inflows of “hot money,” or speculative capital, as today’s move widens the differential with rates in developed economies. In the U.S., the Federal Reserve has kept its benchmark near zero since December 2008....

China’s inflation accelerated to 5.2 percent last month, the fastest pace since July 2008, according to the median estimate in a Bloomberg News survey of nine economists. Consumer prices jumped 4.9 percent in February from a year earlier, topping the government’s full-year target of 4 percent.

5--Wall Street Trading Revenue Seen Falling 4th Straight Quarter, Bloomberg

Excerpt: A surge in market volatility following Japan’s worst earthquake on record and a jump in oil prices may not be enough to keep investment-banking and trading revenue from falling for a fourth consecutive quarter.

Analysts have lowered first-quarter earnings estimates at the biggest U.S. banks, saying trading revenue won’t rebound as much as they had expected from a weak fourth quarter. The outlook for the period fuels speculation that Wall Street is facing a prolonged decline in investment-banking and trading revenue after record figures in 2009....

First-quarter earnings per share at the five largest U.S. firms by investment-banking and trading revenue -- Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Morgan Stanley -- may fall 23 percent from the same period a year earlier, with only JPMorgan likely to post higher profit, according to the average of 104 estimates by analysts surveyed by Bloomberg.

Total investment-banking and trading revenue at the five banks may drop 25 percent from the first quarter of 2010, according to estimates by Chris Kotowski, an analyst at Oppenheimer & Co. in New York....

“In the aftermath of the financial crisis, you’re going to have a sustained period of uncertainty in the market,” Staite said. “So you could argue that it’s at least a semi-permanent decline in revenue.

6--Geithner Sees ‘Severe Hardships’ If Debt Limit Isn’t Raised, Bloomberg

Excerpt: Treasury Secretary Timothy F. Geithner told lawmakers that a failure to raise the debt limit would bring “severe hardship” for Americans as the government is forced to suspend services such as Social Security payments.

Geithner, in a letter to members of Congress, said the U.S. will reach the $14.29 trillion limit on its ability to borrow no later than May 16 if Congress doesn’t act. Republican lawmakers, including Senator Marco Rubio of Florida, have been resisting a debt-limit increase while calling for extensive budget cuts.

“The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,” Geithner said yesterday in a letter addressed to Senate Majority Leader Harry Reid.

Geithner’s warning came as lawmakers debated budget legislation needed to avert a government shutdown on April 8, when existing spending authority expires. While the Treasury can continue to sell debt during a shutdown caused by lack of spending authority, it has no such leeway if it runs out of borrowing room....

“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” Geithner said. “For these reasons, default by the United States is unthinkable.”

7--The Transmission Mechanism for Quantitative Easing, Paul Krugman, New York Times

Excerpt: It’s now widely claimed that QE2 has been a success — and for sure, the US economy, which seemed to be sliding into a deflationary morass last summer, has perked up since then. But why? A few thoughts.

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever....

So if QE2 did work, how did it work?...

For what it’s worth, casual observation suggests that a lot of the growth in consumer spending has been at the high end, which suggests in turn that a higher stock market might be driving it. And the lower dollar has clearly helped US exporters and import-competing firms.

If QE really is working through stocks and the dollar, are there further implications? I’m not sure — in a highly indebted society, you might hesitate at policies that would increase private debt further, but if stocks are driving the story, the consumers now spending more aren’t the same people who are in debt trouble — so that’s actually OK. And as for the weaker dollar, if the Chinese and the Brazilians don’t like it, they are free to let their currencies appreciate.

Anyway, that’s my casual take on what has happened. I would say that if it’s right, it’s far from clear that the recovery will prove self-sustaining.

8--Roubini: "China overheating", naked capitalism

Excerpt: Nouriel Roubini----The economy is overheating here and now, but I’m convinced that in the medium term China’s overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown. Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate and infrastructure....

Despite policy rhetoric about raising the consumption share in GDP, the path of least resistance is the status quo. The details of the new plan reveal continued reliance on investment, including public housing, to support growth, rather than a tax overhaul, substantial fiscal transfers, liberalization of the household registration system or an easing of financial repression.

No country can be productive enough to take 50% of GDP and reinvest it into new capital stock without eventually facing massive overcapacity and a staggering nonperforming loan problem. Most likely after 2013, China will suffer a hard landing. China needs to save less, reduce fixed investment, cut net exports as a share of GDP and boost consumption as a share of GDP.

China is rife with overinvestment in physical capital, infrastructure and property. To a visitor, this is evident in brand-new empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, massive new government buildings, ghost towns and brand new aluminum smelters kept closed to prevent global prices from plunging.

It will take two decades of reforms to change the incentive to overinvest. Traditional explanations of the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle—the rest is the household sector’s sub-50% share of GDP.

9--Fed Exit Means No Pain for Obama as Foreigners Take Up Slack, Bloomberg

Excerpt: Treasuries are signaling that the $9 trillion market will weather the end of the Federal Reserve’s quantitative easing program in June without suffering a selloff that drives long-term borrowing cost higher.

The class of investors that includes foreign central banks purchased 60 percent of the $66 billion in benchmark 10-year U.S. notes sold this year, up from 42 percent in 2010. Fed data show banks have increased their holdings of Treasuries to the most since December, as a panel of bond dealers and investors that advises the government says lenders may double their stake to $3.2 trillion in 2016.

Rising demand from international investors and financial institutions bodes well for bonds with the Fed’s plan to buy more than $600 billion of Treasuries more than 80 percent complete. U.S. fixed-income assets are retaining their appeal as the credit quality of European sovereign debt deteriorates and banks meet tighter risk standards governing the capital they need cushion against losses.

“Foreign investors are going to continue to come to the U.S.,” said Robert Tipp, the chief investment strategist for fixed income at Newark, New Jersey-based Prudential Investment Management, which oversees more than $200 billion in bonds. “The liquidity aspect is not to be underestimated. If past is prologue, cessation of large scale asset purchases is likely to prove bullish” for longer-maturity Treasuries, he said....

Completion of the Fed’s purchases “should have limited effect as net fixed-income supply declines and the demand is picked up by foreign investors and households,” fixed-income strategists at London-based Barclays Capital wrote in a report dated April 1. The firm is one of the 20 primary dealers that trade with the central bank....

Removing the biggest buyer of Treasuries as the Fed winds down its $600 billion, second round of so-called quantitative easing, or QE2, is bound to drive yields higher, according to Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

Inflation Expectations

“We’re getting signals from a lot of members of the Fed that there’s not going to be a QE3, which will lead to yields on Treasuries rising faster than for other debt,” he said.

The Fed voted in November to buy Treasuries to avoid deflation, or a general decline in consumer prices, by pumping cash into the financial system and increasing the flow of credit. Central bank data show it purchased $488 billion of U.S. debt through last week....

Even with the Fed printing cash and the budget deficit exceeding $1 trillion, U.S. assets has attracted investors seeking refuge from Europe’s sovereign-debt crisis, which has forced Greece and Ireland to seek bailouts from the European Union and International Monetary Fund.

The dollar’s share of global currency reserves stood at 61.4 percent at the end of 2010, little changed from 61.5 percent in 2009, the IMF in Washington said March 31. The euro’s share dipped to 26.3 percent from 27.9 percent.

Foreign Holdings

Foreign investors owned $4.45 trillion of Treasuries as of January, up from $3.7 trillion a year earlier, according to the government. China, the largest overseas lender to the U.S., held $1.15 trillion of the debt in January, up from $889 billion a year earlier. Japan’s stake grew 16 percent to $885.9 billion.

Bank holdings of Treasuries and agency debt rose $1.64 trillion as of March 23, approaching the record high of $1.65 trillion on Dec. 1, the Fed said at the end of last week....

A Feb. 1 report by the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Soros Fund Management LLC, said demand from banks may total an additional $1.6 trillion through 2016 as regulatory changes require them to add more lower-risk assets to cushion against losses.

No comments:

Post a Comment