Thursday, April 21, 2011

Today's links

1--Gold Rises Above $1,500 to Record on Weaker Dollar, Inflation, Bloomberg

Excerpt: Gold futures rose to a record for the ninth time this month as a weakening dollar boosted investment demand for the precious metal as an alternative asset. Silver topped $45 an ounce for the first time since 1980.

Gold reached $1,506.50 an ounce in New York as the dollar slipped as much as 1 percent against a basket of six major currencies to trade at a 16-month low. Gold has risen 32 percent in the past year as the dollar fell 8.2 percent. Earlier this week, Standard & Poor’s revised its long-term outlook for U.S. debt to negative from stable.

“For the dollar, the S&P statement was like getting kicked when you’re already down,” said Matt Zeman, a senior market strategist at Kingsview Financial in Chicago. “The dollar is losing its status as the king of the hill, and gold is looking to take its place.”

2--S.&P. Should Be Embarrassed, Yves Smith, New York Times

Excerpt: The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

The Standard & Poor's rating firm should be embarrassed. If there is any political judgment at work here, it is S.&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.

Every time Japan tried to lower its public-debt-to-gross-domestic-product ratio by cutting spending, the resulting drop in economic activity actually made that ratio worse. We are seeing the same results in Ireland and Latvia. The United Kingdom tried the same experiment 10 times in the last 100 years, and every time it got the same results: cutting spending to reduce budget deficits results in a fall in G.D.P. that makes the debt burden worse, not better.

The remedy should be to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts. But S.&P. instead would have us do the economic equivalent of trying to cure an infection by using leeches.

Misguided cures killed a lot of patients and are killing a lot of economies.

3--Putin: U.S. Monetary Policy Is ‘Hooliganism’, Wall Street Journal

Excerpt: Russian Prime Minister Vladimir Putin slammed expansionary U.S. monetary policy, calling it “hooliganism”, in remarks that followed more veiled criticism from China after Standard & Poor’s Corp. cut the outlook on its U.S. debt rating this week.

“We see that everything is not so good for our friends in the States,” Putin told lawmakers Wednesday.

“Look at their trade balance, their debt, and budget. They turn on the printing press and flood the entire dollar zone — in other words, the whole world — with government bonds. There is no way we will act this way anytime soon. We don’t have the luxury of such hooliganism,” he said.

Even as Putin blamed the U.S. for printing money — something for which Russia was criticized during periods of hyperinflation in the 1990s — other Russian officials said there is no alternative to the U.S. dollar and declined to discuss cutting the country’s dollar holdings.

Russia has the world’s third-largest international reserves after China and Japan, with the biggest part in U.S. government debt. However, Russia appears to have cut its direct Treasury holdings significantly in recent months, according to data from the U.S. Treasury.

Russia can be seen as benefiting from the recent policy of the U.S. Federal Reserve, linked to higher commodity prices. But an increase in dollar supply and low interest rates could also lead to a commodities bubble that could wreak havoc on Russia’s finances if oil prices later collapse.

Moscow is also battling inflation, which the International Monetary Fund sees hitting 9.3% in 2011. In remarks to the lower house of parliament Wednesday, Putin said he sees inflation remaining below 7.5% if the country has a good harvest, following last year’s severe drought.

4--China says "Too many foreign reserves", China Daily via zero hedge

Excerpt: China's huge stockpile of foreign exchange reserves, the world's largest, have become excessive and the government must diversify investments using the reserves, Zhou Xiaochuan, governor of the People's Bank of China, said in comments published on Tuesday.

The country's foreign exchange reserves swelled by nearly $200 billion in the first quarter of this year to more than $3 trillion, indicating hefty capital inflows, and the government has so far focused on investing mainly in US dollar assets, including US Treasures.

"Foreign exchange reserves have exceeded our country's rational demand, and too much accumulation has caused excessive liquidity in our markets, adding to the pressure of the central bank's sterilization," Zhou was quoted by the official Shanghai Securities News as saying.

"The State Council has required a cut in excessive accumulation and good management of the funds accumulated, including diversification of investments," Zhou was quoted as telling a forum at Tsinghua University in Beijing.

To keep the yuan exchange rate stable in a capital account control system, the PBOC injects huge amounts of yuan into the banking system by buying foreign currencies from commercial banks.

The central bank then soaks up the excess yuan in the system via open-market operations and higher bank deposit reserve requirements. This is to prevent the money from flowing into the economy and fueling inflation.

5--More Expensive Houses Entering Foreclosures,

Excerpt: Home prices are down almost 32 percent from their 2006 peak nationwide, and many economists expect them to drop at least 5 percent more in 2011; some expect even steeper declines. Millions more homes still face foreclosure as the sputtering economy, uncertain- and under-employment, and government spending and attempts to relieve the situation struggle to overcome the inertia.

With tight lending standards, and almost one-quarter of homeowners with mortgages underwater, it will be a long, difficult road for them to move into better homes because they owe so much more than their current house is worth.

Of the over 70 million Americans who were born between 1945 and 1960, one-third (or approximately 212,000 people) have zero retirement savings. The only money they have is their equity in a house, so they must sell when they enter retirement age, which some have begun doing. This adds more houses to the market, further pressuring prices down.

Nationally, 1 in 7 homeowners currently with a loan over $1 million is seriously delinquent on mortgage payments. For loans less than $1 million, the ratio is closer to 1 in 12. As many luxury home owners saw the value of their homes drop dramatically when the housing market crashed, they were suddenly making huge payments on a house that was worth substantially less than the mortgage. Many wealthier homeowners realized this as a poor investment of their cash and decided to stop making payments; a “strategic default” action....

A massive and growing backlog of hidden foreclosures:

There is an enormous inventory of housing that is not yet on the market. Millions of homeowners in financial difficulty have simply stopped paying their mortgages, and the banks are allowing the owner live in the house for free. When a bank forecloses and takes possession of a house, the bank is responsible for property taxes and maintenance; an added cost to the bank. If a bank then sells the foreclosed house at current prices, the bank has to admit a loss on the loan. So there is a deluge of foreclosures approaching that the banks are ignoring, for the time being.

6--Beer-drinking charts of the day, Feluix Salmon, Reuters

Excerpt: How do we know that the world is getting happier? It’s drinking more beer!...What we’re seeing here is largely the China effect — and, more generally, a world where poor people, once they reach a certain minimum income, start hitting the hops...By all indications, we’re still in the early days of this trend, whereby countries slowly converge in terms of per-capita beer consumption. For while China and Russia are soaring, the main beer-drinking nations of the world are all in decline:

In middle and low income countries which experience growth, such as China, Russia, Poland and India, beer consumption grows. In rich countries, however, further growth has led to a reduction in beer consumption per capita....

7-- Paul Ryan's Reverse Robin Hood Budget, Alan Blinder, Wall Street Journal via Economist's View

Excerpt: Why do I oppose Rep. Paul Ryan's plan for reducing the federal budget deficit, the one House Republicans approved overwhelmingly last week? ...

Worst things first. The plan threatens to eviscerate Medicare by privatizing it—with vouchers that, absent some sort of cost-control miracle, would fall further and further behind the rising cost of health insurance. And to make that miracle even less likely, House Republicans want to repeal every cost-containment measure enacted in last year's health-reform legislation. ...

Then there's Medicaid, which is a lifeline for the poor. House Republicans want to turn it into a block grant, underfund it, and let the 50 states figure it out. Make your own judgment about how well your state would cope. ...

The sums involved are huge. ... According to the Center on Budget and Policy Priorities, about two-thirds of Mr. Ryan's so-called courageous budget cuts would come from programs serving low- and moderate-income Americans, while the rich would gain from copious tax cuts. That's courage?

This reverse-Robin Hood redistribution is bad enough in the abstract. ... But was such class warfare necessary...? Absolutely not. Both President Obama's plan and the Bowles-Simpson plan achieve comparable deficit reduction without further gilding the New Gilded Age.

8--Dollar's destruction saves markets, Phil's Stock World

Excerpt: The Dollar is down from 76 yesterday to 74.5 this morning, a stunning 2% drop for a currency in a country that didn’t have an earthquake or a revolution overnight. 75.63 was our low of last November (a one-day spike and we were back at 81 by the end of the month as the market fell apart) and before that we only touched 74.23 briefly in November of 2009 (it’s a bad month for the Dollar) and we flew up from there to 78 in December and 80 in January....

As David Fry notes: "Monday’s S&P debt downgrade shocker is quickly old news and steamrolled by freshly minted cash (POMO) with ideas of more to come. Keeping money printing presses on high was a green light to sell the dollar which always causes commodities to rise. Why is that a good thing The Fed is also rumored to be selling puts on Treasury bonds to keep rates low combined with maintaining the bogus inflationary “core rate” to keep you mesmerized. It’s some Orwellian-speak to keep the masses happy even though they see the disconnect at the pump and check-out counter."

That disconnect this morning sent gold over $1,500 per ounce and oil touched $110 a barrel where, of course, we are shorting it (very tight stops). Unfortunately, the hawks may shriek louder, but the doves have the power at the fed and investors tend to overestimate the influence of the hawkish side of the Fed, according to former Fed economist Roberto Perli, who explains why Fed Funds futures consistently predict more and earlier tightening than actually occurs.

9--The speculative boom in borrowing continues, Pragmatic Capitalism

Excerpt: When the Fed initiated QE2 they had visions of lower interest rates in mind. This would result from “portfolio rebalancing” and these lower borrowing costs would lead to higher economic activity as businesses took advantage of the low rates to invest in their businesses. The St Louis Fed recently described this as one of the primary goals of QE:

“As prices increase, interest rates fall. As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.”

Of course, that’s not exactly how things played out. While the academics like to point to real interest rates as proof of success of QE, the real proof is in the pudding. And the pudding doesn’t taste so good. Total borrowing at commercial banks has continued its steady descent downward. There has been a net decline in total borrowing since QE2 began.

But what QE2 has done is spark a mania in speculation. And according to the NYSE’s margin data there is near record borrowing occurring. According to the March data margin debt is quickly approaching its all-time highs. As I noted last week, this surge in borrowing is not a sign that QE is “working”, but rather, a sign that it is only fueling the very same sort of imbalances and unproductive economic activity that got us into this crisis in the first place.

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