Wednesday, April 27, 2011

Today's links

1--Deficit Fever, Dean Baker, Counterpunch

Excerpt: We already knew that the folks involved in debating and designing economic policy had a weak understanding of economics, that is why they couldn't see the $8 trillion housing bubble that wrecked the economy, but now it seems that they are breaking their ties to reality altogether. The country is still smoldering in the wreckage of the collapsed housing bubble, but the victims have left the policy debate altogether.

Twenty-five million people are unemployed, underemployed or out of the workforce altogether, but that's not on anyone's agenda. Millions of homeowners are underwater in their mortgage and facing the loss of their homes, that's also not on anyone's agenda. Tens of millions of baby boomers are at the edge of retirement and have just lost their life savings. This also is not on anyone's agenda.

Deficit-cutting fever is the current craze in the nation's capital. But even here there is little tie to reality. House budget committee chairman Paul Ryan put out a budget that proposes that in 2050 we will be spending less on defense, domestic discretionary and various non-medical entitlements together than we spend on defense today. And most of the punditry praise its seriousness. Meanwhile, the Progressive Caucus, the largest single bloc in Congress, proposes a way to get to a balanced budget by 2021, and it is virtually ignored.

2--New Home Sales in March at 300 Thousand SAAR, Record low for March, Calculated Risk

Excerpt: Sales of new single-family houses in March 2011 were at a seasonally adjusted annual rate of 300,000 ... This is 11.1 percent (±21.7%)* above the revised February rate of 270,000, but is 21.9 percent (±10.3%) below the March 2010 estimate of 384,000....

Months of supply decreased to 7.3 in March from 8.2 months in February. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal)....

In March 2011 (red column), 29 thousand new homes were sold (NSA). This is a new record low for the month of March.

The previous record low for March was 31 thousand in 2009. The high was 127 thousand in 2005.

3--Fed Searches for Next Step, Wall Street Journal

Excerpt: Starting essentially last year on Aug. 27—the day Fed Chairman Ben Bernanke laid the groundwork for QE2—investors have flocked to riskier investments. Since Aug. 26 the Standard & Poor's 500-stock index has gained 28%. Smaller, generally riskier stocks have done even better, with the small-company Russell 2000 Index gaining 41%. It stands just 1.15 shy of its all-time high set in 2007.

Corporate bonds have rallied and commodity prices have risen sharply, too. Gold is up 22% since Aug. 26 and silver is up 143%, both hitting nominal record highs. Even subprime mortgage securities, which were largely blamed for causing the financial crisis, are back in demand.

The biggest loser has been the U.S. dollar, the consequence of the Fed essentially printing more of them to buy bonds. The Fed's index of the value of the dollar against a broad basket of currencies is down 7.9% since Aug. 26.

4--Dollar Tumbles With US Monetary, Fiscal Policy In Focus, Wall Street Journal

Excerpt: The dollar fell to multi-year lows against most major currencies Thursday, undermined by an unpalatable mix of loose U.S. monetary policy and a fiscal imbalance that made investors reluctant to hold the battered greenback.

Reverberations from Standard & Poor's downward revision on Monday of the U.S. government's ratings outlook continued to dominate market sentiment. Investors' antipathy toward the U.S. currency intensified after S&P warned that the U.S. could lose its coveted AAA-rating.

But the primary negative for the dollar has been the Federal Reserve's loose monetary policy. In a market where investors are gravitating to higher-yielding assets, the dollar has been jettisoned by traders who appear more comfortable holding euros--even though Europe is struggling to contain a debt crisis that has raged on for nearly two years.

"The driver is (U.S.) monetary policy and the subtext is fiscal policy. We know there's a train-wreck coming and it makes people uneasy," said Andrew Busch, global currency strategist at BMO Capital Markets.

"The main driver is interest rate differentials, and the glaring fact is that the Fed remains on hold with extremely easy monetary policy...while other nations raise interest rates."....

Against a basket of major currencies, the dollar tumbled to its weakest trough since August 2008.

In an environment where investors' ardor for riskier assets has continued unabated, there are signs that at least some investors see risks ahead. The safe-haven Swiss franc is soaring, as is the price of gold--traditionally a safe-haven for nervous buyers.

5--WSJ: Fund Giants Take Competing Stands On US Bond Outlook, Wall Street Journal

Excerpt: The 10-year note's yield has already risen to 3.4%, from 2.62% on the day QE2 was announced last November. Thirty-year mortgage rates, which track 10-year note yields closely, have risen to 4.8% from 4.24% last November, doing little to help a struggling housing market.

The direction of interest rates after the Fed ends its bond-buying program is crucial for the economy. The issue will be in sharp focus this week, when Fed policy makers hold a two-day policy meeting, starting Tuesday, to discuss their efforts to steer the economy between the shoals of recession and inflation.

They face an economy that has shown signs of losing momentum in recent months, with first-quarter economic growth now widely believed to be less than 2% annualized.

At the same time, soaring commodity prices have raised inflation alarms. The spread between short-term and long-term interest rates has widened, and demand for inflation-protected securities has picked up, suggesting inflation concern is rising among investors.

The Fed's policy makers this week will likely vow to stick to their plan to end the purchases of Treasurys by the end of June.

But that's where the certainty ends.

One yardstick for the immediate future of Treasury yields after QE2 could be QE1, which included a $1.25 trillion Fed buying spree of mortgage bonds from late 2008 to March 2010.

The mortgage-bond market felt barely a ripple when the Fed stopped buying. Treasurys, some observers reason, may follow the same path....

What worries some is that the Fed has been buying almost all of the Treasurys the government has been issuing on a regular basis.

So far the Fed has bought $548 billion worth of Treasurys under QE2, according to a Barclays Capital tally, with maturities ranging from 1 1/2 to 30 years, and inflation-protected securities as well. The buying has made up more than 85% of the net $638 billion of bonds the government sold between November and March.

6--Dollar's Decline Speeds Up, With Risks for U.S, Wall Street Journal

Excerpt: This past the week, the dollar, as measured by the index that tracks it against a basket of currencies, hit its lowest point since the 2008 financial crisis. Before the crisis began, the dollar had lost more than 40% of its value against the basket during a steady six-year decline, driven by many of the same factors bedeviling the currency today. The dollar is 5% away from its all-time low, hit in March 2008, as tracked by the dollar index, which dates back to 1971.

The dollar's weakness is even more striking in the face of the struggles facing the European Union and Japan, the U.S. currency's biggest rivals. Expectations are growing that Greece, which required a bailout from other euro-zone countries in 2010, will in coming months be forced to restructure its debt obligations. That could inflict losses on banks across Europe holding those bonds—an event that might be seen as a negative for the euro.

Japan is struggling to recover from the earthquake and subsequent nuclear disaster. The economic toll from the tragedy now looks as if it may play out for months. The biggest beneficiaries have been gold, which crossed $1,500 an ounce for the first time this week, and other commodities.

7--Case Schiller: Double dip almost here, The Big Picture

Excerpt: Today, the S&P Case Shiller NSA 20 checked in at 139.27; the previous post-bubble low is 139.26.

Here’s the release:

“Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10-City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels. Washington D.C. was the only market to post a year-over-year gain with an annual growth rate of +2.7%. Ten of the 11 cities that made new lows in January 2011 saw new lows again in February 2011. With an index level of 139.27, the 20-City Composite is virtually back to its April 2009 trough value (139.26); the 10-City Composite is 1.5% above its low.”

8--Why rising money supply has not sparked inflation, Paul Krugman, New York Times

Excerpt: Not all readers of this blog have been reading it consistently for the past few years, and as I read some of the comments it’s clear that many people don’t know where I’m coming from on macro issues. So it may be worth reiterating a point I’ve made before — that I’ve actually been very consistent on this stuff, and that there’s a simple model underlying almost everything I write about macro.

My view is that we had a deleveraging shock that landed us in a liquidity trap — a situation in which short-term nominal interest rates are close to zero, so that conventional monetary policy has no traction.

And I had worked out the implications of a liquidity trap long ago. In a liquidity trap even large increases in the monetary base aren’t inflationary; even large government deficits don’t drive up interest rates.

What’s striking to me is the way people who reject this framework keep inventing special reasons to explain why things aren’t going the way they “should” — e.g., it’s QE2 that’s holding down those interest rates, so just you wait, or the surge in commodity prices (driven by growth in emerging markets) is a harbinger of huge inflation here, never mind the flatness of wages. But as I see it, things have gone pretty much the way a model that we had before the crisis said they would.

9--David Stockman: The middle class is dying, Tech Ticker, Yahoo Finance

Excerpt: (video) November's job report was disappointing; 9.8% unemployment is nothing to applaud. Economic bulls, however, contend a recovery never occurs in a straight line, and point to the 11 consecutive months of private sector job creation.

David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, isn't one of them. Stockman believes severe structural problems in the job market will continue to haunt the U.S. economy.

Stockman is most concerned with the middle class. "For the last decade we have lost 10% of the middle income economy and so far, in this, alleged recovery we've not replaced one of this 6.5 million [middle class jobs] we've lost," he tells Aaron at last week's Minyanville holiday party.

Most of the job gains come from temporary or entry level jobs, he says. But, without rejuvenation in the "base of the economy...where the high paying jobs exist" the economy will continue to struggle with "very, very slow growth."

"We've got a real income distribution problem in this economy," argues Stockman, "and it's getting worse, not better."

10--The Confidence Fairy Has Taken a Leave of Absence, Paul Krugman, New York Times

Excerpt: Was it only last June when Alan Reynolds was holding Ireland up as a role model, not just for troubled European economies, but for the United States? Yes, it was:

“The Irish approach to tackling the recent recession,” investment adviser Michael Johnston said, “was vastly different than the strategies implemented by the U.S. and much of the rest of the developed world. Most governments cranked the printing presses into high gear and began injecting round after round of capital into the global economy. Ireland went the opposite direction, imposing draconian budget cuts and reeling in government spending.”

The Irish approach worked in 1987-89 — and it’s working now.

This is a lesson that Washington should learn sooner rather than later. (see chart of skyrocketing 10-year Irish bond)

11--Guantánamo Bay files: Al-Qaida assassin 'worked for MI6', The Guardian via Information Clearinghouse

Excerpt: An al-Qaida operative accused of bombing two Christian churches and a luxury hotel in Pakistan in 2002 was at the same time working for British intelligence, according to secret files on detainees who were shipped to the US military's Guantánamo Bay prison camp.

Adil Hadi al Jazairi Bin Hamlili, an Algerian citizen described as a "facilitator, courier, kidnapper, and assassin for al-Qaida", was detained in Pakistan in 2003 and later sent to Guantánamo Bay.

But according to Hamlili's Guantánamo "assessment" file, one of 759 individual dossiers obtained by the Guardian, US interrogators were convinced that he was simultaneously acting as an informer for British and Canadian intelligence.

After his capture in June 2003 Hamlili was transferred to Bagram detention centre, north of Kabul, where he underwent numerous "custodial interviews" with CIA personnel.

They found him "to have withheld important information from the Canadian Secret Intelligence Service and British Secret Intelligence Service … and to be a threat to US and allied personnel in Afghanistan and Pakistan".

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