Friday, April 22, 2011

Weekend Links

1--The oil crisis gets real, zero hedge

Excerpt: As if a dollar in freefall was not enough, surging oil is about to hit the turbo boost, decimating what is left of the US (and global) consumer. Xinhua, via Energy Daily, brings this stunner: " Chinese oil giant Sinopec has stopped exporting oil products to maintain domestic supplies amid disruption concerns caused by Middle East unrest and Japan's earthquake, a report said Wednesday. The state-run Xinhua news agency did not say how long the suspension would last but it reported that the firm had said it also would take steps to step up output "to maintain domestic market supplies of refined oil products"....

China Petrochemical Corp (Sinopec Group), Asia's largest oil refiner by capacity, said Tuesday it had halted refined oil exports, except those to Hong Kong and Macao, in order to bolster domestic supply. Analysts said the move would help prepare for a possible domestic fuel shortage later this year.

Due to the turmoil in the Middle East and the earthquake in Japan, Sinopec is facing pressure just to meet demand at home, the company said.

2--Bernanke Bond Market Signals No Shift With Obama Deficit Cutting, Bloomberg

Excerpt: The Federal Reserve can be counted on to keep its balance sheet big and interest rates low if President Barack Obama and Republican lawmakers agree on a multi-year deal to slash the $1.4 trillion budget deficit.

That’s the message from the Treasury bond market, where yields on 10-year securities sank to their lowest level in almost a month this week on speculation that government budget cuts will slow the economy and encourage the Fed to hold off from raising borrowing costs, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co....

A 10-to-15 year agreement to stabilize and then reduce the ratio of federal debt to gross domestic product would trim U.S. economic growth by a quarter to a half percentage point a year, according to a scenario run by Englewood, Colorado-based consultants IHS. The Fed probably would try to mitigate that impact by tightening credit more slowly than it otherwise might, said IHS Chief Economist Nariman Behravesh.

3--Recognize this Pattern, Pragmatic Capitalism

Excerpt: If there’s been one thing that has been most apparent during QE2 (and QE1) it has been the repetitious trading patterns. There’s the Monday rally, the overnight futures ramp, the random intra-day surge and of course, the most obvious one – the buy the dip. If you don’t recognize the pattern you haven’t been paying attention....

...this could be sheer coincidence. But I am guessing it’s not. My guess is our computer driven market is taking advantage of slow trading periods to drive action. Combined with the Bernanke Put and you have a market that is ripe for a unidirectional trade. So, the volume dies out and the computers kick in and take the market where they want. There’s nothing really fundamental about it. During QE it’s as easy as “risk on = computers on”.

There’s nothing conspiratorial about any of this. It just is what it is. We live in a market where modern technology drives much of the action. These profit driven algos grab the bull by the horns and steer it where ever it will result in a profit. But now, in a weird sort of Terminator-like way, we have to wonder whether it’s good that the machines are taking over. I view this is as one more sign of the financialization of our economy. The exchanges are now in the pockets of the banks and as public companies (as opposed to non-profit market regulators) they don’t really care about anything except volumes. Clearly, I don’t think that’s a good thing, however, I’d be very interested in reader opinions.

4--QEased credit – but maybe not for long, FT Alphaville

Excerpt: Where, exactly, is all that money coming from?

....(it's) the effect QE has had on reducing the available supply of fixed income assets at a time when investors have been receiving already heavy inflows...When QE2 began in November 2010, it had a similar effect. The Fed’s absorption of the majority of Treasury issuance has left significantly less paper to be bought by the private market....If you reduce net fixed income supply to almost zero at a time when funds are enjoying record inflows, they end up buying the market whether they like it not. It is hardly surprising that this then has an effect on prices. Once QE ends in June, net supply will increase and inflows should be more easily absorbed by the market.....

From here, we think the going gets tougher – in particular for investment grade credit. Low rates should sustain appetite for risky assets even after the end of QE. But demand seems likely to become increasingly concentrated on high yield and equities. Nothing here suggests an outright reversal lies immediately around the corner. But at a minimum, we think high grade investors should realize they have never had it so good. And investors everywhere would do well to delve beneath the ubiquitous references to cash waiting on the sidelines, and ask themselves where all the money is coming from, and – more importantly – whether it will keep on coming.

5--Crude Rises as Increasing Equities Bolster Economic Optimism, Businessweek

Excerpt: Crude oil rose for a second day in New York on optimism the economic recovery is accelerating and as the dollar dropped to the lowest level against the euro in more than a year, bolstering investor demand for commodities.

Futures topped $110 a barrel after stocks advanced on Intel Corp.’s forecast for higher sales and company results in Europe and Asia beat estimates. The U.S. currency’s drop sent gold to a record and silver to a 31-year high. Oil extended gains after the Energy Department reported an unexpected decline in U.S. crude supplies.

“The dollar is getting hammered again and all the commodities are flying,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “The falling dollar and inventories as well as the outlook for increasing demand are pushing the oil market higher.”...

Dollar Slump

The dollar fell as much as 1.5 percent to $1.4548 per euro, the lowest level since January 2010. The Dollar Index, a measure of the currency versus those of six U.S. trading partners, slid as much as 1 percent to 74.272, the lowest level since Dec. 1, 2009. A drop in the dollar makes commodities priced in the currency more attractive for investors.

6--Richard Koo Explains Why The S&P's Downgrade Is Totally Absurd, business Insider

Excerpt: S&P just downgraded its outlook on its U.S. credit rating to negative, in what could be the beginning of a ratings agency assault on the U.S. sovereign's status. Many will argue this is deserved. The U.S. government has been running significant deficits, racking up debts, and dilly-dallying around getting its economic house in order. But Richard Koo of Nomura has written before that ratings agencies don't understand how government debt functions in a deleveraging cycle, or a balance sheet recession.

From Richard Koo:

What Japanese market participants understand that Western rating agencies do not is that fiscal deficits generated during a balance sheet recession are the result of economic weakness triggered by private-sector deleveraging, and that the private savings needed to finance those deficits are by definition made available at the same time.

In other words, such conditions lead to a substantial surplus of savings in the private sector. What makes an economy under such conditions fundamentally different from an ordinary economy (i.e., one that is not in a balance sheet recession) is that those savings are plentiful enough to finance the government’s deficits.

Corporate savings (and personal savings to a lesser extent) have boomed since the recession, and it's that excess cash the U.S. government can continue to make use of while the country is deleveraging to keep the economy from shrinking.

And ratings agencies, failing to understand this situation, have got their downgrades wrong every time in Japan. Koo has compared ratings agencies to a "doctor who cannot even identify his disease."

The S&P may have just kicked off the beginning of a U.S. debt downgrade round that will put pressure on the government to cut spending when the economy is weak. We've already seen how that's working out for the UK.

7--Existing Home Sales in U.S. Rise on Growing Demand for Distressed Property, Bloomberg

Excerpt: Sales of U.S. previously owned homes rose in March as a mounting supply of properties in or near foreclosure lured investors.

Purchases increased 3.7 percent to a 5.1 million annual rate, exceeding the 5 million median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. All-cash deals accounted for 35 percent of transactions, the most on record, the group said.

Unemployment, falling property values and stricter loan rules may push the number of households losing their homes to a record level this year, a sign the market will take time to recover. Even with last month’s gains, housing may remain a weak component in the economic recovery that began in June 2009.

“We continue to just tread water along the bottom,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “The housing market is fairly depressed. We think home prices will fall further.”

8--The never-ending pipeline of shadow inventory, Dr Housing Bubble

Excerpt: Think for a second what “shadow inventory” is composed of and what it signifies about the housing market. It means 1,800,000 homes are currently in foreclosure or are bank owned but do not show up in the regular non-distressed inventory. Another 2,000,000 homes are underwater by at least 50 percent. These are likely to end up as foreclosures since the number one predicting factor for future housing issues is being underwater (otherwise you would simply sell into the market and move on). I would put these 2 million homes into the category of the 1.8 million homes and these two items combined are larger than the “healthy” market. And don’t think the pipeline has stopped growing. Each month we add more people into this and there has been little movement here to purge the inventory. This is probably the more troubling factor. The inventory is slowly dissipating but at this rate we are looking at 3 to 7 years before the market is “normal” depending on the rate and that assumes no more homes fall into the pipeline which is unrealistic.

Ultimately what we are left with is a horrible housing market. This also means an entirely new generation of Americans will be absolutely reluctant to buy a home or at the very least, do more significant due diligence. The fact that we are leaking the inventory out slowly and the system is designed to help banks preserve their balance sheets guarantees us problems down the road. The financial industry is largely a drag on the economy right now and will continue to operate that way. Until we truly clean out the shadow inventory to a manageable level there will be no recovery in the housing market. Until solid wage growth occurs, there will be no push for home values to go up. This is the end scenario of the experiment orchestrated by Wall Street investment banks. Gear up because the bill is now coming due and it certainly isn’t Wall Street investment banks that will be paying the bill.

9--More than a Lost Decade, Calculated Risk

Excerpt: I've been more upbeat lately, but even as the economy recovers - and I think the recovery will continue - we need to remember a few facts.

There are currently 130.738 million payroll jobs in the U.S. (as of March 2011). There were 130.781 million payroll jobs in January 2000. So that is over eleven years with no increase in total payroll jobs.

And the median household income in constant dollars was $49,777 in 2009. That is barely above the $49,309 in 1997, and below the $51,100 in 1998. (Census data here in Excel).

Just a reminder that many Americans have been struggling for a decade or more. The aughts were a lost decade for most Americans.

And I'd like to think every U.S. policymaker wakes up every morning and reminds themselves of the following:

There are currently 7.25 million fewer payroll jobs than before the recession started in 2007, with 13.5 million Americans currently unemployed. Another 8.4 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more.

10--Vladimir Putin Thinks We’re Hooligans, Paul Krugman, New York Times

Excerpt: “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.

The funny thing is that Russia, like other emerging markets, is suffering from inflation precisely because it doesn’t want to let the United States reduce its trade deficit. Capital wants to flow to the EMs, with the counterpart of that flow being a move on their part into trade deficit while America reduces its trade deficit. But the necessary counterpart of that move is a real appreciation on the part of the EMs — a rise in the relative price of their goods and services. They could let their currencies rise; if they won’t, the real appreciation will take place via inflation, which is what is happening.

What’s really weird, of course, is the large number of US analysts who are taking the side of China and Russia in this business. Why do they hate America?

11--If the United States Loses Its Aaa Rating Will China Raise the Value of the Yuan Against the Dollar?, Dean Baker, CEPR

Excerpt: This is the logical implication of the threats reported in a Reuters article, saying that China would cut back its investment in U.S. government bonds if the United States loses its Aaa credit rating. The article implied that this threat is something that would be scary to the Obama administration.

In fact, it should not be scary at all, since China is effectively threatening to do exactly what the Obama administration claims it is asking them to do. The Obama administration claims that it wants China to raise the value of its currency against the dollar. The way that China keeps the value of its currency down is by using the dollars it accumulates as a result of its large trade surplus to buy government bonds and other dollar denominated assets.

If China stopped buying government bonds, then the dollar would fall against the yuan (i.e. the yuan would rise), exactly what the Obama administration supposedly wants. This would make Chinese goods more expensive in the United States, leading us to buy fewer imports from China, and it would make U.S. exports cheaper in China, leading China to purchase more U.S. exports.

This sort of adjustment is necessary to get the U.S. economy on a stable growth path. Therefore this threat from China should have been viewed as a positive development. It was not reported this way.

12--S&P aims to whip Congress into debt action, Brad DeLong, Financial Times

Excerpt: A spokesperson for Standard & Poor’s said on Monday that there was an "at least a one-in-three likelihood" that the rating agency "could lower" its long-term view on the US within two years. US equities quickly dropped by more than 1.5 per cent. Importantly, however, the dollar did not weaken and US Treasury interest rates did not rise. The reason for this unexpected pattern is simple: the markets think this move is important not because it signals something fundamental about the economy, but because of the political impact it will have in Washington.

So what is going on?

... what we saw just what might have been expected to see if S&P’s announcement is seen not as a piece of information produced by a financial analyst studying the situation, but instead as a move by a political actor trying to nudge a government toward its preferred policies.

Why? On Monday we saw confidence in the US, and the dollar as a safe haven, strengthen. This means that some who were previously leery of keeping their money in dollars, out of fear of future depreciation, are now less leery. This means some in the markets expect the S&P announcement to be successful as a political intervention. In short, the market thinks the S&P has just increased the chance of a long-term budget deal.

Monday’s pattern makes sense, therefore, if S&P’s announcement is seen as a political move. The market reaction sees Congress like a mule: it only moves when hit with a whip. Normally the whip to get a deficit-reduction deal is fear of the bond market’s producing a spike in interest rates and borrowing costs, but perhaps a fear of a ratings downgrade will do instead. Over the next few months we will see if the market is right.

13--Greece forced to pay sky-high rates to borrow, Emma Rowley, Telegraph via Automatic Earth

Excerpt: Greece was forced to pay sky-high rates to borrow money for the next three months, amid reports Athens accepts that it has no alternative but to renege on the terms of its impossible debt burden.

The bailed-out nation sold €1.625bn (£1.43bn) of 13-week government bonds on Tuesday, but investors demanded a yield, or return, of 4.1pc to hold the debt - a quarter of a percentage point more than in a similar sale in February. That means Greece pays a higher rate to borrow for three months than Germany pays for three decades, at 3.8pc.

The costs of servicing Greece's debt keep rising as markets ignore politicians' protestations that the country will not have to restructure the burden - effectively default, by changing its repayment terms. A local report on Tuesday quoted a European Commission official as saying Greece "has realised that there is no other way and has accepted a mild debt restructuring". Denials from the Commission, which argued that discussions were "not even" taking place between Brussels and the Greek government, could not convince investors.

Greek government 10-year debt is trading with a yield around 14pc, surpassing the peaks seen during the country's €110bn bail-out last year. The nation's weak economy, hobbled by a severe austerity programme, means it is seen as an impossibility that Greece will manage strong enough growth to support a debt equivalent to 144pc of output.

14--Beyond ForeclosureGate - It Gets Uglier, Michael Collins, Smirking Chimp

Excerpt: The big banks and their partners on Wall Street need a preemptive strike to derail the legal process that threatens their existence. They may get a temporary reprieve through pending consent decrees from the United States Department of Justice and consortia of state attorney's general. If that protection fails, big money will make every effort to buy a bill from Congress that absolves them retroactively, en masse. The consent decree might cost them a few billion dollars. That's much better than owing the trillions in lost home values due to their contrived real estate bubble and stork market crash.

As bad as this is, it gets worse.

Beyond ForeclosureGate

The surface scandal is about fraudulent business practices and a systematic assault on homeowners by lenders, servicers, and the legal system. A much broader picture must be viewed in order to understand the utter contempt that the ruling elite has toward citizens and the depraved tactics used to express that contempt, all to serve endless desire to accumulate more money and power....

Before Congress passed the 2005 bankruptcy reform act, homeowners could avert foreclosure in many states by filing for bankruptcy. Not just anyone could qualify. The process of qualifying was difficult and, oftentimes humiliating. But homes were saved and families were preserved with a chance to start over.

A myth emerged of the bankruptcy abuser, a high-class sort of welfare cheat. These reckless people worked the system to rack up large debts that were subsequently wiped clean through bankruptcy. The alleged abuse of the system became the excuse for a major overhaul of bankruptcy law. The legislation passed the Senate with 74 yes votes and soon became law.

The changes since the 2005 legislation provide substantial benefits to creditors. Morgan et al summarized the direct benefits to creditors in a forthcoming publication in the New York Fed's Economic Policy Review. Before bankruptcy reform, the filer of a bankruptcy claim used to determine Chapter 7 or 13 filing status. That makes a difference in the amount and type of debt relief. The legislation imposes means test that determines precisely which chapter (7 or 13) filers must use. Significantly, chanter 13 filers retain more debt from medical and other unsecured credit.

15--CEOs earn 343 times more than typical workers, CNN Money

Excerpt: In 2010, chief executives at some of the nation's largest companies earned an average of $11.4 million in total pay -- 343 times more than a typical American worker, according to the AFL-CIO.

"Despite the collapse of the financial market at the hands of executives less than 3 years ago, the disparity between CEO and workers' pay has continued to grow to levels that are simply stunning," said Richard Trumka, AFL-CIO president.

In an effort to shine a light on CEO pay, the AFL-CIO examined chief executive salaries at 299 firms traded on the S&P 500. Their compensation was up 23% in 2010, compared to 2009. AFL-CIO used Bureau of Labor Statistics wage data to define typical worker pay, which was $33,190 for all occupations in 2009, the most recent year for which data is available.

16--Debt, Like Matter & Energy, Was Not Destroyed, The Big Picture

Excerpt: UBS’ Art Cashin directs us to the Economist’s Buttonwood column for an interesting take post S&P downgrade. The debt in the system has not been eliminated — it has merely been moved from banker to taxpayer:

It is three years since Bear Stearns was pushed into the arms of J P Morgan and the fundamental debt problem has not been resolved. The debt has been moved around but not eliminated. This has undoubtedly bought time and I quite understand the point made frequently by my colleague on Free Exchange that governments and central banks have acted to protect workers from losing their jobs and to prevent consumption from collapsing. In this, they have had a fair degree of success.

17--Nation’s Mood at Lowest Level in Two Years, Poll Shows, New York Times

Excerpt: Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll....

Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month....

After the first 100 days of divided government, and a new Republican leadership controlling the House of Representatives, 75 percent of respondents disapproved of the way Congress is handling its job....

Frustration with the pace of economic growth has grown since, with 28 percent of respondents in a New York Times/CBS poll in late October saying the economy was getting worse, and 39 percent saying so in the latest poll. “They’re saying it will get better, but it’s not,” Frank Tufenkdjian, a Republican of Bayville, N.Y., said in a follow-up interview. “I know so many people who are unemployed and can’t find a job.”

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