Friday, April 29, 2011

Weekend Links

1--Residential Investment and Non-Residential investment in Structures at Record Lows as Percent of GDP, Calculated Risk

Excerpt: Residential Investment (RI) decreased in Q1, and as a percent of GDP, RI is at a post-war record low at 2.21%.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units....

I expect RI to increase in 2011 and add to both GDP and employment growth - for the first time since 2005 (even with the weak start in Q1).

Non-residential investment in structures is at a record low of 2.48% of GDP, and will probably stayed depressed for some time. I expect non-residential investment in structures to bottom later this year, but the recovery will be very sluggish for some time with the high vacancy rates for offices and malls.

2--Wall Street's biggest bear turns bullish, Pragmatic Capitalism

Excerpt: After trying to call the top in equities every other week for the last two years, David Rosenberg has finally thrown in the towel on the bearish calls. In his Wednesday research report he detailed why he believes equities have achieved a “holy grail” and should continue to move higher:

“On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail yesterday – both in level terms and with respect to the change. This is not throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint….

…All that said, we had a breakout to new highs yesterday and this time, the volume rose on the major exchanges, not to mention rising above the 50 DMA on the Nasdaq, which is a clear sign that the big boys are putting money to work. This market continues to impressively climb a wall of worry. Market internals are too strong to ignore right now – the NYSE advancers beat decliners by a 3 to 1 ratio yesterday; the Dow transports soared 1.9%; and the small caps beat their major benchmarks. My overall macro concerns have not gone away, but these market facts on the ground are tough to ignore.”

3--One Million Exhausted Jobless Benefits in Past Year, Wall Street Journal

Excerpt: Roughly one million people were unable to find work after exhausting their unemployment benefits over the past year, new data released Thursday by the Labor Department suggests.

The back-of-the-envelope datapoint is yet another sign that the labor market remains weak, economists said.

About 8.2 million idled workers were receiving unemployment benefits as of the week ended April 9, the Labor Department said in its weekly jobless claims report. That compares to about 10.5 million individuals at the same time last year, a decline of roughly 2.3 million people.

Since the federal government estimates that the economy created 1.3 million jobs during the 12 months ended in March, economists said that slightly less people probably fell through the cracks and couldn’t find employment.

“That leaves, roughly speaking, about one million people who have exhausted their unemployment benefits and have very likely not yet found a job,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York.

4--More Than Half Still Say U.S. Is in Recession or Depression, Gallup

Excerpt: More than half of Americans (55%) describe the U.S. economy as being in a recession or depression, even as the Federal Open Market Committee (FOMC) reports that "the economic recovery is proceeding at a moderate pace." Another 16% of Americans say the economy is "slowing down," and 27% believe it is growing....


Although economists announced that the recession ended in mid-2009, more than half of Americans still don't agree. These ratings are consistent with Gallup's mid-April findings that 47% of Americans rate the economy "poor" and 19.2% report being underemployed.

It also seems likely that most Americans would not agree with the FOMC's assessment of the current economic recovery. Nor does it seem likely that -- given surging gas and food prices -- most would agree with the Committee that "longer-term inflation expectations have remained stable and measures of underlying inflation are subdued."

Although the FOMC seems to perceive current economic conditions differently than most Americans, it does say it needs to "promote a stronger pace of economic recovery" by continuing its aggressive monetary policy, often referred to as "quantitative easing," through June. On the other hand, in the press conference after the FOMC's April meeting -- the first ever by a Fed chairman -- Ben Bernanke said that, "the trade-offs are getting less attractive at this point," meaning it is getting harder to aggressively add liquidity to stimulate stronger economic growth while avoiding inflation.

In another possible disconnect with monetary policymakers, many Americans may not see the trade-off Bernanke suggests between promoting a stronger economy and experiencing higher inflation. Right now, prices are soaring, yet the latest Gallup Daily tracking data show that 67% of Americans say the economy is "getting worse."

5--Bad Numbers, New York Times

Excerpt: It would be comforting to believe that housing-market distress represents a normal, if painful, correction after a period of excess. But all housing trends — in prices, sales, construction and foreclosures — indicate a market that is likely to decline even more, and far more than is needed to erase the artificial gains of the bubble.

High postbubble unemployment coupled with falling home equity will lead to more defaults and foreclosures. The resulting downward pull on prices will probably not be offset by adequate demand because potential buyers will be afraid they are still buying high in a declining market. Rather than a virtuous self-correcting cycle, the housing market is caught in a negative self-reinforcing one.

The best response would be for government to adopt policies to attack joblessness and foreclosures, including public investment in infrastructure and high-technology manufacturing and a renewed emphasis on negotiating new loan terms for homeowners whose homes have declined in value. Unfortunately, Washington is moving in the opposite direction on the mistaken belief that cutting budget deficits and leaving wounded markets to their own devices will somehow spur the economy.

6--Economy in U.S. Grew 1.8% in First Quarter, Less Than Forecast, Bloomberg

Excerpt: The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.

Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the last three months of 2010, the Commerce Department said today in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey.

To keep spurring the expansion, Federal Reserve policy makers said yesterday they’ll complete their $600 billion round of stimulus through June. While slower than the previous three months, a reflection of higher gasoline prices, consumer spending climbed more than projected in the first quarter.

“2011 began on a sour note,” Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said before the report. “The disappointing first quarter will be short-lived and the recovery will accelerate through the remainder of this year.”

6--China Property Slowdown Poses Growth Risks, World Bank Says, Businessweek

Excerpt: China’s real-estate market is a “particular source of risk” to growth given the importance of property construction to the world’s second-biggest economy, the World Bank said.

“Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets,” the Washington-based lender said in its China Quarterly Update released in Beijing today. “A property downturn could affect the finances of local governments which do a lot of the infrastructure investment.”

Regulators told China’s banks last week to conduct more stress tests on their real-estate lending as the government steps up efforts to curb surging housing prices. A potential rise in bad debts on property loans and credit to local government financing vehicles risks triggering another state- funded bailout, Fitch Ratings said this month.

“With tension between the underlying upward housing price pressure and the policy objective to contain price rises, interaction between the market and policy measures could lead to a more abrupt than planned downturn in the real-estate market,” according to the report....

Hot Money

China’s foreign-currency reserves rose by $197 billion in the first quarter, the second-highest on record, boosting its total holdings to more than $3 trillion even as the nation reported a trade deficit in the Jan. to March period.

7--Weekly Initial Unemployment Claims increase, 4-Week average over 400,000, Calculated Risk

Excerpt: The DOL reports on weekly unemployment insurance claims:

In the week ending April 23, the advance figure for seasonally adjusted initial claims was 429,000, an increase of 25,000 from the previous week's revised figure of 404,000. The 4-week moving average was 408,500, an increase of 9,250 from the previous week's revised average of 399,250.

Weekly claims have increased over the last few weeks, and this is the first time the four-week average was above 400,000 in two months.

8--A few takeaways from Bernanke Press Briefing, Calculated Risk

Excerpt: When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. And, as I was indicating earlier, I think that even purely from an employment perspective that if inflation were to become unmoored - inflation expectations were to rise significantly - that the cost of that in terms of employment loss in the future if we had to respond to that would be quite significant." This sounds like QE3 is unlikely unless the economy slows sharply (or inflation falls).

• Bernanke noted that an early exit step would be to stop reinvesting maturing securities. This suggests that the Fed will continue to reinvest maturing securities after QE2 ends in June.

9--Tim Duy: Very High Bar for QE3, Calculated Risk

Excerpt: From Professor Tim Duy: Very High Bar for QE3

Apparently the threat of headline deflation off the table, Bernanke is not inclined to pursue sustained easing despite low core inflation and high unemployment. Again, I am not entirely surprised, except that Bernanke appear to suggest we are much closer to an inflation tipping point than I would expect. He could have tempered these comments with a more forceful discussion of labor costs, but did not. It seems clear these comments were intended to calm the non-existent bond market vigilantes, but is it consistent with the outlook? Arguably, no. For what it’s worth, I think Bernanke appeared most uncomfortable during this portion of the conference.

Bottom Line: When I look at the revisions to the Fed’s outlook and listen to Bernanke, I get the sense that the basic Fed policy is summarized as follows: “The economic situation continues to fall short of that consistent with the dual mandate, we have the tools to address that deviation, but will take no additional action because some people in the Middle East are seeking democracy.”

The Fed's forecasts for inflation and the unemployment rate would seem to suggest more QE, but I think Tim Duy's assessment is correct: Bernanke has set the bar very high for QE3. And the odds of more fiscal policy aimed at the unemployed are zero.

10--Ducking the jobs question, Economist's View

Excerpt: The Fed’s dual mandate requires it to pursue both full employment and price stability. Currently, however, the Fed is falling short on both of these goals.

Employment is far below its full employment level, and inflation is running below the Fed’s preferred range of 1.5 to 2.0 percent. Inflation is expected to rise a bit in the short-run due to rising commodity prices, but the Fed says it expects commodity price increases to be transitory.

Thus, none of the Fed’s forecasts show any long-run concern about inflation at all. The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why the Fed isn’t doing more to help with the employment problem? Why not a third round of quantitative easing?

.... The Fed first began seeing “green shoots” in April of 2009, a full two years ago. At every step since, the Fed has used the prospect of better times just around the corner as a reason to downplay the benefits of further easing.

But the growth of the green shoots has been stunted, or they have wilted away entirely. In retrospect, more aggressive action by the Fed was warranted in every instance..... the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.

11--How Asia Copes with America’s Zombie Consumers, Stephen Roach, Project Syndicate

Excerpt: Asia needs a new consumer. A post-crisis generation of “zombie consumers” in the United States is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers.

But the most prominent zombie may well be a broad cross-section of American consumers who are still suffering from the ravages of the Great Recession. Afflicted by historically high unemployment, massive under-employment, and relatively stagnant real wages, while burdened with underwater mortgages, excessive debt, and subpar saving, US consumers are stretched as never before....

Notwithstanding government life-support initiatives, US consumers seem headed for years of retrenchment. Consumption’s share of US GDP currently stands at a sharply elevated 70%. While that’s down from the high of 71.3% in early 2009, it remains fully four percentage points above the 66% norm that prevailed in the final quarter of the twentieth century....

It (Asia) should start by looking in the mirror. For developing Asia as a whole, internal private consumption currently stands at a record low of just 45% of GDP – down ten percentage points from the 55% share prevailing as recently as 2002...

Nowhere is that more evident than in China. With private consumption having fallen to a record low of 35% of GDP in 2008 (fully ten percentage points below the Asian norm), China faces major rebalancing imperatives – all the more urgent if post-crisis consumption growth in the West remains weak.

12--Dollar Doldrums, The Big Picture

Excerpt: The US$ index is down for an 8th straight day with gold rising to another record high. This is becoming an unfortunate broken record but the pace of declines have picked up as it’s down 3% over these 8 days. Bernanke yesterday said maintaining the purchasing power of the $ is a Fed goal by keeping inflation in check. Here is the report card on that using the CPI: since Bernanke took office on Feb 1, 2006, the purchasing power of the US$ is down 11%, it’s down 21% over the past 10 yrs, down 82% since the gold standard was ended in 1971 and down 91% since 1920.

13--Obama's MexicoGate, Laura Carlsen, Counterpunch

Excerpt: A secret operation to run guns across the border to Mexican drug cartels — overseen by U.S. government agents — threatens to become a major scandal for the Obama administration.

The operation, called "Fast and Furious," was run out of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) office in Phoenix, Arizona. ATF sanctioned the purchase of weapons in U.S. gun shops and tracked the smuggling route to the Mexican border. Reportedly, more than 2,500 firearms were sold to straw buyers who then handed off the weapons to gunrunners under the nose of ATF.

But once across the border, the agency seemed to lose track of the weapons. Hundreds of AK-47s and Barrett .50 caliber rifles — favorites of warring drug cartels —made it easily into the hands of some of Mexico's most ruthless crime organizations....

...the director of the ATF Mexico office, Darren Gil, told CBS that he began to receive disturbing reports of an unusually high number of Phoenix-area guns showing up in Mexican cartel violence. When he began asking questions, Gil discovered that his team had been blocked from computer access to information on Fast and Furious.

Gil questioned officials at U.S. headquarters who told him they were under direct orders from the Department of Justice and that he should say nothing to the Mexican government about the program.

14--Jobless claims rose 6% last week, Housingwire

Excerpt: Initial jobless claims climbed 6% last week to the highest level since the end of January.

The Labor Department said the seasonally adjusted figure of actual initial claims for the week ended April 23 rose by 25,000 to 429,000. Initial claims for the prior week were 404,000, which was revised upward a by 1,000. The Labor Department said unadjusted claims normally fall by about 18,500 during the week that includes the Good Friday holiday, when markets are closed. But unadjusted claims rose by 3,500 last week, according to Bloomberg.

New claims remained higher than 400,000 for the third consecutive week. Most economists believe claims lower than that indicate the economy is expanding and jobs growth is strengthening.

15--Mexican Narco-Trafficker’s Revelation Exposes Drug War’s Duplicity, narcosphere

Excerpt: A high-level player with one of the most notorious narco-trafficking organizations in Mexico, the Sinaloa “cartel,” claims that he has been working with the U.S. government for years, according to pleadings filed recently in federal court in Chicago.

That player, Jesus Vicente Zambada Niebla, is the son of Ismael “El Mayo” Zambada Garcia — one of the purported top leaders of the Sinaloa drug-trafficking organization. Zambada Niebla was arrested in Mexico in March 2009 and last February extradited to the United States to stand trial on narco-trafficking-related charges.

The indictment pending against Zambada Niebla claims he served as the “logistical coordinator” for the “cartel,” helping to oversee an operation that imported into the U.S. “multi-ton quantities of cocaine … using various means, including but not limited to, Boeing 747 cargo aircraft, private aircraft … buses, rail cars, tractor trailers, and automobiles.”

16--Wal-Mart: Our shoppers are 'running out of money', CNN Money

Excerpt: -- Wal-Mart's core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

"We're seeing core consumers under a lot of pressure," Duke said at an event in New York. "There's no doubt that rising fuel prices are having an impact."

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they're "running out of money" at a faster clip, he said.

"Purchases are really dropping off by the end of the month even more than last year," Duke said. "This end-of-month [purchases] cycle is growing to be a concern.

17---The Housing Bubble Broke the Middle Class, Charles Hugh Smith, of two minds via

Excerpt: The bursting of the housing bubble wiped out half of the net worth of the Mortgaged Middle Class.

On the face of it, American households were not that affected by the bursting of the housing bubble. If we look at the Fed Flow of Funds report, the Balance Sheet of Households and Nonprofit Organizations, we find that net worth only declined by about 11% ($7.3 trillion) from 2007 to 2010: a $2.9 trillion decline in financial assets and a $4.9 trillion decline in tangible assets, i.e. real estate and consumer durable goods....

Calculated another way: household real estate is worth $16.4 trillion, and there is $10 trillion in outstanding mortgage debt, so total equity is $6.4 trillion. One-third of homes are owned free and clear, so one-third of $16.4 trillion is $5.4 trillion. $6.4 trillion - $5.4 trillion = $1 trillion in equity spread over 35 million homes.

That's not much--roughly 1.8% of all household net worth.

The family house was the traditional foundation of household wealth. As for all those trillions in financial wealth--as we all know, 83% is owned by the top 10%. ...

Before the housing bubble, households owed about $5 trillion in mortgages. The housing bubble came along, introducing the fantasy of home-as-ATM-cash-withdrawal-machine, and mortgages ballooned to over $10 trillion.

Back at the top of the bubble, the middle class had $6 trillion more assets on the books. Considering the Mortgaged Middle Class now owns about $6 trillion in net assets, then the bursting of the housing bubble caused their net worth to drop by 50%.

No comments:

Post a Comment