Thursday, May 5, 2011

Today's links

1--The Economy Slows, New York Times

Excerpt: The economy lost steam in the first quarter. Growth in personal consumption — the single largest component of the economy — slowed markedly. Business-related construction cratered and residential construction fell. Exports stumbled. The only unambiguous plus was continued business investment in equipment and software, which is necessary but not sufficient for overall growth.

In all, economic growth slowed from an annual rate of 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter of 2011....

When lauding the economy, Mr. Bernanke and many other economists and politicians point out, correctly, that the unemployment rate has declined from a recession high of 10.1 percent in late 2009 to 8.8 percent now. That would be encouraging news if it indicated robust hiring for good jobs. It does not.

Over the last year, the number of new hires has been outstripped by the masses who have either given up looking for work or who have not undertaken a consistent job search, say, after graduating from high school or college. Those missing millions are not counted in the official jobless rate; if they were, unemployment today would be 9.8 percent. The rate would be 15.7 percent if it included those who took part-time jobs in lieu of full-time ones.

Another purported bright spot in the unemployment data — the relatively low jobless rate for college-educated workers — does not stand up to scrutiny. For college educated workers over age 25, unemployment is indeed lower than for other groups. But for college graduates under age 25, unemployment over the last year has averaged 9.7 percent, and shows no sign of improvement. ...

The economy still needs help and, specifically, a sustained focus on jobs and income. Instead, policy makers are gearing up for deep spending cuts, ignoring the damage they are likely to cause. Last quarter, cutbacks by governments at all levels took a chunk out of overall growth. If cuts of similar or greater magnitude become the norm, the slow economic pace of the first quarter also could very well become the norm. It’s nice to believe slowing growth is transitory. But as long as spending, jobs and incomes are at risk and policy priorities are skewed, it’s hard to believe in a turnaround.

2--The debt-ceiling drama begins, Washington Post

Excerpt: It won’t be topic number one for a few days, or even weeks, yet. But this is the week that the debt limit moves from abstraction to crisis. According to the Treasury Department’s estimates, we will officially hit the debt limit on May 16th. No one anywhere thinks there’s any chance that we’ll pass an increase in the debt limit in the next few weeks. So, as of Friday, Geithner is beginning “extraordinary measures” to delay an actual default.

In a letter to Congress, Geithner detailed the first of these: “On Friday, May 6, Treasury will suspend until further notice the issuance of State and Local Government Series (SLGS) Treasury securities,” he wrote. I’m not going to pretend to be an expert in SLGS securities, but their basic point is to help state and local government smooth out their finances. As Geithner writes, suspending them “is not without costs; it will deprive state and local governments of an important tool to manage their outstanding debt expenses.” Sucks for them.

But there are only so many tricks that Geithner can pull out of his sleeve. Currently, Treasury is estimating that they can play games until about August 2nd, at which point we’ll go from moving money around to defaulting on our debt. Of course, August 2nd is just a guess: it could be a bit later or, due to unforeseen circumstances or unexpected fiscal needs or market reactions, it could be a bit earlier. And there’s always the chance that the spectacle of Congress bickering towards a default will cause the market to freak out even though we technically have a couple of weeks left. This is the Clint Eastwood theory of money management, in which Congress needs to ask itself, day after day, week after week, whether it feels lucky. And it’s totally reckless and unnecessary.

3--Bankruptcy Hell - Abandon hope all ye who enter here, Michael Collins, Smirking Chimp

Excerpt: There is no justice guaranteed for the weak, disadvantaged, poor, or dispossessed. Debtors filing bankruptcy operate on a limited budget and simply want the nightmare to end. They want to get on with their lives. They often lack the ability to make legal challenges. When their lawyers don't inform them of those challenges, they have no options.

In the 50% of the cases where critical documents were missing, their lawyers fail to make the challenge. Worse still, in those and other cases where creditor filings are obviously deficient and outside the law, the court misses the error....

At least seven federal courts have cited Katherine Porter's study Her study included over 1,700 cases., half of which had a defective part - missing documentation required by law to justify the bankruptcy. Compare 850 instances of a defective part with no corrective action to the twelve instances referenced by Honda that generated a universal recall of models for two consecutive years.

Perhaps, the federal bankruptcy courts should emulate the judgment and practices of Honda.

The failure of bankruptcy courts to apply the law equally and the refusal to go back and correct every error in judgment demonstrate that we are clearly not a nation of laws. We are a nation in which the front room of the law serves the back room of The Money Party.

4--Steep Drop Tarnishes Big Bets on Silver, Wall Street Journal

Excerpt: Yet silver, which has had a huge run, remains up nearly 38% in 2011. It rose 84% last year....

"We haven't seen this much volatility in decades," said Robin Rodriguez, a metals trader in Charlottesville, Va. "We have such large profits built in," so some investors are taking their winnings, said Mr. Rodriguez, who remains bullish on the metal.

Interest in holding the silver ETF grew so intense it became hard to borrow shares to sell, as bearish traders need to do if they want to sell the metal short and bet on a decline.

All this helped set up the tumble, which started late Sunday, catching many by surprise. As sell orders flooded the market in Asia, brokers sought more collateral from investors who had bought on margin, even as they fielded calls from anxious investors who wanted to sell.

"Everybody wanted to get out," said Richard Digenan, an executive at R.J. O'Brien, a brokerage firm in Chicago.

5-- Get Ready for a Global Growth Slowdown, Marshall Auerback, Naked Capitalism

Excerpt: Governments across the globe are headed for a disaster entirely of their own making.

Though capital markets remain strong, the global economic backdrop continues to deteriorate as fiscal retrenchment takes hold. Commodity markets have rallied in tandem with the fall in the dollar even though there are signs that growth in the emerging world is slowing. Japan’s economy is in the soup, the U.S. economy has failed to pick up as many thought (with a mere 2% growth rate expected to be released for Q1 shortly), and the European economy is overdue for its own slowdown. The U.S. stock market has also rallied despite the threat of a very high gasoline price, disappointing economic growth data, and a fairly mixed earnings picture.

The new theme in the market seems to be that the Fed, unlike other central banks, will stick with super easy money policies, hence the tendency to push the weak dollar, rising equity prices, and soaring commodity prices. But the news that real GDP growth has fallen sharply in the first three months of 2011 is evidence that the current policy mix, with its emphasis on public spending cuts, is not working. If gasoline prices spike as high as they did in June 2008, they will further weaken an already feeble economy. Consumers did not show up at Walmart at the end of the month because they ran out of money. House prices are still falling....

All in all, not a pretty global picture. It’s only made worse by the fact that virtually all economic debates remain heavily skewed to further cutting government spending at a time when growth rates are falling and unemployment claims are rising. In short, the human tragedy we are now experiencing is totally self-inflicted policy stupidity.

6--Energy prices and recessions, Early Warning

Excerpt: I stress that I'm not saying that a recession started as early as March 2011....But it might not be very far off. I think it all depends on what happens next. I doubt energy prices can go a whole lot higher without triggering another recession, so it depends on whether the world can scrape up a few more mbd of oil to keep growth going without prices rising too much more. We will be watching oil production statistics closely...

...We are in an era where the availability of natural resources is not sufficient to support the wealth levels that the developed world has grown accustomed to, along with the speed of growth with which the developing world is trying to approach those same levels. So, this is represented by oil prices rising (along with food and other commodity prices more generally). But the effect of this is not to place a uniform drag on growth, because the global mind has not accepted this truth yet. Instead, the global economy keeps trying to grow in a way that is inconsistent with the resource constraints, and then some part of the system tears and gives way.

So, in 2007/2008 the sector that gave way was the American subprime consumer, along with a significant chunk of the financial system that was predicated on the idea that poor Americans could continue to take on more and more debt indefinitely. Instead, rising gas and food prices eventually destabilized the finances of that sector of consumers, they started to default, then their lenders started to default, financial contagion set in, and the situation was only stabilized with massive extraordinary interventions by sovereign governments. That worked, but left a lot of the sovereigns in significantly weaker condition than before.

Now poor Americans borrowing more and more to bid house prices higher and higher was always an unsustainable trend that was going to end in tears one way or another. But the timing was likely determined by the oil/food price shock that ended in 2008.

So now, just three years later, here we are again with oil and food prices rising fast, and the question in my mind is this: what part of the global fabric tears next? And when?...

I would argue that this data is at least consistent with the narrative that, in the post 1973 era, energy is consistently in somewhat problematic supply, and you can think of many of the recessions as showing a pattern in which energy prices are rising as the world overshoots what can currently be supplied, or what can currently be supplied drops as a result of geopolitical events, and energy prices rise until some pre-existing weakness in the global economic fabric tears in the course of a recession, and prices fall back again. In some cases, perhaps, like 2001, the thing was about to tear on its own anyway, and energy prices fall almost immediately at the onset the recession. In other cases, like 1990 or 2007, it perhaps wasn't quite ready to tear, and energy prices had to rise substantially more before finally breaking.

7--Declining Crop Yields, Economist's view

Excerpt: Why is food production slowing down?

There are many reasons for high commodity prices. But recent data from FAO shows a pretty rapid slowdown in productivity growth. The price spike in 2008 occurred in a particularly bad year in which yields declined on a worldwide basis for three of the four largest food commodities. In 2009 all four of the majors saw yield declines, something that hasn't happened since 1974. 2010 couldn't have been much better and was probably worse, given how bad things were in the U.S, the world's largest producer and exporter (worldwide data for 2010 isn't available yet).

The yield slowdown comes at a particularly unfortunate time, with accelerating demand from emerging economies like China and subsidy-driven expansion of ethanol. Keep in mind: we need productivity growth to accelerate considerably to keep up with projected demand growth. FAO says we need 70 percent higher yields by 2050. (Although I'd like to do my own projections, and will one of these days...)

Maybe it's just bad luck with the weather. But I think it just may be a longer run phenomenon.

Yeah, resource scarcity will be in the news for awhile yet.

8--About 1 in 7 in U.S. Receive Food Stamps, Wall Street Journal

Excerpt: Growth in the food stamp program appeared to reach a plateau in February — with 14.3% of the population relying on the safety net program.

The number of food stamp recipients was essentially flat in February, the most recent month available, with 44.2 million Americans receiving benefits, according a new report from the U.S. Department of Agriculture. (See a sortable breakdown of the data here.)

The food stamp program ballooned during the recession as workers lost their jobs or saw their hours and income reduced. The rise in recipients has begun to flatten in recent months, which may mean that as the economy is improving fewer Americans are seeking to join the program. Enrollment in the program is still high though, with 11.6% more people tapping benefits in February than the same month a year earlier.

9--Delaying a US default 101, FT Alphaville

Excerpt: We are 12 days from hitting the $14,300bn US debt ceiling. And, perhaps more importantly, just a few months away from when the Treasury will run out of accounting moves that can prevent a default.....

Here’s Deutsche Bank again:

The ideological debate over raising the debt ceiling rages on. We are an estimated 17 days from bursting through the $14.3 trillion ceiling, and an estimated 70 days until the Treasury runs out of accounting moves that can prevent a default. Former Treasury officials have come out swinging, with Paul O’Neill, George W. Bush’s first Treasury secretary, calling opponents of raising the ceiling “our version of al-Qaeda terrorists.” Another former Treasury official has floated an idea that could theoretically forestall default for even longer: a new law that prioritizes interest payments over all other expenses. Writing in the Wall Street Journal, Emil Henry Jr., a former assistant secretary of the Treasury from 2005 to 2007, says this move could avoid a technical default, theorizing that “near-term economic dislocation might be the painful medicine necessary for long-term health.”

10--TrimTabs explains impending slowdown, Zero Hedge

Excerpt: From TrimTabs: May 4, 2011 – TrimTabs Investment Research reports that the U.S. economy added 181,000 jobs in April after adding 283,000 jobs in March.

“Economic growth has slowed, leading to a decline in job growth,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “Trillions of dollars in fiscal and monetary stimulus not only spurred economic growth but also unleashed inflation, causing a rise in food and energy prices, which is now hurting consumption.”

TrimTabs’ employment estimates are based on analysis of daily income tax deposits to the U.S. Treasury from all salaried U.S. employees. They are historically more accurate than initial estimates from the Bureau of Labor Statistics.

In a research note, TrimTabs points out that various indicators point to slowing economic growth which is curtailing job growth:

* Wages and salaries increased an adjusted 5.3% year-over-year in April, down from 8.6% y-o-y in March. While moderate economic growth is characterized by year-over-year increases between 5.0% and 5.5%, growth decelerated throughout April....

* Real GDP growth slowed to 1.75% in Q1 2011 from 3.11% in Q4 2010.

* The Bureau of Labor Statistics’ Consumer Price Index (CPI) – also referred to as top line inflation – jumped 6.1% annualized in the three months ended March 2011. The gasoline component of the CPI surged a whopping 71.2%. Meanwhile, core inflation, which excludes food and energy, increased only 2%.

11--Service industries blues: New orders drop by the most on record, Bloomberg

Excerpt: Service industries in the U.S. expanded in April at the slowest pace in eight months as higher fuel prices prompted companies to cut back.

The Institute for Supply Management’s index of non- manufacturing companies declined to 52.8 last month from 57.3 in March. Readings greater than 50 signal growth, and the median forecast of economists surveyed by Bloomberg News called for a gain to 57.5. A gauge of new orders dropped by the most since record-keeping began in 1997.

Stocks fell and Treasuries rose on signs gasoline prices at their highest levels in almost three years are blunting purchases of other goods and services. Employment in the services industry fell to a seven-month low, indicating increased corporate costs may be restraining hiring, one reason why the Federal Reserve last week said it would maintain record monetary stimulus.

“It’s another sign that we’re losing momentum more broadly in this recovery,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Businesses are still concerned about pricing power.

12--Underperforming labor market hits snag, Bloomberg

Excerpt: Employment increased by 179,000 in April from a revised 207,000 the prior month, according to figures from ADP Employer Services. The median estimate in the Bloomberg News survey called for a 198,000 advance this month.

The gain in employment projected by ADP may be insufficient to help the economy accelerate after a surge in food and fuel costs caused growth to slow to a 1.8 percent annual rate in the first three months of the year. Businesses added 200,000 jobs in April and the jobless rate held at 8.8 percent, economists project a Labor Department report to show in two days.

“This pace keeps things moving forward but not at a strong enough growth rate to really, really improve labor market conditions and improve the economy,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York who forecast a gain of 175,000. “The labor market is still underperforming the expectations where growth will be and should be at this point.”

13--Shares and commodities tumble as slowdown looms, Bloomberg

Excerpt: U.S. stocks fell and commodities slumped, while 10-year Treasuries rallied for a fifth straight day, as lower-than-forecast growth in service industries and employment damped optimism about the health of the economy. The euro and Portuguese bonds rose after a bailout agreement.

The Standard & Poor’s 500 Index lost 0.8 percent to 1,345.23 at 10:45 a.m. in New York, with commodity producers leading declines. The S&P/GSCI Index of raw materials sank 1.6 percent as cotton and silver lost more than 3.8 percent and oil slumped 1.8 percent to $109.07 a barrel in New York. Ten-year Treasury yields decreased three basis points to 3.22 percent, the lowest since March 16 on a closing basis. Portugal’s two- year note yield tumbled 43 basis points to 11.39 percent.

Stocks opened the U.S. session lower after ADP Employer Service’s tally of jobs growth in April was 179,000, trailing the 198,000 median forecast of economists in a survey. Losses swelled as the Institute for Supply Management said its gauge of non-manufacturing companies slumped to the lowest level in eight months. European stocks extended and earlier drop triggered by concern the region’s central bank will map out interest-rate increases tomorrow....

Commodity Producers

The S&P 500 dropped for a third day as Exxon Mobil Corp. and Freeport-McMoRan Copper & Gold Inc. lost at least 1.6 percent, with declines in commodity producers overshadowing a pickup in takeovers. Las Vegas Sands Corp. (LVS) plunged 5.1 percent after the casino company’s earnings missed estimates.

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