Thursday, May 26, 2011

Today's links

1-- Greece’s euro-zone membership is at risk, Reuters

Excerpt: European Union Fisheries Commissioner Maria Damanaki (says) Greece’s euro-zone membership is at risk.

“It’s the first we’ve really heard someone explicitly state what could happen,” said Andrew Busch, global currency strategist at BMO Capital Markets....

“People are starting to talk about the elephant in the living room, and that scares the market and reminds them of the precarious nature of what Greece is,” Busch said.

2--QE3? Jeff Harding, Marketwatch

Excerpt: End of QE2 Pits Traders Against the Fed.

I agree with everything he says about the bubble consequences of the money supply expansion. The vast amount of liquidity the Fed pumped into its primary dealers have fueled the stock markets and the current M&A splurge. It has also provided liquidity to the corporate markets which makes borrowing cheap . That is why you see companies like cash rich Google... borrow $3 billion on the bond market at an average of 2.33%.

It makes sense that when the growth momentum of quantitative easing stops, that this will eventually affect the markets, usually six to nine months later.

Shostak sees that this will put downward pressure on credit expansion by banks and thus the money supply will shrink. I think that is correct as well. We have seen some growth in lending activity recently and, as I have written lately on this, it is likely that this will stagnate....

The consequence of taking their foot off the money pedal will lead to higher unemployment and I do not think this is politically acceptable to the Fed or to the Administration. I think they will institute a new round of quantitative easing (QE3) because politicians will demand that the Fed “do something.” Which is, of course, the worst thing they could do. It will lead to more “bubble” activities and higher price inflation....

The Fed is serious about freezing its balance sheet starting in June. They will continue to buy Treasurys as issues mature and are replaced. But, as Shostak points out, the momentum of money growth will slow down and that is the key to understanding what will then happen. If Treasury rates do not take off, then my assumption about domestic and foreign demand for Treasurys will be correct. If they do take off, it will be an indication of a shrinking money supply as Shostak points out which will lead to economic stagnation or even a market bust. On the other hand, I don’t believe the Fed will play “chicken” during an election year, and when things turn ugly they will announce QE3 and that will kick the can down the inflationary road. QE3 may be the last installment of this monetary madness.

3--FHFA: House prices show hardest fall since 2008, Housingwire

Excerpt: National house prices fell 2.5% in the first quarter from the previous period, the largest quarterly drop since the last three months of 2008, according to the Federal Housing Finance Agency.

The FHFA analyzes the mortgage records for Fannie Mae and Freddie Mac to track average house price changes. Over the past year, prices fell 5.5%.

In March, prices dropped 0.3% from the prior month and remain almost 20% below the peak in April 2007.

For the first quarter, prices dropped in 43 states and in all nine Census Bureau divisions. All 25 of the metro areas tracked by the FHFA experienced drops during the quarter ,as well. The steepest came in the San Diego area, where prices fell more than 7% in the quarter.

Several house price indices across the country have already called a double-dip in the housing market as the inventory of distressed and vacant properties lingers.

4--Financial Lobbying and the Housing Crisis, New York Times

Excerpt: The study, by Deniz Igan, Prachi Mishra, Thierry Tressel, three economists at the International Monetary Fund, suggests that implicit subsidies and a lack of regulation helped make it possible for lenders to offer lower rates on mortgages that were increasingly likely to default. My fellow Economix blogger Simon Johnson has also noted the interplay of political influence on regulation and finance.

The study by the I.M.F. economists found that the heaviest lobbying came from lenders making riskier loans and expanding their mortgage business most rapidly during the housing boom. The loans originated by those lenders were, by 2008, more likely to be delinquent.

Most important, lobbying meant access to tax dollars. The lenders lobbying more heavily were 7 percent more likely to receive bailout funds, received larger amounts of those funds, and enjoyed a 27 percent greater increase in their market capitalization in October 2008, the month the bailout program was announced...

Nobody knows for sure how much of the blame for the housing boom can be put on the federal government, but we’re starting to see how political influence was associated with mortgage lending and, ultimately, with taxpayer subsidization of delinquent and defaulting mortgages.

5--Time to PANIC!!: Second-Quarter Real GDP Growth Looks Slow Enough to Put No Upward Pressure at All on the Employment-to-Population Ratio, Grasping reality with both hands

Excerpt: Time to push the panic button.

Macroeconomic Advisers is revising their tracking forecast of real GDP growth in the second quarter. It now looks as though, come July 1, that there will have been no gap-closing in the six quarters since the start of 2010.

That means that it is:

* Time for Quantitative Easing III...
* Time for pulling more spending from the future forward into the present, and pushing more taxes from the present back into the future...
* Time to use Fannie and Freddie to (temporarily) nationalize mortgage finance and fix the ongoing foreclosure crisis...
* Time for a weaker dollar...

6--Unemployment: Why Stimulus Hasn’t Created More Jobs, Mark Thoma, The Fiscal Times

Excerpt: The focus on long-run growth and the shunning of anything that so much as resembles a “make-work” project has made it difficult to deal effectively with the unemployment problem. There are still 11 million people who need jobs, and we are doing very little to help with this problem.

Long-run growth projects are slow to come online, especially when the projects must make it through the political process, and if they are not big enough initially it’s difficult to find the political will to go through the process of implementing another round of spending. Tax cuts are an alternative, but the current stimulus package was just shy of 40% tax cuts and we still have an unemployment problem.

Monetary policy is another option, but the effectiveness of monetary policy is limited when interest rates bottom out as they generally do in severe recessions. Thus, more direct methods of dealing with the unemployment problem are needed.

In the past, we did not pay enough attention to whether the policies used to fight a recession would also help with long-run economic growth. But in the present the pendulum has swung too far in the other direction – long-run growth should not be the only consideration when selecting stabilization policies.

In the future, we must do a better job of attacking the unemployment problem when recessions hit the economy even if it means implementing policies that do not directly have an impact on long-run economic growth. Those who promote supply-side policies above all else might be surprised at how much growth will be helped nonetheless by policies that avoid the long-term problems associated with high and persistent unemployment.

7--Rosenberg: 7 risks brewing, Pragmatic Capitalism

Excerpt: Just in case you were worried that David Rosenberg had turned all bright and happy with regards to the US equity markets – he brings us his 7 major risks brewing:

* China hard landing (PMI down to 51, perilously close to contraction mode)…equity market may have begun to price in some probability of such.

* Contagion sovereign credit risks in Europe (the rating agencies have already begun to take action against Spain, Italy and Belgium).

* Countertrend rally in the US dollar – this is crushing the risk-on carry trades: the unwinding of net speculative short positions in the dollar and long positions in the Euro seem to have further to go based on the latest CFTC data.

* Deepening recession in Japan – still one of the world’s largest economies; spill-over on global production schedules still to be felt.

* US fiscal policy is becoming more radically austere at all levels of government.

* The end of QE2 will be a very big deal given the 89% correlation between the Fed’s balance sheet and the movements in the S&P 500 over the past two years.

* US leading economic indicators are rolling over. The Conference Board Index fell in April for the first time since June 2010; the coincident-to-lagging indicator is down three months in a row; and the ECRI smoothed index is down now for four straight weeks, a streak last seen in July 2010.

8--Bonds are for losers? Pragmatic Capitalism

Excerpt: All of those cries about the bond bubble last year and hyperinflation have turned out to be dead wrong. The current environment is not consistent with past hyperinflations or even periods of high inflation. What is boiling beneath the surface is the balance sheet recession, however, the USA has done enough spending to fend off this beast for the time being. That said, the risk is still not hyperinflation in the USA. In fact, I believe the risk of hyperinflation remains close to nil. At the beginning of the year I said we were likely to experience inflation in the 2.5% range this year – higher than what I had been calling for over the last 2 years, but lower than the historical average. That’s been pretty close to dead right so far. I also think Bernanke is likely to finally get something right – this surge in inflation (mostly due to motor fuel prices) is likely to be transitory.

As for bonds, Rosenberg has nailed it. You can’t be super bearish about bonds unless you believe in one of two scenarios – hyperinflation or booming growth. Ironically, the paper bears don’t understand that the history of hyperinflations (as previously covered here) is not even remotely consistent with the current state of the US economy. So, the only way they will likely be right about bonds is by being wrong (about US economic growth). And while I’d love to be a believer in booming growth I just don’t see the USA experiencing strong economic growth with such enormous slack remaining in the economy and the increasing likelihood of austerity in the coming years. We remain deep in the balance sheet recession and until policy makers recognize that the likelihood of stronger growth is very low. And because of this malaise and persistent government ineptitude (around the globe) US bonds will continue to perform just fine.

Rosenberg: And event, the 3.07% yield level for the 10-year note would represent a key technical break – where the 200 day moving average resides. Mortgage convexity would then very likely take the yield down to 2.9%. And the rally we are seeing of late in the Treasury market is occurring on the back of renewed deflation pressure – the 5-year CDS spreads, measuring US government default risks, actually widened 10bps last week to 51bps.

Of course, deflation is now going to rear its head again. Oil prices are down 13% from the nearby peak. The base metals complex is down 10% from the recent high as well and trading both below the 50 and 200 day moving averages. The agriculture price sphere has corrected 10%. Gold is off the boil and silver has plunged 35%. Deflation is the principal threat, not inflation.”

9--Third Depression Watch, Paul Krugman, New York Times

Excerpt: Last year I warned that we seemed to be heading into the “Third Depression” — by which I meant a prolonged period of economic weakness:

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

Brad DeLong points us to Macro Advisers, which has now downgraded its estimates for second-quarter growth. As Brad says, these estimates now suggest that we have now gone through a year and a half of “recovery” that has failed to make any progress toward closing the gap between what the economy should be producing and what it’s actually producing.

And nobody in power cares!

10--Albert Edwards and an afternoon tea-party with the Vestal Virgins, FT.Alphaville

Excerpt: Albert Edwards is bullish.

Bullish on US Treasuries that is, which the SocGen strategist expects to hit record levels before before government profligacy and the Fed’’s printing presses take the world back to both double-digit inflation and bond yields.

From Edwards’ latest Strategy Weekly (emphasis ours):

Many think I am mad. But I am not the only commentator expecting a deflationary bust – the sort of bust that will take the S&P down to 400 from the current 1300. I recently watched John Authers of the FT Lex and Long View columns interview Russell Napier, formally [sic] of CSLA and a leading stockmarket historian....

For those of you who cannot see the video let me try and paraphrase Russell. He believes massive central bank balance-sheet expansion has failed to boost broad money in the west, but rather this huge monetary stimulus has been transferred to emerging markets (EM) via foreign exchange (FX) intervention to peg EM currencies to a weakening US dollar (most notably the Chinese Renminbi). Together with the impact of a weak dollar driving commodity prices higher, the emerging markets’ own version of QE has led to overheating and inflation. EM countries are now far more inclined to aggressive monetary tightening, including allowing currency appreciation, which will halt the flow of EM-driven demand for US Treasuries. The creditor Chinese and other EM nations will tighten global liquidity, not the debtor US. This will cause what Russell terms “The Great Reset” which will drive US real bond yields higher and, amid a deflationary bust send the S&P down to its ultimate bottom – commensurate with levels of compelling cheapness represented on the Shiller PE at around 400 on the S&P.

Where I diverge slightly from Russell is that the world he describes sounds pretty recessionary to me. Clearly the S&P falling to 400 destroys household balance sheets and consumption anew. And EM liquidity tightening could cause hard landings. .... So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.

Crikey. Fresh lows for government bond yields!

And there was us thinking they might push higher after the Fed’s latest bond buying programme ends in June.

11--Fiscally I'm A Right-Wing Nutjob, But On Social Issues I'm Fucking Insanely Liberal, The Onion (Humor)

Excerpt: The world is a complicated place, and in this day and age, you just can't expect a person to fall on the same political side of every issue he is confronted with. Things are more nuanced than that, and the average American might think one way about one topic, and a completely different way about another. For instance, when it comes to fiscal issues, I consider myself to be a rabid, foaming-at-the-mouth, right-wing lunatic. But on the social front, I'm a completely out-of-his-mind, wacked-out liberal loon.

It's all about striking a balance, really.

Take finances. It is my opinion that all taxes whatsoever should be abolished, and that everything relating to money in any way should be privatized, including the minting of coinage. Thus, each American should have his own system of currency and his own bank named after him to maintain that currency, and anyone whose personal currency system fails in the unfettered free market should be left to die bleeding and penniless in the street, with his family crying helplessly at his side. Also, corporations should be able to buy whatever and whomever they want, and at the end of every year the richest and most powerful corporation should be allowed to physically demolish 15 other corporations that it wishes to see destroyed, murdering all of the various employees of said corporations in any way it sees fit. I guess you could say I'm a fucking nutcase conservative when it comes to this kind of stuff, but I do believe it's an ideology that has its limits.

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