Friday, May 6, 2011

Weekend Links

1--Jobless Claims in U.S. Unexpectedly Jump Due to Anomalies, Bloomberg

Excerpt: The number of claims for U.S. unemployment benefits unexpectedly rose last week, pushed up by auto-plant shutdowns and other unusual events that seasonal variations failed to take into account, the Labor Department said.

Applications for jobless benefits jumped by 43,000 to 474,000 in the week ended April 30, the most since August, Labor Department figures showed today. A spring break holiday in New York, a new emergency benefits program in Oregon and auto shutdowns caused by the disaster in Japan were the main reasons for the surge, a Labor Department spokesman said as the data was released to the press.

Even before last week, claims had drifted up, raising concern the improvement in the labor market has stalled. Employers added 185,000 workers to payrolls in April, fewer than in the prior month, and the unemployment rate held at 8.8 percent, economists project a Labor Department report to show tomorrow.

2--U.S. Productivity Slowed in First Quarter, Labor Costs Rose, Bloomberg

Excerpt: The productivity of U.S. workers slowed in the first quarter and labor costs rose as a growing economy prompted companies to boost employment.

The measure of employee output per hour increased at a 1.6 percent annual rate, exceeding the median forecast of economists surveyed by Bloomberg News, after a 2.9 percent gain in the prior three months, figures from the Labor Department showed today in Washington. Expenses per employee climbed at a 1 percent rate after dropping 1 percent the prior quarter.

Companies may need to keep adding staff and increasing hours after reaching the cap of how much efficiency they could extract from their workforces in the early phase of the recovery. A report tomorrow is projected to show employers in the world’s largest economy hired 185,000 additional workers in April.

“We’re moving to the period where companies are starting to hire more workers as they ramp up output, so productivity growth is settling down,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “We’re going to see solid but not spectacular gains in employment” in coming months, he said.

3--Schools Find Ayn Rand Can’t Be Shrugged as Donors Build Courses, Bloomberg

Excerpt: John Allison, former chairman of bank holding company BB&T Corp. (BBT), admires author Ayn Rand so much that he devised a strategy to spread her laissez-faire principles on U.S. campuses. Allison, working through the BB&T Charitable Foundation, gives schools grants of as much as $2 million if they agree to create a course on capitalism and make Rand’s masterwork, “Atlas Shrugged,” required reading.

Allison’s crusade to counter what he considers the anti- capitalist orthodoxy at universities has produced results -- and controversy. Some 60 schools, including at least four campuses of the University of North Carolina, began teaching Rand’s book after getting the foundation money. Faculty at several schools that have accepted Allison’s terms are protesting, saying donors shouldn’t have the power to set the curriculum to pursue their political agendas, Bloomberg Markets magazine reports in its June issue.

“We have sought out professors who wanted to teach these ideas,” says Allison, now a professor at Wake Forest University’s business school in Winston-Salem, North Carolina. “It’s really a battle of ideas. If the ideas that made America great aren’t heard, then their influence will be destroyed.”

4--U.S. Warns China Is Closing Up Again, Wall Street Journal

Excerpt: U.S. Commerce Secretary Gary Locke warned that China is backtracking on promises to make its economy more friendly to foreign companies, pointing to recent proposals to review and restrict investments in its economy. ...

Ticking down a list of complaints about how China has failed to back up pledges to avoid discrimination, improve transparency and tackle rampant counterfeiting, Mr. Locke said, "All of these recent moves by China result in its economy becoming less competitive and less welcoming to foreign direct investment."...

The biggest challenge continues to come from China's efforts to support "indigenous innovation," he said. Despite China's agreement during the December trade talks to lift restrictions against U.S. firms in its foreign-investment catalog, a newly released draft of those rules covering investments in different sectors "falls short of that promise."

In addition, he said China's new system to review foreign investments is based on "vague" national security parameters and includes a "potentially abusive" policy allowing competitors to propose a review...

A report released Wednesday found that Chinese foreign direct investment into the U.S. more than doubled last year to more than $5 billion, but remains just a fraction of the more than $2 trillion in overall stock of foreign direct investment in the U.S.

5--Property market in 'state of rigor mortis' as prices drop further, Telegraph

Excerpt: House prices are falling at their fastest rate for two years at what is traditionally a boom time of the year for the market, data showed yesterday.

Economists said the figures illustrated how Britain’s property market remained in a ‘fragile state’.

One analyst even described the lower end of the market as being in a 'state of rigor mortis' because the lack of affordable mortgages is preventing first-time buyers stepping onto the property ladder.

Nationwide said the typical value of a home in Britain fell 0.2 per cent to £165,600 in April....Separate figures released by the Bank of England showed a slight improvement in the number of mortgages approved for those buying a new home, rising to 47,557 in March, the highest level since November last year.

But the figure is still well below the 70,000 to 80,000 a month that economists consider consistent with a stable property market....

Households are trying to reduce their debt amid fears that interest rates will rise and push up the cost of their monthly loan repayments.

Net consumer credit was just £100 million in March, compared with £800 million the previous month, the bank said.

6--Is Home Ownership Overrated?, Wall Street Journal:

Excerpt: In the wake of the real estate bubble and collapse, all of these assumptions have been called into question—and in some cases, are under attack. Decades of policies designed to foster home ownership are being reexamined, from taxpayer support for the giant mortgage agencies to the tax deduction for mortgage interest. In light of this sea change, I decided to reapproach the sacred cow of home ownership with an open mind. Does it make sense financially? Does it promote social benefits?....

Nonetheless, home ownership has historically yielded other financial benefits. "Over 75 years the mortgage system is how the middle and lower-middle class accumulated capital," John Quigley, a professor of economics at the University of California at Berkeley, told me. "It was a system of forced savings rather than an investment per se. It was never intended to triple your money in three years."

For the most part, the system worked as intended, enabling Americans to accumulate wealth, put their children though college and retire comfortably. Returns were enhanced by the leverage provided by the mortgage—as long as housing prices rose. But as with any asset, leverage can also magnify losses. No one can borrow 80 percent of the price of a stock, yet that amount of leverage—and even more—became routine with real estate. In the wake of the housing collapse, that notion is being reexamined. "People have not ascribed enough of a risk premium to the leverage," says Christopher Mayer, professor of real estate at Columbia Business School.

Today, the answer to the question of whether a home is a good investment may well be "not always," according to Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Policies that increased home ownership created what Gabriel calls "transitory owners," who ended up suffering defaults, evictions, foreclosures and other financial disruptions. "Policy that creates only temporary home ownership is bad policy," Gabriel adds....

7--Clear Capital Home Price Index shows Double Dip, Calculated Risk

Excerpt: From Clear Capital: Clear Capital® Reports National Double Dip

Clear Capital... today released its monthly Home Data Index... Market Report, and reports prices have double dipped nationally 0.7 percent below prior lows experienced in March 2009.
“The latest data through April shows a continued increase in the proportion of distressed sales that are taking hold in markets nationwide,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital. “With more than one-third of national home sales being REO, market prices are being weighed down...

From Clear Capital:

This comparison leads to concern over home price declines through the rest of 2011. The trends of 2008 were quickly reversed with the introduction of stimulus measures. However, home prices today are already down nearly 25 percent since the 2008 period, creating increasing home affordability, in addition to gradually improving employment measures. Unlike the 2008 period where the downward trend ended in the winter, we're now heading into the home buying seasons of spring and summer. Regardless, the housing market still faces many challenges that will only be solved through increased buying activity or a reduction in the distressed segment―neither of which is assured in 2011.

8--Will high oil prices bring a new recession? Econbrowser

Ten of the 11 recessions in the United States since World War II have been preceded by an increase in oil prices. Does the recent surge in oil prices mean we should be looking for recession number 12?

I've noted before that once energy expenditures get above 6% of average consumer spending, we start to see significant changes in spending patterns. We crossed that threshold in March, when 6.27% of every dollar spent went to energy-related goods and services. For lower-income groups, that expenditure share is significantly larger....

This discussion illustrates a principle that applies to the economy more broadly. Higher oil prices by themselves put a burden on consumers and force them to cut back spending somewhere. But getting unemployed people back to work is a much bigger positive factor in overall spending. The momentum of the ongoing recovery is an important factor that is serving at the moment to offset the contractionary effect of higher oil prices.....

My judgment is that, contrary to my 2003 model, there will be some contractionary consequences of recent developments, but, consistent with that model and many others, they will not be as severe as what we experienced in 2008.

9--Falling Dollar Phobia, Paul Krugman, New York Times

Excerpt: I continue to be amazed by the way Very Serious People find ways to worry about everything except devastating unemployment. They’ve now spent two years warning about the bond vigilantes about to pull the rug out from under us any day now; as of right now, the 10-year interest rate has fallen to 3.21 percent on weak economic data.

Now there’s suddenly vast alarm about the possibility of a drastic fall in the dollar.

Why has the dollar fallen lately? The main answer is that while the Fed wants to keep rates low to help fight unemployment, the ECB is signaling that it wants to raise rates, never mind 21 percent unemployment in Spain. This is a difference in economic philosophy, not the decline of empire.

And why, exactly, should we regard dollar decline as a problem? It helps exports — and export booms are the normal way countries emerge from financial crisis. Dollar declines haven’t brought woe in their wake in the past: neither the huge decline after 1985 nor the sustained decline during the Bush years — both of them dwarfing anything we’ve seen recently — brought catastrophe; in fact, both were associated with OK economic growth and mild inflation.....

So where’s this dollar panic coming from? Well, like so many other things that have suddenly become big issues among the VSPs, it’s yet another reason not to do anything about unemployment.

10--Commodity Surge Need Not Boost Total Inflation, Fed Research Says, Wall Street Journal

Excerpt: In the paper released Wednesday, Boston Fed researcher Geoffrey Tootell wrote “evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate.” He noted his conclusions in the paper were drawn from a brief given to his bank’s president, Eric Rosengren, to assist the official in preparing for a recent Federal Open Market Committee meeting.

The contention that long-run inflation can indeed remain stable despite a surge in commodity prices is one that’s widely held within the Fed. Indeed, as gasoline prices have risen a dollar a gallon from a year ago, and as all manner of other commodities leap higher, most members of the central bank have remained sanguine about the long-term inflation stability.

Chairman Ben Bernanke has stated on a number of occasions that much of these recent gains are tied to global growth and unexpected supply issues. He’s confident commodity prices will soon stabilize. That viewpoint has underpinned the support to keep the Fed’s policy stance very stimulative and to press forward to its long-planned end of a controversial $600 billion bond-buying effort....

The Boston Fed paper described what’s happening now as a time of adjustment. In the case of energy, for example, “as all prices adjust to the increase in the level of oil prices, both total and possibly core inflation will increase. Once the price levels adjust, inflation should settle back down to its original rate.”

11--Who's afraid of a sinking greenback? The Economist

Excerpt: Does this matter? Well, sure, it matters in some ways. A falling dollar is an important mechanism through which the American economy makes needed adjustments. It increases import prices, which could fuel inflation but which will also reduce import growth. Similarly, it makes American products cheaper abroad, which boosts American export industries. A declining dollar is a natural means through which America's trade imbalances are resolved, and it is the mirror of adjustments in large trading partners, where appreciation is the order of the day.

Long-term weakening of the dollar is also likely to accompany efforts to diversify global reserve holdings away from the greenback. Other countries don't like the fact that when it comes to global reserve currencies, the dollar is the biggest game in town. That lack of reserve portfolio diversification leaves countries like China, which holds large reserves of dollar assets, heavily exposed to movements in the greenback. The problem for these countries is that good alternatives are still lacking. The euro would be a natural reserve currency (and indeed, the hawkish ECB's decision to raise rates has boosted euro fortunes), but for questions about euro-zone stability. China would like its currency to play a bigger role, but that will require the Chinese government to dismantle many of the financial controls it currently uses to manage capital flows and the value of the yuan. This process will take time.

But still, it's quite natural to expect that dollar hegemony won't continue forever, and there's no reason to expect that this end will be catastrophic for the American economy. So why do so many financial writers act as though dollar decline is a scary thing?

One reason may be a misguided conflation of dollar strength and American power. But another issue is a worry about what Neil Irwin describes here:

If global investors suddenly lost confidence in the value of the dollar, they would demand higher interest rates to lend money to the U.S. government. That could make it more expensive for the government to continue financing its debts, aggravating the budget crisis further.

So, one quick point to make is that while the dollar has recently declined, American government-bond yields have been low, and quite often falling. Having said that, it's not impossible to imagine that dwindling confidence in the dollar could hit a tipping point, at which point there might be a sudden stop in lending to America and a potential crisis.

But there are two important things to consider here. One is that the non-American world has a huge stake in the value of dollar assets because they're holding a load of them, because they value global macroeconomic stability, and because they don't want their exporters to develop a huge cost disadvantage relative to the world's largest economy. Any dangerous decline in the dollar would almost certainly generate a massive response, in the form of a major, coordinated intervention.

The other is that—as I mentioned earlier today—currency declines facilitate helpful adjustments in struggling economies. As the dollar falls, it supports growth in net exports. That, in turn, boosts America's economy and reduces its external funding needs. In many ways, it's more dangerous to try and sustain America's imbalances than to have them resolved via a weakening currency. So in general, I think it's a bad idea to warn that necessary and benign adjustments could somehow turn into a disastrous dollar plunge. This is unlikely to occur, and the more one sounds the alarm over this unlikely scenario, the more reluctance Americans are going to be to allow the necessary and benign adjustment to happen. And efforts to prevent a dollar fall could be quite damaging.

12--How Much Will the Second Round of Large-Scale Asset Purchases Affect Inflation and Unemployment?, New York Fed

Excerpt: Based on these estimates, the announced purchase of $600 billion of longer-term Treasury securities would be expected to translate into an 18-to-90-basis-point reduction in the ten-year Treasury yield. Using the mid-point of the above range of estimates as a guide, we assume the effect of LSAP2 is a 50-basis-point reduction in the ten-year Treasury yield and then focus on its potential effects on macroeconomic variables. Our results suggest that following a 50-basis-point shock to the ten-year Treasury yield, the maximum reduction of unemployment is 0.14 percentage points after seven quarters, while the maximum increase in inflation is 0.18 percentage points after sixteen quarters. Based on the model estimates, the impact on unemployment is equivalent to a 175-basis-point reduction in the federal funds rate (a factor of 3.5=175/50). The relative strength of changes to the long-term rate vis-à-vis the federal funds rate is also common to previous studies (see Rudebusch)....

Our results for unemployment are slightly larger than the estimates by Roubini Global Economics (maximum reduction of 0.1 percentage points in 2011), but smaller than Macroeconomic Advisers’ simulations using their large-scale macroeconomic model (maximum reduction of 0.5 percentage points in 2012:Q4)....

We interpret this evidence as indicating that a depreciation of the dollar is not likely to be a strong channel influencing unemployment and inflation in the United States under current circumstances.

In summary, our simple VAR analysis suggests that the second round of LSAP as currently conceived is likely to have a moderate and delayed impact on macroeconomic variables such as unemployment and inflation, with substantial uncertainty (not reported here) around the point estimates.

13--The IMF’s Switch in Time, Joseph Stiglitz, Project Syndicate

Excerpt: The crisis showed that free and unfettered markets are neither efficient nor stable. They also did not necessarily do a good job at setting prices (witness the real-estate bubble), including exchange rates (which are merely the price of one currency in terms of another).

Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact. And the US Federal Reserve’s “quantitative easing” (QEII) made the demise of the ideology of unfettered markets inevitable: money goes to where markets think returns are highest. With emerging markets booming, and America and Europe in the doldrums, it was clear that much of the new liquidity being created would find its way to emerging markets. This was especially true given that America’s credit pipeline remained clogged, with many community and regional banks still in a precarious position.

The resulting surge of money into emerging markets has meant that even finance ministers and central-bank governors who are ideologically opposed to intervening believe that they have no choice but to do so. Indeed, country after country has now chosen to intervene in one way or another to prevent their currencies from skyrocketing in value....

But an even more important change is the link that the IMF has finally drawn between inequality and instability. This crisis was largely a result of America’s effort to bolster an economy weakened by vastly increased inequality, through low interest rates and lax regulation (both of which resulted in many people borrowing far beyond their means). The consequences of this excessive indebtedness will take years to undo. But, as another IMF study reminds us, this is not a new pattern.

The crisis has also put to the test long-standing dogmas that blame labor-market rigidity for unemployment, because countries with more flexible wages, like the US, have fared worse than northern European economies, including Germany. Indeed, as wages weaken, workers will find it even more difficult to pay back what they owe, and problems in the housing market will become worse. Consumption will remain restrained, while strong and sustainable recovery cannot be based on another debt-fueled bubble.

As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise.

But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all. As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.

14--House GOP Bill To Delay Financial Regulations Clears Key Hurdle, Huffington Post

Excerpt: With gas prices approaching record highs and soaring food prices fueling global unrest, Republicans on the House Agriculture Committee passed a plan Wednesday to delay regulation on financial speculation, including in the food and oil markets.

In a Wednesday vote, the committee approved a bill to delay by 18 months the writing of many key regulations outlined in last year’s Dodd-Frank financial reform law. Dodd-Frank requires regulators to write a host of new rules to tighten oversight over derivatives, financial instruments designed to help farmers and manufacturers hedge their risk that are also used by financial speculators. Warren Buffett has called derivatives "financial weapons of mass destruction" and the financial tools played a key role in the downfall of insurance giant AIG.

During Wednesday's debate, Rep. Joe Courtney (D-Conn.) introduced an amendment to the bill that would have exempted from the 18-month delay key rules designed to rein in speculation in food and energy markets. The rules, called “position limits,” would restrict the size of the bets that Wall Street traders can make, which experts say would ease commodity price swings.

All 20 Democrats on the panel voted in favor of Courtney’s amendment, as did two Republicans: Reps. Jeff Fortenberry (Neb.) and Chris Gibson (N.Y.). But, the amendment was defeated, with the 23 other Republicans on the committee voting against it....

President Barack Obama has created a new inter-agency working group to prosecute fraud and manipulation in the oil markets, but some experts worry that, despite the merits of increased law enforcement, outright fraud will only have a minor impact on prices. Since the CFTC has not yet issued its rules to crack down on excessive speculation, much of the activity that may be driving up prices is likely legal, they say.

15--JPM's Jamie Dimon says 'Foreclosure is good you', Naked Capitalism

Excerpt: I missed this howler from a few months ago, but it’s so outrageous that I’ve got to comment on it, even thought it’s stale..... In the course of a CNBC interview JPMChase CEO Jamie Dimon stated that:

“Giving debt relief to people that really need it, that’s what foreclosure is.” As he explained:

“[Homeowners] are probably better off going somewhere else, because they get relieved almost 100% of the debt through foreclosure.”


16--Japan's Auto Sales Fall 51% in April, Wall Street Journal

Excerpt: New auto sales in Japan posted their biggest-ever drop in April, as a parts shortage caused by the March 11 earthquake and tsunami cut into production of vehicles and reduced supplies of new vehicles to dealerships, the Japan Automobile Dealers Association said Monday. Sales of new cars, trucks and buses tanked 51% from a year earlier in April to 108,824 vehicles—the lowest-ever monthly volume, the association said. The figures don't include sales of mini vehicles with engine capacities of 660 cubic centimeters or less.

The April drop was the deepest since the association started compiling data in 1968, eclipsing the 45.1% fall in May 1974, when an oil supply crunch crimped sales. The fall was sharper than the 37% tumble in March, as a disruption in parts procurement after the disaster weighed on the whole month of April.

Sales of Toyota Motor Corp. vehicles dropped 68.7% to 35,557 vehicles in April, with those of the luxury Lexus brand down 44.7% at 1,656. Nissan Motor Co. vehicle sales tumbled 37.2% to 17,413, while Honda Motor Co.'s sales sagged 48.5% to 18,923.

17--Ireland state pension fund sells off investments to help cover bailout costs, Independent via Automatic Earth

Excerpt: The National Pensions Reserve Fund (NPRF) was forced to sell some of its investments in the past few months to help cover the costs of the €85bn bailout, it emerged yesterday. The pension fund reported it held only €5.3bn in its so-called discretionary portfolio at the end of April. This was down from €9.8bn in assets a month earlier, as it liquidated investments to help cover the cost of bailing out the banks.

Up to €10bn is to be put up by the pension fund as part of the bailout deal agreed with the European Union and IMF last November. The NPRF also said the value of its so-called directed portfolio, which includes €7.9bn the Government has provided in aid to AIB and Bank of Ireland in return for shares in the lenders, was €13.4bn at the end of March. There was €5.5bn in cash, representing liquidated investments to help the State meet its contribution to the EU/IMF bailout. The total fund size at March 31 was €23.2bn.

18--Silver loses shine in 20% tumble, Telegraph via Automatic Earth

The price of silver futures tumbled again on Wednesday, taking total losses to more than 20pc in a week amid fears that the precious metal represented a bubble bursting.

Silver – which has suffered its biggest three-day fall in 28 years – plunged from a peak of almost $50 an ounce last Thursday to a low last night of below $40. In recent weeks, experts have warned that a dangerous bubble was forming in the silver markets. The price has soared nearly 175pc between August and the end of last week. Gold, which has also risen to record highs, is up 28pc over the same period.

19--Commodity Plunge Resumes, Zero Hedge

Excerpt: The liquidation wave has arrived, as the entire commodities complex, with an emphasis on silver and crude, continues to feel the wrath of a bipolar market which from inflation has suddenly realized that the underlying deflation needs to exhibit itself before the US Central Bank has a justification for more monetization. Elsewhere, the by bar biggest bubble in the world: the dollar short, is blowing up, with the EURUSD on route to post a 300 pip move in a few hours. Basically, the tit for tat repeat of 2010 in this Anno Domini 2011 continues.

20--NYSE Margin Debt Surges To Highest Since February 2008, Net Speculator Leverage Second Highest Ever, Zero Hedge

Excerpt: The NYSE has released its monthly margin debt update for March. Not surprisingly, with everyone, and yes EVERYONE, chasing nothing but levered beta, margin debt surged to a fresh 3 year high at $315.7 billion, the highest since February 2008. But far more troubling is that when netting out positive margin balances such as Free Credit Cash Accounts and Credit Balances in Margin Accounts, the investor net worth, or alternatively net leverage, as it is defined, plunged by $18.2 billion to ($75.2) billion. This is the second highest net leverage ever seen on on the NYSE, only lower compared to the $79 billion hit at the absolute peak of the credit bubble in June 2007. We all know what followed after.

21--Stocks Decline a Third Day as Commodities Plunge; Euro Weakens, Bloomberg

Excerpt: Commodities plunged the most in two years, stocks worldwide posted the biggest three-day drop since March and the dollar rallied after American jobless claims unexpectedly rose and the European Central Bank signaled it will wait until after June to raise interest rates.

The Standard & Poor’s GSCI index of 24 commodities sank 4.8 percent at 12:10 p.m. in New York and has lost 8.1 percent this week. Silver tumbled 7.4 percent, extending its decline since April 29 to 25 percent, and oil sank 5.9 percent. The MSCI All- Country World Index of shares in 45 nations fell 0.7 percent to 349.22, extending its three-day loss to 2.4 percent. The S&P 500 was unchanged after dropping 0.8 percent. The dollar gained 1.6 percent against the euro, making commodities quoted in the greenback more expensive for holders of other currencies.

U.S. claims for employment benefits jumped to 474,000 last week amid auto-plant shutdowns, exceeding the median economist estimate of 410,000 in a Bloomberg survey, while worker productivity declined. The euro weakened after ECB President Jean-Claude Trichet surprised some investors who expected a quicker move to fight surging inflation.

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