Monday, June 27, 2011

Today's links

1--Macro Update, Pragmatic Capitalism

Excerpt: First, a few of today’s headlines to set the mood:

“China factory sector close to stalling – Flash PMI”
“Europe Services, Manufacturing Weaken More Than Forecast”
“France’s Manufacturing, Services Growth Slows More Than Forecast”
“Trichet Says Risk Signals ‘Red’ as Crisis Threatens Banks”
“Italian Household Confidence Falls Amid Concerns on Growth, Jobs”
“U.K. Retail-Sales Index Declines to Lowest in a Year, CBI Says”

“Deficit-Cut Talks Hit Roadblock, Cantor Exits”
“Jobs Picture Grows Worse as Weekly Claims Post Jump”
“New US Home Sales Fall 2.1 Percent in May”
“Fed Slashes Growth Forecast, Sees High Unemployment”
“Oil Prices Plunge”

It’s all unfolding like a slow motion train wreck. The underlying deflationary forces were temporarily masked when QE2, under the misconception that it was somehow inflationary, caused global portfolio managers to exit the dollar, both directly and indirectly.

But now that psychology is fading, as the global lack of aggregate demand revealing the actual spending power just isn’t there to support things at the prices managers paid to place their bets. And the next ‘really big shoe’ (as Ed Sullivan used to say) to fall could be China, as they move into their traditionally weaker second half.

2--CUT, CAP AND BALANCE = R.I.P. U.S.A., Pragmatic Capitalism

Excerpt: Is our 1937 moment in the not too distant future? It’s beginning to look that way. House Republicans are using the debt ceiling debate as their bargaining chip to “cut, cap and balance”. According to The Hill this means:

Cut — Substantial cuts in spending that will reduce the deficit next year and thereafter.

Cap — Enforceable spending caps that will put federal spending on a path to a balanced budget.

Balance — Passage of a balanced-budget amendment to the U.S. Constitution — but only if it includes both a spending limitation and a supermajority for raising taxes, in addition to balancing revenues and expenses....

With the US now running a current account deficit of 4% it is imperative that the government sector run a deficit in excess of 4% in order for the private sector to be able to save. If this were not the case, the private sector would be forced into deficit and the economy would contract. This occurred repeatedly in Japan in the 90′s and is currently occurring in the periphery nations of Europe. Austerity is not helping as so many said it would in 2008. Instead, it is causing near depression throughout the region. Were it not for 10% budget deficits in the USA you can be certain that we would be suffering a similar economic decline. Fortunately, we have not allowed ourselves to be scared by the persistent fear mongering with regards to our imminent (mythical) insolvency.

Cut, cap and balance is genius politics if you’re trying to send President Obama out in 2012 as the worst President of all-time, but it’s awful economics (yes, it was awful economics under Clinton as well) and the equivalent of walking the US economy out on the plank. The details here are still early in the making, but if we do indeed pass harsh cuts and enforce a balanced budget amendment in the coming years I would get extraordinarily bearish on the outlook for the US economy. 1937 here we come?

3--And Policymakers Are Proposing to Withdraw Stimulus?, Econbrowser

Excerpt: ...Finally, on the spending side, government expenditures on goods and services are a negative component of overall GDP growth, in an accounting sense....

In fact, JEC had a recent hearing, entitled “Spend Less, Owe Less, Grow the Economy”. Here’s the concluding paragraph from Chad Stone’s assessment of the expansionary fiscal contraction thesis:

The United States faces a serious long-term deficit problem and an immediate short-term problem of slow growth and high unemployment. Current economic and budget conditions in the United States do not look at all like the conditions in countries that have experienced successful deficit reduction through short, sharp fiscal contractions. Non-partisan experts like Fed Chairman Bernanke and the Congressional Budget Office warn against cutting deficits too fast. And as the non-partisan Congressional Research Service concludes from its analysis of the international evidence, cutting budget deficits too rapidly under current U.S. economic conditions is most likely to hurt the economy and ultimately be unsuccessful. If we go down this path, I’m afraid the lesson will be “Spend Less, Grow Less, Slow the Economy.”

By the way, here is the nonpartisan Congressional Research Service's assessment of contractionary fiscal expansions. (If only our Congressional members read these reports...)

4--Phony Deficit Hawks, Paul Krugman, New york Times

Excerpt: So, just to summarize: Republicans are deeply, deeply concerned about the budget deficit; they believe that our nation’s future is at stake.

But they’re willing to sacrifice that future, not to mention risk the good faith and credit of the federal government, rather than accept so much as a single penny of tax increases as part of a deal.

Given all that, it seems almost redundant to mention that federal tax receipts as a percentage of GDP are near a historic low: (chart)

So what’s it all about? The answer, of course, is that the GOP never cared about the deficit — not a bit. It has always been nothing but a club with which to beat down opposition to an ideological goal, namely the dissolution of the welfare state. They’re not interested, at all, in a genuine deficit-reduction deal if it does not serve that goal.

And everyone who has preached bipartisanship, who has called for a meeting of minds on the subject, is either a fraud or a chump.

5--Flight from money market funds connected to EU, Credit Writedowns

Excerpt: The FT writes:

Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.

At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks because of growing worries over Greece, according to brokers and bank traders.

You know, scratch that. Let me quote from last May’s post on BBVA’s problems in the US commercial paper market:

The Wall Street Journal is reporting that the Spanish bank Banco Bilbao Vizcaya Argentaria (BBVA) is having a difficult time funding itself in the US commercial paper market. Moreover, according to the Journal this has been going on for some time – since the beginning of the month. The amount is small ($1 billion) given BBVA's large balance sheet which is almost $700 billion, the same as when the crisis started in 2007. And BBVA is widely seen, along with Banco Santander, as the healthiest institution in Spanish banking. Their having problems rolling over paper speaks to the panic of CP buyers, in my view. But the commercial paper market has also been a major source of bank runs since the credit crisis began and this has to be seen by authorities in the US and Europe as a signal of liquidity problems…

What do I make of this? For starters, I don't think it is entirely rational because the two entities I identified are the strongest in their respective markets. These stories have all the hallmark of panic. Yet, it speaks to a certain Eurozone debt revulsion that is now widespread.
-European Contagion Spreads; Is This Rational?

6--More Americans applied for unemployment benefits, Bloomberg

Excerpt: More Americans applied for unemployment benefits last week, adding to evidence that the job market is weakening.

The Labor Department says applications rose by 9,000 to a seasonally adjusted 429,000 last week. It was the second increase in three weeks and the biggest jump in a month. Applications have been above 400,000 for 11 straight weeks.

Applications dipped below 400,000 in February and stayed below that threshold for seven of the following nine weeks. Applications fell as low as 375,000, a level that signals sustainable job growth. But applications surged in April to an eight-month high of 478,000 and have shown only modest improvement since that time.

7--NYSE: Margin Debt Declines For First Time In 9 Months In May, Wall Street Journal

Excerpt: The New York Stock Exchange said Tuesday margin debt fell 1.7% in May, the first decline since a marginal slide in August.

At the end of May, margin debt totaled $315.38 billion, retreating from April's $320.71 billion, which was the highest level since February 2008, according to Big Board data for customers of NYSE-member securities firms.

Market analysts track margin-debt activity as a signal of investors' appetite for speculative trading.

Those trading "on margin" take on a risk in exposing themselves to margin calls during a sharp decline in stock prices, which require them to post additional collateral lest their brokers sell their securities to cover the debt. A wave of margin calls can worsen selling pressure on stocks, a phenomenon that some say contributed to the market's plummet during the financial crisis.

8--More On The On-Going China Economic Slowdown, Business Insider

Excerpt: Yesterday, the HSBC China PMI flash estimate shows that manufacturing is probably not growing at all in June. With the latest reading at 50.1, it is pretty much getting ever closer to downright contraction territory.

This is by no means surprising though. As I have pointed out time and again, as the Chinese government and the People’s Bank of China tighten the policy, economic slowdown is bound to happen. The only question is when and how slow. As we have gotten more data over the past few months, my sense is that the inflation and property prices remain very sticky. With the mixed bag of economic data coming in in the previous weeks, I can only confirm that the economy has slowed, but definitely not slow enough to solve the biggest problems.

It will remain necessary for the People’s Bank of China to raise interest rates and reserve requirement ratio, in my view, as the inflation and property prices problems remain unsolved. However, the impact of that is a further tightening of liquidity of the Chinese banking system. Indeed, we have been seeing large surges in interbank rates in recent days, with one-week Shanghai Interbank Offered Rate (SHIBOR) shot pass 9% now.

Source: SHIBOR

Although the stated objective of price stability has not been met, the monetary and credit tightening is affecting the economic growth in a negative way. I have been early to warn about the dire situation among small businesses in China, who are struggling with the lack of credit and labour, as well as power shortages. I have also been early to warn the growth in underground credit due to the lack of bank credit, in which small companies are paying exceptionally high interest rates to keep themselves afloat.

Unfortunately, that is still not enough to bring inflation and property prices down. So far, the data points are still confirming my previous conjecture that China needs a recession, or a drastic slowdown, to bring inflation down. As tightening continue, I believe the risk of hard landing to increase, and I believe we can only see easing after we see more meaningful decrease in inflation and significant correction in the real estate market.

9--Correct: US Money Mkt Funds Cut European CP on Greece Fears, IMarket

NEW YORK (MNI) - U.S. money market funds, fearing indirect risk from Greek debt via the commercial paper of European banks, are exiting such holdings and putting money into Treasuries, or executing reverse repos in the overnight market, Treasury traders said.

But finding Treasury bills to buy is no easy task, traders said, as so many other accounts also are buying them that yields are at zero interest, if not negative.

"The money funds have cash," one trader said. "If they have excess cash, they can do a reverse repo with a primary broker. They are lending money on a collateralized basis. They can give money to the institutions, who give them back collateral. But they want something safe. So now the money market funds have absorbed all the safe collateral.

"They is why the Treasury repo rate is going to zero percent, and why T-bill rates are going to zero," he added.

Traders said some money market funds are putting money into the overnight market and/or in buying T-bills as they do not want to have inadvertent exposure to the Greek situation through the European banks. And in some cases they want to borrow the bills from a bank through the overnight repo market.

"Some of the banks, with the headline risk of Greece, Italy etc., are doing that," one trader said. "They are seeing a flight to quality. That is why you will see some of the overnight repo markets on Treasuries are trading negative" rate as money market funds invest money in such assets.

10--Pensioners to Aid Nuclear Plant Clean-Up on Worker Shortage, Bloomberg

Excerpt: Yasuteru Yamada, a 72-year-old former anti-nuclear activist, will lead a band of pensioners to the Fukushima Dai-Ichi plant early next month to help clean up the site of Japan’s worst atomic disaster since World War II.

Yamada, a retired Sumitomo Metal Industries Ltd. (5405) plant engineer, is waiting for Tokyo Electric Power Co. to allow his volunteer “Skilled Veterans Corps” to carry out preliminary inspections at the plant after the government welcomed the move.

Almost four months after the March 11 earthquake and tsunami triggered the crisis by damaging the Dai-Ichi plant, 3,514 workers involved in the clean-up have been exposed to radiation, including nine whose readings breached the annual limit of 250 millisieverts for a nuclear plant worker. Tepco said it had 1,044 workers at the plant as of June 19, about half the number a month earlier.

“I’m not on a suicide mission,” said Yamada, a 1962 graduate of Tokyo University. “I am going to try my best to protect myself and come back alive.”...

Five-Member Team

“People who are willing to sacrifice their daily lives to help the nation resolve these problems are invaluable,” Goshi Hosono, special advisor to Prime Minister Naoto Kan, said in a news briefing in Tokyo today. “First we’ll have to check on their health status, as people at an advanced age working in that kind of environment could fall ill.”...

Yamada and his fellow pensioners said they’re aware of the risks of entering the nuclear station.

“I am mentally prepared for death, but I’m not a kamikaze,” Yamada said, referring to the Japanese soldiers who carried out suicide attacks during World War II. “The kamikaze were making irrational, obligatory self-sacrifices. What I’m doing is self-motivated and rational.”

11--Mortgage Principal Write-Downs Lagging, Bloomberg

Excerpt:“We do not see principal reduction as a solution that should or can be used on a broad basis,” Bank of America spokesman Rick Simon said.

States aren’t the only ones struggling to get banks on board. A year-old Federal Housing Administration effort that pays lenders to write down second liens and refinance underwater debt has drawn only 207 takers so far.

In all, banks wrote down principal on fewer than 5,000 loans in the fourth quarter of 2010, according to the Office of the Comptroller of the Currency.

About 23 percent of U.S. homes have negative equity totaling about $750 billion, as reported by CoreLogic. In contrast, the biggest banks combined hold a total of $717 billion in Tier 1 capital, according to Bloomberg data.

As states continue to negotiate with banks, they also are coping with borrowers who seem fatigued by a flood of aid programs that so far haven’t helped much....

consumer advocates say such aid is long overdue. Homeowners innocently swept into the run-up in home prices are now bearing the financial and psychological burden of a mortgage they might never be able to repay.

“There was a lot of money put into rescuing the banks and not nearly the resources put into rescuing regular folks,” said Bruce Mirken of the Greenlining Institute, an economic policy group in Berkeley, California. “A fair number of these loans were written based on fantasy values. It’s better for everybody concerned to have a mortgage market and a housing market that has some connection to reality.”

12--Austerity Is Already Here, and It's Killing the Recovery, The Atlantic

Excerpt: As Congress bickers over how to cut the deficit, some economists warn that cuts too deep too soon would endanger the recovery. Unfortunately, spending has already declined on the state and local government levels. As a result, we're seeing weaker results in the two economic indicators that matter the most: hiring and economic growth. Without the headwind created by the state and local governments, the recovery would look significantly stronger....

A Recovery With 326,000 More Jobs

In March 2010, the U.S. economy finally began to add jobs again. Every month since then, private sector employment has grown. Yet almost every month since then, state and local governments have cut jobs. Without those layoffs, the U.S. labor market would have 326,000 more people employed through May 2011. Here's a chart showing job growth with and without the impact of state and local government cuts: (chart)

How much better would we feel about the U.S. economy having grown by 3.4% and 2.4% over the past two quarters instead of 3.1% and 1.9%? This change would have both tangible and intangible positive effects on the economy. Not only would there have been more money spent to stimulate the economy, but sentiment would be a little higher, as growth would be looking a little bit better.

A Taste of What's to Come?

Remember, all of these benefits to the economy would have come merely if state and local governments didn't cut jobs or spending -- not if they had hired or had increased spending compared to 2009 levels. To be sure, budget troubles are forcing state and local austerity, but if the federal government were able to stop their bleeding, then the recovery would be proceeding with greater strength. The additional money and jobs in the economy would help to stimulate a higher rate of growth going forward as well, which means we'll miss the impact of this lost economic activity in quarters to come as well.

13--The Payroll Tax Needs a Vacation, by Robert Frank, New York Times

Excerpt: The federal budget deficit is a distraction. It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness...

Almost 14 million people ... were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.

If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.

Excerpt: The Payroll Tax Needs a Vacation, by Robert Frank, Commentary, NY Times: The federal budget deficit is a distraction. It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness...

Almost 14 million people ... were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.

If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.

14--State and local governments should be listed as a primary risk to the US outlook, New York Times

Excerpt: I don't see why the aggregate state funding gap is not numero uno on the 'risks' to the US outlook (I usually hear oil, Europe, China, etc., in my line of work). According to the Center on Budget and Policy Priorities, the State budget gap is not expected to clear at least through 2013. From the CBPP report "States Continue to Feel Recession's Impact":

Three years into states' most severe fiscal crisis since the Great Depression, their finances are showing the clearest signs of recovery to date. States in recent months have seen stronger-than-expected revenue growth.

This is encouraging news, but very large state fiscal problems remain. The recession brought about the largest collapse in state revenues on record, and states are just beginning to recover from that collapse. As of the first quarter of 2011, revenues remained roughly 9 percent below pre-recession levels.

Consequently, even though the revenue outlook is better than it was, states still are addressing very large budget shortfalls.

Better put: state revenues are rising more quickly than expected from a low base following the most precipitous drop 'on record'. Not feeling too confident here....

The trend for job growth has been decidedly negative for state and local governments. State and local governments have net-fired workers every single month since November 2010....

Federal government support to state and local governments is set to decline significantly next year (see figure 2 on html of CPBB report). So it's up to the private sector to provide sufficient income growth to offset the likely decline (latest data is 2009) by the giant of aggregate compensation, state and local governments, for years to come. I'm skeptical.

15--The G20 and global imbalances, Barry Eichengreen, VOX

Excerpt: Global imbalances continue to place the stability of the global economy at risk. The International Monetary Fund’s forecasts anticipate essentially no reduction in existing imbalances in the next five years, assuming the continuance of current policies. And independent observers have suggested that, if anything, the IMF may be overly optimistic about the prospects. A shock that causes those imbalances to unravel quickly could lead to sharp drops in the currencies of countries that depend most heavily on foreign finance for their current-account deficits (“countries that depend most heavily on foreign finance” being code for the US). That in turn could have major repercussions, both real and financial. As the IMF puts it, the global economic recovery could be “resting on hollow legs.”

Admittedly, not a few of us have warned before about the risks posed by global imbalances and pointed to savings-investment imbalances in the US and China as their source. Some of those warnings were issued as early as 2004. That these early warnings were — how to put it politely? — premature does not mean that they were off target. They were derailed by the global financial crisis, which directed attention elsewhere. Evidence that global financial markets were seizing up had the effect, ironic in the circumstances, of inducing additional flows into the dollar, that currency being a traditional safe haven in times of financial turmoil and the US treasury market being the most liquid in the world. But simply because these warnings were early and rendered moot for a time by other events does not make them wrong.

No comments:

Post a Comment