Friday, July 1, 2011

Weekend links

1--BofA, Goldman Among Banks Cutting Jobs as Trading Slows, Bloomberg

Excerpt: Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) are among financial firms cutting more than 1,300 workers in an effort to trim expenses and match revenue as equity and bond trading slows.

Bank of America, the biggest U.S. bank, cut about 60 positions in its equity-sales and trading division this month, said two people with knowledge of the decision. Goldman Sachs, the fifth-biggest U.S. bank by assets, plans to eliminate 230 jobs in New York starting in September, according to a filing the firm submitted to the state’s Department of Labor.

The firms join Barclays Plc (BARC) and Credit Suisse Group AG (CSGN), which are cutting investment-banking workers as they grapple with reduced revenue from buying and selling securities. Fixed- income trading revenue at U.S. banks probably dropped 30 percent in the second quarter from the previous three-month period, while equities trading fell 15 percent, Keith Horowitz, a Citigroup Inc. analyst, wrote in a report last week.

2--A second stimulus, Robert Reich, Marketplace

Excerpt: (from the archives) ROBERT REICH: The recovery is showing every sign of stalling. Yet 13.5 million Americans are still out of work and millions more have stopped looking. And with housing prices sinking, millions more home owners are facing uncertainty.

So what's Washington doing about this calamity? In a word, nothing. Instead, our representatives are staging a giant game of chicken over raising the debt ceiling, and negotiating furiously over spending cuts.

None of this has anything to do with the current crisis. While it's important to cut the long-term public debt as a percent of the national economy, the last thing you want to do is cut public spending right now -- when consumers can't and won't buy enough to get the economy going, and businesses won't create enough jobs without customers.

Instead we need to boost demand. For example, exempt the first $20,000 of income from payroll taxes for the next year. Recreate the WPA to employ the long-term jobless and the Civilian Conservation Corps to give jobs to millions of unemployed young people. Let distressed home owners declare bankruptcy on their primary residence, so they can reorganize their mortgage loans.

Call it a second stimulus if you want. Call it chopped liver. It doesn't matter. The point is to put money back into peoples' pockets so they can spend more and generate more jobs, which will get the virtuous cycle going again.

3--What's happening to the US economy, Martin Feldstein, Project Syndicate

Excerpt: The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. This is a sharp change from the economic situation at the end of last year – and represents a return to the very weak pace of expansion since the recovery began in the summer of 2009.

Economic growth in the United States during the first three quarters of 2010 was not only slow, but was also dominated by inventory accumulation rather than sales to consumers or other forms of final sales. The last quarter of 2010 brought a welcome change, with consumer spending rising at a 4% annual rate, enough to increase total real GDP by 3.1% from the third quarter to the fourth. The economy seemed to have escaped its dependence on inventory accumulation.

This favorable performance led private forecasters and government officials to predict continued strong growth in 2011, with higher production, employment, and incomes leading to further increases in consumer spending and a self-sustaining recovery. A one-year cut of the payroll tax rate by two percentage points was enacted in order to lock in this favorable outlook.

Unfortunately, the projected recovery in consumer spending didn’t occur. The rise in food and energy prices outpaced the gain in nominal wages, causing real average weekly earnings to decline in January, while the continued fall in home prices reduced wealth for the majority of households. As a result, real personal consumer expenditures rose at an annual rate of just about 1% in January, down from the previous quarter’s 4% increase.

That pattern of rising prices and declining real earnings repeated itself in February and March, with a sharp rise in the consumer price index causing real average weekly earnings to decline at an annual rate of more than 5%. Not surprisingly, survey measures of consumer sentiment fell sharply and consumer spending remained almost flat from month to month....

Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years.

4--Shilling: China Heading for a Hard Landing, Pt. 4, Bloomberg

Excerpt: Money, Banks, Stocks

Growth in the broadest measure of China’s money supply has declined from 30 percent year-over-year in December 2009 to 15 percent year-over-year at the end of May. Bank loans fell 25 percent in May from April. Excavator sales fell 10 percent in May from a year earlier, possibly foreshadowing a construction bust. The 14.3 percent decline in the Shanghai Composite Index last year and the 10 percent drop since mid-April also don’t bode well for growth.

Despite all these negatives, with recent data showing first-quarter GDP expanding by a still-healthy 9.7 percent, and consumer inflation at its highest levels since July 2008, China has continued to tighten its economic policy. The government raised banks’ reserve requirements to 21.5 percent in June, the ninth such increase since November. And it will probably continue to tighten until it sees decisive results -- that is, a hard landing.

What will happen next?

Holding Treasuries

China also won’t be selling its $1 trillion in reserves of U.S. Treasuries in great amounts, as some have feared. The Chinese are well aware that doing so would be disastrous for their economy, because the resulting nosedive in Treasury prices and the dollar would decimate the value of China’s remaining holdings of U.S. debt and other assets. A global depression might well ensue, with China and other export-dependent countries as the biggest losers.

Excess Capacity

Instead, China’s most likely reaction -- to focus still more on exports -- will exacerbate its hard landing. If consumer spending doesn’t increase substantially in the next few years, China will have a serious problem using all the industrial capacity it has built, partly to keep people employed. Capacity is mushrooming so rapidly that even in China’s booming economy, most manufacturers are still seeing flat or falling utilization rates.

This unused capacity portends weak profits and trouble for the loans that financed it. My judgment is that it will once again be used for exports aimed at the U.S. and Europe. And once again, this will add to global excess supply and put downward pressure on prices.

Then China, along with other export-dependent emerging economies, will be competing fiercely in a world of slow growth and deflation.

5--The Wageless, Profitable Recovery, New York Times

Excerpt: Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.

The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007-2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.

According to the study, between the second quarter of 2009, when the recovery began, and the fourth quarter of 2010, national income rose by $528 billion, with $464 billion of that growth going to pretax corporate profits, while just $7 billion went to aggregate wages and salaries, after accounting for inflation.

The share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades, the study found.

“The lack of any net job growth in the current recovery combined with stagnant real hourly and weekly wages is responsible for this unique, devastating outcome,” wrote the report’s authors, Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin and Sheila Palma....

With regard to corporate profits, the report noted that the preliminary estimate for the first quarter of 2011 was $1.668 trillion, an increase of $465 billion of just under 40 percent since the recovery began.

“Aggregate employment still has not increased above the trough quarter of 2009, and real hourly and weekly wages have been flat to modestly negative,” the report concludes. “The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders.”

6--QE2 Ends, Reuters

Excerpt: The Federal Reserve ended its
$600 billion bond-buying program, known as QE2, on Thursday and
has yet to offer any hints of more monetary easing to come.

That hasn't stopped investors from wondering what new
tricks the central bank may have in its repertoire should the
U.S. economy continue to struggle in the second half of 2011.

Bill Gross, manager of PIMCO, the world's largest bond
fund, said last week the Fed may signal as soon as August that
it stands ready to print more money if the economy worsens and
recession starts looking like a real possibility.

"I'm surprised at how quickly talk has turned to QE3. It
began even before QE2 had ended," said Gregory Whiteley, who
manages the government debt portfolio at DoubleLine Capital, a
Los Angeles-based fund with some $12 billion in assets.

"But it's a bit like automakers who offer incentives to
buy. People get hooked on them, and before one program ends,
they're thinking about when the next one will come along."

7--U.S. Reliance on Exports for Growth May Boost China’s Role, Wall Street Journal

Excerpt: The U.S. economy will have to increasingly rely on exports for growth because of the reluctance of policy makers to use monetary or fiscal policy prescriptions, ITG Investment Research senior economist Steve Blitz said, a formula which poses downside risks.

The Federal Reserve‘s closing of its bond-purchase program and the expiration of some stimulus efforts mean an outsized emphasis on selling goods overseas to pull the economy along, Blitz said. U.S. policy makers will have to hope one of its chief economic rivals steps in to pick up the slack.

“You’ve got a contractionary bias going forward now on the monetary and fiscal side,” Blitz said in an interview.

“How do you keep the economy going? Exports, and that means whether it’s directly to China or not, they are certainly the linchpin.”

With unemployment figures still inflated, Blitz said there are sentiment risks as consumers and businesses both show unease about the state of the economy. Any contraction in hiring or negative surprises have the potential to quickly sour consumers’ feelings.

8--Martin Wolf and the "contained Depression", Pragmatic Capitalism

Excerpt: The thrust of Wolf’s piece is about a recent BIS report which largely rejects the balance sheet recession idea and instead calls for global tightening of monetary and fiscal policy:

“addressing overindebtedness, private as well as public, is the key to building a solid foundation for high, balanced real growth and a stable financial system. This means both driving up private savings and taking substantial action now to reduce deficits in the countries that were at the core of the crisis.”

Wolf argues that the BIS does not understand a basic facet of economics – sectoral balances. He gets very MMTish:

“Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced? The BIS notes four answers: repayment; default; higher real incomes; and inflation.

Let us rule out the last and focus on the first. Repayment means spending less than one’s income. That is what is happening in theUS private sector (see chart). Households ran a financial deficit (an excess of spending over income) of 3.5 per cent of gross domestic product in the third quarter of 2005. This had shifted to a surplus of 3.3 per cent in the first quarter of 2011. The business sector is also running a modest surplus. Since the US has a current account deficit, the rest of the world is also, by definition, spending less than its income. Who is taking the opposite side? The answer is: the government. This is what a controlled depression means: every sector, other than the government, is seeking to strengthen its balance sheet at the same time.”

It’s always nice to see Wynne Godley’s ideas gaining more traction. Even though they aren’t being used in any logical manner by our politicians.

9--What Conservatives Don’t Want You to Know About Government’s Role in the Economy, New Deal 2.0

Excerpt: But at the root of the neoclassical world view is the idea that the economic system is self-regulating, that is, if the economy is pushed off course by “external” forces, then it will become stable by itself — without government interference. And yet we know that economies are constantly growing and changing — that is, they are not stable — and they are often under threat of recession and depression. That is why governments always have to be part of the solution. They are needed in order to support economic growth, maintain the right structure of the economy, and intervene when the economy goes bad.

FDR’s presidency is the perfect example of this. When he became president, Herbert Hoover had just spent several years trying to reverse the Great Depression with market-based solutions, but FDR championed a set of governmental policies that turned the country around. To deal with unemployment, FDR established the Works Progress Administration, or WPA, which was not only designed to employ one fully able member of each household in which no one could find work, but also to build up the country’s physical infrastructure. Building infrastructure is what governments do best. In fact, one could say that civilization started when the first governments constructed the irrigation and drainage systems that enabled agriculture to flourish. The United States, like every successful country, has a long and rich history of infrastructure building, without which the country would have very likely stayed poor. From canals like the Erie Canal before the Civil War, to the railroads after, from the dams that even conservative Republicans like Calvin Coolidge initiated, to the WPA that built libraries, schools, airports, roads, and other structures in virtually every town, to the Interstate Highway System championed by a Republican president, the United States has kept itself at the forefront of the global economy by making the building of transportation, energy, communications, water, education, and other systems the foundation of prosperity....

Instead of learning this lesson of history, however, our current political class seems determined to follow Herbert Hoover, not FDR. Meanwhile, the long-term domestic problems we face are worse than what FDR confronted. In the 1930s, the US was by far the leading manufacturing power and the top producer of oil; now the manufacturing sector is sinking fast, and not only do we import almost two-thirds of the crude oil we process, the global supply of oil is becoming harder to produce and is shrinking. In addition, we desperately need to eliminate the use of fossil fuels and transform agriculture and forest management in order to avoid the worst of global warming. The path forward is clear: we need an electric transportation system based on high-speed rail for long-distance travel, electric rail for freight, transit and small electric cars for intra-city movement, wind and solar power for electricity generation, recycling on a serious and massive scale, a densification of urban areas, and a more labor-intensive, localized, organic agricultural system. And these could provide the market for a revived manufacturing sector.

Only the government can build all of these systems in the time needed to both save the economy and save the environment. Incentives can go part of the way, but not fast or far enough. Taxing carbon or trading rights to carbon won’t solve global warming or decrease the use of oil as quickly as we need them to; lowering taxes or reducing the deficit won’t bring the manufacturing sector back. Government-as-builder does not mean government-as-warrior or government-as-Big-Brother. It is possible to have a strong government that is peaceful, democratic, and not beholden to our economic royalists, as we currently are. But maintaining democracy is never easy; the political system is no more a self-regulating system than is the economy. At least we can have a clear vision of where we are heading.

History doesn’t care if the political conversation of the United States won’t allow for talk about large-scale government intervention into the economy. The path to economic and ecological collapse is paved with “realistic” intentions. If the conservatives can be audacious enough to threaten policies that will further destroy the middle class and poor for the sake of the superwealthy, why can’t progressives draw on a rich American history, from before FDR and after, to rebuild a once mighty nation and help the rest of the planet move toward a sustainable future?

10--Fed Halts Sales Of Toxic AIG Sludge Upon Realization Any Balance Sheet Unwind Crashes The Market, zero hedge

Excerpt: Three weeks ago, when discussing the failed (yes, failed) Maiden Lane 2 auction by the New York Fed, we said: 'Something quite disturbing happened during today's latest attempt by the Fed to sell $3.8 billion in face amount of Maiden Lane 2 assets: it had a busted dutch auction. In fact, the auction was so massively busted, the New York Fed managed to sell only half of the bonds for sale, or $1.898 billion in 36 Cusips of the total 73 Cusips offered for sale." Subsequently we noted the sudden radiosilence from the Fed on this issue on Twitter. To be sure, every MBS trader and the kitchen sink promptly complained that the Fed was saturating the market with toxic AIG garbage, which prompted us to declare that: "unless someone opens up a release valve, we are about to see a massive regurgitation and even more massive repricing of credit risk, first in IG, then in HY and ABX/CMBX, and lastly, and most massively, in equities, which continue to exist in their own world and which are now totally disconnected with HY, which they used to track so very closely." We just got the release valve: from Bloomberg: "The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. "Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public," Jack Gutt, a New York Fed spokesman said in an e-mail." Uh, what prevailing market conditions: a Nasdaq which has ripped over 100 points in one week (granted on no volume and on unprecedented market manipulation but so what). Regardless, this is a huge slap in the face for the Fed, which has just proven that even in a surging market it can not unwind an amount from its book that is less than 1% of its total asset holdings without actually crashing the market.

We certainly can not wait for BTIG's spin on this news tomorrow.

In the meantime, we remind readers of what we predicted, accurately, on June 9:

If dealers and funds are unable to handle a mere $31 billion MBS portfolio disposition, and its weekly sale (think of its as a reverse repo) is starting to cause massive ripples in the bond market, just what will happen when dealers are forced to hold back the tens of billions in weekly bond auctions they freely flip back to the Fed now. In other words, is the credit market on the verge of a oversaturation implosion (hence the title)?

Good luck with that end of QE2 boys. You will need it.

11--Fed Scorecard: Five Ways QE2 Worked—And Where It Failed, CNBC


1) The Stock Market Soared. Yes, there’s that. Major indices last summer had fallen 17 percent from their April 2010 cycle highs and it looked like there was little relief in sight. But after Bernanke’s Jackson Hole speech in late August and subsequent official QE2 launch on Nov. 12, it was a different story. The Nasdaq jumped 29 percent, the S&P 500 [.SPX 1319.29 11.88 (+0.91%) ] rose 25 percent and the Dow industrials surged 23 percent. So if you are part of the 20 percent of the people who own most of the stocks, you saw a wealth effect indeed.

2) Commodities Climbed. Certain commodities, like oil [LCOCV1 112.02 -0.38 (-0.34%) ], copper and, for a while, silver [XAG= 34.70 -0.06 (-0.17%) ], saw moves that could only be described as parabolic. The connection to QE2 was undeniable: All that money-printing debased the dollar, in which commodities are valued. So cheap dollars equate to strong commodities, simple as that. The CRB index rose 11 percent while the dollar fell 10 percent during QE2. That’s a pretty straight line.

3) A Boost for Exports: See previous item: Cheap dollars make for cheap exports, and commodity-driven stocks led the market rally. Energy rose 45 percent while materials surged 31 percent. Multinationals prospered and set the stage for a move to big-cap stocks in 2011 and beyond.

12--Money market funds see more outflows on Europe fears, LA Times

Excerpt: Cash outflows accelerated in recent days from some money market mutual funds amid concerns about European debt holdings.

But some investors appear to be switching to funds that own only U.S. government securities rather than leaving money funds altogether.

Overall, a net $18 billion came out of the funds in the seven days ended Tuesday, or about 0.7% of total assets of $2.68 trillion, according to data firm iMoneyNet Inc.

That was smaller than the outflow of about 1% the previous week, even though money funds have come under more scrutiny over the last week as Europe’s government-debt crisis has deepened.

Federal Reserve Chairman Ben S. Bernanke noted in comments on June 22 that the funds have had major holdings in short-term debt or certificates of deposit from large European banks in Germany, France and Britain. Fitch Ratings said in a report last week that the biggest U.S. money funds had about 50% of their assets in paper from those banks.

13--CIA spies uncovered in Hezbollah, Daily Star

Excerpt: BEIRUT: Two Hezbollah members have confessed to working for the U.S. Central Intelligence Agency and a third had links to an as-yet-undetermined foreign intelligence service, the group’s leader Sayyed Hasan Nasrallah said Friday, admitting for the first time the penetration of one of the most secretive organizations in the region.

“When Israel failed to infiltrate Hezbollah’s structure, it requested the assistance of the most powerful intelligence agency,” Nasrallah said in a televised speech broadcast by Hezbollah’s Al-Manar television Friday night.

“We have two cases of spies affiliated with the CIA and one more might be affiliated with the CIA, European intelligence or Mossad,” he added.

It was the first time Hezbollah has acknowledged that spies had penetrated its ranks, a rare acknowledgment of a group which takes pride in its ability to prevent infiltration.

“The U.S. Embassy in Awkar is a nest of spies recruiting [spies] to serve Israel. We have become a direct target of the U.S. intelligence. This put us in a new stage of security struggle,” Nasrallah said....

Nasrallah said the spies, one of whom was recruited five months ago, did not pose a serious threat to Hezbollah or its military capabilities.

“None of these three cases is within the first line of senior leadership. They were not in positions of sensitive responsibility,” he said. “It is impossible to touch the military and security infrastructure of the resistance and its ability to confront.” “None of them has sensitive information that could harm the structure of the resistance,” he added. Nasrallah said the three individuals were not close to him and they did not include any cleric.

14--Priests, Plots … and Hugo Chávez, Guardian

Excerpt: Among the latest revelations to emerge from WikiLeaks is that, in 2002, as plotters in Venezuela's capital Caracas were liaising with the US authorities about the conspiracy to topple President Hugo Chávez, the leaders of the Catholic church in that country were defying the instruction of Pope John Paul II to desist from having anything to do with the coup d'état. Instead they threw their lot in with Pedro Carmona, the extremist rightwing businessman, who took office for less than 48 hours during a brief military coup in April 2002.

The cables reveal that Cardinal Antonio Ignacio Velasco, the Salesian archbishop of Caracas, was on hand to sign papers purporting to legitimise the ridiculous Carmona as he dismissed the congress and the judges, and briefly sent Venezuelan politics back into the dark ages. Happily, the genuine popularity of the legitimate head of state was such that the Carmona gang and their military accomplices were routed and Chávez was restored to power.

In doing what he did, Velasco, who died in 2003, and the majority of his fellow bishops, betrayed not just the papacy but their compatriots at the instance of a foreign power – in this case, the United States. This added to the prelates' marginalisation in Venezuelan life by the majority who, unsurprisingly, see them as firm upholders of the establishment in a major oil-producing country, where half of the population live below the poverty line.

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