Tuesday, August 2, 2011

Today's links


Excerpt: On Monday, China's central bank reiterated that fighting inflation remained its policy priority. Since October, it has raised interest rates five times and bank required reserves nine times to prevent rising prices from fuelling social unrest.

But even with the steady tightening, China's inflation hit a three-year high of 6.4 percent in June.

Tightening monetary conditions have forced small to medium-sized mainland companies to tap the shadow banking system, where anecdotal evidence shows lending rates are as high as 18 to 25 percent, and of late the international debt and CNH markets.

At $14.3 billion year-to-date, high-yield issuances in the international bond markets have already eclipsed the 2010 numbers with China accounting for a nearly 70 percent market share.

Closer to home, HSBC estimates bonds of "sub-investment-grade quality" make up roughly a seventh of the 138 billion yuan in total outstanding offshore yuan debt. In the second half of 2010, such issuances were virtually non-existent.

2--Putin says U.S. is "parasite" on global economy, Reuters

Excerpt: Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.

"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi while touring its lakeside summer camp some five hours drive north of Moscow.

"They are living like parasites off the global economy and their monopoly of the dollar," Putin said at the open-air meeting with admiring young Russians in what looked like early campaigning before parliamentary and presidential polls.

3--Debt Deal Puts U.S. on Austerity Path as Economy Falters, Bloomberg

Excerpt: The federal government looks to be getting out of the business of trying to spur the economy just as the U.S. expansion shows increasing signs of faltering.

A deal struck over the weekend to cut $2.4 trillion or more off budget deficits over a decade marks the beginning of a prolonged effort to put the government’s finances into better shape. While the immediate economic impact from the agreement is likely to be small, it will add to a reduction in growth next year of 1.5 percentage points coming from the expiration of past stimulus programs, according to economists at JPMorgan Chase & Co. and Deutsche Bank Securities.

“Over the next 10 years, there will be further spending cuts and higher taxes, and that’s not good for economic growth,” said Paul Dales, senior economist for Capital Economics Ltd. in Toronto. “It is the start of a meaningful move toward fiscal consolidation.”...

Job-creation efforts already have been hampered by cutbacks in the public sector. Since May 2010, total government employment has dropped by 916,000 jobs, according to Labor Department data....

The Standard & Poor’s 500 Index ended 0.4 percent lower at 1,286.94 for a sixth straight daily loss. European stocks fell to the lowest level in almost 10 months today amid concern that a U.S. slowdown is derailing global growth.

The 10-year Treasury yield fell four basis points to 2.71 percent as of 10:05 a.m. in London, after touching 2.69 percent, the least since November.

The Institute for Supply Management reported yesterday that its factory index slumped to 50.9 in July, the lowest level in two years, from 55.3 a month earlier. A reading below 50 in the Tempe, Arizona-based group’s index signals the manufacturing industry is contracting.

The shift from stimulus to austerity coincides with a slowdown in the two-year recovery. A report last week showed that gross domestic product grew at an annual rate of 1.3 percent in the second quarter of the year following 0.4 percent in the first three months, prompting economists to warn of possible relapse into recession.

The economy will suffer another blow next year with the expiration of a temporary 2 percent payroll tax cut, an end to extended unemployment benefits and completion of the $830 billion stimulus program that President Barack Obama signed into law more than two years ago. Obama will press Congress to extend a cut in payroll taxes before the end of the year, White House press secretary Jay Carney said yesterday.

4--Personal Income increased 0.1% in June, PCE decreased 0.2%, CalculatedRisk

Excerpt: The BEA released the Personal Income and Outlays report for June:
Personal income increased $18.7 billion, or 0.1 percent ... Personal consumption expenditures (PCE) decreased $21.9 billion, or 0.2 percent.
Real PCE decreased less than 0.1 percent. ... The price index for PCE decreased 0.2 percent in June...PCE decreased 0.2 in June, and real PCE decreased less than 0.1% as the price index for PCE decreased 0.2 percent in June. On a quarterly basis, PCE barely increased in Q2 from Q1 (this was in the GDPreport Friday).

5--Dollar Stores Find Splurges Drying Up, Wall Street Journal

Excerpt: Sales and profit growth have started to slump at the deep-discount retailers called dollar stores, after a robust performance during the recession, a sign that even fairly cheap toys and other small indulgences now are a stretch for some consumers.

In the past several weeks, Dollar General Corp. and Family Dollar Stores Inc., the country's largest chains that sell sharply discounted food, household staples and other items in modest-size stores, missed their quarterly earnings targets. The two chains, as well as Dollar Tree Inc., also reported gross profit-margin declines

6--Forecast Update, Tim Duy, Economist's View

Excerpt: ...the first major report of the month – the ISM manufacturing survey – is a red flag that the underlying weakness is more pervasive and less temporary than the general consensus believes.
The simple model always reminds me of the ongoing precariousness of the US economic situation. Perhaps we will start to see some upside surprises, but for now the data is just not supportive of a solid growth dynamic emerging. And lacking such a dynamic, initiating fiscal contraction seems foolhardy. But here we go anyway.

Note also that the revised data and forecast implications suggest the CBO-based estimate of the output gap is set to widen further (Chart).....Note that the model does not have a trend reversion mechanism; if the economy doesn't bounce back to potential on its own, the model will just put GDP on the path of what it estimates to be the average rate of growth. Which is another of of saying that if the economy doesn't snap back to potential like in a pre-1990 recovery, is there any reason to expect it will do so at all? What is going to drive such growth?

It is reasonable to expect that a widening output gap would again place downward pressure on inflation, putting the Fed back in play. But there are many steps between hear and there – don’t expect the monetary or fiscal policy to be proactive here. Despite a clear justification in the data for more policy stimulus on the basis of existing data, policymakers will instead wait for at least the next round of data, if not the round after that.

7--The Debt Ceiling Deal: Little Fiscal Drag in 2012, Big Fiscal Risk in 2013, Macroadvisors

Excerpt: Fiscal drag from the debt ceiling deal reached in Washington over the weekend would be modest and likely spread fairly evenly over the coming decade unless automatic spending cuts described in the legislation are triggered.

If the deal is enacted as planned — $917 billion of initial cuts followed by $1.5 trillion of additional cuts to be recommended by a Joint Select Committee (JSC) of Congress — the average impact on annual GDP growth over the next decade would be roughly 0.1 percentage point before multiplier effects, with the peak effect probably never more than 1⁄4 percentage point.

However, if the JSC recommendations are not enacted, automatic spending cuts could subtract as much as 0.7 percentage point of GDP growth from FY 2013, again before multiplier effects.

This would be bitter medicine for an economy likely still to be mired in a sub-par recovery at a time when the Federal Open Market Committee (FOMC) is badly positioned to offset any fiscal drag.

There would be somewhat less fiscal drag next year under the terms of this deal than we assumed in recent forecast, but a lot of risk surrounding any fiscal assumptions for 2013.

Our most recent forecast assumes that federal spending in FY 2012 is cut $36 billion below the March CBO baseline. The debt ceiling deal shows cuts of only $22 billion, suggesting a slight upward revision to our GDP forecast, all else equal.

8--The economic drag, Calculated Risk

Excerpt: It looks like the spending cuts in the deal through the end of 2012 will be $22 billion, although there could be more after the special committee fails makes their recommendations later this year.

These spending cuts will only have a small negative impact on the economy, but we have to remember that the original stimulus is almost over - and that the payroll tax cut expires at the end of the year - as do the emergency unemployment benefits. Plus state and local governments are continuing to cut spending....

Floyd Norris writes in the NY Times that this could lead to a larger deficit Could This Deal Raise Budget Deficits

[T]his deal could manage to do the exact opposite of what it promises — raise the deficit.

... This could damage the economy enough to send tax receipts down again. Although you never would have guessed it from the rhetoric, tax receipts are at the lowest level in years, as a percentage of gross domestic product. Get a healthy economy and tax revenues rise while a lot of spending, on such things as unemployment benefits, goes away.

It is not just this deal, but the winding down of all the programs that will be a drag on the economy.

9--Non-inflation Watch, Paul Krugman, New York Times

Excerpt: Today’s personal income report was predictably dreary, as the march to a lost decade (or more) continues apace. But let me highlight one piece of the report: the inflation, or lack thereof.

The personal consumption expenditures deflator fell, thanks to falling commodity prices. More interesting is the sharp decline in inflation as measured by the PCE deflator minus food and energy, which has traditionally been the Fed’s favorite measure of “core” inflation.

Many of the people who keep seeing runaway inflation just around the corner made a big deal of last month’s PCE core, which rose at an annual rate of 3.1 percent. Aha! they said: inflation is here. But some of us argued that this was a temporary blip, driven by the indirect effect of commodity prices even on core prices. And all consumer price index-based measures of core inflation turned down last month.

Now the same thing is happening with the PCE core, which rose at an annual rate of only 1.3 percent in June. Later today we’ll get the Dallas Fed trimmed mean measure, which was already down in May and will almost surely show further decline in June.

So once again the usual suspects — the people who predicted runaway inflation from Fed expansion and soaring interest rates from federal borrowing — are being proved wrong, while textbook macroeconomics is continuing to work just fine.

Too bad the people who get everything wrong are driving Very Serious discourse and policy.

10--Goldman: Rising Unemployment Rate Raises Recession Risk, Wall Street Journal

Excerpt: With last week’s dismal GDP report, and Monday’s disappointing manufacturing purchasing-managers report, the odds of the U.S. reentering recession are rising. The dividing line between a double-dip and a renewed recovery will be drawn by the job market.

Goldman Sachs economists have come up with a rule of thumb to determine if the economy has entered recession: If the three month average of the unemployment rate increases by more than 0.35 percentage points, the economy will enter recession within the next six months. Stripping out months when the economy is already in recession, or has recently exited one, the measure has proved accurate about two-thirds of the time.

“The important take away from this historical pattern is simple: the labor market is pivotal to sustained growth,” writes Goldman’s Andrew Tilton. “When economic activity slows enough to push the unemployment rate higher for more than a short period, household income growth is interrupted. This typically leads to a pullback in consumer spending, and companies respond with further cuts in labor demand.”

Given the way unemployment has recently hooked higher, the risk of recession is rising. In June, the three-month average rate was 9.07%, up from 8.9% in April. Goldman expects Friday’s job report will show the economy added 50,000 jobs in July – not much, but better than May and June – and that the unemployment rate will stay pat at 9.2%.

“The unemployment rate would need to increase to 9.3% and stay there for two months to surpass the 35-basis point threshold,” notes Mr. Tilton. “We forecast (and hope) that will not prove to be the case.”

11--Robert Fisk: Egypt's revolutionary youth are being sidelined, The Independent

Excerpt: Revolution betrayed. The Egyptian army now colludes with the hated Muslim Brotherhood to bring you – well, a new Egypt that looks much like the old one, cleansed of Mubarak and most (not all) of his henchmen, but with the Army’s corrupt privileges (housing, complexes, banks, etc) safely maintained in return for allowing the bearded ones a share in power. Cut out of the picture: the young and secular revolutionaries who actually fought Mubarak’s security thugs off the streets in order to rid themselves of the 83-year old dictator.

The picture is a grim one – Arab Spring turned into eternal Arab autumn. And the only bread and circuses to give the young Egyptians who demanded dignity in return for their courage will be the sight of the weary, disbelieving old lion in his iron cage at the Cairo convention centre tomorrow….

An ex-dictator gone to seed or a revolution gone to seed? The prospects aren’t good. The youth and secular parties suspect tomorrow will be a one-day “opening” trial and then a postponement of a month or two to give time for the former company chairman to die in his bed back in Sharm el Sheikh. “But we are trying him, just like you asked us to,” the army will say. And they will hold further meetings with the Muslim Brotherhood.

It’s not just that Field Marshal Tantawi, head of the Supreme Military Council and friend of Mubarak, is running the show. Here, for example, is Major-General Mohamed al-Assar, member of the Supreme Council, telling the US Institute of Peace in Washington how jolly mature and co-operative the Brotherhood have become: “Day by day, the Brotherhood are changing and getting on a more moderate track,” he told them. You bet they are. They took over Tahrir Square last week, demanding the new Egyptian constitution be based on sharia. But Tantawi, al-Assar and the rest of the gold-braid brigade will do anything to avoid the real change the original revolutionaries insist upon.

Instead of the destruction of the whole corrupt system, the revolutionaries are going to get “reform from within”, along with the plump, middle-aged beardies whose existence was the very reason why the Americans backed Mubarak in the first place. Later, no doubt, they can be turned into a threat again – once the spirit of Mubarakitism is back in place.

12--US Court Documents Claim Sinaloa “Cartel” Is Protected by US Government, narconews

Excerpt: Deal Allegedly Gave Sinaloa Bosses Immunity in Exchange for Providing Info on Rival Drug Organizations

The son of a heavy hitter in a powerful Mexican drug trafficking organization has filed explosive legal pleadings in federal court in Chicago accusing the US government of cutting a deal with the the “Sinaloa Cartel” that gave its leadership “carte blanche to continue to smuggle tons of illicit drugs into Chicago and the rest of the United States.”

The source of that allegation is Jesus Vicente Zambada Niebla, the son of Ismael “El Mayo” Zambada Garcia, one of the purported top leaders of the Sinaloa drug-trafficking organization — a major Mexican-based importer of weapons and exporter of drugs.

The top capo of the Sinaloa drug organization, named after the Pacific Coast Mexican state where it is based, is Joaquin Guzman Loera (El Chapo) — who escaped from a maximum security prison in Mexico in 2001, only days before he was slated to be extradited to the United States. Chapo has since gone on to build one of the most powerful drug “cartels” in Mexico. With the death of Osama Bin Laden in May, Chapo (a Spanish nickname meaning “shorty”) jumped to the top of the FBI’s “Most Wanted” persons list. He also made Forbes Magazine’s 2010 list of “The World’s Most Powerful People.”

13--REPORT: U.S. Let Guns Walk Across The Border And Into The Hands Of Brutal Mexican Drug Gangs, Business Insider

Excerpt: At least 122 firearms from a doomed U.S. gun smuggling sting have been found at Mexican crime scenes or intercepted en route to Mexico's drug gangs, according to a new Republican congressional report released today.

Two of those guns were found at the murder scene of a U.S. border patrol agent along the Mexican border in Arizona last December.

The weapons were part of Operation Fast and Furious, a highly controversial program in which U.S. Bureau of Alcohol, Tobacco, and Firearms agents in Phoenix allowed firearms purchased in the U.S. to "walk" across the border and into the hands of Mexico's powerful drug bosses.

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