Tuesday, October 11, 2011

Today's links

1--White House Aims to Lure More Foreign Investment, Wall Street Journal

Excerpt: Searching for ways to boost job creation at home, the Obama administration is trying to focus the machinery of the federal government on drumming up foreign investment in the U.S.

The White House is considering a plan aimed at attracting at least $1 trillion of new investment from abroad over the next five years, according to people familiar with the matter. But that target could prove difficult to reach, given that the sluggish U.S. economy may hold smaller potential payoffs to global investors, experts say.

Compounding this are some U.S. policies outsiders deem unfair, from antitrust rules to the federal ...

2--Behind a Surprising Income Trend, New York Times

Excerpt: Anyone with detailed knowledge of the annual Census Bureau data on household income may be surprised by the new study Robert Pear describes in today’s Times. From the article:

In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

The annual Census data, which is better known than the monthly data that forms the basis of the study, presents a somewhat different picture. It shows that inflation-adjusted median income fell 3.6 percent from 2007 to 2008, more sharply than in any year since. From 2008 to 2010 — a two-year period — income fell 2.9 percent.

What explains the difference between the two surveys?
For one thing, the monthly data (which goes through June of this year) is more current than the annual data (which ends in 2010) and reflects the economy’s continued weakness.

But there is also a second, more surprising reason for the difference: The annual data may be less reliable in some ways than the monthly data.

3--Chart of the day, median income edition, Reuters

Excerpt: Why has no one thought to do this before? Every month, the Current Population Survey goes out to a nationally representative sample of more than 50,000 interviewed households and their members. And in one of the questions, those households — or at least the households who didn’t answer the same question the previous month — are asked how much money they made, in total, over the past 12 months. That question has now been asked in 138 successive months, since January 2000. Which means that with a bit of clever analysis, it’s possible to put together an apples-to-apples comparison of what has happened to household income every month.

And when you do that, the results are very scary indeed. (see chart)
The red line, here, is median real household income, as gleaned from the CPS, indexed to January 2000=100. It’s now at 89.4, which means that real incomes are more than 10% lower today than they were over a decade ago.

More striking still is the huge erosion in incomes over the course of the supposed “recovery” — the most recent two years, since the Great Recession ended. From January 2000 through the end of the recession, household incomes fluctuated, but basically stayed in a band within 2 percentage points either side of the 98 level. Once it had fallen to 96 when the recession ended, it would have been reasonable to assume some mean reversion at that point — that with the recovery it would fight its way back up towards 98 or even 100.

Instead, it fell off a cliff, and is now below 90.

In dollar terms, median household income is now $49,909, down $3,609 — or 6.7% — in the two years since the recession ended. It was as high as $55,309 in December 2007, when the recession began.

Some of this decline has been hard to see because nominal incomes have been holding very steady: before taking inflation into account, median household income was $51,465 in December 2007, and $51,140 in June 2009. But even then, over the past two years, nominal incomes have shrunk significantly to the current level of $49,909.

All of these numbers come from Gordon Green and John Coder, economists who both worked at the Census Bureau for more than 25 years. They’ve now set up a private company, Sentier Research, to collate these household income figures every month; the full report costs a reasonable $20.

4--China’s local governments dig deeper, FT Alphaville

Excerpt: So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, More…
… into a hole, that is.

So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, dragging down the Shanghai Composite and Hang Seng.

Reuters has taken a long look at the problems faced by some of China’s local authorities. According to Chen Jun, a director at Chengdu Communications Investment Group, which built a giant version of Waterloo Station:

“We’re still unable to reflect on our accounts the problems that may arise from our investments into Chengdu’s railroads,” Chen said. “What happens next is that we may face some trouble repaying our loans when many of them come due.”

Chengdu Communications had liabilities of 18.9 billion yuan at the end of 2010 against current assets valued at 11.7 billion yuan.

Chen is not unduly concerned. He thinks he has a solution, one local governments across China have also grasped: Real estate. Chen, the chairman of six other state companies in the city, intends to build huge residential and commercial projects around stations such as Waterloo — with borrowed money, of course.


Meanwhile James Kynge, author and editor of the FT’s China Confidential service, has come out with a doomy-ish oped in today’s FT. He writes:
At no time over the past three decades of “reform and opening” has Beijing’s control over the supply and price of credit in its economy been so tenuous. The reasons for its enfeebled position derive from the state-centric nature of its 2009-10 stimulus. They also help explain why a repeat would be hard to pull off.

Kynge says that the shadow banking sector has now overtaken the formal banking sector for credit issuance, and therein lies the problem for the CCP: it’s not clear how these lenders — the most well-regulated of which are trust companies — will respond to government attempts to rein in expansion.

Back to those falling property prices. Credit Suisse property analyst Jingsong Du told Bloomberg that developers had so far been holding off reducing their prices, but a turning point appears to have been reached. They are of course not helped by restrictions on speculative buying, put in place by a central government nervous of inflation and housing affordability. Which all means that many indebted local governments can’t continue to count on crazy high prices for land sales.

5--Dexia was not a bank but a hedge fund", Credit Writedowns

Excerpt: This comes via Belgian daily de Staandard:

[Dexia CEO Pierre} Mariani and [Chairman Jean-Luc] Dehaene Dexia's took over leadership in 2008 after the Belgian and French governments had intervened to prevent the company’s collapse the first time. Dehaene stated that Mariani confided to him then, after a review of the group, that Dexia was more like a hedge fund than a real bank. During the three years that we were at the helm of Dexia, we have done everything to build a better risk profile, but the euro crisis has thrown a spanner in the works. That is the explanation of both top men.

They illustrated their message with numbers. The portfolio of toxic assets grew from $40 to 260 billion between 2006 and 2008, but has since been reduced to "less than 100 billion". The short-term financing of long term loans in 2008 accounted for 43% of the balance sheet, an "aberrant situation," according to Mariani. That percentage has been reduced to 19%. [My translation]

If you recall Global Macro Monitor’s post on Europe's Bank Problem last week, the IMF chart showed very well how banks were struggling to wean themselves from short-term funding sources and increase tangible common equity. The Belgians had made Herculean strides in this effort. But it has not been enough.

6--Flat-Lining the Middle Class, Mother Jones

Excerpt: Food pantries picked over. Incomes drying up. Shelters bursting with the homeless. Job seekers spilling out the doors of employment centers. College grads moving back in with their parents. The angry and disillusioned filling the streets.

Pan your camera from one coast to the other, from city to suburb to farm and back again, and you'll witness scenes like these. They are the legacy of the Great Recession, the Lesser Depression, or whatever you choose to call it.

In recent months, a blizzard of new data, the hardest of hard numbers, has laid bare the dilapidated condition of the American economy, and particularly of the once-mighty American middle class. Each report sparks a flurry of news stories and pundit chatter, but never much reflection on what it all means now that we have just enough distance to look back on the first decade of the twenty-first century and see how Americans fared in that turbulent period.

And yet the verdict couldn't be more clear-cut. For the American middle class, long the pride of this country and the envy of the world, the past 10 years were a bust. A washout. A decade from hell.

Paychecks shrank. Household wealth melted away like so many sandcastles swept off by the incoming tide. Poverty spiked, swallowing an ever-greater share of the population, young and old. "This is truly a lost decade," Harvard University economist Lawrence Katz said of these last years. "We think of America as a place where every generation is doing better, but we're looking at a period when the median family is in worse shape than it was in the late 1990s."

7--Fed Watch: Too Early to Sound the All Clear?, Economist's View

Excerpt: My experience is that when a financial landscape is as ugly as we see here, there is no rescue plan. Things tend to get much worse before they get better. That seems to be what financial market are telling us.
With that cheery thought in mind, I offer another distressing correlation. While I generally find monetary aggregates difficult indicators in the best of time, this caught my attention:(see chart)

Since the end of the 1990's, there has been a negative correlation between M2 growth and industrial production growth. It appears that financial market disruptions of the current magnitude are sufficient to drive substantial changes in spending. If this correlation continues to hold, then I need to rethink my belief that any recession in the near term will be relatively mild considering the lack of rebound from the last recession. Perhaps underneath today's seemingly comforting data something very ugly is brewing. Which means enjoy these big rallies on Wall Street while you can.

8--Insight: Deflating China's housing bubble, Reuters

Excerpt: As housing bubbles go, China's looks relatively benign. Unlike in the United States, Chinese home buyers typically put down at least 40 percent of the purchase price. That means they don't have to worry about a modest decline wiping out all their equity, and banks have little reason to fear an influx of "jingle mail" from defaulting homeowners returning the keys.

Household debt amounts to less than 20 percent of China's gross domestic product, according to the International Monetary Fund, one fifth of the U.S. ratio.

"In the United States, housing was a borrowing vehicle for households. In China, it's a savings vehicle," said Stephen Green, an economist with Standard Chartered in Hong Kong....

There are a couple of trouble spots. China's new home sales have fallen sharply in some cities, putting property developers in greater danger of default. Local governments counting on land sales to help repay $1.5 trillion in loans may find the money flow slows, saddling banks with bad debts....

In July, China extended the list of cities where it limits the number of homes a family can buy. There are now 40 cities with such restrictions in place, including Beijing and Shanghai.

In January, it raised the minimum down-payment for second homes to 60 percent from 50 percent....

"The problem with China is that it tells people it doesn't want them to invest in housing, but it doesn't tell people what else to invest in," said John Woods, chief Asian strategist at Citi Private Bank.
The IMF's housing policy recommendations to Beijing earlier this year were to raise interest rates, develop financial markets, and introduce a broad-based property tax....

"It is hard to see problems in China's housing market unraveling in a manner that sets off a major crisis," said Eswar Prasad, a former head of the IMF's China division who now teaches trade policy at Cornell University in New York.

9--ISM orders minus inventories points to steep contraction, Pragmatic Capitalism

Excerpt: Notable permabear Albert Edwards of Societe Generale, points out an ominous sign in the ISM data. In a recent research report Edwards highlights the US ISM new order minus inventory component. As you can see, there correlation is extremely high between the ISM headline and the new orders minus inventory. What’s so disconcerting about this data is the level of contraction that it is currently pointing to. Edwards details the findings:

“One of the US indicators that has held up quite well and maintained some sense of hope that recession can still be avoided is the ISM which has stayed above the critical 50 level. But further pronounced weakness seems baked in the cake and will disabuse the optimists. The excess of inventories over new orders suggests a very sharp slowdown (see left-hand chart below), and the inventory de-stocking cycle is set to remove one source of component strength from the overall ISM indicator (see right-hand chart below).” (chart)

Markets are far from pricing in a contraction as deep as this data indicates.

10--How the bank bailouts reduce our standard of living, Pragmatic Capitalism

Excerpt: The distribution of wealth has become increasingly skewed as trade has become more globalized and technology has allowed the innovations of a single person to be spread across millions of consuming “units.”....An economy where capital is scarce, protectable, and can easily be distributed over numerous units, while labor is plentiful, homogeneous and can only be applied to a smaller number of units, is an economy that is prone to an enormously skewed distrbution of wealth.

This process takes on a grotesque character when it becomes possible for a company to distribute its impact over a very large number of units, and government policy protects that ability even when the impact of the company reflects not skill but ineptitude. This is essentially what has happened with the “too big to fail” institutions. Despite inflicting massive damage on the economy, they are afforded a protected status that allows them to extract “rents” that don’t reflect the cost they have imposed. From that standpoint, the Occupy Wall Street protests are a welcome reflection of public frustration over Washington’s slavish coddling of reckless financial institutions.”

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