Thursday, December 15, 2011

Today's links

1--Davidowitz: Consumers In TERRIBLE Shape, “Going to Get Worse”, Tech Ticker

Excerpt: Davidowitz at his pessimistic best

2--Stocks, Euro, Commodities Drop as Treasuries Advance After 30-Year Auction, Bloomberg

Excerpt: “We’re not seeing the developments unfold that show they want to put an end to the crisis now,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. “Talking about a fiscal union is now next to useless because that would happen five years from now,” he said. “As long as they continue to talk about issues that are irrelevant, we’re going to continue to have a market that gives the thumbs down to EU policy-maker efforts.”...

Treasury Auction
Treasuries extended gains after the U.S. sold 30-year bonds at a record low yield of 2.925 percent, compared with a forecast of 2.976 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers....

German Chancellor Angela Merkel reiterated opposition to euro bonds, while European Central Bank council member Jens Weidmann said policy makers are becoming more skeptical that the ECB’s debt purchases are working. Merkel said there’s no looking back after last week’s European summit deal on stricter budget controls, with the path to fiscal union in the euro region now “irreversible.”...

The cost for European banks to borrow in dollars rose for a fifth day to the highest in two weeks, according to money-market indicators. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 147 basis points below the euro interbank offered rate, from 141 basis points yesterday. The gap has widened by 38 basis points since the European Central Bank cut its main interest rate on Dec. 8.

The London interbank offered rate, or the rate that London- based banks say they pay for three-month loans in dollars, was 0.555 percent, according to the British Bankers’ Association, rising for a fourth straight day and reaching the highest level since July 2009. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, was 46.5 basis points, from 46.0 basis points.

Italy’s 10-year yield increased 11 basis points to 6.80 percent.

3--Europe debt woes prompt year-end flight from risk, Reuters

Excerpt: Asian shares retreated and the euro and commodities nursed stinging losses on Thursday after fears that Europe's debt crisis is still worsening prompted investors to dump riskier assets and huddle in the safety of the dollar and Treasuries.

The market view that a European Union summit last week had failed to produce a solution to the crisis was reinforced when Italy was forced to pay an eye-watering 6.47 percent on 5-year bonds on Wednesday, a record borrowing cost for the euro era.

Wednesday's stock market declines were dwarfed by carnage in commodity markets, where oil, gold and copper shed 4-5 percent.

Gold has been hammered in recent days as fund managers liquidate their holdings, either to cover losses elsewhere or to lock in profits on an asset that is still up more than 10 percent for the year.

The precious metal edged up on Thursday, gaining about 0.3 percent to around $1,580 an ounce, while U.S. crude oil was almost unchanged at $95 a barrel.

The euro fell as low as $1.2944, its weakest level since January 11, and was later steady around $1.2990.

A downgrade by ratings agency Fitch of five major European financial groups, including France's Credit Agricole to A-plus from AA-negative, added to the already euro-negative sentiment.

This comes on top of the prospect of further cuts by rival Standard & Poor's, which warned earlier this month it could downgrade the ratings of 15 of the 17 euro zone members.

4--Demand for ECB funds hits 2-1/2 year high, Euribor rates sink, Reuters

Excerpt: Demand for European Central Bank funding surged to close to 300 billion euros on Tuesday, a new 2-1/2 year high, as the intensification of the euro zone debt crisis left a growing pack of banks locked out of
open markets and dependent on the ECB.

A total of 197 banks borrowed 292 billion euros from the
ECB's weekly handout of limit-free cash on Tuesday, the largest
amount since June 2009.

The money was the first offered at the ECB's new, lower
interest rate of 1 percent and comes just a week before it will
offer banks 3-year funding for the first time in its history.
The moves, taken by the ECB last week, have applied fresh
downward pressure on lending rates in crisis-hit open markets.

The recent intensification of the euro zone debt crisis has
left a growing pack of banks locked out of open funding markets
and reliant on the ECB.
The 292 billion euros weekly take up of ECB cash was well
above the 250 billion expected by traders polled by Reuters.
Banks also took an additional 41 billion euros in one-month

Overnight deposits also remained extremely elevated on
Tuesday at 346 billion euros. Emergency overnight borrowing
stayed high at almost 9 billion euros.

5--The ECB now wants export-driven growth for the whole of Europe, not just for Germany, credit writedowns

Excerpt: One claimed objective of the single currency area in Europe is (or should I say was?) to create a large single market for producers. But now the ECB is pressing national governments to gear their policies to enhance competitiveness so that they can “count on external demand” and increase their net exports! Mario Draghi, President of the ECB, and a key figure in the team now managing the European crisis, made this statement while responding to an Italian journalist, in the Q&A session of the ECB press conference of 8 December 2011....

Alessandro Merli (from Il Sole24ore) asked Draghi if he wasn’t worried that budgets cuts in Europe would further intensify the recession.

Draghi’s answer was quite indicative of the conceptual framework of the ECB and of the economic scenario that the ECB expects will unfold as Europe continues with fiscal adjustments.

The ECB President admitted that budgets cuts and tax increases are contractionary—“in the short term” he added—but there are two ways to lessen their negative impact on growth:

One is the confidence-enhancing effect that will follow the new “fiscal compact”.

Now, does Draghi really believe that deficit and debt ratios will look any “better” after implementing the deficit cuts (which will, as he admits, deepen the recession in Europe)? And even assuming modest “improvements” of debt ratios, will this be enough to see markets suddenly rush for Italian and Spanish debt? Does he have a good explanation of why markets love debt issued by a non-euro country like the UK, whose deficit-gdp ratio is higher than Italy and Spain?

The other way of easing the impact of fiscal restrictions is, for Draghi, that “if you enhance the competitiveness, you can actually count on your external demand, on your net exports” (ECB press conference from 35′40” to 36′20”).

Does he really intend to make European growth depending on (or should I say at the mercy of) high levels of aggregate demand abroad? Does he not see that this means that Europeans will net export their standard of living by giving away goods and services in exchange for credits abroad? It is of course a matter of accounting logic that nations that net export will find it easier to keep their fiscal deficit lower, so perhaps Draghi is telling us that the myth of a balanced budget should rule all European policies, and Europe will do anything it takes to achieve “fiscal discipline”? Even if this means stagnation?

6--The book of jobs, Joseph Stiglitz, Vanity Fair

Excerpt: The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension....

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy...

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity....

it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery....

Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.

Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be....

What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now...

7--Percentage Growth in Annual Wages and Salaries, economist's view

Excerpt: See chart--upper .1% takes it all

8--David Stockman on EU banks, zero hedge

Excerpt: In his most recent email to me, Mr. Stockman expounds on some things that illustrate why the European banking system is on the verge of collapse:

The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral.

BNP-Paribas is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage; it has only $730 billion of deposits or just 29% of its asset footings compared to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates; and all the rest of its funding is from the wholesale money market , which is fast drying up, and from repo where it is obviously running out of collateral.

Looked at another way, the three big French banks have combined footings of about $6 trillion compared to France's GDP of $2.2 trillion. So the Big Three french banks are 3X their dirigisme-ridden GDP. Good luck with that! No wonder Sarkozy is retreating on France's AAA and was trying so hard to get Euro bonds. He already knows he is going to be the French Nixon, and be forced to nationalize the French banks in order to save his re-election.

By contrast, the top three U.S. banks which are no paragon of financial virtue--JPM, BAC, and C--have combined footings of $6 trillion or 40% of GDP. The French equivalent of that number would be $45 trillion. Can you say train wreck!

It is only a matter of time before these French and other European banks, which are stuffed with sovereign debt backed by no capital due to the zero risk weighting of the Basel lunacy, topple into the abyss of the shadow banking system where they have funded their elephantine balance sheets. And that includes Germany, too. The German banks are as bad or worse than the French. Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis, and that its Basel "risk-weighted" assets are only $450 billion, but actual balance sheet assets are $3 trillion? In other words, due to the Basel standards, which count sovereign and other AAA assets as risk free, DB has $2.5 trillion of assets with zero capital backing!

This is all a product of the deformation of central banking and monetary policy over the last four decades and the destruction of honest capital markets by the monetary central planners who run the printing presses. Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost.

9--Forget David Cameron's veto, another eurozone crisis is only weeks away, Telegraph

Excerpt: Taxpayers in richer regions are made to subsidise the poorer ones, in much the same way as high earners, by paying disproportionately for public services, subsidise low earners. These transfers are thought acceptable because nations are bound together by shared history, language, culture and political institutions.

Monetary union cannot work effectively without such transfers. The eurozone provides a textbook study in why this is so. A common currency and interest rate allowed less competitive nations to borrow from richer ones to finance unsustainable development, public spending and lifestyles. The curtain has now fallen on the abundance of credit that fuelled these booms. With no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating austerity in order to survive and pay their debts. The default mechanism of currency devaluation is also denied to them.

There was nothing in the measures agreed last weekend to relieve these pressures and therefore no reason to believe we are any closer to a resolution of Europe’s rolling series of debt crises. It is only a matter of time – I’d give it no more than a week or two into the new year – before the financial and accompanying economic contagion breaks out anew, very likely in even more virulent form. The system has essentially broken down, but it is as if eurozone policymakers are still fumbling around in the boot for solutions, rather than looking under the bonnet.

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