Wednesday, December 28, 2011

Today's links

Excerpt: Use of the European Central Bank's overnight deposit facility reached a new, all-time high Monday, as euro-zone banks increasingly turned to the ECB as a safe-haven for extra funds.

Banks deposited EUR411.813 billion overnight Monday, up from EUR346.994 billion deposited overnight Thursday ahead of the Christmas holiday, ECB data showed Tuesday.

Monday night's deposit figure surpasses the previous all-time high record of EUR384.3 billion reached in June 2010.

The high level reflects ongoing distrust in inter-bank lending markets, where banks prefer using the low-risk ECB facility for excess funds rather than lending them to other banks.

The high deposit level also suggests markets aren't fully convinced that the ECB's massive long-term loan allotment last week is enough to fortify the currency bloc's banking sector. The central bank extended nearly half a trillion euros in long-term loans to euro-zone banks last week, hoping to ease fears of a new credit crunch as banks struggle to borrow from markets.

The ECB further said banks borrowed EUR6.131 billion from the ECB's overnight lending facility, compared to EUR6.341 billion borrowed Thursday.

When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.

Excerpt: Consumer spending was tepid in November and a gauge of business investment fell for a second straight month, suggesting the economy lost some of its recent momentum.

Some analysts trimmed fourth-quarter growth forecasts after the weak consumption and factory data on Friday. But many still expected output to expand at an annual pace of more than 3 percent, faster than the 1.8 percent in the July-September period.

"The economy got off to a solid start this quarter, but it seems to have cooled a little bit in November. Growth is still going to be strong this quarter, but it's going to slow in the first half of 2012 because of Europe," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania....

n another report, the department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.2 percent last month after declining 0.9 percent in October.

Shipments of these so-called core capital goods, which go into calculations of U.S. gross domestic product, dropped for a third straight month.

This suggests that business spending, which has been robust since the start of the recovery in mid-2009, could slow considerably from the third-quarter's 15.7 growth percent pace.

Economists said uncertainty about fiscal policy at home and the debt crisis in Europe were causing businesses to becoming more cautious about spending.

The ability of U.S. consumers to keep on spending while incomes remain weak is also a potential drag on growth in early 2012.

"No one is putting themselves out there in terms of business expansion and capital equipment because it's a dangerous world out there and there are still a lot of risks in terms of Europe and China," said Steve Blitz, senior economist at ITG Investment Research in New York....

Income ticked up 0.1 percent, the weakest reading since August, as wages and salaries fell. Disposable income was flat.

A strengthening in the labor market has offered some hope income growth will quicken, but analysts said the report augured poorly for consumer spending at the start of the new year.

"The lack of real income growth really raises questions as to what is going to happen to the economy in the first quarter," said Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina....

On the bright side, the report confirmed an easing in inflation, which should help to support spending. Further help should also come from the temporary extension of payroll tax cut and benefits for the long-term unemployed.

A price index for personal spending was flat last month after falling 0.1 percent in October. In the 12 months through November, the PCE price index was up 2.5 percent, the smallest rise since April.

A core inflation measure, which strips out food and energy costs, edged up 0.1 percent last month after a similar gain in October. In the 12 months through November, it was up 1.7 percent after increasing 1.7 percent in October.

Excerpt: With U.S. unemployment at a lofty 8.6 percent, home foreclosures rising and property prices under pressure, more and more Americans have given up the dream of owning, opting instead to rent, a shift that is remaking the face of the U.S. housing industry.

The percentage of Americans who own their home dropped from a peak of 69.2 percent in late 2004 to a 13-year low of 65.9 percent in the second quarter. It edged up to 66.3 percent in the third quarter of this year.

On the flip side, the percentage of rental properties that are empty fell to 9.8 percent in the third quarter from 10.3 percent a year earlier.
In a recent report, Oliver Chang, an analyst at Morgan Stanley, dubbed 2012 "The Year of the Landlord."

Groundbreaking for new housing jumped 9.3 percent in November to the highest level in 19 months, fueling optimism that the battered housing market was regaining its footing.....The gains, however, were almost solely in multifamily housing

"Rents are rising, vacancies are falling, household formations are growing and rental supply is limited," the Morgan Stanley report stated. "We believe the demand for rental properties will continue to grow." 

Excerpt: Falling Commodities, Easing Price Rises Give Central Bank Room to Spur Growth...

U.S. inflation is slowing after a surge early in the year.

This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth.

The slowdown has been apparent for months in some commodities. The price of copper is down 21% from a year earlier. Cotton is down 45%. Natural-gas prices continue to fall, and crude oil has retreated from peaks hit in April, though not as sharply as other commodities.

Now, more broadly, the Commerce Department's measure of consumer prices for November, released Friday, stood 2.5% above year-ago levels in November, down from year-over-year increases of 2.7% in October and 2.9% in September. A less volatile measure excluding food and energy, watched closely by the Fed, rose 1.7% from a year earlier....

Another closely tracked measure, the Labor Department's consumer-price index, has risen at a 0.8% annual rate in the past three months....

The Fed has been considering new steps to spur growth. Two ideas are on the table: commit to keep short-term interest rates near zero for even longer than through mid-2013, and restart a bond-buying program aimed at driving already-low long-term interest rates lower. Before taking either step, though, Fed officials would want to have some comfort that they wouldn't be creating undesired inflation.

"This inflation news would open the door for Fed action if the unemployment rate is drifting higher in the first half of the year," said Mr. Kasman....

Inflation is retreating as a concern in bond markets, too. Yields on inflation-sensitive 10-year Treasury notes have fallen from 3.7% in February to about 2%.

Excerpt: When on Friday we penned "And This Is Where The LTRO Money Went" we said that the final nail in the "Carry Trade" theory was that instead of using the LTRO "Bazooka" cash to collect meaningless pennies in front of a steamroller, Europe's banks turned around and deposited it right back with the ECB after the bank's deposit facility soared to a 2011 record €347 billion, €82 billion more than the day before. Today, any residual doubt of where the LTRO cash proceeds went is eliminated, as the ECB has just confirmed that what goes out of one pocket comes back in the other, as the ECB's deposit facility has just exploded to not a 2011 record, but an all time record high €412 billion, a €65 billion increase overnight, and €167 billion higher in the past two days alone, which effectively accounts for practically all of the LTRO's free €210 billion.

And to those who foolishly claim this is a seasonal year end cash parking, we present the full history of the ECB's facility usage since it exploded on the scene in 2008. P;ease go ahead and show us when in 2008, 2009 and 2010 there was a spike in year end facility usage. We have all day. But wait: there's more! In another independent confirmation that all hell is about to break loose, we just saw the 1 Year Bund drop sub zero again. As a reminder, the last time it was there was in the last days of November, just before the global central bank cartel had to come in and provide a global liquidity bailout for Europe's banks. So: back to square minus one ladies and gentlemen of an insolvent Europe?

But the biggest slap in the face of Sarkozy is that instead of banks pocketing the "guaranteed" 2-3% in carry trade between the 1% LTRO rate and the soveriegn bond yield, banks are losing 75 basis point on this inverse carry trade, where they take LTRO cash and deposit it with the ECB where it yields... 0.25%!

6--A New Force in Latin America, MARK WEISBROT, counterpunch

Excerpt:  Although most Americans have not heard about it, a historic step toward changing this hemisphere was taken three weeks ago.  A new organization for the region was formed, and everyone was invited except the U.S. and Canada. The new organization is called the Community of Latin American and Caribbean States (CELAC).

There was a reason for the exclusion of the two richest countries, including the world’s largest economy. In fact there were many reasons, but they went mostly unnoticed in the major media.  The existing regional grouping, the Organization of American States (OAS), is too often controlled by the U.S. State Department, with Canada as junior partner.

In 2009, there was a big eye-opener for the rest of the hemisphere, especially those governments that thought President Obama would break with tradition and support democracy in the hemisphere.  The democratic government of Honduras was overthrown in a military coup in June of that year. Although the U.S. role in the coup itself is still unclear, there is no doubt that Washington did quite a bit to help the coup government succeed and establish itself. And one of the things that the Obama administration did was to block the OAS from taking more effective action against the coup government.

The OAS was also used by Washington to overturn election results in the first round of Haiti’s presidential election of last year.  An OAS “expert verification mission” changed the results without even so much as a recount or any statistical basis for its actions, and the U.S. and its allies threatened Haiti’s government until it accepted the result....

it is no coincidence that Latin America’s worst long-term growth failure in more than a century – from 1980-2000 – took place during the era of the “Washington Consensus,” when economic policy in the region was heavily influenced by Washington-based institutions such as the International Monetary Fund (IMF).  In fact, the Latin American spring was mainly driven by this economic failure and a desire for alternatives.

The new CELAC reflects this new reality – Latin America has become politically independent of the United States, there have been many changes in economic policy as a result, and these changes have brought higher living standards.

Excerpt: With neither exports nor private consumption able to pull the economy the state has been under constant pressure to offer support via deficit spending, leading to the accumulation of an unsustainable quantity of government debt. This deficit spending is about to come to an end (permanently according to the latest EU agreement), and under these circumstances the economy is likely to remain in or near contraction for as long as it takes to recover competitiveness. The question is, how long is that going to be, and what will happen to the debt dynamics in the meantime....

Poised On A Knife-edge

But given everything it is clear that Italian debt, and with it the future of the Euro, now sits poised on a knife edge, as is illustrated in the chart below (which comes from Barclay’s Capital). If you take a neutral scenario where Italy has a balanced budget and a sum total of zero nominal GDP growth (ie growth+inflation = 0) debt stays put at 120% of GDP out to infinity....

But then imagine the average finance cost of Italian debt rises, and stays high. In this case the only way to compensate is by running a larger primary surplus (ie more spending cuts, or revenue increases to compensate for the extra interest cost). The net effect of this would either be to generate deflation or a more sustained economic contraction, in which case debt to GDP would start to rise indefinitely. Think of it like this, either prices fall by one percent and GDP (via exports) rises by 0.5% (for example), in which case nominal GDP falls 0.5% a year (the Japan type case), or prices rise by 0.5%, exports lose more competitiveness, and so growth falls by 1%. I mean, this example is only illustrative, but it is meant to give some sort of feel for what “knife edge dynamics” really mean....

t’s All About Structural Reforms, Or Is It?

So basically, what the whole argument about whether or not Italy can make a final burst and reach the finishing line is all about structural reforms, and whether the country can get enough growth (quickly enough) to turn the “knife edge trap” around. Personally I am extremely doubtful that it can, which is why I placed so much emphasis on the growth performance in the first section. The turnaround needed here is massive. It is a 30 year decline we are talking about, and I doubt short of outright default and substantial devaluation we have historical examples of anyone doing this. The adjustment made in Germany between 1999 and 2005 was much smaller in comparison....

The bottom line is that Italy is both too big to fail and too big to be bailed out, which is why it is still hanging dangerously in limbo-land. Since, as I argue in this article, some sort of restructuring or other is well nigh inevitable in the Italian case, the sooner Europe’s leaders work up a credible plan on how to achieve this, the better. Otherwise it will not only be Italy’s citizens who are subjected to the Full Monti, Europe’s leaders may also find themselves with their credibility stripped naked.

Excerpt: Data through October 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices ... showed decreases of 1.1% and 1.2% for the 10- and 20-City Composites in October vs. September. Nineteen of the 20 cities covered by the indices also saw home prices decrease over the month. The 10- and 20-City Composites posted annual returns of -3.0% and -3.4% versus October 2010, respectively.

“There was weakness in the monthly statistics, as 19 of the cities posted price declines in October over September,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Eleven of the cities and both composites fell by 1.0% or more during the month.

9--Restoring European Growth, Project Syndicate

Since the crisis began, the need for economic growth in Europe’s debt-distressed countries has been portrayed as their problem. For creditors, especially German lenders, the main priority has been to impose austerity and discipline on the eurozone’s profligate south. Because German banks hold much of the debt owed by peripheral banks and governments, officials have focused on this financial link between Germany’s economy and those of troubled eurozone members. But German Chancellor Angela Merkel’s understandable desire to discipline the spendthrifts entails sawing away at the last remaining branch on which Germany’s bankers and taxpayers are perched....

Until the crisis hit, Germany benefited immensely from the stable environment created by the eurozone. Peripheral eurozone countries ran large current-account deficits, which subsidized German growth. If these markets now contract – and austerity has thus far led to severe recessions in Greece and Ireland, with Portugal expected to follow next year – so will the German economy. The highly indebted southern countries are far from being the sole stakeholders in their own economic growth.

Any viable strategy to resolve the crisis must address both links between core and peripheral economies. This means finding the right policy mix between austerity and growth. Only a solution that balances the two will guarantee the long-term growth of both peripheral and core eurozone economies, reassuring debt markets of their solvency and stemming the contagion that threatens to sweep the continent. The agreement reached at the recent EU summit to institutionalize austerity needs to be supplemented by a growth policy....

This requires a two-pronged approach. First, highly indebted countries should be allowed to swap existing debt for new bonds issued at a heavy discount. The discount is essential for reducing sovereign debt in the periphery to manageable levels and lowering immediate debt payments, thereby freeing resources for the investment and consumption that make growth possible.

But if creditors must share in the downside of the current crisis, they should also share in the future economic growth of peripheral eurozone economies. This requires a second step: linking the new bonds to warrants tied to debtor countries’ GDP growth. Converting existing sovereign debt into new bonds attached to GDP warrants would work like a debt/equity swap in a corporate bankruptcy. It would guarantee that creditors share in the upside of the reforms that the eurozone must implement to guarantee its own viability.

There is a precedent for this. Following its debt default in 2002, Argentina successfully implemented a similar program. In exchange for a reduction of its existing debt, the Argentinean government issued new bonds linked to GDP warrants and committed 5% of future annual GDP growth above 3.3% to a pool shared among creditors.

These Argentinean GDP warrants soon became tradable separately from the bonds to which they were initially linked, allowing their holders to cash in. Once growth resumed in Argentina, its GDP warrants became some of the best investments in the developing world, generating a total return of more than 500% over the last five years.

Without economic growth, there will be no lasting solution to the eurozone crisis. For the troubled economies to revive, the recent agreements on austerity must be supplemented by significant debt haircuts. Such haircuts, however, are hard to sell to the German electorate. GDP warrants would be a good way to close the deal.

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