Thursday, January 19, 2012

Today's links

1--Doubt over IMF's eurozone lifeline, Telegraph

Excerpt: Traders were unconvinced by a radical proposal by the International Monetary Fund (IMF) to deploy $1 trillion (£648bn) to stem the European debt crisis and its impact on the global economy.

Christine Lagarde, head of the IMF, dramatically announced the fund's intention to raise $500bn to almost double its resources after a meeting of the 24-strong executive committee.

Ms Largade said its members recognised the "importance of ensuring adequate fund firepower to help defuse current global economic weaknesses and regional challenges."

But neither traders nor economists - nor some key politicians - were prepared to bet on the delivery of the IMF's plan and worried instead about the advancing debt crisis.

2--Some Thoughts On IMF Resources, credit writedowns

Excerpt: IMF Managing Director Lagarde has mentioned that other “options” are being looked at. We assume these would include leveraging existing resources and/or relying on more unorthodox contributions from central banks, rather than on governments. These options have been leaked in recent months, and the fact they need to be considered suggests that increased funding from the more traditional sources is seen as problematic or limited, even as the global backdrop is getting worse. The next IMF quarterly update of its World Economic Outlook is scheduled for release January 24. The last one from September 2011 saw significant markdowns in global growth forecasts to 4% for both 2011 and 2012. The World Bank just this week released a 2012 global growth forecast of 2.5%, down sharply from a 3.6% forecast back in June 2011.

Bottom line: We think markets are getting too bulled up on the IMF headlines today. As the saying goes, “Show me the money!” Until then, we remain skeptical that the IMF will be able to obtain the extra funding it desires. Even if the IMF does get the extra financing, will it make a material difference? IMF/EU programs for Greece, Ireland, and Portugal have not been able to halt the crisis.

3--ECB accepts "the worst quality" collateral, FT Alphaville

Excerpt: ...As Comotto told FT Alphaville on Wednesday, the pattern we’re seeing seems to be that the very best European collateral — German government bonds — is being hoarded for a rainy day (kept out of the market), while the cheapest-to-deliver (the worst quality) is what’s finding its way into the ECB collateral ‘lock-up’.

That has led the overall private market to depend increasingly on other types of ‘good’ and ‘liquid’ collateral, such as UK bonds, Japanese bonds, and the bonds of smaller core Eurozone members for day to day operations....

As the report’s conclusion states:

The rebound in the overall share of government securities in the main survey and in tri-party repo may be evidence of greater risk aversion. This is also evident in the continued reduction in the use of German government securities, which seem to have been hoarded as a safe-haven asset that investors were reluctant to lend. To some extent, collateral issued by smaller core Eurozone members has taken up the slack. UK and Japanese collateral may have benefited from safe haven status.

4--S&P 500 Profit Season Has Worst Start in Years: Chart of the Day, Bloomberg

Excerpt: U.S. companies that beat analysts’ earnings estimates are an exception, rather than the rule, for the fourth-quarter reporting season getting under way.

Only 47.1 percent of companies in the Standard & Poor’s 500 Index that posted quarterly results between Dec. 1 and yesterday exceeded the average projection, according to data compiled by Bloomberg. Citigroup Inc. and JPMorgan Chase & Co. are among those that trailed estimates.

As the CHART OF THE DAY illustrates, so-called positive surprises have surpassed 50 percent at a comparable point in every other quarterly reporting period for the past four years. The previous low was 51.5 percent in the third quarter of 2008, when a global financial crisis was taking hold.

“Early reporters’ results” are one of two reasons to expect the current earnings season to be disappointing, Thomas M. Doerflinger, a strategist at UBS AG, wrote yesterday in a report. The other is that many companies are likely to cut estimates for this year.

5--Münchau: We are fighting the wrong crisis, credit writedowns

Excerpt: In Münchau’s view, the reason for the downgrades was that Europe is fighting the wrong battle. S&P even said in their message on the downgrades that an austerity-centered approach would make matters worse. Wolfgang noticed that German Chancellor Merkel and her Finance Minister Schäuble responded to this message by exhorting Europe to push through their austerity packages more quickly. Clearly they don’t get it.

Wolfgang goes on to say that the problem is not in the public sector but in the private sector, where high debt, deleveraging and then recession caused a gaping hole to open up in the public sectors’ balance sheets. Moreover, in what Münchau calls the single currency "strait jacket", the economies of Euroland have diverged rather than converged and that has meant current account imbalances and private debt accumulation in the periphery.

To me this situation looks pretty hopeless frankly. Policy makers in Europe just don’t get it. The best we are going to get is austerity and partial monetisation by the ECB until the union breaks or sovereign debtors default and banks are recapped. The question is why are they leading us down the abyss. Wolfgang says it’s because the government deficit story is an easier narrative to tell and simpler to attack within the existing institutional limitations of Euroland. That makes some sense politically, but it tells me that this crisis will continue to get worse.

6--World Bank slashes global GDP forecasts, outlook grim, Reuters

Excerpt: The World Bank warned developing countries on Wednesday to prepare for the "real" risk that an escalation in the euro area debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.

In a report sharply cutting its world economic growth expectations, the World Bank said Europe was probably already in recession. If the euro area debt crisis deepened, global economic forecasts would be significantly lower.

"The sovereign debt crisis in the euro zone appears to be contained," Justin Lin, the chief economist for the World Bank, told reporters in Beijing on Wednesday.

"However, the risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real."...

"We think it is now important to think through not only slower growth but sharp deteriorations, as a prudent measure," said Hans Timmer, director of development prospects at the bank....

"The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome," it said...

"No country and no region will escape the consequences of a serious downturn," the World Bank said, adding that now was the time for developing countries to plan how to soften the impact of a potential deep crisis.

7--Five-Year Treasury Yield Hits All-Time Low, Crossing Wall Street

The yield on the five-year Treasury got down to 0.77% today. That’s the lowest yield ever.

In 1981, the five-year yielded 16.27%. Five years ago, it was close to 5% and 11 months ago, it was going for 2.4%

8--UPDATE 1-Bank deposits at ECB climb to new record high, Reuters

Excerpt: Commercial banks parked over half a trillion euros at the European Central Bank for the second day in a row, as the mix of debt crisis worries and a recent giant injection of ECB cash left banks awash with money but too scared to lend it.

Overnight deposits at the ECB have been hitting new records even since last month's first ever offering of three-year loans from the ECB pumped 490 billion euros ($620 billion) into the banking system.

ECB data on Wednesday showed deposits hit an all-time high of 528 billion euros, up from 502 billion the previous day. It is likely to mark at least a temporary peak in the level of hoarding.

The end of the ECB's monthly reserves cycle - the point when banks have fulfilled their ECB targets and have few options to juggle their funding - ended on Tuesday. Deposits traditionally drop early in the new reserves cycle....

The deep reluctance of banks to lend to one another continues to paralyse money markets and highlights the barriers to achieving any substantial relief in the euro debt crisis.

ECB President Mario Draghi was unconcerned about the high deposits in remarks made on Monday, brushing off concerns that liquidity was not making its way to the real economy.

9--Is Obama pushing Russia to the breaking point?, RT

Excerpt: Most in the civilized world are blissfully unaware that we are marching ineluctably towards an increasingly likely pre-emptive nuclear war. No, it's not at all about Iran and Israel. It's about the decision of Washington and the Pentagon to push Moscow up against the wall with what is euphemistically called Ballistic Missile Defense (BMD).

On November 23, a normally low-keyed Russian President Dmitry Medvedev told the world in clear terms that Russia was prepared to deploy its missiles on the border to the EU between Poland and Lithuania, and possibly in the south near Georgia and NATO member Turkey to counter the advanced construction process of the US ballistic missile defense shield: "The Russian Federation will deploy in the west and the south of the country modern weapons systems that could be used to destroy the European component of the US missile defense," he announced on Russian television. "One of these steps could be the deployment of the Iskander missile systems in Kaliningrad." Those would be theatre ballistic missile systems. The latest version of Iskander, the Iskander-K, whose details remain top secret, reportedly has a range up to 2000 km and carries cruise missiles and a target accuracy to 7 meters or less.

Medvedev declared he has ordered the Russian defense ministry to "immediately" put radar systems in Kaliningrad that warn of incoming missile attacks on a state of combat readiness. He called for extending the targeting range of Russia's strategic nuclear missile forces and re-equipping Russia's nuclear arsenal with new warheads capable of piercing the US/NATO defense shield due to become operational in six years, by 2018. Medvedev also threatened to pull Russia out of the New START missile reduction treaty if the United States moves as announced.

Medvedev then correctly pointed to the inevitable link between “defensive” missiles and “offensive” missiles: “Given the intrinsic link between strategic offensive and defensive arms, conditions for our withdrawal from the New Start treaty could also arise,” he said.

The Russian President didn’t mince words: “I have ordered the armed forces to develop measures to ensure, if necessary, that we can destroy the command and control systems” of the US shield, Medvedev said. “These measures are appropriate, effective and low-cost.” Russia has repeatedly warned that the US BMD global shield is designed to destabilize the nuclear balance and risks provoking a new arms race. The Russian President said that rather than take the Russian concerns seriously, Washington has instead been “accelerating” its BMD development

10--The Non-Mystery of Slow Job Growth, CEPR

Excerpt: The Wall Street Journal had a bizarre article about capital investment and robotics to explain the slow job growth in this recovery. There actually is a much simpler explanation, it's called "slow growth."

Productivity growth has averaged close to 2.5 percent since 1995. That means the economy must grow at a 2.5 percent rate just to keep labor demand constant. If it grows slower than this, we expect the demand for labor to fall and the number of jobs to decrease or the average number of hours worked to fall.

Since the recovery began in the summer of 2009 GDP growth has averaged just under 2.5 percent. These means that we should not have expected the economy to create any jobs over this period. In fact, it has added almost 1,500,000. Insofar as there is a mystery, given the weak growth of the economy over the last two and a half years, it is why the economy added so many jobs.


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