Thursday, February 16, 2012

Today's links

1--Odd Retail Data Aren’t as Worrying as Rising Gas Prices, WSJ

Excerpt: On Valentine’s Day, consumers are playing hard to get.

Data released Tuesday showed shoppers were less responsive to retailers’ come-ons in December and January. Retail sales increased just 0.4% in January, less than the 0.9% forecast. December’s numbers were revised to flat sales instead of the 0.1% gain reported earlier.

The numbers, however, look odd given other reports and trends. For instance, auto makers said they sold 14.2 million vehicles in January, the best annual rate showing since May 2008, according to Autodata. Yet, the Commerce Department said sales at car and parts dealers (which measures dollar value, not unit sales) fell 1.1%.

Also, Internet sales dropped in December and January. Those were the first back-to-back declines since late-2008, at the depths of the recession, but it runs counter to the growing popularity of online shopping.

Those quirks may get erased or moderated in later revisions. For now, the report shows spending had less momentum heading out of 2011. Coupled with a small gain in business inventories, the weakness means fourth-quarter real gross domestic product looks to be lowered when the revisions are reported February 29.

More worrisome, spending didn’t start the first quarter with much momentum. After adjusting for prices, real consumer spending is probably growing between 2% and 2.5%, at an annual rate, this quarter. That’s good, but not fabulous.

The “adjusting for prices” is key to the outlook because while inflation overall is moderate, consumers are once again battling rising gasoline prices.

Higher oil prices, the loss of some refining capacity and higher world demand have pushed up U.S. gasoline prices more than they usually track in the winter. So far in February, a gallon of gas nationwide costs $3.56, up from $3.44 in January.

Because they are shelling out more at the pump than usual this winter, consumers have less to spend elsewhere.

The strain is likely to get worse. That’s because gasoline prices typically rise in the first half running up to the summer driving season.

One antidote to the gas pain would be faster income growth. That will have to come from either bigger pay raises or job growth maintaining its January strength.

Another bit of relief came this week, when the House of Representatives agreed to extend the social security payroll tax cut for a full year.

Workers, however, face the same predicament as last year: The extra cash will go to cover higher costs at the pump

2--A Few on FOMC Saw Need for More Bond Purchases, Bloomberg

Excerpt: A few members of the Federal Open Market Committee meeting said the central bank may soon have to consider more asset purchases, while others said the economic outlook would have to deteriorate first.

A few members said economic conditions “could warrant the initiation of additional securities purchases before long,” according to minutes of their Jan. 24-25 meeting released today in Washington. “Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain” below 2 percent in the medium run.

The central bank said at its meeting last month that it plans to hold interest rates near zero at least through late 2014 to spur growth and reduce unemployment, extending a previous date of mid-2013. Fed Chairman Ben S. Bernanke has since repeated the pledge, which was made before a report this month showing that the jobless rate fell to a three-year low of 8.3 percent in January.

Policy makers said it was unlikely that the Fed would soon begin reducing the size of its balance sheet by selling some of the Treasury and mortgage bonds amassed in the course of two rounds of large-scale asset purchases.

“Most participants saw sales of agency securities starting no earlier than 2015,” said the minutes, which included, for the first time, “qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.”...

It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work,” Bernanke said in response to a lawmaker’s question during his testimony. “There are also a lot of people who are either out of the labor force because they don’t think they can find work” or who have taken part-time jobs.

3--Nigel Farage: "Greece is in a downward death spiral", credit writedowns


4--Student Loans Near $1 Trillion Hurt Young U.S. Buyers, Bloomberg

Excerpt: As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.

“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”
White Paper

The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.

Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of, a student loan website. Recent college graduates carry an average debt load of more $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.

Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.

Drag on the Economy’
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

People age 25 to 34 made up 27 percent of all home buyers in 2011, the lowest in the last decade and compared with 33 percent in 2001, according to the National Association of Realtors. At the same time, first-time buyers last year accounted for 37 percent of all purchases, the lowest since 2006, when home prices peaked and the housing boom was showing cracks.

“Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries,” said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, California. “These things pile on each other and tell us it’s not going to help the housing recovery right now.”

n September, the Fed announced plans to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to lower borrowing costs even more. The moves followed two rounds of large-scale asset purchases totaling $2.3 trillion that ended last June.
Mortgage Rates

Record-low mortgage rates haven’t revived housing sales enough to spur the economic recovery. The average 30-year fixed rate mortgage was 3.87 percent as of Feb. 9, according to a Freddie Mac index, the lowest in data going back 40 years....

First Leg’
Palacios, who published research in December on student debt and housing, says first-time buyers are key to a housing recovery because they enable current owners to move into larger, pricier homes. “Move-up buyers need somebody to purchase their homes to move,” he said in a telephone interview. “You need that first leg in the recovery to materialize.”...

Single-family starts fell last year while multifamily housing construction surged as more Americans became renters. That should continue to boost apartment real estate investment trusts, said Palacios. Equity Residential (EQR) is among them, up more than 240 percent from its March 2009 low. AvalonBay Communities Inc. (AVB) is up 230 percent.

New home sales and starts of single-family homes in 2011 were the lowest since 1963. Existing home sales for all of 2011 were up only 3.6 percent from their 2008 recession-trough, which was the lowest for a full year since 1995. Sales of distressed homes, including foreclosures, accounted for about a third of existing home sales last year, according to the realtors group.
Not a Priority

Prices are down about 33 percent from their 2006 peak, according to S&P-Case Shiller (SPCS20) data, and most experts expect further declines. Patrick Newport, who covers housing for IHS Global Insight in Lexington, Massachusetts, sees prices falling another 5 to 10 percent nationwide.

People age 25 to 34 accounted for 52 percent of first-time buyers last year, near the average since 2005, according to the Realtors group. Still, almost 6 million Americans in that group were living with their parents in 2011, up from 4.7 million when the recession began in 2007, according to Census data.

5--Watchdog: Another Draghi Conflict of Interest Uncovered, GEI

Excerpt: From the report on the Council recommendation for appointment of Mario Draghi (pictured) to be the President of the European Central Bank (rapporteur: Sharon Bowles):
4. Do you have any business or financial holdings or any other commitments which might conflict you with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?

[M. Graghi:] No.

Follow up:
Yet, Draghi's son has been an interest trader at Morgan Stanley since 2003. From the ECB Code of conduct...

Goldman's other line of defense (repeated at nauseum) during these hearings, is that their deal with Greece was commonplace. It wouldn't have made it right (only embarrassing in the capitals of Europe, an effective weapon), and, in any case, IBTimes recently reported that it is false:

Eurostat, which provides the EU with statistics on member states, told IBTimes UK that there were "only a very few off-market swaps for small amounts" in a "limited number of EU member states" including Italy, Germany, Poland and Belgium...There were concerns that other countries may have done similar large deals to that between banking giant Goldman Sachs and troubled Greece a decade ago, using pretend exhange rates, effectively disguising the true scale of their debts.

The hearings, which were chaired by Michael Fallon and Sharon Bowles, respectively, were a complete mockery of due process : no independent evidence, no witnesses, just a Q/A between some MPs and a Goldman Sachs spokesman, Mr. Corrigan, who was hardly challenged. He sits with Trichet (he's not off the hook, he has to answer for closing access to ECB files on this issue, and Draghi on the G30).
Meanwhile, Goldman was one of four banks selected for the underwriting of EFSF bond, the precursor to Euro-bond, potentially the largest bond market in the world (if the Euro survives). Hats off, Mr Klaus Regling

6--Breaking: Monsanto Found Guilty of Chemical Poisoning in France, natural society

Excerpt: In a major victory for public health and what will hopefully lead to other nations taking action, a French court decided today that GMO crops monster Monsanto is guilty of chemically poisoning a French farmer. The grain grower, Paul Francois, says he developed neurological problems such as memory loss and headaches after being exposed to Monsanto’s Lasso weedkiller back in 2004. The monumental case paves the way for legal action against Monsanto’s Roundup and other harmful herbicides and pesticides made by other manufacturers.

In a ruling given by a court in Lyon (southeast France), Francois says that Monsanto failed to provide proper warnings on the product label. The court ordered an expert opinion to determine the sum of the damages, and to verify the link between Lasso and the reported illnesses. The case is extremely important, as previous legal action taken against Monsanto by farmers has failed due to the challenge of properly linking pesticide exposure with the experienced side effects....

Farmer Paul Francois was not alone in his quest to hold Monsanto accountable for their actions. He and other farmers affected by Monsanto’s deadly concoctions actually founded an association last year to make the case that their health problems were a result of Monsanto’s Lasso and other ‘crop protection’ products. Their claims were also met by many other farmers. Since 1996, the agricultural branch of the French social security system has gathered about 200 alerts per year regarding sickness related to pesticides. However only 47 cases were even recognized in the past 10 years....

7--Chinese Credit Growth Slows Significantly, naked capitalism

Excerpt: The big picture is that Chinese government has been tightening credit to try to lower inflation, with some success, and various commentators have been calling a soft landing outcome. But residential real estate sales took a tumble in November, and electricity use fell in January (although that may be in part due to the Chinese New Year). This is another sign that just as American economists were unduly confident in their ability to fine tune the economy in the 1960s, so too may analysts be overly optimistic about the ability of Chinese leadership to control its economy.

Cross posted from MacroBusiness

A week ago Phat Dragon was oozing calm in relation to what the January credit figures would say about the economy. Either an even 1 trillion yuan would be disbursed (the consensus), which would been fine, or a larger number would print, which would mean that the turnaround in monetary policy, as expressed through bank lending, was unambiguously here. Having now seen the new lending figure – a genuine tiddler at just 738 billion – (if that were a hooked fish, you’d throw it back in disgust) that state of calm has rapidly evaporated. The last time that a January month produced a smaller nominal new lending flow was in 2007. The economy has expanded by 77% since that time. Unless new lending jumps sharply in February – and by sharply Phat Dragon means a lift beyond even the extravagances of 2009 – then an annual loan supply north of 8 trillion yuan (and thus a total social financing provision that keeps pace with nominal GDP) is under serious threat.

A huge problem with relying on that to happen is that February lending has exceeded January lending exactly … let me just count this on my talons , … exactly, … bear with me … – exactly never. If an appropriate credit supply is not forthcoming, downside risks to already decelerating aggregate demand will emerge swiftly. In sum, Phat Dragon will reconsider his baseline 2012 forecasts if February loans do not break all sorts of records in addition to the Sinitic laws of seasonal motion.

8--The Demise of the Lincoln Derivatives Amendment, counterpunch

Excerpt: Blanche Lincoln, once a senator for Arkansas (1998-2010) noted for her fealty to Wall Street, has had one hope for immortality: Section 716 of the Dodd Frank Financial Reform Act, known to history as the Lincoln Amendment.

Though larded with loopholes, the amendment, introduced by Lincoln when facing a tough primary challenge from a progressive, made it harder for banks to trade derivatives.

Now, even that is about to be blown away like chaff, thanks to proposed legislation a mere four lines long, beautifully pure in its austere simplicity.

Lincoln’s amendment banned swaps – derivatives – trading by anyone on the receiving end of “Federal assistance.”

Federal assistance, otherwise known as taxpayer subsidies in the form of deposit insurance as well as bailouts from the Federal Reserve is of course what the banks live by. Strenuous efforts to gut the amendment, by Lincoln herself among others once she had won her primary, were not totally successful, thereby impinging on financial industry trading profits.

H.R. 1838, introduced by Republican Nan Hayworth of New York (herself no slouch in collecting Wall Street cash) sets things to rights in a straightforward manner. It simply states “Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (15 U.S.C. 8305) is amended by striking subsections (a) through (h) and (j) through (m) and redesignating subsection (i) as subsection (a).” That’s it.

Assuming its eventual enactment (and why not?), derivatives trading, which was what brought the financial house down in 2008, can again flourish completely unfettered.

Just to be cruel, she or whoever wrote this has called it “The Swaps Bailout Prevention Act.”

9--In Europe, the reasons to fear a Lehman-like event still seem compelling, credit writedowns

Excerpt: In this environment, creditor nations seem to be making a bet on the LTRO that will provide banks with another large liquidity cushion. It will increase their ability to deal with a shock emanating from Greece, if necessary. Ironically, that may mean that the larger than take down at the Feb 29th LTRO, the more likely European officials will be emboldened vis a vis Greece.

There is plenty of room for policy error. The reasons to fear a Lehman-like event still seem compelling. European officials suggest the problem is the lack of implementation of reform and growth measures in Greece. No doubt there is an element of truth with that assessment...

Nor will an exit by Greece solve the underlying problems in the euro zone. Greece is a symptom of the problem but not the cause. The problem is structural. The crisis has interrupted the recycling of the North’s surplus to the South in the euro area, though previously European officials assured themselves that imbalances within the euro zone are not significant. If Greece (and other peripheral countries) have an over-valued currency, then surely Germany has an undervalued currency.

Just like there are policies that can duplicate the effect of a devaluation–such as a large increase in the VAT, for example, and a large reduction in cost of labor (including employment taxes)–which appears to be the Troika’s agenda, there are policies that can duplicate the effect of an appreciation. With or without Greece in the euro zone, Germany does not seem prepared to take such action.

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