Thursday, April 5, 2012

Today's links

1--The problem with prices, The Big Picture

Excerpt: According to the Case Shiller index of national prices, the median price of a home in the United States has fallen ~35% from peak price to trough. Very few folks had forecast this....

Let’s begin with current prices: The most recent Case Shiller index of national prices (January 2012) reveals that prices are still falling, about 4% year over year. We can point to three favorable data points regarding home prices:

1. Prices are decelerating, falling more slowly than they had been circa 2007-10;

2. Prices are now back to where they were in 2003;

3. The median prices comparing Rentals vs. Home Purchases now slightly favor purchases....

Yesterday, we discussed crucial purchase impediments such as having a 20% down payment, and qualifying for a mortgage. The next chart (again courtesy of Ned Davis Research) shows the historic relationship between median income and median purchase price. This is yet another crucial factor, as any buyer must earn sufficient income to service their mortgage obligations if they hope to keep the house.

And therein lies the rub: Real Incomes have been mostly flat the past decade; this is making it challenging to grow into a full blown housing recovery. Without real income growth, the purchasing power of potential buyers remains flat....

we must consider that the ZIRP policy of the Fed is keeping mortgage rates at unprecedentedly low levels. This helps explain most of the slowing of the mean reversion.

Post Bubble Pricing Behavior

There is one last factor that requires some discussion: How asset prices behave following a bubble.

Regardless of the asset class — stocks, bonds, commodities, homes, etc. — assets do not merely mean revert. We have never seen a stock market that has run up into bubble territory, and then merely reverted to fair value of a 15 P/E. Instead, we careen wildly past that level, to deeply undersold, and exceedingly single digit P/E cheap.

That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money finally returned to its rightful owner, the prudent investor.

To date, we have not fully mean reverted, much less fallen far below fair value. In order to form a lasting recovery, we need to see homes cheap enough that they fall into “good hands” — i.e., long term owners who can afford to make their monthly mortgage payments.

Until that happens, homes will continue stumbling along the bottom of the price range, with a negative bias to prices. Another 5-10% is a very easy downside target — assuming nothing else goes wrong

2--The Foreclosure Deal Spares the Housing Market (So Far), Bloomberg

Excerpt: 667--The number of days, on average, since homeowners in the foreclosure process made their last mortgage payment....

Delinquent mortgage borrowers, take note: Banks still aren’t moving very fast to kick you out of your homes.

February's foreclosure settlement between big U.S. banks and state attorneys general should have been bad news for mortgage deadbeats -- and for house prices. Having resolved charges that they had filed bogus documents to speed up repossessions, the banks should have felt free to move ahead with millions of foreclosures. They should also have started selling more repossessed houses, an influx of cheap supply that would weigh on the market.

So far, though, that's not happening. In the month of February, banks started 172,502 foreclosures, down 15 percent from January and 15 percent from a year earlier, according to data provider LPS Applied Analytics. Foreclosure sales also slowed.

Partly as a result, the average number of days since the last mortgage payment had been made on homes in the foreclosure process rose to 667, up from 660 the previous month and 253 in February 2008. In other words, the average delinquent borrower could live rent-free for nearly two years without getting evicted, assuming the borrower chose to stay in the house.

Banks might have been waiting for the settlement's final court approval, which came only in March. But some elements of the deal suggest it could take a while longer to start clearing out the foreclosure pipeline.

For one, February's agreement requires banks to provide borrowers with extensive information on the state of delinquent loans before foreclosing, including proof of the bank's right to foreclose, the complete payment history and the name of the investor holding the loan. The difficulty of obtaining such information was why many loan servicers cut corners in the first place.

The added hurdles could mean a temporary reprieve for some delinquent borrowers, and for the broader housing market. The longer the process takes, though, the larger the final losses are likely to be.

3--Regulators Should Move Faster to Make Shadow Banks Safer, Bloomberg

Excerpt: The U.S. is busy exiting its taxpayer-funded bailouts, most recently reducing its stake in American International Group Inc. And AIG (AIG) is considering increasing its mortgage book by purchasing the loans it insures, a move that could be profitable for AIG, but could also heighten the insurer’s risks -- and taxpayers’ too.

Nearly four years after the financial crisis began, regulators on Tuesday finally agreed to the criteria they will use to decide which parts of the shadow banking system to regulate, but they still haven’t imposed tougher standards on a single insurer, hedge fund, private-equity shop or money-market mutual fund. Failure to do so exposes the U.S. economy to unnecessary dangers.

AIG is a prime example. The giant insurer required a $182 billion bailout in 2008. Its near-collapse helped propel the Dodd-Frank financial regulatory overhaul. Many lawmakers and policy makers agree that large, complex companies like AIG had fallen through the regulatory cracks.

The Dodd-Frank law addressed this by creating a special panel of top financial regulators, called the Financial Stability Oversight Council, to supervise large companies whose unraveling could threaten the economy. Those designated as “systemically important financial institutions” would be subject to stricter supervision and tougher capital and liquidity requirements.

Holes Remain

The stability council spent 18 months debating the criteria it would use to name so-called SIFIs. With that chore out of the way, the council should move quickly -- next month wouldn’t be too soon -- to begin naming the actual institutions.

The final criteria are an improvement over an earlier proposal, but holes remain. For one thing, many potentially risky companies probably won’t make the list. A Bloomberg Government analysis identified 15 that would meet or exceed the thresholds, and 10 more that might. Among the companies that probably will make the cut are AIG, General Electric Capital Corp. and 10 government-sponsored enterprises, including mortgage giants Fannie Mae and Freddie Mac.

Not a single hedge fund, private-equity shop or money- market mutual fund made the list.

Many of the criteria make sense, including a company’s debt relative to the capital it holds, reliance on short-term funding, importance as a source of credit and amount of derivatives outstanding. The U.S. will also consider existing regulatory scrutiny to ensure a company is not drowned by excessive oversight.

Yet the rule will mostly apply to firms with at least $50 billion in assets, the same threshold the Dodd-Frank law set for banks. It’s unclear whether any hedge funds or private-equity shops would meet that or the other tests. For example, just one U.S. hedge-fund manager, Bridgewater Associates LP, has more than $50 billion in assets, according to Bloomberg Markets.

The council said it lacks data on such firms and may have to adjust its criteria once it gathers more information. It also retained the right to designate any non-bank firm as systemic if “material financial distress” at the company could threaten the system. We hope the panel makes broad use of those powers -- and doesn’t let the $50 billion cutoff blind it to potential threats.

Hedge funds and private-equity firms have been lobbying regulators not to pull them into the dragnet. Many of these companies are closely held, and their financial data are not available to the public. The council should do whatever it takes to properly assess these firms’ risks.

Money-Market Funds

The panel also delayed a decision on whether to designate money-market mutual funds as systemically important. That’s surprising, given the tumult the Reserve Primary Fund caused in fall 2008 when it “broke the buck,” meaning its net asset value fell below the $1-a-share level that money-market funds are expected to maintain. The Securities and Exchange Commission is considering new rules for these funds, but if it fails to act, the council should

4--China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil, Bloomberg

Excerpt: China had its largest trade deficit since at least 1989 last month as Europe’s sovereign-debt turmoil damped exports and imports rebounded after a weeklong holiday.

The shortfall was $31.5 billion, the customs bureau said yesterday. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said.

The data, along with lower-than-forecast inflation, industrial output and retail sales reported March 9, raise the odds PremierWen Jiabao will ease policies to support growth in the world’s second-biggest economy. Commerce Minister Chen Deming’s warning last week that boosting trade by 10 percent this year will require “arduous efforts” may also signal a slower pace of yuan gains as policy makers seek to aid exporters.

Easing inflation and weakening economic activity send a strong signal for further loosening in the upcoming months,” said Shen Jianguang, Hong Kong-based chief greater China economist for Mizuho Securities Asia Ltd

5--Draghi Says Inflation Risks Prevail as Economy Stabilizes, Bloomberg

Excerpt: European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn’t plan to withdraw emergency stimulus any time soon.

“All the necessary tools are available to address upside risks to price stability in a firm and timely manner,” Draghi told reporters in Frankfurt after the ECB held its benchmark rate at a record low of 1 percent today. At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said, adding that the economic outlook is subject to downside risks and inflation will remain contained in the medium term.

The ECB is balancing the threat of inflation in Germany, Europe’s largest economy, against the need to fight the sovereign debt crisis. While nations from Greece to Spain are battling recessions and record unemployment, workers in Germany are winning some of the biggest pay increases in 20 years.

“Today’s press conference was a strange brew between reassuring the markets that talk of an exit strategy is premature and trying to alleviate the German fear of an uptick in inflation,” said Peter Vanden Houte, an economist at ING Group in Brussels. “The ECB’s policy has been criticized in Germany as potentially stoking inflation. Draghi clearly wanted to set things straight.”...

We will pay particular attention to any signs of pass- through from energy prices to wages,” Draghi said. “However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.”

6--(From the archives) Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World, Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal

Excerpt: Jeong Seong-jin: Most media and analysts label the current crisis as a “financial crisis.” Do you agree with this characterization?

Robert Brenner: It’s understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure. But the difficulty is that they have not gone any deeper. From Treasury Secretary Paulson and Fed Chair Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector. At the same time, they assert that the underlying real economy is strong, the so-called fundamentals in good shape. This could not be more misleading. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator -- GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was -- by far -- the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.

Jeong: How would you explain the long-term weakening of the real economy since 1973, what you call in your work “the long downturn”?

Brenner: What mainly accounts for it is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries. What happened was that, one-after-another, new manufacturing power entered the world market -- Germany and Japan, the Northeast Asian NICs (Newly Industrializing Countries), the Southeast Asian Tigers, and, finally, the Chinese Leviathan. These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and, in that way, profits. The corporations that experienced the squeeze on their profits did not, moreover, meekly leave their industries. They tried to hold their place by falling back on their capacity for innovation, speeding up investment in new technologies. But, of course, this only made overcapacity worse. Due to the fall in their rate of return, capitalists were getting smaller surpluses from their investments. They, therefore, had no choice but to slow down the growth of plants and equipment and employment. At the same time, in order to restore profitability, they held down employees’ compensation, while governments reduced the growth of social expenditures. But the consequence of all these cutbacks in spending has been a long-term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy’s long-term weakness.

Jeong: The crisis was actually triggered by the bursting of the historic housing bubble, which had been expanding for a full decade. What is your view of its significance?

Brenner: The housing bubble needs to be understood in relation to the succession of asset price bubbles that the economy has experienced since the middle 1990s, and especially the role of the U.S. Federal Reserve in nurturing those bubbles. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing. In effect, in order to stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the U.S. and Europe, led by the Clinton administration, famously tried to break their addictions to debt by moving together toward balanced budgets. The idea was to let the free market govern the economy. But, because profitability had still not recovered, the reduction in deficits delivered a big shock to demand, and helped bring about the worst recessions and slowest growth of the postwar era between 1991 and 1995. To get the economy expanding again, U.S. authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy. So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalized by state policy makers -- and regulators -- first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s.

7--Where's the criminal investigation of the Murdoch Empire? Shareholders to the rescue, The Money Party

Excerpt: The current revelations of cable television hacking, laid out in detail by Australia’s Financial Review and the BBC, provide a more concrete connection between outright criminality and the Murdoch run media giant. This alleged criminal behavior involves hackers on the payroll of a former Murdoch controlled Israel based company, NDS, and the demise of cable television competitors in Great Britain, the United States, and Australia due to that activity.

These allegations are reinvigorating the institutional shareholders revolt that may be the end of the Murdoch clan’s control of News Corporation...

The London Metropolitan Police bungled several promising investigations that could have broken the current phone hacking fiasco years ago by fingering Murdoch’s News Corporation as the main perpetrator. A detailed deposition given to the phone hacking inquiry by a senior Met officer described how two top Met officials (the commissioner and assistant commissioner) stifled investigations when matters came too close to the powerful in London.

Ray Adams, the NDS security head who launched the hacker web site, was twice investigated for shielding gangsters before retiring from the Met. The damaging findings of the internal investigations were kept form a subsequent high profile investigation of a racially motivated murder in 1993 where Adam’s behavior was called into question. Was the Met protecting Adams? Is is still protecting Adams?

The U.S Department of Justice has failed to follow up on the cable hacking charges, a major cyber crime despite the evidence brought forth in the Canal+ trial. In fact, in 1998, the U.S. Customs Service partnered with NDS in a sting operation to catch cable pirates in the state of Washington. The sting backfired when the stolen cable security codes became available to cable pirates. Direct TV, then owned by General Motors, lost millions as a result of the operation. Had Justice been a little more curious in 1998, the subsequent hacking and cable piracy would have been prevented.

Where is the United States Department of Justice? How much more smoke do they need to see before they suspect a major fire?

8--Spain Fights Austerity, counterpunch

Excerpt: With a deepening crisis and aggressive austerity measures, the people in Spain have reasons aplenty to rebel. First a socialist and now a conservative government have slashed retirement, unemployment, and severance benefits, made all labor contracts effectively precarious, steeply raised the prices for education and transportation, begun the privatization of healthcare, further militarized police and private security and dramatically increased their numbers, and paid out insulting amounts of money to bail out banks or pander to tourists. But given the events in the recent past, the most level-headed expectations for the March 29th general strike were decidedly pessimistic. After workers paralyzed Spain with a one day strike in September, 2010, the two major labor unions, CCOO and UGT, showed their true colors by signing on to the reforms proposed by the socialist government then in power. The following January, minority unions such as the anarchosyndicalist CNT and CGT tried calling their own strike without the big unions, and though the mobilization functioned well as a major day of protest, as a strike it achieved only a paltry participation.

9--The Problem of Low-Wage Jobs, conversable economist

Excerpt: Define "low-wage jobs" as those that involve earning two-thirds or less of the median hourly wage: that is, those earning less than about $10/hour. As Schmitt notes: "If low-wage work were a short-term state that helped connect labor-market entrants or re-entrants to longer-term, well-paid employment, high shares of low-wage work would be less of a social concern...

the share of U.S. workers who are low-wage is considerably higher than in many other high-income countries. About one-quarter of U.S. workers are low-wage, compared with 20-21% in the UK, Canada and Germany; about 15% in Japan; and 8% in Norway and Italy....

The issue here can be summed up with this question: If someone in the U.S. economy is a law-abiding citizen who works full-time for a period of years, can they earn a level of wages that let them afford a slice of middle-class standard of living? If you are earning $10/hour and working 2,000 hours per year, your annual earnings of $20,000 would put you below the poverty line of $22,891 for a single parent with three children.

And the problems of low-wage work aren't limited to low wages. Schmitt writes: "Not only are low-wage workers likely to stay in low-wage jobs from one year to the next, they are also more likely than workers in higher-wage jobs to fall into unemployment or to leave the labor force altogether. ... U.S. labor law offers workers remarkably few protections. U.S. workers, for example, have the lowest level of employment security in the OECD and no legal right to paid vacations, paid sick days, or paid parental leave. ... [M]ore than half (54 percent) of workers in the bottom wage quintile did not have employer-provided health insurance and more than one-third (37 percent) had no health insurance of any kind, private or public."

It's worth noting that labor force participation rates for men aged 16-24 have fallen from 72% in 1990 to 57% in 2010, and for men from 25-54, the labor force participation rate has fallen from 93% in 1990 to 89% in 2010, according to Bureau of Labor Statistic data. Much of this is due to the low pay available to those with low skill levels.

Schmitt only sketches his policy suggestions here, which include higher rates of unionization, higher minimum wages, employment-protection legislation and other national labor laws, along with higher benefits for the jobless and low-income households.... the U.S. labor market seems to be producing an outcome where a substantial and growing proportion of full-time employees earn barely enough to creep above the poverty line. If we wish to build a society and an economy on rewarding work, it is a harsh fact of U.S. labor markets that such a reward is currently not apparent for many.

10--Are US Multinationals Abandoning America?, Project Syndicate

Excerpt: , in 2009, US multinationals accounted for 23% of value added in the American economy’s private (non-bank) sector, along with 30% of capital investment, 69% of research & development, 25% of employee compensation, 20% of employment, 51% of exports, and 42% of imports. In that year, the average compensation of the 22.2 million US workers employed by US multinationals was $68,118 – about 25% higher than the economy-wide average.

Equally important, the US operations of these firms accounted for 63% of their global sales, 68% of their global employment, 70% of their global capital investment, 77% of their total employee compensation, and 84% of their global R&D. The particularly high domestic shares for R&D and compensation indicate that US multinationals have strong incentives to keep their high-wage, research-intensive activities in the US – good news for America’s skilled workers and the country’s capacity for innovation.


Second, during the 2000’s, US multinationals expanded abroad more quickly than they did at home. As a result, from 1999 to 2009, the US share of their global operations fell by roughly 7-8 percentage points in value added, capital investment, and employment, and by about 3-4 percentage points in R&D and compensation...But the data tell a more complicated story. From 1999 to 2009, US multinationals in manufacturing cut their US employment by 2.1 million, or 23.5%, but increased employment in their foreign subsidiaries by only 230,000 (5.3%) – not nearly enough to explain the much larger decline in their US employment.

Moreover, US manufacturing companies that were not multinationals slashed their employment by 3.3 million, or 52%, during the same period. A growing body of research concludes that labor-saving technological change and outsourcing to foreign contract manufacturers were important factors behind the significant cyclically-adjusted decline in US manufacturing employment by both multinationals and other US companies in the 2000’s.

So, while US multinationals may not have been shifting jobs to their foreign subsidiaries, they, like other US companies, were probably outsourcing more of their production to foreign contractors in which they held no equity stake. Indeed, it is possible that such arm’s-length outsourcing was a significant factor behind the 84% increase in imports by US multinationals and the 52% increase in private-sector imports that occurred between 1999 and 2009....

Previous research has found that increases in employment in US multinationals’ foreign subsidiaries are positively correlated with increases in employment in their US operations: in other words, employment abroad complements employment at home, rather than substituting for it.

Facts, not perceptions, should guide policymaking where multinationals are concerned. And the facts indicate that, despite decades of globalization, US multinationals continue to make significant contributions to US competitiveness – and to locate most of their economic activity at home, not abroad. What policymakers should really worry about are indications that the US may be losing its competitiveness as a location for this activity.

11--Fitch Ditched in Bond Dispute, WSJ

Excerpt: Fitch Group's new chief executive said Credit Suisse Group AG CSGN.VX -3.06%dropped the firm's rating from a mortgage-backed security because Fitch took a harsher view than two rivals that assigned triple-A ratings to the deal.

"It was an 11th-hour thing when they decided which agency it would be to publicly rate it," said Paul Taylor, who took over this week as chief executive of Fitch Group, in an interview. "We had a materially different take."

Mr. Taylor said Fitch Group, which includes credit-rating firm Fitch Ratings, had been compensated for its rating on the mortgage-backed deal.

Fitch shared its differing view with investors after the deal closed Friday, publishing a report critical of Standard & Poor's Ratings Services and DBRS Ltd. for issuing triple-A ratings on the residential-mortgage-backed security issued by Credit Suisse.

The deal was a bond backed by $746 million in jumbo mortgages originated by MetLife Inc. MET -1.91%and other lenders.

A spokesman for Credit Suisse said it's not rare for a rating firm to be paid and then ultimately not have its rating chosen. An S&P spokesman said "the market benefits from a diversity of opinions on credit risk." A DBRS spokeswoman said in a statement that the firm "rated the transaction in accordance with its published methodologies."

Fitch's response sets the stage for more public spats between ratings firms as they vie to rate mortgage-linked deals. The market collapsed during the financial crisis, and new issues remain scarce.

Claims of issuers shopping around for the best ratings have been common for years. A Fitch spokesman said an issuer has dropped a rating firm at the last minute on three of the six residential-mortgage-backed deals issued since 2010. The spokesman acknowledged that it was rare for Fitch to publish such a detailed report for a deal the firm didn't ultimately rate.

12--Foreclosure effort flags(Just 3% of Eligible Borrowers Apply for Foreclosure Review), WSJ

Excerpt: Last April, federal banking regulators cracked down on alleged foreclosure abuses by announcing enforcement actions against 14 major financial companies and promising widespread reforms.

A year later, borrowers haven't received any compensation from banks, officials haven't agreed on penalties for errors ranging from incorrect credit-bureau reporting to wrongful foreclosure, and millions of invitations to start foreclosure reviews have received no response.

The Federal Reserve and another federal banking regulator, the Office of the Comptroller of the Currency, also haven't agreed on whether some of those receiving aid in exchange should relinquish their right to sue the banks, people familiar with ...

13-- The EZ's problem is demand not inflation, CEPR

Excerpt: A major Washington Post article reporting on the situation of depressed areas of former West Germany implied that Germans would have to sacrifice more in order to finance a larger bailout of Greece, Spain and other heavily indebted countries. This is not true.

The major problem facing the euro zone countries right now is a lack of demand, not a lack of supply. In other words, increased resources for the indebted countries do not have to come at the expense of Germany's living standard. The European Central Bank (ECB) can simply support increased demand, as it is now doing to some extent with its $1 trillion special lending facility. This would actually leave the people in the depressed regions of western Germany better off, not worse off.

Unfortunately, rather than trying to boost demand enough to restore full employment, the ECB is producing silly propaganda cartoons about the "inflation monster," which tries to scare viewers into believing that there is a realistic fear of hyper-inflation in Europe. Of course the real problem facing Europe right now is the depression monster, which is leaving millions of people out of work, but the folks running the ECB lack the competence to recognize this fact.

14--Chips Forecast a Slowdown Is Coming, WSJ

Excerpt: For its preferred economic forecasting tool, San Francisco-based SouthBay research looks at chips–as in data chips, not the chocolate or potato variety.

And what do the chip orders, and other West Coast-centric indicators such as Internet usage rates, say? Hint: there is a good chance you will find a lump of coal in your holiday stocking this year.

Based on its analysis of our nation’s consumption of silicon wafers and its telecommunication of bits and bytes, the firm is forecasting a slowdown from the current period of improved growth. That in turn could mean more quantitative easing from the Fed and, as a result, a weaker dollar.

For now, the minutes from the Federal Open Market Committee’s March 13 meeting, released at 2:00 p.m. EDT Tuesday, have given the dollar a lift, partly because it included modest upward revisions to the Fed’s gross domestic product growth forecasts. But there was still plenty of material in that write-up suggesting that the doves on the committee remain a force. And Fed Chairman Bernanke and others have left it crystal clear that if U.S. economic data were to weaken considerably, more QE would be forthcoming. As with past policy moves of this nature, the dollar would likely weaken on that.

According to SouthBay Research and its founder Andrew Zatlin, weakness in the most recent semiconductor data point to the kind of problems that might trigger more QE, not now but toward year-end. That could suggest that retailers foresee a weak 2012 holiday season for computer products, or that businesses are reluctant to invest in computing due to concerns about the longer term economic outlook .

The reason: there is a six-month lag between orders for semiconductors and their actual delivery time.

April is when global supply chains begin gearing up for sales for the fourth quarter. And with the first quarter over, semiconductor conditions have been gloomy and worse than expected. There has been no pickup in inventory, minimal increases in shipments and weak demand across multiple sectors, says SouthBay, whose own index for semiconductors continues to signal little willingness among investors to boost inventories.

This is not a good signal for business investment, a key component of GDP. And it coincides with a February factory orders report released Tuesday, whose weakness implied declining corporate investment and a challenge to GDP growth, according to Steve Ricchiuto, chief economist of Mizuho USA.

The head winds of ongoing public sector weakness, limited household spending growth and trade imbalances are all contributing to what is seen by businesses as a global growth slowdown. And, as a result, it seems they’re not investing in computers–despite the improvement that the U.S. economy has seen in recent months.

SouthBay Research, founded in 2009, claims to have one of the lowest forecasting mean error rates for predicting job trends. The company mines the Internet for data points using proprietary algorithms that extract high frequency real-time data points from 45 major metro areas.

The good news, if you can see it that way, is that the firm’s data don’t suggest immediate US economic weakness. So there’s likely no need to rush to sell dollars–a heartening thought to those who jumped into the greenback after the FOMC minutes.

There’s a certain consistency between SouthBay’s forecasts and the way I see events in the global economy playing out.

In the first half of the year, in which the dollar will remain well bid, the pressure will remain in Europe, due to austerity measures that are causing European growth to stagnate. After that, however, via both trade and financial transmissions from Europe’s problems, weakness will shift across the Atlantic to U.S. shores as uncertainty over the outcome of the U.S. election grows. There’s a real risk that a divided Congress will fail to reach a compromise that averts a massive wave of growth-killing spending cuts and tax hikes scheduled for the end of this year.

The best bet would be to stay long dollars for now through the second quarter and watch the economic data. When and if it turns, the dollar will go negative with it, as the Fed’s response will likely be swift. Trust me, betting against a central bank can be quite the painful experience.

15-- Beware of Rule by Central Banks, naked capitalism

Excerpt: The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good. Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending. Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone.

Even worse, some monetary policy hyper-enthusiasts seem to view the Fed has having vast powers to manage the nation’s overall spending level and adjust the nation’s money supply up and down though mysterious and occult mechanisms that extend well beyond the grubby plumbing of the credit system. The Wizard of Fed, it seems, can control the economic minds of Americans though imperious pronouncements on his expectations for the future. Hundreds of millions of Americans, one is led to believe, pay close attention to the Beloved Leader and await his determinative dicta, and then adjust their own behavior accordingly. L’√Čtat, c’est Ben. The nation’s central banker is the glass of financial fashion and the caller of the economic tune.....

The problem in America is not bankers who won’t lend. Corporations are already sitting on record-setting amounts of profits and cash, but production and hiring are not booming. The problem is that ordinary people at the foundation of our economy, the people whose desires for goods and services drive the production that employs our resources, are lacking income. They do not want more credit and more debt. They want more income.

Yet it’s not as though we don’t know how to promote economic production, deliver income and boost unemployment when the private sector fails to deliver as much of these social goods as we need. As a monetarily sovereign country, the US government can finance an expansion in spending that does not require either new taxes or burdensome debts left to posterity. What people want the Fed to do – somehow push new, spendable monetary assets into the real economy – the political branches of the government can do better, and in a much more direct and effective way. What is called for is a renewed commitment to fiscal policy, not more exercises in conventional and unconventional central bank policy. We need to return fiscal policy to the front and center of our national discussion of economic policy....

We are faced with imposing national problems of social decay, public underinvestment, incoherent and feckless national purpose and unconscionable underemployment of people and resources. These are problems that can’t be fixed by Fed money management and expectations setting, and many of them are challenges of national scope that manifestly exceed what we can expect from the hurly-burly and hustle of private sector entrepreneurialism. Solving these problems is going to take an activist national government, and a politically engaged and committed public, directing serious resources toward unmet public purposes.

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