Wednesday, April 11, 2012

Today's links

1--Alcoa Posts Surprise Profit After Aluminum Orders Climb, Bloomberg

Excerpt: Alcoa Inc. (AA), the largest U.S. aluminum producer, reported an unexpected first-quarter profit after orders rose and it closed higher-cost smelting capacity.

Net income fell 69 percent to $94 million, or 9 cents a share, from $308 million, or 27 cents, a year earlier, New York- based Alcoa said today in a statement. Profit excluding restructuring costs and other items was 10 cents a share, compared with the 4-cent loss that was the average of 19 analysts’ estimates compiled by Bloomberg. Sales rose to $6.01 billion from $5.96 billion, beating the $5.77 billion average of 12 estimates...

The earnings were “driven by higher-than-expected profitability from every operating segment,” Brian Yu, an analyst at Citigroup Inc. in San Francisco who estimated a 6- cent loss, said in a note. “Good cost control likely played a major role.”

2--U.S. 10-Year Note Yield Falls Below 2% on Europe’s Debt, Bloomberg

Excerpt: Treasury 10-year yields fell below 2 percent for the first time in almost a one month on speculation the European sovereign-debt crisis is worsening as yields on Spanish and Italian bonds rose.

U.S. debt securities declined earlier on speculation yields that slid to a four-week low will curb demand as investors prepared to bid for $66 billion of notes and bonds at three auctions starting today. The yield on Spain’s 10-year note rose to 5.9 percent, the highest since November. The yield on Italy’s 10-year note reached 5.58 percent, the highest since February.

Spain is raising the prospect of an additional flight-to- safety rally,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York, which manages $12 billion in bonds.

Yields on 10-year notes fell six basis points, or 0.06 percentage point, to 1.98 percent at 12:36 p.m. New York time, according to Bloomberg Bond Trader prices...

The gap between Spanish and German 10-year yields widened to 4.28 percentage points, the most since November, after Spanish Prime Minister Mariano Rajoy’s unexpected announcement yesterday that he would cut an additional 10 billion-euros ($13 billion) in education and health spending failed to ease concern in the bond market that the nation may become the fourth euro member to need a bailout.

The Federal Reserve has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases intended to stimulate the economy, known as quantitative easing.

3--Shadow Banks on Trial as China’s Rich Sister Faces Death, Bloomberg

Excerpt: When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.

Operating outside the banking system or government regulation, the informal networks provide an important source of economic growth, capital for private companies and return for investors seeking to beat inflation. Premier Wen Jiabao, in an unusual move, weighed in on the case at a March 14 news conference. His comments highlighted a public debate over the importance of shadow banking to the Chinese economy, government efforts to bring it under control -- and whether capital punishment is an effective means to do so.

“Chinese companies, especially small ones, need access to funds,” Wen said when asked about Wu’s case. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.”...

Shadow banking has been fueled by a two-year credit squeeze in China and by large, state-owned banks’ preference for lending to government-run companies rather than small businesses. Private entrepreneurs account for 60 percent of China’s total economic activity and provide jobs for 80 percent of its urban population, according to China’s National Development and Reform Commission.

“Underground banking filled the hole left by China’s state-owned banks, which have this long-term bias toward big enterprises,” said IHS’s Ren. “Even though it is an extremely opaque market and has a lot of hidden problems, the government needs it to meet the basic financing needs of small businesses.”

4--Homes for the Price of a Car, zillow blog

Excerpt: A house for the price of an SUV? That’s plausible, given the dip in housing. But a home for the price of a Ford Fiesta?

Whoa. Now there’s a value-bending proposition.

While most people don’t think of real estate in prices relative to that of a car, there are houses in some parts of the United States that are for sale with listing prices just like what you’d see at an auto dealership.

And we’re not talking about a house priced at the median home value of $150,000, which is akin to the sticker price of an Aston Martin. The homes featured below compare more favorably to standard highway fare: Nissans, Hondas, Fords, etc.

Some of these properties are distressed sales — either foreclosed or in the midst of a short sale — and some need a little renovation, but that’s still a pretty impressive given that they’re all comparable to the price of a new car. (Check out the photos)

5--Brazil Leader Slams U.S. Money Policy, WSJ

Excerpt: Brazilian President Dilma Rousseff delivered the latest salvo in a global debate over currencies pitting the emerging economies against rich ones, telling President Barack Obama that an expansive U.S. monetary policy meant to drive growth at home is potentially harming Brazil and other developing countries.

The U.S. decision to leave benchmark lending rates near zero has created an overload of speculative money that floods into economies like Brazil, leading to overvalued local currencies and uncompetitive factories, "thus impairing growth…in emerging countries," Ms. Rousseff said on the first day of a two-day visit to the U.S.

Ms. Rousseff, in her second year in office, has made global currency imbalances in the wake of the 2008 financial crisis the centerpiece of her foreign policy agenda. Last month, Ms. Rousseff delivered a similar complaint about loose euro-zone monetary policy to Germany's Angela Merkel during a visit there.

Complaints by emerging-market leaders that weak U.S. and European monetary policies are having unwanted side effects in the developing world are taking on new urgency as big emerging-market economies such as Brazil are slowing—dragged down in part by overly strong currencies. Brazil's economy grew 2.7% in 2011, compared with 7.5% in 2010.

Economists who support the rich-world approach say it is justified since the whole world—Brazil included—will benefit if growth in the U.S. and Europe clicks into a faster gear.

6--The Secret Source of Economic Weakness: The Trade Deficit, CEPR

Excerpt: I know, it isn't really secret. The Commerce Department publishes data on the trade deficit every month, but given the extent to which it is ignored in economic policy discussions, as for example in this otherwise thoughtful NYT column, it might just as well be secret.

The basic story is incredibly simple. If we are buying more from abroad than we are selling, this means that we have negative national saving. If we have negative national saving, then either the public sector must have negative savings (i.e. a budget deficit) or the private sector must have negative saving (we are investing on net more than we households and corporations save) or both must have negative saving.

Currently the trade deficit is close to 4 percent of GDP at $580 billion. If we were near full employment, it would likely be close to 5 percent of GDP or $750 billion a year. (At higher levels of GDP the trade deficit increases, other things equal, because we would buy more imports.)

To offset this gap we must have a large budget deficit. Alternatively, we can have the situation like what we had in the housing bubble years of the last decade or the stock bubble years of the late 90s when private investment exceeded private saving.

In the last decade this was accomplished through the bubble-spurred housing boom and the near zero savings rate as people consumed based on their bubble-generated housing wealth. In the 90s we got negative private savings as gullible investors threw hundreds of billions of dollars into dot.garbage. Savings also fell to near zero in that period as households spent based on their ephemeral stock-bubble-generated wealth.

Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years. They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it.

The key to reducing the trade deficit is of course getting the dollar down. That will make our goods more competitive internationally.

This all is really simple, but it does require thinking for a moment or two. Repeating the Washington conventional wisdom gets one nowhere. (Okay, I don't mean that literally -- it can get you a high paying important job.) People actually have to think about how the economy works in order to understand it.

7--Record Treasury Demand Keeps Yields Low as Supply Shrinks, Bloomberg

Excerpt: Investors are plowing into Treasuries (USB2YBC) at a record pace as the supply of the world’s safest securities dwindles, ensuring yields will stay low regardless of whether the Federal Reserve undertakes more stimulus to fight unemployment....

Skepticism about the U.S. recovery, as well as signs Europe’s debt turmoil isn’t over, is enhancing demand for Treasuries. This may keep yields from surging even if Fed policy makers refrain from a third round of quantitative easing, and allow the Obama administration to finance a fourth deficit exceeding $1 trillion at near-record low costs.

“Investors are holding an overwhelming amount of cash in the system and chasing fewer securities, which has supported Treasuries,” said Dominic Konstam, global head of interest- rates research in New York at Deutsche Bank AG, one of 21 primary dealers that trade with the central bank, in an April 5 telephone interview. ...

Investors have continued to pour cash into bonds funds at the expense of equity funds as debt mutual funds have attracted $62 billion this year and $837.4 billion since 2008, compared with a $1.6 billion drop in equity funds this year and a $396.8 billion drop since 2008, according to data compiled by Bloomberg and the Washington-based Investment Company Institute....

In response to the crisis, the Fed tripled the size of its balance sheet to $2.88 trillion on March 28, from $905.7 billion in September 2008 as it created balances it used to bolster the financial system.

Rising inflation expectations may cause investors to slow their purchases of Treasuries and switch to higher-yielding assets. The difference between the yield on the 10-year Treasury note and its comparable maturity inflation-indexed security, the so-called break-even rate, rose to 2.24 percentage points from a yearly low of 1.95 at the start of January, indicating the market expects price increases to accelerate.

The Fed has purchased $1.4 trillion in mortgage and $900 billion of Treasury debt in two rounds of asset purchases beginning in November 2008


Demand for Treasuries is also being fed by banks needing to add safe assets to meet new reserve rules under the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland. Lenders have increased holdings of government debt since 2008 to protect their capital after the credit crisis caused more than $2 trillion in writedowns and losses at global financial institutions, according to data compiled by Bloomberg.

U.S. commercial lenders bought $62.8 billion of Treasuries and securities of agencies this year, compared with $62.6 billion in all of 2011, Fed data show.

Corporate Treasury Holdings

Corporations flush with cash are also contributing to demand for Treasuries. Since 2009, the amount of cash held by non-financial companies has increased 56 percent to a record $2.232 trillion, Fed data show. ...

After buying $2.3 trillion of assets to support the economy in two rounds of quantitative easing from December 2008 to June, the central bank has been replacing shorter maturities in its holdings with longer-term debt to cap borrowing costs without increasing holdings on its balance sheet. The $400 billion program, known as Operation Twist, is due to end in June...

While the amount of marketable debt outstanding has more than doubled to $10.3 trillion from $4.34 trillion in mid-2007 as the U.S. sold bonds to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, interest expense equaled 3 percent of the economy in fiscal 2011 ended Sept. 30. That’s down from 4 percent in 1999, when the U.S. ran budget surpluses.

8--European Bank Shares Take a Nosedive, NY Times

Excerpt: It was a bad day for European banking stocks.

On Tuesday, shares of several of the region’s largest financial institutions fell as much as 8 percent as fears about the debt crisis in Europe re-emerged.

After weeks of renewed optimism, particularly after the European Central Bank pumped in more than $1 trillion to prop up local banks, concerns are growing that countries like Spain and Italy will not be able to pay their debts.

Mounting questions about those to nations’ abilities to finance their loans are affecting banks because many institutions have been actively buying billions of dollars of state-backed debt.

Spanish banks, for example, increased their holdings of government bonds by 68 billion euros ($89 billion) from November to February. Italian firms bought 54 billion euros ($71 billion) of government securities over the same period

And investors continue to fret. The yield on Spanish 10-year bonds, for example, rose to nearly 6 percent on Tuesday despite an announcement from the country’s prime minister, Mariano Rajoy, about an additional 10 billion euros ($13 billion) of budget cuts.

Shares in Banco Santander dropped 3.9 percent on Tuesday, while the stock in BBVA of Spain fell 3.6 percent.

The effect on European banking stocks was worsened by the long Easter weekend for most European countries, when the Continent’s largest exchanges were closed on both Friday and Monday.

That meant Tuesday was the first day when European traders could respond to the worse-than-expected job numbers announced in the United States on Friday.

The pain was most acute in Italy. Shares in UniCredit, the country’s largest bank, fell 8.1 percent, while the stock of its local rival Intesa Sanpaolo slipped 7.9 percent.

The declines came after local media reports said the Italian government would cut its growth forecast for 2012. Italy is expected to grow by a mere 0.4 percent, according to statistics from the European Union.

The falling share prices, however, were not limited to debt-laden Southern European countries. Slow growth is forecast across Europe, which is expected to hurt some of region’s largest banks.

On Tuesday, the stock of Deutsche Bank of Germany dropped 4.2 percent. Shares in Barclays of Britain fell 5.9 percent, while those of BNP Paribas of France declined by 5.7 percent.

9--The Age of the Shadow Bank Run, NY Times

Excerpt: I RECENTLY asked a group of colleagues — and myself — to identify the single most important development to emerge from America’s financial crisis. Most of us had a common answer: The age of the bank run has returned.

The new complication is that bank deposits are no longer the dominant form of modern short-term finance. The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution. But these new versions are in some ways still similar to the old: both reflect the desire to pull money out of an endeavor — and to be the first out the door. And both can set off a crash.

These newer forms occur in the so-called shadow banking system, involving short-term financial credit not guaranteed by the deposit insurance umbrella. According to the Federal Reserve Bank of New York, shadow banking accounts for about $15 trillion in assets — more than the traditional banking system. But as recently as 1990, the shadow-banking total was much lower, at less than $4 trillion. The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free.

On top of this problem is the market for derivatives. The quantity of open derivatives amounts to trillions, and these positions are another source of short-term credit risk. So a need for sudden payouts could also prompt a run on a financial institution.

It now seems that the 21st century will resemble the 19th and early 20th centuries, with periodic panics and runs on financial institutions, perhaps followed by deflationary collapses. In the euro zone, these problems have plagued banks and entire countries, like Greece and Portugal. The “country as bank” is a new and not entirely reassuring catch phrase, and it shows that the problem goes beyond the private sector.

If a central bank is deft enough, it can avoid deflation by using loans and monetary policy to guarantee the liabilities of run-prone institutions. That worked reasonably well in 2008, but in the long term such a policy sets up the system for even more danger, by subsidizing bank risk-taking and precarious financial structures.

Another problem is that ending those central bank guarantees isn’t always easy. The European Central Bank has stemmed a financial collapse for now, but only by lending large amounts to banks at 1 percent for a three-year window. And yet the euro zone has entered a recession, so it’s unclear when troubled European banks can return to private capital markets. The central bank may end up taking over much of the allocation of capital.

The arrangement also assumes that economic growth will pick up fairly quickly in the euro zone — hardly a certainty. And there is little market discipline to force European banks to clean up their balance sheets or to exercise caution for the future. So the system remains extremely vulnerable.

Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.

THIS entire package of problems seems to be part of “the new normal” — it’s not going away anytime soon.

Some economists, like Ricardo J. Caballero of the Massachusetts Institute of Technology , have called for extending governmental guarantees well beyond traditional bank deposits. That would check the problem, but at what cost? In a larger financial crisis based on insolvency, our government would face intolerable financial burdens, as happened in Ireland when its government guaranteed bank debts.

A broader government guarantee would also spread the moral-hazard problem to an even larger class of financial transactions, raising the odds that the guarantee will someday have to be paid out. In any case, bailouts for creditors are already politically unpopular, and are unlikely to be expanded.

In short, no promising financial path is before us. It’s good that the American economy seems to be recovering, and this may shove some problems into the future. But banking and finance remain a mess at their core. Welcome to the 21st century.

10--Shadow bank chart, NY Times

11--Fox Criticized for Calling Neo-Nazis a "Civil Rights Group", Democracy Now

Excerpt: In media news, a Fox affiliate in Florida is facing criticism after it referred to a neo-Nazi group as a "civil rights group" in a report about Trayvon Martin’s killing. Here is part of the Fox report that includes an interview with Jeff Schoep of the National Socialist Movement.

Anchor Jennifer Bisram: "There’s another civil rights group in town: the National Socialist Movement."

Jeff Schoep: "A lot of people in the community, in the white community down there, had been contacting us out of concern for their safety just because of racial tensions."

Anchor Jennifer Bisram: "Racial tensions after 17-year-old Trayvon Martin was shot and killed by George Zimmerman. Zimmerman is claiming self-defense and has been in hiding now for weeks."

Jeff Schoep: "We’re a white civil rights organization, and we go into areas where we’re needed and where white citizens need our help."

According to the Southern Poverty Law Center, the National Socialist Movement has its roots in the original American Nazi Party. It is now one of the largest neo-Nazi organizations in the country. The group openly idolizes Adolf Hitler and calls for the deportation of every non-white person in the country.

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