Thursday, June 14, 2012

Today's links

1--Nigel Farage: "The Euro Titanic, has now hit the iceberg and sadly there simply aren’t enough life boats." credit writedowns

2--Iceland emerges from crisis, Paul Krugman, NY Times

(Chart) GDP is still below previous peak, but I think one could argue, much more so than in say America, that a significant part of that peak involved a Ponzi financial sector that isn’t coming back

3--Is Canada facing a housing bubble?, Sober Look

(Great charts) In the 2007 recession, the US residential property market was the hardest hit among the various asset classes. As a reaction to that event, lenders in the US are being fairly conservative in providing residential mortgages. Home buyers on the other hand are in no rush to buy properties. The risks associated with real estate markets are still on everyone's mind and will probably be for some time. That type of risk aversion keeps asset bubbles from forming.

Canada on the other hand did not experience the same level of housing bubble nor the correction that followed as did the US (see chart below). Therefore housing in Canada does not tend to conjure up the same connotation of risk as it does in the US. At least not yet.

Canadian home prices have been growing quite rapidly, particularly as compared to the US. Some may argue that this is justified because Canada's unemployment rate is lower. 8.1% in the US vs. 7.4% in Canada. Is that enough to justify such a divergence in housing prices, particularly when the GDP growth rates in the two countries is fairly similar?

4--Euro area industrial production slumps, economonitor

Euro area industrial production (ex construction) declined 0.8% in the month of April. Across the major sectors, the largest decline occurred in capital goods; however, the trend in consumer and intermediate goods is worse than that of capital goods.

5--Yields on 10-Year Treasurys Plumb a New Bottom, WSJ

Concerns about the U.S. economy Wednesday pushed investors into the safety of U.S. Treasurys, helping the government borrow at the lowest cost in the history of 10-year auctions.

An economic report that showed a drop in consumer spending last month fueled significant demand for the asset, a safe haven for investors in a down economy.

The $21 billion of 10-year Treasurys was sold at a record-low yield of 1.622%.

6--Jobless Claims in U.S. Unexpectedly Rose Last Week, Bloomberg

More Americans applied for jobless benefits and consumer prices dropped by the most in three years, giving the Federal Reserve room to spur an economy that’s generating little growth or inflation.

Claims for unemployment insurance payments unexpectedly climbed by 6,000 to 386,000 in the week ended June 9, Labor Department figures showed today in Washington. The cost of living fell 0.3 percent in May, led by the biggest decrease in gasoline prices in three years, the agency also reported.

Stocks rose as investors increased bets Fed policy makers meeting next week will take additional steps to boost growth and cut an unemployment rate stuck above 8 percent since February 2009. Cheaper energy costs also provide some relief for Americans against a backdrop of moderating job and wage gains that has slowed consumer spending.

“The Fed is really concerned about the outlook for employment and growth,” said Kevin Logan, the chief U.S. economist at HSBC Securities USA Inc. in New York who correctly forecast the decline in prices. “They’ve been pretty sanguine about the inflation outlook, and today’s data certainly didn’t contradict that outlook.

7--Imperialism and the Houla massacre, WSWS

Investigations of the May 25 massacre in Houla, Syria have shattered the lies Washington and its allies are using to justify their escalating military intervention in Syria.

Responsibility for the deaths of 108 people massacred in Houla lies not with the Syrian army, but with the Syrian “rebel” forces the US is arming against Syrian President Bashar al-Assad, according to the Frankfurter Allgemeine Zeitung, a leading German daily. The newspaper reported that the Syrian guerilla groups functioned as Sunni sectarian death squads, wiping out much of Houla’s Shiite Muslim minority. Its sources were not drawn from the Assad regime, but from the Syrian opposition itself, as well as from French religious groups in Syria.

The implications of this revelation go far beyond the atrocity in Houla. They undermine the rotten foundations of the US-led campaign for war with Syria. The media uncritically reports opposition accounts of the killings and Western denunciations of Assad to cynically present arms support for the opposition—or, possibly, a US invasion of Syria—as acts of conscience to halt a humanitarian disaster.

Media outlets carrying such reports are acting as nothing more than propaganda agencies for US intervention.
8--Global crisis deepens after Spanish bailout, wsws

Rising interest rates in bond markets demonstrate that the €100 billion Spanish bailout last weekend has done nothing to resolve the euro zone crisis and may well have made it even worse. The rate on Spanish 10-year bonds climbed to the danger level of 6.8 percent Wednesday, while interest rates on Italian one-year government debt reached their highest levels since last December.

The latest turmoil came as the World Bank issued a report warning that so-called “emerging markets” face heightened risks from the European crisis. The World Bank’s latest Global Economic Prospects report predicted that growth in developing countries would fall to 5.3 percent in 2012, down from 6.1 percent. The forecast for overall world growth was cut to 3 percent for 2013, down by 0.1 percent from the estimate in January.

The bank said that developing countries should prepare for a long period of volatility, warning that Eastern Europe and Central Asia were particularly vulnerable because of their trade and financial ties with the major European economies....

calls for greater ECB intervention, which are supported by Britain and the US in order to safeguard the financial interests of their banks, continue to be opposed by German Chancellor Angela Merkel. She fears such a policy could endanger the German financial system unless there is more centralized control of national budgets.

“Germany is prepared to do more on integration”, she said, “but we cannot get involved in things which I am convinced will lead to an even bigger disaster than the situation we are in today.”

Rises in interest rates on the debt of so-called “core” countries, Germany and France, were interpreted as evidence that concerns were spreading about the stability of the entire system. Normally, when interest rates in the “periphery” rise, those in the “core” decline. One financial trader told the Financial Times that if there was a simultaneous sell-off of bonds [leading to a rise in interest rates] “we’d move from concern to alarm.”

9--ECB’s Weidmann: Must Resist Efforts to Expand Central Bank Mandate, WSJ

The European Central Bank must resist calls to widen its mission of defending price stability, even against the backdrop of the escalating debt crisis ravaging the currency zone, ECB Governing Council member Jens Weidmann argued Thursday.

Letting inflation rise wouldn’t solve the continent’s problems, said Weidmann, who also serves as president of the Deutsche Bundesbank, according to the text of a speech prepared for an event in Mannheim, Germany.

10--Vitals Signs: Slowing Retail Sales, WSJ
(See chart) Retail sales are slowing. Excluding cars and auto parts, retail sales fell 0.4% in May from April. Sales are still rising compared with a year ago, but more slowly than earlier in 2012. Falling gasoline prices account for much of the slowdown, just as rising prices at the pump helped explain last year’s spending increases. But even excluding gasoline, sales growth has stalled.

11--Consumers Are Facing Stronger Headwinds, WSJ

Consumer headwinds are strengthening. Hiring is sluggish, incomes are barely keeping pace with inflation, future tax policy is uncertain. No wonder shoppers are taking a breather.

Retail sales fell 0.2% in May, with non-auto sales down 0.4%. Moreover, April’s numbers were revised lower so that top-line sales fell 0.2% rather than the 0.1% gain reported earlier.

A few special circumstances explain part of the weakness. Retail sales are reported nominally, so the drop in gas prices–a plus for future consumer demand–caused the 2.2% plunge in gas-station receipts. Also, the warm winter pulled forward some spending on building materials into the first quarter.

Still, since consumers account for about 70% of economic activity, the lackluster shopping performance in April and May raises worries about gross domestic product.

Core sales–the ones included in GDP calculation and that exclude purchases of vehicles, building materials and gasoline–are barely up so far in the second quarter. Consequently, real GDP is probably growing less than a 2% annual rate this quarter. That pace shouldn’t heighten recession fears but it isn’t good news for prospects for job growth.
The weak retail data–coupled with some slowing in wholesale inflation–raise the odds of further easing by the Federal Reserve.

With the Fed scheduled to meet next week, investors are hoping that bad numbers up the ante for a third round of quantitative easing.

The big question, however, is what can the Fed do to boost demand by consumers and their equally reticent counterparts in the business sector?

Economists are skeptical that QE3 will spur spending. Liquidity isn’t the problem right now. The challenge is to trigger the risk-taking spirits that spur consumers to borrow and spend and businesses to hire and expand.

If anything, QE3 would benefit financial markets more than the average consumer or business owner.

“Equity market people are dying for another round as the Fed has been the biggest gift to equity prices since people actually thought dot-coms were real,” says Joel Naroff, president of Naroff Economic Advisors.

But the Fed might wait to act because it might need to offset a euro-zone collapse. How that debt crisis plays out remains the biggest uncertainty in the outlook (followed closely by Washington’s own fiscal problems.)

The next big step down that road to possible perdition is this weekend, when Greeks go to vote.

12--Fed’s Tarullo Pushes for Less Risk in Shadow Banking, WSJ

Federal Reserve governor Daniel Tarullo pressed Tuesday for quick action to reduce risks in the shadow banking system, including in money-market mutual funds and in short-term financing markets.

Murky corners of the financial system still pose vulnerabilities and regulators should work to make the “shadow banking” system more transparent and less vulnerable to risk, Mr. Tarullo said in a speech delivered via satellite to a conference at the Federal Reserve Bank of San Francisco on Tuesday.

“We ought not to wait for the comprehensive solution,” he added. “We need to identify areas of vulnerability in clear established markets in order to act there.”

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