Tuesday, July 3, 2012

Today's links

1--Let's end this rotten culture that only rewards rogues, The Guardian


Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of " light touch" regulation earlier and if the Serious Fraud Office's budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism....

A rotten culture does not emerge from thin air. It emerges from structures that encourage rotten behaviour – and Britain, following the false gods that free markets and financial services were its economic future, created such structures big time, cheered along by a cross-party alliance that extended from Boris Johnson to Gordon Brown. Now is a decisive moment for both the City and the economy. The City's reputation is at rock bottom. Meanwhile the economy acutely needs a financial system that backs wealth-generating innovation. We need a determined root and branch reform of British finance to restore international trust, develop the national economy and to bring an end to the mis-selling scandals. In RBS's case, the bank was even unable to discharge for a week its basic function – allowing its customers to transact financial business.


A start has been made with the promised implementation of the Vickers commission's recommendations to ringfence investment banking from commercial banking.

2--The changing face of equity ownership, Bloomberg
It's all going to the 1%

3--Barclays chief resigns, naked capitalism

Bob Diamond is threatening to reveal potentially embarrassing details about Barclays’ dealings with regulators if he comes under fire at a parliamentary hearing on Wednesday over the Libor rate-setting scandal, according to people close to the bank’s chief executive.

“If he is attacked, he will fight back,” said one person familiar with preparations for the Treasury select committee hearing. Such a confrontational tactic could aggravate the fraught relations between the bank and the authorities after Barclays paid £290m to settle an investigation by UK and US regulators over the bank’s involvement in manipulating key interbank lending rates.

There were already overt threats to drag Paul Tucker, a leading contender to take over from Sir Mervyn King as BoE governor, in to the mire by suggesting that his unit somehow condoned fantasy Libor quotations.

But that’s not the point. You just don’t threaten the Bank. The City of London is not some sort of financial democracy. It is a hierarchy. It is not Capitol Hill; political brawling is prohibited.

4--U.S. Fiscal Policy: Headwind or Tailwind?, FRBSF

Aggregate state, local, and federal fiscal policy was expansionary during the Great Recession and the initial stages of recovery, providing a tailwind to economic growth. Federal fiscal policy in particular was more expansionary than usual, according to a historical analysis, even when the weakness of the economy is taken into account. However, during the past year, aggregate government budgetary policy has reversed course. Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth....

Conclusion

In aggregate, state, local, and federal fiscal policy was unusually expansionary during the Great Recession, but has since reversed course. Overall government spending and the combined state, local, and federal deficit have been declining over the past year more rapidly than would be expected given the slow pace of recovery and the typical countercyclical pattern of fiscal policy. Moreover, CBO projections suggest that fiscal policy, at least at the federal level, will become increasingly contractionary over the next couple of years compared with normal cyclical patterns. This suggests that the tailwinds fiscal policy provided to economic growth during the Great Recession and the first few years of recovery have shifted direction. Going forward, the forecast calls for fiscal headwinds.

5--Consumers Unlikely to Rekindle the Recovery, WSJ

...Consumer sentiment, which tanked during a summer dominated by headlines of debt downgrades and Washington gridlock, rebounded to levels not seen since the recession. Retailers reported strong holiday sales. Cars began flying off lots. And in April, when the government released its first look at economic growth during the first three months of the year, it showed total spending growing at 2.9%, its fastest rate in close to two years. Even rising oil prices didn't seem to faze consumers.


Then job growth fizzled, turning the virtuous circle into a vicious cycle. After adding more than 250,000 jobs a month from December through February, U.S. employers have added an average of less than 100,000 jobs for the past three months. As hiring slowed, so did spending. Retail sales have fallen for two consecutive months. Overall consumer spending fell slightly in May, the Commerce Department said Friday, the first drop in nearly a year. Consumer sentiment tumbled in June to its lowest level since December, wiping out nearly all the recent gains....

Beneath the weak May and June numbers lies a deeper problem: The consumer recovery was never as robust as it first appeared. In May, the Commerce Department revised down its estimate of first-quarter spending growth to 2.7% from 2.9%. Last week, the figure was revised down yet again, to 2.5%. That still represents the fastest growth since late 2010, but it isn't enough to shift the recovery into a higher gear.


What's worse, the first quarter's lackluster spending growth came despite a historically warm winter that likely gave at least a modest boost to restaurants and retailers. That boost has since reversed. Inflation-adjusted spending fell in March and barely rose in April and May. Economists had hoped that newly confident shoppers could offset weakness elsewhere in the economy; instead, the same factors slowing the rest of the economy—chief among them the turmoil in Europe and the resulting caution among businesses at home—ended up dragging down consumers, too.

"It's finally catching up with consumers," said Chris Christopher, an economist with the forecasting firm IHS Global Insight. Coming into April, IHS expected consumer spending to grow at a rate of 2.5% in the second quarter; now it expects sub-2% growth. "Things are not as good as we thought," Mr. Christopher said....

consumer spending isn't likely to enjoy a sustained recovery until the job market improves. Three years into the recovery, the U.S. still employs nearly five million fewer people than when the recession began and 12.7 million Americans remain out of work. That's millions of consumers whose spending is, at best, limited.


The impact goes beyond the unemployed. With so much slack in the labor market, there is little upward pressure on wages. Adjusted for inflation, hourly earnings are lower now than they were when the recession ended in June 2009. Weekly earnings have risen barely 1%. After-tax income, which takes into account investment returns, government benefits, and other sources of income, is up a still-modest 4% in that time

6--Texas GOP’s 2012 Platform Opposes Teaching Of ‘Critical Thinking Skills', TPM

The Republican Party of Texas’ recently adopted 2012 platform contains a plank that opposes the teaching of “critical thinking skills” in schools. The party says it was a mistake, but is now stuck with the plank until the next state convention in 2014.


The plank in question, on “Knowledge-Based Education,” reads as follows:

We oppose the teaching of Higher Order Thinking Skills (HOTS) (values clarification), critical thinking skills and similar programs that are simply a relabeling of Outcome-Based Education (OBE) (mastery learning) which focus on behavior modification and have the purpose of challenging the student’s fixed beliefs and undermining parental authority.Elsewhere in the document, the platform stipulates that “[e]very Republican is responsible for implementing this platform.”....

On Homosexuality:


We affirm that the practice of homosexuality tears at the fabric of society and contributes to the breakdown of the family unit. Homosexual behavior is contrary to the fundamental, unchanging truths that have been ordained by God, recognized by our country’s founders, and shared by the majority of Texans. Homosexuality must not be presented as an acceptable “alternative” lifestyle, in public policy, nor should “family” be redefined to include homosexual “couples.” We believe there should be no granting of special legal entitlements or creation of special status for homosexual behavior, regardless of state of origin. Additionally, we oppose any criminal or civil penalties against those who oppose homosexuality out of faith, conviction or belief in traditional values.

On the UN Treaty on the Rights of the Child:

We unequivocally oppose the United States Senate’s ratification of the United Nations Convention on the Rights of the Child.
7--Charting the Drop in U.S. Manufacturing Activity, WSJ

U.S. manufacturing activity is contracting, according to data from the Institute for Supply Management. The drop was led by a plunge in new orders, especially export orders. That offers a worrying sign about future demand. A subindex that look at employment was lower, but above 50, suggesting that manufacturers are still adding jobs, albeit at a slower rate. (good charts)

8--Is Manufacturing Slowing or Shrinking?, WSJ

Is the U.S. manufacturing sector slowing or is it falling off a cliff? The answer depends on which of the two manufacturing reports you looked at on Monday.


According to the Institute for Supply Management’s closely followed and market-moving report on sentiment among factory purchasing managers, the U.S. manufacturing sector contracted in June for the first time in three years. The new orders index — a crucial gauge of future activity — plunged at a rate that hasn’t been seen since the aftermath of the September 11 terrorist attacks on the Pentagon and World Trade Center. Analysts used words like “plunged” and “awful” to describe the report.

9--Recession Now More Likely, WSJ

There’s no way to sugarcoat it: The already-sluggish U.S. economy is stalling out, stung by doubts about our economic and fiscal future.


The Institute for Supply Management reported that its manufacturing index dropped to 49.7 in June from 53.5 in May, signaling that the manufacturing sector is contracting for the first time since mid-2009.

Both the ISM headline index and the ISM new orders index plunged below 50 in June.

By itself, the decline in the ISM index below the benchmark 50 level does not mean that the economy is in recession, but it does make it much more likely. A reading of 49.7 is consistent with slow, but positive growth of about 2.4, according to the ISM.

The manufacturing sector has been the most robust part of the economy coming out of the recession, but that momentum has now been lost. The U.S. has now caught the fever racing through Europe and China.

The decline in the ISM was led by the biggest one-month drop in new orders since October 2001, just after the Twin Towers were destroyed. The new-orders index now stands at 47.8, a level that’s extremely rare outside of recessions.

10--Americans Saving More, WSJ

Americans are saving more money. The personal saving rate — savings as a percentage of after-tax income — rose to a seasonally adjusted 3.9% in May, up from 3.7% in April and 3.4% in February. Workers are seeing modestly higher earnings and lower oil prices are keeping inflation in check. Consumers appear to be holding on to the extra money and not spending it. (Chart)

11--World-Wide Factory Activity, by Country, WSJ

A global manufacturing slowdown deepened in June, as the U.S. slipped into contractionary territory for the first time since July 2009.


The JPMorgan Global Manufacturing Purchasing Managers’ Index, a broad measure of manufacturing activity across the world, fell to a three-year low of 48.9 in June.

The reading below 50 signals that global activity is contracting for the first time since last November and only the second time since 2009. Much of Asia and the U.S. joined the euro zone in contractionary territory last month. An official figure from China indicated that the sector there continues expanding, though at a reduced rate. But a figure released by private companies Markit and HSBC indicated that the nation’s factory activity was contracting.

The drop in global factory activity was driven by declines in new orders, especially in the export sector. That increases fears that a slowdown will continue into the summer months.

12--Profit Forecasts Feel Europe's Effect, WSJ

Europe is a mess. China is disappointing. So investors will be watching nervously as U.S. companies report quarterly earnings over the next few weeks for any signs of collateral damage in the American economy...

China's economic growth slowed to an annual rate of 6.6% in the second quarter from 6.8% in the first, J.P. Morgan estimated. The firm forecast growth of about 8% in the second half, still sluggish by China's standards. Mr. Davis said he feared China won't really pick up steam before next year.


Aside from weaker demand in Europe, U.S. companies are being hurt by the fall of the euro, which reduces the dollar value of earnings made there. Forecasts already have come down sharply for companies that rely heavily on Europe, such as General Motors Co. GM +3.93%and Ford Motor Co. F +3.30%

Overall, estimates for second quarter S&P earnings are 3% lower than they were three months ago, FactSet said. But the estimates for GM and Ford have been cut by more than 25%. As of Friday, analysts were projecting that GM's second-quarter earnings would be about 45% below the year-earlier level. Ford warned Thursday that it expected to report "substantially lower" pretax operating profit for the quarter, largely because of heavier losses outside North America. Morgan Stanley projected a decline of about 65% in Ford's second-quarter earnings per share.

So far, 74 S&P 500 companies have lowered their second-quarter forecasts, while 28 have raised them.

13--The slump deepens, WSJ

We never expected anything like the magnitude of the decline in the new orders index in June. The drop of 12.3 points in the orders index is the largest since October 2001 (when, in the wake of 9/11, the index dropped 12.4 points) and the second largest decline since December 1980. Thus we are dealing with an event that occurs in roughly one in 100 reports. The question, which we cannot answer at this point, is does this represent volatility reflecting fears over Europe (the export order index fell six points) and will orders bounce back (as the orders index did in November 2001) or is it a slide into something more worrying? –RDQ Economics

14--Banks reducing number of homes in foreclosure to stabilize prices, WSJ

California has among the largest volumes of foreclosures... At the end of March, the share of loans in foreclosure in the California fell to 3.3%..... Less than three years ago, the rate stood at nearly 5.8%,....according to the Mortgage Bankers Association.

(The reason why Calif has less foreclosures) A loan in foreclosure in April had been delinquent for an average of 22 months, up from 14 months two years ago, according to Lender Processing Services Inc.

15--EZ Sovereigns buy garbage MBS to keep ponzi-banks afloat, Bloomberg

Spanish and Portuguese banks are leading European lenders in buying back their own mortgage- backed securities at distressed prices to bolster capital and stockpile eligible collateral for European Central Bank loans....

The purchases follow European Banking Authority demands that banks raise 114.7 billion euros by last week after the sharp fall in the value of bonds issued by governments in the 17-member shared currency. The deals are poised to accelerate after the ECB last month reduced the minimum ratings it will accept for mortgage securities offered as collateral for cheap loans, adding incentive to lenders to buy back debt and pledge it with the Frankfurt-based institution.


“Compliance with the EBA rules has been the main reason of all buybacks we are seeing so far, but there will be more deals since the ECB will take more of that paper,” said Frank Erik Meijer, head of asset-backed securities at The Hague-based Aegon Asset Management, which oversees 220 billion euros of assets. “Lenders with little or no other sources to raise capital and funding can turn to this strategy.”...

The bigger the discount the mortgage debt is trading at the larger the incentive for banks to repurchase their own deals because that translates into greater capital gains....
Incentives are greatest for Spanish and Portuguese lenders, where yields over benchmark rates for mortgage-backed securities are as much as 17 times higher than comparable notes pooling home loans in the U.K. Eleven Spanish banks and four Portuguese lenders have put out tenders to repurchase some of their securitizations, according to Barclays Plc data. (Absurd. Would you buy this garbage paper?)

House prices in Spain and Portugal are declining at the fastest pace on record as borrowers face increasing unemployment rates and lenders are contracting the financing available to potential home buyers. Spanish home prices declined 12.6 percent in the last year through March, the biggest fall since 2008, and Portugal’s retreated 8.9 percent in the last 12 months as of May, the biggest declined since 2009, according to governments’ figures....

Banks are accelerating repurchases of mortgage-backed securities at a time the deals credit quality is deteriorating. Standard & Poor’s cut 382 portions of European prime residential mortgage-backed securities in the first quarter compared with 68 in the fourth quarter last year, and 65 a year earlier, according to Association for Financial Markets in Europe data.





 












































 




























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