Monday, July 30, 2012

Today's links

1--Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move, Bloomberg

Excess reserves have mushroomed as the Fed bought securities from banks in its bid to lower long-term interest rates. The amount of such reserves at the Fed was $1.49 trillion on July 25, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007, Fed data show...
Clearly the market is purchasing some lottery tickets in case the Fed does cut the IOER,” Lee said. The Fed has held the rate at 25 basis points since December 2008.

What you’re actually doing by this is sort of incentivizing the banks” to “keep their excess reserves at the Fed,” Representative Scott Garrett, a Republican from New Jersey, said to Bernanke during Feb. 29 congressional testimony by the central bank chief. “Isn’t that sort of counter to what your policy should be?”

2--Bill Keller Wants to Take Away Your Social Security and Is Either Too Ignorant or Dishonest to Acknowledge that He Is Not a Typical Baby Boomer, CEPR

Does Keller know that the typical near retiree has total wealth of $170,000. This includes everything in their 401(k), all their other financial assets and the equity in their homes. Another way to put this is that the typical near retiree (between the ages of 55-64) could take all their wealth and pay off their mortgage. After that they would be entirely dependent on their Social Security to cover all their living costs.

3--The Draghi Put Will Be Stillborn, Trimtabs

Let us step back and look again at the European big picture. What I see is a bunch of economies whose citizens are making less money than before. And even before the current recessions European economies were not generating enough taxable income to pay current government expenses. Now, a worsening recession means there will less taxable income for governments to fund ever growing entitlements. Add that to a huge pile of moldering away bad debts. And what I see is not a solvable problem the way the world works today.

Neither Draghi or any of the bankers even bothers to talk about the real problem of not enough regional income and too much government spending. Draghi’s only solution is some form of money printing. Printing money to pay bills maybe will work over the short term. But long term, it cannot. If money printing works in the real world why not print and give every one a billion dollars, Euros or Yen?

The most Draghi can do is have the ECB print money to service existing bad debts made by banks and governments. But printing money to pay interest and principle on loans is not debt service! That is called money printing, debasing the currency whatever. Yes, governments want to do whatever possible to avoid bad times for its citizens. But, as someone else once said, the road to hell is paved with good intentions.

4--What is the quid-pro-quo for restarting SMP?, IFR

The key to Draghi’s comment on Thursday is that he is focused on how sovereign premia are hampering the “functioning of the monetary policy transmission channels”.

It was after all problems with the functioning of the transmission mechanism that led the ECB to start the SMP in the first place citing “dysfunctional markets”. It is thus easy to see the ECB taking action via the SMP or even helping to restart the sovereign carry trade via another 3-year LTRO. The ECB could either act now or wait until the day of the ECB meeting next week.

The SMP would certainly help investors as it would provide an avenue to exit and a willing buyer on the other side. The same would be true if the ESM were to be given a bank licence but on both investors will still worry about being subordinated.

The fact that more novel steps are now on the table highlights how the crisis management script in the eurozone has shifted as Spain and Italy prove too big to ignore.

A shift from the ECB in utilising its balance sheet is a game changer but the SMP by itself will not be enough especially if they are conducted in a similar manner to which that has already been seen.

A more lasting solution would involve the ECB providing the EFSF/ESM with a banking licence but the quid-pro-quo for such action will be for speedy political movement toward a more integrated eurozone. These are the very same pillars that Draghi helped script involving fiscal union, banking union, economic union and political union.

5--ESM armed with a banking license - the ultimate bailout "bazooka", sober look

It's a powerful concept because being a bank, the ESM could tap the ECB's unlimited lending facilities to leverage its holdings of sovereign paper. By granting the ESM a banking license, it can effectively buy Spanish and Italian bonds "on margin", with the ECB being the margin provider. This entity would wield buying power several times larger than the Eurozone's original ESM commitment, making it the ultimate bailout "bazooka"....

However there is a political problem with this scenario. The ESM now has a €500bn cap on total debt purchases. That means no matter what leverage is available to the entity, it can only purchase bonds of up to the amount of the cap. An increase in its buying power would require (among other things) Germany's approval. And with the elections coming up in Germany next year, the chances of German politicians agreeing to this increase are quite low.

Barclays Capital: - From a political perspective and in view of the German national elections scheduled for September 2013, we do not see much of a chance that the German government would agree to another increase in the ceiling until then, or to more fundamental changes implying the mutualisation of national, public debt. This constraint may be relaxed if the crisis picks up pace rapidly and moves into the core.

Nevertheless the rumors of the ESM being armed with a banking license are flying (and even moving the "risk" markets on Friday).

CNBC: - Reports (vague rumors) that ECB head Mario Draghi may have reached out to Bundesbank head Jens Weidmann moved the Dow more than a hundred points in the middle of Friday's trading day.

It certainly wouldn't be surprising that they talk, but the rumor mill threw in a rich tidbit: that they had discussed giving the EU's permanent bailout fund (the ESM) a banking license.

The danger of course is that after this buildup, the "bazooka" and other expectations from the Eurozone may not materialize. Without a decisive follow-through, the "risk" markets may retrace their recent gains and then some. After all when it comes to the Eurozone crisis, the EU leadership has a knack of over-promising and under-delivering.

6--Growth in U.S. Slows as Consumers Restrain Spending, Bloomberg

The world’s largest economy cooled in the second quarter as limited job growth prompted Americans to curb spending while state and local governments cut back.

Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department data showed today in Washington. Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year....

Economies around the world are showing signs of weakening,” Chief Executive Officer Scott Davis said on a July 24 call with analysts. “In the U.S., uncertainty stemming from this year’s elections and the looming fiscal cliff constrains the ability of businesses to make important decisions such as hiring new employees, making capital investments, and restocking inventories.”

The so-called fiscal cliff represents more than $600 billion in higher taxes and reductions in defense and other government programs next year that will occur automatically without action by U.S. lawmakers, threatening to push the economy into recession....

Another report today showed consumer confidence in July dropped to the lowest level this year. The Thomson Reuters/University of Michigan final index of sentiment declined to 72.3 this month from 73.2 in June. The gauge was projected to hold at the preliminary reading of 72, according to the median forecast of economists surveyed by Bloomberg.

Recent data signal consumers are reluctant to step up purchases. Retail sales fell in June for a third consecutive month, the longest period of declines since 2008. Same-store sales rose less than analysts’ estimates at retailers including Target Corp. (TGT) and Macy’s Inc. (M) ...
Consumers may remain cautious until hiring accelerates. Payroll gains averaged 75,000 in the second quarter, down from 226,000 in the prior three months and the weakest in almost two years. The unemployment rate, which held at 8.2 percent in June, has exceeded 8 percent for 41 straight months. ...

Cutbacks by government agencies continued to hinder growth as spending dropped at a 1.4 percent annual rate in the first quarter, the ninth decrease in the last 10 periods. The decline was led by a 2.1 percent fall at the state and local level that marked an 11th consecutive drop.

Business investment cooled last quarter, reflecting stagnant spending on commercial construction projects. Corporate spending on equipment and software improved, climbing at a 7.2 percent pace, up from a 5.4 percent increase in the previous quarter.

A report yesterday showed the corporate spending outlook has dimmed

7--Federal Spending Cutbacks Slow Recovery, WSJ
8--Banks are the Achilles’ heel of capitalism, The Big Picture

Edward Yardeni of Yardeni Research in this week’s Barron’s:

“The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations.

In my opinion, banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

9--From Bank of America, Shipwrecked, zero hedge

That sinking feeling

Sifting through our strategists’ top reports this week, we can’t help but notice one overarching theme – it’s been a fun ride, but prepare for a global slowdown. US stocks have been particularly volatile this week on earnings and we’ve also had the biggest weekly outflows in equities this year. Headlines continue to be macrodominated and it’s not easy to be a captain of a ship in such troubled global waters....
Likely next steps: forward guidance extension and QE3
We have revised our Fed call. We now believe the Fed will extend its forward guidance to “at least through late-2015” on August 1, rather than through “mid-2015”. We also expect the announcement of a $600bn QE program in Treasuries and MBS on September 13, up from $500bn in our old forecast. We expect lower 5-10y rates in the near term and recommend fading any significant knee-jerk back-up in rates on a QE3 announcement. We believe QE3 will be much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy....

ECB purchases first, then EFSF/ESM once ESM is ratified

In our view, bond market intervention would first take the form of SMP, which could have an important impact on yields given the lack of liquidity in the bond markets. The temporary nature and limited efficacy of such intervention, should the bond market pressure not wane, could call for larger official intervention. But this would require countries under pressure to request such support, which could take several weeks or months to materialize in the current environment. For the time being, we think Spain has some room to maneuver: 1) it is under limited pressure probably until year end, even in current market conditions; and 2) the ESM will not be in place until October, thus limiting the size of EFSF/ESM interventions. Should a problem occur, it would likely be in the form of bank liquidity access, which the ECB tends to fix by lowering collateral requirements.

10--Stagnating Corporate Profits...prag cap

This earning’s season is starting to raise some red flags. As expected, corporate profits are starting to show some serious signs of deterioration. Q3 is expected to show a year over year decline in earnings now and Q4 is expected to show a sharp bounce back. As uncertainty is likely to persist into Q3 I would expect those Q4 estimates to come down some. Factset has some details on this quarters earning trends:

“Of the 265 companies in the index that have reported earnings to date for Q2 2012, 71% have reported actual EPS above the mean EPS estimate. This percentage is consistent with the average over the past four quarters (72%). In terms of revenues, just 43% of companies have reported actual sales above estimated sales. This percentage is well below the average over the past four quarters (63%). If 43% is the final percentage, it would mark the lowest number since Q1 2009 (37%).

11--Regional Fed Surveys Paint a Dreary Picture of Economic Growth….prag cap

Recent regional manufacturing data has been notably weak with the Philly Fed Survey posting -12.9, KC Fed posting +5, Richmond Fed posting -17, Empire State posting 7.4, and then today’s Dallas Fed survey at -13.   It all paints a picture of weakening trend growth.  The consensus reading is now pointing to a ISM reading below 50.

12--Restaurants Blame Weak Consumer Confidence for Sales Slowdown, WSJ

Overall, U.S. economic growth pulled back during the second quarter, the Commerce Department said Friday, as consumer spending slowed. The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June: a reading that suggests domestic fiscal worries may be having a greater impact on consumer confidence.

McDonald’s Corp., Starbucks Corp. and Chipotle Mexican Grill Inc., which have in the past proved resilient during tough economic times, said they saw a bit of a slowdown in U.S. guest count-growth in the second quarter, which took some executives by surprise.

“The U.S. continues to build sales and guest counts. It is, however, happening at a slower pace amid an unpredictable economic environment and increased competition,” McDonald’s Chief Executive Don Thompson said on a recent conference call.

Starbucks’ Chief Executive Howard Schultz said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July. “So, this is not a Starbucks issue, this is a macro problem,” he said on a conference call.

13--Halfway Through, 2012 Has Been a Disappointment, WSJ

14--Obama’s Second Term Agenda: Cutting Social Security, Medicare, and/or Medicaid, naked capitalism

Barack Obama continues in this fine tradition of Democratic policymaking, and his advisors are quietly laying plans to cut Social Security, Medicare, and/or Medicaid in the second term of his administration. Obama appointed Erskine Bowles, who now works for a Wall Street botique, to head up his commission on fiscal responsibility. Bowles, along with an old man named Alan Simpson, came out with a set of proposals to cut the programs. And while Obama couldn’t get the Republicans to agree to it in 2011, he will try in his second term. Here’s the New Yorker laying out the plan.

There is a possibility that a second Obama term could begin with major deficit reduction and serious reform of taxes and entitlements. A similar opportunity arose in the second terms of Reagan (who in 1986 signed into law a historic tax-reform bill) and Clinton (who in 1997 reached a significant budget deal with Republicans). Although both victories occurred when the two parties were less polarized, many White House officials regard the successes as encouraging precedents. Several senior Clinton officials involved in the 1997 deal now work for Obama, including Jacob Lew, Obama’s chief of staff, and Gene Sperling, the head of the National Economic Council....

It’s useful to remember, this election season, that the way the debate is framed matters. That Obama isn’t choosing to discuss in public what he will do to cut Social Security, Medicare, and Medicaid, and that Romney isn’t specific about it either, should show you who this election is for. But in addition, that both Bush, Clinton, and Obama (in his first term) failed at cutting Social Security means that an aroused public can stop austerity, when politicians feel their office is at risk. Clinton chose to abandon his plans to gut entitlements when facing impeachment and Bush chose to stop when his plan threatened the Republican Congress.

The joke during the transition in 2008 was that the people who supported Obama got a President, and those who supported Clinton got a job. The Clintonistas didn’t manage to gut entitlements in the 1990s, but they will sure try again and again until they succeed or someone takes their keys to the White House away.

This election, aside from not being much of an election for anyone but the billionaire funders who have the real votes, doesn’t really matter. But keeping in mind who is doing what does. Because if there’s a chance to save anything for anyone who isn’t ultra-wealthy from 2013 going forward, it’s going to require being able to create credible threats to the politicians making the policy.

15--Will Draghi really cross the Rubicon, naked capitalism

Moreover, even if German political leadership were to change its stance, that would not be sufficient for the ECB to move into high gear. The Bundesbank, as well as German members of the ECB, appear to remain firmly against dramatic new measures. Bloomberg tells us that the Bundesbank said in the wake of the ECB statement that it is opposed to more bond purchases. On Friday, the Bundesbank reiterated its objection to reviving the securities markets program which allowed for direct bond buying (and truth be told, when it was implemented last year, it made matters worse). The German central bank no doubt continues to disapprove of giving the soon-to-be-live European Stability Mechanism a banking license, which would allow the ECB to monetize sovereign debt (note that Draghi has not officially changed his stance of being against that option).

While it is hard to be certain from this remove, it looks as if the EBC’s efforts to mount a full court press on the German political leadership and Bundesbank, both via the media talking up Armageddon (a replay of the scare tactics used to get the TARP passed) and private arm-twisting, are not getting the needed traction.

The big date is next Thursday, when the ECB’s governing council meets. Draghi has raised expectations, and the lack of meaningful follow-through on Thursday would be proof that he was unable to overcome opposition. Note that even if the pro-bailout forces are gaining ground on the holdouts, the longer the to-and-fro goes on, the less leverage the proponents have. If Spain about to go into financial asphyxiation and Italy starting to go critical won’t produce a change in posture, it’s hard to see what would.

And even if the ECB were to pull the trigger, would it act decisively? To be effective, the ECB would need to make clear it is willing to act on a monster scale. Half a trillion, or even a trillion won’t cut it. But the ECB has less latitude that the Fed did in the crisis. It isn’t permitted to rescue sovereigns directly. And that brings us to the second problem, that the so-called core nations (the creditor countries) as well as in some cases the ECB itself is blocking the path to ways to get around this impediment....

By e-mail, Marshall Auerback mused as to whether things were already past the point of no return:

Dealing with this issue means an unconditional backing of all of the national sovereigns including, yes, Greece. Because failing to stand behind ALL of the members of the eurozone contradicts the currency union’s central premise: namely, that it is permanent and indissoluble...

What kind of a banking system is this? A dysfunctional and a highly unstable one. One would have a set of banks on the periphery that are massively dependent on ECB lender of last resort financing. That would probably be dysfunctional, as they would be disinclined to lend to their normal client base. What does “whatever it takes” really mean? It’s a paradox. To make his “whatever it takes” pledge credible, Mr. Draghi has to go well beyond the traditional boundaries of economic and central banking orthodoxy. But in going well beyond these boundaries, does Mr. Draghi risk creating another crisis of confidence in the euro?

And will the Germans and others let him?

Despite the reports of wavering, the answer still appears to be “nein”. And the window for changing their mind is about to close.

16--The jobs crisis and the 2012 elections, WSWS

17--Do the benefits of shadow inventory outweigh the costs?, OC Housing News



No comments:

Post a Comment