Thursday, October 11, 2012

Today's links

1--Investors are overconfident that the Fed can keep stock prices high, naked acapitalism

El-Erian warns that monetary authorities are deep into uncharted territory, and their efforts are a deliberate effort to divorce the prices of certain assets from their fundamental values. These are the key sections of his piece:
• The assets likely to be impacted the most and longest are those under the immediate influence of central bank measures – namely the securities they buy directly.
• The more investors venture beyond these assets (and the larger and more illiquid their risk positions), the greater their conviction that unconventional central bank policies will eventually succeed in engineering more robust economic and financial fundamentals…
• The longer this persists, the higher the risk that policy benefits will be offset by collateral damage and unintended consequences; and the greater the political heat on central banks.
• If the critical hand-off to fundamentals does not materialise, the reaction of markets will not be pleasant. Positioning on the basis of the “central banks’ put” is a particularly crowded trade. Also, it involves some investors being overconfident in the powerful omnipresence of these institutions, some believing in immaculate economic recoveries, and some feeling they can wait for markets to peak decisively and then exit smoothly.
El-Erian’s discussion of investor overconfidence is particularly important. While things could actually work out, the market feels a lot like early 2007 to me. While the consensus forecast range is admittedly a lot more sober, there still seems to be a discounting of tail risks, when those looked troubling large then and now....
My sense is that QE Now and Forever, focusing on the MBS market, is designed not so much to send people out the risk curve, as it is to allow the big banks to replace those MBS with Treasuries on their balance sheets. There might be a twofold reason for that. First, to insure continued buyers of Treasury debt; that’s the Fed conducting fiscal policy through the backdoor. And perhaps more importantly, to get the banks stuffed with good collateral, so that when the proverbial stuff hits the fan again, they’ve got some cushions. The problem with Bowles Simpson, aside from all its other problems, is that corporate profitability is the flip side of the deficit, and will get crushed if there’s any serious attempt to rein in government spending.
The bigger takeaway may be that that one of the big channels by which all this central hocus pocus works is confidence boosting. And if not enough people clap, Tinkerbell, erm, the Confidence Fairy, really might die. But the longer it takes for the economy to reach liftoff, the more people will correctly question the efficacy of central bank intervention. In other words, while the central banks might really believe they have the ability to implement QE Now and Forever (Ambrose Evans-Pritchard points out Japan is on QE8), investor apostasy could prove to be more of a powerful offset than they anticipate

2--Europe Dispensing Wrong Fiscal Medicine in Koo Warning, Bloomberg

European policy makers are dispensing the wrong medicine by tackling the euro-area’s fiscal ills with austerity, according to Richard Koo, chief economist of Nomura Research Institute....

Koo’s theory that like their Japanese counterparts in the 1990s, policy makers in Europe are failing to see that their region is suffering from a “balance-sheet recession.”
That’s when the end of an asset boom cripples companies and households with debt they need to minimize and leaves them with little desire to borrow and spend even with rock-bottom interest rates. Koo’s solution is to offset private sector savings with government spending, the opposite of what Merkel and Draghi are advocating in the euro-area, where Spain is mulling whether to become the latest country to request a sovereign bailout.
“If governments do nothing, economies enter a deflationary spiral,’ said Koo. ‘‘When you look around Europe you see balance-sheet recessions.’’
The lessons of Japan’s lost decades are getting a sounding this week as the International Monetary Fund hosts its annual meetings in Tokyo. The world’s third largest economy has grown less than one percent on average in the past two decades and average consumer prices have fallen in seven of the last 10 years.

3--IMF calls for action as euro zone crisis festers, Reuters

4--IMF does a 180, ft.com

Christine Lagarde has urged countries to put a brake on austerity measures amid signs that the IMF is becoming increasingly concerned about the impact of government cutbacks on growth. Ms Lagarde, IMF managing director, cautioned against countries front-loading spending cuts and tax increases. “It’s sometimes better to have a bit more time,” she said at the annual meetings of the IMF and the World Bank on Thursday.
The fund warned earlier this week that governments around the world had systematically underestimated the damage done to growth by austerity.

5-What's Driving Projected Deficits?, economists view
http://www.offthechartsblog.org/whats-driving-projected-deficits-2/
 
The CBPP hasupdated its chart (full report) showing the source of the budget deficit, "and they continue to find that these deficits stem overwhelmingly from the economic downturn, the tax cuts first enacted under President Bush, and the wars in Iraq and Afghanistan." But going forward, it's the Bush-era tax cuts that make the largest contribution:

6--Coordianted fiscal contraction, VOX

Not only we see a majority of countries reducing budget balances (a coordinated fiscal policy contraction) but the numbers are extremely large. Greece is an outlier (16.3%), but many others are large (Spain, Portugal and Ireland close to 10%), the UK around 7% and a significant number of countries around 4%.

How this coordinated fiscal policy contraction is affecting the pace of the recovery (or the likelihood of another recession) depends on your views on the fiscal policy multipliers (see my previous post), but what remains a fact is that the amount of coordinated fiscal policy contraction during the current cycle is very large and I doubt that we can find a similar experience in any of the previous recoveries.

7--The IMF and the GOP, Paul Krugman, NYT

the IMF has an answer to that: it looks at forecast errors versus austerity. Part of the reason for doing this is to figure out why things are going so much worse than expected; but there’s also the fact that the forecasts already included the known problems of the economies in question, so that you’re more or less getting an estimate of the impact of austerity over and above the known problems (and the initially assumed effect of austerity, which was supposed to be small). It looks like this:

As it says, this indicates that the contractionary effects of fiscal consolidation are substantially bigger than policy makers were assuming.
So one thing I haven’t seen pointed out is that this directly contradicts current GOP doctrine. To the extent that the GOP has a theory of recession-fighting, other than the view that the animal spirits of job creators will soar once that evil Obama is gone, it was  embodied in the Joint Economic Committee manifesto Spend Less, Owe Less, Grow the Economy (pdf), which declared that
In the short term, fiscal consolidation programs that rely predominately or entirely on spending reductions have expansionary “non-Keynesian” effects that may offset the contractionary Keynesian reduction in aggregate demand.
-
In some cases, “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term.
Tell that to the Greeks.

8--U.S. foreclosure activity hits 5-year low, housingwire

The filings surveyed include default notices, scheduled foreclosure auctions and bank repossessions.
Overall, September's foreclosure numbers fell 7% from August and 16% from last year as more non-judicial foreclosure states moved through backlogs of foreclosure inventory.

9--Low interest rate mortgages still require stellar credit scores, OC Housing News

What’s going on here? Given the Federal Reserve’s repeated interventions to lower the cost of money to banks, why are they keeping their credit requirements so high? Are there any prospects for relief for prospective buyers who simply don’t have 20% or 30% to put down and don’t have elite-bracket FICO scores?
Doug Duncan, the chief economist for Fannie Mae and former chief economist for the Mortgage Bankers Assn., has a unique perspective on all this. He readily acknowledges that big banks — and Fannie and Freddie themselves — are seeing their highest-quality “books of business” in decades, maybe ever, thanks in large part to their strict credit standards and rigorous documentation rules.
The strict credit standards and rigorous documentation rules are a direct result of the threat of buybacks....

He believes, however, that the underwriting cycle could start to loosen up as banks begin to pare their post-housing-bust pricing add-ons for borrowers, their fears of costly buybacks of existing loans recede and long-awaited rules on mortgage lending are unveiled by the federal government.
That’s somewhere on the horizon. But in the meantime, don’t look for any dramatic relaxation. To get a mortgage, you’ll generally need high scores, big down payments — except for the FHA, which accepts 3.5% down — plenty of time and reams of documentation

10--Redfin--Homes sales Down 44% in Sept 2012, Home prices Up 47% Sept 2012
in zip 98290 (Snohomish)

11--Bank owned sales edge up in Sept--Seattle Bubble

12--Inventory, Sales, & Prices Head South For Winter, Seattle Bubble 

No comments:

Post a Comment