Thursday, February 21, 2013

Today's links

1---Fed Signals Possible Slowing of QE Amid Debate Over Risks, Bloomberg

The Federal Reserve signaled it may consider slowing the pace of asset purchases as officials extended a debate over whether record monetary easing risks unleashing inflation or fueling asset-price bubbles.
Several participants at the Federal Open Market Committee’s Jan. 29-30 meeting “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to theminutes of the gathering released yesterday.

Stocks fell, along with oil and gold, on bets the central bank will curb stimulus earlier than expected, even as several Fed officials warned against a premature end to $85 billion in monthly bond buying. A gradual reduction in purchases may win the FOMC’s support because it gives policy makers flexibility, said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York.

The minutes show “tapering is a likely outcome at some point in the future,” said Hanson, a former Fed economist. “If you taper the purchases, it allows you to calibrate how the market reacts to your actions without having to go cold turkey

2---The Fed speaks: "We have no idea what we're doing, but trust us!", economists view

However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects....

...Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred....

Now, in all honesty, we should have seen this coming. Cleveland Federal Reserve PresidentSandra Pianalto:
While our policies have been effective, our experience with our asset purchase programs is limited, and, as a result, we must analyze their benefits and costs carefully. Over time, the benefits of our asset purchases may be diminishing. For example, given how low interest rates currently are, it is possible that future asset purchases will not ease financial conditions by as much as they have in the past. And it is also possible that easier financial conditions, to the extent they do occur, may not provide the same boost to the economy as they have in the past.
In addition to the possibility that our policies may have diminishing benefits, they also may have some risks associated with them. I will mention four: credit risk, interest rate risk, the risk of adverse market functioning, and inflation risk. These and other risks are not easy to see or measure, but they need to be taken into account when setting monetary policy.
First, financial stability could be harmed if financial institutions take on excessive credit risk by “reaching for yield” —that is, buying riskier assets, or taking on too much leverage—in order to boost their profitability in this low-interest rate environment
3---Want to Tackle Income Inequality? You Need to Go After Capital Gains, Mother Jones

 The study is from Thomas Hungerford, an analyst with the Congressional Research Service, and the chart on the right tells the story:
  • Wages, interest, and taxes have contributed to a lowering of income inequality.
  • Business income and retirement income have contributed to an increase in income inequality.
  • Capital gains and dividends have contributed more to the rise of income inequality than everything else put together.
As Hungerford put it in an interview, "The reason income inequality has been increasing has been the rising income  going to the top one percent. Most of that has come in capital gains and dividends

4---Correction Time? The Big Picture

The S&P500 had its worst daily decline for the year. The VIX spiked over 19 percent, its biggest 1-day increase in 2013. The dollar index closed at its highest level since November 16th, which was the day the S&P500 bottomed and began its relentless 14 percent move to yesterday’s high of 1530. Gold got clocked with its 50-day moving average falling through the 200-day generating the feared “death cross.”
It’s now or never for that long anticipated equity correction.
We do see a few catalysts that may bring out some sellers — and there must be some real sellers to generate a decent correction. A dearth of sellers has been a major reason for the recent melt up, in our opinion.
Selling catalysts:
1) China tightening to cool real estate speculation. See here;
2) Housing stocks, the leaders in the latest move, are rolling over. See here.
3) Sequestration and fears of fiscal drag on demand and economic growth. See here.
4) Fed heads getting nervous over super loose monetary policy. See here and here.
5) The hit to consumption due to the rise in gas prices. See here.
6) Equities have been generally overbought. See here.
5---JPMorgan Said to Seek First Sale of Mortgage Bonds Since Crisis, Bloomberg

JPMorgan Chase & Co. (JPM) is seeking to sell securities tied to new U.S. home loans without government backing in its first offering since the financial crisis that the debt helped trigger.
The deal may close this month, according to a person familiar with the discussions. Servicers of the underlying loans may include the New York-based lender, First Republic Bank and Johnson Bank, said the person, who asked not to be identified because terms aren’t set.

The market for so-called non-agency mortgage securities is reviving as the Federal Reserve’s $85 billion a month of bond purchases help push investors to seek potentially higher returns. As deals accelerate, Pacific Investment Management Co. is questioning the prices paid. At the same time, a weakening of contract clauses that offer protection to investors if the loans don’t match their promised quality is stoking debate, said Kroll Bond Rating Agency analyst Glenn Costello...

The bonds have been backed by so-called prime jumbo loans, which are larger than allowed in government-supported programs. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500 in high-cost areas. . 

6---Housing ‘Taking a Breath’ as Starts and Confidence Decline, Yahoo Finance

7---Aggregate demand shock and depression,  you tube video

8---Without Fed’s QE, the 10-year Treasury would yield 3% or more: Goldman, Marketwatch

The Federal Reserve is such a drag. A drag on yields for the 10-year U.S. Treasury note /quotes/zigman/4868283/delayed10_YEAR-1.99%, that is.

A report published Wednesday by Goldman Sachs says those yields would be 100 to 125 basis points higher if the Federal Reserve hadn’t enacted its unconventional monetary policy measures to boost the economy. That’s a pretty significant increase, since the yield on the 10-year note is currently fluttering around 2%. One basis point is one one-hundredth of a percentage point. The note is a benchmark for all sorts of debt, including mortgages. Read more on bond trading.

The Fed’s monetary policy and the euro-zone crisis are the major factors in depressed yields. Eighty to 90 basis points of the 10-year’s yield increase are linked to the Fed’s bond-buying program and 27 to 35 basis points are associated with its forward guidance, said analysts Silvia Ardagna and Jari Stehn.
The Fed started buying $45 billion in Treasury purchases in December in addition to its existing bond-buying program of $40 billion in mortgage debt per month

9---Krugman skewers Alan Simpson, NYT

Simpson is, demonstrably, grossly ignorant on precisely the subjects on which he is treated as a guru, not understanding the finances of Social Security, the truth about life expectancy, and much more. He is also a reliably terrible forecaster, having predicted an imminent fiscal crisis — within two years — um, two years ago. Yet he remains not only respectable among the Beltway crowd; as Ezra says, he’s lionized in a way that looks from the outside like a clear violation of journalistic norms:
For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday’s Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you’ll find, asked Simpson and Bowles whether they believed Obama would do “the right thing” on entitlements — with “the right thing” clearly meaning “cut entitlements.”
So what is it that makes Simpson the figure he is? Clearly, it’s an affinity thing: never mind his obvious lack of knowledge, his ludicrous track record, reporters trust and idolize Simpson because he’s their kind of guy.
And think about what it says about them that their kind of guy is this cantankerous, potty-mouthed individual, who evidently feels not a bit of empathy for those less fortunate.

10---Sen. Lindsey Graham says US drones have killed nearly 5,000 people, RT

11---Obama calls for more spending cuts to prevent “sequestration”, wsws

The “sequester” is part of the stage-managed campaign by the two big-business parties to impose unpopular policies through manufactured crises

Obama’s opposition to the sequestration cuts has nothing to do with any real opposition to cuts to social spending. Obama has called for $1.5 trillion in additional “deficit reduction” on top of the roughly $2.5 trillion that has already been passed. While both parties agree to this ballpark figure in principle, Obama is insisting that that spending cuts be associated with increases in revenues, much of which will come through the elimination of tax benefits that benefit broader sections of the working class.

Obama has been pushing for this measure as part of a so-called “grand bargain” that would lower corporate taxes from the current rate of 35 percent to 28 percent, while including trillions of dollars in cuts to Medicare, Medicaid, and Social Security.

Earlier Tuesday, Alan Simpson and Erskine Bowles, the former co-chairmen of the White Houses’s bipartisan deficit-reduction commission, held a press conference to propose a set of budget cuts along similar lines to Obama’s comprehensive proposal, although at a slightly larger in size: $2.4 trillion over 10 years, compared to the White House’s proposed $1.5 trillion.

The Simpson-Bowles proposal would cut $600 billion from federal healthcare programs like Medicare and Medicaid, while Obama has proposed an additional $400 billion on top of the cuts that have already been imposed. Commentators were quick to point out that the proposal was far more similar to Obama’s plan than that of the Republicans, since it included a mixture of spending cuts and revenue increases....

The attempt by the Obama administration to posture as an opponent of budget cuts is cynical. Obama has overseen an austerity program unprecedented in postwar US history. The number of layoffs of public sector workers during the first term of the Obama administration is twice that of any other presidency.
The so-called Obama recovery has been nothing but the recovery of corporate profits, which have set records three years in a row, at the expense of workers’ wages and working conditions.
This was amply demonstrated in data released last month by Emmanuel Saez, which found that between 2009 and 2011—the first two years of the “recovery”—the “Top 1 percent incomes grew by 11.2 percent while bottom 99 percent incomes shrunk by 0.4 percent. Hence, the top 1 percent captured 121 percent of the income gains in the first two years of the recovery.”

12---Italy's recession and upcoming elections threaten reforms, sober look
The Guardian had a good summary yesterday on the situation in Italy, where the recession is showing no signs of abating. The winner of the upcoming elections will face some severe challenges.
The Guardian: - A stagnating economy, corruption, organised crime, political apathy, misogyny, youth unemployment ... The person elected to run Italy next weekend will have a formidable to-do list.

The country is now in its longest recession in 20 years, the economy having contracted for the last six consecutive quarters and languished in more than a decade of almost non-existent growth. Unemployment is at more than 11%; for under-25s, it is more than 36%. Italy has the second highest ratio of sovereign debt to GDP in the EU
13---Mortgage lending standards continue to tighten, oc housing  

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