Wednesday, March 13, 2013

Today's links

1---Euro-Region Industrial Output Drops as Slump Persists: Economy, Bloomberg

Euro-area industrial output fell more than economists forecast in January, adding to signs that the region’s recession extended into the first quarter.

Factory production in the 17-nation euro zone dropped 0.4 percent from December, when it rose a revised 0.9 percent, the European Union’s statistics office in Luxembourg said today. The median forecast in a Bloomberg News survey of 32 economists was for a 0.1 percent decline. Production fell 1.3 percent in January from a year earlier.

The euro-region economy is struggling to regain momentum after five straight quarters of contraction, with unemployment at a record 11.9 percent. The economy will shrink again in the first three months of 2013 before returning to growth, according to a separate Bloomberg survey, while the European Central Bankhas forecast a 0.5 percent contraction this year.

2---Intel Chief: Iran Cannot Secretly Divert Nuclear Material for a Bomb, antiwar

In Senate testimony on Tuesday, the US’s most senior intelligence officials reiterated their conclusion that Iran has not decided to develop nuclear weapons and that its strategy is essentially defensive in nature

We do not know if Iran will eventually decide to build nuclear weapons,” Director of National Intelligence James Clapper told the Senate Intelligence Committee...

And again, on Tuesday, Iranian news agencies quoted Vice President Mohammad Reza Rahimi as saying, “Iran plans to declare in the United Nations that it will never go after nuclear bombs.”
Despite progress in their nuclear capabilities, Clapper said, “we assess Iran could not divert safeguarded material and produce a weapon-worth of WGU [weapons grade uranium] before this activity is discovered

3----More expansionary contraction (austerity), NYT

Ah, remember the good old days of expansionary austerity? On both sides of the Atlantic, austerians seized on academic work by Alberto Alesina and Silvia Ardagna claiming that fiscal consolidation, if focused on spending cuts, would if anything lead to economic expansion. It wasn’t because the paper was especially compelling — even a quick look suggested that the methodology for identifying austerity was seriously flawed. But A-A told people what they wanted to hear, and they went with it.
Since then we’ve had what has to be one of the most decisive combinations of scholarly critique and real-world tests of an economic doctrine ever — and expansionary austerity has failed with flying colors. The IMF went about identifying austerity through an examination of actual policy, and A-A’s results were reversed. Critics showed that all of the alleged examples of expansion through austerity involved factors like currency depreciation or sharp falls in interest rates that don’t apply now. Osbornian policies in the UK led to stagnation; and in the euro area, well …
By the way, if you take out Greece, the result is pretty much the same, although the R-squared goes down.
So you might have expected austerians to change their minds, or at least to come up with other justifications. But no. Both David Cameron and Paul Ryan are still preaching that old expansionary austerity religion, confidence fairy and all

4---Does Paul Ryan Want to Change the Relationship Between Americans and Their Government or Give Money to Rich People?, CEPR

5---On Beppe's "Revolution without the Guillotine" and fighting back, IFR

Grillo might be a buffoon but he is a democratically-elected buffoon. His line of argumentation is not entirely unknown but in the interview he reiterates his core belief that Europe has been driven to the verge of self-destruction by self-seeking political and financial elites which are prepared to pay any price – or, more precisely, have the people pay any price – in order to protect their plutocracy. He refers to his movement as a kind of “French Revolution without the guillotine”....

Grillo is neither entirely wrong nor simply joking when he rhetorically asks why Germany is the only country which has enriched itself from what were supposed to be benefits for all?
Let’s face it: as often as we have questioned the wisdom of the weakest being lumbered with a currency which is too strong for their economic reality, equally often we have forgotten to remember how Germany has thrived on the same currency which is hugely too weak to reflect its economic power and output.
In the thinking of the growing crowd of dissenting voters, the euro has ultimately achieved nothing more than to enforce a transfer of wealth from the periphery to the core which to them seemingly sports one single significant member.

6---Italy's "worst possible outcome", IFR

Italy’s election produced the hung parliament investors said was the worst possible outcome, recession is deepening, debt is rising and its credit rating has just been downgraded. So why do markets seem largely unconcerned?...

...by virtually any measure other than bond yields, Italy’s situation now is far worse than 18 months ago.
Its economy has contracted for six straight quarters - the longest recession for 20 years - and is smaller now, in inflation adjusted terms, than it was in 2001. That means that on average Italy has been in recession for 11 years, a situation that has no parallels in Europe and few in the world.
The slump shows no sign of easing and will continue to take a heavy toll on public finances. Credit for firms is still tightening and bad loans are rising. (Full Story)
When Fitch downgraded Italy on Friday it forecast the economy would shrink by 1.8 percent this year, following a 2.4 percent fall in 2012 (Full Story).
Its industrial base has been so eroded in the last few years that many business people think it may never recover, with a huge cost in terms of jobs.
Analysts say all this has been at least partly due to the waves of austerity measures taken since early 2011 to calm markets and try to rein in the second largest public debt in the euro zone after Greece.
Yet while markets have calmed, Italy’s debt keeps rising. It hit an all-time high of 127 percent of output in 2012 and Fitch forecast it will be almost 130 percent at the end of this year.

AUTOPILOT?

Markets ignored all this while the technocrat Mario Monti was in office, yet even he admitted his reforms to deregulate services and the jobs market were only a first step towards improving Italy’s growth outlook.
And after a weak performance in last month’s election Monti is gone, and no one knows what is coming next.
The election served up a perfect recipe for instability, with parliament split three ways between Pier Luigi Bersani’s centre-left, Silvio Berlusconi’s centre-right and the populist 5-Star Movement led by comedian Beppe Grillo.
Even if a coalition government can be formed quickly, which looks doubtful, the policy stances of the parties suggest it is very unlikely to pursue the sort of market-friendly policies attempted under Monti. (Full Story)
It may be that, with the ECB backstop in place, markets really don’t care who governs Italy.
Draghi said at his monthly ECB news conference on Thursday that much of its fiscal adjustment was now on “automatic pilot.”...

Even without such policies it would risk remaining in its trap of permanent near-recession and rising debt. What the ECB may have removed is the threat of contagion to other countries.
Giacomo Vaciago, economics professor at Milan’s Cattolica University, said Italy was now protected from market assault, but the election gridlock still left its economic prospects in tatters.
“Italians, like Greeks, can’t hurt the euro any more, we can only hurt ourselves and our children,” he said.

7---China's real estate bubble set to burst in seconf half of 2013, IFR (3 min video)

8---Imagine for a moment that a certain class of large hospital got a big subsidy, like the banks in funding, but couldn’t be sued for malpractice. What do you imagine the impact on healthcare would be?, IFR

For investors, there is no getting on the right side of this kind of wrongdoing as the very poor share performance of the TBTF banks over the past decade amply demonstrates.
Lots of people were getting rich off of Citigroup, for example, but they weren’t the widows and orphans with Citi shares in their mutual funds; they were employees who took big risks, took home big rewards and didn’t have to stand good for the mess they made.
The strength of the rule of law has to be one of the biggest protections for shareholders, and whatever weakens it threatens them. A country with lawless and entitled large banks is a country which will have lower structural growth and worse investment returns. Sound familiar?
Money will be badly allocated, both because TBTF banks will have an incentive to make financial products as complex as possible, and because bank employees will game the system to their own advantage.
Heard this story before?
Imagine for a moment that a certain class of large hospital got a big subsidy, like the banks in funding, but couldn’t be sued for malpractice. What do you imagine the impact on healthcare would be?
Looked at from ground level, this is going to sting investors even if they try to take advantage of TBTF banks’ special status.
TBTF bank employees will have even more incentive than before the crisis to take on too much risk and to flout the law. After all, they will continue to pocket huge sums and the most they can lose is their job rather than their liberty

9--More on Abenomics, IFR

He said he would do what ever it takes to hit the Bank of Japan’s inflation target of 2 percent. The economy has rarely seen that level of inflation since the early 1990s.
Kuroda is expected to be approved by parliament later this week because opposition parties, whose support is needed in the upper house, have indicated they would back him.
Supporters of the more aggressive monetary policy advocated by Prime Minister Shinzo Abe can point to a 13.1 percent drop in core machinery orders in January from December as highlighting the need for urgent action. (Full Story)

Analysts and government officials suggested the much weaker than expected figures released on Monday were a blip in a typically volatile data series, but they did show companies remained cautious in their spending plans. Analysts had expected a fall of just 2 percent.
Japan has been in deflation for most of the past two decades and figures last week showed that the economy edged out of its fourth recession since 2000 in the last quarter of 2012

10---On stocks and the all-red roulette table, IFR

To many, the current rally is a clear statement of intent and, as ever, there are plenty of analysts tripping over themselves to justify the move. Then, yesterday, I was made aware of a series of American economic stats which made me think and it went as follows:
“The Dow - back to 2007 levels. Let’s compare where everything else is:
  • GDP Growth: Then +2.5%; Now +1.6%
  • Regular Gas Price: Then US$2.75; Now US$3.73
  • Americans Unemployed (in Labour Force): Then 6.7m; Now 13.2m
  • Americans On Food Stamps: Then 26.9m; Now 47.69m
  • Size of Fed’s Balance Sheet: Then US$0.89trn; Now US$3.01trn
  • US Debt as a Percentage of GDP: Then 38%; Now 74.2%
  • US Deficit (LTM): Then US$97bn; Now US$975.6bn
  • Total US Debt Outstanding: Then US$9.008trn; Now US$16.43trn
  • Consumer Confidence: Then 99.5; Now 69.6
  • S&P Rating of the US: Then AAA; Now AA+
  • VIX: Then 17.5%; Now 14%”
Apart from the simple fact that there are, according to Winston Churchill, lies, darned lies and statistics, one does get quite a shock looking at the comparison for although it tells us little about the reasons and justifications for a Dow at 14,447 points, it lays bare the staggering deterioration in the nation’s overall financial position at the same time as making us aware of just how impossible it will be for the Fed to embark on a tightening cycle, irrespective of what insipid inflationary pressures might rear their ugly heads.
The near-zero interest rate policy is the glue that holds these divergent but scary figures together

11---Stocks see fading help from QE, IFR

Equity markets, especially in the US, are being held aloft by two historical anomalies – quantitative easing and high corporate profits – either of which could start to go away in 2013...

Profits’ magic carpet ride

With this as a possibility, it is important to realize exactly how remarkable the growth of corporate profits in the US has been, especially given the economic backdrop. Corporate profits after tax now account for about 11% of GDP, having oscillated between 4% and 6% between 1950 and 2000.
A simple return, over several years, to the historic mean implies really poor future returns for stocks in the absence of some other extraordinary support.

But why might profits drop? Firstly, profits have expanded in part because wages in the US have taken a smaller and smaller piece of the pie; now below 44% of GDP and dropping, down several percent since 1999. That is in part the fruit of globalization and the offshoring of jobs. However, that which can be offshored largely has been and the likely trend is for new manufacturing technologies to start pushing jobs back into the US As well, a rebound in housing markets is the kind of growth which can only happen onshore.

Secondly, there is the issue of the potential for declining government spending. A dollar spent by the government is a dollar that supports household income, and consumption, and corporate profits. Whatever the right policy should be, the debate now is about the extent to which government spending is curtailed, in real inflation-adjusted terms, over time.

When governments cut back on deficit spending, the only hope for profits is a cutback in household savings, which would run against both the trend and, given the pitiful state of Americans’ retirement accounts, logic.

“Here is the punch line. Any normalization in the sum of government and household savings is likely to be associated with a remarkably deep decline in corporate earnings,” John Hussman of the Hussman Funds wrote in a note to clients.

That decline in earnings is going to hurt stocks, especially if companies are caught in a vise between a rise in earnings and a gentle decline in revenue from government spending. If profits fall just as the Fed is withdrawing support, either because employment has recovered or because it has lost faith in its own magic – then watch out.

Equities’ best hope might be a cut in government spending deep enough to kill job growth – and extend QE.
That is neither likely nor desirable.

12--Stocks rise on 'no growth' economy, Trimtabs

Whatever estimate for inflation you want to use, nominal growth of just over 2 percent translates into an economy that is not growing in real terms. Anybody surprised by that? You should be if you watch the stock market and listen to those who are fully invested “talking their book” that higher stock prices mean that the U.S. economy is recovering.

By the way, “talking their book” is an old Wall Street term for those touting whatever they own, regardless of the truth.

As I have been saying all year, the reality is that stocks have neared all time highs for just two reasons. The first and most important is that the Federal Reserve has been consistently debasing the currency by creating $4 billion of new money via computer keystrokes each and every day and some of that money has been increasing the demand for equities.

The second reason why stocks are so high is that companies have accumulated a huge cash hoard earning nothing sitting on balance sheets. That’s why companies are using some of that cash to shrink the number of shares outstanding.

So we have more money chasing fewer shares. The end result is that stock prices go up. So what if the U.S. economy is not growing? Remember, Las Vegas magicians do not use magic. They use misdirection to deceive the audience.

Misdirection is the name of the game at the Fed these days. In the past a rising stock market had some relationship to an improving economy. But not this time. This time it is all a charade.

 
Long-term readers of this report know that I’m not much of a knee-reflex conspiracy theorist. But when someone like Chávez dies at the young age of 58 I have to wonder about the circumstances. Unremitting cancer, intractable respiratory infections, massive heart attack, one after the other … It is well known that during the Cold War, the CIA worked diligently to develop substances that could kill without leaving a trace. I would like to see the Venezuelan government pursue every avenue of investigation in having an autopsy performed.

Back in December 2011, Chávez, already under treatment for cancer, wondered out loud: “Would it be so strange that they’ve invented the technology to spread cancer and we won’t know about it for 50 years?” The Venezuelan president was speaking one day after Argentina’s leftist president, Cristina Fernández de Kirchner, announced she had been diagnosed with thyroid cancer. This was after three other prominent leftist Latin America leaders had been diagnosed with cancer: Brazil’s president, Dilma Rousseff; Paraguay’s Fernando Lugo; and the former Brazilian leader Luiz Inácio Lula da Silva.

“Evo take care of yourself. Correa, be careful. We just don’t know,” Chávez said, referring to Bolivia’s president, Evo Morales, and Rafael Correa, the president of Ecuador, both leading leftists.

Chávez said he had received words of warning from Fidel Castro, himself the target of hundreds of failed and often bizarre CIA assassination plots. “Fidel always told me: ‘Chávez take care. These people have developed technology. You are very careless. Take care what you eat, what they give you to eat … a little needle and they inject you with I don’t know what.” 1

When Vice President Nicolas Maduro suggested possible American involvement in Chávez’s death, the US State Department called the allegation absurd

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