Wednesday, March 20, 2013

Today's links

1---Why the Trader Joe's Model Benefits Workers--And the Bottom-Line, national journal

Companies who invest in higher salaries for low-level employees find success in a competitive market

2---The Dangers of a Chinese Financial Crisis, naked capitalism

On the macro side, the rapid growth in shadow banking credit has led to a significant easing of overall credit conditions since mid 2012. While this has been helpful for growth recovery, people including policy makers who have focused on the traditional broad money and bank lending indicators may misjudge the true credit conditions in the economy. In such a case, policy adjustment may be delayed until massive leverage increase has led to over-investment, inflation, and/or asset bubbles. By then, the government may have to tighten credit abruptly, causing more pain to the economy and leaving NPLs in the wake.

Another major risk is economic volatility related to unexpected liquidity tightening. Liquidity in the shadow banking sector is generally not very stable compared with deposit-funded regular bank lending, and depends heavily on market confidence. Payment issues in parts of the market (for example, wealth management products or local government platforms) could shake confidence and dry up liquidity suddenly. Alternatively, the government may decide to clamp down on some specific WMPs or irregular local government financing practice, leading to a quick shrinkage of some shadow banking activities. In these cases, the most likely scenario is that banks either bring the underlying assets back to their balance sheets (along with deposits), or develop other products to take things over. However, either takes time and banks’ balance sheet can not expand quickly enough to completely compensate for the drop in shadow banking, especially as banks face credit quota and other regulatory constraints. In both cases, a liquidity and credit tightening occurs, perhaps even unintended by the government, in which case it may loosen later, but the damage would have been done, leading to volatility in the economy. This is kind of what happened in the summer and Q3 of 2011.

3--Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?, naked capitalism

You should basically never hit non-insured depositors either. For all its free market capitalism, the US extended $13T of guarantees to things like money-market funds to avoid outcomes like this. But in the EU, they are willing to risk lack of trust in the banks over 5B euros.
10. There is nothing resembling a proper order of default here. As far as I can tell, people who have not been wiped out yet include: bank shareholders, bank bond holders, sovereign bondholders.
The rationale, broadly speaking, of why they have not been hit is “It is hard and they might sue us” as if restructuring and insolvency was otherwise a dinner party or we might only save 1-2B that way (as if that is not meaningful in the context of a 5B haircut…)...

Large” Account holders:
The large account holders (large being defined as above 100K) are not just fat-cat hedge funds (as if 100K makes you a fat-cat) but the operating accounts of basically every business of size in Cyprus.
BoC and Laiki are the whole money center system of Cyprus and basically you cannot transact business in Cyprus if you are of any size and avoid them.
So, the chaos that is going to emerge when checking accounts, payroll accounts, escrow accounts, pensions, trusts, payments-in-transit and so on are arbitrarily haircut is going to be massive – both in disrupted business operations and small business bankruptcies, but also in thousands of legal disputes.
14. Even despite all the arbitrariness above, at least it solves the problem right???
Absolutely not. You will haircut 10% of deposits on day 1 to make up a capital shortfall and promptly watch 30% of the rest of the deposits flee the country, leading to a much bigger capital hole that Europe will have to fill.

4---Trans Pacific Partnership , counterpunch

President Obama is pushing the anti-democratic Trans Pacific Partnership which is a gift to the big banks and other transnational corporate interests. For the big banks it will require countries to let capital flow in and out without restriction, not allow the banning or regulation of risky investments like derivatives and credit-default swaps and will prevent the formation of much-needed public banks. Our Wall Street government continues to serve Wall Street first at the expense of the people’s necessities

5---Americans Widely Back Government Job Creation Proposals, Gallup
Seven in 10 favor business tax breaks and infrastructure repair programs

Next, suppose that on Election Day you could vote on key issues as well as candidates. Would you vote for or against -- [RANDOM ORDER]?
Majority of Party Groups Favor Each Jobs Proposal
A majority of Democrats, Republicans, and independents support each of the three job creation proposals tested in the poll. Republicans are much more supportive of business tax breaks than the new job programs, and Democrats are more likely to favor the job creation programs, while independents show roughly equal support for all three.
Support for Job Creation Proposals, by Political Party

Implications
Job creation proposals enjoy widespread public support, including majority backing among all party groups, even when the issue of government spending is raised in an era when deficit reduction is one of the major priorities for the federal government. Despite the high levels of support for the job creation proposals, the political realities in Washington are such that Congress has not passed any of the proposals since President Obama first advocated many of these more than a year ago. The major sticking point with jobs legislation -- as with most other measures being considered in Washington -- may not be whether the programs should be pursued but whether the government should pay for them through increased taxes or cuts in other government programs.

6----Mortgage applications slide 7.1%, Housingwire

7---Iraq was a mistake, RT

The number of Americans thinking the Iraq invasion was a good thing dwindled from 75% in 2003 to 42% in a recent Gallup poll. RT asked some of the politicians behind the decision to intervene if ten years on they still think it was right thing to do

8--Can you tell where austerity is being used?, conversable economist

....compare the U.S. recovery to that of the economy of the countries of Europe that are in the euro area, or the economy of the United Kingdom. The pattern looks similar in 2007, leading up to the recession, and through 2008 and into 2009, when the recession hit. The recovery for the euro area also looked farly similar to the U.S. experience for a time, up to early 2011. At about that time, the euro area economy began to suffer through its own second wave of problems. Thus, while real GDP in the U.S. economy had exceeded pre-recession levels by late 2011, real GDP in the euro area and the UK has not yet recovered to pre-recession levels. The U.S. recovery has been sluggish; for the euro area, the recovery is not yet complete.


9---Osborne Says 2013 GDP Forecast Cut in Half, Cites Euro Risks, Bloomberg

It is taking longer than anyone hoped, but we must hold to the right track,” Osborne said. “The problems in Cyprus this week are further evidence that the crisis is not over, and the situation remains very worrying.”

10---Osborne Should Be Fired, Voters Say in Pre-Budget Poll, Bloomberg

11--Cameron Evokes Black Wednesday as Pound Weakens 7%: U.K. Credit, Bloomberg

Chancellor of the Exchequer George Osborne delivers his annual budget to Parliament at 12:30 p.m. today amid calls from the opposition Labour Party and even his own Cabinet colleagues to spur an economy at risk of falling into a third recession in five years. Britain has recovered only half of the output lost in 2008-2009, and the country forfeited its top credit rating at Moody’s Investors Service on Feb. 22. Output in the U.S. is back above its pre-recession peak and the recovery is gaining pace.

“The chancellor’s policy is bankrupt -- he is going to have to face that,” Robert Skidelsky, a member of the upper chamber of Parliament without party affiliation and biographer of John Maynard Keynes, said in a phone interview on March 14. “The economy is not growing, the pound will go on slipping and we will lose further credit ratings.” ...

No Growth

When Cameron and Osborne took office in May 2010, they predicted the economy would grow more than 5 percent over the next two years, a budget deficit equal to 11 percent of gross domestic product would fall to 2 percent by April 2015 and the U.K. would keep its top credit rating. Instead, output rose 1.1 percent, the deficit is still 8 percent of GDP and analysts say Fitch Ratings and Standard & Poor’s will follow Moody’s in downgrading Britain’s credit score after today’s budget.
Credit-default swaps insuring gilts rose 69 percent from a more than four-year low of 26 basis points on Nov. 1, the most among 67 governments tracked by Bloomberg. The premium investors demand to hold gilts rather than German bunds has increased fivefold since August to 52 basis points.

BOE Stimulus

Constrained by his self-imposed austerity program, Cameron is relying on the Bank of England to revive the economy. The central bank has bought 375 billion pounds ($564 billion) of government bonds since March 2009 as part of its quantitative- easing program and kept its benchmark interest rate at a record low of 0.5 percent.

12---China’s new premier to enforce “painful” market restructuring, wsws

China’s newly installed premier, Li Keqiang, emphasised in his first press conference on Sunday that the government is preparing sweeping “free market” economic restructuring measures, including privatisation of state assets and deregulation of the banking and finance sector. The remarks of Li, who was formally appointed the successor of Premier Web Jiabao by the National Peoples Congress (NPC) that concluded on the weekend, underscore the new Chinese Communist Party leadership is committed to an accelerated assault on the jobs, working conditions, and living standards of the working class.

After the NPC, Li took questions from Chinese and foreign journalists for nearly two hours in Beijing’s Great Hall of the People. During the press conference, broadcast live on Chinese state television, the new premier mentioned “reform” two dozen times to emphasise the forceful character of his policy. “The reform is about curbing government power; it is a self-imposed revolution,” he declared. “It will require real sacrifice and this will be painful and even feel like cutting one’s wrist”.
Li added: “We need to leave to the market and society what they can do well… All wealth creators, either state-owned or private, should be duly rewarded for having honestly competed on a level playing field.” The premier admitted that the government was heading into “unchartered waters”, warning: “We may also have to confront some protracted problems. This is because we will have to shake up vested interests… Sometimes stirring vested interests can be more difficult than stirring the soul. No matter how deep the water is, we’ll wade into it because we have no alternative.”

Li struck a populist, anti-corruption pose when he pledged to rein in spending on government buildings and on officials’ perks. This was an obvious attempt to placate public hostility towards the CCP leadership’s accumulation of enormous personal wealth in the last two decades. The premier was also preparing a bogus “shared sacrifice” rationale for austerity spending cuts targeting the working class.

The central message of Li’s press conference was directed to the international financial markets. He explained that the market would be given a greater role in setting the interest rate and exchange rate, allowing companies to have greater access to credit via bond and equity markets. Li also told global investors that the state-dominated railway, energy and financial sectors would be opened up by the government to allow private capital “to enter more smoothly and effectively”....

Li’s installation as premier is a product of a protracted power struggle within the Chinese Communist Party (CCP). Li was a student of a leading neo-liberal economist, Li Yining, at Peking University. In 1991, the economist and three of his students, including Li, co-authored a book, Towards A Strategic Choice of Prosperity, which argued for the introduction of share ownership reforms of state-owned enterprises. This ended up being adopted by the government as it moved to restore capitalism and sell off state industries in the 1990s. In 2005, Professor Li Yining became publicly known after declaring that it was necessary to “sacrifice a generation” or 30 million workers by axing them from state enterprises in order to advance further “reform”.

13---The CIA's global gulag, wsws

A report released in early February by the Open Society Justice Initiative titled “Globalizing Torture: CIA Secret Detention and Extraordinary Rendition” establishes that the Central Intelligence Agency, acting under the direction of the highest levels of the US government, has utilized a global network of secret prisons, foreign intelligence agents, and interrogation and torture centers to send detainees to without any legal protections.
This arrangement is worldwide and includes the involvement of at least 54 different countries touching almost every continent...

14--The American media, ten years after the Iraq war, wsws

The media’s promotion of aggressive war, now the unquestioned basis of American Middle East policy, is open to the same condemnations as those issued against top operatives of the Nazi propaganda machine. UN Resolution 110, passed after the Nuremburg trials, censured “all forms of propaganda in whatsoever country conducted, which is either designed or likely to provoke or encourage any threat to the peace, breech of the peace, or act of aggression.”

The American population was railroaded into an unpopular war, despite mass protests, based on lies for which no one has been held accountable. Evidence to show Iraq’s possession of weapons of mass destruction (WMDs) was fabricated by US officials, including in Secretary of State Colin Powell’s 2003 presentation at the UN. US President George Bush and Vice President Dick Cheney falsely claimed that the US had to attack Iraq to prevent it from allying itself with Al Qaeda—which now serves as a US proxy force in Syria.

Given the scale of the crimes and the devastation wrought by the Iraq war, the reaction of the American media has an Orwellian character. Ten years after a massive media campaign to pressure the public to support a war of aggression, there is not one serious review of the events that led to this catastrophe. The story is consigned to two-minute news spots and brief articles.

15---US retirement confidence at 23-year low, wsws

The percentage of Americans who are confident that they will have enough money for a comfortable retirement is the lowest in 23 years. According to the latest Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), 49 percent of workers are either not too confident (21 percent) or not confident at all (28 percent) that they will be financially comfortable when they retire.

16---China's shadow banks, sober look

The risk of China's "shadow banking" keeps resurfacing. It's been a topic widely discussed in the media and the blogosphere, and even chastised by high-level Chinese officials. Nevertheless the issue remains unresolved.
MoneyNews: - The World Bank warned recently that the Chinese economy could overheat from an influx of capital, resulting in excessive credit growth.

The International Business Times reported that the shadow banking system in China is "growing at an alarming rate.”

In fact, nearly half of all new credit is supplied by non-banks or through off-balance-sheet vehicles of regular banks, International Business Times said, up from 10 percent a decade ago.

Of particular concern to some regulators are so-called wealth management plans (WMPs), which are yield-bearing instruments sold by banks that do not have guaranteed principal.

Xiao Gang, chairman of the board of Bank of China, wrote an op-ed in the English language China Daily in which he said the quality and transparency of WMPs are “worrisome.”

"To some extent, this is fundamentally a Ponzi scheme,” Xiao said, according to the International Business Times.
 
17---Defying Gravity: Miami Condos Soar Again, CNBC

18---Homeownership at 1990s levels in Calif, Dr Housing Bubble

Ironically the California homeownership rate is at a low not seen since the early 1990s. What is going on? For one, a massive gentrification has occurred. While you do have a subset of the population that is doing much better, California now holds the highest unemployment rate of all states. Nearly half of the state rents, many cannot buy today even with record leverage being provided. Even if you manage to get a FHA insured loan, good luck trying to buy a place with this in certain markets. You need 20 percent down to be competitive in desirable markets. Is this a big part of the market? Doesn’t seem like it. The bulk of sales are all cash investors and FHA insured buyers. The conventional buyer is not the dominant group here as it is in most typical markets.

For these reasons, this is why we see the median price in Southern California up over 20 percent year-over-year but sales up only 1 percent. Like in New York, some areas are gentrifying to a very high degree. San Francisco is a prime example. People are smart but think in the short-term. The bubble bust is now a distant memory. This is an entirely different ballgame today

19---Experiments in Negative Real Rates Tend to Lead to Excess…., prag cap

Here’s Fed Governor Jeremy Stein first:
“For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield.” An insurance company that has offered guaranteed minimum rates of return on some of its products might find its solvency threatened by a long stretch of low rates and feel compelled to take on added risk. A similar logic applies to a bank whose net interest margins are under pressure because low rates erode the profitability of its deposit-taking franchise.
 
David Rosenberg:

... each period of real zero or sub-zero real interest rates ushered in by the Fed in recent cycles generated bubbles somewhere.

gs1 Experiments in Negative Real Rates Tend to Lead to Excess.... 

No comments:

Post a Comment