Tuesday, April 23, 2013

Today's links

1---Guest Post: Boston Marathon Attacks, Chechnya And Oil - The Hidden U.S. Connection, oilprice

2---Corporate America’s Excuses Rise as Earnings and Revenues Fall, naked capitalism

Some of the crown jewels of corporate America have reported declining revenues and earnings, and have lowered their forecasts, and in doing so, have unleashed a flood of obfuscation and excuses – from Easter falling on the wrong date to lazy sales reps. So when Caterpillar reported on Monday, it was almost refreshing in its unvarnished ugliness.
Sales plunged 17.7%, profits 44.6%. “A challenging first quarter,” Corporate Controller Mike DeWalt called it. Dealer sales had been less than expected, inventories had piled up on their lots, and they’d cut back their orders to bring down their inventories. End-user demand was down, along with sales of aftermarket parts. Everything was down. But manufacturing costs jumped, and profits sagged. The rest of 2013 would be tough, and revenue guidance was lowered by a chunk. Not a single excuse.
Then there’s IBM. Because it’s the world’s largest supplier of information technology, its earnings report is a harbinger of things to come… namely excuses...

It’s the same problem that other gauges of the global economy, such as Caterpillar and Oracle, have: declining demand in the US, Europe, and China, combined with tough competition.
A scary thought that the three largest markets in the world could weaken simultaneously – despite the prodigious amounts of money that central banks have printed and handed out.

3---A Heartbreaking Work of Staggering Folly, Paul Krugman, NYT

As I have been writing a lot lately, the clean little secret of the global economic crisis is that standard economic theory actually performed pretty well.

It’s true that few anticipated the severity of the 2008 crisis — but that wasn’t a deep failure of theory, it was a failure of observation. We actually had a pretty good understanding of bank runs; we just failed to notice that traditional banks were a much smaller share of the system than before, and that unregulated, unguaranteed shadow banks had become so important. Once that realization hit, as Gary Gorton (pdf) has documented, standard bank-run theory made perfectly good sense of the story.
And the aftermath of the crisis — persistent low interest rates despite high deficits, impotence of monetary policy, major negative impacts of fiscal austerity — may not have been what most economists or government agencies predicted, but it’s what they should have predicted; Econ 101 macroeconomics, as I often point out, has worked pretty well.

Even the euro area crisis made and makes a lot of sense in terms of standard optimum currency area theory.

The point is that radical new theories haven’t been needed at all; off-the-shelf economics, tools we already had, provided plenty of guidance.

In that case, however, why are we doing so badly? And I mean really badly; in Europe, recovery is now behind where it was at the same point of the Great Depression. Here’s European industrial production from the League of Nations starting in 1929 and Eurostat starting in 2007:
The immediate answer is, bad policy — above all, fiscal austerity in the face of mass unemployment, which is exactly what everything we know about macroeconomics says you shouldn’t be doing. From the latest IMF World Economic Outlook:
Some of this reflected the problems of the monetary union — but there has been a lot of austerity even in core nations. And underlying it all was the absolute determination of officials to throw out everything we had learned about macroeconomic policy in depressions, and go with their prejudices instead. Of course, they found prominent economists — Alesina, Reinhart-Rogoff — who told them what they wanted to hear. But there were plenty of prominent economists desperately warning that they were wrong; it was the policy makers and the Very Serious People in general who decided who they would regard as serious and worth listening to — leading to what now look like comical mistakes.

But it’s no joke; it’s a terrible tale of folly and disaster. 

4---Consumption falls as consumers break free of mortgage debt, Housingwire

In five years time, U.S. households reduced their total outstanding debt by $1.3 trillion as mortgage debts either paid off or were written down, researchers with the Federal Reserve Bank of New York claim in a new report
But all this credit wariness comes at a cost, according to the Fed study, which is titled 'The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit.'
"While household debt pay-down has helped improve household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession," the Fed researchers asserted.

Some of the more notable improvements occurred on the mortgage side of the lending spectrum. Fresh mortgage delinquencies reached a new low of $140 billion in the third-quarter of 2012.  However, a large amount of mortgage debt was also cleared through the foreclosure process and other transactions such as short sales in the five-year period following the financial crisis.

Still, the NY Fed Bank says mortgage-related debt accounts for 76% of all household debt, with credit cards, auto loans, student loans and other consumer accounts making up the rest.
As for how consumers are reducing their debt levels, the report says they're either demanding less credit, dealing with a falling supply of credit or benefiting from nonperforming debt being written off by lenders after a spike in default rates.

The report claims consumers reduced a portion of their overall household debt voluntary.
"Holding aside defaults, from 2007 through 2011, consumers reduced their debt at a pace not seen over the last ten years," the study concluded. "A remaining issue is whether this reduced reliance on debt is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior?"

The answer to that question is both. The Fed researchers noted that "both borrowers and lenders have acted to curtail consumers existing credit in the face of growing delinquencies and broader financial market uncertainty."

5---Table of cash buyers for selected cities in March 2013 compared to March 2012, calculated risk


6--- The police state has arrived, antiwar

7---The Recovery in Housing Is Behind Us: David Rosenberg, Yahoo

Sales of existing homes unexpectedly fell 0.6% to a seasonally adjusted annual rate of 4.92 million in March, the National Association of Realtors reported Monday. Analysts had been expecting an increase of 5.03 million homes. February existing home sales were revised down to 4.95 million from an original estimate of 4.98 million.
The numbers in March continue to point to a healthy housing recovery: existing home sales are up 10.3% compared to a year ago and the median home price in March ($184,300) is nearly 12% higher than it was in March 2012. Last month also marks the largest year-over-year price growth since November 2005....

First-time buyers accounted for 30% of existing home sale purchases in March versus 33% just one year ago. Even with mortgage rates sitting at historical lows – the 30-year fixed rate was 3.57% in March – potential new buyers are choosing to sit on the sidelines as institutional investors and hedge funds briskly snap up available properties.

8---The Incredible Shrinking Budget Deficit, NYT

Spending in the fiscal year to date is lower than a year ago and the nominal growth rate is lower than it has been in decades,” the Goldman economists wrote in a note to clients. “Revenues have also exceeded expectations, with a 12 percent gain fiscal year to date. What is more notable is that the strength in revenues preceded the payroll tax hike at the start of the year, and the spending decline does not seem to reflect sequestration, which has just started to take effect.” To translate: the deficit could come in even smaller than currently anticipated because of spending cuts and higher tax rates

9---Low Interest Rates Are Hurting, Not Helping, the Economy: Sheila Bair, Yahoo

Sheila Bair, the former FDIC chair and senior advisor to the Pew Charitable Trusts, says in an interview with The Daily Ticker that the low interest rate strategy promoted by the Fed to goose the economy is backfiring.

“The Fed has got the best of intentions…but it’s counterintuitive,” she argues. “Low rates dampen the incentives to invest.”

The Fed’s monetary policies have made it more difficult for banks to generate revenue, forcing them to seek profits in other ways, she notes.

“It’s very difficult to make a loan of a multi-year duration because you have this very low interest rate on your balance sheet,” Bair explains. “That’s not good for business lending. Banks can make money in other ways – trading profits, investment banking fees, deposit accounts – other ways…that don’t necessarily help the economy.”

Business lending, not home refinancing, holds the key to the economic recovery, according to Bair. The U.S. needs to shift its economic priorities if a full recovery is to happen, Bair adds.

“Our economic policies are too much aligned with trying to revitalize the economy we had pre-2007,” she says. “To have a sustainable growth model for everybody, including banks, we need to get more jobs and we need to get real wages going up again.”

10--Detroit emergency manager proclaims power to end collective bargaining, wsws

11---US sequester furloughs delay flights, threaten airport safety, wsws

12--Why this is the worst recovery on record, Robert Reich

13---DAVID WOO: The Global Slowdown Is Hinting At A ‘Major Re-Alignment Of The Markets’ — And It Won’t Be Pretty, Business Insider

Home price appreciation has stalled a bit, consumer confidence is falling, and, as Woo highlights in his report, “with the household saving rate having fallen to just 2.6% in February – the lowest level since December 2007 – household consumption could be more vulnerable than usual to any sudden confidence shock.”

That confidence shock could set in with the effects of the sequester, which entails around $50 billion in fiscal tightening measures over the next six months.

“If we were to assume that this will primarily take the form of reduced wages/salaries of government employees and contractors and that most of the hit will occur in Q2,” writes Woo, “this could result in a very dramatic shock to household income.”

14---China PMI Misses – Global Economy Looks Increasingly Fragile, prag cap

15---Goldman Sachs: A Consumption Setback, prag cap

16---Iran, Pakistan, Syria, Qatar: Pipelineistan at work, Pepe Escobar

17---From the Wall Street Journal, naked capitalism
Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.
U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.
The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.
“Every now and then you see a glimmer, things seem to improve, and then a little bit of bad news comes,” World Bank chief economist Kaushik Basu said….

18--Economy In Pictures: Have We Seen The Peak?, streettalk live

Wages & Salaries
Incomes are the lifeblood of the economy.  In order for consumers to consume (which makes up roughly 70% of the economy currently) wages must rise at a rate to support increases in consumption.
Consumer Spending:
As state above, personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation.  As PCE goes - so goes the economy.
Production and Manufacturing:
The chart below is the STA Economic Output Composite Index which is an index comprised of the Chicago Fed National Activity Report, ISM Composite, several Fed regional manufacturing surveys, Chicago ISM PMI, and the NFIB Small Business Survey.  This is a very broad measure of the economy.
moving average of the non-seasonally adjusted data.
The first two charts show retail sales.  The first is the ISCS-Goldman Sachs weekly retail sales data smoothed with a 3-month average of the annual rate of change.
While the stock market continues to ramp up due to the Fed's interventions the disconnect between the markets, and the real underlying economic fundamentals, will ultimately resolve itself. I am not suggesting that a crash is looming as none of this data suggests that a recession is imminent, however, the data also does not support the mainstream view that the economy is set to accelerate or that the markets are entering into the next great secular bull market.
The reality is that the economy is continuing to muddle along through the greatest monetary experiment in modern monetary history. However, what is becoming more readily apparent is that the impact from these ever expanding programs continue to support Wall Street and the financial system but fails to improve the diminished state of Main Street."


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