Wednesday, May 1, 2013

Today's links

1---End of QE?, Bloomberg

Chairman Ben S. Bernanke will probably reduce the Federal Reserve’s monthly bond buying in the fourth quarter to $50 billion from $85 billion as he begins to unwind record stimulus, economists said in a Bloomberg survey.

Policy makers must find a way to slow the pace of purchases enough to signal confidence the economy is strengthening without prompting a sudden rise in interest rates, said former Fed economists Michael Feroli and Joseph LaVorgna. They said that probably means the Fed, which concludes a policy meeting today, will follow a three-step strategy to wind down bond buying....

The U.S. job market remains short of the FOMC’s goal of substantial improvement, with employers adding 88,000 positions in March, the fewest since June.

Jobs Report

The Labor Department on May 3 will probably say the unemployment rate in April remained unchanged at 7.6 percent as employers added 148,000 jobs, according to the median estimate in a separate Bloomberg survey. 

2--China Manufacturing Gauge Signals Slowdown Persisting: Economy, Bloomberg

3--Oz manufacturing PMI falls to 36 (crisis), macrobusiness

4--Eurozone unemployment hits new high, Guardian

5---U.S. Homeownership Rate Falls to Lowest Since 1995, Bloomberg

6--Iraq explodes, RT

7---The Incredible Shrinking Budget Deficit, NYT

8--Dems ask: What debt crisis? Politico

And then there are the other Democrats — the ones who reject the entire premise of the current high-stakes fiscal fight. There’s no short-term deficit problem, they say, and there isn’t even an urgent debt crisis that requires immediate attention. This group could make it even harder for President Barack Obama to strike a grand bargain because they increasingly see no immediate need for either new spending cuts or significantly more revenue, both of which they say could further slow the economy.

These Democrats and their intellectual allies once occupied the political fringes, pushed aside by more moderate members who supported both immediate spending cuts and long-term entitlement reforms along with higher taxes.

But aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution.

This group got a huge boost this month with the very public demolition of a sacred text of the austerity movement, the 2010 paper by a pair of Harvard professors arguing that once debt exceeds 90 percent of a country’s gross domestic product, it crushes economic growth.

Turns out that’s not what the research really showed. The original findings were skewed by a spreadsheet error, among other mistakes, and it’s helping shift the manner in which even middle-of-the-road Democrats talk about debt and deficits.

“Trying to just land on the debt too quickly would really harm the economy; I’m convinced of that,” Kaine, hardly a wild-eyed liberal, said in an interview. “Jobs and growth should be No. 1. Economic growth is the best anti-deficit strategy.”
And the intellectual shift away from austerity is not just coming from the left.
The conservative American Enterprise Institute issued a paper last week saying Congress has already achieved enough deficit reduction for now. Other organizations not typically associated with free-spending liberalism, including the International Monetary Fund and Goldman Sachs, have cautioned that the austerity movement — which favors rapid reduction of national debt — may be worsening Europe’s economic problems and slowing down the U.S. recovery, as well.

9---The risks of QE, Jared Bernstein

And what are the risks of unprecedented growth in the Fed’s balance sheet?  The Fed has been forthright about them: future inflation, low rates pushing investors to recklessly “reach for yield,” the balance sheet exposure to a rate spike, the instability to the markets once they start to sell off their holdings…to which some panelists added “the Fed’s credibility” if they screw it up.

Yep…that’s the right list.  But again, compared to what?  Surely evaluation of the Fed’s actions must offer more analysis than free-floating anxiety about unconventional tactics taken in highly unusual times, and taken in the interest of a great cause: providing some much needed opportunities for the jobless.

Remember, for reasons that range from anti-government ideology to just plain bad economics, Congress has been pushing the wrong way on fiscal policy, leaving the Fed as the only game in town still trying to do something about unemployment.  That’s a critically important pursuit.  If you want them to cut it out, you need to bring considerably more game to the panel than I heard today.

10--The missing workers: how many are there and who are they? , EPI

11----Europe Bleeds out, Economist

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.
There is blame to go around for this, but one has to reserve special criticism for the European Central Bank. The Federal Reserve's main policy rate has been effectively zero since late 2008; the ECB's has never fallen below the current 0.75% level.

 The Fed has undertaken major asset-purchase programmes in an effort to raise growth expectations, lower interest rates, and improve lending conditions; the ECB deployed a special lending programme to banks last year in order to prevent a systemic collapse, but its balance sheet has since been shrinking as those loans are repaid. The Fed has reacted to weakening inflation and inflation expectations and has linked policy changes to labour market indicators. The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain. Europe's governments have behaved badly, but American fiscal policy has hardly been better. The ECB faces a more complicated set of political constraints, but it has already proven how adroitly, aggressively, and inventively it can act when necessary.

The ECB meets this week. On Thursday it may announce an interest-rate cut; if it doesn't it is probable that a cut will be made in June. But a rate cut will not be enough, not remotely. As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany. The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

12---Homeownership Plummets and No One Notices, CEPR

Okay, neither part of that one is exactly right. According to the Census Bureau the unadjusted rate of homeownership in the first quarter of 2013 dropped by 0.4 percentage points to 65.0 percent. The seasonally adjusted rate edged down by 0.1 percentage point to 65.2 percent. This may not be a "plunge" exactly, but either way you would have to go back to 1995 to find a lower rate of homeownership. (Can we get Alan Greenspan out here to give us another lecture on the glories of subprime and other innovative mortgages?)

It's also not quite right that no one noticed. There are some business reporters who have heard of the Census Bureau. Mark Lieberman had a piece highlighting the new data

13---Homeownership Rate Drops to 18-Year Low, DS News

The homeownership rate peaked at 69.2 percent in the second quarter of 2004. The rate measures the proportion of households owning their primary residence, computed by dividing the number of household that are occupied by owners by the total number of occupied homes. A year ago and in the previous quarter, the homeownership rate stood at 65.4 percent.

The Census Bureau also reported the homeowner vacancy rate rose to 2.1 percent in the first quarter from 1.9 percent in the fourth quarter. The homeowner vacancy rate is the proportion of the homeowner inventory that is vacant for sale.

The Census data paints a grim picture for the home sales market, which has already been struggling against mortgage restrictions and weak inventory. The Census report suggests homeownership may have lost its place in the “American dream” as a new generation of potential homebuyers may have become wary of homeownership as a result of the wave of foreclosures in the last several years.

14---Draghi will act to avoid deflationary spiral, sober look
The ECB will have no choice but to ease monetary policy and possibly prepare for more drastic actions. The Eurozone is facing a growing risk of deflation - similar to Japan. Once the inflation rate in Japan fell below 1%, the external shock of the Asian currency crisis (late 90s) sent Japan into a deflationary spiral - something the nation is still dealing with today. The Eurozone may end up facing a similar scenario.
Danske Bank: - Europe is heading into a deflationary scenario if they don’t do anything to boost the money supply. This already looks very similar to what happened in Japan in 1996 and 1997.”
Source: CNN

Growth in consumer lending has come to a crawl as bank deleveraging continues. With retail credit growth curtailed, corporations have no pricing power. Signs of deflationary pressures are already in place.
15---A slowdown in US lending or a ramp up in shadow banking?, sober look
16---The earnings fun-house mirror, IFR
US corporate earnings appear as if reflected in a distorting fun-house mirror: profits are huge but revenues strangely shrunken 
17--Legacy assets (toxic) clog credit system in EZ, IFR
The European Central Bank is becoming increasingly concerned that troubled loans made before the onset of the financial crisis are clogging the arteries of the region’s banking system, with bank officials worried that the problem could hinder the ECB’s efforts to boost lending.

Policymakers privately admit that they have become frustrated with the reluctance of national governments, regulators and banks to clean up balance sheets after years of delay. They believe many banks have cut back on lending in order to prop up their growing pools of non-performing loans.

According to KPMG, European banks have about €1.5trn of non-performing loans sitting on their
 balance sheets – about €600bn of that belonging to UK, Spanish and Irish banks alone. It said in a recent report that a “wave of deleveraging transactions is yet to materialise”, with banks choosing to roll over loans rather than sell and recognise losses.

18---IFR Comment: The ECB and fragmented expectations, IFR

19---Robert Shiller: Home Prices Will Remain Relatively Stagnant For Next 10 Years, Yahoo

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