Friday, May 17, 2013

Today's links

1---Failure to Delverage Causing Ongoing Financial Distress, DS News

U.S. households experienced higher levels of financial distress in the first quarter as they faced budget constraints and a drop in the savings rate, according to the CredAbility Consumer Distress Index.
“Despite the growth in jobs and an improved housing market, our index shows that the average U.S. household has seen little improvement in the past year and took a step back in 2013’s first quarter,” said Phil Baldwin, CEO for CredAbility. “The jump in Social Security taxes in January forced people to save and spend less compared to the previous quarter. With nearly 49 million people on food stamps and almost 12 million still unemployed, there are still a lot of challenges facing many families.

2---Rising & Falling Home Prices in the USA, Big Picture (great graphic)

3---Ratings agency flap: They're up to their old tricks again, naked capitalism

The real fireworks came from Jules Kroll, of Kroll Bond Rating Agency, and I’m really surprised this didn’t get more attention:
Jules Kroll, a former private investigator who started a bond-rating company after the financial crisis, said the largest credit-rating firms are again putting profits ahead of accuracy amid record demand for corporate debt.
“They’re selling themselves out just as they did before,” the chief executive officer of Kroll Bond Rating Agency Inc. said today at a U.S. Securities and Exchange Commission roundtable in Washington. “If you want to see the next tsunami, wait for the outcome in high yield and watch what washes up on shore.”
The article swings wildly away from Kroll’s comments almost as soon as it finishes the lede, so we don’t get much more information. However, a separate Bloomberg story makes pretty clear that we are all the way back to the golden age of ratings shopping.
Almost six years after the start of the worst financial crisis since the Great Depression, bond issuers are again exploiting credit ratings by seeking firms that will provide high grades on debt backed by assets from auto loans to office buildings considered inappropriate by rivals.
Fitch Ratings isn’t grading a deal linked to a Manhattan skyscraper after saying investors needed more protection. The securities won top grades from Moody’s Investors Service and Kroll Bond Rating Agency Inc. Blackstone Group LP’s Exeter Finance Corp. got top-tier ratings from Standard & Poor’s and DBRS Ltd. in the past 15 months on $629 million of bonds backed by car loans to people with bad credit histories, even as Moody’s and Fitch said they wouldn’t grant such rankings.
Borrowers are finding more options than ever to get the top ratings that many investors require after U.S. regulators doubled the number of companies sanctioned to assess securities to 10 since 2006.
In other words, the additional upstarts in the rating agency biz have just made it easier for issuers to play them off of one another. And this has just driven more garbage securities into the market, tied to commercial mortgages, subprime auto loans (which accounted for an amazing 43% of all car financing in the last quarter of 2012), or whatever else is laying around. Meanwhile, junk bonds are at record sales highs, and of course those are the bonds that have that rating profile; surely, with this running rampant there are plenty of other “junk bonds without portfolio” out there.

4---Ireland unemployment nightmare, Krugman, NYT

5---Krugman sees "no bubbles", NYT

Short-term interest rates are near zero because the economy is so depressed, and will stay that way for a long time. Long-term rates are low because people, rightly, expect short-term rates to stay low for a long time. What about stocks? Here’s profits versus the S&P 500:
Does this shout “bubble” to you?
Now, there are some real puzzles here. Why have profits been so strong in a weak economy?

6----Data Dump: Bad, bad, bad, economists view

7---The budget deficit has dropped by about $200 billion so far this year and maybe $30 billion of that deficit reduction is due to income growth., Trim Tabs

If the drop in the deficit is a trend that will continue due to underlying economic improvement, that means that the bulls no longer have to worry about an impending stock market crash when the Fed stops printing.

If only it were the true that we are in a sustainable recovery. The actual numbers tell a different story, a tale of three one off items, masking a continuing slow growth economy.....
The budget deficit has dropped by about $200 billion so far this year and maybe $30 billion of that deficit reduction is due to income growth.

Bottom line, no sign of sustainable growth that I can see.

8---The myth of liquidity and bubbles in financial markets, VOX

The first source of confusion is to that rates and returns are low just because central bank actions. As I have argued before, interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse.  When no one wants to invest or consume, interest rates are low. And they are unusually low this time because the patterns of investment and saving are driven by a  crisis that is very large compared to historical patterns. As a reminder, interest rates are low everywhere not just in countries where quantitative easing is taking place:...

The chart above (from the most recent IMF Asia Pacific Regional Outlook) shows that real rates are negative in all countries in the Asia-Pacific region...

"(Quantitative easing) has lowered interest rates on government bonds, forcing investors to search elsewhere for yield. But what has intensified the crunch is that, while central banks have been gobbling up bonds, the supply of assets has declined."

Why is the supply of assets declining? There must be a reason why companies or individuals do not borrow (or borrow less). Equilibrium is about demand and supply. Why is it that companies are not borrowing in what seems to be extremely favorable financial conditions? When asset prices are too high and the cost of capital is below its fundamental value we should observe an excessive amount of (real) investment. But we do not see it. Isn't it more natural to think about an equilibrium where relative high saving and low investment are resulting in low returns and yields across all assets? It is, but it is probably less interesting to write an article about it.

The final confusion is about how low interest rates (or equilibrium returns) should be reflected in asset prices. If markets suddenly learn that the fundamentals of the world economy are pushing the real rate on safe assets down, we expect asset prices to increase to adjust to this new equilibrium. What we should NOT expect is that stock market returns are higher going forward. In fact, stock prices should go up so that equilibrium returns are lower across all asset classes. And this is the biggest source of confusion in the commentary we often read about the stock market rally. The question is always: "How long will the rally last?" as opposed to "Are current stock prices supported by fundamentals?" Bubbles occur when markets think in terms of arrows and not in terms of levels. Some of the rally in the stock market now, as well as in 2003-2007, is associated with the fact that the market is learning that interest rates and equilibrium returns are going to be lower for longer than what they though (this is what some call the search for yield). Asset prices increase to reflect this new equilibrium. But this increase, this "rally", leads to a reading in terms of the high short-term returns that it has generated. And then investors extrapolate and assume that they have finally found a place where yields are high! This is a bubble. When asset prices are not consistent with fundamentals.

The current value of the stock market is consistent with a world where returns are likely to remain low (by historical standards) across all assets, and this is why stock prices are high. But this story is inconsistent with a world where stock prices keep going up and generate an excessive return in the future. If we keep looking at the stock market in terms of arrows we will end up once again in a very unstable world. And it will not be the liquidity of central banks who caused it but the lack of understanding about some basic principles of asset pricing.

9---Surprise! Inflation is too low almost everywhere on earth, WA Post

The leading central banks at this point are all unified on this: 2 percent is the amount of annual inflation they are aiming for. And they are all failing in that mission, and nearly all failing in the same direction (Britain is the notable exception; prices there rose 2.8 percent over the year that ended in March, the most recent data available)....

even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece.

The biggest conclusion to draw from all of this is that warnings that massive quantitative easing efforts would spark explosive inflation are turning out to be as wrongheaded as can be. In the United States and Japan, central banks now have open-ended policies of printing money to buy assets. But while the money seems to be finding its way into asset markets, such as for stocks and corporate debt, it isn’t being circulated so widely as to drive up prices for consumers.

This is the opposite of what the currency war alarmists have warned about. Instead of  creating rounds of vicious inflation while trying to expand the money supply in a race to the bottom, central banks are all trying to get inflation up to their target and coming up short. Deflation is looking like a greater risk that inflation, despite the extensive hand-wringing over the latter in the last several years. It’s a currency war in which almost every country is losing.

10---Fed’s Rosengren: Government Fiscal Policy Big Drag on Economy, WSJ

The economy would benefit much more from the Federal Reserve‘s aggressive monetary policy actions if not for the significant headwinds being created by government taxation and spending policies, a central bank official said Thursday.

The policy maker, Federal Reserve Bank of Boston President Eric Rosengren, said some of the economic weakness many see as a sign of ineffective monetary policy is, in fact, created by the headwinds arising from the government’s troubled financial situation. He believes fiscal policy is too austere for the current state of the economy, and said the drag created by the government indicates there may be room for the Fed to be even more aggressive in its efforts to spur better rates of growth and keep inflation at the official target of 2%, he said.

“Contractionary fiscal policy will in the near term place downward pressure on inflation and upward pressure on unemployment,” Mr. Rosengren said. He also said the Fed’s inability to keep price pressures near target and its struggle to lower the unemployment rate “can be attributed to the emergence of more fiscal restraint than might have been expected” based on the historical experience of recovery efforts.

11---Low Demand, low Inflation, Jared Bernstein

check out the tanking rate of inflation, as per the BLS this AM.  The index has actually declined over the past two months, and prices are up only 1.1% over the past year.  As the figure reveals, with the exception of February, yr-over-yr price growth in overall inflation has mostly been decelerating since late last year.

Falling energy costs drove the slide over the last few months–core inflation, which exlcudes volitile food and energy, has been declerating more slowly.  Also, gas prices have reversed course over the last week or so.

But the message here is that the underlying economy remains considerably weaker than you’d know about if you just tracked the stock market and corporate profits.  Low inflation at a time like this also slows down the deleverging process regarding household debt, since higher prices erode nominal debt burdens.  At any rate, I’m sure the Fed is watching and I suspect and hope that if this continues, they’ll push out their plans for unwinding their monetary stimulus.
Source: BLS

12----Economic Outlook: Fed Gov Raskin: Current federal fiscal policy is one headwind to the recovery that has intensified this year. , Fed Board of Govs

Unfortunately, current federal fiscal policy is one headwind to the recovery that has intensified this year. In fact, federal fiscal policy has been tightening since 2011, after having been quite expansionary during the recession and early in the recovery. More recently, actions by the Administration and the Congress to reduce the budget deficit have led to further tightening of federal fiscal policy.
As I already mentioned, both the tax legislation signed into law in January and the sharp spending cuts associated with sequestration will likely significantly hinder GDP growth this year. Indeed, the Congressional Budget Office has estimated that these changes in fiscal policy would reduce GDP growth by 1-1/2 percentage points this year relative to what we otherwise would have achieved.3 Looking further ahead, fiscal policy seems likely to remain restrictive at the federal level...

Households at the bottom of the income distribution have also had a harder time than others finding jobs during the recovery and their wages have continued to stagnate. In my view, the large and increasing amount of inequality in income and wealth, which has been an ongoing development for decades, may have exacerbated the crisis and I think more research is required to determine whether it may also pose a significant headwind to the recovery from the crisis for years to come. So, while I am hopeful that pressures will ease further as home prices continue to rebound, I also believe that some of the restraints on the recovery may be quite long-lasting

13---Commentary: Seven Little Words , DS News

When the Federal Open Market Committee completed its two-day meeting at the beginning of May, it issued the usual six-paragraph post-meeting statement.

The May statement included seven words—changed from the statement issued March 20—summarizing the Federal Reserve’s frustration as it has taken unprecedented efforts to shore up the economy by dropping interest rates to historic lows and pumping in billions of dollars.
The seven words suggest the FOMC has been going it alone, without the cooperation of the president or Congress.

After suggesting in its statement there have been improvements in consumer spending and the housing sector, the FOMC added: “fiscal policy has been restraining economic growth.”
“Fiscal policy,” simply put, is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy. It is the sister strategy to monetary policy that is used to influence the nation’s money supply. Taken together, the two policies are used to direct a country’s economic goals.

Monetary policy is set by the Fed while fiscal policy is the result of actions—or inactions—by the executive and legislative branches.

The numbers support the argument the fiscal policy has been holding back economic growth.
Since the recession officially ended in mid-2009, the nation’s economy as measured by gross domestic product, has grown by an average of about 2.14 percent, hardly robust, but that doesn’t tell the entire story. Growth rates for quarters in which federal spending increased are significantly higher than for quarters in which federal spending fell.

Federal spending increased in seven of the 15 quarters since the point at which the National Bureau of Economic Research said the recession ended. In those seven quarters, growth averaged 2.6 percent—below the “trend” of 3.0 percent, but almost half again as fast as the 1.76 percent growth rate in the eight quarters in which federal spending declined.

14---Sharp increase in US jobless benefit claims, wsws

A string of negative economic figures released this week point to continuing stagnation in the US in the midst of a worsening slump internationally. The US Labor Department reported Thursday that new claims for unemployment benefits jumped by the highest amount in six months. The same day, the retail giant Walmart said its sales tumbled unexpectedly in the first quarter of the year.

Signs of growing economic and social distress in the US coincide with an accelerating downturn in Europe and slowing growth in China. On Wednesday, the European Union’s statistics agency said that the economy of the euro area contracted for the sixth consecutive quarter, after having posted record unemployment rates earlier in the month.....

There are indications, however, that the effectiveness of these vast and unprecedented money-printing operations in staving off deflation is reaching its limit. The Labor Department said Thursday that consumer prices in the United States fell by 0.4 percent in May, the sharpest fall since late 2008. This marked the second consecutive month of falling prices, after a 0.2 percent decline in April.

Over the past twelve months, prices have grown by only 1.1 percent, about half the target rate set by the Federal Reserve. “Further falls in US core inflation in the coming months may make some Fed officials concerned about very low inflation, or even deflation,” Paul Dales, an economist with Capital Economics, told Reuters.

Nearly five years after the financial crash of September 2008, there is no recovery in sight. Depression-like conditions in the real economy combined with an unsustainable stock market bubble demonstrate that the crisis is not a temporary downturn that will pass and give way to pre-crisis conditions. Rather, it is a breakdown of the world capitalist system, with no prospect within the framework of that system of relief for the broad masses of working people.

No government anywhere in the world, whether of the official “left” or right, has any policies to offer to address mass unemployment, falling living standards and growing poverty. On the contrary, they all pursue the bankers’ agenda of deeper and more brutal cuts.

15---The AP spying scandal and the crisis of American democracy, wsws

Writing in 1916, Lenin noted, “Imperialism is the epoch of finance capital and of monopolies, which introduce everywhere the striving for domination, not for freedom. Whatever the political system, the result of these tendencies is everywhere reaction and an extreme intensification of antagonisms in this field.”....The American corporate and financial elite, pursuing a deeply unpopular policy at home and abroad, stands in irreconcilable conflict with democratic forms of rule.

Thus, for Obama—who, according to his official curriculum vitae, taught constitutional law at the University of Chicago—freedom of the press and speech merely “help our democracy function.” With these words, Obama argued implicitly that freedom of the press and speech are somehow external to democracy, and that there can be a democracy without these rights! They may be useful as a matter of procedure, assisting “democracy.” But “democracy,” without these rights, is a meaningless phrase. When constitutional rights conflict with the operations conducted by the Pentagon and CIA, then, according to Obama, government can and should violate them.

This is the antithesis of democracy. Obama was also asked at the press conference what he felt about comparisons between the scandals plaguing the administration and those that occurred under Nixon. The president brushed aside the question, saying the reporter could “draw your own conclusions.” In fact, Obama has carried out operations that go far beyond the crimes and misdemeanors for which Nixon was forced out of office in 1974.

An urgent warning is necessary: The assault on democratic rights is far more advanced than the American people realize. Every basic democratic right included in the Bill of Rights—freedom of the press, freedom of association, free speech, the protection against warrantless searches and seizures, due process, the right to a trial by jury and public counsel, the ban on torture—has been systematically undermined.

The AP spying scandal is entirely in line with the policies and practice of the Obama administration, the most anti-democratic in US history. Obama has prosecuted six current or former government officials for leaking classified information, double the number prosecuted by all previous presidents combined.

The administration has declared the right to assassinate anyone, anywhere, including US citizens, without due process. Earlier this year, Attorney General Eric Holder declared that the president has the right to order the killing of a US citizen within the United States....

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