Saturday, May 25, 2013

Today's links

1---Abenomics 101 - The 15 Most Frequently Asked Questions, (Barclays) zero hedge

Via Barclays:

Q1: Is the BoJ’s 2% price stability target achievable?
A1: It will be difficult through monetary easing alone

Q2: Where might a surprise appear in inflation trends?A2: Inflation tends to jump unexpectedly when a combination of monetary easing and significant fiscal expansion coincides with some sort of supply shock.

Q3: What transmission channel is the BoJ envisioning for achieving its inflation target?
A3: Since the interest rate and credit channels are unlikely to recover anytime soon, the BoJ will have to depend largely on more accommodative financial conditions via higher share prices and a weaker yen.

Q4: What other monetary policy actions are expected?
A4: We think the BoJ will likely be compelled to ease again in 2H FY13 (most likely in October), consisting mainly of increased purchasing of ETFs as the most feasible risk asset.

Q5: How do we describe the government’s fiscal policy stance for 2013-14?A5: Assuming no additional fiscal measures, fiscal policy will shift from a markedly expansionary stance relative to other developed nations in 2013 to an abrupt contractionary stance next year.

Q8: How has the government’s growth strategy progressed?
A8: There has been no notable progress yet. Momentum for growth initiatives may pick up depending on the Upper House election results, but key measures such as a corporate tax cut and easing of job dismissal regulations could take considerable time.

Q9: Are Japanese stocks overvalued?
A9: Japanese stocks are superficially rich as measured by valuations such as P/E. However, we believe share prices have further upside as long as excess liquidity continues to curb the ERP.

Q10: What will be necessary to ensure a more sustained rise in share prices?
A10: A more sustained rise in the liquidity-driven stock market will require a return of surplus funds to shareholders when real interest rates fall into negative territory, a cut in corporate tax rates, and higher financial leverage...

Q12: Will QQE trigger significant portfolio rebalancing by financial institutions?A12: Banks will reduce their JGB holdings substantially in 2013-14. Still, their considerably higher risk tolerance levels compared with the VaR shock of 2003 should act as a buffer for JGB markets

2---10 Cities Where Housing Bubbles May Be Forming, the exchange

3---5 Most Horrifying Things About Monsanto, alternet

Monsanto began as a chemical company in 1901 and was responsible for some of the most damaging toxins in US history, like polychlorinated biphenyls (PCB’s), and dioxin. Consumer advocacy group Food and Water Watch (FWW) released a  report on APril 3 detailing Monsanto’s role in chemical disasters, Agent Orange, and the first genetically modified plant cell. The report shows that the “feed-the-world” agricultural and life sciences company Monsanto markets itself as today is only a recent development. The majority of Monsanto’s history is involved with heavy industrial chemical production, including the supply of Agent Orange to the US for Vietnam operations from 1962-'71.

4---Veteran fears 'beginning of the end' for Japan as bond market buckles, Telegraph

Global markets face a witches’ brew of new risks as Japan’s monetary adventure wobbles, China slows further and the US Fed prepares to shut the spigot of dollar liquidity...

Richard Koo from Nomura, an expert on Japan’s Lost Decade, said the sell-off in recent days has shown that the BoJ may not be able to hold down yields “no matter how many bonds it buys”. This could lead to a “loss of faith in the Japanese government” and the “beginning of the end” for its economy, if handled badly. ...

China’s leaders are walking a fine line, reluctant to overdo stimulus for fear that it will leak into the property bubble and perpetuate a deformed structure. Fitch says the economic return on lending has collapsed over the past four years from a ratio of 0.8 to 0.35, a sign of credit exhaustion.

Morgan Stanley has stopped relying on Chinese growth data to assess growth, using proxies such as Korean exports and Taiwan bonds.

“China is slowing hard. We are concerned that leverage is higher than reported, and banks have a huge maturity mismatch,” said Hans Redeker, the bank’s currency chief.

Global equities have risen 27pc since July, lifted first by the Fed’s “QE3”, then the move by Mario Draghi at the European Central Bank to back-stop Italy and Spain, and, finally, by the reflation blitz of Japan’s premier, Shinzo Abe.

Mr Redeker said this phase is over as the Fed shifts gears, with the latest Fed minutes showing that several rate-setters want to wind down bond purchases as soon as June. Chairman Ben Bernanke has given mixed signals, but it is clear that the Fed’s centre of gravity is shifting.

“The Fed is moving to neutral. That is why stocks are getting hammered. It is toxic for anybody around the world who relies on dollar funding, and that means emerging markets,” said Mr Redeker.

Marc Ostwald of Monument Securities said Ben Bernanke had “signed the death warrant for markets”, while Julia Coronado from BNP Paribas said the Fed’s minutes were “simply astounding”, creating total confusion over when it will taper off QE. “What may be in store over the next few months is a showdown between the markets and the Fed,” she said.

The mere promise of “Abenomics” has lifted Japanese equities by 70pc since November, with foreign hedge funds accounting for a third of all net long positions, but the dark side is becoming clear. The BoJ is purchasing enough bonds to cover 70pc of Japan’s budget deficit this year under the new governor, Haruhiko Kuroda. This is $70bn a month, almost as much as the Fed in an economy one third the size. ...

Surging yields have already caused Toyota to shelve a bond issue. The great fear is that a bond rout will set off a banking crisis since Japanese lenders hold JGBs equal to 80pc of GDP. The International Monetary Fund said a 100 point rise in yields would erode the Tier-1 capital of regional banks by 20pc.

“At some point, the JGB market is going to crash. The crucial question is whether they can prevent the banking system from being hurt? It will be tricky, and I am not sure the BoJ has thought this through,” said Prof Werner.

Mr Koo said the BoJ has undermined the “market structure” that has kept Japan’s bond market stable for 20 years, and invited an attack by short sellers....

Japan has taken a huge gamble, but Mr Abe says the status quo is not an option either. With public debt to reach 245pc of GDP this year, the country must restore growth in nominal GDP to head off a debt compound spiral. That Holy Grail is at last in sight

5---Challenging Monsanto: 200,000 in 40 countries expected to turn up as campaign against GMO kicks off, RT

6---Millions of Above-Water Borrowers Lack Enough Equity to Move, DS News

7--Survey: Distressed Sales Fall, Investors Increase Short Sale Activity, DS News

As expected, investor activity also slowed during the same time period. According to the survey, 21.6 percent of purchases were made by investors for the month, which is the lowest level recorded for investors since November.
Despite the overall decrease in distressed sales and investor activity, the survey reported short sale activity has gone up for investors, with investor short sale purchases up to 35.3 percent, an increase from 31.8 percent in March and 30.5 percent in April 2012.

8---Record High New-Home Prices Have Room to Grow , Realty Check

The concern now is that home prices are rising too fast—faster than incomes and job growth. Realtors worry that, at some point, buyers will be priced out.
"These price increases are not healthy," said Lawrence Yun, chief economist for the National Association of Realtors. "We need to moderate price growth and get more supply."
But Lennar's Miller disagrees:

"I think if you look at affordability right now, with interest rates where they are, and even if they go up a bit, we're in a very comfortable place. There's a lot of room for prices to continue to move up."
Supplies of new and existing homes are at levels not seen since the frenzy of the last housing boom. The phenomenon is national and not just relegated to the former boom markets. April listings were down 41 percent from a year ago in Los Angeles, down 24 percent in Houston, down 27 percent in Washington, DC and down 29 percent in Minneapolis. While the stock of newly built homes on the market rose to an 18-month high, builders are still facing land and labor shortages, which will keep starts lower than they could or should be based on demand.
"It has the look of a runaway housing boom again," said Jane Fairweather, a Realtor in Maryland, who added that looks can be deceiving. "What you have is very inexpensive money and you have very few houses for sale. As soon as interest rates go up, I think you'll see a lot of people back off."
Interest rates have been moving steadily higher. After Wednesday's speech by Federal Reserve Chairman Ben Bernanke, rates took another jump of 0.375 percentage points.

9---Banks stop paying property taxes, Dr Housing Bubble

“STOCKTON (CBS13) — Some of the same banks that foreclosed on homes up and down the valley are now skipping out on paying their property taxes, a Call Kurtis investigation has uncovered.

While local counties lay off workers — unable to pay for the services they once could ­— Call Kurtis found more than $3 million dollars in back taxes and penalties on properties owned by the banks, according to tax collectors in six Northern California counties.”

It is definitely hard to predict where things will go when so many programs are taking us into uncharted territory.  Just look at this chart showing all the intervention into the mortgage market:
Millions of various types of modifications have occurred and many have lost their homes.

10--Europe’s Lost Keynesians , project syndicate

11--Austerity illusions, project syndicate

Austerity’s advocates rely on one – and only one – argument: If fiscal contraction is part of a credible “consolidation” program aimed at permanently reducing the share of government in GDP, business expectations will be so encouraged by the prospect of lower taxes and higher profits that the resulting economic expansion will more than offset the contraction in demand caused by cuts in public spending. The economist Paul Krugman calls this the “confidence fairy.”
The pro-austerity argument is pure assertion, but it is meant to be a testable assertion, so econometricians have been busy trying to prove that the less the government spends, the faster the economy will grow. Indeed, just a year or two ago, “expansionary fiscal contraction” was all the rage, and a massive research effort went into proving its existence...
An International Monetary Fund paper in 2012 brought Alesina’s hour of glory to an end. Going through the same material as Alesina had, its authors pointed out that “while it is plausible to conjecture that confidence effects have been at play in our sample of consolidations, during downturns they do not seem to have ever been strong enough to make the consolidations expansionary.” Fiscal contraction is contractionary, period.
An even more spectacular example of a statistical error and sleight of hand is the widely cited claim of Harvard economists Carmen Reinhart and Kenneth Rogoff that countries’ growth slows sharply if their debt/GDP ratio exceeds 90%. This finding reflected the massive overweighting of one country in their sample, and there was the same confusion between correlation and causation seen in Alesina’s work: high debt levels may cause a lack of growth, or a lack of growth may cause high debt levels.
On this foundation of zombie economics and slipshod research rests the case for austerity. In fact, the austerity boosters in the UK and Europe frequently cited the Alesina and Reinhart/Rogoff findings.
A sequester is a compulsory budget cut, the kind of idea only politicians could come up with. With the country deeply in debt and President Barack Obama and the Republicans unable to agree on how to make long-term budgetary cuts, the two factions cobbled together a ticking time bomb of austerity, set to go off in 2013. The idea was that these cuts would be so absurd that one side or the other would have to back off and yield ground in order to prevent the bomb from going off.
That's what the president thought would happen. That's what the Republicans thought would happen. It didn't.

Cutting with Wanton Abandon
The grace period expired on March 1 with no agreement reached, and since then the government has been cutting programs at random, lawn-mower style -- $85 billion (€66 billion) in spending cuts have to be made by the end of September, an amount roughly equal to the entire federal budget of Austria. In other words, within the space of half a year, the US needs to slash the equivalent of Austria from its budget. Hundreds of thousands of jobs are at stake. And if politicians in Washington still haven't reached an agreement by that point, the cuts will continue. The country is in danger of existing in a perpetual sequester, with another $1.2 trillion in budget reductions needed by 2021.

14--Chart of the Day: Sequester Cuts Are Starting to Bite, Mother Jones

15--Self defeating austerity, real time economic issues

The relevant question is how much stronger would US economic growth be this year and in future years if the Congress and the administration had delayed tax hikes and spending cuts another year or more. Jackie Calmes and Jonathan Weisman of the New York Times report that private-sector economists estimate that growth would be almost 2 percentage points higher. A growth rate of around 4 percent is consistent with historical norms for recovery from a deep recession; the current rate of around 2 percent is abnormally low given the large excess capacity in the economy.

At least part of this extra growth would have taken the form of business investment that would have supported durable gains in future economic activity. Even more important, Calmes and Weisman report that unemployment would be about 1 percentage point lower. Many economists believe that allowing people to remain out of work for long periods of time permanently reduces their skills and attachment to the labor force and thus reduces economic output for decades.

The case that austerity is self-defeating hinges on the long-lasting reduction in tax revenues associated with the lower economic growth caused by austerity. In the current unusual circumstances, it is possible that this year’s austerity will reduce future economic activity by so much that the decline in future tax revenues will ultimately outweigh any near-term reduction in our national debt, leaving national debt even larger relative to the US economy than if the austerity were delayed to a period of lower unemployment and higher interest rates.

We cannot be sure whether the conditions for austerity to be self-defeating are fully met at present, but it is clear that this year’s austerity, and the associated improvement in the US fiscal position, have been achieved only at an enormous price in terms of long-term unemployment and reduced economic growth. And even if this year’s austerity does not make our long-run debt burden heavier, it surely does not reduce it by enough to justify the hardship it has imposed on millions of Americans.

16---Paul Krugman: Japan the Model, economists view
Critical discussion on abenomics

17---Is Japan's star rising again, Morningstar

18---We need more fiscal (not monetary) stimulus, naked capitalism

   Thoma’s suggestions contain nothing novel, and I suspect Thoma is fully aware that what our economy really needs is a fiscal expansion from the federal government. But perhaps these tired calls for additional central bank string-pushing deserve some sympathy. Many have concluded that the attempt to get Congress and the White House to act to increase government spending are futile, since the elected branches of our government seem unwilling to do what needs to be done out of some combination of incompetence, iniquity, ignorance, ideology and insanity....

I really think it is important here for pundits and informed members of the public not to lose hope about the possibility of fiscal expansion. We have had four years of confusion and time-wasting debate about various misguided austerity theories, but those theories are now in the process of crashing and burning. We have yet to see what can happen if economists, economics bloggers and the public begin to mobilize a call for intense political pressure on Washington (and other governments) to reverse the austerity push and expand spending.
The US government is an extremely large public enterprise, and a tremendously important part of our national economy. It produces a great number of public goods and services and employs millions of people, and it also helps fund state and local governments. It is a consumer, investor and employer. But throughout the Obama administration, and especially following the election of the reactionary Republican Congress in 2010, we have seen a massive decrease in government consumption and gross investment, and unprecedented reductions in government employment. Public enterprise is collapsing at a time when we need it most, both to help stabilize the economy and to drive the next stage of national development and progress. The best way for government to stimulate demand is to expand its role as a demander. The largest potential customer in the known universe – the United States government – has to step up its purchases, step up its hiring and step up its leadership role in the economy.

Comments section---Bruce Wilder

I don’t think it is unfair to Mark Thoma. He’s a perfect example of the ineffective liberal economist, the useful (to the plutocracy) idiot. Why does Kervick have to “suspect” that Thoma thinks fiscal stimulus spending is required? Why is Thoma writing in Pete Peterson’s Fiscal Times, a news syndicate dedicated to destroying Social Security and promoting . . . (wait for it) austerity?
Liberals are not making a main case. Kervick clearly knows that the main case is fiscal policy: increased spending and public investment. But, what’s his argument? Geeky points about the role of bank reserves?
The problem with Mark Thoma’s argument is that it is crap: It is not good public policy to increase the pressure on a dysfunctional banking system to make loans. Maybe, someone should wonder why Bernanke is funneling free money to a dysfunctional banking system, with interest on excess reserves, but neither Kervick nor Thoma focus attention on that small scandal, with their remarks.
It is not good public policy to let public goods investment to languish, and an already decrepit infrastructure deteriorate. It is not good public policy to ignore peak oil in favor of fracking fever. It is not good policy to ignore global warming.
Liberals masturbating over geeky slogans and jargon they don’t understand and, about MMT or targeting nGDP, is self-defeating. Krugman has a measure of integrity; he’s a decent person and very smart. And, he’s a conventional neoliberal, not the messiah. His arguments are not persuading anyone in power, and would not do much good, even if they did persuade someone, because his policy preferences are neoliberal!
Why are Krugman and Thoma supporters of Bernanke? What does that tell you?
There are two useful things a liberal or social democrat with some genuine expertise in economics could do, that are not being done nearly enough.
One is to make the impossible-dream case straight-on, and keep on making it, so that people everywhere understand just how destructive and evil the politicians in Washington are. Making highly technical arguments for technical variations on otherwise bad policy is not going to do much good in the short-run and will be massively destructive in the long-run, because the crisis will come, and no one will know what to do. Again.

I want Bernanke to go to Congress, and with all the magisterial authority he can muster as Fed Chief and a Princeton economist with conservative Republican credentials, to ask for a massive program of fiscal stimulus spending. To say, “that is the technocratic imperative, the (nonpartisan) right thing to do in our circumstances”.
I want Bernanke, as chief regulator of the banking system, to break up the TBTF universal banks, and, with or without Congress, or the Treasury’s Comptroller of the Currency, to push banking in the direction of greater integrity and less predation.
Realistically, he cannot do the latter, without the shelter of massive fiscal spending, because the financial sector would shrink as a percentage of the economy, disemploying a fair number of people. And, a lot of debt would have to be written off, and organizations dismantled. But, the latter he can do, and should do. So, he needs Congress to know its duty, so he should tell them.
I think Quantitative Easing is, in the long-run, insanely bad policy. Free money for usurers is no way to run an economy

19--Sequester cuts shut down four government agencies for one day, wsws

20--Government of, by, and for the banks, wsws

The New York Times reported Friday that, according to emails the newspaper examined, 70 out of the bill’s 85 lines were based on the recommendations of Citigroup, one of the largest US banks. Two paragraphs were inserted nearly word-for-word from an email written to lawmakers by the bank.
The bill restricts provisions in the Dodd–Frank Wall Street Reform and Consumer Protection Act, signed on July 21, 2010. This law was largely a publicity measure by the Obama administration, made to appear as a crackdown on financial speculation while in reality allowing the banks to go on with business as usual.
Instead of creating regulations, the Dodd-Frank bill merely mandated that a series of regulations be implemented at some point in the future by regulators. Nearly three years after the bill’s passage, the vast majority of these regulations have not been implemented

21--Abe’s Resurgent Japan Hurt by Lack of Business Spending, Bloomberg





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