Tuesday, June 18, 2013

Today's links


1---Abenomics should take aim at structural reform, financial news

There is no evidence that inflation will help consumption. Growth requires higher household incomes or lower savings. Inflation tends to push up prices faster than wages and thus depresses household real incomes. Savings rates have been falling steadily as inflation has turned to deflation. A strong stock market may be giving a boost to consumption, but it is a mistake to confuse this with the impact of inflation.

It is also argued that inflation will reduce the burden of the national debt, by increasing the rate of growth of nominal GDP. This would be true if we were looking at hyper-inflation. However, as the bond market’s response shows, moderate inflation may well make matters worse, not better, by pushing up bond yields’ rates even faster than inflation.

As Japan’s gross national debt is 214% of its GDP, rising interest costs can readily outpace any rise in nominal GDP. If the market starts to fear inflation, then bond prices will fall and, as Japanese banks are heavily invested in government bonds, this threatens to cause another financial crisis.

Worries about inflation causing a bond market crisis are made worse by the new fiscal stimulus. In 2012 Japan is estimated by the Organisation for Economic Co-operation and Development to have run a fiscal deficit of 9.9% of GDP. While this needs to fall, this must be done slowly and to have the decline matched by increased demand elsewhere, so that the tightening of fiscal policy does not push the economy into recession.
In theory, monetary stimulus should also give Abe real firepower in creating investment-led growth. But Japan’s chronic deflation suggests that decades of debt-fueled investment and loose money haven’t been productive. One key reason, as ING’s Tanweer Akram points out, is that credit hasn’t grown along with the expanding monetary base, despite the fact that Japan is largely out of its deleveraging cycle. While bank lending has shown signs of pick-up, the sluggish economy means there’s little demand for credit from small- and medium-sized businesses. Abe’s recent plan to set aside ¥83 billion in funding for these struggling businesses bodes well for generating productive investment. But given anemic global and domestic demand, some corporations say there’s little worth investing in, even with rates so low....
So if both foreign trade and investment are unsure bets, then what about the third traditional pillar for boosting growth: consumption? That looks similarly bleak. Private consumption has been dropping year-on-year for the last two quarters (pdf). This is due to deflation, but also because wages growth is largely flat.

All this suggests that there’s little demand for the excess money, from either businesses or consumers. As for government-led spending, Abe’s wallop-packing stimulus should spur demand through the first quarter of 2013, but whether it can sustain growth will depend on how much of the investment flows into wasteful projects and overcapacity-saddled sectors.
( From CFR:) Abe also ordered a hefty 10.3 trillion yen short-term stimulus package, approved by the cabinet in January 2013, which will go toward infrastructure projects with a focus on building bridges, tunnels, and earthquake-resistant roadshttp://www.cfr.org/japan/abenomics-japanese-economy/p30383
Six months into Abe’s shock-therapy experiment of massive monetary and fiscal stimulus as well as sweeping structural reforms, Japan faces record trade deficits, extreme volatility in the bond market and rising energy and food costs as a weaker yen makes imports more expensive. The capital-spending and household-wage increases that are needed to halt deflation have yet to materialize.

Punters could ignore all this data when Japanese stocks were locked into an upward trajectory. Abe’s hope was that the equity boom would spark a positive domino effect. Optimistic companies would hire more and fatten paychecks. Households would open their newly flush wallets. Increased output would swell government coffers and help pay down Japan’s massive debt. Buoyant corporate profits would draw ever more investors into markets and keep the whole virtuous cycle going until gross domestic product soared.

Pulling a Koizumi

In effect, Abe hoped to pull a Koizumi on the political establishment. Former Prime Minister Junichiro Koizumi was able to outmaneuver Japan’s parliament and bureaucracy, privatize the vast postal-savings system, and cut public-works spending by appealing directly to the public and investors. That’s why Abenomics began with the Bank of Japan doubling the monetary base, bolstering consumer confidence.

Already, though, the strategy is beginning to fray, as evidenced by recent stock swoons. Huge gains in the Nikkei 225 Stock Average and broader Topix Index bought Abe time to articulate how he planned to deregulate the economy, liberalize trade, cut corporate-tax rates and encourage entrepreneurship. He has failed to do so, and his lack of a clear blueprint is now eroding any goodwill he had earned in the markets.

4---Abe's zero-sum game, Christian scientist monitor

The popularity of "Abenomics" among non-Japanese pro-inflationists is puzzling for many reasons. One is, as I've noted before, the fact that Japan with its 4% unemployment rate was already very close to full employment, so even using Keynesian models there is little it can do to boost growth....

But Abenomics will to a large extent also cause a lot of 2), which is to say, it will have a deflationary effect. Why? Well, for three reasons. One is that a weaker yen will reduce export earnings from Japan in other countries, reducing nominal income. Another is that Japanese demand for oil and other internationally traded commodities will fall as the yen prices of these commodities have soared, and that means that the prices of these commodities in terms of for example dollars and euros will drop.

And a third reason is that a weaker yen will lower prices of imports from Japan. Between 2006 and 2012, prices of Japanese imports in the U.S. rose by between 1 and 2 % per year, but in the latest year, they have dropped by 1.4%. This still implies that they have dramatically increased their margins, but as time passes competitive pressure will likely lower those margins, leading to continued declines in import prices from Japan.

In other words, non-Japanese pro-inflationists are cheering for a policy that has a deflationary effect on their economies!

Presumably, their response is that they hope other central banks will mimick the Bank of Japan's policies. But with interest rates near zero, and with much of the effect of Abenomics coming from the dramatic drop in the yen and with exchange rates being a zero sum game (one currency area's depreciation is another's appreciation), the scope for that is limited

5---The dark side of Abenomics, Japan Times

The Bank of Japan led by Gov. Haruhiko Kuroda had hoped that its massive monetary easing would lead to a fall of long-term interest rates. On the contrary, interest rates have gone up. The resultant effect is an upward trend in interest rates for housing loans and loans for businesses. Mr. Kuroda apparently failed to accurately predict the movement in the national bond market.

The government and the BOJ must pay serious attention to the real economic conditions people are facing. The nation’s 10 major power companies and four major city gas companies will raise their rates in July for the fourth straight month because the prices of imported liquefied natural gas and crude oil have risen. Prices of food items such as ham and sausage are also rising.

There is no prospect that workers’ wages will rise. The Abe administration’s policy to achieve a 2 percent inflation in two years is likely to result in price rises without wage increases, and could even create economic bubbles.

Mr. Abe and other government officials should be aware that their economic policy could wreak financial havoc on many households, which in turn would stall domestic recovery. They should take steps that will create jobs and boost wages

6--Europe in Depression, NYT

7---Fiscal Headwinds: Is the Other Shoe About to Drop?, FRBSF (The worst is yet to come)

Brian Lucking and Daniel Wilson
Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries....

Federal fiscal policy has been a modest headwind to economic growth so far during the recovery. This is typical for recovery periods and in line with the historical relationship between the business cycle and fiscal policy. However, CBO projections and our estimate based on the countercyclical history of fiscal policy suggest that federal budget trends will weigh on growth much more severely over the next three years. The federal deficit is projected to decline faster than normal over the next three years, largely because tax revenue is projected to rise faster than usual. Given reasonable assumptions regarding the economic multiplier on government spending and taxes, the rapid decline in the federal deficit implies a drag on real GDP growth about 1 percentage point per year larger than the normal drag from fiscal policy during recoveries.

8---Second-quarter profit warnings target record, marketwatch

Companies will close their books on the second quarter in two weeks, and so far, the number of S&P 500 companies that have issued earnings guidance below consensus analyst estimates is running higher than normal.

As of Friday, Thomson Reuters said it’s counted 96 negative EPS announcements vs. 14 positive announcements, putting the running negative-to-positive ratio at 6.9. That would be the most negative on record, if it persists into the start of earnings season.

FactSet figures are somewhat less negative. but still above average. FactSet puts the figure at 80%, or 86 of the 107 S&P 500 components that have provided second-quarter outlooks. The 5-year average is 62%, according to FactSet, which collects the financial projections of Wall Street analysts.

By sector, materials, industrials and information technology  are leading the way in terms of warnings on a percentage basis. Those companies range from DuPont /quotes/zigman/225806 /quotes/nls/dd DD +0.12% to FedEx /quotes/zigman/254280 /quotes/nls/fdx FDX +1.30% to Autodesk /quotes/zigman/68719 /quotes/nls/adsk ADSK -0.59% , said John Butters, senior earnings analyst at FactSet.

No surprise, Wall Street has reduced its earnings growth expectations for the second quarter. The projected earnings growth rate has fallen to year-over-year growth of 1.1%, down from 4.3% as of March 31.
Judging by the 4% gain in the U.S. stock market since the second quarter began, investors seem to be pinning their hopes on rebounding earnings growth in the July through December period.

9---Key Measures show low and falling inflation in May , cal risk

10---Bernanke: mission accomplished, Economist

11---Next bust creeps a little closer, MSN Money

12---”Truth is coming and it cannot be stopped”, Edward Snowden, wsws

In comments posted Monday on the web site of the British Guardian newspaper, Snowden maintained that he is not deterred by the political establishment’s slanderous campaign or the fact that he could be targeted for assassination by US intelligence agencies.

Snowden issued a stinging response to accusations from former Vice President Dick Cheney and others that he is a “traitor.” He said, “[I]t’s important to bear in mind that I’m being called a traitor by men like former Vice President Dick Cheney. This is a man who gave us the warrantless wiretapping scheme as a kind of atrocity warm-up on the way to deceitfully engineering a conflict that has killed over 4,400 and maimed nearly 32,000 Americans, as well as leaving over 100,000 Iraqis dead.

“Being called a traitor by Dick Cheney is the highest honor you can give an American, and the more panicked talk we hear from people like him, [Democratic Senator Dianne] Feinstein, and [Republican Representative Peter] King, the better off we all are. If they had taught a class on how to be the kind of citizen Dick Cheney worries about, I would have finished high school.”

Denouncing the role of the press, Snowden noted that the “mainstream media now seems far more interested in what I said when I was 17 or what my girlfriend looks like rather than, say, the largest program of suspicionless surveillance in human history.”

Asked whether analysts can listen to the content of calls without a warrant, Snowden refuted the lying denials of administration and intelligence officials and indicated that he has proof to the contrary......

Snowden sought to refute government attempts to downplay the profound illegality of the spying operation, as exemplified by President Obama’s interview yesterday with the Public Broadcasting System’s Charlie Rose. Obama claimed once again that if US intelligence agencies want to wiretap a phone, they have to “go to the FISA court with probable cause and ask for a warrant.” He made the absurd claim that the program as a whole “is transparent” because “we set up the FISA court”—a secret court that last year approved every surveillance request submitted by the government.

Obama’s dishonest, meandering words cannot diminish the significance of Snowden’s courageous and powerful statements.

The spying operations revealed by Snowden are global in scope, with hundreds of millions of people swept up in an international dragnet that involves the complicity of other intelligence agencies. As Snowden pointed out, the claim that the programs target only non-US persons—a false assertion—is “a distraction from the power and danger of this system.” He added, “Suspicionless surveillance does not become okay simply because it’s only victimizing 95 percent of the world instead of 100 percent. Our founders did not write, ‘We hold these truths to be self-evident, that all US persons are created equal.’”

Snowden wrote that with the campaign of denunciations against him, the US government has “immediately and predictably destroyed any possibility of a fair trial at home, openly declaring me guilty of treason, and that the disclosure of secret, criminal and even unconstitutional acts is an unforgivable crime.”
Responding to claims that the leaks had undermined the “war on terror,” Snowden replied: “Bathtub falls and police officers kill more Americans than terrorism…yet we’ve been asked to sacrifice our most sacred rights for fear of falling victim to it.”...

He continued: “Many Americans felt similarly. Unfortunately, shortly after assuming power, he closed the door on investigating systemic violations of law, deepened and expanded several abusive programs, and refused to spend the political capital to end the kind of human rights violations like we see in Guantanamo, where men still sit without charge.”

The hysterical lies of the ruling class over the past two weeks reflect its growing nervousness over the prospect of an entire generation of young people forming similar political conclusions.
Edward Snowden has dispensed more truth in a few paragraphs than the corporate media has in decades of twenty-four hour news cycles. His actions and words serve as a powerful refutation of the geyser of mud, endless lies and vacuity of the entire political and media apparatus.

13---China's economy: new warning signs, sober look
China's consumer confidence declined sharply in May to 99.0 from 103.7 in April. Of course household spending in China represents only around 35% of the GDP (according to the World Bank), while the US consumer is over 70%. Nevertheless taken together with China's manufacturing PMI, we may be seeing signs of renewed economic weakness.

Source: National Bureau of Statistics of China, Markit

China's stock markets also sold off in the last few weeks (now at a 6-month low). These are all indicators of potentially slower growth ahead. And slower growth poses a number of risks that have been masked by the nation's booming economy. One of the key risks of course is the size and health of the shadow banking system. Fitch in particular has been ringing some alarm bells with respect to China's private credit growth.
Forbes: - With a shadow banking system that is becoming increasingly prominent, the rise of bundling of assets and securitization, and an acceleration of policy tightening, over-indebted local governments and institutions will feel the pain of a rising cost of capital, prompting Fitch Ratings to raise red flags about the future growth prospects of the Chinese economy. At Nomura, where they noted that liquidity tightening is dangerous in a highly leveraged economy, they increased their probability that a risk scenario could push GDP growth below 7% this year, threatening social stability.
A major problem is that much of this incredible surge in credit has been channeled through the shadow banking sector, which is very closely connected to the banks. Total non-loan credit hit $5.6 trillion in 2012, with nearly $2 trillion of that credit extended by opaque non-bank financial institutions, Fitch’s research shows. Furthermore, more than $2 trillion were connected to informal securitization of bank assets in so-called wealth management products (WMP).
14---Margin debt in U.S. stock markets are at record highs and could warn of a stock market crash, wall street selector

15---Home Prices, Sales Spike in 19 Major Metros in May, DS News

According to data from Redfin, home prices in San Francisco experienced the biggest annual increase at 34.7 percent, while Baltimore saw the smallest increase—3.2 percent.
At the same time, home sales climbed 15.8 percent from April to May, reaching their highest level since January 2010, which is when Redfin began keeping track.
Year-over-year, home sales shot up by 13.7 percent. Out of the 19 markets followed, five saw sales decline compared to a year ago.

16---Wall Street is ramping up financing to private-equity firms buying homes to rent, helping them accelerate purchases as competition increases and prices jump, Bloomberg

(note: Banks lend banks cheap money to buy bank homes. Hmmmm)

Deutsche Bank AG (DBK) arranged a $1.5 billion credit line for Blackstone Group LP (BX) to buy single-family properties last week, after providing $2.1 billion to the firm earlier this year, according to three people with knowledge of the deal, who asked not to be identified because the loan is private. Leon Black’s Apollo Global Management LLC and Tricon Capital Group Inc. (TCN), a Toronto-based real investment firm, also obtained loans for rental-home purchases this month from the Frankfurt-based bank.

The debt is giving an advantage to institutions competing with individuals, foreign investors and local landlords for a diminishing pool of distressed real estate to turn into rentals. While U.S. home prices remain about 28 percent below their 2006 peak, they’re climbing at the fastest pace in seven years, even as the homeownership rate declines and mortgage availability remains restricted after the housing crash.
“This allows us to further our acquisitions,” Gary Berman, chief executive officer of Tricon Capital, whose $150 million loan has a minimum interest rate of 4.1 percent. “It’s attractively-priced capital.”

17---Goldman tells BoJ to lower long-term rates, zero hedge

Up to now, the driver of Abenomics has been overseas investors, but we see a significant gap between these investors and the BOJ in terms of the degree of concern over the instability of the JGB market. As a result, Kuroda’s remarks at a press conference post the May 22 monetary policy meeting were interpreted as an acceptance of further rises in long-term rates. Overseas investor confidence in the BOJ was further undermined at the June 11 monetary policy meeting when the BOJ decided to forego an extension to fixed rate operations after it was widely reported in the media and already factored into the market.

Of course, other negative factors were present, including disappointing market reaction to the “third arrow” growth strategy in Abenomics and an increase in global volatility on expectations that the Fed could wind back its quantitative easing measures soon. However, any positive market reaction to unprecedented easing has largely been undone, leaving only high JGB yields and high volatility, and we are not in any doubt that overseas investors have started to lose their confidence in the BOJ

18---Are We There Yet?
Employment-Population Ratio



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