Thursday, June 20, 2013

Today's links

1---Like it or not, you too have exposure to emerging markets , sober look

Here are two reasons (among others) that should get you interested in the events taking place in emerging markets - particularly the BRIC nations:
Source: Sandler O'Neill


 1. BRIC nations have been buyers of massive amounts of US treasuries. As their growth slows down and current account surplus declines, so will their purchases of US treasuries. The other large buyer of US treasuries just announced yesterday that their buying days may be over some time next year. What do you think happens to US interest rates? Mortgage rates? Dividend stock valuations?
 
2---China's central bank's inaction can have dire consequences - this is not a game, sober look 
 
It is remarkable that China's central bank has been unable or unwilling to contain the spike in short-term rates, as the interbank liquidity squeeze continues. This is roughly the equivalent of the Fed not being able to control the fed funds rate. You can certainly have fluctuations, but within a couple of days a major central bank should be able to inject enough liquidity into the system to bring down rates - unless of course the central bank wants the rates higher.

Something is amiss here....
 
Some have suggested that the PBoC is in fact trying to tighten liquidity in the financial system in order to put the brakes on the rapidly growing shadow banking sector (see discussion). While an admirable goal, creating a liquidity squeeze in the banking system and sending short term rates to multi-year highs is NOT the way to achieve that. This is especially scary in the face of an already "moderating" economic growth....
 
It's not clear if people fully appreciate the potential impact of this liquidity squeeze - including folks at the PBoC. This is not a game. These tight conditions and high rates over a longer period can easily derail lending activities across the country while potentially putting a number of financial institutions at risk and sending the economy into a tailspin. With the Eurozone still struggling in the aftermath of the crisis, let's see what a recession in China (12% of world's GDP) can do for global growth. Mr. Bernanke and company may need to go back to the drawing board very soon.
 
3---Bernanke's offending words send markets plunging, FOMC statement
 
"If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program
 
4---As good as it gets, economist
 
5--Our broken social contract, NYT
 
Figure 1 from the St. Louis Federal Reserve, hardly a bastion of radicalism, shows that corporate profits as a share of Gross Domestic Product have reached record levels:
Fig. 1St. Louis Federal ReserveFig. 1

Fig. 2Whitehouse.govFig. 2

6---Rising home prices are unsustainable, CNBC

Based on the change in mortgage rates from early May to today, the average buyer would have to pay 13 percent more in monthly payments, including taxes and insurance, according to Mark Hanson, a California-based analyst. They also have to earn 10 percent more in income to qualify for a loan based on a typical qualifying debt-to-income ratio of 45 percent.
"These are huge moves especially considering—when purchasing a house using a mortgage—most people buy based on 'monthly payment and the maximum allowable debt-to-income ratio.' This means first-timer share will fall even further. They are already at a multiyear low even with record-low rates," said Hanson.
 
First-time homebuyer participation was at just 29 percent, according to the Realtors, a five-year low. Without these buyers, as investors pull back and prices rise, home sales will likely lose steam. June's report on pending home sales, or signed contracts in May, will tell just how much rising rates are impacting sales. That report will be released Thursday, June 27.

7--Bernanke Said Taper & Free Money Addicts Felt Withdrawal Symptoms, trim tabs

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Remember bond funds, both mutuals and ETFs, had $900 billion of inflows starting in 2010 through May 22. So far this June, bond funds have had a whopping $36 billion in outflows even though the average bond fund is only down less then 1% in price, and even high yield bond funds are down all of 2.5%.

The real damage has occurred in Japan and the emerging markets. Japanese stocks are down 20% since May 21 and all emerging markets are down 10%.

All this volatility solely because of a Bernanke comment that at some point the Federal Reserve will stop creating $85 billion monthly of new money. Why that is so important to the markets is that central bank new money creation is the sole reason why global stock markets are so high in price. Therefore, any threat to stop the free money has caused stock and bond markets to act as if their future heroin supply is in doubt.

It got so weird that when last Thursday, the Federal Reserve’s unofficial PR guy, the Wall Street Journal’s John Hilsenrath, reported that the Fed is unlikely to stop creating new money anytime soon, the stock market spiked 2%.

In other words the druggie investors need the reassurance from their drug dealer’s mouthpiece that they would still be able to still keep scoring free their drug, free money. Isn’t that precious.

Meanwhile the US economy is sputtering along and barely growing. As we have documented time and time again, wages and salaries of all US workers subject to withholding taxes has been growing about $200 billion yearly each of the past three years, not much more then the growth in inflation. Even to get to this anemic growth rate, the economy has been totally dependent upon the trillions of free money created since 2009.


8---Chinese Interbank Markets Having a Heart Attack, Repo and Shibor Skyrocket, Could Trigger Bigger Unraveling, naked capitalism

9---Emerging Markets Crack as $3.9 Trillion Funds Unwind: Currencies, Bloomberg

Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil.

More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global. Foreign investors dumped an unprecedented $5.6 billion of Brazilian stocks and $3.2 billion of Indian bonds this month, exchange data show. JPMorgan Chase & Co.’s emerging-currency index is down 1.4 percent this quarter, while the rupee and Turkish lira hit record lows and the real reached its weakest level since 2009.

These are pre-quake tremors: something big is coming,” Stephen Jen, the co-founder of hedge fund SLJ Macro Partners LLP, said in a phone interview from London on June 12. “There’s tremendous deceleration in emerging markets. You may see crisis-like price actions without having a crisis.”

The reversal of the $3.9 trillion of cash that flowed into emerging markets the past four years has been compounded by popular protests in Turkey and Brazil challenging government policies on everything from fighting inflation to developing infrastructure. China, the largest developing economy, is forecast by the World Bank to expand at the slowest pace since 1999 this year, while current-account deficits in Indonesia, Brazil and Chile have grown to the widest in a decade.

Cheap Money

Speculation that the Federal Reserve and European Central Bank will end the flood of cheap money is contributing to the pullout. Fed Chairman Ben S. Bernanke said yesterday that policy makers may “moderate” their pace of bond purchases later this year, reducing money being pumped into the U.S. economy, some of which has found its way to other countries...

Developed-market investors have been heavily favoring emerging-market bonds and equities in recent years” because their economies were expanding rapidly and their assets were “systematically cheap,” JPMorgan strategists led by Jan Loeys in New York wrote in a June 14 note. “They are now starting to wonder whether this is still the case, and are slowly moving to neutral on emerging markets.” ...

The declines in emerging-market assets may accelerate outflows and create a vicious cycle, according to Phillip Blackwood, who oversees $3.7 billion of developing-nation debt as managing partner at EM Quest Capital LLP in London.
“This is the beginning of the end of the easy money,” said Blackwood, who’s betting on a retreat in the lira and Colombian peso. “The positive situation they were in before is now reversing. That’s a perfect storm for further drops.”

10--Pols sellout US workers on immigration reform, economic populist

As a result, Big Tech Business is getting all the cheap labor they want:
More than any other group, the high-tech industry got big wins in an immigration bill approved by the Senate Judiciary Committee last week, thanks to a concerted lobbying effort, an ideally positioned Senate ally and relatively weak opposition.
The result amounted to a bonanza for the industry: unlimited green cards for foreigners with certain advanced U.S. degrees and a huge increase in visas for highly skilled foreign workers. 
And thanks to the intervention of Sen. Orrin Hatch, R-Utah, the industry succeeded in greatly curtailing controls sought by Sen. Dick Durbin, D-Ill., aimed at protecting U.S. workers.
In exchange, Hatch voted for the bill when it passed the committee, helping boost its bipartisan momentum as it heads to the Senate floor next month. 
11---Immigration Bill Disaster for Workers, economist populist

Senator Bernie Sanders, a Democratic Socialist, is warning on the Immigration bill:
at a time when nearly 14 percent of Americans do not have a full-time job and when the middle class is working longer hours for lower wages, I oppose a massive increase in temporary guest worker programs that will allow large corporations to import hundreds of thousands of blue-collar and white-collar workers from overseas,” Sanders said in remarks prepared for a Senate floor speech.
 There could be an eight-fold jump in the number of blue-collar foreign workers in the U.S. over the next five years and the number of skilled-workers granted visas could more than triple in three years under provisions that Sanders opposes in the immigration bill the Senate is expected to take up next week.
 Instead of hiring young Americans looking for work as lifeguards or ski instructors, Sanders said too many businesses would rather pay less to foreigners. “At a time when the youth unemployment rate is more than 16 percent and the teen unemployment rate is over 25 percent, many of the jobs that used to be done by young Americans are now being performed by temporary guest workers,” Sanders said.

Sanders also opposes a provision that would greatly expand the number of foreign workers allowed to take jobs at high-tech companies in the U.S. at a time when the American middle class is disappearing and corporations are posting record profits. Sanders noted that half of all recent college graduates majoring in computer and information science in the United States did not receive jobs in the information technology sector.

BIS Warns Central Banks Setting up the Next Big Financial Bang

The Bank of International Settlements warned Central Banks are setting up the next financial crisis:
Markets are “under the spell” of the world’s central bankers, with cheap money driving stock prices to record highs despite a lack of good economic news, the Bank for International Settlements has said.
The BIS, the so-called central bankers’ bank, on Sunday became the latest high-profile financial institution to warn that low rates and a plentiful supply of cash from quantitative easing had prompted investors to drive asset prices to record highs in spite of signs that a meaningful recovery continues to elude the global economy.
If that wasn't bad enough, the Central Banks are also ignoring a big, fat correlation to predict the next crisis.
Regulators may be overlooking a signal that could give them an opportunity to identify a new financial crisis, according to the Bank for International Settlements.
By focusing only on the gap between the size of an economy and the amount of bank credit within it, policy makers are ignoring contributions that foreign and non-bank lenders make to credit booms that typically precede systemic banking crises, according to Mathias Drehmann, a senior economist at the Basel-based institution. That role can be “significant,” as shown by a new BIS database that shows domestic banks currently supply only 30 percent of credit in the U.S. economy 

12--Roiled markets seesaw on Taper announcement, wsws

Boosted by the cash handed out by the Federal Reserve and other central banks, stocks and other financial assets have soared—the DOW is up by 140 percent from 2009—while wages have fallen and economic activity has stagnated. Between 2007 and 2011, the US median household income plunged by 11.6 percent, from $57,143 (in 2011 dollars) to $50,502.
The growing contradiction between the dizzying rise in the value of financial assets and the stagnation of production and employment threatens a collapse of the entire system. Recognizing this, the Federal Reserve is attempting to orchestrate a “soft landing” of the financial system by scaling back its asset purchases.

The response of financial markets to the Fed’s actions indicates the potential for convulsions arising from Wall Street’s addiction to the central bank’s free money. The mere suggestion that the Fed “may consider” reducing asset purchases has caused bond prices to go into a tailspin, causing investors to pull $17.6 billion from bond funds in the two weeks ending June 12, according to Thomson Reuters.

13---China Panic: Overnight Rate Hits 25%, Forbes


The overnight repo rate in China has just hit 25%, an indication the credit market is now frozen.
This month, liquidity tightened considerably.  Two government bill auctions failed, and several banks defaulted on their interbank obligations.  Overnight rates in the last few weeks surged to about 15% but had fallen back, settling in at just north of 7%.  The 25% rate indicates credit is becoming unavailable.
Nothing is going right for China at the moment.  In the last few hours, the HSBC Flash PMI for June came in at 48.3, down considerably from the 49.2 final reading for May.  The country’s problems are now starting to feed on themselves. 
 
 
After lobbying Congress to weaken the Dodd-Frank financial reforms, big banks are delivering the coup de grace by litigation
 
 
16--Do higher wages cause inflation, real news

POLLIN: No, they don't necessarily. What higher—lower unemployment does lead to workers having more bargaining power, and I would argue that's good, especially where we've been historically, where wages are roughly on average 10, 12 percent below where they were 38 years ago, in 1972, whereas the average productivity, what a worker produces in the course of a day, has almost doubled, is up 90 percent. So workers have not enjoyed any of the benefits of being more productive. So on those grounds, workers have taken a huge hit over two generations. And what about the inflationary effect? The only way higher wages can cause inflation is if the wages are rising faster than your ability to produce things, because otherwise the pie is getting bigger and workers are just getting their equal or maybe even a smaller share of a growing pie. It's only if the pie is not growing, and then the wages get bigger, and then businesses try to make up for the difference by raising the prices faster. And that's what's the inflationary part
do higer wages cause inflation


17---Will Home Prices Be Constrained by Stagnant Incomes?, WSJ
The U.S. Federal Reserve has put a lot of its eggs in the housing basket. After all, a healthy housing sector brings benefits to the economy. Home-building provides jobs, mortgage financing offers revenue to the banking system, and households feel more financially secure if the value of their home isn’t freefalling into the abyss.
By keeping mortgage rates super cheap, the Fed has propped up housing demand. And after years of few projects, builders are breaking ground on more homes.
Tuesday brought news that housing starts in May rose 6.8% to an annual rate of 914,000. While much of the gain came in apartment projects, single-family homes edged up 0.3% to 599,000.

Some fret the recent rise in mortgage rates could scramble the Fed’s goal. The 30-year fixed rate edged up to 4.15% last week. What is the impact if the 30-year fixed rate jumped from its recent low of 3.5% to 4.5%?

A new single-family home costs, on average, $310,000. With a 10% downpayment, the monthly payment increases by $161. With a 20% downpayment, the rise is $143.
The extra cost wouldn’t darken the housing outlook except it is running up against puny growth in incomes.

Consider the trends in home prices and incomes since housing’s bottom in 2011. The average new-home price is up about 17%, while per capita income has increased just 2.8% (or about the same pace as inflation).

Assuming the average household income has risen just as slowly as per capita earnings, the typical family needs to devote more of its monthly budget to housing costs even with no change in interest rates. A larger debt burden will make banks more reluctant to write a mortgage.

The constraint will fall harder on adults aged 35 or younger who make up the usual cohort of first-time buyers. They have higher unemployment rates than other adult workers. And many also carry large amounts of student-loan debt.

With many households still priced out of home-buying, it is no wonder apartment-building is doing so well.

The Fed has little direct power to lift income. (Indeed, rapid wage gains without commensurate productivity growth would raise inflation alarms among the more hawkish Fed officials). Yet unless prospective home buyers see better income gains, affordability will limit just how busy home builders will be in the future.
 
18---Vital Signs Chart: No Inflation Pressure, WSJ

The consumer-price index rose a seasonally adjusted 0.1% in May and the core price index — which excludes food and energy — climbed 0.2%. Year over year, the indexes rose 1.4% and 1.7%, respectively. The Fed tends to rely more heavily on a different inflation measure in policy consideration, but price increases this year haven’t given central-bank policy makers much cause for concern.

 19---Stocks, bonds, commodities slump on Fed comments, Reuters
 
 

 



 

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