Sunday, June 23, 2013

Today's links

1--- "I Am Sorry That It Has Come to This": A Soldier's Last Words, gawker

I am sorry that it has come to this.
The fact is, for as long as I can remember my motivation for getting up every day has been so that you would not have to bury me. As things have continued to get worse, it has become clear that this alone is not a sufficient reason to carry on. The fact is, I am not getting better, I am not going to get better, and I will most certainly deteriorate further as time goes on. From a logical standpoint, it is better to simply end things quickly and let any repercussions from that play out in the short term than to drag things out into the long term
2---Why Bernanke failed, De Long
If you believe--as I do--that the overwhelming proportion of the effects of non-standard monetary policy at the zero nominal lower bound come from reducing short-term safe real interest rates by raising expectations of inflation, the failure of Bernanke's monetary policy to ever raise the average of 5, 10, and 30-year TIPS inflation break-evens above 2.5%--and its recent fall to 2.0%--demonstrates that Bernanke's policies have failed....
Taking the five-year breakeven, right now the expected core CPI as of June 2018 stands at 257--compared to the 276 that it stood at in 2008. The Federal Reserve's monetary policies have thus either--depending on your taste--forced a 9.3% deflation relative to 2008 expectations of 2018 on the economy, or simply sat on its hands and dithered while the financial panic forced a 9.3% deflation relative to 2008 expectations of 2018 on the economy
Comments: QE without an expansionary fiscal policy is a contractionary policy....The biggest enterprise in the known universe - the United States Government - has been using both its fiscal arm and monetary arm in a joint project to hoover dollars out of the private sector while shrinking its own contribution to demand, employment and production
3--QE will never end, Telegraph
Today's QE relies on pushing down borrowing costs. It is "creditism". That is a very blunt tool in a deleveraging bust when nobody wants to borrow. .....
Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.
The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.
This is more or less the essence of "Abenomics", the three-pronged attack on deflation by Japan's new premier and Great Power revivalist Shinzo Abe.
Stephen Jen from SLJ Macro Partners says Western analysts have been strangely slow to understand the breathtaking scale of what is under way. The Bank of Japan is already committed to bond purchases of $140bn a month in 2014. This is almost double the US Federal Reserve's net purchases (around $75bn a month), and five times as much as a share of GDP.

4---Bernanke doesn’t fear deflation — but should, Marketwatch
Commentary: Fed is too complacent about too-low inflation

Bernanke is confident that inflation will climb, but the Fed has been consistently wrong about hitting its inflation target of 2%. The Federal Open Market Committee’s central tendency forecast for inflation in 2013 have been revised lower and lower, meeting after meeting, and now stands at a range of 0.8% to 1.2%. The committee doesn’t foresee getting back above 2% for at least two more years.

That’s extremely low and, in fact, dangerous to the economy. One of the many headwinds keeping the economy down is the low rate of inflation.

We don’t actually have to have a negative inflation rate (deflation) for bad things to happen. Even low levels of inflation can disrupt the normal functioning of the economy because inflation changes the incentives to spend, to invest or to borrow. Why borrow when deflation will make your debt burden larger in real terms? Why spend now when prices will be lower later?

How low is inflation right now?

Here are a few facts:

The Fed would like inflation to average 2% over time, but the inflation rate is 0.74% over the past 12 months and is slowing rapidly, as measured by the personal consumption expenditure price index. Outside of recessionary periods, that’s the lowest rate in more than 50 years. The core inflation rate (excluding volatile food and energy prices) is up just 1.05% over the past year — the lowest rate on record.

Also, the trimmed mean PCE index (which is an alternative way of looking at underlying inflation trends that doesn’t automatically exclude food and energy) fell 0.1% in April. That was its first decline ever.

Inflation expectations are also low and falling. The spread between regular 10-year Treasurys and inflation-protected Treasurys (TIPS) has narrowed. The Cleveland Fed’s analysis shows expected inflation below 2% for the next 30 years. Professional forecasters also expect low inflation to continue. ...Bernanke hemmed and hawed. He agreed that low inflation is terrible. “It increases the risk of deflation. It raises real interest rates. It means that debt deleveraging takes place more slowly.”

5---China Poses Global Growth Risk as Li Squeezes Credit, Bloomberg

6---Extreme Budget Cuts of 2014, NYT

The spending limits imposed by Republicans in the Budget Control Act of 2011 will be different in the upcoming fiscal year. The arbitrary, across-the-board cuts of the sequester will come to an end for most discretionary spending (the kind that has to be renewed each year), but the severe overall limits on each department’s budget will get worse as total discretionary spending declines by 2 percent. The difference in 2014 is that lawmakers can reallocate money within departments as they see fit, within the limits, and won’t be confined by the sequester rules.

House Republicans, of course, have decided to exceed the caps for their favorite programs. They want to give the Pentagon a 5.4 percent increase — $26 billion it doesn’t need — along with a 3.3 percent raise to Homeland Security. To pay for that, and still shrink the budget, they are demanding severe cuts from spending bills for which they have little use: nearly 19 percent out of the labor, health and education bill; 15 percent from the financial services oversight bill; 14 percent from the interior and environment bill; and 11 percent from the energy and water bill.
Those percentages, just to be clear, represent cuts below this year’s already ruinous sequester levels. The effect is visible in several of the bills that have emerged from the Appropriations Committee:
Pop quiz: What do the following financial crises — AIG, Lehman Brothers, Citigroup off-balance sheet SIVs, Bear Stearns, Long-Term Capital Management, and the “London Whale” of JP Morgan — all have in common? According to a speech given by Gensler earlier this month, they all involved exposures to derivatives across countries
Equities markets stabilized in choppy trading on Friday, while Treasury yields hit their highest levels in almost two years in the wake of the Federal Reserve's plans to withdraw its economic stimulus.
Markets are adjusting to the Fed's plan laid out earlier in the week for the central bank to scale back its asset purchases later this year if the U.S. economy keeps improving as expected.
This has roiled markets around the world since Chairman Ben Bernanke outlined the timeline on Wednesday, with interest rates rising and equities markets selling off.

"It's all one big unwind. That's been a negative for Treasuries as hedges are unwound," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
Easing fears about an immediate banking crisis in China helped make for a calmer tone, but short-term funding rates there remain elevated, especially for smaller lenders.

U.S. stocks were modestly higher by early afternoon following a two-day selloff and 10-year Treasuries yields rose above 2.50 percent, their highest level since August 2011. The dollar rose and was headed for its biggest weekly gain in almost a year.
He said the dollar is likely to gain regardless of Fed actions on tapering. If the economy improves and the Fed cuts back on its stimulus, the dollar will benefit from expectations of higher interest rates. But if the Fed maintains stimulus because the economy is weak, the dollar will rise on safe-haven demand.
The Fed-inspired US dollar rally has caused tremendous volatility across the world’s financial markets, and virtually nothing, from equities to commodities to currencies, was safe from massive price swings.

The US dollar (USD) continued to power higher against all major currencies, wreaking havoc across the financial markets in the process. While we can't blame all of the volatility on the dollar since ten-year US Treasury yields also spiked above 2.4%, the latest moves have unsettled investors around the world.

Consequently, the S&P 500 dropped 2.59%, European equities fell 3%, and major indices in Asia lost anywhere between 1.5% and 3%. Most of this weakness can be attributed to the spike in global bond yields, which boosted the cost of borrowing around the world. This accelerated deleveraging in the forex market, and dollar strength only added to the pain.....
While the world may wind up thanking the Federal Reserve for keeping inflation at bay and boosting the US export sector by weakening the currency, right now the focus is on volatility and its impact on confidence.

Central banks around the world are not going to be happy with the pace of depreciation in their respective currencies, as well as the spike in bond yields and decline in stocks. Unfortunately, given the amount of re-pricing that needs to occur, the latest moves could extend further.

However, the selloff in US stocks and the panic across global markets are not completely justified.

Investors should realize that the Federal Reserve is planning to reduce asset purchases due to increased confidence in the US economy. The latest upside surprises in the Philadelphia Fed survey and existing home sales only supports that decision.

The central bank would not be taking steps that will drive Treasury yields higher if policymakers did not feel that the US economy and corporations could handle it. So eventually, the selloff in US stocks should stabilize, allowing US yields and the dollar to hold on to their gains and grind slowly higher.
These are major tectonic shifts, and, while they may not give investors direct cues as to short-term positioning, they clearly drew the battle ground for the longer-run.  The U.S. dollar is strengthening, and there’s little people can do about it as long as the world’s largest economy continues to outpace is peers.
The market has sniffed this economic strength, Nomura’s currency Jens Nordvig explained, which is even more extraordinary in the face of fiscal restraint and the sequester.  The U.S. dollar has generally outperformed major FX crosses, commodity currencies, and emerging markets, despite Wednesday’s weakness.  The greenback is now up more than 6% this year, a major move for the global reserve currency.

Aggregate U.S. dollar longs on the CME hit $39 billion last week (before the large yen washout), and are approaching levels seen in the summer of 2012, when the greenback rallied sharply and then fell precipitously.  Portfolio equity flows in the U.S. are also picking up, even as major central banks like the Bank of Japan, the Reserve Bank of Australia, and the European Central Bank have eased monetary policy to stimulate growth.  And gold, once seen as a safe-haven, has fallen dramatically and currently trades below $1,400 an ounce...

Resiliency is the best way to describe the U.S. consumer, which, along with housing, have helped secure a relatively decent economic performance.  Consumer confidence hit a five-year high in May, while home prices continue to rise.  Shares in homebuilders like KB Home and PulteGroup PHM -0.32% have remained near 52-week highs for quite some time, while consumer discretionary has been a solid S&P 500 sector, with big players like Walt Disney DIS +1.21% and Ford Motor delivering sweet returns in 2013.

It seems like it’s all a matter of timing now, as Barclays’ research team notes.  It is difficult to set positions for the long-term as volatility is expected to remain.  Fiscal restraint in the U.S. promises to continue to rear its ugly head, obstructing growth and throwing off stocks.  The Bernanke Fed has made it clear that it plans to respond to incoming data, increasing or decreasing asset purchases to reflect underlying conditions.  Europe remains a conundrum, and major EMs like China and Brazil are exhibiting weakness.  What is clear, though, is that the game has changed, at least in terms of investor perception, when it comes to monetary policy in the U.S. and elsewhere.

11---Was Hitler Keynesian?, calculated exuberance

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