Tuesday, July 2, 2013

Today's links

1--China's five year plan, global connections

China’s five year plan foresees average annual GDP growth of 7% between now and 2015, compared with 11.2% over the past five years. However, opinion is divided on the regime's ability to achieve this more moderate pace. Growth in the provinces shows no sign of slowing, and the central government doesn't necessarily have the means to curb this trend. "Everybody wants to be the next Shanghai, so everybody wants to expand faster than their neighbours," says HSBC's chief economist for China, QuHongbin, quoted by Reuters.

2---Long term rates to rise by 4th quarter, Bloomberg

Unemployment will fall to about 7 percent in the fourth quarter, according to economists at five of the world’s largest banks, creating more confusion among investors about the Federal Reserve’s bond-buying plans.
Fed Chairman Ben S. Bernanke said last month that the central bank could stop purchasing assets around the middle of next year when joblessness “would likely be in the vicinity of 7 percent.” Bank of Tokyo-Mitsubishi UFJ, Barclays Plc, Citigroup Inc., Deutsche Bank AG and UBS AG all predict the rate will be either at or just above that level in the fourth quarter, six months sooner than Bernanke projected. ....

Bond prices have dropped and market volatility has increased in the last six weeks as investors have struggled to figure out the Fed’s plans for its asset purchases. Prices will fall further during the next 12 months, as a faster-than-forecast decline in unemployment pressures the Fed into ending its program early, said Joseph LaVorgna, Deutsche Bank chief U.S. economist in New York.
One consequence of 7 percent unemployment is that the yield on 10-year Treasury notes will rise to 2.75 percent by year’s end, with a further increase to 3.25 percent by next June, after the Fed winds up purchases by January, LaVorgna said. Treasuries advanced today, with the 10-year yield slipping 2 basis points to 2.46 percent as of 9:11 a.m. London time. ...

Bond-market volatility probably will increase even more later this year, as the drop in joblessness sows confusion among investors about the Fed’s aims, Matus said. Unlike LaVorgna, he doesn’t see the Fed ending its purchases early and instead says policy makers will point to other indicators -- such as continued low inflation -- to justify extending the program until the middle of 2014.....

A decline in workforce participation, partly caused by retiring baby boomers, has helped bring the rate down faster than Fed officials expected for an economy expanding at about 2 percent annually.

Further Decline

The proportion of the population in the labor force, either employed or looking for work, dropped to 63.4 percent in May from 66.2 percent in January 2008. While it rose 0.1 percentage point from April, a further decline is possible, said Gary Burtless, a Brookings Institution senior fellow in Washington.

3---The mother of all bubbles? Bloomberg video

4---Banks benefiting from "taper" on both sides of the balance sheet , sober look

Not only are banks increasing the longer term rates at which they lend, but they also have lowered rates they pay on various types of deposits.

5---Taper talk , Trimtabs

On May 22 almost all markets were at multi-year if not all time highs.

That all changed May 22, when Taper Time began. All it took was for Fed Chairman Bernanke to say that the Fed sometime soon it will be creating less new money daily. That is if economic growth improves as the Fed is predicting.

That simple comment created a tsunami. First Japanese stocks started plunging – remember I have been saying in these videos that Japan is the canary in the central bank money creation coal mine. Why did Japanese stocks plunge? Because Japanese trust banks, realizing how important Fed money creation is to overall investing, panicked and sold such huge amounts of Japanese stocks as to overwhelm US buyers. US buyers had been the big net buyer of Japanese stocks ever since the Bank of Japan announced an easing boost. Guess what, Americans are now also selling Japanese and emerging market stocks....

There is only one reason why stocks, bonds and all that are trading at such lofty market capitalizations today. That is because of central bank money creation in the face of a global contraction. And the truth is in the history of currency, going back around 3,000 years, there never, ever has been a positive outcome from extended money debasement.

That said, the Fed has made very clear that tapering will only happen if the US economy does improve, which is what the Fed is predicting. But what if the US economy does not improve? The Fed has been predicting a second half economic improvement each year since 2010 and in each of the past three years, the US economy actually weakened as the year wore on. In response to each of the past three second half slowdowns, the Fed did something new to hopefully boost the economy via the wealth effect.

And there is nothing different now. Both the Fed and most economists are so fully invested in believing that an economic recovery is happening that they can’t fathom that it may not be in the cards..

6---Credit shrinks at record pace in Spain, economista

 According to the Bank of Spain, loans to the private sector residents, families and businesses have registered a fall of 6.1% in the month of May, the highest percentage in the entire crisis.

7---Turmoil in Egypt, wsws

The very same day, the Egyptian Armed Forces issued a statement giving the political parties a 48-hour ultimatum “as a last chance to bear the historical burden that the nation is currently facing,” to “reconcile and end the current crisis.”

The all-party coalition envisioned by the military—bringing together the MB, the main liberal parties, former Mubarak officials and possibly some minor pseudo-left groups as a fig-leaf—would serve to delegitimize protests and give the military time to prepare a more violent crackdown.

These aims are shared by Washington. US imperialism is frightened by the prospect that the Egyptian working class will emerge in an open confrontation with the weakened Egyptian state, threatening to undermine the entire imperialist set-up of the Middle East—in which Egypt, with its deep ties to the US and to Israel, plays a crucial role

8---"Tapering" in not "Tightening", FRBSF

reducing or even ending our purchases does not mean the Fed will be tightening monetary policy. Not at all. The amount of stimulus our purchase program creates depends on the size of our securities holdings, not the amount we buy each month. Even if we start reducing our purchases later this year, our balance sheet will continue to grow, providing an increasing amount of stimulus. That is, as long as we are adding to our holdings of assets, we are adding monetary stimulus to the economy.

Third, future adjustments to our asset purchases in no way alter or undermine our approach of maintaining the current very low federal funds rate at least as long as the unemployment rate is above 6½% and the other conditions regarding inflation and inflation expectations are met. Indeed, as the FOMC projections released in June show, a large majority of Committee participants don’t expect the first increase in the federal funds rate to occur until 2015 or later. And the median projected value of the federal funds rate at the end of 2015 is only 1%.
...
Our second type of unconventional program involves large-scale purchases of longer-term U.S. Treasury and mortgage-related securities. Under the current program, we are purchasing $85 billion in securities each month. Our purchases increase demand for these securities, pushing up their prices and pushing down their yields. That in turn drives down other longer-term interest rates. We have said we will continue this program until the outlook for the labor market improves substantially in a context of price stability.

9---The GSEs have led to nearly 2.8 million foreclosure prevention actions since the start of the September , DS News

So far, efforts from the GSEs have led to nearly 2.8 million foreclosure prevention actions since the start of the September 2008 conservatorship, the FHFA reported Monday.

More than 2.3 million of the foreclosure prevention actions allowed struggling borrowers to keep their home, including nearly 1.4 million permanent loan modifications.
In the first quarter of this year, 130,000 foreclosure prevention actions were completed, essentially unchanged from the previous quarter.

10---Abenomics losing battle with deflation, Reuters

core consumer prices continued to fall and manufacturers forecast further weakness ahead, government data showed on Friday, underscoring the challenges the Bank of Japan, under new Governor Haruhiko Kuroda, faces in meeting its 2-percent inflation target.
"The deflationary trend shows no signs of changing," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo. He forecast the economy will continue to recover through the latter part of the fiscal year to March 2014.

"Expectations for deflation, deeply embedded among the public, are very persistent," Kodama said. "It appears quite difficult for monetary easing implemented by Governor Kuroda to achieve a positive cycle of inflation and economic recovery."...

Core consumer prices, which include oil but exclude volatile costs for fresh food, fell 0.4 percent from a year earlier, matching the median market forecast. The sixth straight fall was a bit narrower than the 0.5 percent decline in March....

STRUCTURAL REFORMS KEY
Japan's economy grew a faster-than-expected 0.9 percent in January-March from the previous quarter, as private consumption and the export rebound led a recovery from a slump last year.
Economists expect the recovery to firm up in the coming quarters backed by exports and private consumption. But risks to the outlook remain, including uncertainty in the global economy, underlined recently by a string of weak data from the United States and China, Japan's two biggest export markets.

"Abenomics," which has caused Tokyo shares to soar in recent months and the yen to fall sharply, appears to be showing early success. But the gains have been cast into doubt in the past few weeks as the bond market has become volatile and Tokyo shares have slumped sharply.
The government is under pressure to build on the improved sentiment by undertaking painful structural reforms, such as deregulation, to foster more sustainable growth.

11---Deflation and falling wages (from the archive) NYT

in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.

12---Wage stagnation in Japan, Bloomberg

Ending consumer price declines would give companies and households more incentive to borrow, and boost revenue for businesses and the government in a nation that saw its third recession in five years in 2012. The danger: prolonged deflation has altered behavior across the economy, from entrenching declines in pay to driving more than half of savings into cash.

“The key is wages,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research and a former BOJ official in charge of price data. “Without pay increases, the economy won’t recover and households will only suffer from inflation.”

Japan’s main business lobby signaled it won’t endorse pay rises at regular wage negotiations with labor unions this spring, Kyodo News reported Dec. 20. Prime Minister Shinzo Abe’s Liberal Democratic Party is considering tax breaks for companies that raise pay or expand hiring...

Japan last had 2 percent annual inflation in 1997, when Toyota Motor Corp. unveiled the Prius hybrid and the yen sank as as low as 130 per dollar. Prices have fallen in 10 of 15 years since, according to data compiled by Bloomberg.
While deflation helps savers, younger generations are hit by stagnant wages and diminished incentives for borrowing. Unemployment among those aged 15-24 was 6.5 percent in November, compared with an overall rate of 4.1 percent. Wages have failed to rise for nine of the past 12 months. About 56 percent of household assets were in cash or bank deposits at the end of September, according to a central bank report.

13---Will Japan's frozen wages rise via "trickle down"?, NYT

Much hangs on how much corporate profit will trickle down to consumers in the form of higher wages and better job opportunities. Jobs data released Friday, however, showed the nation’s unemployment rate in April unchanged, at 4.1 percent.
      
Tokyo’s benchmark Nikkei index reacted positively to the data over all, jumping 3.5 percent to 13,677.32. Japanese stocks surged 80 percent by mid-May in strong hopes for Mr. Abe’s economic turn, but have since fallen by as much as 20 percent before starting to edge back up
 
 
But Keidanren, the main big-business lobby, has remained cool, saying it wants to see more sustainable profit growth before its members agree to basic-pay increases, which are harder to reverse than bonus payments. Masamichi Adachi of J.P. Morgan says overtime and bonus payments are likely to rise before core salaries do. He says that, rather than higher inflation expectations, the country needs higher growth expectations before companies commit to permanent wage increases. As it is, a planned rise in the consumption tax next year is likely to offset some of the effect of a big fiscal stimulus this year, which means growth may flatten in late 2014.

There is a danger, Mr Adachi adds, that the popularity of Mr Abe’s policies will quickly decline if the public perceives they are getting “cost-push” inflation caused by rising prices, rather than “demand-pull” inflation, caused by rising wages. “A reflationary policy is initially quite well received until inflation actually comes.”

15---More on inflation expectations and the limits of monetary policy, Fed Watch

Form the perspective of policy, however, I am not so confident the survey is the best measure of inflation expectations.  The Federal Reserve transmits policy through financial markets, and if those markets are not signaling stable or, more importantly, higher inflation expectations, then it is arguable that by itself, quantitative easing has limited impacts on economic activity.  It can put a floor under the economy, but not accelerate activity.
Perhaps at best, quantitative easing does not cause higher inflation.  At worst, some argue it is actually deflationary.  The latter argument, however, will not get much support at the Federal Reserve, at least not yet....

Inflation expectations turned down in March, just when the Fed started sending signals that tapering was on the horizon.  In this story, the Fed extrapolated a handful of data into the future and decided enough was enough.  But that data was endogenous to Fed policy, and threatening to remove that policy once again undermined the economic outlook.  In short, just by talking about tapering in an uncertain economic environment, the Fed pulled the plug on a successful policy.

But what should the Fed do now?  Can they reverse the decline of inflation expectations merely by ending expectations of tapering?  I am somewhat doubtful; the cat is out of the bag.  They may very well have to expand asset purchases if they want market participants to believe "no, we were just kidding."  ...

Bottom Line:  Infaltion expectations are falling, and that by itself should complicate the Fed's expectation that they can start scaling back asset purchases at the end of the summer.  But falling inflation expectations may complicate monetary policy more broadly by revealing the limits to quantitative easing.  And Japan isn't helping.

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