Sunday, August 25, 2013

Today's links

1--Americans say "no" to Syria war, RT

the American public shows no willingness to get involved in another costly conflict in the Middle East, a recent Reuters/Ipsos poll suggests.

Only 9 percent of the surveyed believe President Barack Obama should take action on Syria, while some 60 percent of Americans said the United States should not intervene in Syria's bloody civil war.
According to the poll taken on August 19-23, 25 percent of Americans would back intervention if it is proven that the forces of Syrian President Bashar Assad used chemical weapons against civilians, while almost double that number – 46 percent – would still oppose such a move.

2---DoD training manual suggests Founding Fathers followed 'extremist ideology', RT

3---Abenomics failure (repeat), Testosterone Pit

Flooding the land with money goosed growth in early 2013, largely on consumer and public spending, but already the keen eye of the Bundesbank observed that the “straw fire” was dying down in the most recent economic figures – led by a corporate refusal to invest in Japan (though companies are investing heavily overseas). By 2014, the impact on growth would be minimal. But the hangover would begin to burden the economy in 2015 and onward, it said.

Its graph (below), titled “Effect on GDP Growth,” shows the “straw fire” in 2013 dying down in 2014 and 2015. The brown bars denote the fiscal-policy contribution to GDP in percentage points. The current stimulus spending is additive to GDP (though it worsens the fiscal fiasco), but then the consumption tax hikes kick in, from the current 5% to 8% in 2014 and to 10% in 2015. The blue bars denote the contribution of the Bank of Japan’s money-printing binge, whose positive effects the Bundesbank expects to peter out in 2015 and then turn into a long drag on the economy that will last till 2022 or so...

Only about half of the central government’s spending is funded with tax collections. The rest is funded with borrowed money. That’s where Japan’s fiasco lies. It has gotten away with it for years – and might get away with it for a few more years. But now it’s suffocating under a rapidly growing mountain of debt that already exceeds 200% of GDP. And then what?
“A rise to over 25%” in the consumption tax “is ultimately needed to stabilize the nation’s finances,” Mr. Oguro said. Oops, 25%? Not 10%?

That’s how rosy, and off target, the Cabinet Office’s recent projections were.

4---Housing: Will investors try to time a top (and vamoose?), Dr Housing Bubble

The news of rocketing home sales was plastered all over the headlines.  However, mortgage applications are going in the exact opposite direction (of course little was reported on this):
existing home sales and mortgage apps
The median home price in the US is $214,000 and from multiple reports, most Americans don’t have much saved up (definitely not enough to buy a home without a mortgage or even a car for that matter).  This trend simply highlights the massive power being wielded by the cash buying crowd.  Someone is buying these homes and if mortgages are not being used, something else is being used.  The cash buying crowd has always been around but as a small subset of the market.  Today, it is one of the biggest players out there.  The group is big enough to push prices up as it has over the last few years....

It is obvious that the cash buying crowd is large and driving many markets.  The big banks are carefully looking at the Fed’s next move because they realize that without low rates, financially strapped US households will not be able to purchase their property for a nice profit.  The bailout was subtle if you can call the Fed’s balance sheet at $3.4 trillion subtle but the big win has gone to banks.  Low rates alone are not enough to save an economy.  The home ownership rate has collapsed and all this focus on housing has diverted our attention from other growth sectors to housing.  Rents and home prices are rising yet incomes are not.  Is this a positive development?

5---Did Fed’s Forward Guidance Backfire? Paper Says Probably, WSJ

The Federal Reserve believes that providing clear guidance about the likely future course of its policies make them more effective in boosting the economy, while helping to tamp down on market volatility and uncertainty.
That may not be so, said a paper presented here Saturday by Jean-Pierre Landau of Princeton University at the research conference hosted by the Federal Reserve Bank of Kansas City.

Over the last year, the Fed has been buying $85 billion a month of bonds in an effort to lower long-term interest rates, hoping that will spur growth and lower unemployment. Fed officials have been warning for months since May that they could start scaling back the program if the economy continues to improve as they expect.
The problem for the Fed is that as its policy makers have tried to prepare markets for this shift, they’ve generated considerable market volatility, in part driving up bond yields and boosting borrowing costs.
There’s been considerable debate about why it’s happened, and whether the development could create new headwinds for the economy, or whether it’s simply a market that’s moving to reflect an improved economic outlook.

Mr. Landau lays a lot of the blame for the bond-market turbulence on the Fed itself. The paper notes that current Fed guidance on the policy outlook eliminates the cost of leverage, and creates “strong incentives” to increase and even overextend investment exposures.

In turn, “this makes financial intermediaries very sensitive to ‘news,’” whatever that may be, he wrote. In this case, the catalyst for the market tumult is the Fed’s statements about possibly scaling back the bond program this year. Once that view was conveyed to markets, it drove a big shift in market positions, to a degree that was very surprising to many observers.

6---Is the treasury sell-off overdone?, sober look

7---Obama Focuses on Risk of New Bubble Undermining Broad Recovery,(which is why he has sit on his hands for 4 years while the Fed inflated it's balance sheet by $2.4 trillion) Bloomberg

President Barack Obama, who took office amid the collapse of the last financial bubble, wants to make sure his economic recovery doesn’t generate the next one.
Obama this month spoke four times in five days of the need to avoid what he called “artificial bubbles,” even in an economy that’s growing at just a 1.7 percent rate and where employment and factory usage remain below pre-recession highs.

We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his Aug. 10 weekly radio address.
Obama’s cautionary notes call attention to the risk that the lessons of the financial crisis, which was spawned by a speculator-driven surge in asset values, will be forgotten, widening the income gap and undermining a broad-based recovery.

“Clearly, this is a growing concern both in the administration and at the Fed,” said Adam Posen, a former member of the Bank of England’s monetary policy committee.
While economists are more concerned with inadequate growth, there’s reason for vigilance. Thanks to low borrowing costs, U.S. companies have issued $241 billion in junk bonds this year, more than twice the amount during the same period in 2007; investors’ use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging in areas such as Las Vegas and Phoenix.
U.S. stocks also are near record highs, with the Standard & Poor’s 500 Index rising about 16 percent so far this year. ....

Obama doesn’t share that criticism, saying in June that Bernanke has done “an outstanding job.” The president sees bubbles arising from other causes. Chief among them: an increasingly skewed distribution of income.
“When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy,” the president said in a July 24 speech.
When the wealthy lend ever-greater amounts to less-affluent Americans, those bigger debt loads can trigger financial crises, according to a 2010 paper by economists Michael Kumhof and Romain Ranciere of the International Monetary Fund.

‘Highest Priority’

Narrowing the rich-poor gap is “my highest priority,” Obama said in a July 30 speech in Chattanooga, Tennessee. ....

Both the White House and Fed have acted to prevent another bubble. Bernanke told a Senate committee on July 18 that Fed officials are watching for signs of deteriorating credit standards, such as weaker loan covenants, that could signal destabilizing financial imbalances. ....

As evidence that the economy remains feeble, Posen cites the money supply. The broadest measure of how fast funds are moving through the economy remains at its lowest level at least five decades, according to data compiled by Bloomberg.
Some investors, such as Mohamed El-Erian, Pimco’s co-chief executive officer, argue that a bubble may be emerging. “We see artificial pricing in virtually every asset class,” he said.
Home prices are up more than 12 percent from a year ago, according to the S&P/Case-Shiller Composite 20-city home price index. Recent increases have lifted prices, which had been about 10 percent below fair value “back into the approximate neighborhood of fair valuation,” Jerome Powell, a member of the Fed’s Board of Governors, said in a June 27 speech.
The president’s concerns also are evident in appointments to economic-policymaking posts. In February, Jeremy Stein, a Fed governor Obama named to his post in 2011, warned of potential “overheating” in credit markets.

Greater Risks

“A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage,” Stein said.
The extra yield investors demand to hold speculative-grade or junk bonds rather than investment-grade corporate debt has narrowed over the past year from more than 4 percentage points to 3.2 percentage points, according to the Bank of America Merrill Lynch’s US High Yield Master II Index.
Sarah Bloom Raskin, a Fed governor nominated by Obama to be deputy Treasury secretary, highlighted the need for regulatory policy to prevent the emergence of asset bubbles and make the financial system more resilient.
“Asset bubbles are a feature of our financial landscape,” she said at a Washington luncheon in July. “What happened before could happen again.”

8---The Strange Business of Central Banking, Bloomberg

Just a year ago, Federal Reserve Chairman Ben Bernanke was arguing that the Fed's bond-buying had lowered borrowing costs enough to boost the economic growth by 3 percent and add 2 million jobs. His analysis was based on a paper by, among others, the president of the Federal Reserve Bank of San Francisco.....Two weeks ago, the San Francisco Fed published a new paper refuting their earlier study. (Go figure.) Nowadays, the thinking is that asset purchases don't matter. The latest thinking is that the real punch comes from the Fed's so-called forward guidance on the future path of short-term interest rates....(The old switcheroo)...

Shin's concern with the details was reinforced by Krishnamurthy, a professor at Northwestern University, and Vissing-Jorgensen, a professor at the University of California, Berkeley. Their paper is worth reading in full, but the gist is that the Fed buying government-guaranteed mortgage bonds boosted the economy but buying Treasury debt wasn’t helpful.

Mortgage-backed security purchases helped because they freed savers and banks to buy other risky assets, like corporate bonds. This effect was most pronounced during the asset purchases at the end of 2008 and the beginning of 2009. It has been less potent since then as the risk of default has receded.
Over the past two years, the Fed pushed mortgage rates lower and encouraged additional lending by banks by gobbling up about half of newly issued mortgage bonds. The focus on new issues has been crucial because mortgage lenders only look at those bonds when deciding how to set mortgage rates. This is why Krishnamurthy and Vissing-Jorgensen recommend that the Fed keeps buying as many fresh mortgage bonds as possible even when it sells off the rest of its portfolio.

By contrast, Krishnamurthy and Vissing-Jorgensen find that Treasury bond purchases lower borrowing costs for the government but don't do much for interest rates in the private sector. Even worse, buying Treasury bonds "may actually reduce welfare" because those instruments "offer unique convenience services" to savers. That’s because those purchases reduced income for bondholders without lowering borrowing rates for anyone else.
We should be troubled by these two analyses. Together, the message is that the tools available to central banks force them to favor certain groups over others. If only there were a way around this problem.

9---(Monetary theories which enrich the banks promoted at Jackson Hole) The Federal Reserve should concentrate its unconventional monetary stimulus on mortgage asset purchases, according to a new study released on Friday, ditching Treasury bond buys which the authors say have not had much of an effect., Bus Insider

In particular, Fed Chairman Ben Bernanke and others have argued that asset purchases work by taking safe assets out of the market and therefore forcing cautious investors to take more risk. In official parlance, this is known as the "portfolio balance effect," affecting rates in markets well beyond those targeted by the Fed.
The impact of asset buying is a lot narrower than Fed officials contend, according to the authors of the paper.
"It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds," the paper finds.

Instead, mortgage-buying has been more effective because, by targeting a specific sector that was under duress, Fed officials have been able to create scarcity of supply in the mortgage market, leading prices - and therefore credit availability - to rise.
"We find that (mortgage purchases) are more economically beneficial than Treasury (buying)," the authors write.
Recently, Fed officials have worried excess risk-taking may have gone a step too far, potentially leading to dangerous asset bubbles - hence all the talk of a ‘tapering' in quantitative easing.
In response to the worst recession in generations, the Fed has left official rates effectively at zero for over four years, and is on track to buy over $3 trillion in assets in an effort to support still-weak growth.
The U.S. economy expanded at an annualized 1.7 percent rate in the second quarter, while the jobless rate remains at an elevated 7.4 percent

10---Taper talk pushes mortgage rates higher (real time action) TMR

11---Study Suggests Shift in Fed Bond-Buying, NYT
(The study ignores the fact that the banks rake off billions in profits off the spread between MBS and mortgage rates)

Professors Krishnamurthy and Vissing-Jorgensen argue that the Fed’s purchases of more than $2 trillion in Treasuries since the financial crisis have had “limited economic benefits.” The purchases have cut the government’s borrowing costs, but they found little evidence for the Fed’s assertion that that has reduced borrowing costs for businesses and consumers.
It follows that “cessation of Treasury purchases or a sale of Treasury bonds will have small negative macroeconomic effects.”

They argue that the Fed should focus instead on buying mortgage bonds. The two professors found in an influential 2011 paper that the Fed’s purchases of mortgage bonds in 2008 and 2009 did reduce the cost of mortgages.
In the new paper, they write that the Fed’s current round of purchases has also worked, but for a different reason.
The first round of Fed buying helped because the financial crisis had constrained the resources of traditional bond buyers, in effect creating a shortage of demand for mortgage bonds, forcing sellers to offer higher interest rates.
The second round, by contrast, has worked because the Fed is reducing the supply of bonds available for purchase.

In both cases, the authors write, the benefit of the purchases is mostly limited to the housing market.
“It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds.”
Interestingly, it also follows from this logic that selling the Fed’s existing holdings of mortgage bonds won’t have much impact on borrowing costs, because that would not affect the supply of the current crop of mortgage bonds.

Referring to mortgage-backed securities, the study says: “We conclude that an exit should proceed in the following sequence: The Fed should first cease its purchases of Treasury bonds and then sell down its Treasury portfolio. Second, the Fed should sell its higher-coupon M.B.S. as this will have small effects on primary market mortgage rates. The last step in this sequence is that the Fed should cease its purchases of current-coupon M.B.S. as this tool is currently the most beneficial source of economic stimulus.”
Professors Krishnamurthy and Vissing-Jorgensen argue that the Fed should be as clear as possible about its plans for this exit.
One of the most important developments in monetary policy over the last generation is the conclusion that central banks can increase the power of their actions by talking about their goals, thereby shaping the expectations of investors.

The Fed has embraced this approach in its core business of adjusting short-term interest rates, declaring that it intends to keep rates near zero at least as long as the unemployment rate remains above 6.5 percent and inflation remains under control. But it has not offered similar clarity about its bond-buying plans.
Fed officials have said that they want to remain flexible because they are still learning about the costs and benefits of asset purchases. The new paper argues that this is a mistake; it says that clarity about quantitative easing is even more important because of the large role of expectations in determining long-term rates.
“It is imperative that central banks outline a framework for the use of LSAP,” the paper says, using the acronym for asset purchases favored by cognoscenti. “Without such a framework, investors do not know the conditions under which LSAPs will occur or will be unwound, which undercut the efficacy of policy targeted at long-term asset values.”
In English: If the Fed doesn’t explain what it’s doing, investors will assume the worst, and borrowing costs will rise as if the Fed is doing nothing.

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