Saturday, November 2, 2013

Today's links

1--This sounds bad. Fed to Test Banks for Interest Rate Rise, Housing Collapse, Bloomberg

The Federal Reserve said it will examine how the biggest banks might react to a jump in long-term interest rates and another housing crash as it released the next round of stress-test scenarios designed to monitor the ability of the U.S. financial system to withstand economic shocks.

The central bank mentioned that as part of two adverse scenarios it will gauge bank resilience against declines in the prices of high-risk, high-yield loans and debt and some high-priced real estate markets around the country, according to a statement released in Washington today. The central bank also inserted a test for large trading and clearing banks on counterparty default.

The Fed is using the tests -- based on hypothetical adverse conditions and not forecasts -- to encourage the 30 biggest banks to build capital cushions against economic turmoil. The central bank said 12 of the banks will be subject to the capital review for the first time.

“The aim of the annual reviews is to ensure that large financial institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that they have sufficient capital to continue operations throughout times of economic and financial stress,” the Fed said in the statement. ....

(We have insurance!)
The test suggests Fed officials remain concerned that banks might still rely too heavily on single or weak counterparties to hedge potential losses on assets and other commitments, a trend that contributed to the 2008 financial crisis. Banks have argued in past years that they can mitigate risks by purchasing protection such as credit-default swaps from counterparties.
Goldman Sachs and other firms had purchased protection from New York-based insurer American International Group Inc., allowing them to subtract the CDS on their books from their reported subprime mortgage debt holdings

2---U.S. Stocks Rise Amid Factory Data, Corporate Earnings, Bloomberg

Investors continued to shift money into stocks last month, as U.S. equity exchange-traded funds drew $18.2 billion in October, the most in three months and the third-highest amount since 2010, according to Bloomberg data. About $110.6 billion has been absorbed this year, putting the stock ETFs on pace for the highest flows since the records began in 2000.

Economic Data

Equities turned lower earlier today after improving manufacturing data raised concern that the Fed will cut its $85 billion in monthly bond buying sooner than expected. The Institute for Supply Management’s factory index rose at a faster pace than forecast in October, indicating U.S. manufacturing was a source of strength. An earlier report from China indicated the nation’s official manufacturing Purchasing Managers’ Index rose more than estimated in last month.

“There’s some concern clearly that the economic data is getting better and we might get tapering in December,” Eric Green, director of research and fund manager at Penn Capital Management, said by phone. The Philadelphia-based firm oversees about $7 billion. “As you get positive economic data points, those that were concerned about the taper get more concerned.”

3---David Einhorn's Three Questions For Ben Bernanke, zero hedge
  • How much does QE contribute to the growing inequality of wealth in this country and what are the risks this creates?
  • How much systemic risk does the Fed create by becoming what Warren Buffett termed “the greatest hedge fund in history”?
  • How might the Fed’s expanded balance sheet and its failure to even begin to “normalize” monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis

4---From B Of A: It's Getting Frothy, Man!, zero hedge

Equity funds: 3rd straight week of big inflows ($12.4bn); YTD, equities have seen $231bn inflows versus a mere $16bn inflows to bond funds (Chart 1)

5---Wall St. Watchdog Too Broke To Do Any Watching (Thanks To Austerity), Mark Gongloff

The Commodity Futures Trading Commission has decided not to press charges against two traders in the "London Whale" case partly because it is so strapped for cash, its former chief enforcement officer, David Meister, told the Wall Street Journal. The CFTC is also slowing down investigations and laying off staff as a result of its funding crunch.
"We will do everything we can… but we have limited staff and limited resources," Meister, who stepped down this week, told the WSJ. "Ultimately, it comes down to the math."

6---US home sales plunge in September, high mortgage rates blamed, daily news

The number of Americans who signed contracts to buy existing homes fell in September to the lowest level in nine months. The decline reflects higher mortgage rates and home prices that have made purchases more costly.
The National Association of Realtors said Monday that its seasonally adjusted pending home sales index dropped 5.6 percent last month from August to a reading of 101.6. That also pushed the index below its year-ago level, the first time that’s happened in nearly 2 ½ years

7--Four Intriguing Ideas for How to Fix the Banks, Bloomberg

It was a huge mistake for Congress to allow swap contracts to be unregulated, writes John Parsons, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. Credit default swaps written by AIG’s Financial Products unit went so bad that the U.S. had to take over AIG (AIG), the world’s biggest insurance company. Parsons says regulation is heading in the right direction, but slowly. “The key elements of reform—universal supervision, transparency through exchange-trading and price reporting, and central clearing—are tools for reclaiming the powerful good these financial instruments can provide,” he writes. “There remains much to be done to realize that goal

8---Corporate earnings will grow this year at their lowest level since 2009, Testosterone Pit

Corporate earnings will grow this year at their lowest level since 2009. Revenue growth at public companies is almost non-existent. Companies are buying back stock at a record pace to boost per-share earnings. The U.S. economy is so terrible, the Federal Reserve can’t stop printing money for the fear the markets and the economy will collapse. Economic growth is terrible; the number of poor people in the U.S. economy is at a record high.
But here’s what’s really bothering me about the stock market…something I’m not seeing many analysts write about. I’m talking about the significant decline in trading volume on the markets.
Since March of 2009, when the current rally started, volume on key stock indices has been falling hard.

9---Public and Private Sector Payroll Jobs: Reagan, Bush, Clinton, Bush, Obama, cal risk

Public Sector Payrolls A big difference between the presidencies has been public sector employment.  Note the bumps in public sector employment due to the decennial Census in 1990, 2000, and 2010. 

The public sector grew during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,748,000 jobs).

10---The trouble with Germany's trade surpluses, Krugman

The creation of the euro was followed by the emergence of huge imbalances, with vast amounts of capital flowing from the core to the periphery. Then came a “sudden stop” of private capital flows, forcing the peripheral nations to eliminate their current account deficits, albeit with the process slowed by the provision of official loans, mainly through loans among central banks. The really bad news for the periphery is that so far the adjustment has taken place mainly through depressed economies rather than regained competitiveness; so the counterpart of that “improvement” for Spain is 25 percent unemployment.

Normally you would and should expect the adjustment to be more or less symmetrical, with surplus countries reducing their surpluses as deficit countries reduced their deficits. But that hasn’t happened. Germany hasn’t adjusted at all; all of the rise in peripheral European current accounts has taken place at the expense of the rest of the world.

And that’s a very bad thing. We are still in a world ruled by inadequate demand, and very much subject to the paradox of thrift. By running inappropriate large surpluses, Germany is hurting growth and employment in the world at large. Germans may find this incomprehensible, but it’s just macroeconomics 101.

11---Truly Hateful;  Slashing the Food Stamps Program, by Dorothy Samuels, NYT

 Even as negotiations proceed in Congress over a new farm bill likely to contain a large cut in food stamps, needy Americans who rely on the program are confronting an immediate drop in benefits.
As of today, the boost to the federal food stamps program included in the 2009 Economic Recovery Act expires, abruptly slashing benefit levels that were already inadequate for millions of poor children and their families, as well as impoverished disabled and elderly people, who will now find it significantly harder to afford adequate food.
The callous Republican obsession with eviscerating the program is only partly to blame. Today’s cut is the product of a shabby deal Democrats made in December 2010, which accelerated the sunset of the benefit increase contained in the economic stimulus plan.  Essentially, Congressional Democrats, cajoled by the Obama White House, gambled that they could restore the lost money before the cut became effective — a convenient but unrealistic bet given that Republicans were about to take control of the House. Anti-hunger advocates expressed concern at the time about the bargain and its potential to seriously hurt food-stamp recipients not too far down the road — a worry, unfortunately, that has now become reality. ...
Duncan Black puts it this way:
Happy Food Stamp Cuts Day: We should all congratulate ourselves on our success in kicking the poors. Go team!

12--- "We’ve experienced as deep an extent of government failure as many of us have seen in our lifetimes" , NYT

One of the most fundamental building blocks of capitalism is its ability to convey important and correct signals through pricing, where “correct” means at least roughly accurate valuations of opportunity costs and risks.  No one would buy a Snickers bar that sold for $10 as there would be a lot more “utility” (happiness) spending the $10 on other stuff.  But people would, and did, borrow into unaffordable mortgages because credit was underpriced in ways they either didn’t understand or chose to ignore.  In many cases, the only way they could service the debt was if their home values kept going up — i.e., if the bubble kept inflating.

To the extent that lenders knew what was going on, they not only didn’t care, in part because they could unload the risk down the line (IBGYBG), they were also compelled by the profit motive to keep dancing “as long as the music is playing,” as Citigroup’s chief executive said at the time.
In other words, the oversight, or regulatory function that should have prevented all this failed … there’s that word again.  The myriad agencies, from the Federal Reserve to the alphabet soup of (too many) others supposedly focused on some aspect of financial markets, were either asleep at the switch, gutted by lobbying efforts to defund and defang them, or, in the case of the Greenspan Fed, ideologically convinced that markets would “self-regulate.”

We begin to see the toxic combination of market and government failure

13---Labor's lost share, Economist

IN THIS week's print edition we examine a rather disconcerting trend: a steady decline in the share of income across countries that flows to labour, rather than capital.
The “labour share” of national income has been falling across much of the world since the 1980s...The Organisation for Economic Co-operation and Development (OECD), a club of mostly rich countries, reckons that labour captured just 62% of all income in the 2000s, down from over 66% in the early 1990s. That sort of decline is not supposed to happen. For decades economists treated the shares of income flowing to labour and capital as fixed (apart from short-run wiggles due to business cycles). When Nicholas Kaldor set out six “stylised facts” about economic growth in 1957, the roughly constant share of income flowing to labour made the list. Many in the profession now wonder whether it still belongs there.

A falling labour share implies that productivity gains no longer translate into broad rises in pay. Instead, an ever larger share of the benefits of growth accrues to owners of capital. Even among wage-earners the rich have done vastly better than the rest: the share of income earned by the top 1% of workers has increased since the 1990s even as the overall labour share has fallen. In America the decline from the early 1990s to the mid-2000s is roughly twice as large, at about 4.5 percentage points, if the top 1% are excluded.

14---All around the world, labour is losing out to capital, Economist

15--Single-family rental securitization market boasts near trillion-dollar potential, housingwire
(MBS Redux: Back to the Future)

15---US attacks Germany’s economic policies, wsws

16---The political implications of the NSA exposures, wsws

...The entire political system has been caught out in a massive conspiracy against the democratic rights of the people. The elevation of Obama, the first African American president, was intended to give the ruling class a certain cover to continue unpopular policies. The “candidate of change”—the man whose election was hailed as “transformative” by pseudo-left organizations that promote the Democratic Party—has gone far beyond his predecessor, George W. Bush, in eviscerating core Constitutional rights....

The collapse of democratic rights in the United States reflects a deep and unbridgeable social gulf between a parasitic financial aristocracy and the working class, the vast majority of the population. Those who dictate the policy of the government look around and see enemies, real and potential, everywhere.
On the basis of speculation and fraud, a tiny layer has amassed unprecedented wealth. Social inequality is greater than ever. Just yesterday, amidst record corporate profits and the unending flow of money from the Federal Reserve to Wall Street, the most basic form of nutritional assistance in the US, food stamps, was slashed, affecting more than 47 million people. More severe cuts are to come.

The ability of the ruling class to maintain its stranglehold through its traditional ideological and political structures is breaking apart. The emergence of individuals like Snowden and Manning is itself a reflection of shifts taking place more broadly. Within broad sections of the population, what is emerging is disgust and hostility to the entire system—a pre-revolutionary sentiment....

What remains of the political and ideological foundations of capitalist rule in the United States? Since the end of World War II, the American government has sought to present itself as the leader of the “free world,” the supposed champion of democratic rights and individual liberty.

It now stands exposed as the perpetrator of a global police state operation involving the illegal monitoring of the communications of hundreds of millions of people. With its vast data-bases, the American government has the ability to discover the social and political connections of virtually any individual. This negates the basic freedoms—speech, political assembly, privacy—laid down by the US Constitution and its Bill of Rights.....

And what of the “war on terror”? US officials continue to evoke the still unexplained events of September 11, 2001 to justify every act of aggression and every attack on democratic rights. On Thursday, US Secretary of State John Kerry, responding to the latest NSA revelations, insisted, without any evidence, that “we have actually prevented airplanes from going down, buildings from being blown up, and people from being assassinated because we’ve been able to learn ahead of time of the plans.”
Kerry is lying. But he is speaking for a government and a political establishment that lie continuously and without restraint.

17---1,370 Killed in Iraq in October, Worst Since 2007, antiwar
           Death Toll Continues to Rise
(From "cakewalk" to killing fields)

18--Israel strikes provoke regional war, antiwar

19--Why Vladimir rules and Obama bombs (Dogs bark, the caravan passes), RT

While the dogs of war and surveillance bark, the silent Russian caravan passes. Putin is extending Russian influence in Central Europe as well as solidifying the partnership with Germany. The Chinese-Russian strategic partnership is proceeding smoothly. Russia is back as an influential player in the Middle East. Putin is trying to create a viable, multilateral alternative to imperial US diktats. This is as much about soft power as hard power. 
Back to the facts on the geopolitical ground. Putin has seized the moment and now is arguably the key actor trying to build an emerging, alternative multilateral order. As for imperial lame duck Obama, he seems destined to keep bombing in more ways than one.

20---Putin op-ed, NYT
(US---Not so special after all)

force has proved ineffective and pointless. Afghanistan is reeling, and no one can say what will happen after international forces withdraw. Libya is divided into tribes and clans. In Iraq the civil war continues, with dozens killed each day. In the United States, many draw an analogy between Iraq and Syria, and ask why their government would want to repeat recent mistakes.
No matter how targeted the strikes or how sophisticated the weapons, civilian casualties are inevitable, including the elderly and children, whom the strikes are meant to protect.
The world reacts by asking: if you cannot count on international law, then you must find other ways to ensure your security. Thus a growing number of countries seek to acquire weapons of mass destruction. This is logical: if you have the bomb, no one will touch you. We are left with talk of the need to strengthen nonproliferation, when in reality this is being eroded.
It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation. There are big countries and small countries, rich and poor, those with long democratic traditions and those still finding their way to democracy. Their policies differ, too. We are all different, but when we ask for the Lord’s blessings, we must not forget that God created us equal.       
We must stop using the language of force and return to the path of civilized diplomatic and political settlement.
Koo: As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down. At the moment, however, that is not yet the case, as the sharp fall of the yen following the announcement of Abenomics with its commitment to monetary easing amply demonstrates….The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limitmued impact.
In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more....
About Japan’s Abeconomics:
In Japan, the new governor of Bank of Japan Mr. Kuroda, who has no prior experience with monetary policy, is still clinging to the obsolete idea that additional bond purchases will somehow get the economic activity and inflation rates to pick up.

....This time, however, the US and UK central banks are in the long end of the market. This means the removal of QE will have much larger effect at the long end of the yield curve, with equally larger impact on the economy just when the economy is regaining its health and willingness to borrow

23---China mimics worst of ‘Abenomics’ at worst time, Japan Times

Just like Abenomics, China’s new leaders bamboozled the masses with a pair of grand gestures — neither of which worked as intended — to deflect attention from the third. The first was a credit clampdown in June; the second was the proclamation that a brake was being applied to growth in the name of preventing the economy from overheating.

Closing the credit spigot traumatized markets so much that officials backed off. There’s loads of credit being extended around the nation today that will go bad when China experiences trouble, as every industrializing nation invariably does. The broadest measure of money supply, or M2, has exceeded the official goal of 13 percent every month this year, rising at a 14.2 percent rate in September. Some clampdown.

China’s growth, meanwhile, isn’t slowing to 7 percent from the 10.5 percent average pace of the past 10 years by design. The economic model that once worked so brilliantly has run out of steam. China isn’t promoting slower growth — it’s stuck with it...

No industrializing economy has ever avoided a crash of some kind, and neither will China. The more Beijing puts empty sloganeering ahead of retooling its economy, the more it tries to delay its day of reckoning, the bigger it will be. And all the spin in the world can’t save China from that reality.

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