Thursday, November 21, 2013

Today's Links

1---Uh oh. PBOC Says No Longer in China’s Interest to Increase Reserves, Bloomberg

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes. ....

It appears that many in the People’s Bank think the time is about right to scale back currency interventions,” Mark Williams, London-based chief Asia economist at Capital Economics Ltd., wrote in an e-mail yesterday. “But China has got itself into a situation where stopping intervention will be very hard to do” and comments such as Yi’s will spur speculative inflows, he added.

Less intervention and smaller gains in foreign-exchange reserves may damp China’s appetite for U.S. government debt. The nation is the largest foreign creditor to the U.S. and its holdings of Treasuries increased by $25.7 billion, or 2 percent, to $1.294 trillion in September, the biggest gain since February. U.S. government securities lost 2.6 percent this year, according to the Bloomberg U.S. Treasury Bond Index.

2--Prelude to a Crash. Stock Funds Lure Most Cash in 13 Years as Market Rallies, Bloomberg
(Out of the pan, into the fire)

People shifting into equities “are jumping from one frying pan to another,” Eric Cinnamond, manager of the $694 million Aston/River Road Independent Value Fund, said in an interview from Louisville, Kentucky.

Intermediate-term bond funds, a category often used for primary fixed-income holdings, declined 0.9 percent in 2013 through Nov. 19, according to Chicago-based Morningstar. Fixed-income funds had net redemptions of $11.2 billion in this year’s first 10 months, the firm estimated.

Statement Shock

Bonds have lost value since Federal Reserve Chairman Ben S. Bernanke in May raised the possibility of the U.S. central bank scaling back its asset-buying program. The yield on the 10-year Treasury note rose to 2.79 percent as of 4:15 p.m. yesterday in New York from 1.93 percent on May 21, the day before Bernanke first mentioned the idea of reducing monetary stimulus. Bond prices fall as rates rise. Pacific Investment Management Co., the biggest manager of bond funds, lost $39 billion to net withdrawals in the third quarter.
“People are rotating into stocks because they opened up their statements and saw losses in their bond funds for the first time in god knows how long,” Michael Mullaney, who oversees $10.7 billion as Boston-based chief investment officer for Fiduciary Trust Co., said in a telephone interview....

There is no doubt that people are moving further out the risk curve and it’s manifesting in the equity side of the house,” Henry Herrmann, CEO of Overland, Kansas-based Waddell & Reed Financial Inc. (WDR), said on an Oct. 29 conference call for investors

3---Wholesale prices drop for second month, Bloomberg

4--Deflation Alert. OECD warns of Eurozone deflation risks; suggests ECB consider non-conventional measures  sober look

The Independent: - The eurozone must follow the examples of the UK, US and Japan by turning to the printing presses to avoid the threat of damaging deflation, according to an assessment by a leading economic think-tank [OECD].
5---Larry Summers' Desperate Depression-Fighting Idea May Soon Be Reality , mark gongloff
 
Depositors to pay interest on savings in bank?
 
6---Fed nears Taper time minutes show, Bloomberg
 
Federal Reserve officials signaled they may taper their $85 billion in monthly bond buying “in coming months” if the economy improves as anticipated.
Policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released yesterday in Washington...
 
The FOMC has pledged to press on with so-called quantitative easing until seeing substantial improvement in the outlook for the labor market. Employers added 204,000 workers to payrolls in October, more than forecast by economists, and the unemployment rate has fallen to 7.3 percent from the 8.1 percent rate the month before the central bank began a third round of bond buying in September 2012.
 
7---Stimulus Lost---A Giant Sucking Sound. Households lose $630 billion in net interest income from QE, naked capitalism (A great read)
 
Nonfinancial corporations benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5% in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.
 
The impact that ultra-low interest rates have had on banks has been mixed. They have eroded the profitability of eurozone banks, resulting in a cumulative loss of net interest income of $230 billion between 2007 and 2012. But banks in the United States experienced an increase in effective net interest margins and a cumulative increase in net interest income of $150 billion. The experience of UK banks falls between these two extremes....
 
Rising bond prices are the flip side of declining yields, and the value of sovereign and corporate bonds in the eurozone, the United Kingdom, and the United States increased by $16 trillion between 2007 and 2012.
 
(Stiglitz was right. QE's impact on EM)Ultra-low interest rates do appear to have prompted additional capital flows to emerging markets, particularly into their bond markets. Purchases of emerging-market bonds by foreign investors totaled just $92 billion in 2007 but had jumped to $264 billion in 2012. Emerging markets that have a high share of foreign ownership of their bonds and large current account deficits will be most vulnerable to capital outflows if and when central banks begin tapering current policies...
 
Red Alert--Capital flows to emerging markets could reverse...
 
By every measure, the big banks are bigger
Assets at the six largest U.S. banks are up 37% from five years ago. What happened?...
 
The six largest banks in the nation now have 67% of all the assets in the U.S. financial system, according to bank research firm SNL Financial. That amounts to $9.6 trillion, up 37% from five years ago. And the big banks seem to be getting better at acquiring assets all the time. The overall growth of assets in the system in the same time is up just 8%.
The biggest bank in the nation, JPMorgan, has $2.4 trillion in assets alone – the size of England’s economy. And JPMorgan is seven times larger than the nation’s No. 10 bank U.S. Bancorp, which itself has $350 billion in assets – along the lines of Austria — and at this point is probably part of the TBTF club as well. Also way up: Profits. The four biggest banks in the U.S. alone, which along with JPMorgan include Bank of America, Citigroup, and Wells Fargo, made collectively nearly$45 billion in the first six months of the year, nine times what those same banks made five years ago....
 
too big to fail has only become bigger, and therefore even harder to fail. Courtesy of quantitative easing. Well, and creative accounting.
But that is not at all how QE has persistently been presented to the people. It’s presented both by Bernanke and by his footsoldiers as an effort to heal the American economy and create jobs. For which there is so little evidence that they get away with throwing ever more money at the by now too bloated to fail banks, and always under the same guise. And as the American people seem to believe them, banks and investors are just happy with all the free money and low interest rates. It’s as if nobody pays, and if someone does pay, who cares, they don’t raise their voices, do they?...
 
By 2012, Americans had lost $630 billion just in net interest income, some $2000 per capita. Today, that amount is undoubtedly higher. And Janet Yellen, faithful puppet of the architects of America’s worst ever financial crisis, will do her best to make sure it keeps on rising.
Why doesn’t America recognize the failure of QE and try something different? $85 billion a month, over $1 trillion a year, is about $3000 for every American, or close to $10,000 per household. If that were handed not to banks, but to these households, and it could achieve the same economic efficiency that foodstamps have, i.e. they create $1.7 worth of – primarily local – economic activity for every $1 they’re worth, the average household would have $10,000 extra to spend, and the benefit to the economy would be $17,000. That couldn’t fail to create jobs.
 
It’s theoretical, of course, and things being as they are, it’s almost certain that it will remain a theory only. But even if you would take just, let’s say, 10-20% of the amounts presently spent to relieve too big to fail but already failed anyway banks of their mortgage debt risk, that would still do a lot more to revive the economy than all of QEs relief does. Not that that’s hard, mind you, since QE has only made matters worse for the people. That’s what that graph from McKinsey tells us.

8---Banking did not recover for 20 years, (No Return to Normal, James Galbraith,  Washington Monthly (archive)
 
James K. Galbraith again:
"Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936…
The New Deal rebuilt America physically, providing a foundation (the TVA’s power plants, for example) from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving. There were many, in the 1930s, who did not think so.
 
“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended….. the relaunching of private finance took twenty years, and the war besides.
 
“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around."("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)
 
9---BULL RUN, Bubble Fears as stocks break records, FT 
Investors veer from "sensible valuations to one of the greater fool theory"
Tobias Levkovich, US chief equity strategist at Citi, still believes in the secular bull market, but says: “The market is vulnerable to a pullback here; if profit-taking sets in, no one wants to be the last one out of the door.”
As the equity market looks to chalk up more milestones in 2013, the worry remains that the new peaks could become a millstone for late bull run arrivals.
Mr Kastner says: “We seem to have moved from investing under sensible valuations to one of the greater fool theory, hoping there is another buyer willing to pay a higher price at these extended levels.”
 
Markets have left milestones for dust. US stock prices are enjoying their best year since 1997, with investors apparently untroubled by the backdrop of a lacklustre economy and high unemployment.
The S&P 500 has barrelled through three century marks this year alone, from below 1,500 to this week’s intraday peak of 1,802 for a year-to-date gain of 25 per cent. The Dow Jones Industrial Average has finally breached the 16,000 threshold, after rising through 15,000 in October, while the Nasdaq Composite is looking to revisit 4,000 after an absence of 13 years since the dotcom bust of 2000.
As the Fed’s balance sheet approaches $4tn, its expansion in recent years neatly matches the rise in the S&P 500, creating unease that an equity bubble is surely inflating as was the case in 2007 and 1999....

 
Even the most bullish investor would admit that sluggish economic growth, a lacklustre labour market, and political discord are hardly the logical bedfellows of a stock market at new highs,” says Nicholas Colas, chief market strategist at ConvergEx.
“The current market action of a year end melt-up coming after five years of truly solid returns for US stocks, seems at first blush to be irrational performance-chasing. And who knows, it may end up being exactly that.”
Certainly the return of money into US stocks after outflows in 2011 and 2012 has been one catalyst for outsized performance. According to Lipper, investors have pumped a net $285bn into US equity mutual funds and exchange traded funds in 2013, the best year for the market since their records began in 1992.
Among the winners, FedEx, Google, Amazon and Microsoft have rallied 40 per cent or more, while companies such as IBM and Apple are modestly negative in 2013
 
10---Psychiatric Rampage; Mass shootings traced back to prescription drugs, Global Research
 
The data that reinforce the psychiatric drugs and violence connection is overwhelming.
  • A PLOS One study, based on FDA adverse event drug data, authored by Thomas J. Moore, Joseph Glenmullen and Curt D. Furberg, found that “acts of violence towards others are a genuine and serious adverse drug event associated with a relatively small group of drugs.” Verenicline (Chantix) and antidepressants with serotonergic effects were the most strongly and consistently implicated drugs.
11---DANGER; TAPER AHEAD, (This time they mean it. Kind of.) zero hedge

12---Bernanke: "We want to taper, but worry about impact on markets, er, economy", economists view


We know the Fed has been looking to pull the plug on asset purchases, they just haven't explained why. Well, not exactly. Federal Reserve Chairman Ben Bernanke was more direct on the subject in his speech this week:
..though a strong majority of FOMC members believes that both the forward rate guidance and the LSAPs are helping to support the recovery, we are somewhat less certain about the magnitudes of the effects on financial conditions and the economy of changes in the pace of purchases or in the accumulated stock of assets on the Fed's balance sheet. Moreover, economists do not have as good an understanding as we would like of the factors determining term premiums; indeed, as we saw earlier this year, hard-to-predict shifts in term premiums can be a source of significant volatility in interest rates and financial conditions. LSAPs have other drawbacks not associated with forward rate guidance, including the risk of impairing the functioning of securities markets and the extra complexities for the Fed of operating with a much larger balance sheet, although I see both of these issues as manageable....

Fed officials have little faith in any of their alternatives. They want to pull back from quantitative easing, fearing that the costs will turn against them soon, yet have little to offer in return. Not good - it is almost as if the Fed is beginning to believe that they are near the end of their rope.
Interestingly, one of the costs of quantitative easing seems to be the inability to exit quantitative easing. This was revealed in today's bond market sell-off after the minutes were released. Despite the Fed's repeated efforts to use forward guidance to hold down rates, despite repeated reassurances that tapering is not tightening, Treasury yields gain almost 10 basis points at the 10 year horizon on even a whisper of tapering - and this after Bernanke's dovish speech and Vice Chair Janet Yellen's (perceived) dovish Senate hearing last week 

13---Saving glut or investment dearth?, VOX

14---FOMC: Rates will be low for a long time, cal risk

15---Food stamp use already falling, offthechart

16---Is zero the new normal, mainly macro

Simon,
Falling labor share of national income needs to be added to your list. More so then inequality of income. Capital income has a much lower propensity to consume than even the labor income of the rich. And capital income share has risen quite a bit.
I have a model to show that low labor share is keeping the prescribed Central bank rate below 0%. The CBs are fighting a losing battle. Labor share has not just fallen, it has actually anchored into a new lower normal after the 2001 and 2008 recessions. The result is that the utilization of labor and capital are both constrained to lower levels. The CB rate then goes lower in a vain attempt to raise them back up, but they won't go back up because low labor share is constraining them.

Labor share continues to fall as countries try to increase national savings in an attempt to raise exports. Lowering labor share so broadly is bringing down the global economy, and more specifically the workable range of the Central bank rates.
My view to resuscitate the CB rates is to either raise labor share, or shift the Central bank policy to a lower standard of expectations for the utilization of labor and capital. If the CBs acknowledge the constraining effect of low labor share on the utilization of labor and capital, they would realize their hopes for success of the ZLB are futile. They would realize that the costs will outweigh the benefits of the ZLB since there is not as much spare capacity as they think.

Central banks would then fit their rate policy to the new lower range of labor and capital utilization. By surrendering to this sub-optimal truth, CBs would be obliged to raise their rates. The new sub-optimal reality would start to function correctly, albeit with more marginalized workers. Then attempts can be made to restore the former reality. But that would require coordination on a global scale.
As for now, CBs are drowning in the delusions that they are still in the former reality. The truth is hard to accept, especially this truth.
 
Other comments:
Japan has raised government debt/GDP by more than 100% over the last two decades. They are still at the ZLB. If that experiment does not falsify the theory that raising public sector debt is "helpful" in raising the natural rate at the ZLB, what would?

17---No, Larry Summers, We Don’t Need More Bubbles, Bloomberg

Larry Summers stirred a lot of interest with a talk he gave last week at an International Monetary Fund conference. The former Treasury secretary asked an unsettling question: What if the U.S. needs financial bubbles to maintain full employment?
Not for the first time, you might think, life imitates the Onion. The blog Zero Hedge notes that the satirical website got here first. “Recession-Plagued Nation Demands New Bubble to Invest In,” it reported in 2008. It quoted the chief financial officer of a “bubble-based investment firm”: What the U.S. needed was “a concrete way to create more imaginary wealth in the very immediate future. We are in a crisis, and that crisis demands an unviable short-term solution.”...

(Why bubbles become essential)
 Summers then asks, what if this isn’t temporary? Maybe there’s a chronic shortfall of demand, beyond what’s due to the crash. Maybe we face an age of secular stagnation, in which the zero lower bound is normal. If so, short-term fiscal easing can’t be the answer. Permanent fiscal stimulus may be necessary to maintain demand. And if that can’t be done because politics makes it impossible, what’s left? Bubbles. Summers doesn’t advocate them, mind you, he just poses the question. ....

During the recovery from the recession of 2001-2002, the U.S. had a house-price bubble (the proximate cause of the subsequent economic collapse). But during that expansion, Summers argues, the economy returned to full employment without encountering inflation in wages or consumer prices. Without the bubble, the economy would have recovered too slowly. The implication is that bubbles are sometimes a good thing.
It’s a puzzling argument.

18---Snowden confirms NSA created Stuxnet with Israeli aid, RT

19--The US is not leaving Afghanistan, antiwar

20--The revolving door: Geithner moves to Wall Street, wsws

Last July, Robert Khuzami, enforcement chief at the Securities and Exchange Commission (SEC) from 2009 to January of 2013, joined the elite corporate law firm Kirkland & Ellis as a partner. Prior to taking the SEC post, Khuzami was a top lawyer at Deutsche Bank.
In May, the private equity firm KKR & Co. hired David Petraeus, the former commander in Iraq and Afghanistan and Central Intelligence Agency chief. Former Vice President Dan Quayle and former Treasury Secretary John Snow work for Cerberus Capital Management LP.

The New York Times reported on November 12 that the last six SEC enforcement chiefs have moved on to lucrative jobs at major corporations and big banks such as JPMorgan Chase and Bank of America. Stephen Cutler, chief counsel at JPMorgan, headed up the enforcement division at the SEC earlier in the decade.
In Geithner’s case, the progression is from a Wall Street insider in the public sector to a Wall Street operative on the private side—or, to put it differently, from a trusted agent of the financial aristocracy to a bona fide member of the club.

(TARP, Libor, AIG grad moves from Treasury to Wall Street payout)

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