Thursday, January 23, 2014

Today's links



  "The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."  John Maynard Keynes


1---Unglamorous End Of Largest Corporate Profit Bubble In History, Testosterone Pit


Many of today’s investors uncritically assume that the conditions they have known over the course of their professional careers must be normal. The idea that we may soon experience a multi-decade period of zero or negative growth in real earnings per share, taking the level of profits down to a lower share of national income, seems preposterous. Yet economic history has seen many examples of such a turn, including the 1880–1890s, the World Wars, the 1930s, and the 1970–1980s. In fact, almost every decade except the 1990s and 2000s saw a protracted profits slump. Some declines in profitability lasted most of a decade; others, longer!




Many of today’s investors uncritically assume that the conditions they have known over the course of their professional careers must be normal. The idea that we may soon experience a multi-decade period of zero or negative growth in real earnings per share, taking the level of profits down to a lower share of national income, seems preposterous. Yet economic history has seen many examples of such a turn, including the 1880–1890s, the World Wars, the 1930s, and the 1970–1980s. In fact, almost every decade except the 1990s and 2000s saw a protracted profits slump. Some declines in profitability lasted most of a decade; others, longer!




Business success, as defined by growth in revenues and profits and not by financial engineering, is crucial to the economy. But for nearly a quarter of a century, corporate profits have been rising at a faster rate than GDP and they’re now “dangerously elevated by all reasonable measures,” writes Chris Brightman, Managing Director and Head of Investment Management at Research Affiliates, in his excellent report.
S&P 500 Index real earnings per share are far above their long-term historical trend. Industry profit margins are at or near all-time highs. Corporate profits, both as a percentage of GDP and relative to labor income, are at or near record levels. The dramatic rise in income inequality is a direct consequence of this spectacular reallocation of income to capital and away from labor.
Equilibrium real growth in earnings per share cannot exceed real growth in per capita GDP, real growth in wages, and real productivity growth, on a long-term basis, without violating our sense of social fairness: More rapid growth in profits than GDP means a rising share of income to capital. Capital’s share cannot rise in perpetuity; social and political forces, if not economic developments, will cause it – sooner or later – to revert to a more usual level....


 ....inflation of corporate profits has been “facilitated in part by a corporate capture of government policy, inhibiting competition, depressing investment, and promoting rent seeking. Rent seeking may be more extreme within our very own financial industry than in any other. TARP and QE are just the most recent and largest examples of government intervention to benefit corporate interests...


The post-World War II average ratio of profits to wages is 19.8%. By 2013, after the sizzling run since the financial crisis, when companies dumped millions of workers and slashed their labor costs, the ratio (green-to-red line below) hit 29.9%, an all-time high by a big margin. Even when benefits and entitlements are thrown into the mix (blue line), the ratio is “darned close to unprecedented records.”....


The profit bubble since the financial crisis was preceded by the profit bubble of 2007, which, in real EPS terms, was 79% above long-term trend – by far the widest margin than any prior profit bubble, except the one in 1916. And look what happened: profits crashed. They didn’t stop crashing until 1921, then stayed mostly below trend line until 1951....


Many of today’s investors uncritically assume that the conditions they have known over the course of their professional careers must be normal. The idea that we may soon experience a multi-decade period of zero or negative growth in real earnings per share, taking the level of profits down to a lower share of national income, seems preposterous. Yet economic history has seen many examples of such a turn, including the 1880–1890s, the World Wars, the 1930s, and the 1970–1980s. In fact, almost every decade except the 1990s and 2000s saw a protracted profits slump. Some declines in profitability lasted most of a decade; others, longer!


“Fueling popular unrest.”


2---China Manufacturing Index Signals Surprise Contraction , Bloomberg


The preliminary reading of 49.6 for January in a Purchasing Managers’ Index (SHCOMP) released today was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey. A number above 50 indicates expansion…. 
The PMI reading is “really dramatic,” Hu Yifan, chief economist at Haitong International Securities Co. in Hong Kong, said in a Bloomberg Television interview. Rising funding costs are adding difficulties and the official PMI will also show a “continued declining trend,” she said.


3---Trying to deleverage China without blowing up the system, Pritchard, Telegraph


China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and are – buying up nearly completed buildings from distressed developers for a song…


“They are trying to deleverage without blowing the whole thing up,” said CITIC’s Zhang Yichen.
“The M2 money supply is 120 trillion RMB but that is still not enough cash because velocity of money is very slow, and interest rates are going up.”
“My guess is that they will manage it. The US couldn’t contain Lehman contagion but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We’ll see a slow deflating of the bubble,” he said…


There was general agreement that there will be “no more stimulus” for now. President Xi Jinping is determined to tough it out…


Nothing said changes my mind that China is riding a $24 trillion credit tiger that it cannot really control. Loans have jumped from 120pc of GDP to around 220pc since the post-Lehman blitz (George Magnus from UBS says it may be 250pc by now).


As Fitch says, this is an unprecedented rise in the credit-GDP matrix in any large state in modern times. It will not end with a Western style banking crash because the financial system is an arm of the state. It will end in an entirely different way.


4---Wall Street’s unexpected allies: How groups who “represent the poor” quietly push deregulation, Dave Dayen                      


You might expect banks to agitate for exemptions to new mortgage rules – but Habitat for Humanity?...


Last week saw two such incidents, both focused on the Consumer Financial Protection Bureau’s new mortgage rules, based on the simple idea that lenders should only offer mortgages to borrowers who can afford the terms. The rule sets standards for “qualified mortgages,” excluding risky products like “interest only” loans (where the monthly payment only covers the accrued interest) or loans with excessive upfront costs. Additionally, lenders must judge that the borrower has the ability to repay, based on income and other monthly bills.


Lenders can still make riskier loans, but they would be on the hook for a lawsuit if the borrower defaulted. Qualified mortgages get a safe harbor, both for the lender and whoever they might sell the loan to on the secondary mortgage market. The basic idea is to prevent a glut of dangerous mortgages in the marketplace, like the ones that collapsed after the housing bubble and led to the financial crisis. 


The rules went into effect Jan. 10. The sky has not fallen and people are still getting loans, but mortgage bankers and their allies in Washington have been screaming about how the rules will inhibit lending, despite the fact that over 87 percent of all mortgages originated in 2012 would have met the qualified mortgage standard, and the other mortgages aren’t even banned (it’s more that the banks don’t want nonqualified mortgages on their books, and if the loans are that toxic, maybe they shouldn’t be sold in the first place).


CFPB recognized the Habitat issue early on and exempted nonprofit organizations that write under 200 loans a year from the qualified mortgage rules. But because Habitat adds a second mortgage as a safety measure for their clients, some of their affiliates may go above that 200-loan limit. By one estimate, 99 percent of all Habitat affiliates would find themselves within the exemption. But Habitat wants 100 percent blanket coverage, and doesn’t mind loudly suggesting that in congressional hearings that then get amplified by House Republicans with designs on eliminating the qualified mortgage rules altogether. “Lenders are trying to ride on the coattails of these nonprofit organizations and their technical concerns about the scope of the exceptions,” said Michael Calhoun of the Center for Responsible Lending, who testified at the same hearing in support of the qualified mortgage rules...


But the real problem here is the unholy alliance between housing groups catering to the poor and Wall Street. NACA members were also carrying around a study attesting to their effectiveness from Promontory, traditionally a consultant for big banks that helps their clients scale “unprecedented regulatory challenges


5---The 'too big to fail' problem just got worse, Telegraph


Events in Basel are never likely to hit the UK headlines. Yet they should, because early last week, during a meeting of central bankers and regulators in the sleepy Swiss town, the international standard for the so-called leverage ratio, the main measure of any bank’s financial strength, was quietly but significantly weakened. This move came after intense lobbying by deep-pocketed global investment banks. Once the deal was done, City firms wrote to their clients with news of “a series of victories”, a “better than expected outcome” and “a significant relaxation” in the post-sub-prime regulatory regime. ....


The leverage – or loan exposure, for a given amount of capital – of Western banks has been rising steadily for more than a hundred years. At the end of the 19th century, British and American banks would typically hold capital equivalent to around 25pc to 35pc of their loans. Such banks could absorb losses up to a quarter or a third of their outstanding loans, then, and remain solvent. .....


By the time of the credit crunch in 2008, then, RBS had capital reserves so meagre it could cover just over 2pc of its loans and investments. So their leverage ratio was 2pc....


So what just happened in Basel? Well, far from imposing a leverage ratio of 5pc, 10pc or even 15pc, the committee continues to propose a leverage ratio of just 3pc – that’s right, only slightly above that displayed by the UK banking industry just before the last collapse.


At the same time, technical changes related to the “netting” of derivatives and the treatment of off-balance sheet items will now allow banks further to reduce the capital they’re required to hold for a given loan/investment exposure. It’s precisely what the bankers wanted.


6---"Flying Blind": Banks Could Still Blow Up The World, mark gongloff


Derivatives, in case you don't know, are essentially side-bets that banks and hedge funds and other investors make with each other on the prices of things trading in other markets. These other things include everything from corn prices to subprime mortgages. Sometimes derivatives are helpful ways to buy insurance against wild price swings (see corn futures, for example). Sometimes they're dangerous ways to feed Wall Street's addiction to obscene bonuses (see subprime mortgage-backed securities, for example). Sometimes they're both!


Though banks these days aren't trading too many subprime mortgage-backed securities -- the derivatives that blew up the world last time -- they're still trading plenty of other such stuff, including the credit-default swaps that recently cost JPMorgan Chase $6 billion in the London Whale debacle. Even years after the crisis, JPMorgan didn't see that one coming.


7---The Euthanasia of the Rentier, Paul Krugman


8--"All cash" sales; Housing (chart), cal risk


9---Banks Remain Vulnerable in a Key Area Years After the Crisis , WSJ


Unlike stocks, most derivatives aren’t securities traded on exchanges. Instead, they are bilateral contracts between a bank and another financial firm or a company. As a result, figuring out who is on the other side of a deal during a period of financial stress is like looking for a needle in a haystack at night with a candle....


Those wondering whether any of this matters should cast their minds back to 2 p.m., Sunday, Sept. 14, 2008. At that time, derivatives markets were forced to open for an extraordinary trading session to try to unwind billions of dollars in positions held by Lehman Brothers Holdings Inc. With Lehman on the brink of collapse, regulators and Wall Street executives wanted to ensure its failure didn’t endanger the hedge funds, banks and companies that had derivatives contracts with the firm. The session quickly turned into chaos partly because of poor data on crucial details such as the maturities and terms of the derivatives as well as the identities of the major counterparties.


As one trader told The Wall Street Journal at the time: “People were screaming at each other over the phone, asking: ‘How can this work?’” It didn’t. Sunday passed without a meaningful reduction in Lehman’s derivatives contracts, adding to the uncertainty, fear and confusion that haunted the markets the following Monday and for many months to come.


On derivatives, the global financial system was flying blind. It still is, albeit less so, according to the 10 regulators....


To be fair, there is some good news: 13 of the 19 firms managed to report weekly data on derivatives contracts to a central database within three days—the standard set by regulators. But some other details are unsettling: Two unnamed U.S. banks provided worse data in 2012 than in previous years. And eight European Union banks, one U.S. and one Canadian firm couldn’t update critical metrics required by watchdogs...


Regulators are fairly toothless in this respect because they can’t really compel banks to provide derivatives data. And bank executives argue that it is costly, time-consuming and fiendishly complicated to get through the thicket of legal entities, derivatives contracts and counterparties that make up the undergrowth of the financial system.


10--Shinzo Abe betting on wage growth , sober look


The Star: - Japanese companies are unlikely to raise wages significantly this year and inflation will be well below the official target, economists said in a Reuters poll, suggesting tough challenges for Prime Minister Shinzo Abe's drive to end years of falling prices and generate robust growth.

The forecasts bolster the view that, with a few high-profile exceptions, businesses are cautious about passing on higher profits to employees, which is seen as vital to Abe's hopes for sustained growth in the world's third-biggest economy.

The economists in the monthly survey are also pessimistic that the Bank of Japan can meet its goal of 2% consumer price inflation by next year


11--America in Denial,  MWC News


In the United States, the One-percent Elite, today’s knighted gentry, could not maintain total rule of the nation if it weren’t for a sizeable group of squires, the Nineteen-percent Sub-elite.  In fact, if we analyze the data provided by economist Edward N. Wolff at New York University (2012), we find the change in net worth for the top 1 percent rather small, an increase from 33.8% to 35.4%, during the period 1983-2010; with an actual decrease in financial (non-home) wealth, from 42.9% to 42.1% for the same group, during the same period.  Yet, the Squires (next 19 percent of the population) increased their net worth from 47.5% to 53.5% during the same 1983-2010 period, with a similar increase in the financial (non-home) wealth… from 48.4% to 53.5%.


Those figures provided by Professor Wolff (NYU) indicate clearly that in the wealth distribution scheme of things – which directly impacts the poverty level – the Bottom Fishers (80 percent of the population in the US) lost more than ONE-THIRD of their wealth from 1983 to 2010… not to the hated elite of One-percenters (Knights) but to their lackeys, the Nineteen-percenters (Squires).  It places the wealth of the Haves, or one-fifth of the population, at 88.9% of the nation’s total; the Have-nots, representing the other four-fifths, just holding on to 11.1%.  And the disparity gets even greater when the mythical home-wealth is extracted from the figures, bringing the bottom line to 95% of the wealth held by the elite and sub-elite, and just a minuscule 5% for the masses (80 percent of the population).


So, perhaps the lead-photo’s sign in The Atlantic’s article, should have read “20% HAVES, 80% HAVE-NOTS”.  That would have been a more accurate description for the enlightening article which follows, pitting poverty and democracy in the US.....


This width of economic inequality and poverty that we constantly measure attains a different dimension as it grows and appears irreversible… and the width becomes that new dimension: breadth.  And the breadth of inequality and poverty hovers over us as we compare ourselves, negatively, to much of the industrialized world: in infant and maternal mortality; life expectancy; the number of children living with a single parent; the lack of educational opportunities for the poor; deficient literacy (we refuse to call it illiteracy); trans-generational poverty; and the fifth-worst rate of poverty (after taking into account the effect of taxes and government spending programs) in the OECD.  That’s the true breadth of America’s interlaced inequality and poverty.
Yes, we are in total denial!


The United States may be a rich country but, unfortunately, the power elite (economic, social and political) prevent it from behaving like one.


12---American Psychological Association: No Rebuke for Torture Doctor, antiwar
           Won't Term Conduct in Torture of Gitmo Detainee 'Unethical'


13---Davos elites worried about "over regulation" and deficits, just like Obama, wsws




The attendees have reason to celebrate. The wealthiest 300 people on the planet saw their net worth grow by $524 billion over the last year, according to Bloomberg News. The Bloomberg article, entitled “Davos Billionaires See Wealth Gains on 2014 Stocks Rally,” noted that Bill Gates was last year’s biggest gainer, having increased his fortune by $15.8 billion to $78.5 billion, recapturing the position of world’s richest person....


No one at the conference, however, is proposing any social reforms to ameliorate the plight of the working class or redistribute wealth downwards from the top. On the contrary, the watchword is “structural reform,” a euphemism for stripping workers of all protections, dismantling what remains of the welfare state, and removing all environmental and health and safety rules that restrict corporate profit.
A survey of 1,344 business executives at the forum by PricewaterhouseCoopers concluded that the top concerns were corporate “over-regulation” and government deficits (i.e., social spending). Seventy two percent of the executives said overregulation was an impediment to economic growth, while 71 percent complained of “excessive” social spending and government debt.
.....
The annual celebration of wealth and avarice follows a bumper year for the world’s super-rich. Stock prices and corporate profits surged to new record highs, swelling the bank accounts and portfolios of the financial elite, even as austerity measures, wage cutting and layoffs slashed living standards and threw tens of millions more people into poverty.


On the eve of the forum, the British charity Oxfam released a study documenting the staggering growth of social inequality. Oxfam reported that the richest 85 individuals possess more wealth than the poorest 50 percent of the world’s population—3.5 billion people!


14--Revolt of the Right: John McCain aids right wing fanatics in Ukraine, wsws


Lavrov was referring to the interventions in December by EU foreign policy chief Catherine Ashton and then-German Foreign Minister Guido Westerwelle who openly expressed their solidarity with demonstrators. EU incursions on behalf of the opposition were supported by Washington. US Senator John McCain addressed a mass rally in Independence Square and dined with leaders of the opposition parties, including Oleh Tyahnybok, the leader of the ultra-right and anti-Semitic Svoboda party.


Washington and Berlin have mobilized the most right-wing, reactionary forces in their campaign to overthrow Yanukovych and replace him with a regime who would break the country’s longstanding ties with Russia and implement austerity through the EU.


At the start of December, Svoboda supporters tore down a statue of Vladimir Lenin in the city centre to the chants of “Hang the Commie!”


Svoboda organizes regular commemorations to the notorious Ukrainian collaborator with the Nazis, Stepan Bandera. The party is a member of the so-called Alliance of European National Movements, which includes the British National Party, National Demokraterna of Sweden, the Front National in France, Fiamma Tricolore in Italy, the Belgian National Front, and Jobbik in Hungary...


In addition to the support of the EU bureaucracy, the White House and the German government, the Ukrainian opposition has also received fulsome support from intellectuals from all over the globe. Their praise for the Ukrainian ultra-right forces speaks volumes on the corrupt and reactionary character of the social tendencies that dominate intellectual and university life today.


15--2 million fewer people on benefits than a year ago., zero hedge-


but the major news is the drop in Emergency Unemployment Compensation beneficiaries from 1.37 million to (drum roll please) zero! Congress decision not to extend this beenfit means there are 2 million fewer people on benefits than a year ago. The 1.4 million drop also means the number of people NOT in the labor force is about to rise by the same amount, which as we explained before, means the US unemployment rate is about to drop by up to 0.8%, which means the January unemployment rate could be as low as 5.9%....


The total number of people claiming benefits in all programs for the week ending January 4 was 3,706,087, a decrease of 1,003,734 from the previous week. There were 5,659,482 persons claiming benefits in all programs in the comparable week in 2013.









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