Monday, January 6, 2014

Today's Links

1---China Slowdown, Reuters

Wednesday's December Fed meeting minutes and then Friday's non-farm payrolls data will give further clues on how quickly the Fed could unwind the stimulus that has been a major driver for global risk assets in the past few years.

"With the Fed having set the tapering process in motion, it would likely take a fairly significant miss to derail tapering expectations and push yields significantly lower from their year-end levels," analysts at BNP Paribas wrote in a note

2--The Bill comes Due, Bloomberg

The world’s biggest economies will need to refinance $7.43 trillion of sovereign debt in 2014 as bond yields begin to climb from record lows, threatening to raise borrowing costs while nations struggle to bring down elevated budget deficits. ....

In the U.S., the world’s largest debtor nation with $11.8 trillion of marketable debt obligations, the amount due this year will increase by about $187 billion, data compiled by Bloomberg show. France, faced with an economy that has barely grown in two years, will see the amount of debt securities due this year rise by 15 percent to $410 billion.

China will lead emerging-market economies with the amount of maturing bonds increasing by 12 percent to $143 billion.

Japan will have $2.38 trillion of bonds and bills to refinance this year, 9 percent less than in 2013, while the amount of German debt maturing this year will decrease by about 5.3 percent to $268 billion.

Public Debt
Including interest payments, the amount of debt that needs to be refinanced by the G-7 countries plus the BRIC nations this year increases by about $712 billion to $8.1 trillion, according to data compiled by Bloomberg.

3---The economic case for extending unemployment benefits, El Erian

Benefit recipients have, what economists call, the highest marginal propensity to consume. Their consumption is supportive of the general economic healing that America is undergoing after the trauma of the global financial crisis. And the bigger aggregate demand is, the higher the probability that more companies would be tempted to convert their high cash balances and record profitability into greater investment

4---A Roadblock to Brawny Bank Reform, NYT

Banks resist leverage ratios. Don't want to hold more capital

5---With the New Year, New Consumer Protections on Mortgages, NYT

One way lenders can comply with the new rules is by making what’s called a qualified mortgage, which is a loan with features aimed at making it safer for consumers. For instance, such loans can’t have risky features like interest-only payments or negative amortization, in which the principal balance on your loan increases over time. In general, the borrower’s debt, including mortgage payments, can’t total more than 43 percent of gross monthly income (although there are exceptions to that cap for the next several years). And points and fees are limited to 3 percent of the loan amount

6---The Bubble Is Back, NYT
(mostly BS)

In 1997, housing prices began to diverge substantially from rental costs. Between 1997 and 2002, the average compound rate of growth in housing prices was 6 percent, exceeding the average compound growth rate in rentals of 3.34 percent. This, incidentally, contradicts the widely held idea that the last housing bubble was caused by the Federal Reserve’s monetary policy. Between 1997 and 2000, the Fed raised interest rates, and they stayed relatively high until almost 2002 with no apparent effect on the bubble, which continued to maintain an average compound growth rate of 6 percent until 2007, when it collapsed.
Today, after the financial crisis, the recession and the slow recovery, the bubble is beginning to grow again. Between 2011 and the third quarter of 2013, housing prices grew by 5.83 percent, again exceeding the increase in rental costs, which was 2 percent.
Many commentators will attribute this phenomenon to the Fed’s low interest rates. Maybe so; maybe not. Recall that the Fed’s monetary policy was blamed for the earlier bubble’s growth between 1997 and 2002, even though the Fed raised interest rates during most of that period.
Both this bubble and the last one were caused by the government’s housing policies, which made it possible for many people to purchase homes with very little or no money down...
Today, the same forces are operating. The Federal Housing Administration is requiring down payments of just 3.5 percent. Fannie and Freddie are requiring a mere 5 percent. According to the American Enterprise Institute’s National Mortgage Risk Index data set for Oct. 2013, about half of those getting mortgages to buy homes — not to refinance — put 5 percent or less down. When anyone suggests that down payments should be raised to the once traditional 10 or 20 percent, the outcry in Congress and from brokers and homebuilders is deafening. They claim that people will not be able to buy homes. What they really mean is that people won’t be able to buy expensive homes. When down payments were 10 to 20 percent before 1992, the homeownership rate was a steady 64 percent — slightly below where it is today — and the housing market was not frothy. People simply bought less expensive homes.
If we expect to prevent the next crisis, we have to prevent the next bubble, and we will never do that without eliminating leverage where it counts: among home buyers.
Wallison wants to blame the bubble on government policy of promoting homeownership. There certainly has been a problem of a housing policy that is far too tilted toward homeownership, but this does not explain the bubble. Fannie Mae and Freddie Mac were bad actors in the bubble years, buying up trillions of dollars of loans issued on houses purchased at bubble inflated prices, as I said at the time.

However the worst loans were securitized by folks like Citigroup, Merrill Lynch, and Goldman Sachs. They weren't securitizing junk mortgages to meet government goals for low-income homeownership, they were doing it to make money. And they made lots of money in these years. In fact, the private securitizers were so successful in securitizing junk mortgages that they almost put the Federal Housing Authority (FHA) out of business. Since the FHA maintained its lending standards it couldn't compete with the zero down payment loans being securitized on Wall Street. It saw its market share fall to 2 percent at the peak of the bubble. Some of us warned about the problem posed by the bubble in low-income communities at the time.

Anyhow, Wallison's chronology of the last bubble is more than a bit off. He tells readers;
"In 1997, housing prices began to diverge substantially from rental costs. Between 1997 and 2002, the average compound rate of growth in housing prices was 6 percent, exceeding the average compound growth rate in rentals of 3.34 percent. This, incidentally, contradicts the widely held idea that the last housing bubble was caused by the Federal Reserve’s monetary policy. Between 1997 and 2000, the Fed raised interest rates, and they stayed relatively high until almost 2002 with no apparent effect on the bubble, which continued to maintain an average compound growth rate of 6 percent until 2007, when it collapsed."

I also date the bubble as beginning in the mid-1990s, but there was a qualitative difference in the price rises of the late 1990s and the 2000s.
All sounds so easy, doesn't it? In contrast, Mike Derby at the Wall Street Journal reports that the person responsible for making it happen isn't quite to confident:
Speaking as part of a panel in Philadelphia on the activities of the regional Fed banks, Mr. Dudley acknowledged a lot is still unknown about how the bond buying works. His observation is important because he has long been a supporter of aggressive Fed actions to help the economy. 
The New York Fed leader has for some time expressed support for continuing the purchases, even as he also voted in favor of the Fed’s decision last month to cut back.
Referring to the Fed’s stimulus program, Mr. Dudley said, “we don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?”.. 
...Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers.
“There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

9---Summers: Strategies for Sustainable Growth, economist's view
Larry Summers:
Strategies for sustainable growth, by Lawrence Summers, Commentary, Washington Post: Last month I argued that the U.S. and global economies may be in a period of secular stagnation in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates. ...
More troubling,... there are signs of eroding credit standards and inflated asset values. If the United States were to enjoy several years of healthy growth under anything like current credit conditions, there is every reason to expect a return to the kind of problems of bubbles and excess lending seen in 2005 to 2007...
The challenge of secular stagnation, then, is not just to achieve reasonable growth but to do so in a financially sustainable way. There are, essentially, three approaches. The first would emphasize ... deep supply-side fundamentals: the skills of the workforce, companies’ capacity for innovation, structural tax reform and ensuring the sustainability of entitlement programs. ...
The second strategy, which has dominated U.S. policy in recent years, is lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to ensure financial stability. ... 

10---Europe Faces Specter of Deflation, WSJ

Wages and salaries hold up initially, but slumping corporate profits eventually force companies to cut output and wages, hold off investment and lay off workers. Falling income and rising unemployment pushes demand lower, setting off a self-reinforcing downward economic spiral. Banks, meanwhile, are enfeebled as losses on loan portfolios grow.

If this weren’t enough, deflation throws up further obstacles to growth. Real interest rates—measured by nominal interest rates minus expected inflation—rise, increasing burdens on borrowers and would-be entrepreneurs.

Central banks can respond by lowering their benchmark interest rates. But the ECB’s refinancing rate is already just 0.25%, leaving little room to cut further. And while negative interest rates—charging banks to keep money at the ECB—are theoretically possible, there is a limit to their effectiveness. Banks are likely to start charging customers for deposits, encouraging depositors to withdraw money and hoard it.

For borrowers, deflation is a double whammy. In addition to increasing the real costs of servicing debts, as deflation shrinks the economy, it also increases the burden represented by existing debt. The nominal value of debts doesn’t change as incomes diminish, so a greater share of national (or personal or corporate) income must be devoted to debt repayment.

This latter phenomenon is, on the face of it, a zero-sum game. Creditors benefit, and debtors lose out. But the problem for the euro zone is that the debtors are concentrated in the slowest-growing, deflation-prone countries, like Greece, Spain, Portugal and Italy, to the south.

Those already suffering most of the pain will be asked to bear more. Or they won’t be able or willing to bear more—and will default on their debts. That would have severe knock-on effects for domestic banks and other creditors, threatening further hardship. There are plenty of reasons to worry.

11---Geo-political tensions raise spectre of 1914 Great War, wsws

As Trotsky wrote: “War is the method by which capitalism, at the climax of its development, seeks to solve its insoluble contradictions. To this method the proletariat must oppose its own method, the method of the social revolution.”

As Leon Trotsky explained in his brilliant pamphlet War and the International, written in 1915, while the imperialist antagonists in World War I sought to blame the war on their opponents, in order to rally their populations to the banner of “defence of the fatherland”, the real cause of the war lay in the contradictions of the global capitalist system as a whole.

The four decades leading up to the outbreak of World War I had seen rapid economic expansion and the establishment of a world economic system. But this process, what we now term globalisation, had immensely heightened a fundamental contradiction between the global advance of mankind’s productive forces—a truly progressive development—and the system of rival nation-states and great powers in which the capitalist system is rooted.

The capitalist governments, Trotsky wrote, sought to overcome this contradiction not by the “intelligent, organised cooperation of all of humanity’s producers, but through the exploitation of the world’s economic system by the capitalist class of the victorious country.” The war, in essence, represented “the most colossal breakdown in history of an economic system destroyed by its own inherent contradictions.”

12---Two-faced Obama for cutting unemployment benefits to 1.3 million workers, wsws (Today's "must read")

The Democratic Party's cynical references to social inequality are part of an effort to rehabilitate the public image of the Obama administration amid growing popular anger over its right-wing social policies, its illegal domestic spying programs, and its foreign policy of militarism and war. This campaign is being coordinated with the trade union bureaucracy, which staged protests last month calling for an increase in the minimum wage.

All of this once again underscores the social character of the Obama administration, which is nothing but an agency of the banks, the corporations, and the military-intelligence apparatus, supported by an upper-middle class layer of trade union officials and their political allies who seek to give its right-wing policies a “progressive” veneer.
“Just a few days after Christmas, more than one million of our fellow Americans lost a vital economic lifeline—the temporary insurance that helps folks make ends meet while they look for a job,” President Obama said in his weekly address Saturday. Blaming Republicans for letting the benefits expire, he declared, “So when Congress comes back to work this week, their first order of business should be making this right."

The claim that blame for the expiration of federal jobless benefits rests entirely, or even primarily, with the Republicans is a shameless lie. Notwithstanding Republican opposition to the benefits program, the failure to extend it past its December 28 deadline is, in the first instance, the result of a calculated policy carried out by the White House and congressional Democrats. By agreeing to a budget deal last month that excluded an extension of the benefits, the Democrats ensured that the program would lapse before the new year.

On December 7, White House spokesman Jay Carney made clear that the administration would not make the extension of jobless benefits a precondition for the budget deal then being negotiated by House and Senate Democrats and Republicans. The Democratic leadership immediately fell into line. House Minority leader Nancy Pelosi, who only hours before had said the Democrats would not vote for any budget that did not include funding for long-term jobless benefits, turned around and said such a provision did not “have to be part of the budget.”...

Democratic strategists have told the press they intend to keep the issue of extended jobless benefits on the agenda as long as possible, believing it will give them an advantage in this year's midterm elections. William A. Galston, a senior fellow at the Brookings Institution and a former Clinton administration advisor, told the Washington Post: “Those are issues with histories. The public support is pretty clear.”...

Obama took up the theme of social inequality in his Saturday address. “That’s my New Year’s resolution—to do everything I can, every single day, to help make 2014 a year in which more of our citizens can earn their own piece of the American Dream," he declared.
Other Democrats echoed these points on the Sunday morning talk shows, with Senate Majority Leader Reid declaiming, “The rich are getting richer, the poor are getting poorer, and the middle class is being squeezed out of existence.”

This hollow and utterly hypocritical “campaign” against social inequality takes place in the wake of White House approval for a bipartisan budget that makes permanent over a trillion dollars in “sequester” budget cuts, increases federal employee pension contributions, establishes new consumption fees, and makes nearly $30 billion in additional cuts in Medicare reimbursements.
It comes in the sixth year of Obama’s presidency, a tenure that has been devoted to bailing out Wall Street while slashing wages and cutting government spending in the midst of the greatest economic crisis since the Great Depression. As a consequence, social inequality has soared to record levels, along with the surging stock market and corporate profits.

13---Breaking: It's Still The Economy, Stupid., Third Way

America's number one issue, still "the economy"

14--Obama approval slips to 40%, Gallup

15--Arrival of ‘bad inflation’ trend bodes ill for Japan’s rebound, JT

BOJ will alter inflation target if pay can't hang with prices: poll

Lower earnings, higher prices and a looming tax hike present a triple burden for households in the world’s third-largest economy, prompting Bank of Japan Gov. Haruhiko Kuroda to urge regional business leaders to raise basic pay. While swaps indicate annual inflation of 2.12 percent for the next two years, economists surveyed by Bloomberg News said the BOJ will modify or abandon its 2 percent target.
“The trend appears to be a sign that bad inflation is unfolding,” Toru Suehiro, a market economist in Tokyo at Mizuho Securities Co., said of the drop in mayonnaise production. “Stockpiling shows consumers are sensitive to prices. If salaries had been rising, there wouldn’t have been such stockpiling.”

Even as 15 years of deflation lowered the cost of living, consumers didn’t have as much purchasing power as those in other developed nations. Salaries have fallen 8 percent since they peaked in 1998, figures from the labor ministry show....

We’re getting poorer in real terms when prices rise,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees more than $67 billion. “I feel the quality of meals has declined in my home.”...

The yen tumbled 18 percent last year against the dollar, the biggest annual slide since 1979, as the BOJ injected more than ¥7 trillion ($67 billion) into the market every month through bond purchases to stoke inflation. The benchmark 10-year note yield closed at 0.735 percent in 2013, compared with the six-month low of 0.58 percent on Nov. 8.
The weakening yen combined with rising demand for commodities to drive up food-oil costs, prompting Kewpie to raise prices, said Yuki Tanaka, a spokeswoman for the Tokyo-based company that has a 60 percent share of Japan’s mayonnaise market....

Speaking in Nagoya, Kuroda told business leaders last month that he expects an increase in base wages amid rising corporate profits. The BOJ’s commitment to its inflation target is aimed at “drastically” changing people’s expectations, he said.

16---BOJ purchasing "70 percent of new government debt issued", Bloomberg

The Bank of Japan, which in April intensified asset purchases and introduced a new inflation target, also may pursue more stimulus as the government raises the sales tax to 8 percent from 5 percent this April to curb its debt.

Bank officials see significant scope to boost Japanese government asset purchases if needed to achieve their 2 percent inflation target, according to people familiar with the matter. The current pace, equivalent to 70 percent of new government debt issued, isn’t a limit for many officials, the people said last month. They asked not to be named as the talks are private.

17---US the biggest threat to world peace in 2013 – poll, RT

The US has been voted as the most significant threat to world peace in a survey across 68 different countries. Anti-American sentiment was not only recorded in antagonistic countries, but also in many allied NATO partners like Turkey and Greece.

A global survey conducted by the Worldwide Independent Network and Gallup at the end of 2013 revealed strong animosity towards the US’s role as the world’s policeman. Citizens across over 60 nations were asked: “Which country do you think is the greatest threat to peace in the world today?”
The US topped the list, with 24 percent of people believing America to be the biggest danger to peace. Pakistan came second, with 8 percent of the vote and was closely followed by China with 6 percent. Afghanistan, Iran, Israel and North Korea came in joint fourth place with 5 percent of the vote.

18---Cheap yen boosts stocks but does little for economy, global times

Japan's GDP is currently expanding, however the major forces behind the growth are more government infrastructure spending and increasing residential construction as buyers gobble up real estate prior to April when the country's sales tax rate will rise from 5 percent to 8 percent.

From April 2013, Japan's central bank has introduced several measures to ease market liquidity, however the effects of these have been modest. Falling interest rates failed to stimulate corporate demand for capital as interest in ordering new equipment remained muted. Limited new bank loans left Japan's cash stock almost unchanged after the central bank's moves...

In 2014, the yen's exchange rate will remain the most important factor affecting Japan's economy. If the yen continues to depreciate, the situation would be similar to that in 2013 - company earnings will increase, stock prices will go up, but the real economy will remain still in neutral. However, once the yen stops falling, the positive factors will disappear with it.

19---Maestro on falling business investment, WA Post


Here is Greenspan's explanation:
Private construction has been a major contributor to every recovery out of recession since 1949—except that of 2009. Both nonresidential and, especially, residential construction had important roles in the previous ten recoveries of postwar America. But construction as a share of GDP, after falling sharply in the wake of the economic collapse of 2008, has failed to fully recover since the recession officially ended in the second quarter of 2009. A deep-seated reluctance of business and households to invest in projects with a life expectancy, or durability, of more than twenty years (predominantly buildings) explains virtually all of the weakness in business activity and rise in the unemployment rate following the Lehman Brothers default in September 2008. An economically and politically driven pall of uncertainty has engulfed our markets.

The business community’s willingness to invest in fixed assets more generally is best captured by the proportion of liquid cash flow that nonfinancial corporate businesses choose to commit to difficult-to-liquidate equipment and structures. It is a useful measure of the degree of business confidence about the future. It doesn’t rely on what people say but on what they do. In 2009, that ratio had fallen to the lowest peacetime annual level since 1938. Similarly, the interest rate spread between the U.S. Treasury’s five-year and thirty-year obligations, currently the widest in history, reflects the degree of heightened uncertainty beyond five years and explains why long-lived assets especially have been so heavily discounted and scaled back in recent years.

20--- Will businesses finally shed their caution? WSJ

A devastating financial crisis led business owners and corporate executives to be especially wary about adding staff or investing in new equipment. Some worry about risks from Washington or overseas. Others are seeing consumers maintain their slow-but-steady spending, providing little incentive to deploy their cash stockpiles.
As a result, business investment in key areas such as equipment has been historically weak for a U.S. recovery. A slowly improving jobs picture and rising household wealth could spark a virtuous cycle of stronger consumer spending, increased business confidence and rising investment. If it doesn't, the year could be another letdown.

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