Friday, February 21, 2014

Today's Links

1---Signs of Global Slowdown popping up everywhere: World economic recovery struggling to gain traction, Reuters


Another month of slower factory activity in China and a sharp decline in a closely watched gauge of U.S. manufacturing on Thursday added to concern about the state of the global economy.
Surveys also showed business activity across the 18-country euro zone slowed this month, confounding expectations of an acceleration.


Investors were also concerned about minutes of the Federal Reserve's most recent meeting, released on Wednesday, which showed the U.S. central bank was set to keep winding down its stimulus spending despite recent softer economic data.
"While we expect the recovery to continue during the course of this year, the market remains volatile in the near-term as investors are nervous on the back of the U.S. tapering story," Henk Potts, equity strategist at Barclays Wealth, said.


Fears that the U.S. economy had lost some momentum in the new year after a strong finish to 2013 were reinforced by a decline in the Philadelphia Federal Reserve Bank's business activity index to -6.3 from 9.4 in January. A reading above zero indicates expansion in the region's manufacturing....


In China, activity in the vast factory sector fell to a seven-month low of 48.3 this month from 49.5 in January, according to the flash Markit/HSBC purchasing managers' index...


The euro zone may have the most to worry about, said Lena Komileva, economist at G+ Economics.
The economic bloc, she said, "is most at risk of a global demand shock given the chills emanating from China's deleveraging across emerging markets, North America's current 'frozen' growth patch and the fact that the U.S. is exporting less of its growth to the rest of the world."
Markit's Eurozone Composite PMI, which is based on surveys of thousands of companies and considered a good guide to growth, dipped to 52.7, below January's 31-month high of 52.9....


The region still faces falling prices, however, with inflation dropping unexpectedly to just 0.7 percent in January,
That has increased pressure on the ECB to consider new policy measures to support a recovery that appears to be running out of steam.


2---Bubbles emerging everywhere: Markets flooded with cash, should Fed prep to stamp out risk?, Reuters


The rate on high-yield U.S. corporate debt is running at 6.97 percent this quarter, near its lowest level since at least 2006, according to Thomson Reuters data tracking yield at issuance.
In another sign of risk-taking, over the same time frame the proceeds from U.S. leveraged loans spiked to their highest level in the second quarter of last year, at $364.8 billion. It was $312.9 billion in the fourth quarter of 2013.


Dallas Fed President Richard Fisher, a former hedge fund manager who is now among the central bankers most worried about the risks posed by easy money policies, pointed to high-yield corporate debt as "in the red," in a presentation earlier this month.


Meanwhile, U.S. stocks are near record highs with investors bidding up prices in the hope of future earnings, especially for smaller companies. On the small-cap Russell 2000 index .TOY, the forward price-to-earnings ratio is 20 percent higher now than it was a year ago.


SEA CHANGE IN FED THINKING
At a policy-setting meeting on January 28-29, top Fed officials argued that accommodative monetary policies "could lead investors to take on excessive risk and so undermine longer-term financial stability," according to minutes of the meeting released on Wednesday.


3---Debt Rises, but Who’s Borrowing?, DS News
(Households are loading up on debt?)


In a report released Tuesday, the Federal Reserve Bank of New York noted that aggregate consumer debt rose from last quarter, citing an increase of $241 billion dollars in the fourth quarter of 2013. The figure represents the largest quarter-to-quarter increase since 2007.


Data came from the recently released "Household Debt and Credit Report."
Total household debt is on the rise as well, notching higher to $180 billion from Q4 2012 to Q4 2013. The rise is the first 4 quarter increase since 2008, as net household borrowing resumes.
The report makes comparisons to 2006, noting pre-financial crisis levels as a baseline. "Mortgage and home equity line of credit (HELOC) balances, in particular, grew more slowly in 2013 than in 2006," the report said.


In 2013, balances fell for the lowest credit score borrowers. The report notes that lowered balances were a result of charge-offs from previous foreclosures.
The report commented, "All groups, even those with subprime credit scores, increased their mortgage balances in 2006. Now, the modest mortgage balance increases we see are mainly coming from high credit score borrowers."
Younger consumers are borrowing more across all lines of credit, irrespective of loan types. "In 2013, the increased credit card and mortgage debt among the young and the riskless led to a turnaround in the trajectory of overall debt," the report said.


4---Baker says "No" new debt, just "lower rate of write-downs of bad debt", Dean Baker
Hmmmmm


The NYT had an article discussing a release of data on household debt by the NY Fed. The article noted that debt rose rapidly and highlighted the increase in mortgage debt in the fourth quarter, the first since before the downturn.


Actually, the main reason that mortgage debt increased in the fourth quarter, as compared to declines in prior quarters, was due to a lower rate of write-downs of bad debt. There was no surge in new mortgage debt in the fourth quarter.


5---An Ambiguous Omen, U.S. Household Debt Begins to Rise Again, NYT


“After a long period of deleveraging, households are borrowing again,” Wilbert van der Klaauw, senior vice president and economist at the New York Fed, said in a statement.


6---U.S. Inflation Is a Window into a Global Growth Risk, wsj


7---Not worth reading except this, VOX


In the US, the year-over-year core Personal Consumption Expenditures (PCE) index is at 1.2%, and the core CPI is at 1.7% – down from 1.8% and 1.9%, respectively, in the previous year. This disinflation is a lagged consequence of the disappointingly modest growth in aggregate demand that has constrained business pricing power, and high unemployment that has dampened wages, along with lower prices of selected goods and services benefitting from technological innovations.


8---The madness of abenomics, Testosterone Pit


There are two areas where Abenomics, the democratically elected economic religion of Japan, has succeeded: creating inflation without causing wages to rise, thus whittling down real incomes; and devaluing  the yen by 25%, thus wiping out a quarter of the magnificent wealth of the Japanese without telling them directly. Grudging admiration is due Prime Minister Shinzo Abe for these accomplishments....


The resulting trade deficit skyrocketed 70.8% to ¥2.79 trillion. It was the worst trade deficit ever. It was almost twice as bad as the prior “worst deficit ever,” recorded in January 2013. In January 2010, Japan still had a trade surplus of ¥43 billion! It was the 19th month in a row of trade deficits, the worst such sequence since anyone started counting, worse even than the 14-month series in 1979-1980.
It was the sequel of a relentless deterioration: As the January trade deficit had been the worst January ever, December had been the worst December ever, November the worst November ever, October the worst... an unbroken series of deterioration all the way through 2011:

Imports of manufactured goods, such as iron and steel products, soared 29% from a year earlier. Imports of machinery, including computers: up 37.4%. Electrical machinery, including semiconductors, audiovisual equipment, and telecommunications equipment: up 33.7%.
Transportation equipment: up 41.0%. Japanese companies used to excel in these categories. While some have gotten run over by international competition, others still excel at designing and making these products. They just manufacture them overseas.


Japanese companies have long shifted production offshore to take advantage of cheap labor, though they’ve been lagging behind their US counterparts. But since the earthquake in March 2011, they’ve gone on an offshoring binge to diversify their supply chains that had bogged down, and to escape electricity constraints, rising rates, and rolling blackouts in the wake of the Fukushima fiasco. They’re also locating production plants closer to their customers in their largest markets, particularly China, and particularly in the auto industry.


Now they have another reason: translating profits from foreign operations into the devalued yen applies a thick layer of glossy lipstick to their income statements – and the markets are blinded by this form of illusory sex appeal.


What these Japanese heroes are not doing is repatriating their foreign profits. They understand the fact of Abenomics; they don’t want to see their capital get demolished in the devaluation. Hence, these funds stay overseas, are reinvested overseas, and are spent overseas. The Japanese economy ends up holding the bag. That too is part of the madness of Abenomics.


9---Obama Administration Embeds "Government Researchers" To Monitor Media Organizations, zero hedge


10--Confirming all your worst fears: Matt Stoller: “Free Trade” Pacts Were Always About Weakening Nation-States to Promote Rule by Multinationals, naked capitalsim


...liberal internationalists, including people like Chase CEO David Rockefeller and former Undersecretary of State and an architect of 1960s American trade policies George Ball, began pressing for reductions in non-tariff barriers, which they perceived as the next set of trade impediments to pull down. But the idea behind getting rid of these barriers wasn’t about free trade, it was about reorganizing the world so that corporations could manage resources for “the benefit of mankind”.


previous research efforts, I’ve found that there was a serious elite liberal effort called “Atlanticism” to create an explicit world government, and that this effort really did influence how our current leaders think about international policy-making. By 1967, Ball wasn’t an Atlanticist, he dropped his illusions about the ability to combine the globe into one polity. But he was still a utopianist – he didn’t seek an explicit world government, he wanted to build a set of supranational institutions that could manage all the important economic questions, while national leaders got to argue about symbols.


I guess it turns out that the conspiracy theorists who believe in UN-controlled black helicopters aren’t as wrong as you might think about trade policy, and not just because United Technologies, which actually makes black helicopters, has endorsed the Trans-Pacific Partnership. Oh sure they’re wrong, but so are the people who deny that our trade agreements are just about trade. They aren’t. These agreements are about getting rid of national sovereignty, and the people who first pressed for NAFTA were explicit about it. They really did want a global government for corporations.


11---2008:   Full transcripts of the Fed's monetary policy meetings for 2008 to be released soon, mcromania


many people think of the financial crisis as beginning in the fall of 2008, with the collapse of Lehman and AIG. In fact, the crisis had been underway for more than a year at that point (August 2007). The fact that the crisis had gone on for over a year without major turmoil suggested to many that the financial system was in fact relatively stable--it seemed to be absorbing various shocks reasonably well. Throughout this period of time, the Fed reacted with conventional monetary policy tools--lowering the Fed Funds target rate from over 5% to 2% over the course of a year.

So what happened? Essentially, an oil price shock. By June 2008, oil prices had more than doubled over the previous year. The real-time data available to decision-makers turned out to greatly underestimate the negative impact of this shock (and other factors as well). The rapidly slowing economy served to greatly exacerbate financial market conditions.

The Bear Sterns event occurred in March 2008. The firm was purchased by J.P. Morgan with help (bailout, depending on one's perspective) from the Fed. Bullard identifies two problems with that deal. One, it suggested that all financial firms larger than Bear could expect some form of insurance from the Fed. Two, while the deal was successful in calming down markets, it possibly had the effect of lulling them into a false sense of security.

Of course, we then had the infamous Lehman event in the fall of 2008. But as Bullard points out, everyone knew that Lehman's was in trouble for at least a year--surely investors were prepared for this. And in any case, investors would have properly insured themselves, no?



 Well, no. The big insurer, of course, turned out to AIG. Evidently, very few people had any idea about the potential problems with AIG at the time (which, by the way, was outside the scope of Fed supervision). And so, it was the Lehman-AIG event that brought all financial firms under heightened suspicion--and it was this event that drove the financial crisis from September 2008 and onwards


12---Structural Reform is the Last Refuge of Scoundrels, Krugman


Some background: the OECD is definitely one of the bad guys of this crisis. Back in 2010, it not only enthusiastically endorsed fiscal austerity, it demanded sharply higher interest rates too. When austerity and inadequate monetary stimulus led Europe to an economic performance now in line with that of the 1930s, the OECD warned vociferously against any change in course.

Now, with growth terrible and disinflation-heading-toward-deflation a real threat — largely thanks to the tight fiscal and inadequate monetary policies the OECD cheered on — the OECD warns that things don’t look good. And the answer is … structural reform!
I’m sorry: This may sound serious, but it’s intellectually lazy and cowardly.

13---"There is an international campaign to justify a foreign intervention in Venezuela," Maduro said on Wednesday., RT

14---What is coming in Ukraine, however, is likely to be far worse than what we have seen up to now
, Pat Buchanan

We would have been eyeball-to-eyeball with Russia in the South Ossetian war of 2008, and eyeball-to-eyeball today over Kiev. Yet, in neither country is there any vital U.S. interest worth risking war with Russia.


What is coming in Ukraine, however, is likely to be far worse than what we have seen up to now. For this political crisis has deepened the divide between a western Ukraine that looks to Europe, and an east whose historic, linguistic, cultural and ethnic bonds are with Mother Russia.


With reports of police and soldiers in western Ukraine defecting from the government to join the rebellion, Ukraine could be a country sliding into civil war. If so, the spillover effects could be ominous.
But, to be candid, what happens in Ukraine has always been more critical to Moscow than it has ever been to us.


15---Death toll rises to six as clashes continue in Venezuela, wsws


The government has charged Washington with fomenting the violence, denouncing a statement made by US president Barack Obama in Mexico on Wednesday calling on Caracas to release detained protesters, “engage in real dialogue” and address “the legitimate grievances of the Venezuelan people.”
Obama also denounced the Venezuelan government’s decision to expel three US embassy personnel for involvement in student protests, accusing it of “trying to distract from its own failings by making up false accusations against diplomats from the United States.”


The Venezuelan foreign ministry responded with an official communiqué accusing Obama of carrying out a “new and gross interference in the internal affairs of our country.”
It demanded that the US government “explain why it finances, encourages and defends the opposition leaders who promote violence in our country.” The statement vowed that the Venezuelan government would continue “monitoring and taking necessary actions to stop US agents seeking to sow violence and destabilization and to inform the world on the nature of the interventionist policy of the Obama administration in our country.”


Washington stepped up its attacks on Venezuela following the arrest Tuesday of Leopoldo Lopez, a Harvard-trained economist who is part of the hardline faction within the right-wing opposition coalition known as MUD (Democratic Unity Roundtable)....


The government has charged that the upheavals there are the result of a conspiracy involving both US officials and the Colombian right.
The imposition of a state of exception, a form of martial law, would be unprecedented for the government, which even under Chavez during the 2002 coup and the subsequent management strike against the state oil company did not resort to such measures. As it is, the government has announced that it is sending a battalion of paratroopers to the city to secure transportation routes, reinforcing national guard units to restore order and deploying a contingent from the army’s corps of engineers to carry out the cleanup and reconstruction of facilities damaged in attacks.


16---EU and Washington step up pressure on Yanukovych government, wsws


The fascist Right Sector organization, which, together with the ultra-right, anti-Semitic Svoboda party, is playing the leading role in the street battles, issued a statement Wednesday night declaring that it had not signed up to the government truce and there was “nothing to negotiate.”
According to media reports, the outbreak of violent confrontations on Thursday began early in the morning when protesters armed with axes, knives, truncheons and corrugated iron shields launched an attack on riot police assembled around Independence Square.


Within an hour, the area surrounding the Ukrania hotel, which had been under the control of riot police, fell to the protesters. Following a series of attacks on government buildings and police stations, including the torching of the city’s central trade union offices, far-right elements confiscated large quantities of arms and ammunition. Videos of the fighting on Thursday show protesters armed with rifles firing at police lines....


The US and the EU powers are striving to impose a client regime in Ukraine pledged to carry out austerity policies demanded by the International Monetary Fund and take a much more confrontational stance towards Russia.
During a trip to Mexico, US President Obama publicly criticised the role played by the Russian government in Ukraine. “Mr. Putin has a different view on many of those issues [people’s basic freedoms] and I don’t think that there’s any secret on that,” Obama said.
“Our approach in the United States is not to see these as some Cold War chessboard in which we’re in competition with Russia,” he continued. “Our goal is to make sure that the people of Ukraine are able to make decisions for themselves about their future.”....


In Libya and Syria, the Obama administration and its European allies were prepared to utilize the most reactionary political forces to achieve regime-change. Now in Ukraine they are supporting ultra-right groups to overturn the elected government of Yanukovych. In so doing, they are provoking the break-up of the country and its descent into civil war.


17---Eurozone edges deeper into Depression, sober look


So far the ECB has not responded to the disinflationary risks building in the euro area. Some Governing Council members dismissed the calls for action from numerous economists, referring to the analysts' reports as the "Anglo-Saxon" irrational fear of deflation. Perhaps. But is doing nothing then a "rational" policy? While the ECB has been on the sidelines, the balance sheet of the Eurosystem has been contracting fairly sharply - all in the face of unusually tight credit conditions (see post).



In isolation these disinflation signals may be fine, but on the whole the trends across multiple countries could spell trouble. This is especially important as China's economic growth slows (see story), making it more difficult for the Eurozone to export its way into stronger growth (as some member nations have been doing). An economic slowdown in the Eurozone at this stage could tip the balance, pushing the whole euro area into a deflationary environment.

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