Sunday, February 9, 2014

Today's links

"Bond King" Bill Gross on non existent credit expansion:  "It used to grow pre-Lehman at 810% a year, but now it only grows at 34%. Part of that growth is due to the government itself with recent deficit spending. A deficit of one trillion dollars in 20092010 equaled a 2% growth rate of credit by itself. But despite that, other borrowers such as households/businesses/local and foreign governments/financial institutions have been less than eager to pick up the slack. With the deficit now down to $600 billion or so, the Treasury is fading as a source of credit growth. Many consider that as a good thing but short term, the ability of the economy to expand and P/Es to grow is actually negatively impacted, unless the private sector steps up to the plate to borrow/invest/buy new houses, etc. Credit over the past 12 months has grown at a snails 3.5% pace, barely enough to sustain nominal GDP growth of the same amount."

1--Mexicans flee "no opportunity" US, USA Today

Mexican immigration to the United States is on the brink of a historic reversal: More Mexicans may be going back to Mexico than coming in, according to a Pew Hispanic Center report Monday.

The influx of Mexicans, which has dominated U.S. immigration patterns for four decades, began to tumble in 2006 and 2007 as the housing bust and recession created a dearth of jobs. At the same time, the number of Mexicans returning to their native country along with their U.S.-born children soared.

What it does tell us is that immigration is not the weather," says Steven Camarota, director of research at the Center for Immigration Studies, which advocates controlling immigration. "It's not something that's outside the control of human agencies. It can change. … People do, in fact, go home based on the economy and based on enforcement."
Mexican flows are key to the immigration debate because 58% of the 11.2 million immigrants here illegally are Mexican. Just over half of all Mexican immigrants in the USA are here illegally.

Money Began to Flow Back Into Bond Funds in January after Seven Straight Weeks of Outflows

Investors swapped out of U.S. equity funds and into bonds at the fastest clip on record last week, according to Lipper Inc., as they grasped for safety while the stock market swooned.

Traditional U.S. stock mutual funds and exchange-traded funds together saw withdrawals of $18.8 billion in the week ended Feb. 5, their biggest weekly withdrawals on record. The abrupt reversal, led by ETFs, comes after U.S. stock funds attracted $172 billion in 2013, the biggest inflow since the financial crisis.
Meanwhile, taxable bond mutual funds and ETFs soaked up $10.7 billion, their biggest intake on record, Lipper's data showed.

US consumer credit showed an impressive increase at the end of last year as Americans went shopping. Consumer credit outstanding, excluding real-estate debt, stood above $3.1 trillion in December, rising in a nearly linear fashion since 2011.
Reuters: - U.S. consumer credit in December grew by the most in nearly a year due to a sharp increase in credit card usage, a potentially positive sign for the economy.

Total consumer credit rose by $18.8 billion to $3.1 trillion, the Federal Reserve said on Friday. That was the biggest gain since February.
But let's put this number in perspective by making a couple of adjustments. First let's look at consumer credit trend without the government-held student loans. As discussed before, student loans are not market-based and do not represent private sector credit expansion. A very different trend emerges - with non-student-loan consumer credit barely rising until mid 2013. One could argue that student debt is in effect "crowding out" private credit.

Not seasonally adjusted (source: FRB)

Even the ex-student loan measure does not tell the whole story.

4---Watching the 'China taper' , sober look
Chicago Tribune: - "Emerging markets should be much more concerned about the 'China taper' than the Fed taper" -  Crossborder Capital Managing Director Mike Howell

5---Chart of the Day #2: The Madness of Austerity, Kevin Drum

January's job numbers were fairly dismal, but the bad cheer wasn't equally spread. Private sector employment, as usual, increased—by 142,000 jobs last month. At the same time, public sector employment declined. Government employment at all levels was down 29,000 in January.

Aside from the brief census blip in early 2010, this has been the usual state of affairs for the past four years, ever since the recession officially ended. The chart below shows public and private sector employment indexed to 100 at the end of the recession. Private sector employment is up 6.8 percent. Public sector employment is down 3.4 percent. And that's during a period when population grew 2.3 percent. On a per capita basis, government employment has declined more than 5 percent since 2009, and it's still declining.

This is the price of austerity. If public sector employment had been growing normally during this period, we'd have about a million more jobs than we do now and the unemployment rate would probably be below 6 percent. We are our own worst enemies.

6---Another Drag on the Post-Recession Economy: Public-Sector Wages, EPI

The aftermath of the Great Recession has led to outright wage declines for the vast majority of American workers in recent years, resulting in a full decade of essentially stagnant wages. Though you might expect public-sector wages to have weathered the recession and its aftermath better than private-sector wages, the opposite appears true: While the decline in real public-sector wages started later, it was steeper and ultimately more damaging. According to the Bureau of Labor Statistics’ Employment Cost Index, public-sector wages have fallen by about 1.3 percent in inflation-adjusted terms since 2007, where private-sector wages have been essentially flat (an increase of 0.3 percent).

Unlike in previous recoveries, state and local government austerity has been a major drag on job growth and the broader economy. The number of public-sector jobs fell by almost 3 percent in the three years following the recession, while the number of private-sector jobs grew (albeit anemically). The fact that public-sector wages have lagged behind those in the private-sector exacerbates government’s drag on the economy.

See related work on Wages

7---The Trouble with Repo: Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market, NY Fed
(The 2008 "crisis epicenter" has not been fixed)

Tight Credit Markets Lead to Distressed Sales...

Distressed Fire Sales and the Tri-Party Repo Market From this crisis we learn that it is difficult for firms to hedge losses when market risk and credit risk are highly correlated and aggregate risk remains. In this case, as asset prices fell during a time of distressed “fire sales,” asset prices became more correlated, further exacerbating downward price movement. When one firm moved to shore up its balance sheet by selling distressed assets, that put downward pressure on other, interconnected balance sheets. The liquidity risk was heightened further because most firms were highly leveraged. Those that had liquidity guarded it, creating a self-fulfilling flight to liquidity.

     As we saw during the recent financial crisis, the tri-party repo market was overly reliant on massive extensions of intraday credit, driven by the timing between the daily unwind and renewal of repo transactions. Estimates suggest that by 2007, the repo market had grown to $10 trillion—the same order of magnitude as the total assets in the U.S. commercial banking sector—and intraday credit to any particular broker/dealer might approach $100 billion. And as in the commercial crisis of 1763, risk was underpriced with low repo “haircuts”—a haircut being a demand by a depositor for collateral valued higher than the value of the deposit.

     Much of the work to address intraday credit risk in the repo market will be complete by year-end 2014, when intraday credit will have been reduced from 100 percent to about 10 percent. But as New York Fed President William C. Dudley noted in his recent introductory remarks at the conference “Fire Sales” as a Driver of Systemic Risk, “current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales.” For example, in a time of market stress, when margin calls and mark-to-market losses constrain liquidity, firms are forced to deleverage. As recently pointed out by our New York Fed colleagues, deleveraging could impact other market participants and market sectors in current times, just as it did in 1763.

8--The Tequila Crisis, Dress Rehearsal for future bailouts and decimation of middle class,  Raging Bullshit

Clearly panicked by the potential ramifications of the Tequila Crisis for U.S. banks, the Clinton Administration quickly assembled a huge package of funds, ostensibly to bail out the Mexican financial system. After all, it was the least it could do to help its struggling neighbor.

The fact that Clinton’s then Treasury Secretary Robert Rubin was also a former co-chairman of Goldman Sachs, the vampire squid of recent lore, which just so happened to have aggressively carved out a niche for itself in emerging markets, especially Mexico, is obviously mere coincidence.

According to a 1995 edition of Multinational Monitor, Mexico was “first and foremost among Goldman Sachs’ emerging market clients since Rubin personally lobbied former Mexican President Carlos Salinas de Gortari to allow Goldman to handle the privatization of Teléfonos de México. Rubin got Goldman the contract to handle this $2.3 billion global public offering in 1990. Goldman then handled what was Mexico’s largest initial public stock offering, that of the massive private television company Grupo Televisa.”

But it wasn’t just the U.S. government that seemed determined to lend a helping hand to Mexico’s banks and, indirectly, their all-important creditors. The IMF also extended a package worth over 17 billion dollars - three and a half times bigger than its largest ever loan to date. The Bank of International Settlements (BIS) – the central bankers’ central bank – also got in on the act, chipping in an additional 10 billion dollars.

With such vast sums flowing in and out of Mexico, one can’t help but wonder where the money went and who ended up having to pay for it. In answer to the first question, Lawrence Kudlow, economics editor of the conservative National Review magazine, asserted in sworn testimony to congress that the beneficiaries were neither the Mexican peso or the Mexican economy:

“It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesobonos and about $2.5 billion of peso-denominated Treasury bills (cetes).”

So, just as happened with the bailouts of Greece, Ireland and Portugal, money lent by the IMF and national governments was speedily channeled via the recipient country’s government and struggling banks to the coffers of some of the world’s largest private financial institutions. The money barely touched Mexican soil!

Financial institutions recouped all – or at least most – of the money they had gambled on Mexico during the boom years. So began the modern era of “no risk, all gain” moral hazard in global finance.
Yet although the Mexican bailout was, to all intents and purposes, a mere balance sheet trick, by which funds were transferred from U.S. taxpayers to U.S. banks and investors, via the Mexican financial system, the Mexican people were still left on the hook for the resulting debt (plus, of course, its compound interest). After all, someone has to pay for the banks’ generousity!

After unveiling a minimalist austerity plan in January that the markets dismissed as insubstantial, the Zedillo administration imposed a shock plan on March 9 that amounted to an all-out assault on Mexican businesses and consumers (sound familiar, fellow Europeans?)

With the stroke of a pen, sales tax increased from 10 to 15 percent, fuel prices by 33 percent and residential utility rates by 20 percent. The government also limited minimum wage increases to 10 percent, which, set against a backdrop of 50 percent inflation, inflicted a huge decline in the buying power of minimum wage workers. Government action also pushed interest rates on consumer credit up to 125 percent.

Even today, 19 years on from the onset of the crisis, the country continues to pay its pound of flesh for the toxic debt generated during the “miracle years.” According to recent estimates, between 1976 and 2000, the buying power of the country’s average minumim salary fell by a staggering 74 percent, and has since risen by a pitiful 0.5 percent. As in post-crisis Argentina, the country’s middle class has been decimated. And what little remains of it is on the tab for the more than 3 billion dollars of annual interest payments on the country’s debt.

9---Jobs, productivity, warren mosler

...the federal deficit- the economy’s ‘allowance’ from Uncle Sam- is no longer enough to offset the demand leakages/unspent income inherent in the institutional structure.
That is, we’re flying without a net. ....

note that the household survey was about 1 million jobs short of the payroll survey over the last year and routinely dismissed as an inferior indicator, and the rate of growth remains well below the Nonfarm Payroll report even after today’s release...
I’m also thinking those with expiring benefits suddenly willing to take lower paying jobs will simply displace others already working in those job, which will work to keep hourly wages lower than otherwise.
Not updated for today’s yoy print of +1.9%:

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10--Creditless economy, mosler

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10---Obama hails dismal jobs report, signs bill to slash food stamps, wsws
Obama claims "Victory" over middle class

Speaking at Michigan State University Friday, President Barack Obama hailed the January employment report released that morning by the Labor Department as further evidence of the success of his economic policies.

His remarks, in advance of his signing a bill to slash billions of dollars in food stamp benefits, revealed both his indifference to the social impact of mass unemployment and budget cuts, and the disconnect between the entire political system and the sentiments and needs of the American people.
The jobs report once again belied the official talk of economic “recovery.” US payrolls grew last month by a mere 113,000, less than the number of new jobs needed just to keep pace with population growth and well below economists’ forecast of 189,000. The dismal jobs figure for January followed December’s disastrous total of 75,000 new positions....

Job growth in December and January was the worst for any two-month period since 2010, and well below the already tepid monthly average of 160,000 from January through November of last year. This pace of job creation will do nothing to reduce the near-record level of long-term unemployment, officially estimated at 4 million, or cut into the 20 million-strong ranks of those either unemployed or underemployed.
Yet Obama boasted: “[O]ur businesses in the private sector created more than 140,000 jobs last month, adding up to about 8.5 million new jobs over the past four years. Companies across the country are saying they intend to hire even more folks in the months ahead.”

He did not mention the sharp decline—29,000—in public-sector jobs, including a net loss of 12,000 federal government positions. These job cuts reflect the continuing assault on public services and schools that has already destroyed hundreds of thousands of jobs since the financial meltdown of 2008.
The bulk of his speech has devoted to praising the agriculture bill he was about to sign, which includes $8.7 billion in cuts to the Supplemental Nutrition Assistance Program, slashing almost $100 per month in benefits for nearly a million needy households. Obama called the farm bill, which cuts food aid for families poor enough to qualify for home heating assistance, a “jobs bill, an innovation bill, an infrastructure bill, a research bill,” and a “conservation bill.”

The bill is, in reality, an embodiment of the bipartisan consensus of Democrats and Republicans to make the working class pay for the crisis of American capitalism. Behind Obama’s absurd posturing as an opponent of inequality and champion of the poor, he is working hand in glove with the Republicans to destroy what remains of the social reforms of the 1930s and 1960s and reduce broad sections of the population to conditions of desperation and poverty

That budget agreement continues the austerity policies enacted previously, maintaining the framework of automatic “sequester” cuts that will slash domestic discretionary spending by a trillion dollars over the next decade.

11---Economists Sound the Alarm on Deflation in Europe, NYT

When it takes hold, deflation — a decline in the general level of prices — undermines growth, and lowers corporate earnings and the values of assets like real estate. And in economies burdened by a debt overhang, as much of the euro zone still is, deflation can drive a self-reinforcing downward spiral, in which borrowers are bankrupted by their inability to repay loans on devalued assets.

That has played out in Japan, where land prices have fallen almost every year since the country’s economic bubble burst in the early 1990s, with disastrous consequences for banks, companies and the finances of a generation of savers.

In contrast to inflation, which erodes the real value of loans, making it easier for borrowers to repay, deflation does the opposite. It makes money dearer, raising the burden of repaying existing loans — and adds to the stress on fragile banks that hold the loans when borrowers cannot repay. The E.C.B., which is undertaking a careful review of banks’ finances in its new role as bank supervisor for Europe, is keenly aware of that danger

12---"Running in place": Payroll Data Shows a Lag in Wages, Not Just Hiring, NYT 

For the more than 10 million Americans who are out of work, finding a job is hard. For the 145 million or so who are employed, getting a raise is even harder.
The government said on Friday that employers added 113,000 jobs in January, the second straight month of anemic growth, despite some signs of strength in the broader economy. The unemployment rate inched down in January to 6.6 percent, the lowest level since October 2008, from 6.7 percent in December.

But the report also made plain what many Americans feel in their bones: Wages are stuck, and barely rose at all in 2013. They were up 1.9 percent last year, or a mere 0.4 percent after accounting for inflation. Not only was that increase even smaller than the one recorded in 2012, it was half the normal rate of wage gains in the two decades before the last recession.

The  stagnation helps explain why many people feel apprehensive even though the economy grew at a robust pace in the second half of 2013, corporate profits rose, the stock market boomed and the housing market continued to gain ground. The issue cuts across the American work force. In fact, white-collar workers did a bit worse than blue-collar workers last year in terms of wage growth. ...

With many less educated workers chasing a limited number of new jobs, employers have little reason to increase wages. “It’s just an extremely competitive environment for workers, where people have little negotiating power,” Mr. Harris said.

13---How Dangerous Is China’s Credit Bubble ?  zero hedge

The banking sector has extended $14 trillion to $15 trillion in the span of five years," Chu, who is now with Autonomous Research, told the Telegraph. "There’s no way that we are not going to have massive problems in China." What's more, she added, China "could trigger global meltdown." ....

The kind of meltdown Chu suggests is possible would end Japan's revival, slam economies from South Korea to Vietnam, savage stock and commodity prices everywhere, force the Federal Reserve to end its tapering process and prompt emergency national-security briefings in Washington. So feel free to obsess over Turkey and Argentina, but the real "wild card" is the world's second-biggest economy.”

No-one knows for sure how big a problem China's economy will eventually face due to the massive credit and money supply growth that has occurred in recent years and no-one know when exactly it will happen either. There have been many dire predictions over the years, but so far none have come true. And yet, it is clear that there is a looming problem of considerable magnitude that won't simply go away painlessly. The greatest credit excesses have been built up after 2008, which suggests that there can be no comfort in the knowledge that 'nothing has happened yet'. Given China's importance to the global economy, it seems impossible for this not to have grave consequences for the rest of the world, in spite of China's peculiar attributes in terms of government control over the economy and the closed capital account.

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