Sunday, April 3, 2016

Today's links

1--Stocks: No Easy Way Higher Without Earnings Growth--Only earnings growth is likely to send shares upward, but given the gloomy near-term economic backdrop, that is a lot to ask

Investors are counting on a return to earnings growth to juice U.S. stocks, but they will likely have to wait a while.

First-quarter earnings for S&P 500 companies are forecast to slump 8.5% from the same period last year, according to FactSet. That would seal the index’s first four-quarter streak of declines since the financial crisis. Analysts don’t expect quarterly earnings to rise until the second half of the year.

2--U.S. Government Bonds Barely Budge on Solid Data --‘Puzzling’ disconnect between bond prices, economic data

The bond market barely budged Friday despite solid U.S. employment and manufacturing data.

The U.S. manufacturing index expanded last month for the first time since last summer. In addition, the U.S. added 215,000 new jobs last month, painting a robust picture of the labor market.

U.S. government-bond prices fell earlier in the session in response to the data, but buyers stepped in and helped the benchmark 10-year note eliminate most of its earlier decline....

Yields rise as bond prices fall.

“It is the conundrum in the bond market,” said John Bredemus, money manager at Allianz Investment Management, which oversees $700 billion globally. The disconnect between the bond market and U.S. data is “puzzling,” he said....

Mr. Bredemus said U.S. bond yields “are too low” and unattractive. But he said the stubbornly low yields is among reasons he is “selective” in buying riskier assets which have rebounded sharply since mid-February after a brutal selloff earlier this year.

The 10-year yield dropped by nearly 0.5 percentage point between January and March, its steepest quarterly decline in more than three years. While the U.S. economy remains a bright spot, worries over the global economy stoked demand for haven assets.

Much lower yields in Germany, Japan, the U.K. and France also attracted foreign investors into U.S. government debt, underscoring buyers’ struggle to obtain income from high-grade sovereign debt. On Friday, the 10-year German government bond yielded 0.14% and the 10-year Japanese bond yielded negative 0.07%.

3--Debt Markets: Choppy Trading Has No End in Sight--Bond investors are bracing for a turbulent second quarter as they struggle to reconcile surging U.S. employment with some of the lowest bond yields in years

Bond investors are bracing for a turbulent second quarter as they struggle to reconcile surging U.S. employment with some of the lowest bond yields in years.

Long-term U.S. Treasury yields posted their steepest quarterly decline in more than three years in the first quarter of 2016 and close at their lowest quarter-end level since the end of 2012. The yield on the 10-year Treasury note settled at 1.784% at the end of March, down sharply from 2.273% at the end of 2015, which suggests buyers aren’t concerned about the risks of buying and holding bonds for the long term....

It is hard to figure out what is really going on with the disconnect between data and the bond market,’’ said David Coard, head of fixed-income trading in New York at Williams Capital Group.  “Am I missing something?’’

The yield premium on the 10-year note over the two-year note tumbled to 0.95 percentage point on Feb. 29, the lowest since December 2007. That was a steep fall from 2.62 percentage point at the end of 2013, as hedge funds and money managers have been piling into long-Treasury trades..

The days of nonstop foreign-exchange-reserve accumulation by developing countries is over, said George Goncalves, head of U.S. rates strategy at Nomura. “That will add to volatility,’’ in Treasurys, he said.

4--Cash Squeeze Fuels Repo Rate Surge--Rates on overnight cash loans hit highest level since 2008

Rates on overnight cash loans known as repurchase agreements rose threefold late on Thursday to their highest levels since September 2008, the latest sign of funding squeezes at quarter end.

Overnight repos between dealers backed by U.S. Treasurys hit a high of 1.75% Thursday just before the close, said Scott Skyrm, a repo and securities financing expert at Wedbush Securities. That was well above the March average rate of 0.44% and the highest level since it closed at 1.9% on Sept. 25, 2008, the day of the largest-ever U.S. bank failure, Washington Mutual Inc. WMIH -1.28 %


Repos, short-term loans exchanged for bonds as collateral, are an obscure but critical way financial firms fund themselves and their portfolios of securities across Wall Street. The spike in the overnight general collateral rate in the roughly $3 trillion repo market is another sign that firms were less willing to lend out cash at quarter end amid regulations causing them to pare risk-taking and cushion their operations.

“That implies there was less cash than the market expected on quarter end, and all that goes back to bank regulation and banks trending down the size of their balance sheets for window-dressing on quarter end,” said Mr. Skyrm in an interview.

The new regulations require commercial banks to calculate snapshots of their books at the end of every month, so at quarter end when it comes time for them to show their business mix to regulators in their snapshots, they borrow less to make their balance sheets look safer

5--Regulators Examine Financial Risks of Climate Change

That has triggered fears that a poorly managed switch to less-polluting energy sources, such as solar or wind power, could cause selloffs of fossil-fuel companies and broader economic problems caused by energy shortages.

“A wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions,” Mark Carney, governor of the Bank of England, said in a recent speech....

Estimates used by the ESRB suggest that banks, pension funds and insurers based in the European Union hold more than €1 trillion, about $1.1 trillion, in equity and debt of fossil-fuel companies and that major stock indexes could fall by as much as 20% if assets are revalued in line with a 2-degree scenario....

The attorney general, Eric Schneiderman, has also filed a subpoena against Exxon Mobil Corp. XOM -0.75 % to get additional information on the company’s research on and response to climate change. Exxon has rejected allegations that it suppressed climate-change research.

6--Jobs Report: Higher Participation Takes Heat Off Fed   --Small moves in the labor-force-participation rate could have a big impact on the unemployment rate and future monetary policy

7--Why JPMorgan Believes Central Banks Can No Longer Save The Day

Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers. ...

We are not getting any solace on our fears over collapsing productivity growth, though. Investors have been happy to see the 628K rise in US payrolls in Q1, but at that pace, jobs are growing faster than the economy, implying that GDP per worker/hour, which is productivity, is actually falling. US companies are hiring people frantically as they are unable to get more product and services out of their existing workforce. This is not a good omen for future growth in the economy and earnings, in our view....

Without real upgrades to earnings or growth forecasts, we think that the recent rally in risk assets gained much from dovish actions and messages from central banks, in particular the ECB, Fed and the PBoC. One can only applaud the seriousness and pro-activeness that central banks apply to their mandates. But aren’t investors counting too much on central banks carrying the day if not the cycle

8--Inequality and economic Growth, Joseph Stiglitz, Columbia Edu

"Must Read"

When, for instance, a monopoly succeeds in raising the price of the goods which it sells, it lowers the real income of everyone else. This suggests that institutional and political factors play an important role in influencing the relative shares of capital and labor

Central bank policies focusing on inflation have almost certainly been a further factor contributing to the growing inequality and the weakening of workers’ bargaining power. As soon as wages start to increase, and especially if they increase faster than the rate of inflation, central banks focusing on inflation raise interest rates.  The result is a higher average level of unemployment and a downward ratcheting effect on wages: as the economy goes into recession, real wages often fall; and then monetary policy is designed to ensure that they don’t recover.    

In fact, as empirical research by the IMF has shown, inequality is associated with economic instability. In particular, IMF researchers have shown that growth spells tend to be shorter when income inequality is high. This result holds also when other determinants of growth duration (like external shocks, property rights and macroeconomic conditions) are taken into account: on average, a 10-percentile decrease in inequality increases the expected length of a growth spell by one half.   The picture does not change if one focuses on medium-term average growth rates instead of growth duration. Recent empirical research, released by the OECD, shows that income inequality has a negative and statistically significant effect on medium-term growth. It estimates that in countries like the US, the UK and Italy overall economic growth would have been six to nine percentage points higher in the last two decades, had income inequality not risen.41...

There are different channels through which inequality harms the economy. First, inequality leads to weak aggregate demand. The reason is easy to understand:  those at the bottom spend a larger fraction of their income than those at the top.42 The problem may be compounded by monetary authorities’ flawed responses to this weak demand. By lowering interest rates and relaxing

regulations monetary policy too easily gives rise to an asset bubble, the bursting of which leads in turn to recession.43  
Many interpretations of the current crisis have indeed emphasized the importance of distributional concerns.44 Growing inequality would have led to lower consumption but for the effects of loose monetary policy and lax regulations, which led to a housing bubble and a consumption boom. It was, in short, only growing debt that allowed consumption to be sustained.45 But it was inevitable that the bubble would eventually break. And it was inevitable that when it broke, the economy would go into a downturn. 
Second, inequality of outcomes is associated with inequality of opportunity. When those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future. With nearly one in four American children growing up in poverty,46 many of them facing not just a lack of educational opportunity, but also a lack of access to adequate nutrition and health, the country’s long-term prospects are being put into jeopardy. 
Third, societies with greater inequality are less likely to make public investments which enhance productivity, such as in public transportation, infrastructure, technology, and education...

 macroeconomic policies are needed that maintain economic stability and full employment.  High unemployment most severely penalises those at the bottom and the middle of the income distribution. Today, workers are suffering thrice over: from high unemployment, weak wages, and cutbacks in public services, as government revenues are less than they would be if economies were functioning well.  
As we have argued, high inequality has weakened aggregate demand. Fuelling asset price bubbles through hyper-expansive monetary policy and deregulation is not the only possible response. Higher public investment—in infrastructures, technology and education—would both revive demand and alleviate inequality, and this would boost growth in the long- and in the short-run. According to a recent empirical study by the IMF, well-designed public infrastructure investment raises output both in the short and long term, especially when the economy is operating below potential. And it doesn’t need to increase public debt in terms of GDP: well implemented infrastructure projects would pay for themselves, as the increase in income (and thus in tax revenues) would more than offset the increase in spending.50   ...

Fourth, these much-needed public investments could be financed through fair and full taxation of capital income. This would further contribute to counteract the surge in inequality: it can help bring down the net return to capital, so that those capitalists who save much of their income won’t see their wealth accumulate at a faster pace than the growth of the overall economy, resulting in growing inequality of wealth.51 Special provisions providing for favorable taxation of capital gains and dividends not only distort the economy, but, with the vast majority of the

benefits going to the very top, increase inequality. At the same time they impose enormous budgetary costs: 2 trillion dollars over the next ten years in the US, according to the Congressional Budget Office.52..

We used to think of there being a trade-off: we could achieve more equality, but only at the expense of overall economic performance. It is now clear that, given the extremes of inequality being reached in many rich countries and the manner in which they have been generated, greater equality and improved economic performance are complements. 
This is especially true if we focus on appropriate measures of growth. If we use the wrong metrics, we will strive for the wrong things. As the international Commission on the Measurement of Economic Performance and Social Progress argued, there is a growing global consensus that GDP does not provide a good measure of overall economic performance. 54 What matters is whether growth is sustainable, and whether most citizens see their living standards rising year after year.  

The way globalisation has been managed has led to lower wages in part because workers’ bargaining power has been eviscerated. With capital highly mobile—and with tariffs low—firms can simply tell workers that if they don’t accept lower wages and worse working conditions, the company will move elsewhere

standard neoclassical theories, in which ‘wealth’ is equated with ‘capital’, would suggest that the increase in capital should be associated with a decline in the return to capital and an increase in wages. The failure of wages of unskilled workers to increase has been attributed by some (especially in the 1990s) to skill-biased technological change, which increased the premium put by the market on skills. Hence, those with skills would see their wages rise, and those without skills would see them fall. But recent years have seen a decline in 

the wages paid even to skilled workers. Moreover, as my recent research shows,32 average wages should have increased, even if some wages fell.  Something else must be going on. 
There is an alternative—and more plausible—explanation. It is based on the observation that rents are increasing (due to the increase in land rents, intellectual property rents and monopoly power).  As a result, the value of those assets that are able to provide rents to their owners—like land, houses and some financial claims—is rising proportionately. So overall wealth increases, but this does not lead to an increase in the productive capacity of the economy or in the mean marginal productivity or average wage of workers. On the contrary, wages may stagnate or even decrease, because the rise in the share of rents has happened at the expense of wages.  ...

The assets which are driving the increase in overall wealth, in fact, are not produced capital goods. In many cases, they are not even ‘productive’ in the usual sense; they are not directly related to the production of goods and services.33 With more wealth put into these assets, there may be less invested in real productive capital. In the case of many countries where we have data (like France) there is evidence that this is indeed the case: a disproportionate part of savings in recent years has gone into the purchase of housing, which has not increased the productivity of the ‘real’ economy. 
Monetary policies that lead to low interest rates can increase the value of these ‘unproductive’ fixed assets—an increase in the value of wealth that is unaccompanied by any increase in the flow of goods and services.  By the same token, a bubble can lead to an increase in wealth—for an extended period of time—again with possible adverse effects on the stock of ‘real’ productive capital...

"Excessive inequality tends to lead to weaker economic performance.... Contrary to the rising-tide hypothesis,  the rising tide has only lifted the large yachts, and many of the smaller boats have been left dashed on the rocks.  This is partly because the extraordinary growth in top incomes has been going along with an economic slowdown.   

The term ‘rent’ was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his ownership and not because of anything he does. The term was then extended to include monopoly profits (or monopoly rents) – the income that one receives simply from control of a monopoly – and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rentseekers typically destroy wealth, as a byproduct of their taking away from others. A monopolist who overcharges for his product takes money from those whom he is overcharging and at the same time destroys value. To get his monopoly price, he has to restrict production. 
Growth in top incomes in the last three decades has been driven mainly in two occupational categories: those in the financial sector (both executives and professionals) and non-financial executives.21 Evidence suggests that rents have contributed on a large scale to the strong increase in the incomes of bot

Already in 1990 Jensen and Murphy, by studying a sample of 2,505 CEOs in 1,400 companies, found that annual changes in executive compensation did not reflect changes in corporate performance.22 Since then, the work of Bebchuk, Fried and Grinstein has shown that the huge increase in US executive compensation since 1993 cannot be explained by firm performance or industrial structure and that, instead, it has mainly resulted from flaws in corporate governance, which enabled managers in practice to set their own pay.23 Mishel and Sabadish examined 350 firms, showing that growth in the compensation of their CEOs largely outpaced the increase in their stock market value. Most strikingly, executive compensation displayed substantial positive growth even during periods when stock market values decreased.24

There are other reasons to doubt standard marginal productivity theory. In the United States the ratio of CEO pay to that of the average worker increased from around 20 to 1 in 1965 to 300 to 1 in 2013. There was no change in technology that could explain a change in relative productivity of that magnitude—and no explanation for why that change in technology would occur in the US and not in other similar countries. Moreover, the design of corporate compensation schemes has made it evident that they are not intended to reward effort:  typically, they are related to the performance of the stock, which rises and falls depending on many factors outside the control of the CEO, such as market interest rates and the price of oil

9--The social crisis and the US elections

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