Archive

from Global Investing:

Being chic and not saving

Japanese people are generally regarded as saving a lot and not spending much, but in olden times when Tokyo was called Edo (until the mid-19th century), it was considered iki (chic or sophisticated) not to keep one's earnings overnight.

The latest survey from the Central Council for Financial Services Information (part of the Bank of Japan) may suggest that people are going back to that tradition -- although perhaps not for style reasons.

The survey, only available in Japanese so far, showed more than one in four households (consisting of at least two people) said they have no savings, the highest level since the survey started in 1963.

The average level of savings was 11.5 mln yen ($143,232), down 190,000 yen from last year.

More than 40 percent of the respondents said their savings fell from a year ago, double those who said their savings increased.

As Goldman Sachs predicted last year, it may be a matter of time before Japan's savings rate goes negative.

from MacroScope:

Mid-Atlantic headwinds for U.S. employment

Ed Krudy contributed to this post

The Philadelphia Fed’s Mid-Atlantic manufacturing survey covers a pretty small chunk of an already shrunken U.S. factory sector. Still, analysts at Harris Bank have found that the survey’s employment component has been a pretty solid leading indicator of the monthly payrolls figures.

If the trend persists, then February’s report could be a bit of a letdown following a surprisingly robust gain of 243,000 jobs last month. The Philly Fed’s employment index dropped sharply in February to its lowest level since August.

According to Jack Ablin, Harris Bank’s chief investment officer:

For the last several months, the Business Outlook survey has been a keen predictor of the monthly change in the Bureau of Labor Statistics’ non-farm payroll. The survey came close to nailing last month’s 243,000 gain, even though economists expected a 140,000 pickup on average. Should the survey’s predictive power continue, investors could be disappointed with February’s BLS report. The Philly Fed survey implies roughly 50,000 net new non-farm payroll jobs added in February. Positive yes, but it would be a big momentum killer. Stay tuned. The payroll report is not due out until March 9th.

from Breakingviews:

China’s Ten Kingdoms era has lesson for euro zone

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Angela Merkel and Mario Draghi may not know much about 10th century China, but European parallels with the period’s monetary adventures should encourage them – and all proponents of the euro – to take a lesson.

By 900, a great Chinese economic revolution was underway. As Mark Elvin explained in his classic book, The Pattern of the Chinese Past, the Middle Kingdom was on course to becoming the world’s economic leader. Elvin credits advances in technology, specialisation and trade – all made both possible and more productive by the vast country’s political unity.

The progress was threatened by the terminal decline of the Tang dynasty. In 907, the empire dissolved into many warring kingdoms, hence the subsequent five troubled decades being commonly known as the Five Dynasties and Ten Kingdoms. The new states, each as large as a big European country, struggled to capture more than its share of a limited supply of copper money. The rich states hoarded the metal; the poor states literally debased their currencies with lead and iron. Trade collapsed as governments became protectionist.

Economic renewal came about only when a unifying leader emerged – Zhao Kuangyin, the first emperor of the Song dynasty. Zhao managed to establish enough credibility over the next century to be able to issue the world’s first paper money. Inter-regional trade imbalances seem to have continued under the Song, but the central government was able to keep them from becoming politically disruptive.

Zhao had the economy on his side, because, as Elvin says “political fragmentation rather than political unity [was] the inherently unstable condition” previously. The same principle holds for Europe in the 21st century. Any new national currencies created by ejections from the single currency would be more subject to debasement than the euro. The rewards for greater national economic effort are greater inside than out of the single market. And troubled national governments would be even more subject to the whims of their creditors outside the politically-backed currency union.

from Global Investing:

Beneath the Greek bailout hopes…

Who's tired of the "Markets up on Greece, markets down on Greece" headlines of the past few weeks? (I am.)

Today it's an up day, with world stocks hitting a six-month peak on hopes that Greece will secure a second bailout package next week (finally, really).

But beneath the optimism lies a dire Greek economic and fiscal situation.

The Greek economy slumped 7 percent in the last quarter of 2011, with the rate of contraction since Q4 2008 reaching a whopping 16 percent in cumulative, real GDP terms.

Weak growth is hampering efforts to consolidate the fiscal position. Goldman Sachs, in fact, expects the deep recession has fully offset budget consolidation efforts. Analysts at the bank write:

"The fiscal adjustment, which started off with an impressive deficit reduction of more than 5% of GDP in 2010 stalled in 2011... despite a significant fiscal effort.

They add:

from Global Investing:

A scar on Bahrain’s financial marketplace

Bahrain's civil unrest -- which had a one-year anniversary this week -- has taken a toll on the local economy and left a deep scar on the Gulf state's aspiration to become an international financial hub.

A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain's efforts in the past 30 years to diversify its economy and develop the financial centre.

Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.

Unlike DIFC (Dubai International Financial  Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis.  Bahrain’s reluctance to hire non-resident  talent  has made  Dubai...an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide...  The constraints  – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and  potential to become the financial gateway in the Middle East.

Then came the crackdown of protesters.

Its ruling Al-Khalifa family unleashed  a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address  citizens’ grievances.  These led not only to international opprobrium of  the  Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting  workers and operations to Dubai... Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.

It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its  ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.

Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to  threaten the hard work of more than 30 years.

Bahrain's sovereign wealth fund Mumtalakat, which is leading the country's efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.

from MacroScope:

Europe’s wobbly economy

Things are  looking a bit unsteady in the euro zone's economy.  Just ask Olli Rehn, the EU's top economic official, who warned this week of  "risky imbalances" in 12 of the European Union's 27 members. And that's doesn't include Greece, which is too wobbly for words. 

Rehn is looking longer term, trying to prevent the next crisis. But the here-and-now is just as wobbly. The euro zone's economy, which generates 16 percent of world output, shrunk at the end of 2011 and most economists expect the 17-nation currency area to wallow in recession this year and contract around 0.4 percent overall. Few would have been able to see it coming at the start of last year, when Europe's factories were driving a recovery from the 2008-2009 Great Recession. And it shows just how poisonous the sovereign debt saga has become.

Not everyone thinks things are so shaky.  Unicredit's chief euro zone economist, Marco Valli, is among the few who believe the euro zone will skirt a recession -- defined by two consecutive quarters of contraction -- in 2012. This year is "bound to witness a gradual but steady improvement in underlying growth momentum," Valli said, saying the fourth quarter was the low point in the euro zone business cycle.

That could still happen. Business surveys support the idea that the worst is behind us, while European Central Bank President Mario Draghi agrees that last year's collapse in confidence has now steadied, albeit at low levels. So far, the ECB has not given a strong signal on whether it will take interest rates below the 1 percent level for the first time, but the bigger risk is whether a disorderly Greek default or the threat of a severe credit freeze -- which the ECB's nearly 500 billion euros in loans has so far helped avoid --  come back to crush the green shoots of growth.

The ECB's latest lending survey showed for the last three months of 2011 reinforces the concerns of a credit crunch, as banks are still not passing the money on to the real economy. Thirty-five percent of banks reported they had tightened the standards they apply to loans to businesses, compared to only 16 percent in the third quarter. The ECB is set to make its second offer of three-year loans at the end of the month and that could ease credit risks, but may also discourage banks with bad loans on their books to reform.

So, in economist-speak, the risks are still on the downside and uncertainty remains high. Basically, things are still looking wobbly.

from Breakingviews:

Moody’s shows UK needs more austerity, not less

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

How cruel. Moody’s is threatening to dump the UK’s triple-A rating. Its justification – “materially weaker growth prospects” – has been seized by the government’s opponents to attack spending cuts. But Moody’s warning is in reality a Valentine to austerity. George Osborne, the UK Chancellor, really does need to continue his policy of tough love.

The UK’s big problem, half forgotten amid the euro crisis, is that its fiscal deficit, at over 8 percent of GDP, is double the average for the euro area, where only Greece and Ireland have a bigger gap. That government cuts have wounded growth in the short term is true. But how much deficit-spending do the critics want? This year, if the cuts go according to plan, the government will still spend 120 billion pounds more than it takes in taxes. That would normally be considered pump-priming on a heroic scale.

The risk for the UK is that if the huge deficit is not brought down fast, government debt will become problematic. At present it amounts to 64 percent of GDP which, at half Italy’s level, looks rather good. But the Office for Budget Responsibility, the government’s fiscal watchdog, forecasts a rise in the debt to GDP ratio to 78 percent in 2014-15, even if the government sticks to its policies.

The real policy dilemma would come if cuts were to send the UK into deep recession – as has happened in the euro zone periphery. But fortunately that doesn’t seem likely. Current data point to stabilisation. The prospect is for a pickup in growth later this year. An easing of inflation, down to 3.6 percent in January from 4.2 percent in December, will help. Britons’ earnings are not set to be eroded as swiftly as before.

Moody’s growth warning may be overdone. And provided the government sticks to the task of aggressively reducing its deficit – so-called “Plan A” – the country will remain highly creditworthy. That is how the markets, buying UK 10-year bonds for a yield of just 2.2 percent, see it for now. Of course, the Bank of England’s abundant money printing and debt purchases are a factor in those low yields. But they wouldn’t stay low if markets saw the government unveiling a cuddlier side.

from MacroScope:

Fed hasn’t silenced markets, Williams says

Federal Reserve policymakers have long watched markets to gauge what investors think is in store for interest rates and the economy. Some – like former Fed Governor Kevin Warsh – have worried that the Fed’s unprecedented purchases of trillions of dollars of U.S. Treasuries and its long-term guidance on the future path of interest rates shuts off a key source of policy-guiding information. The Fed’s recent decision to publish policymakers’ interest-rate forecasts will make the problem worse, he predicted in a speech at Stanford University last month.

In some sense I have partially been made blind by these asset purchases. I, for one, consider financial markets an incredibly useful source of information. If the markets take the Fed’s projections and build that into their own, then the Fed won’t have a full set of gauges in front of them. The markets will simply be a mirror to what they say.

Now comes San Francisco Fed President John Williams with a research paper that argues, to put it bluntly, that Warsh is wrong – that markets are providing just as much information about expectations for Fed policy as they did in the days before the Fed had bought $2.3 trillion in long-term securities and began signaling short-term rates would stay low for years.

In the working paper co-authored with San Francisco Fed economist Eric Swanson and quietly posted to the San Francisco Fed’s website on Monday, Williams argued that five-year and 10-year Treasuries traders still respond with as much vigor to economic news as they did before the financial crisis. As Williams explained to reporters after a speech Monday at Claremont McKenna College:

We continue to see the markets reacting to information -- they still give a signal for what they are thinking about when the Fed’s going to do (what), what policy is going to be, what they think of the future path of the economy. The markets are still working, they are still digesting the information, and they are still responding to it.

Williams’ paper also adds to research arguing there’s plenty the Fed can still do to help the economy, even with interest rates near zero for the last three years – and likely to stay there for another three. It’s a view that several of Williams’ colleagues, including Dallas Fed President Richard Fisher, have taken issue with, but one that Williams says his paper backs up. If long-term interest rates can rise and fall on unexpected economic news, as Williams and Swanson show in their paper, the Fed too can make its influence felt on long-term borrowing costs, the reasoning goes. The authors write:

Even when short-term interest rates are constrained by the zero lower bound, there may still be considerable scope for monetary policy to affect medium- and longer-term interest rates and, therefore, the economy. On several occasions since 2008, the Federal Reserve appears to have done exactly that, by managing private-sector expectations of future short-term interest rates and by conducting large-scale purchases of longer-term Treasury bonds and mortgage-backed securities.

from Global Investing:

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece -- rising debt and weak economic growth pushing the country to seek a bailout -- as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.

According to JP Morgan's calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.

from MacroScope:

Is falling U.S. unemployment a statistical mirage?

After the initial jubilance that followed last week’s employment report, Wall Street economists are having a second look at the data. Their conclusions are not quite as rosy.

The rapid decline in the U.S. jobless rate in recent months – from 9.1 percent last summer to 8.3  percent in January – has caught forecasters by surprise given the rather soft pace of underlying economic growth. Steve Ricchiuto, chief economist at Mizuho, says a shrinking U.S. labor force helps explain the apparent discrepancy.

The fact that the employment-to-population ratio has not moved since September even as the jobless rate has fallen by 0.7% suggests that this improvement is a statistical mirage. The fact that the labor force participation rate has also declined by 0.4% during this four month period is another warning that the jobless rate is improving for the wrong reasons. This more realistic look at the data suggests that over-thinking the jobs data will lead to investor disappointment in the months ahead.

Indeed, the labor participation rate has plumbed new depths, as Sven Stehn at Goldman Sachs points out:

The January employment report revealed that demographic changes had pushed down the labor force participation rate – the share of the working-age population working or looking for work – even more than previously reported, hitting the lowest point since 1983 at 63.7%.

Worse yet, Stehn does not see any immediate impetus for improvement.

Our analysis suggests that "structural" drivers of participation – including population aging and "secular" participation trends in different age and gender groups – will continue to weigh on the aggregate participation rate going forward. Despite a pickup in job growth, our model suggests that the "cyclical" boost to participation will be just enough to offset the structural drag such that the participation rate will remain broadly flat through end-2013.