Archive

from MuniLand:

We shouldn’t dread the debt limit

"Have a drink out there, folks, and just know that your kids and grandkids will be out there picking grit with the chickens," says former U.S. Senator Alan Simpson in the video above. Simpson's quip is the best summary I've ever heard of the public's lack of understanding of the severity of the nation's fiscal crisis. The federal government is currently borrowing 42 cents of every dollar that it spends. Thanks to the Federal Reserve's quantitative easing and the strong global demand for U.S. Treasury debt, the nation has been able to borrow heavily at low interest rates to cover its budget shortfalls.

But the debt is piling up so high that the country might face a borrowing shock if there were a black swan event or if bond vigilantes forced higher interest rates. It's not a question of whether rates will rise – they certainly will. What we don't know is when it will happen. The same politicians who created this fiscal quagmire have now tasked themselves with fixing it. Despite numerous proposals on how to get our debt under control, the political dynamics of the issue make it likely that nothing will be resolved in Congress until after November's election. The Washington Post reports:

But once the election is over ... the issue of the debt will quickly rise to the top of the agenda – and not just because of the debt limit. In January, policymakers also will be facing the first round of harsh, across-the-board spending cuts adopted last summer, as well as the expiration of a host of tax cuts that benefit every American household. Unless Congress agrees on an alternative deficit-reduction strategy, the policies threaten to deliver a fiscal shock that could throw the nation back into recession.

Earlier this week at the Peterson Foundation's Fiscal Summit 2012, House Speaker John Boehner gave a speech in which he laid out his plans for tax reform and vowed not to increase the borrowing limit:

Any sudden tax hike would hurt our economy, so this fall – before the election — the House of Representatives will vote to stop the largest tax increase in American history [the expiration of the Bush tax cuts]. This will give Congress time to work on broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits, and special carveouts. Eyebrows go up all over town whenever I talk about this, but when I say ‘broad-based’ tax reform, I mean it. We need to do it all … deal with the whole code, personal and corporate it’s fairer and more productive for everyone.

Meanwhile the Senate Republicans found an obscure Senate rule that allowed them to take control of the Senate for a day and hold a series of votes on their proposed budgets. From Bloomberg:

from MacroScope:

In QE3 waltz, Fed again steps toward easing

On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.

Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.

According to the minutes:

Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.

To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:

Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

Writes Mulraine:

from MacroScope:

Jobs or inflation — Is the Fed distracted?

The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.

The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.

But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.

“Is it a problem?” asked Minnesotan Keith Ellison. “To the degree that we have problems with monetary policy, is the dual mandate the cause?”

Ellison said that far from distracting the Fed, the lofty 8.1 percent unemployment rate should get greater attention. “This is a national disgrace,” he said.

Ron Paul, a presidential candidate who chairs a subcommittee on domestic monetary policy, held a hearing to discuss several pieces of legislation changing the Fed’s mandate. Two of these would limit the Fed’s focus to price stability.

With partisan divisions and other priorities, Congress is unlikely to make any changes to the Fed’s mandate this year. But the effort could gain momentum if Republicans control both houses of Congress after November.

from MacroScope:

Fed’s Tarullo not making any promises

We're pretty sure that Daniel Tarullo, the Federal Reserve's point person on regulation, expects the United States will finally understand exactly what financial reforms are coming "some time next year." But the Fed governor made doubly sure to qualify that statement lest anyone - especially any press "in the back" - take it as gospel.

At a conference in New York Wednesday morning, Tarullo was asked how long it would take for the various regulatory agencies to give final details on the raft of financial crisis-inspired reforms, everything from Basel III capital standards to the Volcker ban on proprietary trading. Here's what he said:

"I know it's frustrating for people not to have the proposed rules out. On the other hand, doing them simultaneously does allow us to see whether something in one of the proposed capital rules will affect something in another proposed capital rule, so that we end up, when we publish the final rules, with fewer anomalies, questions and the like, which will undermine the ability of a firm or academic or just anyone in the public to see and understand how these things are going to function. I hesitate to give a time line on exactly when we'll get there. But I think...it seems to be reasonable to expect that some time next year the basic outlines - and I don't just mean the ideas, I mean the details associated with the major reform elements - should be reasonably clear to people even though questions will inevitably rise in implementation. (You) don't want to take that as a promise. But as I think about these various streams, that is my expectation... To have gotten it done this year would have meant the sheer magnitude of the task would have lead to a lot of inconsistencies or open questions, which then would have just produced another round of change. So you've got me on the record saying some time next year, but I tried to qualify it as much as possible - that's for all you people in the back..."

from MacroScope:

Put your rate hike where your mouth is

Jonathan Spicer and Van Tsui contributed to this post.

This week, for the second time ever, the U.S. Federal Reserve published policymakers’ forecasts for when the central bank should start raising rates. The chart suggested a split Fed, with three policymakers expecting a rate rise this year, three next year, seven in 2014 and four in 2015. That’s useful information, as far as it goes.

But as much as the Fed has embraced transparency in recent years, it stopped short of saying which policymaker backs a rate hike in which year – a key bit of data for grasping where the voters on Fed Chairman Ben Bernanke’s policy-setting committee stand, and how their positions shift over time.

Below is the bar graph that the Fed published Wednesday, with Reuters’ best estimates of who fell where. We stand ready be convinced otherwise by readers offering evidence or insight that supports a different view. Send us an email, gives us a call, write a comment or shout us out on Twitter.

You can find more information about the policy leanings of each top Fed official in our handy interactive hawks-doves chart.

from MacroScope:

Bernanke: U.S. is not Japan, and I have not changed my mind

Of all the questions Federal Reserve Chairman Ben Bernanke was asked during his press conference on Wednesday, one appeared to pique his interest in particular: Was he being less aggressive as central bank chairman than the advice he dished out to Japan as an academic in the 1990s would prescribe?

It was the second half of the question asked by Binyamin Applebaum and yet the chairman was eager to get right to it: “Let me tackle that second part first,” he began.

Applebaum may have been channeling the Nobel-winning economist Paul Krugman, a Princeton colleague of Bernanke’s and critic of Fed policy, who recently argued the Fed chief was being inconsistent and overly cautious.

Bernanke argued that the Fed has done a lot already to support growth and bring down unemployment. Actively aiming for higher inflation with additional use of unconventional tools would risk the central bank’s long-term credibility. Here is his answer in full:

So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.

I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation – that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are no longer – are not exhausted. There are still other things that the central bank can do to create additional accommodation.

Now, looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target. Likewise, we have been aggressive and creative in using non-federal-funds-rate-centered tools to achieve additional accommodation for the U.S. economy.

So the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that Japan was in deflation. And, clearly, when you’re in deflation, and in recession, then both sides of your mandate, so to speak, are demanding additional accommodation. In this case, we are not in deflation. We have an inflation rate that’s close to our objective.

Now, why don’t we do more? Well, first I would again reiterate that we are doing a great deal. The policy is extraordinarily accommodative. We – and I won’t go through the list again, but you know all the things that we have done to try to provide support to the economy. I guess the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction – a slightly increased pace of reduction in the unemployment rate?

The view of the committee is that that would be very reckless. We have – we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

from Tales from the Trail:

Romney looks to give Bernanke the boot

U.S. Federal Reserve Chairman Ben Bernanke attends the International Monetary and Financial Committee (IMFC) meeting during the spring IMF-World Bank meetings in Washington April 21, 2012.

“I’d be looking for somebody new.”

Those words from the U.S. Republican presidential candidate Mitt Romney may give Federal Reserve Chairman Ben Bernanke some pause – or at least thinking about some other job prospects if the GOP frontrunner wins the Nov. 6 election.

As we report,  Romney, a former business executive who’s made the economy the cornerstone of his campaign, has made it clear that if he wins the White House he will try to replace Bernanke. The Fed chief’s term ends in January 2014 – a year after the next president takes office. Although Bernanke was nominated by Republican President George W. Bush, Democratic President Barack Obama give him second term in 2009.

Bernanke, who was back in the spotlight on Wednesday as he defended current U.S. monetary as being on track, has been both vilified and revered for his role amid the Great Recession that began in 2008. Critics contend he is pursuing a reckless money-printing binge that exposes the world's largest economy to a dangerous inflation risks while his defenders credit him with bold moves to stimulate growth that prevented a repeat of 1929-level depression.

from Global Investing:

Research Radar: “State lite”?

The FOMC's relatively anodyne conclusions left world markets with little new to chew on Thursday, with some poor European banking results for Q1 probably get more attention.  Broadly, world stocks were a touch higher while the dollar and US Treasury yields were slightly lower. European bank stocks fell 2% and dragged down European indices. Euro sovereign yields were slightly higher, with markets eyeing Friday's Italian bond auction. Volatility gauges were a touch lower and crude oil prices nudged up.

Following is a selection of some of the day's interesting research snippets:

- Deutsche Bank's emerging markets strategists John Paul Smith and Mehmet Beceren said they retain their negative bias toward global emerging market equities both in absolute and relative terms, highlighting Argentina's expropriation of YPF from Repsol as another negative. "We anticipate that so-called state capitalism will continue to be a negative driver, as it has been since mid-2010, since the poor economic backdrop makes the corporate sector a tempting target for governments wishing to boost their popularity or find additional resources to add to the relatively low levels of social protection across most emerging economies." They added that they remain overweight "state lite" emerging markets such as Taiwan, Mexico and Turkey and underweight Russia, China, Brazil and South Korea.

- Morgan Stanley's James Lord thinks the rally in Hungary's markets following Tuesday's decision by the EU to reopen negotiations on financial assistance is justified but much may now be in the price. He said MS would prefer to wait for some pullback before looking for more bullish trades.  On a relative basis, Hungary 5-year CDS is now 60bp wider than Spain's and MS said that while this gap could close much further  it was hard to see how Hungary CDS rates could trade below Spain.  "Indeed, if Spain goes into serious financial trouble, it could represent a systemic risk for all Europe, and funding stress would likely increase substantially. Given the strong dependence of Hungary towards the EU, it would be difficult to argue for Hungary to trade through Spain on any sustained basis."

- Ashmore Investment Management's Jerome Booth restates his bullish case for emerging markets with 10 points that conclude with the line:  "the best way to lose money without really trying is not to invest in emerging markets." His points include warnings about equating past volatility with risk, passive investing (where he points out that only 12% of emerging debt is represented by available indices) and seeing emerging currency volatility against the dollar as an emerging problem rather than a U.S. one ("It is the dollar which is volatile".)

- Legal & General Investment Managers' Ben Bennett argues that central bank money printing will be needed for some time as banks' bad loans are still way too high for them to be "in a position to drive the money printing presses once again". Explaining QE as a nationalisation of money printing presses normally operated by the commercial banks, he says the success of either form of money creation can only be judged by the productive nature of use to which that money is put. The pre-crisis lending into the property bubble was negative case in point, and the relative success of QE lending to the banks will be even more complex to judge.  "The investment lesson to be learnt is not to follow the money, but to analyse the usefulness of what it is being spent on."

from Tales from the Trail:

Washington Extra – Moonshot no more

U.S. Republican presidential candidate Newt Gingrich bows his head in prayer before speaking at First Redeemer Church while on a campaign tour in Cumming, Georgia, February 26, 2012. REUTERS/Tami Chappell

Earth calling Newt: When the biggest news of your presidential campaign is the penguin biting your hand at the zoo, it's probably time to pack it in.

Even though Newt Gingrich's odds of winning the Republican nomination were about as long as those of realizing his dream for a moon colony, the 68-year-old seemed to enjoy himself to the end. "I never got the sense that he was quote-unquote down," said adviser Charlie Gerow. "I got the sense on a couple of occasions that he was tired. Really tired." And really in debt. His campaign spent $4.3 million more than it brought in.

For all his offbeat ideas, Gingrich did bring a dose of seriousness to this campaign. With some stellar debate performances and a deep knowledge of politics and history, he probably made Mitt Romney and Rick Santorum study more and work harder to win support.

Members of the media, targets of some of his most vicious attacks, may not miss Newt much. But there's no denying that, for the world of news, Gingrich was the gift that kept on giving, right up to his encounter with a penguin.

Here are our top stories from Washington…

from MacroScope:

Listen to FOMC, ignore the dots

Federal Reserve Chairman Ben Bernanke was asked about the discrepancy between individual rate forecasts of policymakers, many of whom -- represented as dots on a chart -- see rates rising in the next couple of years, and the Federal Open Market Committee’s statement that it sees rates staying low until late 2014. Bernanke’s answer was clear: the FOMC is king.

The individual projections are inputs to the committee decision, so the committee decision is the critical element in that respect. The committee was quite comfortable with the consensus that we have reported today.