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Jul 14, 2009

Could US growth hit 4 percent?

Many optimists on US growth base their upbeat projections on hopes that inventories are reaching a low. Even a slow down in the rate of inventory drawdown can produce a rise in GDP.

This argument underpins a highly bullish forecast published by Brian Westbury and Robert Stein of the First Trust Advisors in Wheaton.

Jul 8, 2009

Smart immigrants will help US prosper

NEW YORK, July 8 (Reuters) – It’s hard to believe that just a few years ago many American were worried about a wave of aspiring immigrants. The recession has proved a more effective solution to the problem than miles of walls and an army of over-zealous border officials.
Illegal crossings from Mexico are at their lowest level since the 1970s and U.S. companies no longer have to grapple with unrealistically low quotas to bring in skilled foreigners.
But this is clearly just a lull. With Obama nudging immigration back on the nation’s agenda, the need for overhauling the current policy is as obvious as ever.
A report published today by the Council on Foreign Relations makes a convincing case that America’s immigration laws have become a competitive liability. The inflexibility of border and immigration rules threatens to hamper U.S. growth once the economy crawls back from recession.
As the United States has tightened its rules post-9/11, rival nations have been taking full advantage — nabbing more of the world’s most highly desirable workers. “The US needs to worry as much about attracting good immigrants as keeping the bad ones out,” says the report, which was headed by former Florida governor Jeb Bush and former Clinton White House chief of staff Thomas “Mack” McLarty.
America’s current cap on skilled immigration is appropriate only for the deepest recession. Since the September 2001 attacks, the United States has halved the number of H-1B visas available to just 85,000. As recently as 2007 they tended to sell out faster than U2 concerts. Even Google found they could get only half the visas the company asked for in 2008.
Frustration with the H-1B cap appears to have been behind Microsoft’s decision to establish a research center across the border in Vancouver in 2007 rather than expanding in Washington state.
After years of ranting from anti-immigration zealots like CNN’s Lou Dobbs, few Americans see the upside to letting in foreign workers. Yet many of America’s corporate giants — including Google Inc , Intel Corp and eBay were all built by recent immigrants. Talented immigrants also produce nearly a quarter of U.S. patents, twice their share of the population, the Council report says.
Immigrants and foreign students account for more than half the scientific researchers in the United States and in 2006 received 65 percent of computer science PhDs. Taking such people for granted or abusing them will eventually backfire.
America now has a window of opportunity to put things right before demand for skilled labor picks up. To keep up with other industrial nations it will need to move fast.
The European Union is working on a “blue card” that will give talented foreigners the right to work in any member country. Canada now has a points system that identifies foreign workers likely to make the greatest economic contribution. Australia, New Zealand and Britain have followed Canada’s lead. Unlike the United States, they have not put a ceiling on the number of workers that can be admitted under these systems.
China and South Korea too are becoming more interested in attracting immigrants, the Council on Foreign Relations says. The Obama administration, while making some positive noises, has not yet responded to the challenge. Despite modest efforts to trim the unnecessarily time-consuming background checks on foreign scientists and engineers, he has yet to lay out a vision on high-skilled immigration.
After decades of taking its pick of the world’s best talent, the United States has become complacent. The country still boasts most of the world’s finest universities, innovative companies and a most appealing culture. But America will face ever steeper competition for the brightest and the best. A more welcoming immigration policy is vital if America wants to stay on top.
(Editing by Martin Langfield)

Jul 7, 2009

Banks must brace for creditcard pile-up

NEW YORK, July 7 (Reuters) – Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.”
    Ever after today’s record report — delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent — the peak may still be far off.
    The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just 8.4 percent in this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent. 
    As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead. 
    The dismal job market bodes ill for default rates. The United States is continuing to hemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at last month’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained — an unlikely but possible outcome — unemployment would climb to 11 percent in less than six months. 
   Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent — the highest level since records began in 1948.
    While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued Tuesday by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.
   It’s not just the unemployed that will find themselves increasingly stretched. Wage deflation is now a real threat — magnifying the challenge of servicing debt. Weekly earnings fell at an annualized 0.6 percent in the three months to June. This may help explain why an increasing number of Americans are late even in paying their home equity line of credit — usually a priority for those who want to keep their homes.
    America’s banks have at least had a little time to buckle up. The Federal Reserve warned the top 19 banks to brace for losses of up to $600 billion. The more vulnerable have raised extra capital to cushion themselves and with the yield curve so steep even the dullest bankers can produce strong profits.
    Even so, at current trends the banks will need all their energy to keep ahead of rising defaults. It is increasingly clear that the bank stress tests were not stressful enough.
 (Editing by Martin Langfield)

Jul 6, 2009

A stress test for consumers

NEW YORK, July 6 (Reuters) – People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.

A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.

Jul 6, 2009
via The Great Debate

Stress test the consumer


– Christopher Swann is a Reuters columnist. The views expressed are his own –People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.Debt is at high levels — 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is now harder to borrow money for new consumption or to roll over existing debt.Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the seven years to 2008. So far it has only fallen back by less than 2 percent.There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.With signs of recovery still tentative, a further 10 percent slide is well within the realm of possibility — inflicting a further blow on the balance sheet and sense of well-being of American households. (If nervousness over swelling government debt pushes up bond yields, the outcome could be still worse.)Homeowner’s equity, already down to 40 percent from close to 60 percent, would plunge to 35 percent. This would send household wealth down to its lowest level since the mid-1980s. While Americans can’t immediately rebuild the $12 billion of net worth lost over the past 2 years — equivalent to more than a year’s worth of consumption — further losses will heighten their sense of caution.A second threat is also looking increasingly likely — wage cuts. Fifteen percent of employers surveyed by the Society for Human Resource Management reduced pay in the past six months, a threefold increase from earlier this year. It is no longer implausible to imagine nominal wages starting to decline on a nationwide basis.The Employment Cost Index is already rising at its slowest rate since the early 1980s. Wage deflation would make it even harder for Americans to repay the $10.5 trillion of mortgage debt they hold or the $2.5 trillion of consumer credit.Martha Olney, a professor at Berkeley, envisages disproportionate cuts in spending if wages dip. “For households that are paying 60 percent of their income in mortgage and credit payments a 10 percent pay cut does not mean a 10 percent fall in disposable income,” she says. “It’s a 25 percent fall.” This is the danger of leverage.Even under a rosy scenario it could take years for American consumers to repair their finances. If the savings rate rises to 8 percent of disposable income — about $860 billion a year — it will now take four years for debt to return to its 2002 level. This steady drain alone is equivalent to almost 10 percent of consumer spending.After such a substantial loss of wealth, Americans will be pressed to be even more frugal. Along the way American will be hyper-sensitive to any jolts from weaker than expected employment, house prices or financial markets.Consumer spending may not merely stagnate as most economists expect. It could yet decline more sharply. And like the banks, consumers will almost certainly need more support from the central bank and government before this economic malaise is over.

Jun 30, 2009
via The Great Debate

Don’t trust the false dawn in housing

Economists should not take too much comfort from this month’s Case-Shiller index.

The pace of decline slowed to just 0.56 percent in April. But as last year confirmed, house prices are heavily seasonal. During the busy spring and summer period, the speed of the slide more than halved in 2008.

Jun 29, 2009
via The Great Debate

Madoff’s unusually toxic Ponzi scheme

Ponzi schemes are not always such a bad investment.

Typically they offer such high rates of return that at least a portion of investors end up winning. Tamar Frankel, a professor at the University of Boston, who has made a study of Ponzi schemes believes that it is not unusual for around a third of participants to come out ahead. The eponymous Charles Ponzi offered rates of about 10 percent a month at a time when banks were offering 5 percent a year. Mike Calozza’s scheme benefited about a quarter of those who invested.

Madoff’s scheme may have been more pernicious than either. This is firstly because his rates of return – between 10-17 percent a year – were somewhat parsimonious by the standards of most confidence tricksters. Many investors were loyal enough to stay with Madoff long enough to recoup the equivalent of their principal – in many cases just six or seven years. Sadly, due to the kind of investor that Madoff attracted, Frankel argues, many would plough returns right back into his funds rather than withdrawing them. Part of Madoff’s talent was to attract savers rather than speculators. Rates of return were attractive but not absurdly suspicious.

Jun 18, 2009
via The Great Debate

Learning to love falling house prices


– Christopher Swann is a Reuters columnist. The views expressed are his own –Optimism has been all but extinguished from the U.S. housing market.The number of Americans lining up for new home loans is shrinking again, according to Wednesday’s release from the Mortgage Bankers Association, and the best that can be said of homebuilding is that it has stabilized at almost 80 percent below its peak.With no end in sight to falling prices, perhaps we should look on the bright side. Indeed, there are three good reasons why sliding prices are not such a bad thing.Falling house prices are usually seen as wealth destruction. But they can also be seen as wealth transfer. The next generation of homebuyers will benefit from our loss. Those young homebuyers who have been able to cling onto their jobs are already reaping the advantage. The American dream of home ownership can now be achieved at bargain basement prices.Take San Francisco. If you earned the median wage in San Francisco at the peak of the housing market in 2006, you would have needed to devote 75 percent of your income to meet mortgage payments on the average home. Now people will pay just 35 percent of their income, according to Ian Morris, chief U.S. economist at HSBC.It would no longer be any surprise if prices remained stagnant for a decade – spreading the benefit of cheap housing for at least 13 million new households.Americans may also reflect that much of their temporary housing wealth was illusory anyway. Since house prices in a given area tend to rise in tandem, the only way to cash out was to borrow against equity, or move to a cheaper area or smaller space, or die.A second consolation is political. Tumbling prices have exposed the flaws in the American government’s efforts to subsidize housing.It is now clear that these efforts did more harm than good. More thoughtful U.S. politicians must now question the mortgage interest tax deduction. The benefit of this tax was heavily skewed towards high earners since they paid a stiffer tax rate. Instead of fostering broad home ownership, the deduction encouraged rich Americans to borrow more and build bigger homes.This is bad financial and even worse environmental policy. At the very least, Congress should now cap this deduction at $500,000.The third source of solace is macroeconomic. For several years America borrowed money from abroad to make an investment that did nothing to expand its productive capacity or its ability to export. Residential construction in 2005 reached 6.3 percent of US national income — its highest level since 1951.A more sober level can be gauged from the average since 1980, which is 4.5 percent. Rampant home building went far beyond the actual housing needs of Americans. Over the past five years around 8.9 million housing units were built and just 6.7 million new households were created, according to Harvard economics professor Edward Glaeser. The number of vacation homes jumped from 3.6 million in 2002 up to 4.8 million now.An ever-growing number of U.S. homes were also vacant, as investors waited for tenants or buyers. Not only did houses become more numerous, they also got bigger. The average square footage of a U.S. family home expanded from 2,200 to 2,500 over the past eight years. “Mistaken beliefs about housing may have crowded out more productive investments,” argues Glaeser.Since two-thirds of Americans own their homes, falling prices are never likely to inspire street parades. The economic loss has certainly outweighed the gains and the banking system may take years to fully recover. Even so, our loss is a hidden accounting gain for the next swath of homeowners. A more balanced economy and housing policy may now emerge. For more philosophically minded Americans, this is a cloud with a silver lining.

Jun 12, 2009
via The Great Debate

The Fed needs to get its wallet out


– Christopher Swann is a Reuters columnist. The views expressed are his own –The Federal Reserve is putting on a brave face about the rise in Treasury yields.At the moment, the Fed can afford to put off bringing out the big cannons for a little while. If market optimism is overdone, a few weak economic releases would soon send interest rates plunging again. If the market is right, then higher rates are justified and the economy will cope.But Fed policymakers, who next meet in two weeks, should be getting the artillery ready. They have already promised to buy as much as $300 billion of Treasuries before September.Unless rates come down swiftly, this limit should be increased substantially.So far, the Fed has managed to confound the skeptics of their unconventional monetary policy.Fed intervention breathed life back into the commercial paper market and the program appears to be winding down. The purchase of mortgage securities has driven the spread between 30-year mortgages and Treasury yields down to pre-Lehman levels. The result was a spurt of mortgage refinancing.Thursday’s rally in Treasuries notwithstanding, the recent run-up in yields is now threatening this great achievement.Refinancing of home loans has already halved over the last two months and may grind to a halt. Around $3 trillion of Fannie and Freddie debt has a coupon of more than 5 percent.With rates on a 30-year mortgage rising above 5.5 percent, it no longer makes sense to refinance. Mark Zandi of Moody’s had expected Americans to save up to $30 billion in 2009 by locking in lower rates. This would require the fixed-rate mortgage to stay under 5 percent.The rise in rates will also damage several federal programs aimed at kick-starting the housing market. The Homeowners Affordability and Stability Plan was created to allow those with very limited home equity to refinance. There will be few takers at current rates.Similarly, the $8,000 tax credit for new homeowners expires on December 1 and will be largely wasted unless rates decline.Against these possible outcomes, an additional round of Treasury purchases by the Fed poses relatively modest risks. The threat of an adverse market reaction — with nervous creditors dumping Treasuries and the dollar — is overdone as is the fear of inflation.So far the Treasury Inflation Protected Securities suggest that investors have confidence in the Fed’s ability to keep inflation in check.Even if the Fed buys its full quota of $300 billion in Treasuries it will still own less than 5 percent of the $6.6 trillion of outstanding market.It can afford to buy much more before suggestions that it is monetizing the debt are to be taken seriously. After all the Fed is planning to buy $1.25 trillion in mortgage-backed securities by the end of the year — leaving it with up to a quarter of the total, according to Louis Crandall, chief economist at Wrightson.The Fed still has great credibility, accumulated in the decades since it vanquished inflation under Paul Volcker. Now is the time to spend some of this credibility.

Jun 10, 2009
via The Great Debate

Empty talk of dollar diversification

Rhetorical attacks on the dollar’s supremacy occur with monotonous regularity. They usually come from nations with strained political relations with the U.S. who resent the dominance of the greenback. Iran, Venezuela and Iraq (under Saddam Hussein) all took shots against the dollar.

The announcement by the Russian  central bank is part of this tradition, even though it was more diplomatically worded. 

    • About Christopher

      "I am a columnist at Thomson Reuters focusing on the energy industry and hedge funds. Prior to this I worked at Bloomberg and the Financial Times."
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