Creaky credit markets
It’s not a snap or even a pop – but there’s definitely a crackle. Rumblings emerging from key credit markets bare a frightening resemblance to the early days of the 2008 credit crunch.
Take commercial paper, a widely used instrument for short-term funding in the corporate world. Financial sector issuance of commercial paper fell steadily in the second half of last year, from around $556.5 billion in July to $434.4 brillion in December. The final month of the year saw the downward trend spilling over into other industries.
Paul Ashworth at Capital Economics:
The contraction in commercial paper issued by the financial sector is now being compounded by a dramatic drop off in commercial paper loans to the non-financial sector.
Despite the European Central Bank’s renewed effort to keep bank liquidity ample, money markets have shown some signs of strain. The London Interbank Offer Rate or LIBOR, used for loans between banks, more than doubled in the last six months of the year to its current 0.55 percent as worries mounted about the health of European institutions.
Anthony Crescenzi, portfolio manager at PIMCO:
Liquidity risks by no means have been eliminated because liquidity provisions are no substitute for private capital nor the transference of risk to either the private-sector or the central bank.
For inter-bank rates, this means that while rates might be capped by the cost of borrowing from the Fed and the ECB, no substantial decline in rates is yet likely either until an external balance sheet is drawn into the mix or there is a miraculous endogenous recovery in the wholesale funding market and Europe’s banks therefore regain market access.
The Great Stagnation
Federal Reserve Chairman Ben Bernanke’s verdict on the U.S. economy is sobering. Boiled down, this was the message delivered at his news conference today:
- Brace for roughly three more years of sluggish growth – or longer
- Some of the unemployed will not find work in the foreseeable future
- America’s economic power has downshifted
- Global financial markets could upend recovery yet again
It is a bleak outlook. Bernanke has left little doubt that he sees the United States in the midst of very long and painful period of sub-par growth, dousing some of the optimism stirred by recent reports that showed unemployment falling, the housing market hitting bottom and businesses starting to spend again.
Conditions could worsen, especially if the European crisis deepens and tips the world back into recession as the IMF warned this week. Bernanke said the central bank is ready to pump even more cash into the economy to keep it afloat if necessary. And by formally announcing for the first time that the central bank has inflation target of keeping prices at 2 percent, Bernanke has bought himself the leeway to provide extra support to growth without stoking inflationary fears.
He may need to use the wiggle room. If the Fed’s outlook proves correct, it will have taken 7-1/2 years from the time the credit bubble burst in 2007 for the U.S. economy to find its moorings – the worst performance since the Great Depression. And some of the 17 Fed policymakers are even more gloomy. Rates on hold at least until 2014 was the central view, and six of the Fed officials see no need to raise interest rates until 2015 or 2016. Think about that – a decade of virtually free money for banks.
Here are the numbers that tell the tale. The Fed lowered by a notch its assessment for trend growth to the 2.3-2.6 percent range. Only seven months ago it had estimated healthy growth in the order of 2.5-2.8 percent. Maximum employment now is seen in the 5.2-6.0 percent range in the longer run. In the boom years, full employment was under 5 percent. Bernanke also said some of the unemployment now is structural – meaning that discouraged people have permanently dropped out the workforce or lost the skills needed to get jobs today.
No wonder people are buying gold.
Revving down
It used to be the low-end stuff like shoes, clothes and furniture that displaced American manufacturing, then cars and consumer electronics. A new report by Alan Tonelson, a researcher at the U.S. Business and Industry Council which represents 1,500 American companies, now shows that high-end U.S. industry is facing ever tougher foreign competition in its own backyard.
Tonelson has crunched the numbers since 1997 on high-value, advanced manufacturing – the crown jewel of American industry that is capital intensive and depends on technological superiority such as turbines, pharmaceuticals and electrical engineering. He finds that imported products had captured 38 percent of the $1.63 trillion U.S. market for advanced manufactured products by 2010, up from 24.5 percent when the government started collected the data in 1997. Only six U.S.-based advanced manufacturers have gained market share in the United States in the 13-year period. Sectors that are more than 50 percent dominated by foreign producers have risen from eight in 1997 to 32 by 2010, he said.
The high-value core of America’s domestic manufacturing sector is suffering chronic and significant weaknesses. They strongly indicate that advanced U.S.-based manufacturing industries as a whole are failing a basic test of competitiveness – thriving in a market that is not only the world’s largest single market for such goods, but the market that they should know far better than their overseas counterparts.
Industries that have lost their U.S.-market dominance include metal-cutting machine tools, broadcast and wireless communication equipment, mining equipment, heavy-duty trucks and chassis, turbines and turbines generator sets – to name a few. None of the data are consistent with a smartly recovering, healthy domestic manufacturing sector, he said.
Interestingly, it has occurred even though the U.S. dollar on a trade weighted basis has declined in value by 10 percent over that time, making imports more expensive. His report throws a different light on 2010 as a banner trade year for the United States when exports increased by $85.6 billion, and on U.S. manufacturers adding jobs last year at the fastest pace since 1997. It’s the kind of data that has trade and industry groups in Washington talking of the U.S. needing an industrial policy. Remember Rolls Royce and Great Britain’s manufacturing slide?
Tonelson reviewed 108 industry sectors in 2010 against 114 in his 1997-2004 study. The differences were due to some changes in government data collection, U.S.-import tariffs, on iron and steel, tires and the degree of detail available. Although some significant sectors were excluded as a result, Tonelson said it reflects general trends on import penetration to the U.S. market.
The Fed’s befuddling transparency
The Fed is being more transparent. Any questions? Lots, apparently. Wall Street economists have published a flurry of research notes speculating about just how much new information the U.S. central bank will release along with its federal funds forecasts on Wednesday, and what form it will be presented in.
Even Vincent Reinhart, a former Fed economist now at Morgan Stanley, doesn’t know what to make of it:
Many market participants admit to being somewhat confused about the new disclosure policy. The exercise should be viewed as incremental in nature, limited by design flaws, and as likely to cloud as to clarify the public’s understanding of policy intent, at least at the outset. And the mission statement, if one appears, may amount to little more than a strong commitment to motherhood and apple pie among central bankers – i.e., the importance of price stability in the long run – but provide no practical guidance as to near-term policy choices.
Why does the Fed have such a hard time communicating its communications? It’s still not clear what exactly is being released, or when. Another example, from Mike Feroli, economist at JP Morgan and also a former Fed staffer:
As of now our understanding about the release of information is that at 12:30 we get the usual FOMC statement, then at 2:00 we’ll receive the economic forecasts, expanded now to include the above-mentioned forecast for the funds rate, followed immediately thereafter by the Chairman’s press conference. The narrative regarding the prospects for the balance sheet — which was mentioned as a communication enhancement in the last minutes — will apparently not be released until the next FOMC minutes, three weeks after the meeting.
Dana Saporta, a veteran Fed watcher at Credit Suisse, also has some unanswered questions:
It is unclear whether the “accompanying narrative” the Fed has advertised will be released on January 25, as well, or whether we need to wait for the full Summary of Economic Projections to be released along with the meeting minutes on February 15.
If the Fed is so transparent, why does it refuse to explain why it has been selling Treasuries on balance and shrinking the SOMA since December 21. The Fed is only transparent in promoting higher stock prices. It’s opaque on anything that does not.
from Global Investing:
EM growth is passport out of West’s mess but has a price, says “Mr BRIC”
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:
"How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy."
Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
"Post-crisis, these countries will be our passport out of this mess."
But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world's strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief's position this year, a position traditionally held by a U.S. citizen. O'Neill said the West had to bow to the new reality:
"You can't have it both ways...This game of 'You have the IMF and I have the World Bank' has to stop or these institutions are going to lose their relevance."
He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world's No. 2 economy. "A lot of people (in the West) want China to have a hard landing, " he said. "And that's because it isnt us."
U.S. industrial pop may be just that
Lucia Mutikani contributed to this post
U.S. industrial production rose 0.4 percent in December as manufacturing rebounded at its strongest pace in a year. For the fourth quarter, output climbed at an annual rate of 3.1 percent, increasing for the 10th consecutive quarter. But with Europe expected to slide into recession in the first half of the year, times could get tougher.
Manufacturing has been one of the main drivers of growth in the U.S. economy since the end of the 2007-2009 recession. The economy is expected to have expanded at an annual pace of at least 3 percent in the fourth quarter.
Paul Dales of Capital Economics, makes the bearish case:
The industrial sector is not going to save the overall economy from another year of pretty weak economic growth. To start with, as industrial production makes up just 15% of overall GDP, the sector is just too small to compensate for the continued weakness in other parts of the economy.
Moreover, industrial activity may have recently been supported by a number of temporary factors that are now on the wane. The growth of industrial production has recently been driven by rapid rises in business equipment output, which is at least partly related to the accelerated depreciation investment tax allowance that expired at the end of last year.
In addition, argues Dales, the winds of currency markets have been blowing in America’s favor, but potentially not for long.
Industrial production may have been boosted by the previous fall in the dollar. (While) the relationship between changes in the dollar trade-weighted index and industrial production is far from perfect, the 10% fall in the dollar seen in the first half of last year should have at least helped.
More recently, however, the dollar has strengthened and against a basket of currencies it is at a higher level than a year ago. What’s more, the dollar is probably more likely to strengthen further, at least against the euro, than fall back.
Without the effects of a lower dollar, a good deal of the performance of U.S. manufacturers will be determined by the strength of activity overseas. Our forecast that the euro-zone is on the cusp of a potentially deep recession and that growth in Asia will slow is consistent with a sharp easing in world GDP growth.
Portugal falls victim to Greece’s debt swap ordeal
Portugal is likely to bear the brunt of any outcome to the Greek debt swap negotiations — whether the country convinces investors to take a hit on their debt holdings to help it stay afloat or resorts to legal options to force it to do so.
The 10-year yield spread over Bunds has widened nearly 200 basis points this week after the Greek debt talks failed last Friday, and were briefly suspended, and as a downgrade by Standard & Poor’s to “junk” forced some index-tracking investors to sell. As Greece and creditors work against the clock to try to reach a deal, Portuguese 10-year yields hovered near euro-era highs.
The thinking is, if Greece gets private bondholders to write-down losses on their Greek bond investments, thereby reducing its debt load, what’s to stop struggling Portugal from seeking to do the same?
Richard McGuire, senior fixed income strategist at Rabobank says:
Portugal certainly (is) the weakest link here. Already the market is speculating on haircuts for Portugal, so there already is Greek restructuring contagion in evidence in Portugal. And I think that will continue.
If Greece cannot persuade enough bondholders to sign up to the offered terms on a voluntary basis, it could introduce legislation to force those resisting a deal to swap their bonds through collective action clauses (CACs).
Like dog urinating on a tree, running from country to country to speculate which will go bust. Here’ a story your journalists have been too gutless to report – courtesy of the Guardian and the Daily Telegraph. If your genre is horror stories, at least pick a good one.
UK credit binge pushes debt above 500% of GDP
(quote) UK had the highest level of debt after Japan, an international study by management consultancy McKinsey found
http://www.guardian.co.uk/business/2012/ jan/19/uk-highest-debt-to-gdp-ratio?news feed=true
(quote) The horrifying graph that shows why Britain’s debt addiction now equals FIVE TIMES national GDP and why we face a decade of austerity. Britain has the highest level of debt among the major economies bar Japan, research has found.
Over the past three years it has risen to more than 500 per cent of national output.
The alarming rise since the height of the financial crisis has been fuelled by debt in the financial sector as people seek to borrow their way out of the economic slump, according to consultancy McKinsey.
Even at current trends it will take until 2020 for the UK to return to pre-2003 debt levels.
Growth not enough to ease inequality: Oxfam
Rising income inequality in rich nations has cast doubt on the old adage, often upheld by the economics profession, that a rising tide lifts all boats. A new report from Oxfam reinforces the notion that wealth does not trickle down of its own accord. The anti-poverty advocacy group says sometimes actively redistributive policies may be needed to address huge income gaps. It also says that, contrary to conventional economic thinking, such policies will directly contribute to better growth rather than impede it.
Inequality, often viewed as an inevitable result of economic progress, in fact acts as a brake on growth. Among the best ways to assure inclusive, sustainable growth and fight poverty, finds the study, are policies that reduce inequality. […]
Inequality erodes the social fabric, and severely limits individuals’opportunities to escape poverty. Where income inequality is high or growing, the evidence is clear that economic growth has significantly less impact on poverty: a trickle-down approach does not work.
The report notes that the United States is the most unequal of the world’s wealthy nations – but that’s old news. More interesting is the finding that even strong rates of growth will not be enough to lift more people out of poverty over the next decade, particularly in the less wealthy G20 nations. The report found that inequality increased in 14 of 18 G20 countries since 1990 despite rapid rates of growth in some countries. Oxfam recommends the following:
The exact policy mix should be tailored to each national context, but policies in successful developing countries suggest the following starting points:
- Redistributive transfers
- Investment in universal access to health and education
- Progressive taxation
- Removal of the barriers to equal rights and opportunities for women
- Reforming land ownership, ensuring the right access to land and other resources, and investing in small-scale food producers
What kinds of redistribution would this involve? Oxfam turns to the United Nations’ Economic Council for Latin America and the Caribbean for answers:
ECLAC suggests that cash transfer programs in Latin America typically have three objectives:
- To alleviate poverty through direct income transfers
- To provide incentives for investment in human capacity-building
- To bring the target population into the social protection and promotion networks
Politically impossible? Perhaps. But Oxfam says some countries have already taken some steps successfully, with impressive results.
from Global Investing:
Home is where the heartache is…
On a recent trip home to Singapore, I was startled to learn just how much housing prices in the city-state have risen in my absence.
A cousin said he had recently paid over S$600,000 -- about US$465,000 -- for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.
Soaring housing prices have fueled popular discontent -- little wonder as median monthly household incomes have stagnated at around S$5,000.
For its part, the government -- which houses 80 percent of people on the densely populated island -- insists that public housing prices are shaped by 'market forces', pointing to a raft of financing schemes to help first-time buyers.
What's less contentious is that Singapore is only part of a regional real estate boom that has driven property values by as much as 70 percent since the start of 2009 in cities such as Sydney, Hong Kong and Beijing.
Like Singapore, the government in China is acting to cool house prices that have skyrocketed in recent years out of the reach of a large swathe of its middle classes.
Chief among Beijing's policy arsenal is social housing. The government is stepping up construction of public housing, targeting a rollout 36 million affordable homes from now until 2015. At the same time, clampdown on property speculation has also helped ease Chinese housing prices.
Martin Luther King’s vampire squid: poverty
The devastating U.S. recession of 2008-2009 has highlighted the problems of income inequality and poverty in the world’s richest nation. In 2010, the last year for which data is available, the number of U.S. poor hit a record 46 million. As the country celebrates the Martin Luther King Jr. Day holiday, a look back at the civil rights’ leaders remarks on the subject are enlightening – if only for their continue relevance nearly half a century later:
(One) evil which plagues the modern world is that of poverty. Like a monstrous octopus, it projects its nagging, prehensile tentacles in lands and villages all over the world. Almost two-thirds of the peoples of the world go to bed hungry at night. They are undernourished, ill-housed, and shabbily clad. Many of them have no houses or beds to sleep in. Their only beds are the sidewalks of the cities and the dusty roads of the villages. Most of these poverty-stricken children of God have never seen a physician or a dentist. This problem of poverty is not only seen in the class division between the highly developed industrial nations and the so-called underdeveloped nations; it is seen in the great economic gaps within the rich nations themselves.
Take my own country for example. We have developed the greatest system of production that history has ever known. We have become the richest nation in the world. Our national gross product this year will reach the astounding figure of almost 650 billion dollars. Yet, at least one-fifth of our fellow citizens – some ten million families, comprising about forty million individuals – are bound to a miserable culture of poverty. In a sense the poverty of the poor in America is more frustrating than the poverty of Africa and Asia. The misery of the poor in Africa and Asia is shared misery, a fact of life for the vast majority; they are all poor together as a result of years of exploitation and underdevelopment. In sad contrast, the poor in America know that they live in the richest nation in the world, and that even though they are perishing on a lonely island of poverty they are surrounded by a vast ocean of material prosperity. Glistening towers of glass and steel easily seen from their slum dwellings spring up almost overnight. Jet liners speed over their ghettoes at 600 miles an hour; satellites streak through outer space and reveal details of the moon.
[…]
So it is obvious that if man is to redeem his spiritual and moral “lag”, he must go all out to bridge the social and economic gulf between the “haves” and the “have nots” of the world. Poverty is one of the most urgent items on the agenda of modern life.
[…]
There is no deficit in human resources; the deficit is in human will. The well-off and the secure have too often become indifferent and oblivious to the poverty and deprivation in their midst. The poor in our countries have been shut out of our minds, and driven from the mainstream of our societies, because we have allowed them to become invisible. Just as nonviolence exposed the ugliness of racial injustice, so must the infection and sickness of poverty be exposed and healed – not only its symptoms but its basic causes. This, too, will be a fierce struggle, but we must not be afraid to pursue the remedy no matter how formidable the task.
The time has come for an all-out world war against poverty. The rich nations must use their vast resources of wealth to develop the underdeveloped, school the unschooled, and feed the unfed. Ultimately a great nation is a compassionate nation. No individual or nation can be great if it does not have a concern for ‘the least of these’. Deeply etched in the fiber of our religious tradition is the conviction that men are made in the image of God and that they are souls of infinite metaphysical value, the heirs of a legacy of dignity and worth. If we feel this as a profound moral fact, we cannot be content to see men hungry, to see men victimized with starvation and ill health when we have the means to help them. The wealthy nations must go all out to bridge the gulf between the rich minority and the poor majority.
