Joseph Stiglitz, the
iconoclastic Nobel Laureate in economics, sought to trash the common
wisdom that the Yuan must appreciate by saying in a video on the WSJ
website, “Changes in the exchange rate can actually increase imbalances.
The reason is that if the demand elasticities for Chinese goods are
relatively low, then when the exchange rate increases, the quantity
goes down less than the price goes up. So the net effect could be an
increase in the trade imbalances. So the notion that this is a panacea
is clearly wrong.” And he is correct, but only up to a point; for
this is true only in the short run (but then, these days the short term
iseesm to be the only thing that matters).
In the Third Quarter
the share of ‘underwater’ home owners declined the 3rd
month in a row, to 22.5%, from 23% in the Second. While this is good
news, it is nowhere near enough to restore health to the housing market,
never mind put it on a growth path..
The University of Michigan
Consumer Survey found that, for a record 23rd consecutive
month, 50+% of all US households didn’t anticipate any income gains
over the next year.
In the 2001 recession
2.7MM people lost their jobs & it took four years before the economy
regained them; in this one 8.4MM people did so & now, two years
after it officially ended, only 1MM jobs have been recovered (most of
them accounted for by temporary placement agencies, rather than permanent
employers).
In 2001 the Supreme Court
of Canada in the “Golden Ruling” ruled that “strip searches”
of people arrested by the police are “inherently humiliating and degrading”,
& an extreme exercise of police power that should be used sparingly,
& then only with the prior approval of a supervisor. This message
is apparently was lost on, or is being ignored by, the Toronto police;
for in the most recent year for which data are available, one in three
of the 61,000 people it arrested were strip searched (no data are available
for other Canadian cities since their police forces refuse to keep records
of strip searches).
Until very recently the
market had overlooked the fact that Belgium, even before the crisis
was one of only three EU countries with a debt to GDP ratio > 100%
(the others being Greece & Italy), that it’s fiscal situation
was better only than Greece’s, & trailed that of the other 14
Eurozone countries, and that it hadn’t had an effective government
for two years prior to last June’s elections (& still hasn’t
managed to cobble together a new coalition government in the six months
since). But the interview the leader of the largest (Flemish-based)
party gave Der Spiegel will make that more difficult. For he
called Belgium “the sick man of Europe”, said it had no future &
would at some point “evaporate”, and compared the Walloons to “a
bunch of junkies” who need Flemish cash to survive (negotiations towards
a new coalition government have been hung up on Flemish insistence that
both parts of the country should have more control over, & responsibility
for, their own revenues & expenditures - i.e. that the Walloons
had better ‘learn to live within their means’).
The Dutch airline KLM
is experiencing problems in Iran; for the locals won’t refuel their
planes. This is supposedly in retaliation for the Dutch last month having
refused to refuel a plane carrying the Iranian Foreign Minister, Manoucher
Mottaki, in the Netherlands for a speaking engagement, for fear of being
accused of breaking the UN sanctions (by the way Mottaki was unceremoniously
sacked this week by Ahmadinejad while on an official visit to Africa
- he had never been part of his inner circle and was regarded by the
hardliners as being “too soft’ & having failed to prevent the
latest round of sanctions
GLEANINGS VERSION
II
No. 389 - December
16th, 2010
EUROPE’S OTHER
ISLAND (The Economist)
- S&P’s November 16th
downgrade of Cyprus from A+ to A is a reminder how similar this three-year
Eurozone member is to others on its wobbly periphery. It has a 6%
budget deficit (that its government seems unwilling to come to grips
with), outsized banks (with an asset base 7x GDP while Iceland’s
were only 6x), a property bust & a poor growth outlook. And
its banks hold 5BN Euros in Greek government bonds which, in any future
Greek debt restructuring, could wipe out 25% of their Tier 1 capital,
& 40% of their borrowers are Greek (which puts another 25% at risk).
While OK for now since many nervous Greeks moved their savings out of
Greek- into Cypriot banks, if they ever were to get nervous about the
latter, one-third of their deposits could vamoose in a heartbeat.
Round & round
she goes, where she’ll stop (next), nobody knows!’
EUROZONE SET FOR
MUTED RECOVERY (BBCNews)
· While Eurozone
economic activity has picked up some, the OECD says recovery will be
muted, with growth of 1.5% - 2.0% in 2011 & 2012 & “Potential
output is likely to be lower in the wake of the crisis, underlining
the importance of structural reforms in labour and product markets to
boost economic performance.”
For an aging
Europe 2% isn’t really all that shabby, especially at a time
when some peripheral economies will act as
‘boat anchors’ on overall growth.
FORECLOSURES FALL
TO LOWEST LEVEL IN 18 MONTHS (msnbc. com)
- They were down 28% MoM &
12% YoY to 67,428, a post-May 2009 low. But the YTD total of 980,000
makes breaking the 1MM mark a done deal. While lower than the 1.2MM
expected earlier, this is primarily due to the problems with the foreclosure
process that surfaced last September.
While this will
prompt another low number in December, the pace is expected to pick
up again in 2011 as lenders improve their foreclosure procedures, and
the basic factors driving it, high unemployment, a weak housing market,
flat-to-falling home prices & massive numbers of home owners
‘underwater’ on their mortgages, continue unabated.
JOBLESS CLAIMS
DATA POINT TO IMPROVEMENT (msnbc.com)
- New claims for unemployment
benefits dropped 3,000 to 420,000 in the week to December 11th,
the 3rd decline in four weeks. And the four-week moving average
fell for the 6th straight week to 422,750, its lowest level
since August 2008, the month before Lehman collapsed. On the other hand,
while new home starts were up 3.9% MoM to 555,000, this is still just
16% above the 50-year record low of 477,000. And they were still 76%
below their January 2006 peak & far short of the 1MM annual
rate analysts say is needed to have a healthy housing market
And economists say
new initial applications for unemployment benefits must consistently
be below 375,000 for unemployment to start declining significantly.
FED
‘EASY-MONEY’ PLAN MAY BE BACKFIRING (msnbc, John W. Schoen)
· Printing money
isn’t having the hoped-for results. QE2 looks like a flop. Stephen
Roach, chairman of Morgan Stanley Asia (who worked at the Fed in
the 70's before joining Morgan Stanley where he long was its high profile
economic guru), noted “They’ve gotten the opposite results ...
If anything, that takes a little bit out of economic growth instead
of adding to it.” The Obama tax deal will also work at cross purposes
to QE2; for while the latter was to “flood” the system with US$600BM
in new cash, the former will syphon off US$900BN over a slightly
longer period due to the new bond sales needed to fund it (so Bernanke
is now musing publicly about QE3). QE2's hoped-for pump-priming effect
was also undermined by much of the US$2TR the Fed has printed since
Dec/08 not having benefited households & small businesses (that
create over half of all new jobs) but instead having ended up in the
Fed’s vaults as “excess reserves” of the banks, & in the corporate
sector’s US$2TR cash ‘hoard’. And while it created wealth in the
Third Quarter by raising the value of stocks held by US households by
US$1TR, this was offset by the US$747BN decline in household wealth
due to falling house prices - with the former disproportionately
benefiting the already well-to-do & the latter impoverishing the
increasingly restive middle class.
Even before Bernanke
was born, a time-tested market axiom was that in monetary policy
“you cannot push on a string”, i.e. you cannot make people borrow
(or lend) if they don’t want to..
But monetary policy makers & players often are like ships passing
in the night.
REPUBLICANS REJECT
PORK-FILLED OMNIBUS SPENDING BILL (Fox News)
· The House has
passed a massive 2,000 page US$1.27TR spending bill & Democrats
want the Senate to pass it by midnight on December 18th,
when the current funding authority for the government will expire,
to avoid having the government have to
shut down. But, encouraged by Senate Minority Leader Mitch McConnell
(R.-Ky.), Senate Republicans vow to vote against it, at least until
it is stripped of its ‘earmarks’ (funding for politicians’
pet projects in their states). For apart from US$1BN for the new
health care law (which alone is enough to make Republicans see red),
it contains US$8BN in earmarks, such as US$400,000 for solar parking
canopies & plug-in electric stations in Kansas.
Sen. John Cornyn (R.-Texas)
called it an “ominous”-, rather than an
“omnibus-”, bill.
MASS-TRANSIT TAX
BREAKS TO SHRINK WHILE FARES RAISE (AP)
· Prior to 2009
mass transit riders could set aside US$120/month of their pre-tax income
to pay for their mass transit costs (& drivers US$230/month for
parking - ever since 1984 the former has always lagged the latter).
While the 2009 stimulus bill raised it also to US$230, on January 1st
it will revert back to US$120 (the effect of which will be offset in
part by the one-year cut in workers’ SS taxes that is part of Obama’s
tax deal with the Republicans). This comes at a bad time for mass transit
users. For many states have been slashing their contributions to mass
transit agencies, leaving them no option but to raise fares. Bus fares
in LA are up 40% in two years, in Dallas commuter rail fares rose 67%
last year & will rise another 40% in October,
in New York transit users will pay 17% more on December 30th,
the third increase in three years, metro riders in Washington, D.C.
have been paying 18% more since last summer, fares in New Jersey increased
44% last May, and in Seattle mass transit users started paying one-third
more last June & face another fare hike next June.
This move is highly
regressive. The savings from ending
this program (US$106MM/year) is picayune compared to that of extending
the Bush tax cuts for high income earners (US$55BN/year).Favouring parking
over mass transit use won’t help reduce US oil im,ports (& is
just “Drill baby, drill” in drag). But as I was
told many years ago “if you think politics makes sense, you will go
crazy; if, however, you start out from the premise that the system is
totally & absolutely crackers, the pieces soon start falling into
place.”
PAYROLL TAX CUT
WORRIES SOCIAL SECURITY ADVOCATES
(AP, Stephen
Ohlemacher)
· Social Security
is funded from a 6.2% payroll tax (matched by employers) on the first
US$106,800 of earnings. The Obama tax package will cut that to 4.2%
for 2011. The Administration & CBO say this will give the economy
a fast-acting shot in the arm since it immediately increases take-home
pay for 155MM workers (but only if they spend it, rather than save
it, or use it to pay down debt). But this means Washington must
borrow US$112BN more, to make Social Security whole & former Rep.
Barabara B. Kennelly (D.-Conn), now head of the National Committee to
Preserve Social Security and Medicare, says “This 2 percent payroll
tax is the beginning of the end of National Security as we know it.”
“National Security
as we know it” is on death watch anyway, having been persistently
underfunded. But this will hasten its demise, & the rate at which
the US is hurtling towards a fiscal abyss. For, as the Economist put
it, ‘America is injecting itself with another dose of fiscal stimulus
just when Europe is checking into rehab and enduring cold turkey”
(while throughout history there have been few, if any, that trying to
borrow your way back to prosperity have ever worked.
MOUNTING DEBTS
BY STATES STOKE FEARS OF CRISIS (NYT, Michael Cooper)
· Illinois
is still paying last year’s bills. Arizona no longer funds some organ
transplants under Medicaid. California last year paid its bills with
IOUs. States are freeing prisoners early to cut costs. Newark, N.J.
laid off 13% of its police force. Such events are raising fears state
& local governments are in such financial dire straits that at some
point investors will refuse to buy the weaker ones’ bonds, creating
a crisis that will spread, as it did in Europe.
· While their short-term
budget woes preoccupy state officials, it’s their long-term debt problems
that worry others. For historically states have always faced their biggest
fiscal challenges in late recession/early recovery when rainy day funds
are depleted & the easy things to do done. Matters will be
made worse this time by the fact that the federal stimulus money, that
funded over one-third of state budgets last year, will run out next
year. And what makes observers most nervous is the local governments’
hidden debt : while they have US$2.8TR in debt on their books,
that’s only a fraction of what many have off their books :
their unfunded pension liabilities alone amount to US$3.5TR.
· “Munis” were
always deemed a ‘widows & orphans-safe’ investment on the grounds
they seldom default. But in recent weeks municipal bonds funds reported
big sell-offs, & hedge funds, with help from Wall Street, have been
placing large bets against some states’ debt instruments. Nevertheless,
the credit ratings of many local governments have improved in the past
year because the rating agencies changed their way of analyzing them
since municipal defaults are much rarer than corporate defaults, and
states & cities have always made it a priority to repay their bond
holders, even before paying for essential services. Thus S&P recently
opined the crises facing states & municipalities are “more about
tough decisions than potential defaults”, & Moody’s justified
rating all 50 states’ bonds higher than most US non-financial companies’
on the grounds Washington is ‘more likely to bail out a teetering
state than a bankrupt company’.
The rating agencies’
reasoning has more holes in it than Swiss cheese. It ignores that what
really matters in bankruptcy & default is not insolvency
but illiquidity, & that capital markets at their core are psychological-,
not logical-, beasts, ruled by perception, not reason. It blandly assumes,
despite signs of a swelling taxpayer revolt, that local governments
can raise taxes at will. It fails to appreciate that Joe & Jill
American Tax Payer are likely to bond holders as just more odious &
self-serving Wall Street “fat cats”. It
ignores the fact that Washington has fiscal problems of its own up the
yingyang & may have a hard time saving its own hide, never mind
bailing out others. And it makes no provision for the fact that interest
rates (& hence debt servicing costs) can only go up (which makes
one wonder if they have done any “stress tests” on states’ finances).
And it’s hard to understand the reason for upgrading states sitting
on unimaginable piles of debt while denigrating a corporate sector that
sits on incredible piles of cash.
JUDGE STRIKES DOWN
KEY PART OF HEALTH CARE LAW (msnbc.com)
· In a law suit
initiated by Virginia’s Attorney-General Ken Cuccinelli (an hard-right,
anti-tax arch-conservative, & a darling of Fox News),
Virginia District Court Judge Henry E. Hudson, a 2002 Bush appointee,
declared its central provision, requiring everyone to buy health
care insurance or be fined, unconstitutional on the grounds that
“An individual’s personal decision to purchase - or decline to purchase
- health insurance from a private provider is beyond the historical
reach of the constitution.” Earlier more favourable rulings originated
with judges that had been Democrat appointees & this case’s next
stop will be the 4th U.S. District Court of Appeals in Richmond,
Va. where these also hold sway. There are few doubts this will end in
the U.S. Supreme Court a couple of years hence. Even though Judge
Hudson denied requests to strike down the entire law, or at least block
its implementation (which in any case won’t be until 2014) until it
goes to the Supreme Court, this invigorated the law’s Republican opponents
who plan to have it repealed, or at least starved from funding, after
they gain control of the House on January 20th.
Ken Cuccinelli immediately
launched a big on-line fund-raising blitz.
ISRAEL’S LEADER
DOES NOT WANT TO SHARE Jerusalem (AP,
Amy Teibel)
· Over the December
10th weekend Israeli Defence Minister Ehud Barak told a Washington
forum attended, among others, by Secretary of State Hilary Clinton,
that Jerusalem will have to be shared as part of any peace deal. But
a government official said this view didn’t reflect the government’s
& on December 12th Prime Minister Netanyahu reinforced
this by saying he didn’t intend to share Jerusalem. This came days
after the Administration ended its efforts to extend the settlement
building freeze & days before White House Mideast Envoy George Mitchell
will come once again to try & move the peace process forward.
The question is not
whether, but when, Barak will resign from a Netayahu government in which
he has always been the odd man out. When he
does, he will deprive it of its majority in the Knesset & bring
on a political crisis that, may end
the stranglehold that a relatively small gaggle of hardliners has had
on the country’s policy-making processes.
MIDDLE EAST PEACE
: ELDERS URGE “REVISED’ PROCESS (BBCNews)
· In 2007 Nelson
Mandela organized a group of international luminari, aka The Elders,
to tackle world conflicts. On December 13th it issued a statement
saying a new approach is needed for the Middle East peace talks, describing
as “flawed” Washington’s attempts to get a renewed settlement
ban by offering big freebies. It said “We now urge a renewed effort,
firmly based on international law and respect for human rights, aimed
at defining boundaries between Israel and a new Palestinian state and
addressing security issues, without neglecting the other issues at the
core of the conflict.” Furthermore, that Israel had to halt all settlement
activity in the occupied Palestinian territory, incl. East Jerusalem,
lift its “illegal and inhumane” blockade of Gaza, & agree to
boundaries of a Palestinian state based on the 1967 borders with East
Jerusalem as its capital.
Its bottom line is
that “We need peace in the Middle East, not just a process.”
Still, the peace process will continue to go nowhere
fast as long as there is a government in place that thinks of the West
Bank as the West Bank, and not as the Biblical
lands of Judea & Samarai (the position of
Netanyahu’s rightwing coalition partners (the group currently includes
Aung San SUU Kyi, Desmond Tutu, Jimmy Carter, Kofi Annan, Mary Robinson,
one-time President of Ireland & UN Human Rights Commissioner, Gro
Brundtland, one-time Prime Minister of Norway & WHO Director-General,
Lakdar Brahimi, a one-time UN Special Representative to Haiti,
and to South Africa, and to Iraq &
to Afghanistan, & one-time Brazilian President Fernando H. Cardoso).
CHINA’S NOVEMBER
PASSENGER CAR SALES ROSE 29% TO RECORD (Bloomberg)
· Consumers continued
to take advantage of government incentives that may expire at yearend.
Car sales rose to 1.34MM, surpassing January’s 1.32MM record, &
YTD are up 35% to 12.45MM. Total vehicle sales, incl. trucks & buses,
were up 26.9% YoY to 1.697MM, & 34% YTD to 16.4MM. GM has introduced
a new “affordable” brand called “Baojun” it will start selling
next year in an effort to grow its market share & Ford opened 25
new dealerships on November 25th & plans to open 26 more
by yearend.
With total sales for
the year now expected to be in the 18MM unit range, i.e. in excess of
US sales at its peak a few years ago, China has now
become the world’s largest vehicle market, and going forward is likely
to become more so.
EU TO RECOGNIZE
PALESTINIAN STATE ‘WHEN APPROPRIATE’ (BBCNews)
· After a call by
Mahmoud Abbas to recognize a Palestine based on the 1967 borders now,
its Foreign Policy Council reiterated “its readiness, when appropriate,
to recognize a Palestinian state” but also expressed disappointment
that Israel hadn’t extended its settlement freeze & said “Our
views on settlements, including in East Jerusalem, are clear : they
are illegal under international law and an obstacle to peace.”
Where might this leave
France that on December 8th, after Argentina
& Brazil joined the 100+ nations recognizing a Palestinian state
based on the 1967 borders, said it would follow suit.
PORTUGAL ASKS CHINA
TO BUY ITS GOVERNMENT BONDS (BBCNews)
· Portugal is trying
to avoid an EU/IMF bailout. So its Finance Minister recently made low
profile visits to Brazil & China to try & persuade their
governments to buy his government’s bonds.
China
has been buying European government bonds for some time (apparently
partly in the belief that at its core Europe’s longer term fiscal
position beats that of the US).
