Economic Bears Turn Positive

English: Mohamed A. El-Erian, Managing Directo...

English: Mohamed A. El-Erian, Managing Director of the Pacific Investment Management Company, speaking at the World Economic Forum Summit on the Global Agenda 2008 in Dubai, United Arab Emirates. (Photo credit: Wikipedia)

Three prominent bears — David Rosenberg, chief economist at Gluskin Sheff & Associates, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., and David Levy, chairman of the Jerome Levy Forecasting Center — separately see some hopeful signs. These include a housing market that is healing, a more competitive manufacturing industry and technological breakthroughs that could boost productivity.

“More so than at any time in the past three years, I’m doing whatever I can to identify silver linings in the clouds,” Rosenberg said.

None of the three is ready to declare the all-clear. While the chances the economy could perform better than expected are “somewhat” higher than before, the downside risks are bigger, said El-Erian, who oversees $1.9 trillion at Pimco in Newport Beach, California. These include the so-called fiscal cliff, which all three agree would trigger a recession if nothing is done to avert its spending cuts and tax increases.

The continued caution of the three economists is reflected in advice they are giving investors. Rosenberg recommends gold- mining stocks and shares of utility companies, the latter as part of a strategy he’s dubbed “Safety and Income at a Reasonable Price.”

‘Be Defensive’

“This is a time to be defensive,” said Levy of the Mount Kisco, New York-based economic forecaster. “We are still in a rocky period.” He has been bullish on Treasury bonds for more than five years and eventually sees yields falling even further. The yield on the 30-year bond was 2.78 percent as of 5 p.m. yesterday in New York, according to Bloomberg Bond Trader data.

El-Erian suggests investors look outside the U.S. for economies that are growing faster and put money in companies and nations with strong balance sheets, includingBrazil’s and Mexico’s local bonds. He said investors also should “actively” manage their portfolios to protect against downside risks and take advantage of upside surprises that might materialize through the use of puts, calls and other trading strategies.

El-Erian and Rosenberg recommended a defensive stance on financial markets about a year ago in separate interviews on Bloomberg Television. Toronto-based Rosenberg said investors should look at dividend-paying health-care, utility and consumer-staples stocks, which are least-tied to changes in economic growth.

Worst Performance

Drugmakers in the Standard & Poor’s 500 Index are up 16 percent and producers of household goods have risen 9.7 percent in 2012. Utilities have fallen about 2 percent for the worst performance among the 10 major industries in the gauge.

El-Erian said Dec. 19 that the first part of 2012 would be “risk off” as Europe’s sovereign-debt crisis encouraged demand for safety. Yields on 10-year U.S. Treasuries rose to 2.21 percenton March 30 from 1.88 percent at the start of the year, while theStandard & Poor’s 500 Index (SPXL1) jumped 12 percent. For the year to date, the stock index also is up 12 percent.

The U.S. economy will grow 2 percent next year and 2.8 percent in 2014, the Paris-based Organization for Economic Cooperation and Development said last month. That is faster than the average for the OECD’s 34 members of 1.4 percent in 2013 and 2.3 percent in 2014.

Both Rosenberg and Levy foresaw the bursting of the housing bubble in 2007, the former when he was chief economist for North America at Merrill Lynch & Co. in New York. They’ve generally been more pessimistic than the consensus of economists since then, with Levy saying the U.S. is experiencing a “contained depression,” and Rosenberg incorrectly forecasting the U.S. would relapse into recession at the start of this year. The previous slump began in December 2007 and lasted 18 months.

More Downbeat

El-Erian and his colleagues at Pimco also have tended to be more downbeat. The 54-year-old former International Monetary Fund economist first used the term “new normal” in May 2009 to describe the probable medium-term path of the global economy. For the U.S., that meant annual growth of about 2 percent.

Since the recovery began in the middle of 2009, GDP has expanded by an average of 2.2 percent, in line with the Pimco forecast and short of repeated projections for faster growth by the Federal Reserve and the White House.

Pimco’s Total Return Fund, the world’s largest mutual fund, is up 10.3 percent this year, beating 95 percent of similarly run mutual funds, according to data compiled by Bloomberg.

‘A Stinker’

It has attracted about $17 billion in net new money in 2012, according to Chicago-based research firm Morningstar Inc., after losing $5 billion to withdrawals in 2011, when it suffered what William Gross, the company’s co-chief investment officer with El-Erian, called “a stinker.” It eliminated U.S. Treasuries early in the year and missed a rally when investors rushed to the safety of government-backed debt.

One reason Rosenberg, 52, is trying to look on the bright side is because many other economists have turned more bearish.

“That’s raised my contrarian antenna,” he said.

GDP probably will grow 2 percent in 2013, down from a projected 2.2 percent this year, according to the median forecast of 74 economists surveyed by Bloomberg last month.

Among the more hopeful signs, Rosenberg said, is the bottoming out of the housing market. New-home construction rose 3.6 percent to a four-year high in October, according to the Commerce Department.

‘Strong Phase’

“We’re in a strong phase of the recovery,” Martin Connor, chief financial officer of Toll Brothers Inc. (TOL), a Horsham, Pennsylvania-based luxury homebuilder, said during a conference presentation on Nov. 15. “It’s a function of five years of pent-up demand being released.” Affordability and rising prices also are “spurring people to buy.”

The banking industry also is on the mend, Rosenberg said. “The banks are certainly in better position and more willing to lend money than they have been for years,” after buttressing their balance sheets.

JPMorgan Chase & Co., the biggest U.S. bank by assets, provided $15 billion of credit for small businesses in the third quarter, up 21 percent from a year earlier, Chief Executive Officer Jamie Dimon said in an Oct. 12 press release.

Rosenberg also is encouraged by what he calls a “secular renaissance” of the U.S. manufacturing industry — with output rising 16 percent during the recovery, according to the Fed — and a surge in American energy production.

Net Exporter

U.S. oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s largest fuel consumer almost self-reliant and putting it on track to become a net exporter, the International Energy Agency said last month.

Even so, problems remain. Rosenberg said he is particularly worried about continued high unemployment — 7.9 percent in October, up from 4.7 percent five years ago — and its impact on worker earnings.

“This will go down as a wageless recovery,” the Canadian economist said.

Average hourly earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since Labor Department records began in 1965.

The bottom line for Rosenberg: The economy still is “stuck in the mud.”

Pimco’s El-Erian predicts GDP probably will grow 1.5 percent to 2 percent during the next year as President Barack Obama and Congress strike a “mini-bargain” to avoid the fiscal cliff and moderately reduce the budget deficit.

‘Sputnik Moment’

The economy could do better if policy makers can pull off what El-Erian calls a “Sputnik moment” — a critical mass of reforms that restores corporate confidence and unleashes pent-up investment, hiring and demand. Such steps might include measures to tackle youth and long-term unemployment, as well as cutting the deficit.

“There’s tremendous cash on the sidelines,” he said.

David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), says a budget deal alone could do wonders for the U.S.

“There is a prospect for a robust recovery, something bigger than I think most economists are forecasting,” if the White House and Congress can reach a credible agreement to reduce the deficit by $4 trillion over 10 years, he told Bloomberg Television on Nov. 28.

El-Erian, who re-joined Pimco in 2007 after being in charge of managing Harvard University’s endowment, also sees a chance that technological breakthroughs could give the U.S. a productivity-driven boost. At the top of the list is digitalization: the conversion of pictures, sound and other information into a form computers can process.

Economic Impact

“The whole trend is having an impact on very many sectors of the economy,” he said.

The trouble is that while the potential for such pleasant surprises is bigger than before, it isn’t “meaningfully” bigger, according to El-Erian. And the downside dangers are greater, he said. Besides the fiscal cliff, they include the debt crisis in EuropeChina’s challenge in overhauling its export-driven economy and the risk of continued instability in the Middle East.

Levy said the U.S. private sector is in the middle of a prolonged period of cleaning up its balance sheet after decades in which debt grew faster than income.

“We’ve been at this for five years,” he said. “If we’re lucky, it might take a tiny bit less than a decade.” He added he’d be surprised if the U.S. is able to avoid a recession in the next few years.

More Progress

America, though, has made more progress than Europe and Japan in dealing with its debts, Levy said.

“The U.S. will do generally better in this rocky period than much of the rest of the world, because the risks are higher and the problems are bigger in many places overseas,” the 57- year-old economist said. That includes China, where new leaders face decisions on how — and whether — to curb state enterprises, boost access to credit for private companies and raise consumption.

Levy, who served on the board of the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York, from 1986 to 2001, said America also will benefit from a “secular improvement” in its trade balance. Driving that improvement: the manufacturing revival, boom in domestic energy output and increased demand for U.S. agricultural exports as developing nations grow richer.

“By the end of this decade, we might be looking at trade surpluses,” he said. The U.S. ran a$415.5 billion trade deficit through the first nine months of this year.

Future business investment also is being stored up as companies put off capital expenditures because of depressed demand for their products, he said. Eventually, such spending will surge, boosting productivity and profits.

“While the U.S. is going through a long-term, rough adjustment period,” Levy told Bloomberg Radio Nov. 13, “we are weathering it.

‘‘We are going to come out the other side,’’ he added. ‘‘And there is a very bright long-term.’

Nomura Forecasts A Market Spike Then A Dramatic Fall

English: A frame from a screencast from the US...

English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

Nov 13

Nomura’s bearish macro strategist, Bob Janjuah, is out with his latest update on the stock market in nearly two months. 

Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.

However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.

Here’s what Janjuah has to say in his note:

If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.

Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.

Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.

A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.

However, for the rest of 2012, in the short-term, Janjuah still remains bearish.

Societe Generale on Debasement Of Currency By the Central Banks

English: Two hot-air balloons from Societe Gen...

English: Two hot-air balloons from Societe Generale and Rhein Energie Deutsch: Zwei Heißluftballons von Societe Generale und Rhein Energie Français : Deux montgolfières, l’une Société Générale l’autre Rhein Energie. (Photo credit: Wikipedia)

October 27

the Societe Generale author is Dylan Grice

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for…). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations….

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer?

He runs through some of the Great Debasements of the past, starting with third-century Rome, running through Europe’s medieval inflations and the French Revolution, to the monetary horror story of Weimar Germany in the 1920s.

His key point is that inflations and hyperinflations don’t just hurt money, they hurt people and the societies they live in. Inflating money is less trustworthy money, and so people doing business trust each other less. Plus, those who are farthest from the source of artificially created money suffer the most (the “Cantillon effect”).

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment  the young blame the old, everyone blame the rich  yet few question the ideas behind government or central banks …

I’d feel a whole lot better if central banks stopped playing games with money….

All I see is more of the same – more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens.

In just 10 days we will see how the US elections turn out. Depending on what happens after, the US will either remain as one of those safe havens (and perhaps become even more of one) or those of us who reside here will need to start thinking more globally. I know a lot of thoughtful people who are already contemplating (if not acting on) plans to make sure their life savings maintain their buying power through the coming decade. I remain optimistic that we will set ourselves on a course that ends in a safe harbor, although the sailing will be quite volatile. What Dylan describes are the unintended consequences of people who think they understand macroeconomics and who are well-intentioned but whose policies can be most disruptive.

Click here for for much more detail on the ins and outs of investing in gold.

Euro Zone Rot Spreads To Germany

English: OccupyFrankfurt at the European Centr...

English: OccupyFrankfurt at the European Central Bank (Photo credit: Wikipedia)

from Reuters

Oct 25

LONDON — The eurozone’s biggest member Germany is being sucked into the bloc’s worsening economic quagmire, business surveys suggested on Wednesday, as similar data signalled the slowdown in China may be abating.

The slump that began in Greece and spread to other smaller eurozone economies was clearly gripping the core in October, marking the worst month for the 17-member bloc since it emerged from recession more than three years ago.

Markit’s Composite Purchasing Managers’ Index (PMI), which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, fell to 45.8 this month.

That was the lowest reading since June 2009, confounding consensus expectations in a Reuters poll for a rise to 46.4. The index has now been below the 50 mark that separates growth from contraction since February.

Similar PMI data for China suggested the world’s second biggest economy, a key world exporter, is slowly recovering from its weakest period of growth in three years, with new orders and output at their highest in months.

U.S. manufacturing improved slightly in October but slow growth and economic uncertainty suggested the sector’s recent struggles may persist over the final months of 2012, an industry survey showed on Wednesday.

information firm Markit said its U.S. “flash,” or preliminary, Purchasing Managers Index for the manufacturing sector edged up to 51.3 this month from 51.1 in September. A reading above 50 indicates expansion.

A modest rise in output helped boost business conditions in the sector, which suffered its weakest quarter in three years during the July-to-September period.

But fewer orders from domestic clients and a fifth straight monthly decline in overseas demand for U.S. goods indicates manufacturing was acting as a drag on growth and employment, said Markit chief economist Chris Williamson.

GERMAN PLUNGE

The manufacturing PMI for Germany – another major exporter and Europe’s economic powerhouse – plunged to 45.7 from 47.4, also confounding expectations for a rise and well below even the lowest forecast polled by Reuters. The rate of decline was even worse in France.

“(It) reinforces concern that the economic downturn in the region may be deepening and widening,” said Martin van Vliet, senior economist at ING.

The data were published just before European Central Bank President Mario Draghi was due to appear before German lawmakers for a grilling over whether his plans to buy eurozone sovereign debt might trigger inflation or compromise ECB independence.

They also coincided with the latest numbers from Germany’s Ifo institute showing business sentiment in the country dropped sharply to its lowest in more than 2-1/2 years, the sixth consecutive monthly fall.

“Any hopes of a rebound appear to have been dashed for now. Germany is heavily dependent on exports so a global slowdown is going to impact on Europe’s growth motor,” said Peter Dixon at Commerzbank.

Germany has been mostly resilient to the three-year-old sovereign debt crisis. But economic data in recent months have shown the rot is spreading.

The eurozone economy contracted 0.2% in the second quarter and is predicted to have shrunk 0.3% in the third, meeting the technical definition of recession.

While official data implies a similar decline in the third quarter just ended, Markit said the PMIs suggest the downturn will accelerate into the current quarter – a far gloomier prediction than in a Reuters poll last week.

“We are more downbeat than the official data. The PMIs are running at levels in the third quarter and start of the fourth quarter historically consistent with GDP falling at about 0.6%,” said Chris Williamson at data collator Markit.

Bad news has been flowing out of company boardrooms too.

Carmaker Volkswagen reported a fall in nine-month operating profit on Wednesday and sportswear maker Puma reported sales in the region dropped in the third quarter.

Heineken NV, the world’s third-largest brewer, reported a stronger than expected increase in third-quarter revenue, but sold more beer everywhere except western Europe.

Markit’s measure of services business expectations sank to its lowest reading since February 2009, at the nadir of the last recession and when world stock markets were tumbling.

STABILISATION IN CHINA

But it was a different story for China, where the HSBC Flash Manufacturing PMI rose to a three-month high of 49.1 in October but remained below the key 50 mark.

“(This) adds to recent signs of stabilisation of the Chinese economy, thus underpinning our view that the slowdown in activity is bottoming out,” said Nikolaus Keis at UniCredit.

A Reuters poll taken after last week’s GDP data showed economists anticipating a modest rebound in growth in Q4 to 7.7% from Q3’s below-target 7.4%.

Even that figure would not be enough to lift full year expansion from an expected 13-year low, however.

Clich here for  much more detail on the ins and outs of investing in gold.

Caterpillar Cuts 2015 Outlook

English: Fortescue Metals Group - GE CW44 DASH...

English: Fortescue Metals Group – GE CW44 DASH 9 locomotives, Unit 012 leading, on a loaded 220 wagon, 2.6km long, 31,784 ton, iron ore train. Location Pilbara region, Western Australia. May 2008. (Photo credit: Wikipedia)

 Sept. 25

Caterpillar Cuts 2015 Outlook as Mining Spending Falls

Caterpillar Inc. (CAT), the world’s biggest construction and mining equipment maker, cut its forecast for 2015 earnings after commodity producers reduced capital expenditure.

Caterpillar said profit will be $12 to $18 a share, compared with a previous projection of $15 to $20. While a global recession remains possible, Caterpillar is forecasting moderate and “anemic” growth through 2015, Chairman and Chief Executive Officer Doug Oberhelman said today in a presentation to analysts at the MINExpo industry conference in Las Vegas. Construction activity in emerging markets will probably show modest improvements, he said.

“We’ve seen a slowing in economic growth that was more than we expected,” he said. “We think ‘13 could look like 2012 in terms of worldwide economic growth.’’

Oberhelman has bet on a continuation of growth in commodity demand by buying mining-equipment maker Bucyrus International Inc. for $8.6 billion last year and agreeing in November to acquire ERA Mining Machinery Ltd. in China. His plans are coming under pressure as mining companies cut capital expenditures after economic expansion slowed in China, the world’s largest user of coal and metals.

Shares Drop

Global mining capital expenditures will drop 14 percent through 2014 from a peak of $136 billion this year, JPMorgan Chase & Co. said in a Sept. 21 report. BHP Billiton Ltd., the world’s biggest mining company, last month delayed an estimated $68 billion of projects. Australian iron-ore producer Fortescue Metals Group Ltd. on Sept. 4 cut its full-year spending forecast by 26 percent to $4.6 billion.

Caterpillar fell 2.2 percent to $88.87 at 6:30 p.m. after the close of regular trading in New York. The shares are almost unchanged for this year while the Dow Jones Industrial Average, of which Caterpillar is a member, has advanced 11 percent

Roubini Sees ‘Perfect Storm’ of Risks For Global Economy

English: Nouriel Roubini, Turkish economist, p...

Many attendees at the annual Ambrosetti Forum at Lake Como on Friday fretted about mounting U.S. debt and the Europe’s inability to balance electorates’ apparent insistence on national sovereignty with the need for regional coherence to salvage the teetering euro.

But economist Nouriel Roubini predicted years of gloom almost regardless of what is decided.

That analysis is rooted in the specific nature of this crisis, a downward spiral in which a financial meltdown largely caused by excess credit was defused by a blast of public spending; that 2009 stimulus, widely credited with avoiding a global depression, pushed some governments too far into the red for the markets’ liking — a “sovereign debt crisis”; and this is turn was attacked through severe austerity measures that suppressed spending to the point that countries cannot grow their way back to prosperity.

“History suggests that whenever (there is) a crisis with too much private debt first and public debt second you have a painful process of deleveraging,” said the famously apocalyptic New York University professor, a glowering fixture at such international talk-shops.

“That would imply many years, up to a decade, of low economic growth. And guess what? Economic recovery in the U.S. has been unending and in the euro zone and U.K. there’s outright economic contraction right now, and that’s not going to change unfortunately in the next few years.”

The grim prognosis was consistent with new figures released a day earlier by the OECD, a club of the world’s richest nations. Its report found that the global economy is slowing and that the G7 economies would grow at an annualized rate of just 0.3% in the third quarter of 2012. Furthermore, the OECD found, the continuing euro zone crisis “is dampening global confidence, weakening trade and employment and slowing economic growth” worldwide.

Increasingly popular is the argument that it is fundamentally illogical to allow a country to blunder into massive debt if it doesn’t have the monetary tools to diminish its debt — lacking a currency to devalue.

Roubini said that the only solution was to extend the euro’s monetary union in the direction of a banking, fiscal or even political union, at least to the point of having a single euro zone finance minister empowered to veto individual countries’ budgets for exceeding a given deficit limit. “Today the euro zone is disintegrating. … either move forward or you’re going to fall off a cliff.”

That rankled former Spanish Prime Minister Jose Maria Aznar, who declaimed the idea of “a United States of Europe” as counter to the psychology and history of the region.

It was easier to find common ground on the question of the United States — with great concerns that country is headed toward another debt-ceiling crisis because regardless of the presidential election outcome Democrats and Republicans cannot agree on how to close a deficit that is digging an ever deeper debt hole.

“The largest economy of the world cannot continue this way without doing any kind of predictability about what is going to happen,” said Babican. “We don’t know much about the budget of 2012 and we don’t know what kind of fiscal policy there will be in 2013. A fiscal cliff is coming.”

Also clouding the atmosphere was the slowdown in emerging nations — including China, despite growth there that remains far higher than in the West.

“Seven percent growth may seem high, but for China, which had double-digit growth for 20 years, it really means bad news,” said Li Cheng, a China expert from the Brookings Institute. He said there was risk of millions of layoffs which could spark “the largest crisis in (Communist China’s) history because it may cause revolution.”

The final element of what Roubini described as the “global perfect storm” is the possibility of an attack by Israel or the United States on Iran because “it’s clear that negotiations have failed” on stopping Iran’s nuclear ambitions. “The last thing the world needs given its fragility is another war in the Middle East and a spike in oil prices,” Roubini said.

Doug Kass : Plans On Shorting Stocks ( Response to Draghi / Euro Zone Crisis)

European Central Bank

European Central Bank (Photo credit: jurjen_nl)

Sept. 6

“I plan to sell/short this news for several basic reasons,” writes Doug Kass, President of Seabreeze Partners

In a new note published on The Street, Kass writes that he’s not very impressed by Mario Draghi‘s announcement that the ECB would begin unlimited bond-buying program.

“Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come.”

And he argues that the U.S. serves as a pretty good model for what’s to come:

“…we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won’t be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade.”

Bottom line, he says: “There will be many more Thursdays with Mario.”

Read the whole post at TheStreet.com.

What Draghi said:

  • Transparency: Purchases to be revealed on a weekly and monthly basis.

Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

You can read the full press release on it here.

If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.
ECB press conference was the first time that the bank was expected to announce a real game changer for the euro crisis.

The reason? For the first time, it looks like the ECB is seriously going to open up its unlimited pocketbook and buy bonds agressively to depress yields.

Usually the ECB disappoints when it has a press conference, but this time the markets seem to like what happened. European bond yields are falling, and the Dow is up 130.

The hallmark news of the day was the existence of a new plan: The OMT, which stands for Outright Monetary Transactions.

Previously, when the ECB did bond buying it was under a program called the SMP: Securities Market Program.

The new plan rests on 5 pillars:

  • Conditionality. Strict and effective conditionality is attached to ECB purchases of sovereign debt. What this means is: No country gets to have their bonds purchased unless they submit to outside oversight on fiscal matters. IMF observation will get re-elected. Draghi threatens to terminate actions in non-compliance.
  • Unlimited purchases of 1 to 3 years.
  • ECB is no longer senior. ECB expects the same Pari Pasu treatment.
  • Sterilization: The liquidity created through outright transactions will be sterilized.
  • Transparency: Purchases to be revealed on a weekly and monthl
    • basis.

    Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

    You can read the full press release on it here.

    If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

    In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

    The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

    Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

    The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

    Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.

    The market seems to like it: The Dow is surging 150 points, hitting the highest level in 52 weeks.

     

Euro Crisis Part 367 : Spain Will ” Accept ” A Bailout

Olli Rehn, EU Economic and Monetary Affairs Co...

Olli Rehn, EU Economic and Monetary Affairs Commissioner (Photo credit: Wikipedia)

 

August 14

Spain’s government is considering a request for a sovereign bailout, European Economic and Monetary Affairs Commissioner Olli Rehn signalled.

Spain has an “open mind,” Rehn said Tuesday in a Bloomberg Television interview in New York. No decision has yet been taken by Prime Minister Mariano Rajoy’s government, he said.

“We stand ready to act if there is a request,” Rehn said.

We stand ready to act if there is a request

Rehn’s remarks follow comments by Rajoy that he would ask the European Central Bank to buy Spanish bonds “if it seems reasonable,” as he moved to extend unemployment subsidies for some of the nation’s 5.7 million jobless.

Rajoy’s only criterion will be “defending the general interests of Spaniards,” the premier told reporters today in Palma de Mallorca after meeting King Juan Carlos. The day before an extraordinary jobless subsidy was set to expire, Rajoy also said the government will extend payments for another six months amid a jobless rate of 25%.

Spanish 10-year bond yields rose to a euro-era high of 7.62% on July 24, exceeding the threshold that prompted full sovereign bailouts in Greece, Portugal and Ireland. Yields have fallen since ECB President Mario Draghi said on Aug. 2 the bank would buy sovereign bonds if countries applied for similar support from Europe’s rescue fund and accepted strict conditions in return.

The yield on Spain’s 10-year notes fell 11 basis points today to 6.73%.

Paul Ryan ,The GOP , The Fed and Inflation

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

It’s time to put down Ayn Rand and pick up Milton Friedman
from The Atlantic
Paul Ryan is worried about the Federal Reserve. He is worried the Federal Reserve will try to bring unemployment down. There’s a word for this. I can’t print it, because this is a family publication.

For the past four years, Ryan has repeatedly warned about the real menace threatening the economy: inflation. Forget that long-term unemployment has surged to levels not seen since the Great Depression, and prices have barely risen — Ryan is scared of the inflation monster under his bed, and thinks you should be too. He thinks that trying to bring down unemployment will unleash the inflation monster — and that’s why he wrote an op-ed in the Wall Street Journal back in May of 2008 calling on Congress to revoke the Fed’s dual mandate to target both low inflation and low unemployment. He wants the Fed to only worry about the former and not the latter.
Ryan is pushing bad economics, and worse history. The chart below looks at core PCE inflation — the Fed’s preferred measure — since Congress passed the Humphrey-Hawkins Act in 1978 that gave the Fed its dual mandate. After spiking due to the second oil shock, inflation has been on a steady downward trajectory for the past 30 years.
  HHInflation.png

It takes a vivid imagination to interpret this as evidence that Humphrey-Hawkins has caused an inflation problem. Reality says the opposite. Actually, it’s much, much worse for Ryan — the Fed has gotten much, much better at maintaining price stability since the advent of the dual mandate. We don’t have data on core PCE inflation before 1959, but we do have numbers for CPI inflation — that is, including food and energy costs — going back to 1914. Which period looks like the nirvana of price stability to you in the chart below? (Note: the yellow dot shows when Humphrey-Hawkins became law).
CPIInflationMarker.png
There was 4.4 times more variance in prices before the dual mandate than after it. And those first 20 years came under the gold standard — which its advocates today claim would “cure” inflation! This last point is crucial because Ryan has something of a soft spot for goldbugs. Now, Ryan doesn’t want to bring back the gold standard itself, but he does want to create a commodity standard — in other words, tie the value of the dollar to a basket of commodities. This is a distinction without much of a difference. The Fed would have to raise interest rates when commodity prices go up, regardless of the state of the economy. This is all kinds of crazy. Commodity prices have shot up the past decade as developing nations have developed — unrelated to inflation here. It makes no sense to make our economy worse because China’s economy is getting better.
Where did Paul Ryan get such a truly nutty idea? It’s not from the hero of conservative economic thought, Milton Friedman. Republicans have abandoned Friedman — at least when it comes to monetary policy. (Although libertarians and conservatives like Scott Sumner, David Beckworth, and Evan Soltas still carry the Friedman torch). Friedman’s insight was that low interest rates don’t necessarily mean that Fed policy is easy — usually the reverse — and that the Great Depression wouldn’t have been quite so great if the Fed had printed money to prevent the banking collapse. Ryan hasn’t just ignored Friedman; Ryan is the anti-Friedman. He has sharply criticized Fed Chairman Ben Bernanke for printing money, and issued melodramatic (and incorrect) predictions about “currency debasement.”
Why is Ryan so out of step with what conservatives used to believe about monetary policy? Because he takes his cues on the Fed from a fiction writer instead of a Nobel laureate.
 

We are In A Global Recession: Only Time Can Heal the Economy, Says Gary Shilling

English: Representatives to the Conference on ...

English: Representatives to the Conference on Unemployment The meeting was called by U.S. President Warren G. Harding in response to the 1921 recession. (Photo credit: Wikipedia)

More than two years before the housing bubble burst in 2006, economist Gary Shilling warned that subprime loans were probably “the greatest financial problem” for the future U.S. economy. In 2007 he said “housing would sink the economy,” and a year after that he warned of a “serious recession” that would consume most of 2008. He was right every single time.

Now Shilling says a new recession has begun in the U.S. — in the second quarter — following on the heels of the recession in Europe. He says the current recession is different from previous ones because it wasn’t caused by rising rates or another housing downturn but rather a drop in consumer spending due to a weak job market.

“We’ve had three consecutive months of declines in retail sales,” says Shilling, president of A. Shilling & Co., an economic research and forecasting firm. “That’s happened 29 times since they started collecting the data in 1947, and in 27 of the 29 we were either in a recession or within three months of it.”

Shilling expects this recession will last about a year and shave about 3.5% from growth from peak to trough.

This time is different, says Shilling “because a lot of things that normally go down in a recession are already there, like housing.” And policies that normally help revive the economy are absent. The Fed can’t cut interest rates because they’re already near zero and the housing market won’t be a catalyst for growth, Shilling says.

One thing that hasn’t changed, says Shilling, is the economy as the number one issue in the presidential election. Before the last presidential election Shilling said that whoever got elected then wouldn’t get re-elected because the economy would still be weak with high unemployment.

Now Shilling says he’d like to see one party in control in Washington because it increases the odds of cuts for entitlements and could help “restore confidence in Washington.” But even then he says it will take five to seven years to complete the deleveraging that’s already underway before the economy recovers.

Flood of Foreclosures Could Cause Home Prices to Drop 20%

There is a consensus forming that the U.S. housing market may finally be on the rebound. Home prices are up 4-straight months, according to the latest S&P Case-Shiller index and Zillow’s U.S. home value index increased for the first time since 2007 in the second quarter.

But Gary Shilling of A. Gary Shilling is not convinced home prices have turned to the upside for good.

“The fundamental reason is there is a huge excess of inventory out there,” he tells The Daily Ticker’s Henry Blodget. “Some of it is listed but a lot of it is a so-called shadow inventory.”

Shadow inventory refers to homes in foreclosure and waiting to be sold or properties that homeowners have delayed selling, likely to get a better price.

In his latest Insights investment note, Shilling writes “excess housing inventories, the mortal enemy of prices, measure about 2 million over and above normal working levels. Thats huge considering that housing completions averaged about 1.5 million in earlier balmy years.”

He also cites the backlog of delinquencies and foreclosures that were put on hold during the robo-signing investigation and settlement process.

A CoreLogic report in June showed shadow inventory fell almost 15 percent from 2011 levels to 1.5 million properties. More than half of those 2.8 million homes were “seriously delinquent, in foreclosure or REO.”

“Since peaking at 2.1 million units in January 2010, the shadow inventory has fallen by 28 percent. The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” said CoreLogic chief economist Mark Fleming. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”

As Shilling sees it, the banks have three options to get the bad mortgages off their books:

  1. Flood them onto the market
  2. Institute a mortgage modification plan
  3. Try to convert the properties into rentals

He says the second and third options are a lot less likely because mortgage modifications rarely work and rental properties are very difficult to maintain on a large scale, which may detract institutional inventors.

As a result, he believes the more likely scenario could very well end up being option number one, which would have a negative impact on home prices. The latest National Association of Realtors survey shows foreclosed properties tend to sell at a 19 percent discount to the market.

Too many foreclosures flooding the market at the same time could drive down prices of the surrounding homes.

“It would take a 22% house price drop to return to the long-run trend going back to 1890,” he writes in his research note. “Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative.”

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