Sunday, February 21, 2010

Leftovers --- Radio Show 2/20/2010

In the show we covered the Fed's Federal Open Market Committee minutes from January in which it was apparent the Fed is struggling with the meaning and economic impact of currently high unemployment, despite employment being one of the two mandates of the Federal Reserve.  One quandary they were having is whether extended unemployment benefits were "... encouraging some who have lost their jobs to remain in the labor force."  I found this whole paragraph to discouraging in that it tends to validate my long voiced opinion that the Fed is using unemployment to hold inflation down as the the banks recapitalize and adjust their balance sheets.

The whole paragraph is as follows:  "Though participants agreed there was considerable slack in resource utilization, their judgments about the degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns, by encouraging some who have lost their jobs to remain in the labor force. If that effect were large—some estimates suggested it could account for 1 percentage point or  more of the increase in the unemployment rate during this recession—then the reported unemployment rate might be overstating the amount of slack in resource utilization relative to past periods of high unemployment. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, could reduce the economy’s potential output, at least temporarily; historical experience following large adverse financial shocks suggests such an effect. On the other hand, if recent productivity gains were to be sustained, as some business contacts indicated they would be, potential output currently could be higher than standard measures suggested, and the high level of the unemployment rate could be a more accurate indication of slack in resource utilization than usual measures of the output gap."

In conjunction with those passages, we also noted that a recent speech by the Minneapolis Fed President Kocherlakota included the statement: "The point, though, is that the fall is not spread uniformly across all people. Some workers—those who lose their jobs—suffer much bigger falls in income. For this reason, many macroeconomists now believe that the true cost of a recession is not the fall in GDP per se, but the associated increase in the risk of people becoming, and staying, unemployed. "  I have been saying this for over a year in trying to explain how serious the high unemployment rate and the fact that 21.5 - 22% (if you use the formula from the 1990's for determining discouraged workers) of the population is unemployed is in determining if this technical "jobless" recovery is sustainable and how destructive a long, slow growth recovery will be to the structure and membership of the American middle class while income inequality will continue to grow at the benefit of the top 1%.

In that Kocherlakota's speech devolved into a defense of the Fed's role as a necessary regulator of the banking system, it is unfortunate that the Fed did not get the job done.  My opinion is that the Fed needs to continue having that responsibility as a member of a council of regulators.

Greece may (it has not been formally announced) attempt a bond auction this coming week.  The EU has provided no commitments of assistance preferring to ratchet demands for austerity program plans and reports by March 16 and May 1.  The Greek PM has indicated they are ahead of schedule.  They have raised taxes, but they also have an aging population with a low birth rate.  I pointed out that the EU rules for determining debt to GDP ratios is not based on national debt but also includes local government debt.  The causes of the problems in Greece, Spain, Italy, and Portugal, if not Ireland also, goes directly to the formation of the euro, the exchange rates, low ECB interest rates, competitiveness gaps between Eurozone nations, and trade imbalances within a single monetary union of sovereign nations.  If the EU refuses to deal with the problems of the euro and the lack of appropriate tools for the ECB and attempts to ignore the problems with political compromises and hard line positions, the economic consequences could snow ball from country to country.  If the political compromise approach stimulates social protest and disruption in Eurozone countries, who have not enjoyed the benefits of the economic trade imbalances as Germany has, the question could devolve into one of sovereignty.  How much sovereignty must EU nations, who have economically suffered from the adoption of the euro, surrender to please the more economically dominate EU member nations?

Interestingly, the Greek PM made a public statement that Greece did not need assistance from the EU and could handle the problem itself.  He also indicated that if Greece did want help it may seek it directly from the IMF without the cooperation of the EU.  I was struck by how much this was similar to the recent suggestion of Simon Johnson that Greece bypass the EU and approach the IMF for assistance unilaterally and in so ding put immense political pressure on the EU and particularly France, because French President Sarkozy sees the head of the IMF, Strauss-Kahn, as a potential political opponent for president of France.

Spain, which is seen by some as a potentially larger problem than Greece as it has a much larger economy, is struggling with growing unemployment and a EU imposed austerity program, but this last week it had a bond auction in which it offered 5 billion euro 15 year bonds which priced at a 12 basis points premium and an over subscribed book of 12 billion euro orders.  Over all, it was an encouraging auction.

Iceland will hold its Icesave referendum on March 6tt.  We have documented the Iceland, UK, and Netherlands dispute and various proposals for resolution.  The question is not should Iceland make payments, but what constitutes fair payment under EU law and when payments should be made.  The interest rate of 5.55% has already been denounced by many commentators as excessive and unfair.  Anna Sibert of Birkbeck College, London, and a member of the Monetary Policy Committee of the Central Bank of Iceland has published an article on the legal background of the debate and posits that, if the likely recovery of Landsbanki's assets is close to 90%, it will not be crippling to Iceland's taxpayer's who have already experienced an unprecedented fall in disposable income at 3600 euro per capita or 14% of Iceland's GDP at end of 2015 with the average payment burden from 2016 to 2024 less than 1% of GDP per year.

The economist Thorvaldur Gylfason has written "Eleven lessons from Iceland", in which he lays down eight lessons requiring financial regulatory reform, a tenth that government needs to protect jobs and incomes in such financial crises, and an eleventh that the need for financial regulation and separation of government and private banking does not negate a capitalist approach.

Philly Fed business activity index up to 17.6 January from 15.2 (expected 17.0); new orders up to 22.3 from 3.0; inventory up 5 points.

Citibank, whose majority shareholder is the United States government, which has sent letters in the recent past jacking credit card rates up to 29%, has sent letters to deposit account holders in Texas that Citibank reserves the right to demand 7 days notice in writing before money could be withdrawn from checking accounts, money markets, or savings accounts, which are demand deposit accounts.  While they insist this applies to Texas only, the actual disclosure statement is not limited in its application. 

Remember, Citigroup also wrote the new credit card federal legislation which just took effect.  You will find going forward that the fees, increased minimum payments, and lack of any prohibition of usury will not be the informative disclosure and consumer protection promised.

Capital One annualized credit card write offs rose to 10.41% in January from 10.14% and 30 day delinquent only increased to 5.8% from 5.78%.

Humana will reduce its workforce by 5%.

Morgan Stanley may hand over its $2.4 billion investment in a Japanese hotel chain it bought in 2007 to creditors when debt comes due in April.

AIG has said it plans to keep 25% of its derivatives portfolio, with a notional value of $300-500 billion, as its Financial Products unit winds down saying the derivatives have been "derisked" and have upside potential.

Japan Q4 GDP was 1.1%.

All UK MPC members voted not to expand QE citing the likelihood that inflation will be below target for the next 3 years (below 2% medium term) and further QE might increase asset prices (bubble).

Barclays allocated more in pay bonuses as a percent of revenue than Goldman Sachs by setting aside 38%.

Walmart sales disappointed but were up 4.6% to $112.82 billion (expected $114.36 billion) and profit was $1.21/share vs 96 cents/share a year ago.  EPS, after exclusions and tax benefits, was $1.17/share (expected $1.12).

Simon Property made a hostile offer of $10 million for bankrupt General Growth after a private offer was ignored and is promising that $7 million of that will pay in full unsecured creditors.

RIM (makes Blackberry) warned of a bandwidth crisis in urban areas which requires software developers to come up with better applications and efficient services to conserve bandwidth.

Kraft posted 48 cents/share Q4 profit, which is up 12 cents vs year ago.

Merck, which has merged with Schering Plough, had $2.34/share Q4 profit vs 78 cents year ago.

Abercrombie posted 53 cents/share Q4 profit which is down from 79 cents; revenue fell 4.6%; sales fell 13% down 12% in the US but up 86% internationally.

UK consumer prices were up 3.5% January -- a 14 month high -- supposedly from the implementation of VAT and will fall to normal later this year.

Kansas City Fed President Hoenig said, if interest rates are kept low, major inflation could ensue.  While arguing the Fed needs to remain independent of political pressure, he then ventured into the government's fiscal policy and asserted that the politicians should cut spending and increase revenue (taxes?).

Eurozone trade surplus was $6 billion in December, because exports contracted less than imports.

US gasoline demand is down 1.3% vs year ago.  Refinery capacity is 79.8%

UK business loans fell 8.1% in December vs year ago in the sharpest drop since records began in 1999.

UK retail sales fell 1.8% in January but it is up nine tenths vs year ago.

Spain estimates its economy will contract 5 tenths in 2010.  GDP fell 3.6% in 2009.

Russia cut its interest rate for the 11th time in less than a year by 25 basis points to 8.5%.

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