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).
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.
Risks from ECB debt drip
The abundance of European Central Bank liquidity in the euro zone financial system is making for smoother issuance of shorter-dated debt in the euro zone.
Case in point: Spain. This week the country sold double its previously announced target of three- and four-year government bonds amid solid demand.
But there are risks, particularly if the Treasuries of lower-rated countries get too comfortable issuing at the short-end of the curve. Michael Leister, strategist at DZ Bank, described the potential pitfalls in a telephone interview:
As easy and as attractive it is for the Treasuries to tap these shorter maturities at the moment … obviously this also has a downside in that the average maturity of the debt is decreasing and that builds up a substantial rollover risk because all this short-term debt will become due in a couple of years.
Although you can find a lot of arguments why the situation will be better in say 2-3 years time, it reminds us of the same story back three years ago when the financial crisis kicked off and the Treasuries increasingly went for the shorter maturity to bridge these market tensions. But now we have been living with these market tensions for three, four years.
So indeed rollover risks are building up and the average maturity profile is shortening.
European rescue: Who benefits?
The words “European bailout” normally conjure up images of inefficient public sectors, bloated pensions, corrupt governments. But market analyst John Hussman, in a recent research note cited here by Barry Ritholtz, says the reality is a bit more complicated:
The attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses. Had banks not taken on spectacular amounts of leverage (encouraged by a misguided regulatory environment that required zero capital to be held against sovereign debt), European budget imbalances would have bit far sooner, and would have provoked corrective action years ago.
In other words, even if state actors mishandled government finances, Wall Street was, at the very least, an all-too-willing enabler.
Q&A: Fed poised to adopt inflation target
The Federal Reserve could announce an official inflation target as early as its January 24-25 meeting, part of an ongoing effort to boost transparency.
Most analysts expect the central bank will stick with the target previously pronounced by Fed Chairman Ben Bernanke of 2 percent or a bit lower.
What exactly is an inflation target and what are its purposes? What are the downsides of publicly stating an inflation goal? Here are some questions and answers.
WHY ADOPT AN INFLATION TARGET?
An inflation target is a specific goal agreed upon by the central bank (or, in some places, set by lawmakers). Its purpose is to help prevent future inflation by keeping a lid on inflation expectations, which policymakers see as a precursor to actual inflation.
DO OTHER COUNTRIES HAVE THEM?
Euro zone survival? Depends where youβre from
There was an interesting slant to the forecasts in Wednesday’s Reuters poll about what’s next for the euro zone debt crisis.
Perhaps unsurprisingly, a strong majority of economists from banks, brokers, wealth managers and research institutions thought the euro zone would survive the year intact.
But a detailed look at the survey results suggests the poll was subject to a certain amount of systemic bias. In other words, economists from institutions that have most to lose from any break-up of the euro zone were more likely to predict an optimistic outcome.
None of the almost 30 economists from German and French institutions said the euro zone would fail to make it to 2013 in its current form.
By contrast, out of the 10 economists who believed the currency union wouldn’t survive the year intact, seven worked for institutions outside the euro zone. Four of them were from Britain, where euroscepticism is running high.
While prejudice is much too strong a word, the geographic base of the institutions seems to sway the response of their economists.
So where does the truth lie? The few economists that predicted the onset of the Great Recession three years ago tended to be independent, rather than those who had a vested interest in talking up the economy (consciously or not).
Money funds cut Europe exposure, slowly
Prime U.S. money funds further reduced their holdings of euro zone bank paper in December, although the pace of movement slowed while investors continued to hedge against any bank failures, J.P. Morgan Securities said on Wednesday. The slower movement out of euro zone bank paper was the result of money funds having already strongly reduced their holdings, J.P. Morgan said in a note to clients.
Euro zone bank paper continued to roll off in December from prime money fund portfolios but has seen some slowing as nearly 70 percent of these exposures have been eliminated from prime fund portfolios over the course of the past year. In spite of continued reductions in euro zone bank exposures, prime fund assets under management were basically flat for the second consecutive month reflecting some level of investor comfort in the level of risk in price fund portfolios as much of the cash that left euro zone bank paper has been reinvested in non-European banks and other high-quality products.
The prime money funds had small net outflows of $2.6 billion in December after net inflows of $4 billion in November, according to J.P. Morgan.
The taxable money fund market experienced a significant shift in composition in 2011 with prime money funds losing $177 billion in assets, and government money funds gaining $108 billion in assets as investors sought safety from turmoil in Europe.
Exposure to European bank credit fell by $347 billion last year, of which $331 billion was accounted for by reductions in euro zone bank credit, J.P. Morgan said. The company estimates the top three reductions in exposure by country of origin were to France, Germany and the United Kingdom.
The biggest increases in bank credit by country of origin were to Canada, Japan and Sweden.
Although increases to bank exposures in these banking jurisdictions offset some of the massive declines in European bank exposures, much of the cash that left European banks was reinvested into high quality assets such as Treasury bills and coupons, agency discount notes and coupons and muni variable rate demand obligations.
