Sunday, March 12, 2006

3/12: Fair, honest, responsible news U.S jobs, Japan's easy money

"FHRN" is a regular feature which gives link and excerpts from selected recent key stories, followed by my bold italicized comments. Also see 3/11 "Digests of my previous posts for busy people," link, which gives blog's core ideas. Thanks.

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3/10 Bloomberg "U.S. February Payrolls Rise 243,000; Jobless Rate at 4.8%" link "American employers added a greater- than-expected 243,000 workers in February and incomes rose, signs the job market will bolster consumer spending and economic growth. The unemployment rate increased to 4.8 percent....Economic growth will depend more on jobs this year as housing, a source of strength in the last four years, starts to fade, economists said. Wages in the last 12 months rose by the most in more than four years, posing a risk of higher inflation."

FHRN: As the article notes, job/wage growth is taking on increasing importance as the home equity ATM flattens out.

3/9 NYT "Economists Are Watchful as Tokyo Ends Loose-Money Policy" link "Is Japan about to start a sell-off in global financial markets? Economists have dismissed such fears as alarmist. But a decision by Japan's central bank on Thursday, by a vote of 7-1, to scrap its unprecedented super-loose monetary policy has raised concerns about the possible fallout on the global economy...."These are uncharted waters for a central bank," R. Glenn Hubbard, dean of Columbia University Business School and a central banking expert, said. "Exiting with minimal disruptions will be a difficult exercise.".... [BoJ policy] had the unintended side effect of turning the country into a huge pot of free money for the rest of the world....Global markets have also gotten a boost from the so-called carry trade, in which investors borrowed cheaply in Japan to invest elsewhere....While most economists call these concerns overblown, they do acknowledge that there is some basis for them....They also warn that the anxieties could end up becoming a self-fulfilling prophecy if nervous investors start pre-emptively pulling out of financial markets....Economists [also] say this could lead to a situation — far-fetched but not entirely implausible — in which the Bank of Japan deflates the American real estate market, as homebuyers face more expensive mortgages."

FHRN: Will the unwinding of the BoJ's "quantitative easing" policy create more destabilization than the policy was worth? That was the same question asked of Greenspan when he permitted the TMT equity bubble to expand out of control. His answer was to help create a new, even more massive global real estate bubble.

So let's suppose bad things eventually happen once again during this global central bank tightening cycle, then what will be Bernanke's answer? As both a student of economic history and professed follower of Greenspan's asset inflation playbook, what would be the next mega-bubble "Helicopter Ben" could help to inflate?

Is there some area of potential credit expansion large enough to stave off global deflation, should it start to rear it's ugly head. I don't see it right now, but that doesn't mean it doesn't exist. In the meantime, inflation remains a worry for the bond markets and Fed.

The article says "[BoJ policy] had the unintended side effect of turning the country into a huge pot of free money for the rest of the world." It may or may not have been "unintended," I think that's debateable, but it certainly was embraced by global financial speculators doing "carry trades." Will those profits have been socially productive if a poor economic scenario eventually unfolds?

Btw, like the various professional financial economists, which I'm not, quoted several times in this article, I'm watching this important story, and also have no idea how it will ultimately play out, which is better to admit than pretend otherwise.

3/12 The Nation "Leaking Bubble," link "In 2005 the median first-time buyer put down only 2 percent of the sales price, and 43 percent made no down payment at all. And almost a third of new mortgages in 2004 and '05 were at adjustable rates (because the initial payments are lower than on fixed-rate loans)....adjustable mortgages are likely to adjust only one way: up....Deflating the housing bubble is likely to take some time....That effect [of real estate deflating] could be anything from a mild drag on an already limp economy to a real financial crisis. What it is depends on whether other sectors pick up some of the slack--say, if businesses were to start hiring and investing rather than hoarding their plentiful cash or distributing it to their stockholders. If they don't, things could get quite unpleasant. So many households have taken on so much mortgage debt that if prices merely stop rising, they're going to find themselves under water. And the broad economy has become so dependent on home-equity credit that its withdrawal could come as a terrible shock."

FHRN: Author Henwood gives a good version of the skeptical view of the housing market, with facts and figures (I'm not sure about his home equity extraction figure), without going overboard in claiming the "sky is falling," using the word "could" rather than the much more definitive "will."

He, like myself, believes it may still be too early to tell how much housing will fall and whether something else will pick up the slack. Guessing that the TMT equity bubble eventually would collapse was a no-brainer, if you were an investor, it was just a matter of timing. For various reasons, I find it much harder to guess the ultimate outcome with real estate, one of them being that the stakes may be so much higher if nothing can replace it, as I've said and Henwood does to.

Fyi, this article is from the leftish "The Nation," and he also has written a book from that viewpoint, "After the New Economy: The Binge and the Hangover That Won't Go Away" link. Critiques of the housing bubble abound on the Internet, from all across the economic/political spectrum, but I have yet to see one that definitively convinces, one way or the other.

3/12 NYT "One Eye on the Fed, and the Other on Your Portfolio" link "When interest rates top out, the stock market typically rallies in gratitude that credit conditions will become no worse, investment advisers note. But uncertainty about when the current tightening cycle will end, and concern that a rate peak will also herald slower growth in the economy and corporate earnings, leave much difference of opinion about what portfolio adjustments to make — and when to make them."

FHRN: Comments by various fund managers on when and how they are positioning their portfolios relative to the Fed's tightening cycle, nothing too definitive or compelling here but gives a good flavor for Wall Street's current thinking.

3/9 Morgan Stanley "Save More! Save Less!" link "The two major players in the global economy, the US and China, are operating at opposite ends of the saving spectrum. Thrifty Chinese have taken saving to excess, while profligate Americans have spent their way into debt. Neither of these trends is sustainable — they lead to destabilizing economic and political developments for both nations — and a better balance must be struck. China needs to convert excess saving into consumption, while the US needs to end its buying binge and rediscover the art of saving....American consumers have mistaken bubble-like appreciation of their homes for saving....There is a more insidious connection between the saving postures of China and the US: Chinese savers are, in effect, subsidizing the spending binge of American consumers....China's determination stands in sharp contrast to Washington's inattentiveness to saving initiatives. That could spell trouble. As Chinese saving is converted into consumption, it will have less surplus capital that can be used to fund America's saving shortfall. That means China will be reducing its support for the American consumer. And that would raise the odds of a hard landing for the dollar and the US economy, with dire consequences for a still US-centric global economy."

FHRN mini-essay: Typical thought-provoking macro-economic analysis by Roach, Morgan Stanley's chief economist, though I don't favor his call for a consumption tax. I haven't thought through an alternative, but I would be biased toward a higher tax on speculative capital gains, of both financial entities and the most wealthy individuals.

Roach's point that "Chinese savers are, in effect, subsidizing the spending binge of American consumers" is similar to the following in my "Mommy, Where Do McMansions Come From?"
link: "the disturbing reality [is] that the rest of the world, including poor still developing countries such as China, are helping to finance U.S. consumption of McMansions and everything that goes in them."

Roach said "American consumers have mistaken bubble-like appreciation of their homes for saving." I elaborated on a similar point in my "McMansions" article:

"It is not that the econ 101 distinction between paper speculative capital gains, on the one hand, and real economic production and real savings = real productive investment, on the other, is intellectually difficult to understand, but rather psychologically and politically hard to grapple with, due to self interest.

It is just psychologically difficult to come to grips with the fact that the often hundreds of thousands dollars in capital gains on homes is essentially “unearned,” ultimately simply due to sheer speculation in the global financial system.

At this point, the vast majority of Americans seem simply unaware of the difference between real economic wealth creation from creating new goods and services from investing real savings from real income from real production, versus “paper wealth creation” from capitalized speculative financial gains.

To almost all Americans today, after years of watching how people have become very wealthy through speculative capital gains and through intense “positive reinforcement” conditioning by distorted market incentives, these two different economic concepts, real wealth creation and speculative financial gains, have melded into one and the same thing. (A good example of this are the large, enthusiastic audiences that turn out for real estate "wealth creation" seminars.)"