Monthly Archives: June 2009

Earnings season coming

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I am thinking earnings season should be pretty good this quarter.

Fiscal policy has been more than supportive since year end, fiscal consolidation is currently still all talk.

Negative shock risks are still there, however, California, eurozone banks and/or governments, nukes, etc.

Not sure on timing.

World Outlook: Recovery ahead

For the first time since the beginning of the downturn we have revised up our forecasts for economic growth. We now expect global growth to rise to 2.5% in 2010 compared to 2.0% envisaged in our previous World Outlook from 30 March 2009. The upward revision is due entirely to better prospects for industrial countries, where growth next year is now seen reaching 1.0% compared to 0.3% before.

Most of the upward revision to global growth in 2010 results from a stronger outlook for investment growth (which has risen to 2.0% from 0.1%) and export growth (up to 4.1% from -2.2% before). The improved prospects for exports and investment reflect greater confidence in the effectiveness of authorities’ efforts to restore stability in the financial sector.

In our view the global economic and financial crisis has had two key drivers: (1) the breakdown of the global growth model of the past decade or so, which led to unsustainable international current account imbalances; and (2) the financial crisis, which ensued when the inability of debtors to repay their creditors became evident. As a result, we can expect to see lower trend growth and higher economic volatility, the opposite of what the world economy experienced during the era of the Great Moderation.


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FT.com / Europe – Exporters warn of German credit squeeze

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Don’t think markets are ready for this:

Exporters warn of German credit squeeze

by Ralph Atkins

June 26th (Bloomberg) — Germany’s powerful export industry is warning of a credit squeeze in Europe’s largest economy even after the European Central Bank’s injection this week of one-year liquidity into the eurozone banking system.

The German BGA exporters’ association on Thursday forecast a “dramatic deterioration” in credit conditions in coming months, which would result in “massive financing squeeze”.


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Surging U.S. Savings Rate Reduces Dependence on China

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This gets more ridiculous by the hour.
The dependence on China already was zero.

And, as in my previous post, the high savings rate of the non government sector
comes dollar for dollar from the deficit and is not necessarily indicative of
low spending.

If it were, that would imply there is no inflation risk to deficit spending on the grounds that it all gets added to savings.

So once again one of our opinion leaders is making a statement that supports the opposite of what he thinks it supports.

Federal deficit spending is clearly adding to incomes, savings, and spending.

As it always does.

Surging U.S. Savings Rate Reduces Dependence on China

by Rich Miller and Alison Sider

June 26th (Bloomberg) — Saks Fifth Avenue is cutting orders 20 percent after postinglosses in the last four quarters. Kia Harris says some customers at the Washington shoe store where she works are buying one pair rather than three.

Incomes and spending were up in yesterday’s report.

In the recession following a borrowing binge that sent consumer debt to the highest level ever, Americans are shutting their wallets and building their nest eggs at the fastest pace in 15 years.

Non government savings and income is ‘funded’ by federal deficit spending — to the penny

While the trend will put the country’s finances in better balance and reduce its dependence on Chinese investment,

Dependence on Chinese investment remains at zero where it’s always been.

it may also restrain economic growth in 2010 and beyond,

No, in fact the higher income and savings added by the federal deficit tends to expand aggregate demand and real economic growth.

said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.

Who would have thought???…

“There’s been a fundamental change in people’s behavior,” he said. “It will affect the economy for years.”

Government data today showed that the household savings rate rose to 6.9 percent in May, the highest since December 1993, as personal spending increased less than incomes. The rate in April 2008 was zero.

1993 was also a year of very high federal deficit spending.

This stuff is not that hard…


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JPMorgan, Citigroup Expand in ‘Jumbo’ Home Mortgages

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Lending follows the markets.

As the economy improves banks and other lenders figure it out and jump in.

Also, today’s news on personal income is very bullish as well.

It shows fiscal policy ‘works’ as it did for q2 last year.

The concern is that the ‘savings rate’ is high which takes away from spending.

Not necessarily.

The ‘savings’ comes from federal deficit spending.

Net federal spending adds financial assets to someone’s account in the non government sector that can’t ‘go away.’

The federal spending can be spent many times over and savings will still go up by the same amount.

So to me it looks like the deficit spending is currently high enough to have sufficiently restored savings to levels that promote at least modest increases in consumption.

But not yet enough to bring unemployment down as the output gap continues to grow.

JPMorgan, Citigroup Expand in ‘Jumbo’ Home Mortgages

by Jody Shenn

June 26 (Bloomberg) —JPMorgan Chase & Co. and Citigroup Inc. are expanding in “jumbo” mortgages used to buy the most expensive homes, helping revive a market that shriveled amid a three-year jump in homeowner defaults.

JPMorgan resumed buying new jumbo loans made by other lenders this month, after halting purchases in March, spokesman Tom Kelly said. Borrowers must have checking accounts with the bank, he said. Citigroup is again offering the loans through independent mortgage brokers, spokesman Mark Rodgers said.


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U.S. Federal Reserve Extends Swap Line with Brazil Central Bank

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Wonder if they’ve used it?

In my humble opinion lending them $30 billion unsecured is a high risk proposition.

U.S. Federal Reserve Extends Swap Line With Brazil Central Bank

June 25 (Bloomberg) — Brazil’s central bank said today it
has extended an agreement to access up to $30 billion from the
U.S. Federal Reserve as part of a coordinated international
effort to shore up shaky financial markets.


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China pushing domestic consumption

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Looks like they are moving towards higher levels of domestic consumption to sustain output and employment.

(must be reading my blog…)

China’s Central Bank Pledges to Keep Money Flowing

China to Start Trial Rural Pension System to Boost Consumption

China’s Central Bank Pledges to Keep Money Flowing

June 25 (Bloomberg) — China’s central bank pledged to keep
pumping money into the financial system to support a recovery in
the world’s third-biggest economy.

The economy is in a “critical” stage and the central bank
will maintain a “moderately loose” monetary policy, the
People’s Bank of China reiterated in a statement on its Web site
today after a quarterly meeting.

The central bank triggered an explosion in credit by
scrapping quotas on lending in November to back the government’s
4 trillion yuan ($585 billion) stimulus plan. Record lending is
stoking concern that a recovery may come at the expense of asset
bubbles, bad debts for banks and inflation in the long term.

Banks are set to lend more in June than in May, the same
newspaper reported June 22, citing unidentified sources. Last
month, new loans more than doubled from a year earlier.

China to Start Trial Rural Pension System to Boost Consumption

June 25 (Bloomberg) —China, home to 700 million rural
residents, approved a pilot pension program as the government
tries to encourage farmers to spend more to help revive economic
growth.

The new system, which aims to cover 10 percent of rural
counties this year, will help narrow a wealth gap with cities
and spur domestic demand, according to a statement today from
the State Council, China’s cabinet.

China has expanded its social safety net to reduce
precautionary saving by citizens planning for ill health and old
age. Premier Wen Jiabao has pledged to boost domestic
consumption to help the world’s third-biggest economy recover
from its deepest slump in a decade and lessen dependence on
exports and investment.

“The rural pension system has been almost non-existent,”
said Kevin Lai, an economist with Daiwa Institute of Research in
Hong Kong. “Once you build a stronger social safety net, people
will be more inclined to spend without having to worry about the
future.”

The government in late January also announced it would
spend 850 billion yuan ($124 billion) over three years to ensure
that at least 90 percent of its 1.3 billion citizens have basic
health insurance by 2011.

China’s economy grew 6.1 percent in the first quarter, the
slowest pace in almost a decade.


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King Says U.K. Recovery May Be ‘Long, Hard Slog’

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So how about recommending a suspension VAT for a bit???

King Says U.K. Recovery May Be ‘Long, Hard Slog’

by Robert Schmidt

June 24 (Bloomberg) — “There has to be a risk that it will be a long, hard slog” because of the problems in the banking system, King told lawmakers in London today. “I feel more uncertain now than ever. This is not the pattern of a recession coming into recovery that we’ve seen since the 1930s. Having an open mind and not pretending to foresee the future when it’s so uncertain is important.”

King said that there’s “not much evidence to change our view” since the bank released forecasts in May showing that the economy won’t return to growth on an annual basis until the second half of next year.


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India Should Rely on Lower Rates to Stimulate Growth, OECD Says

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India Should Rely on Lower Rates to Stimulate Growth, OECD Says

by Kartik Goyal

June 24 (Bloomberg) — India should cut interest rates
rather than boost government spending if further measures are
needed to stimulate growth, the Organization for Economic
Cooperation and Development said.

They need to read Bernanke’s 2004 paper which makes it clear lower interest rates are contractionary via the fiscal channel and need to be matched by fiscal expansion to overcome that effect.

Additionally, in today’s environment, lower rates hurt savers a lot more than the help borrowers. Rates for savers have fallen a lot more than rates for borrowers due to risk perceptions and implied capital costs as net interest margins for lenders have increased to over 4%. This also means reduced aggregate demand and begs additional fiscal measures to sustain GDP.

So while I strongly favor lower rates, I also recognize that one of the benefits of lower rates is that they allow reduced taxes or increased public expenditure to sustain output and employment at desired levels.


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