Fed statement

Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Hence the conundrum. On the one hand policy should cause lower rates, but it should also promote the higher rates of growth and inflation desired by the Fed, which in turn would trigger a ‘removal of accommodation’/rate hikes that much sooner than if the QE hadn’t been conducted.

Spain emerges from 2-year recession

Yes, but the output gap continues to widen until GDP growth exceeds productivity gains until then it’s the old ‘good for stocks, bad for people’ thing

Spain emerges from 2-year recession

By Holly Ellyatt

October 29 (Bloomberg) — Spain’s economy emerged from a two-year recession in the third quarter, according to preliminary data released on Wednesday.

Spain’s gross domestic product (GDP) grew 0.1 percent in the third quarter, the data released by the country’s statistics agency showed, in line with forecasts by analysts polled by Reuters.

comments on euro zone and india

Do you think they know austerity causes loans to go bad?

Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

Do you think they know higher rates support higher inflation and weaken the currency?

India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inflation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.

Barack Obama mounts big push to bolster FDI in US

FDI is a function of employment. Note how high it was when unemployment was lowest. It’s about being able to make money here and not that we actually need fdi for anything, as we can instead relax fiscal

Barack Obama mounts big push to bolster FDI in US

By James Politi

October 27 (FT) — President Barack Obama wants to attract more foreign investment in the US

President Barack Obama and his senior cabinet officials are mounting a big push to bolster foreign investment in the US – amid evidence that America is falling behind other countries in the race for global capital.

The move by Mr Obama to pitch America as open for business is more aggressive than usual from the White House, reflecting a growing realisation in Washington that the case for investing in the world’s biggest economy is no longer self-evident.

In 2000, the US held 37 per cent of the worldwide inward stock of foreign investment but by 2012, that share had dwindled to just 17 per cent. The US attracted $166bn in foreign direct investment in 2012, a 28 per cent decline compared with 2011 and slightly below 2010 levels.

This year’s performance could be even weaker, since in the first six months of 2013, the US brought in $66bn in foreign investment, well behind the $84bn of the first half of 2012.

The FDI push comes after this month’s fiscal crisis – involving a 16 day government shutdown and a brush with debt default – that has raised eyebrows around the world about the US ability to manage its economy and caused nervousness in global markets.

Mr Obama and senior figures in his administration will ask foreign investors to shrug off the country’s political paralysis and weak economic recovery this week, when they speak at a conference in Washington, the first of its kind by the commerce department, uniting foreign investors with US economic development agencies and state and local officials.

Jack Lew, the Treasury secretary, John Kerry, the secretary of state, Mike Froman, the US trade representative, and Penny Pritzker, the commerce secretary hosting the event, are poised to speak at the event on Thursday and Friday.

“On the heels of the manufactured crises in Washington, it’s time for folks to come together and focus on doing everything we can to spur growth and create new high-quality jobs,” the White House said on Friday.

The US federal government has generally shied away from any big initiatives to promote foreign investment, leaving that task to states competing with each other for business.

Indeed, the high-profile effort by the Obama administration to lay out a welcome mat for foreign capital marks a reversal after years when Washington took for granted that any investors or companies seeking a global presence could not avoid putting money into the US.

But that reality has changed, with the growth of emerging markets from China to India to Brazil, which has dramatically heightened the competition.

Foreign investment inflows have fallen across many of the countries in the OECD, the Paris based group that aims to promote sustainable growth, but in the US that drop has been more pronounced than the average of advanced economies.

“The administration is focusing on FDI as an economic priority because the US has been losing ground,” says Nancy McLernon, president of the Organization for International Investment, which represents US subsidiaries of foreign companies.

The hard case to make is that the US political act is in order. The way that the US has handled things – on fiscal policy and, frankly, monetary policy – has not exactly been confidence-inspiring – Clay Lowery, Former senior US Treasury official

“I think there is a positive political environment to encourage foreign investment of the likes I have not seen over the past two decades”, she adds

The argument for investing in the US has traditionally been that it enjoys a huge and wealthy consumer market, large and liquid capital markets, and a predictable legal system. The domestic energy boom, driven by shale gas, has added to the country’s attractions.

But otherwise, the country’s competitiveness appears to have taken steps backwards. Its corporate tax system remains a morass, with a top rate of 35 per cent that can be scary to prospective investors, even if they might end up paying less by taking advantage of tax breaks.

The country’s infrastructure is in desperate need of retooling and there are growing fears about the education system’s capacity to develop a well-trained workforce. Moreover, political dysfunction in Washington, laid bare by the 16-day government shutdown and close brush with default , have damaged the case for investment in the US.

“The hard case to make is that the US political act is in order. The way that the US has handled things – on fiscal policy and, frankly, monetary policy – has not exactly been confidence-inspiring,” says Clay Lowery, vice-president at Rock Creek Global Advisers, and a senior US Treasury official under George W Bush.

“If you’re an overseas investor, one of the best things about the US was you always knew what the rules of the road are and we have taken away some of that policy stability,” he says.

Moreover, the country’s desire for foreign investors has been called into question after severe political backlashes to high-profile foreign acquisitions, especially from China and the Middle East.

Typically, foreign investment into America has come mostly from European countries, whose sluggish economies have led to weaker flows into the US. This means another objective for the US is to diversify its sources of foreign investment and attract more from emerging markets.

Pending home sales drop 5.6 percent in September

Problem is the private sector is path dependent/pro cyclical. When sales slow incomes slow sales slow, employment slows, etc. etc.

Govt can be/is counter cyclical. When sales slow tax payments fall and unemployment comp. rises, etc. etc. AKA ‘automatic fiscal stabilizers.’

This cycle’s prior slowdowns had a safety net of govt deficit spending of near 10% of GDP, then a year or so later maybe 7%, etc. As the automatic fiscal stabilizers cut back that govt support with the modest recovery raising tax liabilities and cutting transfer payments.

But today, after this year’s proactive deficit reduction measures, we’ve gapped down to maybe a 3% deficit for ‘support’ when things slow. And it feels to me like the demand leakages have begun ‘winning’ when govt proactively stepped back to ‘make room for the private sector’.

What that actually means is the private sector now must (deficit) spend increasingly more than its income on goods and services to offset those agents spending less than their incomes (demand leakages), or the output doesn’t get sold. By identity. To the penny.

Well, sure doesn’t look like it’s going to come from housing. And while cars remain up some it’s not nearly enough. And capex isn’t coming through as hoped for and as needed to fill the spending gap left by the govt cutbacks. And the 126,000 print for NFP private sector job growth fits the same narrative as well- no top line growth = no job/income growth, etc.

Not to mention QE and low rates in general from the Fed remain a source of drag via the interest income channel, and all as Congress continues to fight for bragging rights with regard to deficit reduction.

It’s all nothing that a big fat tax cut and/or spending increase wouldn’t reverse, of course, as the slow motion train wreck continues.

Global Trade Flows Show Exports Are No Magic Bullet

It’s those pesky accounting identities again.

With govt deficit reduction, it’s up to domestic credit expansion to offset the demand leakages.

Global Trade Flows Show Exports Are No Magic Bullet

By Simon Kennedy

October 25 (Bloomberg) — When HSBC Holdings Plc’s economists from around the world recently pooled their forecasts, virtually all had a similar source of growth in mind for the region they monitored: exports.

The impossibility of every nation being able to sell more than it buys means some of the analysts must be wrong — unless the rest of the solar system becomes a source of demand for the globe’s products, Stephen King, HSBC’s chief economist, told an Oct. 16 conference in London, flashing a slide of the planets.

“Export claims are just far too optimistic,” said King, a former U.K. Treasury official.

The bet on trade is flopping for companies and policy makers who had hoped it would power recoveries held back by weak domestic demand. This week alone, Caterpillar Inc. (CAT) and Unilever (UNA) complained of sliding overseas buying and data showed global trade volumes fell in August by the most since February.

Trade is falling short as emerging markets from Brazil to India slow and the dollar resumes a slide abetted by the Federal Reserve’s maintaining stimulus. The deterioration in cross-border commerce could provoke a response from policy makers eager to protect their expansions and even clashes between them if it endures, said Simon Evenett, professor of international trade at the University of St. Gallen in Switzerland.

“Trade would have picked up much more in a normal recovery,” Evenett said in a phone interview. “The outlook is more of the same as there is much more economic uncertainty than at the start of the year.”

Be the Fed

So imagine you are a moderate FOMC member.

Mortgage apps are down, new home sales marginal, and private sector job creation sagging. And you keep revising your GDP forecast lower at each meeting. Likewise inflation remains low, and you believe the risks are asymmetrical. That is, you know you can stop inflation and growth with rate hikes, but you’re not so sure about fighting deflation.

And so, as an FOMC member, you’d like to see mortgage rates back down. So how do you get them there? You might not like QE, and at least highly suspect it doesn’t have any first order effects, and you fear there are unknown costs, but you know tapering, for whatever reason- almost to the point the reason doesn’t matter- causes rates to go higher. And you know not tapering brought them down some, but not enough. Fed funds are already close to 0% so there’s no room there. Forward guidance, etc. has kept the short end low but not the long end. You are afraid to simply peg long rates with an unlimited bid for securities at your target rate. You know a weaker economic forecast will bring long rates down but that it would be intellectually dishonest to manipulate a forecast.

And maybe worst of all, if you do something that causes markets to believe the economy will do a lot better, mortgage rates go higher, presuming Fed rate hikes will accompany growth, and thereby make things worse instead of better.

Housing Affordability Dynamics

I once said ‘I build cars because the voices in my head tell me to’

At about 4am today those voices were speaking about housing affordability.
:(

There is what I’ll call ‘good affordability’ that can come from higher incomes and maybe lower costs of housing from efficiencies, etc. Also characterized by relatively high levels of housing construction roughly inline with demographics like household formations.

And there is what I’ll call ‘bad affordability’ that can come from lower prices from distressed sales conditions that drive prices down below ‘replacement cost’. This is characterized by lower levels of housing construction.

So seems to me that we have been experiencing the ‘bad affordability’ syndrome as affordability was driven by
the lower prices of distressed sales in a distressed economy (and lower rates from the Fed’s reaction to the distressed economy), with prices remaining sufficiently below replacement cost to keep a lid on construction.

And as distressed sales have run their course prices paid rise towards replacement cost and affordability falls
to the point where the price increases level off just below replacement cost and construction stays low.

All because the federal deficit is too low, of course.

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