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What We Read Today 08 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Trade data relieve pressure on Beijing (Lucy Hornby, Financial Times) China's exports returned to modest year-over-year growth in April after a disastrous 6.6% decline in March. In the most recent month both imports and exports grew from April a year earlier by nearly 1%. The balance of trade was positive at $18.45 billion. See balance of trade graph from Trading Economics after the Read more >> jump. after


The year-over-year comparisons for exports have been problematic so far in 2014 because for January through April 2013 there were rampant faked exports on the books for the purpose of effecting hot money transfers into China. Starting with May the comparisons to 2013 will have more meaning.

  • US slams China over Vietnamese vessels dispute in South China Sea (Demetri Sevastopulo and Geoff Dyer, Financial Times) The Obama administration condemned China's placement of an oil rig in waters near Vietnam claimed by China. Vietnam also claims that Chinese vessels have rammed its vessels in waters near the Paracel Islands which China has occupied and is building a cruise ship port and resort. The Philippines have reported captured a Chinese fishing vessel in Philippine waters. For background see China Reaching for Control of Oil (GEI News, 11 June 2011) and China's Expanding Border Causing Alarm (GEI News, 30 March 2013) which include maps, including the 1947 Chinese map (with the famous eleven dashes) which is used as a unilateral claim for Chinese ownership of the entire South China Sea which borders Vietnam, Malaysia and the Philippines.
  • The declining dollar: Why everyone got it wrong (Sara Eisen, CNBC) The dollar has been declining in 2014, the year virtually everyone predicted would see a rising dollar. One reason is weaker than expected economic data (1Q GDP near zero) and a second is a stronger than predicted treasury market. The surprising strength of government securities markets in Europe (discussed 'behind the wall' yesterday) as well as the U.S. has put pressure on both the euro and the dollar. Eisen concludes her article:

Fundamentally speaking, strategists say it will take a much stronger economy, and therefore higher interest rates, to move the dollar higher-which, at least at the moment, doesn't appear to be imminent. Until then the dollar could continue its weakening ways.

Short-term risks for dollar bears include any mention of higher interest rates or enthusiasm for the economy from Yellen in testimony on Capitol Hill Wednesday and Thursday or easier policy from the European Central Bank on Thursday.

  • German Stocks Little Changed After Factory Orders Miss (Trista Kelly, Bloomberg) Hat tip to Pedro de la Costa. This is a confusing story. Keely writes that manufacturing orders fell unexpectedly (-2.8%) in March because economists had forecast a 0.3% gain. A negative print for March should not have been out of the question since March PMI (Purchasing Mangers' Index) for private sector manufacturing fell sharply to a five month low of 53.0. It was above 50 but it was down sharply from 55.9 in February. With a rebound to 54.7 in April it is likely that factory orders increased significantly in April. It is no wonder that German stocks were little changed. There really was not much new here.
  • Why the Financial Media and Housing Pundits Got It Wrong (Logan Mohtashami) This good article did not make the ten article discussion on U.S. housing 'behind the wall' yesterday. The author points out that the weakness in housing is primarily due to labor market factors (too many still not employed and for those that are, too many low paying jobs). He also says housing market internals are weak (too high percentage pay cash and first time home buyers are missing). Lending standards are very loose, he says, and that is not the cause of market weakness. He says the following graphic shows the relationships he has cited:


Today there are 14 articles discussed 'behind the wall'.

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The April Global manufacturing PMI edged down to 52.0 from 52.1. After three consecutive monthly declines, the index is now at its lowest level since August last year. It nonetheless remains slightly above its long-term average of 51.6, suggesting that the overall pace of industrial activity is relatively satisfactory.

The PMI reports from the West are increasing while those from Asia are weaker. Is this a trend, a shift in relative economic strength?

Click on graphic display for larger image.

That the U.S. population is aging rapidly is no mystery, but that masks an important fact: America will remain a lot younger than many countries in the developed world. Comparing estimates for 65-and-older populations in 2050, the U.S. (21% of total population) is projected to rank behind Japan (40%), Poland (32%), Spain (31%), Germany (30%+), Italy (30%+), China (26%) and Canada (26%). See a new U.S. Census Bureau report released Tuesday and global population estimates posted by Photius Coutsoukis from the U.N. population estimates by UNFPA (spreadsheet).

For perspective the 65-and-older population of China is projected to be almost as large (380 million) in 2050 as the entire population of the U.S. (397 million). The 65-and-older population of the U.S. is projected to be 83 million in 2050 (314 million younger than 65, about the same as current total population). The four European countries cited above will have more tha 55 million 65-and-older by 2050 (almost 2/3 as many as the U.S. out of a total population of 179 million (45% of the U.S.).

"Large scale investment banks with balance sheets greater than $500 billion don't exist now and will not exist in the future."

He doesn't mean that Goldman Sachs and Morgan Stanley are going out of business; instead they will never return to the unregulated firms that existed before the Great Financial Crisis (GFC) of 2008. Starting with the crisis and going forward these former independent investment banks have been "supervised and regulated by the Federal Reserve". But the very concept of effective supervision by the Fed is a questionable concept. The Fed is comprised of 12 regional Fed banks for which the banking industry are the members. While the Fed is charged with regulation and oversight of banks, it acts more lake a self-regulatory agency for the banks that a true regulator. And no less prominent Fed official than Timothy Geithner (New York Fed president 2003-2009) has had a history of opposing regulation of banks. In his confirmation testimony for Secretary of the Treasury in 2009 stated:

"I have never been a regulator, for better or worse."
  • China running down its steel glut (Houses and Holes, from Phat Dragon, Macro Business) The following graph shows the dramatic work down of huge inventory imbalance in China for steel combined with a significant increase in sales. What appeared in January to be a disaster in the making has returned to a more middle of the road condition.


  • Warren: Big banks built on "tricking people" (Ben Lane, HousingWire) This article makes it clear once again why Elizabeth Warren could not get consideration as the first Director of the CFPB (Consumer Financial Protection Bureau), an agency that she was instrumental in getting established. In this article she is again quoted criticizing the lack of conviction of banking leaders for the practices that produced the GFC (Great Financial Crisis) and the 2008 bailout of Wall Street at the expense of Main Street. She also said the big banks "built a financial model on tricking people." These positions are simply not tolerable to the established oligarchy.
  • Fed’s Yellen Gives Fairly Clear Signal Reverse Repos To Be Made Permanent (Michael S. Derby, The Wall Street Journal) Hat tip to Edward Harrison. The Fed is experimenting with a facility for a process known as 'reverse repo' that provides Treasuries held by the Fed overnight in return for cash from member banks. The fee charged by the Fed for this service is currently 0.05 basis points which seems low but if applied across the approximately 240+ banking days per year it amounts to 12%+ if a bank was to use the service every single day it was available for exactly the same amount of money each day. The Fed feels this is one of the tools that can be used to force interest rates higher or lower when either policy is indicated. Recently the Fed has been entering reverse repos daily, averaging about $200 billion, because the falling Federal deficits and high tax revenues associated with April have created a shortage of Treasuries need by banks to meet established agreements. See next article for a more detailed earlier discussion here of how the reverse repo operation works.

Stuber's logic may be confusing. He says the average per day for reverse repos by the Fed is $80.577 billion and he gives that exact same amount as the amount of liquidity withdrawn for the entire month. Since the Fed is selling and then rebuying the securities in a reverse repo, Econintersect would argue that only the difference between sell and higher buy is actually added to the system and nothing is withdrawn even for a full banking day.

(Note: There are actually 49 repos in Stuber's table so his average should have been slightly higher, $82.22 billion.)

There is an "overnight" (or weekend) liquidity removal for the financial system agents buying the securities from the Fed's SOMA (System Open Market Account, dealing in assets on the Fed's balance sheet) with a repo agreement to sell them back the next day (or after weekend) to the Fed. The Fed is actually creating reduced overnight liquidity by the total amount of reverse repos it assumes at any specific time and is adding a permanent level of liquidity equal to the sell-buy back spread paid to the same financial institutions. The financial institutions are buying a very small higher level of long-term liquidity (and financial system balance sheet asset increase) in return for a very much larger short-term (overnight) reduction in liquidity.

The $4.029 trillion total is merely a cumulative currency "float" for the transactions, with a current "float" never exceeding $130.74 billion at any time (and averaging about $57 billion per day for the 71 days starting 02 January 2014 and ending 13 March 2014). Thus the amount of long-term liquidity added is the buy-sell differential per day (0.03% from the table provided by Stuber), which totals $57 billion x 71 days x 0.0003 = $1.21 billion.

(Note: This rate per day is probably on the low side so the liquidity added may well be up to as much as $2 billion or slightly more. Some of the per day rates in this time period were less than 0.02% per day, but others were found as high as 0.05% per day.)

This in no way sterilizes (counteracts) the $150+/- billion QE liquidity injection over the same 2+ months. The net effect is a small increase in total financial system liquidity over the total period and a small improvement in positive cash flows for financial system participants. There are overnight reductions in liquidity averaging $82 billion counting only banking days or $57 billion counting calendar days. These are all reversed the next banking day.

The Fed claims the reverse repo operations are a tool to improve the ability to "manage short-term interest rates".

Stuber claims the actions by the Fed are in a desperate attempt to stem a decline in the value of the dollar and shows the following chart:


  • A Note of Caution in Greek Banks’ Seeming Recovery (Landon Thomas Jr, The New York Times) Greek banks have been making those who bought their stock a year ago rich. The banks have been raising large amounts of cash with equity infusions and bond sales. But analysts (who have retained their sanity) point out this all seems very risky: Greek banks are sitting on 40% non-performing loans. They are still very precarious.
  • Media Slant: A Question of Cause and Effect (Greg Mankiw, The New York Times) Some interesting research by Mathew Gentzkow and Jesse Shapiro, two economists at the University of Chicago Booth School of Business concluded that the political leanings of a media outlet are not correlated with those of their owners. Using some other convincing logic they arrive at the conclusion that the political slant of a newspaper, radio or TV station is determined by the audiences in their region. If there is a larger conservative audience the outlet leans right; if there is a larger liberal audience the outlet leans left. The conclusion is not that media leads its audience but that the audience leads the media. Read one of the pair's journal articles: What Drives Media Slant? Evidence from U.S. Daily Newspapers
  • Inside the 10 Best Dow Days Since the Great Depression (Daniella Pylypcziak, The title says 10 but only nine are mentioned at the time we looked. Of the 9 best days, 5 occurred under Hoover (1929-1932), 2 under George W. Bush (2008), 1 under Reagan and the very best day under FDR, shown below. FDR's big day was was only slightly ahead of Hoover's best day which trailed by only 40 basis points. See graphic display below. On the basis of big days one might postulate that Hoover was much better for stocks than "W" who was better than Reagan and FDR. Of course the over-all record under those four presidents is exactly reversed (market gains are approximate - DJIA - and do not include dividends): 1. FDR (+162%); (2) Reagan (+129%); (3) George W. Bush (-24%); and (4) Hoover (-75%).

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