For a nation to tax itself into prosperity…..Winston Churchill pic.twitter.com/rWNfZ924PE
— Colin Twiggs (@Colin_Twiggs) September 29, 2014
Corporate high yield bonds under pressure | SoberLook.com
Chart: Corporate high yield bonds under pressure – pic.twitter.com/oa22qnpmAL
— SoberLook.com (@SoberLook) September 27, 2014
Market turbulence
A Coincident Economic Activity Index above 0.2 indicates the US recovery is on track. Produced by the Philadelphia Fed, the index includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. Bellwether stock Fedex also suggests rising economic activity.
But contraction of the ECB balance sheet by € 1 Trillion over the last two years has pitched Europe back into recession.
Chart: ECB (Eurosystem) balance sheet. The target is to raise it by EUR 1 trillion – pic.twitter.com/ptoqLkNpxq
— SoberLook.com (@SoberLook) September 27, 2014
Weakness in Europe and Asia has the capacity to retard performance of US stocks despite the domestic recovery.
How Laissez-Faire Made Sweden Rich | Libertarianism.org
From Johan Norberg:
…But in one century, everything was changed. Sweden had the fastest economic and social development that its people had ever experienced, and one of the fastest the world had ever seen. Between 1850 and 1950 the average Swedish income multiplied eightfold, while population doubled. Infant mortality fell from 15 to 2 per cent, and average life expectancy rose an incredible 28 years. A poor peasant nation had become one of the world’s richest countries.
…And so Sweden—a small country of nine million inhabitants in the north of Europe—became a source of inspiration for people around the world who believe in government-led development and distribution.
But there is something wrong with this interpretation. In 1950, when Sweden was known worldwide as the great success story, taxes in Sweden were lower and the public sector smaller than in the rest of Europe and the United States.
Read more at How Laissez-Faire Made Sweden Rich | Libertarianism.org.
Irrational Exuberance Down Under | Bloomberg View
From William Pesek:
Lindsay David’s new book on Australia deserves a medical disclaimer: Reading this will greatly raise your blood pressure.
In “Australia: Boom to Bust” David sounds the alarm about an Australian housing bubble he argues makes the 12th-biggest economy a giant Lehman Brothers. His thesis can be boiled down to the number 9 — the ratio of home prices to income in Sydney. The multiple compares unfavorably to 7.3 in London, 6.2 in New York and 4.4 in Tokyo. Melbourne is 8.4.
Read more at Irrational Exuberance Down Under – Bloomberg View.
Amir Sufi: Who is the Economy Working For? The Impact of Rising Inequality on the American Economy
Amir Sufi, professor of Finance at the University of Chicago, testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy. His statement titled “Who is the Economy Working For? The Impact of Rising Inequality on the American Economy” makes interesting reading.
“Only 76% of Americans aged 25 to 54 currently have jobs, compared to 80% in 2006 and 82% in 1999…..How did we get into this mess?”
The gist of his argument is:
“Richer Americans save a much higher fraction of their income, ultimately holding most of the financial assets in the economy: stocks, bonds, money-market funds, and deposits. These savings are lent by banks to middle and lower income Americans, primarily through mortgages.”
…And collapse of the housing market caused disproportionate harm to the middle and lower-income groups.
It is true is that middle and lower-income groups have a higher percentage of their wealth invested in their homes and are also far more exposed to mortgages than richer Americans. The source of funding for these mortgages, however, is not the wealthy — who are primarily invested in growth assets such as stocks — but the banks who create new credit out of thin air. The collapse of the housing market caused disproportionate hardship to middle and lower-income Americans because their wealth is concentrated in this area. The rich suffered from a collapse in stock prices, but the market has recovered to new highs while housing remains in the doldrums. That is one of the causes of rising wealth inequality.
Where I do agree with Amir is that credit growth without income growth is a recipe for disaster.
“A tempting solution to our current troubles is to encourage even more borrowing by lower and middle-income Americans. This group of Americans is likely to spend out of additional credit, which would provide a temporary boost to consumption. But unless borrowing is predicated on higher income growth, we risk falling into the same trap that led to economic catastrophe.”
The graph below compares credit growth to growth in (nominal) disposable income:
The ratio of credit to disposable income rose from 2:1 during the 1960s to almost 5:1 in 2009.
There is no easy path back to the stability of the 1960s. A credit contraction of that magnitude would destroy the economy. But regulators should aim to keep credit growth below the rate of income growth over the next few decades, gradually restoring the economy to a more sustainable level.
The worst possible policy would be to encourage another credit boom!
What Ukraine needs most now – Evidence from Slovakia Reforms | VoxUkraine
From Ivan Mikloš (former Minister of Finance and deputy Prime Minister of the Slovak Republic):
…Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.
Slovakia during 2003 prepared, and from the beginning of 2004 implemented, a very bold and complex package of deep structural reforms. In 2004 Slovakia was named the most reformist country globally by the World Bank. I am not writing this in order to praise my country or myself. I am writing this because of two main reasons. Firstly, it shows that reforms work. It shows that if country is able to implement a deep and comprehensive package of reforms it will bring relatively quick results. Secondly, I think that our experience shows Ukraine now has a real chance to achieve similar success and progress if necessary reforms are implemented.
Read more at VoxUkraine.
Bad Has Never Looked So Good – Russia
Again from Energy Burrito at Oilprice.com:
…the Russian ruble has been gradually depreciating throughout this year amid rising geopolitical tension in Ukraine. It has now dropped 12% versus the US dollar in 2014.
Yet while a falling ruble hurts Russian imports as they become increasingly more expensive to buy, Russia reaps the rewards when it comes to exports. And it is seeing the greatest benefit from its largest export: oil. To the tune of 7 million barrels a day.
Hence, while crude prices in US dollars have dropped 12% in value since the beginning of July, crude oil in rubles has only dropped 3.4%. For Russian coffers, it is good for the ruble to be bad…
Read more at Bad Has Never Looked So Good.
Bad Has Never Looked So Good
Energy Burrito writes that gasoline prices have fallen nearly 30 cents from their Summer highs:
Why is this good? Because of the one-penny-to-one-billion spending rule. The rule of thumb is that a one-penny change in the price of gasoline leads to a $1 billion increase in household consumption on an annualized basis….gasoline accounts for $2,500 of household spending each year.
Read more at Bad Has Never Looked So Good | Oilprice.com.
Big banks may need $41b more capital, UBS says
From Chris Joye at AFR:
UBS’s more likely scenario of a 3 per cent TBTF capital buffer combined with an increase in the average mortgage risk weight to 25 per cent gives a total capital shortfall of $41.1 billion for the majors.
Risk-weightings, especially for residential mortgages are coming under increased scrutiny. The big four banks have a major advantage in this area, employing risk-weightings as low as 15% to 20% based on their historical record of low defaults. But that history includes a credit boom lasting more than 2 decades which fueled an unprecedented rise in housing prices and is unlikely to be repeated in the future.
APRA alluded to this problem in its second FSI submission:
..APRA also highlighted the problem with the major banks’ predicting their own probabilities of defaults on home loans in the absence of a recession in 23 years and the much lower levels of housing leverage in 1991.“The Basel Committee is currently reviewing the validity and reliability of risk weights generated under the IRB approach [used by the majors] in response to studies showing that the variability … is much greater than could be explained by differences in underlying risks,” APRA said.
Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett
Read more at Big banks may need $41b more capital, UBS says.