By Eldon Mast, on June 21st, 2010
Over the last two months, consumer spending power has increased and not just because of income gains. The U.S. dollar actually goes farther these days as prices have dropped on average in the past two months.
Many argue that prices are down largely because of gasoline prices. However, in May overall inflation declined 0.2%, following the -0.1% measure in April. These latest cost of living adjustments are in line with what most economists were expecting and point to good news for consumers — provided the labor picture continues to improve.
As has been the trend since May of last year, this past week saw several indications that labor indeed will continue to improve. On Thursday the conference board released the leading economic indicators. The most substantial gain in the May report was the factory work-week. The indicators underscored another release on Wednesday which illustrated that overall industrial production in May surged 1.2%, following a 0.7% boost the month before. The production numbers continue to beat forecast — this month above the +1.0% consensus estimate.
By Ajay Shah, on June 18th, 2010
The Budget Speech of February 2010 had announced a `Technical Advisory Group for Unique Projects’ (TAGUP). The press release about creation of this group is out.
Anil Padmanabhan looks back at year 6 of the UPA.
Heather Timmons and Hari Kumar in the New York Times on the carnage on India’s roads.
NSE does Fix.
SEBI’s order on front-running at HDFC AMC. Bhave’s SEBI is a new world of enforcement in Indian finance.
Somasekhar Sundaresan in the Business Standard on the mess in India’s capital controls.
Bibek Debroy in the Indian Express, and an editorial in the Business Standard, on India’s problem with land titles. Most of us in India don’t know about how far back this story goes in other countries : to the Domesday book of 1086 AD, or 924 years ago, in the UK.
Jayanth Varma in the Financial Express on the new world of exchanges. Roughly a decade ago, I had started using intra-day data from NSE and at the time had checked that their trading system clocks were synchronised by NTP — they were.
Ila Patnaik in the Indian Express on the importance of the BSST countries instead of the BRIC countries.
Vikas Bajaj in the New York Times on the difficulties of rail transportation in India.
Gary Schmitt, in the American, worries about the finlandisation of Taiwan.
Nixon’s Nose by Xiaoda Xiao, in Guernica and Angel factories by Anne Applebaum in the New Republic.
Ali Sethi in the New York Times with a piece titled One myth, many Pakistans.
Sebastian Mallaby in the Atlantic on Paul Romer’s work on `charter cities’.
Scott Sumner has an interesting take on the performance of neoliberal policies worldwide.
Rent a white guy.
Scott Adams guide to investment.
By Bron Suchecki, on June 18th, 2010
There has been a lot of speculation recently about how much gold is held in London against unallocated accounts, see some examples below:
Bix Weir: “… stay away from COMEX/LME good delivery gold and silver bars …”
Arnold Bock: “… there is little bullion in storage at the London Metals Exchange or New York’s COMEX …”
Bob Chapman: “… Do you really think that the COMEX and LME would deliver the gold even if they had it …”
John Dizard: “Many of them apparently prefer to have their gold in vaults near where they are, Mr Smith’s “middle of nowhere”, rather than in LME or COMEX warehouse receipts.”
Jim Willie: “A clearinghouse held a Letter of Intent to supply the London metals exchange with 250 metric tonnes of gold bullion.”
I am now prepared to finally reveal the truth – there is actually NO gold in the vaults of the LME (London Metals Exchange). Now I know this is an explosive claim and I’m sure you’ll want to know if I can back it up with proof. Well, go to the LME website and tell me where you see gold mentioned?
That’s right, gold isn’t mentioned. The LME is a base metals exchange and does not trade precious metals. Problem is this makes the commentators quoted above, who talk about gold on the LME, look foolish. In my opinion, if you do see a commentator make the mistake of thinking gold trades on the LME it is an indication that they don’t know what they are talking about with regards to precious metals and you should treat their analysis with caution.
Gold is traded in London over-the-counter, in other words in direct deals between counterparties. There is no gold exchange in London. There is the London Bullion Market Association (LBMA), but that is just a trade association and it does not operate an exchange or have any vaults.
You may think I’m being a bit hard on those who confuse the LME and LBMA. You might argue that it is a reasonable mistake, since they are both in London and both deal in “metals”.
To that I would say what sort of credence would you give a commentary by a stockbroker who talked about Pepsi trading on NASDAQ, or Microsoft trading on the NYSE? Would you feel comfortable following stock advice from someone who did not know which exchange a stock traded on?
Confusing LME and LBMA is actually worse than that because the LME is a base metal exchange whereas the LBMA is just a precious metals trade association – a basic Google search would reveal that.
Sorry, I don’t think there is any valid excuse. Getting LME, LBMA and gold mixed up is a sure indicator that one has no actual precious metals market experience, an example of ultracrepidarianism. In which case, how can you trust them to know what is really going on, how can you know they haven’t made other mistakes in their analysis of the gold market? 
By Trace Mayer, on June 18th, 2010
Trace: Welcome back to the RunToGold Podcast. This is Trace Mayer. And I have with us a special guest, Bill Laggner of Bearing Asset Management. Welcome Bill.
Bill: Trace, good to hear from you today.
Trace: Wonderful. Now can you tell us a little bit about Bearing Asset?
Bill: Trace, we run a hedge fund, macro oriented hedge fund here in Texas. We began back in the summer of 2002. A lot of views that I’m sure that you have are the views that I will probably share with you today.
The biggest difficulty in analyzing this phase of the macro environment is how much of a true contraction in economic activity will we see, and then how much of a contraction in asset prices will be witnessed before we witness the central planners truly panic and implement the next round of money printing experiments.
Trace: Yeah, we actually met you up at the Mises Institute Conference in New York City, and we kind of hit it off and I think we have good things to talk about.
Now before we started recording, what we were talking about the rail numbers being down, Best Buy earning report that came out, and conversation that you had with a bankruptcy lawyer in Las Vegas. Can you expand a little bit on this and the outlook for the US consumer?
Bill: I think that when you try to find good, anecdotal muses that you can stitch together some type of a theme that could be acted upon, and I think that we are at the stage now, we look at just general leading economic indicators that are rolling over. We are over a year past the stimulus measures and spending that the government implemented.
You can see now in some of the other data points that you just referenced, the rail data, something about Best Buy with regards to the retailing space, high-end retailing, and a conversation I had with a Las Vegas bankruptcy foreclosure lawyer; the consumer is in deep trouble. I don’t think that the employment numbers are truly representative of how difficult the consumer situation is. You have the mortgage market, according to him in Las Vegas, where 60% of people are now upside down in their mortgages.
Trace: Oh my goodness…
Bill: Yeah, and if you compare that to… I know that you and I talked about Florida. I got family in Florida and know that you do too. Parts of Florida may be 25 to 28% of the mortgage wars in Florida that may be upside down.
So, some of the states that have real consumer problems, of course the BP oil spill is not going to help the Florida coast or the Louisiana coast, but I just think that the consumer in general is throwing up the white flag at this juncture.
Trace: Yeah, and you know I have to agree with that, look at what’s going on with BP, it’s shutting down a lot of the fishing, that can’t be good for what little business was remaining down there.
And now who exactly could they help the US? You know we were talking earlier, I’m over here in France watching the World Cup and on Friday I go to Rome… well Italy owes France 511 billion in its banks, and then Portugal owing Spain 58 billion, Spain owes France 2 20 billion, and so even with this trillion dollar bailout package, I don’t necessarily see the European economy coming to the US’s rescue.
Bill: Well, as good as they are the backdrop in the Eurozone is very similar to the backdrop in the States. We have New York, Illinois, California, and Arizona running huge deficits and taking extraordinary measures to try and keep this façade alive.
The state of New York borrowing money from a pension fund…
Trace: Wasn’t that just ridiculous?
When the Germans riot they buy gold.
Bill: …but we are in the shell game-phase of this unwind, and Spain has to, actually at 4:30 Eastern time, will be auctioning off quite a bit of debt. If you look at the way that the Spanish bond market is reacting versus say the German bond market, the market smells problems in Spain, and if they can get this auction off tomorrow morning, I think that that’s another feather in the cap of the bearers with regards to economic activity in Europe.
I think that the Germans, I know the constitutional courts turned down the request to listen, hear the bailout case and maybe put it on hold, but I know that the German people know that they are going to get hung with most, or all, of these liabilities . And so I think that the backlash in Germany will only continue to build as we move into the fall here.
Trace: Yeah.
I would like to close with one tip, and I hate to say that it’s the same as the Germans have. You know the saying is that when the Germans, when they riot, they buy gold.
Bill: Yeah.
Trace: So going into this next leg of The Great Credit Contraction, and it’s down where we’re seeing real economic activity grinding to a halt, moving money slowing to a Bush pace, the consumer drying up both in Europe and in the US, the budget deficits with the States, both in the individual states in the US and with the nations in Europe and as we were talking about the protocol and number one killer for small businesses is cash flow.
So when you have these state budget deficits, we are borrowing from a pension fund, making your pension fund payment or maybe your payment to some type of business that relies on government revenues, when these show gains start to collapse in this next stage of the credit contractions that are happening, what would be your tip to the people listening to this show, what should they do to protect themselves and their capital?
Bill: The biggest difficulty in analyzing this phase of macro environment is how much of a true contraction in economic activity will we see, and then how much of a contraction in asset prices will be witnessed before we witness the central planners truly panic and implement the next round of money printing experiments. And that’s what exactly they are. They are experiments.
We don’t know exactly which sectors are going to be getting handouts, Trace. We don’t know what sectors can be ignored, we can see the battle of the states between the political class and the real economy. There is a huge battle going on right now as we go into the elections this fall, you can see some of the primaries. So I do think that they will not sit idle, they will at some point panic but we may not see a panic until asset prices go down another 20% or more and the question then becomes Will they come to the rescue with $1 trillion or $5 trillion and that’s one reason why I think that gold, even in a deflation should perform well because most people realize now that any significant decline will just be met with even more money printing. And more handouts. And more intervention. And more misallocated science projects.
So gold on weakness makes sense. I don’t think that you’ll see the gold price decline, percentage-wise, as much as it did in the fourth quarter of 2008, because I think that these central banks will intervene and print relentlessly and that will ultimately, at some point, slow the decline, nonetheless, of prices.
Trace: Yeah. You couldn’t get a better run to gold, right? And during this depressionary environment, cash is King and gold is Emperor because of these fiat currencies of operations is nothing, you can still make payroll with gold coins.
Bill: Absolutely.
Trace: You will still be able to buy things, so I think that I have to agree with you on that. And avoiding things like Starbucks (SBUX) and their five dollar coffee when there are substitutable goods like McDonald’s (MCD) available, stuff like that. Oh, anything else to add?
Bill: Well I think that that makes a lot of sense. Being very prepared and know that the central planners at this juncture are taking extraordinary steps to try and fight the deflationary waves that we have right now and know that they will continue to try to pull rabbits out of their hat as things become more and more difficult.
Trace: Exactly. Well thank you very much Bill.
Bill: Thanks Trace.
Trace: You’ve been listening to the RunToGold.com Podcast.
DISCLOSURE: Long physical gold, silver and platinum with no interest in Starbucks (SBUX), McDonald’s (MCD), the problematic SLV or GLD ETFs or the platinum ETFs.
 Join the forum discussion on this post - (1) Posts
By Rok Spruk, on June 17th, 2010
Ever since the original proposition by a 19th century German economist Adolph Wagner, Wagner’s law has undergone significant theoretical and empirical discussion on its long-run validity. In the most basic and rudimentary version, the law states that alongside the economic development of industrial societies, there is a persistent tendency of an increasing share of government spending in the GDP. Since the beginning of the 20th century course, the growth in government expenditures has escalated in all major industrial countries. The economic literature has centered the discussion on two elementary versions of Wagner’s law. The first version of Wagner’s law attributes the growing share of government spending to the ever expanding power of interest groups.
The concept of interest groups has been thoroughly developed by a rigorous theoretical analysis by Mancur Olson’s The Logic of Collective Action. There is a remarkably positive correlation between the growth of government spending and the political power of interest groups. Back in 1954, Milton Friedman and Simon Kuznets have analyzed the income dynamics in independent professions (link). Although there has not been much discussion in the economic literature, the Friedman-Kuznets analysis is an important milestone in the explanation of the evolution of interest groups. Friedman and Kuznets examined five independent professions. Using a comprehensive statistical analysis, they showed how income growth in five profession has exerted an upward trend without significant gains in productivity. The five independent professions analyzed by Friedman and Kuznets emerged as pure interest groups. These groups have imposed a regulated labor market structure marred by occupational licencing and aimed at gaining an insider’s earnings rent at the expense of entry restriction. Occupational licensing is one of the most powerful explanatory features of low coefficient of price and income elasticity of labor supply of physicians, dentists, legal consultants and medical practitioners. In most of the industrial countries, these groups have emerged as powerful interest groups and triggered an unbreakable increase on the growth of government spending. The evolution of interest groups in fields such as agriculture, social security and trade has resulted in the intensive pressure on the growth of government spending. The interest group perspective on Wagner’s law emphasizes the state capture created by the democratic system and an irreversible pattern of increases in government spending centered on small and powerful interest groups. If interest group’s representative utility function can be described as a relationship between the group’s size and its price elasticity of labor supply: U(f,e)=f(1-|e|), then the effect of a unit change in price elasticity of labor supply dU/de=-f indicates that greater price elasticity of labor supply will reduce the size (f) of the interest group as a result of pure substitution effect at work. On the other hand, if price elasticity of labor supply of the particular interest group will decrease, causing more price inelastic labor supply, the size of the interest group will increase since most of the excess wage increases will spill into physician’s pocket.
The second version of Wagner’s law states that an increase in government spending in time is a result of a high income elasticity of demand for public goods. Rati Ram (1986) has tested this hypothesis on the sample of 115 countries between 1950 and 1980. His conclusions suggest that income elasticity of demand for public goods is very elastice (exceeding 1) in 60 percent of all countries in the sample. A comprehensive development of econometric methodology has enabled a more rigorous and empirical evaluation of Wagner’s law on the basis of long-run simulation using time-series data. For example Sidelis (2006) has applied cointegration analysis and Granger casuality tests to determine whether long-run changes in income account for the growth of government spending in Greece between 1833 and 1938 (link). The author concludes that income elastic demand for public goods caused a growth in government expenditures. A recent study by Lamartina and Zaghini (2008) indicates (link) a negative relationship between government spending and economic growth in a sample of 23 OECD countries. The study further suggests that the correlation between income growth and government expenditure is stronger in countries with low initial levels of GDP per capita. Neck and Getzner (2007) collected data on government expenditure in Austria between 1870 and 2002 and examined whether the surge of government expenditure is attributed to either Wagner’s law or Baumol’s cost disease. The authors applied Phillipe-Perron and Augmented Dickey-Fuller stationarity tests, concluding that government spending time series more likely represents a stationary time series. In concluding remarks, the authors note that much of the increase in government expenditure is a problem of increasing prices in public sector, relating the growth in public expenditures to Baumol’s cost disease where output reduction in public sector is a result of net decrease in productivity growth which yields a significant pressure from public sector interest groups on expenditure increases.
Wagner’s law is an intriguing theoretical and empirical issue. In spite of the numerous empirical evaluation and theoretical design, the issue will probably remain an intensive course of the academic debate.
By Eldon Mast, on June 17th, 2010
On Wednesday, the Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey for the week ending June 11, 2010. Their Market Composite Index, a measure of mortgage loan application volume, increased 17.7% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 29.7% compared with the previous week.
Their Refinance Index increased 21.1% from the previous week. It was the highest Refinance Index recorded in the survey since May 2009.
“Mortgage applications for home purchases increased last week, the first increase in over a month. Refinance applications also picked up significantly over the week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.
Purchase applications dropped sharply as a result of the tax credit expiration, but with rates continuing at historic lows and the spring buying season in full swing applications are rebounding sharply.
The four week moving average for the seasonally adjusted Market Index is now up 3.8% and the average is now up 5.5% for the Refinance Index.
By B.P.T., on June 17th, 2010
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 450,000 new jobless claims last week, which would would be a slight improvement from last week, and falls within the range of reports in recent weeks.
Also at 8:30 AM EDT, the Consumer Price Index report for May will be released. The consensus is that CPI decreased by 0.2% last month, with a 0.1% increase in CPI when food and energy are removed.
Also at 8:30 AM EDT, the Current Account for the first quarter of 2010 will be released, which will provide information about the international trade balance with the United States.
At 10:00 AM EDT, the Leading Indicators report for May will be released. The consensus is that this index increased by 0.6% last month, which would continue the overall positive trend in 2010, even after a decrease last month.
Also at 10:00 AM EDT, the Philadelphia Fed Survey report for June will be released. The consensus is that there will be a decline of 1.4 points from last month because of weakening new orders in May.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
Join the forum discussion on this post - (1) Posts
By Claus Vistesen, on June 16th, 2010
As it seems that we are finally about to get something which resembles a stable summer here in Denmark it may seem strange to suddenly start talking about snowballs. Yet, the idea of debt snowball is very relevant in the current environment as it relates to the potentially unstoppable development in public/domestic debt levels despite a country’s best efforts in the form of austerity measures. Specifically, the combination of a year long loss of competitiveness, excessive domestic debt levels (private as well as public) and being caught up in a fixed currency union means that as austerity measures enforced to rein in debt levels also push the economy into deflation and growth, by virtue of the loss of competitiveness, remains absent the debt problems essentially worsens despite efforts to the contrary. Recently, I penned a paper on, in part, this very subject and the following passage sums up the main learning point;
Thus, Greece et al are effectively caught in a catch 22. Specifically, the need to simultaneously rein in fiscal stimulus in order to preserve long term debt sustainability as well as to correct an external deficit proves a decisively unattractive macroeconomic medicine which may not only prove difficult to administer, but also effectively impossible to pull through in the current Eurozone setup. The vice which then locks in
uncompetitive economies in the Eurozone is twofold.
Firstly, the deflation in prices and wages needed to restore external competitiveness and thus growth must be relative in excess of other economies’ correction. In this sense, Greece et al are fighting a moving target in the form of relative deflation compared to other member economies and indeed other global economies facing similar pressures to deleverage. In short, the battle for relative market share on export markets will increase in conjunction with the amount of economies pursuing a deliberate export oriented growth strategy. Secondly, deflation increase the real value of overall government debt thus requires even more in the way of austerity measures to keep the debt level sustainable. Moreover and as a complicating factor; Greece, Spain, and Portugal are currently paying a large premium over the base rate (German Bunds) for lending money.
This may sound terribly complicated, but the argument is apperently not more complicated that it made it into a recent EU draft report according to Bloomberg who has obtained a copy of the report. Specifically, the report notes that while the measures already taken are the right way to go they may not prove enough;
(quote Bloomberg)
Debt levels in Spain and Portugal may “snowball” in coming years and additional budget cuts are needed to meet deficit targets announced just a month ago, according to a draft European Commission document. The deficit-reduction measures announced by the two nations as part of a European Union agreement on May 10 to create a 750 billion-euro ($920 billion) financial backstop for indebted countries aren’t sufficient, the report obtained by Bloomberg News said. Spain pledged to cut the EU’s third-highest deficit to 9.3 percent of gross domestic product this year and to 6 percent in 2011. Portugal vowed to lower its shortfall to 7.3 percent of GDP in 2010 and to 4.6 percent in 2011.
“While the newly announced measures are significant and the targets imply impressive budgetary consolidation, more measures are needed to meet those targets, in particular for 2011,” according to the draft report, which is dated May 26. The document, titled “Consolidation Requirement in Spain and Portugal,” was prepared by the European Commission, the EU’s executive arm, for the region’s finance ministers.
Really, I think it is important that you appreciate the irony and tragedy in all this. Consequently, while the process of internal devaluation (which is really what the Eurozone periphery is embarking on) is the underlying cause of the potential debt snowball in Spain, Greece and Portugal what the draft report is saying is essentially that this process should be speeded up. Now, in the internal logic of policy making in the EU it is important to understand that this is the only possible solution within the confines of the Eurozone where currency devaluation is impossible. However, in the specific context of avoiding a debt snowball the discourse falls apart since the very suggestion made by the EU here will only exacerbate the snowball.
In other words; you cannot restore growth and rein in debt levels at the same time through an internal devaluation from within a setup such as the Eurozone. At some point there will be an inflection point and short of some form of Eurozone breakup it will come with a large bout of ongoing deflation in the Eurozone periphery which, I reckon, will end with a wide private and public sector default.So, I will give a C for realizing, while belatedly, the risk of a snowball in itself, but an F for the proposal.
However, the most important thing I think is why this is in fact the only viable policy option the EU can propose to the South. Whether this be irony or tragedy I will leave to you.
By Ajay Shah, on June 16th, 2010
The rupee/dollar rate has gained in flexibility. In order to visualise what has changed, it’s useful to look at a graph of the time-series of weekly percentage changes, expressed in absolute terms. That is, a change of -3% or +3% is shown as a bar of height 3 in this graph:
The vertical blue lines show the dates of structure change in the exchange rate regime. These are taken from our recent paper The Exchange Rate Regime in Asia: From Crisis to Crisis, which is forthcoming in International Review of Economics and Finance, and is part of our work on measurement of the de facto exchange rate regime. As an aside, a recent article in The Economist about Asian currency flexibility talks about this in a larger context.
The vertical blue lines break the overall experience into six distinct periods: a first period of high flexibility, then the shift to a nearly fixed rate in April 1994, then the higher flexibility at the time of the Asian crisis followed by a return to very low flexibility, and then two moves of increasing flexibility.
These movements towards flexibility — and away from administered prices — require corresponding adjustments on the part of the economy. If firms are coddled with an administered price and thus think that currency risk does not exist, or if exporters are coddled with a distorted exchange rate, then this generates the wrong behaviour on their part. See Ila Patnaik in the Indian Express on learning to live with a genuinely market determined exchange rate. Also see T. B. Kapali, of the Shriram Group of Companies, in the Hindu Business Line arguing in favour of greater flexibility for corporations in hedging currency risk.
By B.P.T., on June 16th, 2010
The Mortgage Bankers’ purchase index was released at 7:00 AM EDT, and there was a week to week increase of 7.3% last week, which is the first increase since the second financial stimulus program for home sales came to a close at the end of April.
At 8:30 AM EDT, the Housing Starts report for May will be released. The consensus is that construction on 650,000 new homes were started last month due to a decrease in hosing permits granted in April.
Also at 8:30 AM EDT, the Producer Price Index for May will be released. The consensus is that the index decreased 0.5% over last month, and increased 0.1% when food and energy are excluded. The expected decrease in the overall index is being attributed to lower gas prices.
At 9:15 AM EDT, the Industrial Production report for May will be released. The consensus is that there will be a gain 0f 1% in production and a gain of 0.8% in industrial capacity utilization.
At 5:45 PM EDT, Federal Reserve Chairman Ben Bernanke will speak the Conference on the Squam Lake Report in New York about financial reform.
Join the forum discussion on this post - (1) Posts
|
|
Most Popular Posts