Economist Online

On Thursday, the 4-week moving average of weekly jobless claims reached the lowest level since April 2008. The US labor market continues to show sign of thawing.

If this trend continues, consumer confidence is likely to bounce back. Then the US will be on the track of a virtuous cycle: business investment will follow, so will bank lending.  We need to wait for more data in coming weeks to confirm such trend.

Both precious metal, the current relative valuation of platinum vs. gold makes platinum a better bet than gold.

In a presentation to this year’s annual meeting of the American Economic Association, Alan Blinder argues that the circumstances—low inflation and low nominal interest rates, persistent excess capacity, and fiscal policy paralyzed by large debts—that have forced central banks to operate through unconventional policy will be a recurring feature of the economic landscape. “We can’t stuff the crazy aunt back in the closet”.

According to Economist Magazine, of the rich world’s four major central banks, Britain’s and Japan’s already have their policy rates stuck near zero and the fourth, the European Central Bank (ECB), is likely to get there this year. Meanwhile, the balance-sheets of all four institutions have ballooned as they expand the volume and range of assets and loans they hold (see charts below).

Whatever central bankers do, they cannot repair problems best fixed by politicians, such as America’s incoherent fiscal policy or Europe’s fractured institutions. Asked about the ECB’s aggressive new lending to banks, Masaaki Shirakawa, the governor of the Bank of Japan, said it could “buy time”. But he warned it could backfire if politicians fritter away whatever time the central bank has bought. Unfortunately, that risk is never low.

The following graph was taken out from a recent report on Europe’s debt trajectory by GMO’s Rich Mattione. It pretty much summarizes the current dire situation in Europe.

Greece is not the only country in trouble.  Italy is the real threat to the stability of Europe. If Italy falls, Europe falls.

Germany and France, the two largest economies in Europe, are relatively better positioned, but their government-debt-to-GDP ratios, 83% and 82%, respectively, will seriously constrain their ability to bail out the PIIGS (Portugal, Italy, Ireland, Greece and Spain).  In contrast, Scandinavian countries enjoy the strongest position in all developed countries, with the debt-to-GDP ratio well below 50%.

A snapshot of debt (government, household and corporate) of world’s advanced economies. For a hint of what’s likely to be the end of the game, read my previous post, “The moral breakdown“.

(click to enlarge; source: IMF)

Chris Wood shares his insights on what’s likely the endgame of European sovereign debt crisis.

He predicts it will be either a move from monetary union to fiscal union, or a complete breakdown of the Euro. He thinks the first scenario is more likely and Germany will eventually budge.

Then, Jim Rogers comes in with his thoughts:

Now it looks like no matter what Europeans are trying to do, and how many summits politicians rush to put together, things just keep getting worse.

If PIGS (Portugal, Italy, Greece and Spain) were to ‘fly ‘, and debt contagion were to spread, and Europe’s Lehman moment finally to arrive, you probably want to at least have a slightest hint of where the next domino is likely to fall. That’s the purpose of this short post.

The following four charts are from researchers at BIS, including my former Brandeis teacher Steve Cecchetti.  I suggest that everybody take a minimum of five minutes going through these tables. For nerds like me, I stick them on the wall in my office.

All debt:

Government debt:

Household debt:

Corporate debt:

The latest housing price,  as captured by the Case-Shiller Index, continued to fall in October. Here are two sharp charts from Calculated Risk.

Time trend:

Accumulated price fall by major US cities:

Combined with latest sales figure, the inventory of existing home sale, after a faked jump due to government’s incentive program, seemed starting to move again.  However, the new home sale is still very much depressed.

According to PNC’s Stuart Hoffman, 2012 will be a transition year for the housing market.  The hope is that the gradual fall of the housing price may eventually clear the inventory,  six years after the last housing peak.

If the economy turns weaker in 2012, the Fed may eventually be forced to buy more mortgage-backed securities. However, the likelihood of any household debt relief program is dim, considering the current fiscal situation. In 2012, we are likely to see a continued muted growth in the US. Now people began to appreciate the importance of housing in driving business cycles. Without robust recovery in US housing market, any talk of V-shaped recovery only sounds foolish.

According to WSJ, the ECB last week rushed out emergency support for the euro-zone banking system, laying out an unprecedented €489 billion at its first-ever three-year lending operation.

The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday (Dec.27) , up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.  News that euro-zone banks are parking more and more cash at the ECB’s low-yielding, but safe, deposit facilities adds to evidence that banks are more concerned with seeing out the year in safety than with putting it to work in the real economy or the euro-zone debt markets.

Watch this interview of Bob Mundell -  he thinks this is the game changer, a blockbuster event.

Dennis Gartman seriously doubted it. In his recent investment newsletter, Gartman describes how Europe has arrived at its own “Lehman moment.”

The problem in Europe is that we’ve arrived at Europe’s own “Lehman-moment” when banks and institutions are wholly unwilling to lend money to anyone, anywhere. They are willing to draw down their lines of credit from the ECB, but they are re-depositing those borrowings back to the ECB itself. Initially we thought this reasonable. Initially we thought that the banks drew down their lines from the Central Bank and re-deposited them with the Bank awaiting investment elsewhere. We thought this normal. Now, however, we consider it disconcerting for it shows the utter sense of confusion and the even more utter sense of fear that has engulfed the banking system in Europe. Rather than viewing these new credit lines from the ECB as a source of funding for investment, the banks in Europe are viewing those ECB-created funds as a source of “fear capital” to be used should worst-come to-worse on the continent. Fear rather than optimism is driving the banking system.

We fear then that worse is about to happen, for the very core of things banking and economic depend upon trust and trust is now wholly lacking in Europe.

 

 

China vs. US in key economic metrics, from Economist Magazine.

Bear in mind two things:

1. China’s population is roughly 4 times of the US, so it’s natural for China to be bigger;

2. But size does matter, and matters a great deal.

Interview of Jin Liqun, Chairman of China’s Investment Corp. (or CIC), China’s sovereign wealth fund, with $460 billion assets under management.

Jin offers his views toward Europe and her economic and political systems. He also explains why CIC is unlikely to inject large rescue investments as per European leaders’ request. I’d say Jin’s views toward Europe is quite typical in China.

Starting from 12″10′ in the video interview, Jin had some really strong (yet painfully true) comments toward European welfare system.

How today’s globalization of manufacturing has changed American labor market.
How different are the spillover effects of manufacturing jobs vs. service jobs.

Read more at NYT.

It’s one of the fundamental assumptions in economics that people’s welfare will improve with more choices, and more varieties.  In the following TED video, Sheena Iyengar at Columbia challenges such view with some vivid examples.  She also offered some clever ways to avoid the problem of choice-overload.

Jim O’Neill, Chairman of Goldman Sachs Asset Management, discusses his outlook on China and global economy.

Jagdish Bhagwati analyzes the recent move by the US to establish Trans-Pacific Partnership (TPP).

As if undermining the World Trade Organization’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the United States has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP). President Barack Obama announced this with nine Asian countries during his recent trip to the region.

The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening.

Link to the full text.

Greg Mankiw explains:

I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment).

The parameters in this formula were chosen to offer the best fit for data from the 1990s.

Eddy Elfenbein has recently replotted this equation.  Here it is:

The interest rate recommended by the equation is the blue line, and the actual rate from the Fed is the red line.

Not surprisingly, the rule recommended a deeply negative federal funds rate during the recent severe recession.  Of course, that is impossible, which is why the Fed took various extraordinary steps to get the economy going.  But note that the rule is now moving back toward zero.  As Eddy points out, “At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close.”

The only caveat is the estimation was done in 1990s.  It captured the Fed’s interest rate policy in 1990s, but may not be accurate for the current Fed, especially when the Fed chooses to deviate from the Taylor rule.

The following graph will offer you some clue:

Link to the article at the BIS.

The most recent reading was 8.08 Chinese Yuan per Euro, the lowest reading since October 24, 2002. Chinese government seems to have allowed a large appreciation of Yuan against the Euro in recent months. They may have done so by deliberately selling euro-denominated assets.

Bob Barro now thinks it's official that the Euro experiment has failed.  What's needed is an exit strategy for the common currency.

A fantastic chart from NYT on the US stock market cycles in the long run.

Remember:  TWO does not prove anything statistically.