Daily Comments: 2013-06-04

Since I am making these links posts more of a commentary now, I thought I would change the title to reflect that. Here are 30 more posts that I have for the links as I run through the backlog of articles I find important.

EconoMonitor : Ed Dolan’s Econ Blog » Corporate Profits Soar as Proprietors’ Income Stagnates: The Decline of Small Business and what to do about it.

“It is true that the two series in the chart correspond only approximately to the popular distinction between big and small business. Proprietors’ income includes the current income of unincorporated businesses that have the legal forms of proprietorships, partnerships, and tax-exempt cooperatives. It does not perfectly match up with small firm size because some small firms are incorporated and some proprietorships, partnerships, and cooperatives are large. Also, proprietors’ income is not, in an economic sense, a pure measure of the profits of small businesses, since it includes the imputed income of small business owners who live off the net proceeds of their enterprises without paying themselves a salary or interest on funds they have loaned to their firms.

Even given these caveats, though, the chart is strongly suggestive. It shows that corporate profits reached an all-time high of 12.74 percent of GDP in the fourth quarter of 2011. Although profits for Q1 2013 were down slightly to 12.30 percent of GDP, that is still higher than they had ever been before their peak of two years ago. Meanwhile, proprietors’ income was up slightly to 7.9 percent of GDP, but it remains well below its all-time high of 8.8 percent in 2004. Before the early 1990s, the two forms of income rarely differed by as much as two percent of GDP.”

China credit risks grow as debt produces less GDP, loans rolled over | South China Morning Post

Loans are being rolled over despite signs that debtors cannot pay. This article points to this as a worrying sign beneath the surface in China. NPLs will explode when the downturn really takes shape in this case.

“Increase in borrowings and low level of bad loans are signals that debt is not being repaid”

A coming boom in the eurozone periphery? (technical) – Telegraph Blogs

Take note and disregard the politics. I DO think there is merit to this view encapsulated below.

“Now here is something to ponder. Simon Ward from Henderson Global Investors – one of Britain’s last surviving monetarists – predicts a Latin comeback later this year.
As an anti-Keynesian, he thinks the great austerity debate is largely bogus. Europe tanked last year because monetary policy was too tight, and will now recover (in his view) for the opposite reason.

“Eurozone monetary trends are signalling a return to growth over the remainder of 2013, with the periphery participating in the recovery during the second half – a development that would stun a bearish Keynesian consensus.””

BBC News – China: ‘Scary’ pace of change prompts investor rethink

I have been talking about the Lewis Turning Point for some time now and I think we are seeing an indication that this framework is valid. Here are some links:


“an increasing number of Taiwanese shifting at least some of their operations away from China – either to South East Asia or Taiwan – and adjusting their investment strategies in the mainland.

One of the main reasons is a significant rise in Chinese wages. Some estimate salaries have doubled in the past six to seven years. Companies are also now required to pay into Chinese workers’ health insurance and pension plans.

“Labour costs in China are rising dramatically each year and the pace is scary,” says Mr Chu, chief executive of Fair Friend Enterprise Group.

“Demand for workers is also very high. With more jobs to choose from, Chinese factory workers now switch jobs whenever they can get a higher salary. That makes it difficult for us to find workers with enough experience.

“So the cost of manufacturing in China is higher now, sometimes higher than Taiwan,” he says.”

ekathimerini.com | Labor market balance keeps improving

Again, Greece is not in a recovery but the worst does seem to be over in my view. I know that Yanis Varoufakis thinks the economy is still in freefall. But the numbers suggest otherwise. I remember getting this same feeling about the US in early to mid-2009. Yes, it was tenuous and could go the other way but I saw signs of stabilization and said so despite the bearishness everywhere. Greece seems similar – if more extreme – at this point.

“May was the third month in a row that saw hirings outnumber sackings in Greece, according to the Labor Ministry’s Ergani electronic database.
Salaried employment grew by over 55,000 jobs, as hiring announcements numbered 124,295 against 68,562 dismissals. Departures broke down into 22,498 voluntary exits and 46,064 sackings or expired contracts.”

Global manufacturing data raises growth fears | South China Morning Post

“Manufacturers in China, the United States and Europe struggled last month as demand fell, suggesting an ailing world economy that still needs a steady diet of central bank support.
Output at US factories declined in May for the first time in six months, the Institute for Supply Management reported, while China’s massive manufacturing sector shrank for the first time in seven months, adding to concerns that the world’s two largest economies were losing momentum in the second quarter.

Euro-zone manufacturing contracted for the 22nd consecutive month, although the depth of the downturn eased for the first time in four months.”

ekathimerini.com | Merkel’s lawmakers open to easing Greece’s financial burden, says German MP

This is very interesting. Merkel did not say this herself but members of her party did and they seem to be saying that they are willing to adjust maturities and interest rates even further. I see this as a bullish signal on Greek government debt.

ekathimerini.com | Fitch cuts Cyprus rating on fears rescue program might fail

Default is certainly what I expect to eventually occur.

“The agency cut Cyprus’s long-term foreign currency issuer default rating to B- from B with a negative outlook due to the country’s elevated economic uncertainty.”

Cameron and the folly of playing politics with Europe – FT.com

This sounds right to me. Cameron has been boxed in politically and I am not sure he is deft enough to navigate these treacherous waters.

“There is a lesson for European leaders in David Cameron’s troubles with his Conservative party over Europe. The more you give in to eurosceptics, the more they raise their demands; the more you blame Brussels for your woes, the less you can influence the European decision-making process; the more you twist or hide basic realities about Europe, the more reality will boomerang back to you.”

Markets Insight: Weaker yen could burst China’s asset bubbles – FT.com

Charles Dumas of Lombard Research has the following thesis:

“Japan’s policy trajectory threatens to burst China’s asset bubbles. Japan has devalued the yen competitively: US and European real exchange rates are down some 10 per cent since 2009, courtesy of quantitative easing and the euro crises. Surprise interest rate cuts in a number of countries hint at dangerous imitation. China is the most exposed: following Japan’s devaluation (echoed in Korea and elsewhere), China’s overvaluation has now reached an estimated 33 per cent.”

Big Rental-Apartment Owners in Sunbelt to Merge – WSJ.com

I don’t have a view on this but I know it reduces competition in a hot sector. Because of the downturn, renting has been all the rage as a vehicle for investors. But rental yield is getting weak as people have piled into these markets and bid up prices.

You thought central bank money printing was at an end? Don’t bet on it – Telegraph

The language is very hyperbolic but the sentiment below is correct, that the economy is still fragile and people want/need more monetary stimulus, consequences be damned.
“The world economy is still in a very deep hole, with major structural imbalances still largely unaddressed. Any attempt to apply the brakes would only choke off what remains a very fragile and unconvincing recovery, tipping some major economies back into recession.

This in turn means that central banks will struggle to remove monetary accommodation in the way markets are starting to anticipate. We’ve become hooked on easy money, and I very much doubt the world economy is yet ready for the cold turkey of its withdrawal.”

Argentina’s YPF to sue Repsol chief for over-payments: source | Reuters

This is the sort of thing that makes Argentina a rogue state. The government simply tries to bully people with heavy handed tactics. Every foreign country should be watching this and understand they could end up in the same situation.

“At a shareholders meeting that ended in the early morning hours on Friday, YPF decided to sue Repsol Chairman Antonio Brufau for allegedly overpaying YPF’s board of directors in 2009, 2010 and 2011.

“The suit claims that Brufau is personally liable” for about $38 million in payments to directors that were not authorized by shareholders, said the source, who asked not to be named.”

Coalition’s austerity policies are hitting the poor hardest, says thinktank | Society | The Guardian

“Government cuts regime is increasing social inequality, comprehensive study of recession concludes”

UK retail sales return to growth | Business | guardian.co.uk

I don’t know if these numbers are inflation adjusted because if they are not, it says that UK consumer spending is actually falling in inflation-adjusted terms.

“After a dismal month in April, sales in May were up 1.8% on the same period in 2012 as offers and discounts tempted shoppers”

UK shadow economy worth £150bn | Business | The Guardian

“Thinktank estimates paid work not declared to taxman worth 10% of national income in 2012 – half the level of Spain and Italy”

Jefferson County Reaches Deal With Creditors in Bankruptcy – Bloomberg

Could be a watershed event that we see replicated down the line in the next cyclical downturn. We should see these as contingent bank and muni investor liabilities.

“Creditors include JPMorgan Chase & Co. (JPM), seven hedge funds and bond insurers, said Kenneth Klee, an attorney for Jefferson in a county commission meeting today in Birmingham. The plan still has to be approved by a bankruptcy court, he said.

Together, those parties hold about $2.4 billion, or approximately 78 percent, of the county’s sewer debt.

JP Morgan, which holds $1.22 billion, will forgive $842 million, according to a term sheet circulated at the meeting.”

Japan economy: Shinzo Abe stresses deregulation is priority for growth | Economy | News | Financial Post

Let’s see what we get tomorrow and what the market reaction to it is. As I have said before, stimulus alone is not going to get Japan where it wants to go. I also think they need to think about immigration and nationality policies.

“expectations for structural reform are already dimming, with few expecting early moves to reduce corporate taxes nationwide or to make it easier for firms to lay off workers in business sectors on the decline, at least ahead of a July election for parliament’s upper house.

A third tranche of the growth strategy to be unveiled on Wednesday is expected to focus on the creation of special economic zones where deregulation and tax cuts can be implemented in limited geographic areas such as big cities.”

Rand Paul Pitches Silicon Valley’s Libertarians – The Daily Beast

This sounds about right:

“There are enough disenchanted Obama supporters in the valley with libertarian leanings for a respectable Paul fan base. Perhaps most importantly, Paul isn’t just battling Democrats, he’s fighting a civil war against “Bush Republicans” for control of the party.

Paul readily acknowledges that the Tea Party’s success could not have happened without the organizing power of Web tools. Paul might not turn San Francisco red, but if he’s looking to snag a chunk of money and tech talent to power his way to conservative leadership, his trip to Silicon Valley will likely be very productive.”

Cambridge University Linguists Use Twitter To Study How Welsh Language Use Is Changing | TechCrunch

As some one interested in languages, I think this is pretty cool.

Genetically Modified Wheat Isn’t Supposed to Exist. So What Is It Doing in Oregon? – Businessweek

Fed’s Williams Open to Trimming Bond Purchases – Real Time Economics – WSJ

I see this as the consensus view right now.

““If the forecast goes as I hope and we see continuing good signs from the labor market [and] overall economic conditions [and] continued confidence in that forecast of substantial improvement, I could see, my own view is that as early as this summer [there could be] some adjustment, maybe modest adjustment downward, in our purchase program,” San Francisco Fed President John Williams told reporters on the sidelines of a conference here.”

Fed’s Lockhart: Nearing Time to Trim Bond Purchases – Real Time Economics – WSJ

Playing coy a bit but it’s clear the Fed leans toward earlier tapering.

““Whether that’s June, August, September or later in the year, to me, isn’t really the issue,” even as he acknowledged, “It’s the issue for the markets.””

More Tapering Talk – Tim Duy’s Fed Watch

I agree with this:

“Bottom Line:  Fed is looking to pull back on asset purchases.  They expect the data to give them room to do so.”

Flood waters engulf Prague suburbs – FT.com

“Swathes of suburban Prague were under water on Tuesday after floods that have killed 11 people swept across central Europe, and the deluge moved towards Germany where more than 10,000 people have been forced from their homes.

Areas to the north and south of the Czech capital were submerged, including the city’s zoo and horse racing track, in the worst flooding in a decade which followed days of heavy rain. But metal barriers erected along the Vltava river banks protected the historical city centre.”

Moody’s ser styrke i dansk økonomi – Økonomi | www.business.dk

This Danish article says “Moody’s see strength in the Danish economy” but then the article goes on to tell of Moody’s predicting anemic growth rates: 0.7% in 2013, and 1.6% in 2014. While this may be above the OECD average as the article touts, it is pretty poor in my view. It’s worth noting that this is the kind of slant you get from domestic media.

Britain has highest food and energy inflation in Europe, OECD says – Telegraph

I don’t know what accounts for this huge disparity, but it is significant in keeping British inflation relatively high.

“The OECD said food prices in April in the UK were 4.6 per cent higher than the same month a year ago.

This compares with 3.7 per cent in Germany, 1.6 per cent in France and just 1 per cent in the US.

Energy inflation in the UK was put at 2.2 per cent – more than four-times the rate of increase in Germany. In nearly a dozen European countries energy prices fell in the month – with France, Belgium, Denmark and Spain benefiting from a decrease.”

Elizabeth Warren’s loan bill offers lifeline to America’s indebted students | Sam Blum | Comment is free | guardian.co.uk

The student debt problem in the US will come to a head like most unsustainable things in the next cyclical downturn. But the immediate problem is that the rate on federal student loans is set to go from 3.4% to 6.8% on 1 July if the US Congress doesn’t do anything. Elizabeth Warren has a bill that “would only apply to the 2013-2014 academic year but it aims to give student borrowers the same interest rates that big banks get from the federal government: a modest 0.75%.” This will be interesting

Canada trade deficit yawns wider for 16th straight month | News | Financial Post

“The Bank of Canada repeatedly expresses concern about the sluggish export sector, which is a major driver of the economy. Firms seeking to sell abroad are struggling to cope with a strong Canadian dollar and uncertainty in major markets such as the United States and the European Union.”

Some Markets Showing Addiction to Cheap Money, Fed’s George Warns – Real Time Economics – WSJ

While I agree with Esther George in general, I can’t say anything about this statement since she doesn’t specify – at least according to the text of this article – which markets are addicted to cheap money. I can think of a few like high yield, leveraged loans, mortgage-backed securities. All of these markets have enjoyed cheap rates and that has buoyed them – I would say artificially.

Calculating Apple’s True U.S. Tax Rate – NYTimes.com

Tim Cook said the following at the US Senate hearing, “The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States”. The reality is that this number and the way he phrased his statement are misleading because it includes a massive amount of deferred tax that will probably be deferred for so long that the net present value of those dollars is negligible. Apple’s true US tax rate for 2009-2011 was actually 8.5%, a much lower number.

The American Consumer is Not Okay by Stephen S. Roach – Project Syndicate

Stephen Roach reminds us that this recovery has been painfully slow in terms of consumer spending. But I think the most important point he makes here is that the Fed is trying to “create a shortcut around the imperative of household sector balance-sheet repair”. And that has led us to low savings and will potentially lead us to releveraging in the absence of wage growth. This is NOT the way to stimulate the economy.

Senators mull timetable for liquidating Fannie Mae, Freddie Mac | Reuters

I am not a big supporter of Fannie and Freddie. They should be liquidated to protect taxpayers from another mortgage meltdown.

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