Links: 2013-10-28


FRB: Speech with Slideshow–Stein, Overheating in Credit Markets: Origins, Measurement, and Policy Responses–February 7, 2013

This is Jeremy’s Stein’s speech on reaching for yield from February 2013.

Finance in America: Subterranean capitalist blues | The Economist

“The “master limited partnership” (MLP) combines the limited liability of a corporation, the tax advantages of a partnership and the governance of a private firm. MLPs do not pay corporate taxes so long as profits are passed on to investors each year. They also pay less attention to shareholder rights. A tidal wave of capital is washing towards these and other, similar “pass-through” structures (see this week’s briefing). Together, they represent a mere 9% of the number of listed companies in America, but in 2012 they took in 28% of the equity raised on public markets and paid one-third of Wall Street fees.”

North America

Wall Street expects QE to continue until April: CNBC survey

“There will be no immediate easing of the easing.

In a dramatic shift, the CNBC October Fed Survey finds Wall Street expecting the Federal Reserve to maintain its $85 billion level of monthly asset purchases until April 2014. That’s five months ahead of the average in the last survey.

What’s more, the 40 respondents—economists, strategists and money managers—see the Fed buying about $650 billion of assets next year, up from $381 billion in the September survey. “

Federal government will balance budget by 2015, watchdog says | Toronto Star

If the Canadians are successful, watch for plummeting private savings. And if there is no recession that implicitly means a destabilizing housing bubble.

Calculated Risk: Fed: Industrial Production increased 0.6% in September

At Fed, Some Want a Rule for When to Act –

I expect a Yellen Fed to STRONGLY move toward a rules-based approach on QE. Expect targets and triggers to be strictly adhered to as the Fed makes greater use of the forward guidance tool.

“The Federal Reserve has struggled to communicate clearly about its plans for winding down its $85 billion-a-month bond-buying program. Some Fed officials think they’d have an easier time if they established a rule to determine when and how to trim the purchases.”

U.S. Cities Grapple With Finances –

The next downturn will make municipal finance a big issue for all the reasons enumerated here. I see munis and education debt as the two biggest threats to create a new crisis in the US in the next downturn.

“American cities’ fiscal health is lagging behind other sectors of the economy as the recovery slowly takes hold.

Buffeted by steep drops in state aid, rising pension and health-care costs and sluggish property-tax revenue, many urban centers are struggling even several years after the financial crisis.

“We think we saw the bottom, knock on wood,” said Robert Chisel, director of finance and administration for Reno, Nev. But, he said, “We’re not going back to the old days. We all know that.””

Number of the Week: So Far, Not So Good on President’s Manufacturing Goal – Real Time Economics – WSJ

“the U.S. has added only 12,000 net new manufacturing jobs since the start of 2013. The year actually started pretty strong, with the U.S. adding a combined 37,000 manufacturing jobs in January and February. That means the pace wasn’t too far off of the average monthly increase of 20,833 needed over 48 months to reach the president’s goal.

But since then, the job machine has sputtered. Manufacturers shed workers for five straight months—including a hefty 17,000 cut in July—and only started adding workers again in the last two months. September’s delayed job report, released earlier this week, showed 2,000 factory jobs added during that period.”

Are real rates too high or too low?: Something Wicksell this way comes | The Economist

“Since the interest rate in the short run, and these days (thanks to quantitative easing and forward guidance) in the medium run, is so heavily influenced by the Fed, we cannot definitively say whether the natural rate is high or low, and thus whether the Fed is being too loose or too tight. Bill White, formerly of the Bank for International Settlements, has argued the Wicksellian natural rate must be high and monetary policy too loose because low rates have encouraged all sorts of yield-chasing behavior. But Brad DeLong responded:

[W]e don’t see businesses dipping into their cash reserves to fund investment; a monetary hot potato; unexpected and rising inflation; and full or over-full employment.

Instead, we see elevated unemployment and firms and households adding to their cash reserves. This is what Wicksell expected to see when the natural rate of interest was below the market rate.

This story is not inconsistent with the behavior that alarms Mr White and other critics of the Fed. Businesses and households’ internal rates of return on investment and consumption could be extremely depressed, while financial rates of return on leveraged investments could be high, at least in the fevered, speculative minds of the people making them.”

Free exchange: A natural long-term rate | The Economist

“Over a century ago Knut Wicksell, a Swedish economist, drew the distinction between the financial rate of interest that borrowers actually pay and the natural rate of interest that was determined by the return on capital. If the financial rate is below the natural rate, businesses can reap unlimited profits by borrowing as much as they can and ploughing it into high-returning projects. Eventually, though, all that additional spending pushes up prices, money and credit, and eventually, financial interest rates.

Wicksell saw financial rates as those set by banks competing to make loans. That job is now performed by central banks. They still think in Wicksellian terms: the natural rate prevails when the economy is at full employment. Set the policy rate above the natural rate and the economy tips into depression. Set it below, and inflation results—or, some worry, speculative credit booms.”


Mietmarkt München: Suche Zimmer, nehme alles – Immobilien – Finanzen – Handelsblatt

The rental market in Munich is incredibly tight now as the house price increases in Germany have carried over into rental prices.

The euro crisis: Debtors’ prison | The Economist

“Throughout the euro crisis, tough austerity programmes have been aimed at tackling sovereign debt. That German-inspired focus is badly misplaced. High private debt is more detrimental to growth than high public debt, according to recent research by the IMF. Indeed the IMF study finds that excessive sovereign debt reduces growth only when household and corporate sectors are heavily indebted too.”


Doug Kass: I’d Pay $32.50 a Share for Twitter – MoneyBeat – WSJ

This sounds a lot like the talk we heard in 1999. It may be true in terms of where this stock is headed, but it’s not based on fundamentals, if so.

“Hedge-fund manager Doug Kass, once a Twitter quitter, says he’s now “manifestly bullish” on the microblogging platform.

“It is my view that Twitter’s shares will likely double in the first month of trading — or maybe sooner,” Mr. Kass, president of Seabreeze Partners Management Inc., said in an email.

No profits? No problem.

The crux of Mr. Kass’s argument is pretty simple: He views Twitter Inc. as the biggest source of public conversations throughout the world. The company’s growing user base and its mobile success leave it positioned for future success, he says.”

Civil Liberties

Deutschland und Brasilien bringen UN-Resolution ein – Abhörskandal – › International

Brazil and Germany are looking to tighten the rules on spying at the UN

NSA-Überwachung: Merkel steht seit 2002 auf US-Abhörliste – SPIEGEL ONLINE

Angela Merkel’s mobile has been tapped by the NSA ever since she became leader of her party in 2002.

Merkel will feel sharp sense of betrayal after NSA phonetapping –

“Ms Merkel’s first public comment on the latest reports that the US National Security Agency tapped her mobile telephone was a classic example of her understatement: “Spying between friends is something that is just not done,” she said when she arrived in Brussels for a European summit last week.

Cynics would say that was naïve. But the depth of the chancellor’s anger, and the feeling of personal betrayal, was clear for all to see.

Ms Merkel’s ability to patch up relations will remain. But personal trust is absolutely central to her way of doing business. Having her phone deliberately tapped by a US intelligence agency is both humiliating for her and a breach of trust. That is what she expects Mr Obama to repair – if he can.”

Cover Story: How NSA Spied on Merkel Cell Phone from Berlin Embassy – SPIEGEL ONLINE

“According to SPIEGEL research, United States intelligence agencies have not only targeted Chancellor Angela Merkel’s cellphone, but they have also used the American Embassy in Berlin as a listening station. The revelations now pose a serious threat to German-American relations.”

El Gobierno español califica de “inaceptable” el espionaje de EE UU | Internacional | EL PAÍS

The latest news out of the Snowden cache is information that the US has been trawling through Spanish communications on the massive scale they have done in other countries. This Spanish account says that the Spanish government calls the behavior “unacceptable”.

Kyodo: NSA requested Japan´s help tapping fiber-optic cables CCTV News – CNTV English

“The Kyodo news agency says the US National Security Agency reached out to the Japanese government in around 2011 for help wiretapping fiber-optic cables carrying phone and Internet data across the Asia-Pacific region.

Sources familiar with the matter say the NSA move was apparently aimed at gathering information on China. Most of China’s international cables connecting it with other parts of the region go through Japan. But Tokyo reportedly rejected the request, citing legal restrictions and a shortage of personnel. “

BBC News – NSA ‘monitored 60m Spanish calls in a month’

“The White House has so far declined to comment on Monday’s claims about US spying in Spain, published in the newspapers El Pais and El Mundo.

It is alleged that the NSA tracked millions of phone calls, texts and emails from Spanish citizens between 10 December 2012 and 8 January 2013.”

Is Glenn Greenwald the Future of News? –

I see this exchange as critical in terms of what we see below regarding the Merkel spying affair. The German-language and Canadian media are reporting the issue differently than the US media thus far. And for me, it shows the potential for bias that is at the heart of the discussion below.

“This week’s column is a conversation — a (mostly) civil argument — between two very different views of how journalism fulfills its mission.”

Obama aware of NSA spying on Merkel since 2010, German paper says | Toronto Star

Here, the Canadian paper Toronto Star reports using the German angle which says Obama knew rather than the one from the Wall Street Journal angle below. Seeing this increases my sense that it is always important to get multiple internationally-disparate perspectives.

NSA-Affäre: Zusammenfassung – manager magazin

This German account of the spying on German Chancellor Merkel directly contradicts the account by the Wall Street Journal below. I ask myself why this is so because when I see headlines this contradictory, after the Iraq War I always suspect US papers of having a patriotic pro-US bias. Reading non-US journalism is important to get another perspective.

Obama Unaware as U.S. Spied on World Leaders: Officials –

“The White House cut off some monitoring programs after learning of them, including the one tracking Ms. Merkel and some other leaders, a senior U.S. official said. Other programs have been slated for termination, officials said.

The account suggests President Barack Obama went nearly five years without knowing his own spies were bugging the phones of world leaders. Officials said the NSA has so many eavesdropping operations under way that it wouldn’t have been practical to brief him on all of them.”

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