Worthwhile Reading - June 2 to 5

Non-farm payrolls trend mismatch. Jesse's Cafe Americain.
yet more B/D B.S.

From the subprime to the terrigenous: recession begins at home. Gavin Putland, Land Values Research Group.
as if we haven't been talking about this for 3 years now, from UCLA's Ed Leamer's warnings and those of Calculated Risk to the more recent research reports of Rogoff and Reinhart, but this is a good research paper that provides yet more evidence that a downturn in the domestic property market is a leading indicator of recessions; has housing bubble and recession data for 32 countries.

*** Treasury market: Gonk! and Smackdown Week: Now consumers are all but extinct. Accrued Interest.
What makes this all tough for the serious analyst is that you have to balance holding firm to your viewpoint while admitting you could be wrong. Its another way of saying that the toughest thing in investing is a sell discipline. I'm long Treasuries now (only avoided a real shellacking based on some good technical analysis). I believe in my deflation thesis, but I know I could be wrong. The inflation camp isn't stupid. There is a valid argument for much higher interest rates. The smart trader puts his ego aside and admits when he's wrong.

Bond market close: June 4. John Jansen, Across the Curve.
no need to read the full article; I just thought this point worthwhile:
I hesitate too say this and it is probably the death knell for the bear market in bonds but it is difficult to envision any scenario tomorrow in which the market can rally. One has consistently been paid this year to short the supply and cover back later. There has been no reward for buying early. I think that we will see higher yields into the refunding next week and surely a steeper yield curve. We are in a new age and that new era is governed by supply. There is no refuge from it. It just keeps coming and until there is some sign that the fiscal situation in the US is a road to rehabilitation, the treasury market will remain a cold lonely venue.

The bond war. Daniel Gross, Slate.
more on the Krugman vs. Ferguson debate on inflation/deflation and higher/lower rates.

Fall in LIBOR fails to paint a true picture. FT.
analysts and bankers warn that Libor rates may not be telling the full story.
That is because there are wide differences between the rates at which individual banks can borrow. The biggest institutions are able to fund themselves at around Libor levels while smaller institutions have to pay, in some cases, more than 100 basis points above Libor. This is explained by continuing counterparty risk in what remains an uncertain economic environment. That contrasts with the situation before the credit crisis when institutions paid similar rates to borrow. Meyrick Chapman, fixed income strategist at UBS, says: “We should not build up our hopes that the fall in Libor is such a positive sign for the markets. We have a very tiered market, where many smaller banks are still having to pay relatively high rates to borrow.”
the article does go on to admit that even 100bps back of LIBOR is still low on a historical basis, but the main point is that LIBOR isn't as generally reflective of funding costs as it once was, particularly beyond 3 months.

More on bank lending data. James Hamilton, Econbrowser.
short post, and worthwhile issue to be aware of

Q1 2009 Bank Ratings Update: Zombie dance party just heating up. Chris Whalen of Institutional Risk Analyst, via The Big Picture.

Households saving the fiscal stimulus; possible deleveraging while consumption stabilizes. Rebecca Wilder, News N Economics.
and
What personal consumption data means for the stock market. Ed Harrison, naked capitalism.
of the previous two articles, I favour Harrison's viewpoint, in no small part because of the following:
Retail chain store sales plummet. Tyler Durden, Zero Hedge.
and this:
Personal consumption declining for durables and non-durables, and Durable goods. Jake, EconompicData.
and this:
From powerhouse to funhouse. Sudden Debt.

Trade - it's not just the currency. Michael Pettis, China Financial Markets.
long article, worth just skimming, but the main point, one that Pettis has been arguing for quite some time, is this:
What the world needs from China is not an increase in total consumption but rather an increase in net consumption – i.e. the excess of new consumption over new production – that is roughly in line with the decline in US net consumption. If consumption grows, but production grows just as fast, or even faster (and we can tell by looking at the trade balance corrected for various pricing effects and one-off purchases or sales), then the world imbalance is getting worse and the overcapacity problem will not have been addressed.
i.e. we're not going to solve our global economic problems without significantly reducing global imbalances, so any green shoots we're seeing right now that just exacerbate the current structural imbalances will not be long-lasting green shoots -- they'll lead to further problems down the road

Change, or more of the same? Brad Setser, Follow the Money.
Sure, the US fiscal deficit is up, something China’s state media now likes to highlight.*** And the Fed has cut policy rates in the midst of a severe downturn. But that is only half the picture. Household savings are up. Household borrowing is down. The private sector’s financial deficit is way down. The trade deficit is down too. Foreign inflows finance a trade deficit not the fiscal deficit and, in my book, financing a 6% of GDP trade deficit is more risky than financing a 3% of GDP trade deficit. What has changed is China’s own perception of the risks.
meanwhile, as Geithner's China visit made clear, he believes:
the goal of both US and Chinese policy should be to move away from the current unbalanced relationship
but how, pray tell, are they working towards that goal??
as per Pettis' article, China is trying to get out of the slump by stimulating its export and investment sectors, while the U.S. is trying to get out of the slump by rescuing the banks so as to sustain lending, while also also offering tax cuts, both so as to pump up consumption (albeit with a modest mix of infrastructure spending and auto bailouts which should boost domestic production more than consumption); talk is cheap (particularly from Tim G.)

and yet,
Global crisis inevitable unless U.S. starts saving, Yu says. Bloomberg.
is that what the mercantilist, export-dependent countries of Asia want, for the U.S. to start consuming less than they produce, and have trade surpluses? oh, wait, a deficit is okay, as long as its smaller.

the Chinese could have worse things to worry about; at least the U.S. is not Peru:
Sovereign debt repayment in shit. Paul Kedrosky, Infectious Greed.

meanwhile, as if the situation with the federal deficit were our only concern, there is that issue of what's going on at the state and local level, and it is NOT good:
The fiscal survey of states. National Association of State Budget Officers.
its not just a California problem:
The 50 states are facing one of the worst fiscal periods in decades. Fiscal conditions deteriorated for nearly every state during fiscal year 2009, and weak fiscal conditions are expected to continue in fiscal 2010 and possibly into fiscal years 2011 and 2012....

Expenditure pressures continue as demand for additional funding of programs such as Medicaid increase during tough economic periods and states deal with looming long-term issues such as funding pensions, demographic shifts, and maintenance and repair of infrastructure. Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase. While the American Recovery and Reinvestment Act of 2009 has helped states avoid draconian levels of cuts, it will not end the need for states to cut spending as exhibited by the 2.5 percent decline in governors’ recommended budgets for fiscal 2010.

Reflections and outrage. Robert Rodriguez, First Pacific Advisors.

Bill Gross: "Staying rich in the new normal." Ed Harrison, naked capitalism.

The view from the top. James Kwak, The Baseline Scenario.
quotes Colin Negrych:
“What constituency is there for pessimism? People believe optimism is necessary, an American right. The presumption of optimism is the problem. That’s what creates the debt we have now.”

Debt and money. David Altig, macroblog.
on the question of whether the Fed is monetizing the Treasury's debt; see charts, but here's conclusion:
And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.

Bernanke: current economic and financial conditions and the federal deficit. Mark Thoma, Economist's View.
a condensation of Bernanke's recent speech, in the form of a simulated interview.

Obama's Gorbachev moment. Peter Boone and Simon Johnson, NYT.
suggests that Geithner's promise to the Chinese that their holdings are money good; and that Bernanke's speech which pointed out that Geithner was less-than-convincing but offered no credible policy changes himself other than platitudes, are insufficient ----- actions, not words, are required, i.e. structural reform

for more, see:
What would Gorbachev say? On the U.S. China and Saudi Arabia. Simon Johnson, The Baseline Scenario.

A tale of two depressions. Barry Eichegreen and Kevin O'Rourke, voxeu.
an update to their April post; they still make the same points: today's recession is at least as bad as the Great Depression was at this point, although the policy response is more favourable; the outstanding questions are whether or not the better policy response will ultimately be sufficient, and whether or not those better policy responses get un-done by optimistic green-shoot thinking or political or other considerations.

Why the present depression will be deeper than the great crash of 1929. Charles Hugh Smith, of two minds.

The fate of nations (graphs to contemplate). The Animal Spirits page.

The stock market in context with the Great Crash of 1929 - 1932. Jesse's Cafe Americain.
in particular, take a look at the last chart which shows what Treasury bond yields did in the 1930s:
It is also easy to forget that in 1931 the business community and the leading economists were convinced that the worst was over and that a recovery was underway. Their concerns shifted to inflation, and dealing with the then unprecedented expansion of narrow money in the adjusted monetary base to ease short term credit problems.

Benefit spending hits $2 trillion, highest percent since 1929; one dollar out of every 6 from vouchers. Michael Shedlock.
1 in 9 Americans now on food stamps.

CFO Survey, June 2009. Duke.
RECESSION TO DRAG ON FOR REST OF 2009, CREDIT CONDITIONS DETERIORATE FOR MANY FIRMS, CAPITAL SPENDING AND EMPLOYMENT TO BE SLASHED

What we're watching to identify the economic recovery. Richard Yamarone, Argus, via Scribd.

Speculative bets against the dollar highest since July 15 2008. Mish again.
Kostorhyz:
Next time you run across one of these Dollar Cassandras, please ask them to tell you the names of the currencies that the Dollar going to decline against, and to please speak to you in detail about the relative fundamentals of these nations. Ask them about sovereign debt ratios. Ask them about external debt ratios. Ask them about bank capitalization ratios. My experience has been that when you pose this question to the perma-bears, it usually elicits a long pause and empty stare.
Mish:
Short-term, I do not know where the dollar goes, nor does anyone else. What I do know is anti-dollar sentiment is quite extreme and that signals caution on anti-dollar bets.

Not so loonie. Martin Hutchinson, Breaking Views.
I agree that if China is worried about diversifying its foreign holdings and wants to reduce its purchases of Treasuries, Canadian bonds should be a natural alternative, as should the real assets that Canada possesses. this has been part of my thinking related to why Canadian bonds should outperform Treasuries; and, ultimately, I think it should be one relatively supportive factor of the C$ vs the greenback, but there are other "legs of the stool" that aren't as supportive, including the fact that we're a small open economy very susceptible to global economic weakness, and, in particular, very dependent on exports to the U.S. So, all in all, hard to know what constitutes a fair value level on the C$. But, like Carney, I suspect that a 90 cent C$ doesn't help Canada nearly as much as an 80 cent C$!

[Oil] Demand is in the toilet. FT Alphaville.
and
Oil: supply up, demand down. Jake, EconompicData.

More sausage hiding: banks. Karl Denninger, the Market Ticker.

don't bother reading this, unless you really care about reactionary regulation; I just love the title:
Hubris, nemesis and catharsis. Con Keating, voxeu.

Understanding Taleb. Felix Salmon, Reuters.
the Black Swan Protection Protocol-Inflation, is not really a bet on hyperinflation, as the WSJ would have it. Rather, Taleb describes it as a bet that the error rate in global fiscal and monetary policy is being systematically underestimated. “Forecasting errors can compound either way”, he says, and if you have an incompetent pilot flying a plane, then inevitably there’s going to be some kind of crash, whether it flies into a mountain or into the sea. Essentially, the fund is going long volatility in macroeconomic variables, on the pretty reasonable grounds that policymakers are likely to get things wrong, one way or another.

I don't understand this at all:
Fed's Hoenig calls for rate hikes. Calculated Risk.
Basically, Hoenig says, the consumer is going to be weak for a long time, so the economic recovery is going to be very weak; but the bond market is selling off, so that must mean they're worried about inflation, so we'd better start normalizing the Fed funds rate sooner rather than later.
Is that really the kind of thinking that goes on in some of those Fed meetings??!!
Let's say the market is selling off b/c of supply concerns (which could ultimately prove inflationary) --- how does higher short-term rates do anything to reduce thos supply concerns?! --- if anything, it aggravates them (less monetary stimulus implies need for more fiscal stimulus implies even more issuance; plus, if Treasury is paying higher interest on its debt due to Fed hikes, that means more issuance)
Absurd!

this is too funny:
Sign-o-the-times: Geithner rents home out. Barry Ritholtz, The Big Picture.