- In Asia, Japan +0.7% to 9443. Hong Kong -0.3% to 22869. China +0.6% to 2746. India +0.4% to 18496.
- In Europe, at midday, London +0.2%. Paris +0.6%. Frankfurt +0.7%.
- Futures at 7:00: Dow +0.5%. S&P +0.6%. Nasdaq +0.4%. Crude flat at $99.01. Gold +0.2% to $1549.90.
Tuesday’s Economic Calendar
Factory orders in Germany, Europe’s largest economy, rebounded in April from a slump in the previous month, led by stronger demand for investment goods.
Orders, adjusted for seasonal swings and inflation, rose 2.8 percent from March, when they plunged a revised 2.7 percent, the Economy Ministry in Berlin said in a statement today. Economists had forecast a gain of 2 percent, according to the median of 37 estimates in a Bloomberg News survey. In the year, orders rose 10.5 percent, when adjusted for work days.
Germany’s recovery is broadening as companies boost investment and hiring to meet booming export demand from emerging Asia, even as surging energy prices are sapping households’ spending power and countries including Greece toughen austerity measures. While first-quarter growth was probably “overstated,” the economy is in a “good condition,” Bundesbank President Jens Weidmann said on May 23.
Kash Mansori at the Street Light looks at some interesting data released by the BIS today on who owns the debt, and who sold the default insurance, for Portugal, Ireland and Greece: Betting On the PIGs. It ends up most of the debt is owned by European creditors, but US institutions are more exposed to a default. Kash writes:
If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.
US and European financial institutions are likely to have very different incentives as negotiations regarding debt restructuring and reprofiling proceed. US banks and insurance companies are surely delighted with the “soft restructuring” that is currently being discussed.
In essence, European firms have been betting that a PIG default will happen sooner rather than later, while US firms have been betting that default would happen later or not at all.
Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II. Deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.
There was no economic reason that the government could not have spent on this scale in 1931, as opposed to 1941; the obstacles were political. Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers. The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.
Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s. The May jobs report should have provided the sort of stiff kick that is needed to revive discussion of additional stimulus. Instead, it seems to have barely shaken Washington’s ongoing obsession with deficits.
There looked to be solid hope the recovery was on a better track as 2010 drew to a close, and that momentum appeared to carry through into January. But then we hit a wall.What wall? Theories abound. Temporary weather and tsnumai induced disruptions for one, but we should be trying to look through such short term events. The crisis in Europe, although to be honest I don’t think this is having much of an impact on the decision making of the average US citizen or firm. I tend to think the rise in commodity prices, particularly oil, was the primary culprit, as consumer spending faltered and businesses struggle to pass increasing costs onto consumers. But what it really comes down to is that we have only had one good quarter in this recovery, and that simply was not enough to provide sufficient resilience to the sheer number of shocks the economy has weathered this year.
And let’s face it, even with that one good quarter, forecasters were still looking forward to a protracted recovery. That, however, did not stop the policy environment from turning remarkably contractionary. The debate in Washington quickly turned to how quickly to cut the deficit, how quickly to withdraw monetary stimulus. All with the goal of assuaging the invisible bond vigilantes, who have apparently been helping drive the 10 year Treasury yields back down to 3%. The turn toward contractionary policy – and monetary policy arguably turned contractionary when Fed policymakers questioned the wisdom of continuing QE2 – is surely one of the shocks that hit the economy.
Will the Fed respond with anything more? Well, if Federal Reserve President Richard Fisher is any indicator, the answer is no.
QE2 has clearly failed from an economic standpoint. This failure is not because we haven’t given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren’t binding in the first place. Very simply, neither the Fed’s policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households.The salient problem in the U.S. economy isn’t the precise level of already low mortgage rates. It isn’t “uncertainty” about taxes or health care. The problem is that people aren’t spending as they did in recent decades, because that spending was largely debt-financed, and the pressures now run in the opposite direction. We still haven’t restructured mortgage debt on millions of homes that are underwater. Property values are hitting new lows. Hundreds of thousands of properties are delinquent and yet the mortgages are being carried by the banking system at face value. Banks, knowing this, are clearly reluctant to extend their balance sheets further. Government deficits of nearly 10% of GDP are presently required to cover the gap in private incomes and spending. Indeed, most of what we observe as personal income growth is attributable to transfer payments from government.
Ollanta Humala, a left-leaning nationalist, won nearly 51% of the vote in Sunday’s presidential election in Peru and will take office in late July. Humala has promised to raise royalty payments on mining and that has caused some concern both among the miners themselves and in commodities markets. Higher tax rates are also on the table. In addition to its leading position in silver production, Peru is tied with the US as the world’s second-largest producer of copper behind world leader Chile. It is also the world’s sixth-largest producer of gold.
Intel the tech giant. How about Intel the commodity play? According to one strategist, the chip giant has the ability to move beyond its world of semiconductors to become a leading commodity company focused on solar panels and smart grid solutions.
The iOS 5 upgrade introduces a lot of changes for Apple’s mobile operating system, but iMessages is one of the most significant. It lets iPad, iPhone and iPod touch owners send messages back and forth, including photos, videos, locations and contacts, all free of charge and without limits. If you’re thinking it’s the BlackBerry Messenger of the iOS world, you’d be right, and that’s bad news for RIM, but also for carriers.
The biggest player in digital music has finally vaporized its content. Starting this fall, you’ll be able to store your digital music library on Apple’s internet servers. We’ve already seen Amazon and Google’s attempts at a Web-based music service, with the former’s Cloud Player and the latter’s Google Music Beta, but with iTunes’ dominance in digital music, Apple’s iCloud could eclipse both of them. Apple’s offering differs from those of Amazon and Google in some big ways, though.
Bonus Onion News
Congress reauthorizes funding for Facebook, the massive online surveillance operation of the CIA.