Baum’s Views on Money – Bloomberg 07-31-13

Salient to Investors:

Caroline Baum writes:

Obama’s proposal to cut the corporate tax rate in exchange for new spending on education, training and infrastructure is a non-starter.

50 percent of economists say the Fed will taper in September but if economic conditions change, the Fed’s actions will change with them.

The housing market is healing but would have done so without the Fed focusing on long-term rates to boost housing, so it is time to leave fiscal policy to the federal government.

Read the full article at  http://www.bloomberg.com/news/2013-07-31/pending-headline.html

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All This Inequality Talk Does Nothing for the Poor – Bloomberg 07-31-13

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Clive Crook writes:

The crash will recede, confidence will come back and stronger growth will resume. The zeal of Americans to work hard and prosper will prevail over the weary incompetence of the political class.

Inequality is rising, but the theory that the US system is fundamentally flawed is wrong. As is the belief that the rich have rigged the system, middle class incomes stagnate as labor productivity keeps rising, and if you are born poor, you stay poor.

Scott Winship at Brookings said the CBO found that up to the recession, US median household incomes were rising in inflation-adjusted terms, decade by decade, despite the supply of foreign labor growing faster than ever.

Successive generations are better off than their predecessors, and once the crash is behind us, this will continue. The US recovery is much stronger than Europe’s because US macroeconomic policy was better and the US more flexible and resilient, meaning more capitalist.

If technology and globalized markets had not boosted the incomes of superstar entertainers, athletes and business leaders, incomes would be more equal, but the middle class would not be better off.

A child of a poor family in the US is more likely to stay poor as an adult than his counterparts are in many comparable advanced economies. In this respect, the American Dream is a myth.

Miles Corak at the University of Ottawa and other economists argue that high inequality causes low mobility. But while the recent surge in the incomes of the super-rich, the main driver of US inequality, will make it easier for the very richest children to stay very rich, it is hard to believe it will help the poorest to stay poor.

Worsening inequality and the persistence of poverty from generation to generation are solvable problems, not hard-wired features of the system.

Read the full article at  http://www.bloomberg.com/news/2013-07-31/all-this-inequality-talk-does-nothing-for-the-poor.html

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Pesek’s View From Asia – Bloomberg 07-31-13

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William Pesek writes:

Najib kept his Malaysian coalition in power with a giant spending spree that included smartphone rebates for youths, household electricity subsidies and higher wages for civil servants. Fitch said Malaysia’s public finances are its key rating weakness. It will be difficult to achieve the 3 percent deficit target in 2015 without bold actions, including cutting subsidies.

In India, the only way to stop the investor exit is bold steps to increase economic growth, narrow a record current-account deficit and improve India’s investment environment.

Grim predictions that Chinese GDP growth will dip below 5 percent are no longer looking so crazy. Since its high in 2009, the Shanghai Composite Index has been the world’s worst performer.

Japan got 2 votes of confidence from key foreign investors. Hedge fund Jana Partners took a stake in Japan Airlines. and Aflac is buying Japanese government debt in contrast to a plan last year to put less money into yen-denominated assets.

New Zealand’s business sentiment rose to the highest level since April 1999. Stephen Toplis at Bank of New Zealand proclaimed New Zealand was on fire!  and it is hard to disagree. 52.8 percent of NZ companies in July expect the economy will improve over the next 12 months, growth may soon exceed 4 percent, and employment and profit expectations remain buoyant – all despite a currency many believe to be overvalued and a Chinese slowdown.

Read the full article at http://www.bloomberg.com/news/2013-07-31/pesek-s-view-from-asia.html

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American Automobile Glut? Unsold Cars Are Piling Up – Bloomberg Businessweek 07-31-13

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Automotive News reports that 3.27 million unsold cars sit on lots across the US, the most in almost 5 years and versus 2.7 million a year ago and 1 million more than in the summer of 2011.

Interest rates are still relatively low, car loans are easy to come by, even for those with poor credit, and 100 million cars in the US are 7 to 12, the sweet spot for high-maintenance repairs.

Kevin Tynan at Bloomberg said at last month’s purchase pace, dealers can sell the current backlog in a manageable 61 days versus 75 days in January.

August is not the best time for dealerships to be full, as most 2014 models roll out in September. Dealership lots that stock American automakers appear to be ripe for bargain seekers.

Read the full article at http://www.businessweek.com/articles/2013-07-31/american-automobile-glut-unsold-cars-are-piling-up#r=rss

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American Dream Slipping as Homeownership at 18-Year Low – Bloomberg 07-30-13

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The US home ownership rate is 65% versus the record high of 69.2 percent in 2004, and back where it was two decades ago.

Anthony Sanders at George Mason University said low down-payment loans coupled with exotic adjustable rate mortgages helped fuel the housing bubble, so do we want to do this again?

Stuart Gabriel at UCLA said the housing crisis was brought on in part by the belief that home ownership could drive the economy and give the middle class access to a relatively safe leveraged investment, combined with the housing industry’s thirst for profits.

The housing market is drained of low-cost listings by private-equity firms building an industry of single-family houses for rent.

The NAR said the median home price rose 13.5 percent in June from a year earlier as 1 in 3 properties were purchased with cash.

Sarah Rosen Wartell at the Urban Institute said buyers in their 20s and early 30s are often at a disadvantage because they have thin credit files and limited assets for down payments.

Isaac Boltansky at Compass Point Research & Trading said legislators are not debating how  much home ownership is a good thing, whether we should be a home ownership society.

Christopher Mayer at Columbia Business School said owning a home that is fully paid off provides stability in retirement and if the US has a greater share of aging renters that could put a strain on taxpayers.

Robert Shiller at Yale said home ownership has been oversold, and our 65 percent home ownership rate may be high compared with Germany’s at 53 percent and Switzerland’s at 35 percent. Shiller said home ownership may inhibit economic growth by limiting the ability of families to move as freely for jobs and the government subsidies could be used for other purposes, and we have seen the consequences of encouraging people to put all their life savings in one investment. Shiller said public support for home ownership will be lower for years to come and expects this boom to be smaller than the last.

Read the full article at  http://www.bloomberg.com/news/2013-07-30/american-dream-erased-as-homeownership-at-18-year-low.html

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Julius Sees U.K. at ‘Escape Velocity’ – Bloomberg 07-30-13

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Deanne Julius said the UK has reached the escape velocity that BoE Governor Mark Carney said economies need to achieve, and no additional monetary stimulus is warranted.

John Gieve said the UK economy has turned a corner after growth accelerated to 0.6 percent in Q2, but is some way from materially changing monetary policy. Gieve said most recessions involve a period of above-trend growth, and there’s a reasonable probability we see that now. Gieve said the BoE will hook monetary-policy to some type of economic data, avoiding data that’s revised massively and that he can hit quickly: probably unemployment or possibly real incomes.

Charles Goodhart said the UK economy has reached escape velocity and may be recovering faster than people expect partly because business investment will begin to kick in. Goodhart said forward guidance will be difficult for the 9-member committee to adapt to but while it does not matter very much for the British economy, it does for the MPC, because it will constrain the MPC’s own procedures.

Read the full article at  http://www.bloomberg.com/news/2013-07-30/julius-sees-u-k-at-escape-velocity-.html

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Mobius: Gold Prices to Rise in Long Term – Bloomberg 07-30-13

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Mark Mobius at Templeton Emerging Markets said the dissonance between actual demand and the derivative market is causing gold price volatility, but long-term rising physical demand determines prices and they will trend upwards.

Read the full article at  http://www.bloomberg.com/video/mobius-gold-prices-to-rise-in-long-term-IQBRF2vPQ7uZSFxx5Fk~4g.html

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Following Bernanke Means Using Precedent of Unprecedented Policy – Bloomberg 07-30-13

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The Fed, ECB, and BoJ responded to economic shocks by casting off institutional dogma and broadening their missions. Adam Posen at the Peterson Institute for Intl Economics said unconventional policy will have to become conventional, as central banks act on a wide range of assets and directly in credit markets. Michael Gapen at Barclays cites a 60-day period in which Bernanke turned the Fed on its head and started thinking in an extremely unconventional world.

Greenspan said bold action by a central bank looks easier than it is. and there is an acute bias to staying with short-term policy which limits the range of action.

Sweden’s Riksbank, a pioneer of central bank innovation has lately struggled with providing more stimulus out of concern it might inflate a credit bubble. Robert Bergqvist at SEB says he has never seen as much criticism against the Riksbank, and the market believes the central bank will be unsuccessful in getting inflation back to 2 percent.

Hiromichi Shirakawa at Credit Suisse said Shirakawa was convinced that deflation stemmed from weak demand and external forces, not monetary policy, whereas Kuroda sees monetary policy as the way to get out of deflation.

John Ryding at RDQ Economics said Yellen is absolutely qualified as a macroeconomist dealing with monetary policy issues, but in terms of broader issues of flexibility in financial crisis, Larry Summers more than has the edge.

Summers’s record suggests he wouldn’t hesitate to engage the White House, Congress or the Treasury in policies as he needed them.

Julia Coronado at BNP Paribas said both Summers and Yellen are great academic economists, while Yellen believes deeply in the mission of the Fed and its independence.

Michael Bordo at Rutgers University said reputation comes from being credible for a long time, and in crisis periods, the essence of central banking is to act decisively and boldly.

Read the full article at http://www.bloomberg.com/news/2013-07-31/following-bernanke-means-using-precedent-of-unprecedented-policy.html

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Walsh’s Unconstrained Wins in Bond Rout: Riskless Return – Bloomberg 07-30-13

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Money managers are betting that bond funds that are unconstrained by duration, strategy or region will attract money as interest rates rise and investors shift assets from traditional fixed-income offerings, which are limited in how they can react to falling bond markets. 

Unconstrained funds generally can increase in value when interest rates rise, and some can use hedge-fund techniques such as shorting.

Laurence D. Fink at BlackRock said they are seeing a rotation not from fixed income into equities, but within fixed income to flexible bond strategies.

Eric Jacobson at Morningstar said that by limiting duration risk – potential losses from an increase in interest rates – unconstrained bond funds often have to increase credit risk, and it is difficult for managers to pinpoint where rates are going and set the duration for these funds, which may range from minus 3 years to 8 years. Jacobson said very few managers are able to anticipate interest rate moves consistently, including Bill Gross, who has a history of being able to do it, in this last period.

Rick Rieder at BlackRock said being tethered to a duration and interest rate sensitivity of so long is dangerous in an environment where interest rates almost certainly have to rise from the levels they have been at.

Read the full article at http://www.bloomberg.com/news/2013-07-31/walsh-s-unconstrained-wins-in-bond-rout-riskless-return.html

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Einhorn’s Reinsurer Says It Cut Gold Holding Amid Bear Market – Bloomberg 07-29-13

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David Einhorn at Greenlight Capital Re lowered the reinsurer’s gold and commodities holdings in Q2, and was 90 percent in stocks at the end of June.

Greenlight said the stock market’s rapid advance is creating a potentially unstable condition which could resolve a number of ways and is difficult to predict, and plans to continue holding a combination of a significant position in gold, macro positions in the form of options on higher interest rates and foreign exchange rates, short positions in sovereign debt and sovereign credit default swaps.

Read the full article at  http://www.bloomberg.com/news/2013-07-29/einhorn-s-reinsurer-says-it-cut-gold-holding-amid-bear-market.html

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