John At The Center

I think where we are is this: every economist can tell a story of a sectoral recession in housing. No economist, from any school of macroeconomics, has a really convincing story of how that recession spread so widely.

One story you could tell is one of self-fulfilling expectations. Every executive says, “We are in for bad times, I need to cut costs in order to survive.” They all behave that way, and you get a deep recession. I can offer a lot of anecdotal evidence in support of this story, and it may be right. But it implies a sort of psychological fragility to the economy that I find a bit hard to credit. It's bad enough to have to believe that our economic decision-makers can't figure out how to handle a little bit of deflation. It's even worse to believe that they are afraid of their own shadow.

via Why Such a Deep Recession?, Arnold Kling EconLog Library of Economics and Liberty.

One general lesson from his discussion is that it is often hard to distinguish shocks to aggregate supply and shocks to aggregate demand. Policies and events that adversely affect aggregate supply (e.g., trade restrictions) will often reduce the marginal productivity of capital, decrease investment spending for given interest rates, and depress aggregate demand as well. In the short run, the indirect demand-side effects of “supply shocks” could potentially be larger than the direct supply-side effects.

via Greg Mankiw’s Blog: Smoot-Hawley Revisited.

According to Shih, the rot is located in the so-called Local Government
Financing Vehicles (LGFVs) belonging to one of China’s many levels of
local government ranging from towns and counties to cities and provinces.
LGFVs are conduits, like the Special Investment Vehicles (SIVs) were
for western banks, used by local government to borrow and spend on
infrastructure and other projects (like real estate).

Local governments inject land banks, SOEs and cash into a LGFV to give
it assets and a capital base for borrowing. Guarantees of LGFV debt by
local governments are also common (as are guarantees of one LGFV’s
debts by another). The usefulness of the LGFV is that it allows local
government to borrow and spend way in excess of its own budget, where
normally tax revenues cover only about half expenditure (with the rest
coming from Beijing). Local government deficit spending is not allowed.
via Remember SIVs? China Has ‘Em And They’re Hiding A Massive Credit Bubble.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

via Social Security Payout to Exceed Revenue This Year – NYTimes.com.

The SEC’s decision to freeze all applications for new ETF issuers that want to use swaps and derivatives is a boon for ProShares, Direxion, Rydex, iShares and even ETN issuers.

As reported here, the SEC has temporarily stopped issuing OKs for new ETF firms to develop ETFs that rely on swaps and other derivatives. That primarily impacts leveraged and inverse ETFs, but also applies to certain actively managed strategies.

The reason for the freeze is simple: There was a lot of bad publicity (and some bad investor experiences) surrounding existing swap-based ETFs and derivatives in general, and the SEC wants to step back and slow new filings while it gets a handle on those issues.

via New SEC Move A Boon To ProShares, Others – Blog – IndexUniverse.com – ETFs, Index Funds, Indexes.

The other unsung winners in this are ETNs. As structured notes, they can package together the kind of returns you gain from derivatives without (I believe) falling under the purview of the SEC’s new review. So look for more new products from ETN issuers as well.

In the end, the SEC review is probably a good thing. The issues the SEC has outlined, including whether firms have adequate risk management techniques and adequate portfolio disclosures, are real ones.

I would add to the SEC’s list looking at whether companies should be forced to disclose their counterparties on a real-time basis. That strikes me as critical information that all investors should know.

“People are coming with entire bags full of cash,” said Raymond Hau, general manager of the Sun Valley Golf Resort, which is building the 220 luxury villas. “I’ve seen this myself. A man had a bag and unzipped it. Boom. ‘Here’s the deposit,’ he said. ‘I want two apartments.’”

Mr. Hau shook his head. “It’s crazy. It can only happen in China.”

The golf resort is popular with the privileged. The president of Kazakhstan shot a hole in one here. And on a recent afternoon, when an attendant opened the passenger door of a black sport-utility vehicle that had just pulled up, a pile of large-denomination Chinese bills fluttered to the ground.

via On China’s Hainan Island, the Boom Is Deafening – NYTimes.com.

Not surprisingly, oil producers prefer stability to plan their investments. “The worst thing that happens in our industry is volatility,” said G. Steven Farris, chairman and chief executive of Apache Corporation. With prices stabilizing, his company has increased its exploration and development budget by 50 percent, to $6 billion, this year.

via Oil Prices Find Sweet Spot for World Economy – NYTimes.com.

The biggest long-term threat to the new balance is growing consumption in China and other developing countries. But some analysts express hope that such countries can curb their oil demand growth as they build power transmission lines that will enable them to replace inefficient diesel generators with alternative power sources like gas and nuclear.

Hoping to harness the tech savvy of the high-frequency traders who have eaten away at its business, the New York Stock Exchange is bringing one of the biggest computer-driven firms onto its iconic floor.

Beginning Monday, Chicago-based Getco LLC will become a “designated market maker,” the role once occupied by the specialists who used to fill the floor of the exchange, stepping in to buy or sell shares to keep trading orderly.

The arrival of Getco, a pioneer in computer-driven high-speed trading, marks the first time the exchange has embraced such a technologically sophisticated player in the role. The move ..

via Market Makers Go High Tech – WSJ.com.

These results suggest that, for the most part, at least, “short-sellers do not uncover and trade on information before it becomes publicly available,” the researchers wrote.

Furthermore, they found that in those cases when the timing of short-sellers’ trades did deviate from the timing of other types of trades, more often than not the short-sellers reacted later rather than earlier. In an interview, Professor Reed said that these results show that “short-sellers are primarily reactive rather than proactive,” and so it is “unfair to blame the average short-seller for engaging in so-called ‘distort and short’ schemes.”

via The Wisdom of the Short-Sellers – DealBook Blog – NYTimes.com.

Indeed, one reason I am not fond of TV appearances is that TV hosts frequently ask questions that presume PhD economists can see into the future better than others, whereas actual PhD economists know that very little of our training has anything to do with forecasting.

via Greg Mankiw’s Blog: David Brooks on the State of Economics.