For Your Wednesday Morning Ruminations – Around The Net On February 4, 2015

Noted for you Wednesday morning rumination or procrastination – take your pick.

These are some of the reports, analysis and news-items that I perused through on Tuesday and Wednesday morning in preparation for the day’s activity. You may find them interesting and thought provoking or entertaining.

  1. Tough Fedding – Core inflation is drifting downward, not upward, and is now well below the Fed’s target. So why hike? The immediate answer appears to be a fixation on the unemployment rate, which is close to standard estimates of full employment. But is this really a solid justification for raising rates absent any actual sign of the rising inflation we’re supposed to see at full employment?
  2. Persistent Overoptimism about Economic Growth – Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.
  3. Disinflation in EU Countries outside the Eurozone – The prospect of falling prices could suppress domestic demand, if it prompts households and firms to revise down expectations for wages and profits and thus to cut consumption and investment. These “second-round” disinflationary effects can trigger a self-feeding, vicious feedback loop between inflationary expectations and prices—a deflationary trap.
  4. Fed’s Bullard Calls For Breaking Up Nation’s Biggest Banks -But Mr. Bullard thinks bubbles can be so strong and so irrationally driven that regulatory policy may not be able to put the genie back in the bottle. What’s more, when it comes to these new powers, “they are untested, and it’s unclear whether they’d really work.” He said a better solution would be to reduce the size of banks that are considered too-big-to-fail.
  5. Inflation Reading Furthest Away From Fed Target Since 2009 – The inflation gauge has failed to even match the Fed target for 32 straight months.
  6. S&P Cuts European Banks on Rules Forcing Losses on Bondholders – Under the new rules, authorities will, as a general rule, require 8 percent of a struggling bank’s liabilities to be wiped out before recourse can be made to industry funds or taxpayer support. S&P’s credit ratings assign a default probability that combines a bank’s stand-alone strength with the likelihood that it will get support from the state or from other sources in times of crisis. The uplift from state support is what could be lowered in S&P’s review. Moody’s Investors Service and Fitch Ratings have a similar debt rating structure.
  7. Ford Hiring Move Brings 48% Raise for Hundreds of Workers – With the latest hires, Ford exceeds its promised limit for entry-level workers of about 28 percent of its U.S. labor force. So the company said it will boost the pay of 300 to 500 of its most senior workers in that category to the veteran rate. Ford’s total hourly additions now total more than 15,000 since 2011, exceeding a pledge of 12,000 by 2015.
  8. Sensex slips nearly 1000 points in 4 sessions – In the past six years (FY10-FY15E), Indian households have invested an estimated US$40bn into equities at an average annual rate of $6.7bn. This included direct equity purchase and purchases through mutual funds and life insurance.  “During the same period, FIIs inflows amounted to US$108bn at an average annual rate of $18bn. This excessive dependence on FIIs is likely to change as domestic investors warm up to equities,” IIFL said in a report. “We estimate households to invest $74bn over the next three years (FY16-FY18E) at an average annual rate of nearly $25bn. The last time Indian households were bullish on equities was in FY08,” added the report.
  9. Rajan Says U.S. Must Accept Strong Dollar as Fed Normalizes -The former International Monetary Fund chief economist reiterated his criticism of unorthodox monetary expansion implemented by some developed-nation counterparts. Recent exchange rate depreciations have not translated into greater domestic activity, he said. “If you’re not increasing domestic activity but depreciating your exchange rate you’re essentially drawing demand from the rest of the world,” he said. “It’s a beggar-thy-neighbor strategy.”
  10. Syriza is right about austerity, but wrong about everything else – And now? Within less than a week, the bluff has been called. A deal with Syriza now looks inevitable, with at least a rescheduling on the debt in the cards, and a significant relaxation of the austerity regime. It is a victory for Greece’s youthful Prime Minister Alexis Tsipras.
  11. Opinion: Stiglitz says Greece didn’t fail; austerity failed – Greece largely succeeded in following the dictate set by the troika (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in gross domestic product since 2009, and a 35% increase in the debt-to-GDP ratio.
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