Brad DeLong's Semi-Daily Journal: A Weblog

Of course, if you had been short bonds today as you suggest the hedge fund community should be, then after this announcement you would have lost 1% in about 30 seconds.

Maybe 5.4 is the natural rate of unemployment?

http://www.epinet.org/content.cfm/webfeatures_econindicators_jobspict_20041203

Wage growth was essentially flat in November, with hourly wages up $0.01. In tandem with the one-tenth-of-an-hour decline in average weekly hours worked, this led to a $1.25 decline in weekly earnings. Compared to a year ago, hourly wages not adjusted for inflation have grown by 2.4%, an elevated pace compared to the 2.0% growth rate over the first half of this year. However, inflation has also picked up and was running over 3% in October. In fact, through October, hourly wages after adjusting for inflation were flat or falling in eight of the prior twelve months.

once again, we need to ask: where, exactly, do the employment bulls think that job growth is coming from? I see lots of corporations sitting on cash, which i can only assume means they see no "slam-dunk" investment opportunities, so what is the driver for growth? because we'd like it to occur?

So, the government is running structural deficits, households do not and can not save, corporate saving is as high as its been in decades. But, corporate saving could be more useful were it turned to domestic investment to drive employment. Good grief.

Brad, US bond yields are not set by uncovered interest arbitrage. The trade sector is too small and those masters of the universe that you wonder about are both small (compared to FNMA) and afraid of their own shadow. They do not sit around all the day solving for general equilibrium. They look at moving averages, and "retracements" and stuff, so get over it. You are stupid to assume they are so smart as you.

I hate Bush too, but you assume too much in saying that he has destroyed BOTH aggregate demand prospects AND the bond market. You can't have it both ways because America is a large and somewhat closed economy. And her bond traders are not as smart as her central bank.

If they would raise the minimum wage they would get a spending boost. That would be the best way to quickly get money into the hands of people who would spend it.

Bond traders are lazy guys who babysit program models. They don't even know what they're trading; but they have great faith in their computers. So indeed Brad can have it both ways 'cause Bush is destroying aggregate demand as the traders scry their programs.

"Maybe 5.4 is the natural rate of unemployment?"

Only about a decade ago common wisdom was that it was about five and a half. Five years ago it appeared to be somewhat lower, but perhaps that was too perfect a situation and we are back to the previous level. It's something that's too hard to guess at, so I suppose in a few years we will know.

http://www.nytimes.com/2004/12/04/business/worldbusiness/04banker.html?pagewanted=all&position=

Dollar's Fall Tests Nerve of Asia's Central Bankers
By JAMES BROOKE and KEITH BRADSHER

TOKYO - As Americans embark on another season of debt-supported holiday spending, they might want to give thanks that Masatsugu Asakawa is still buying in America, too.

Mr. Asakawa, 46, is the top official at the Finance Ministry here responsible for managing the largest portfolio of United States government securities in the world, worth a staggering $720 billion. As the dollar has slumped this fall, many investors have started to worry that Mr. Asakawa and his counterparts elsewhere in Asia will be tempted to pare their holdings, perhaps causing the currency to plunge much further and setting off a round of interest rate increases in the United States that could send the global economy into a tailspin.

But Mr. Asakawa, at least for now, says that he intends to keep right on adding American holdings to Tokyo's portfolio.

"We've heard the rumors in the last few days that the Chinese guys, the Indian guys, the South African guys are diverting from dollars," Mr. Asakawa said. "We have no plan at all to divert from our dollar-denominated assets."

Still, Mr. Asakawa admits that he has not been sleeping so well lately.

"This thing wakes me up; it is terrible," Mr. Asakawa said in excellent American-accented English - he once studied at Princeton - as he toyed with a blue plastic portable currency monitor. After hours, the wireless device beeps by his bedside whenever the dollar strays beyond a set range. "Fortunately," he said, "my wife is very understanding."

Mr. Asakawa has been waking up a lot more often because the long-running symbiotic relationship between Asia and the United States has started to fray.

For years, manufacturers in Japan, China, South Korea and Taiwan have been selling far more to Americans than Asians have been buying from the United States. As a result, Asians have accumulated huge quantities of foreign exchange, which they have used mostly to buy American government securities.

By doing so, they helped keep interest rates in the United States low and the dollar relatively strong. That allowed Americans to borrow cheaply and fill their shopping bags with yet another load of well-priced goods imported from Asia. Low interest rates also enabled Washington to readily finance the federal government's gaping budget deficit.

But as borrowing by the United States from abroad has soared this year to $620 billion, a record 5.7 percent of overall economic activity, many foreigners have become reluctant to keep accumulating dollars at the same pace. That has left officials like Mr. Asakawa and others at central banks elsewhere in Asia holding America's purse strings.

Japan's total stockpile of foreign currency, at $817 billion, is still the largest in the world, but China, which now owns about $600 billion, is catching up fast.

Among countries that are accumulating dollars - especially China - grumbling is on the rise that Washington should do more to protect the value of their investments by cutting the budget deficit and adopting other policies to slow or reverse the dollar's decline.

"Shouldn't the relevant authorities be doing something about this?" asked Prime Minister Wen Jiabao of China at a conference in Laos last Sunday.

In Beijing these days, one of the fastest-growing fortunes the world has ever seen is managed by fewer than two dozen traders, chosen for showing mathematical brilliance at China's top universities.

Generally lacking any financial experience outside China, they sit at trading stations around a gold stand bearing a jeweled globe, two feet in diameter and with seas of lapis lazuli, in a rented room on the fourth floor of an insurance building.

Most of the money in China's central bank coffers has accumulated in the last four years, the product of an investment torrent washing over China and the ever-expanding flood of goods pouring out of Chinese factories.

As in Japan and China, small groups of civil servants in Taiwan and South Korea are struggling to invest sizable foreign currency reserves of $235 billion and $193 billion, respectively. For years, all four countries have held the bulk of their reserves in the Treasury bills, notes, and bonds that finance the federal budget deficit, leaving American consumers and companies free to spend more on other things and invest their spare cash in more promising ventures.

Together, these Asian institutions are responsible for holding roughly 40 percent of the American government's public debt.

In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.

Instead, officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.

The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.

Some bankers and economists say that dollar-denominated securities over all represent a slowly declining share of China's recent purchases. But no figures are available on how quickly Beijing may be shifting to other currency holdings, so its effect on the underlying demand for dollars is unclear.

From 1995 to 2000, wage and benefit increases were robust, there was a rollicking stock market increase and a moderate bull market in bonds and moderate increases in home values. Since 2000, wages and benefits have barely kept up with inflation, there was a fierce bear market in stocks, and a fine bull market in bonds. But, home values have risen in dramatic fashion. We are largely living off the increases in home values now, and this dependency could be especially dangerous if interest rates were to rise sharply or the economy were to markedly slow. So far, investors are little attending to a either danger.

Raising household saving is not a simple matter when wages and benefits arebarely keeping up with inflation:

http://www.epinet.org/content.cfm/webfeatures_econindicators_jobspict_20041203

Wage growth was essentially flat in November, with hourly wages up $0.01. In tandem with the one-tenth-of-an-hour decline in average weekly hours worked, this led to a $1.25 decline in weekly earnings. Compared to a year ago, hourly wages not adjusted for inflation have grown by 2.4%, an elevated pace compared to the 2.0% growth rate over the first half of this year. However, inflation has also picked up and was running over 3% in October. In fact, through October, hourly wages after adjusting for inflation were flat or falling in eight of the prior twelve months.

November's weaker-than-expected job growth, in tandem with the decline in hours worked and flat wages, poses downside risk for the ongoing recovery (aggregate hours, an indicator of macroeconomic growth, fell by 0.2% in November). Given the reversal of monetary stimulus as the Fed continues to slowly raise interest rates, the fading of fiscal stimulus, and the high level of indebtedness among both households and the federal government, we are ever more dependent on a robust jobs recovery to fuel growth in household income and consumption. Despite a few good months, such a recovery simply has not yet occurred in the job market.

By EPI senior economist Jared Bernstein with research assistance from Yulia Fungard.

So, amazingly, we can thank China for low home mortgage rates :)

http://www.nytimes.com/2004/12/04/business/worldbusiness/04banker.html?pagewanted=all&position=

In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.

Instead, officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.

The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.

Some bankers and economists say that dollar-denominated securities over all represent a slowly declining share of China's recent purchases. But no figures are available on how quickly Beijing may be shifting to other currency holdings, so its effect on the underlying demand for dollars is unclear.

http://www.nytimes.com/2004/12/04/business/worldbusiness/04losses.html?pagewanted=all&position=

Failed China Fuel Supplier Waited Too Long for Help
By WAYNE ARNOLD

SINGAPORE - It was already too late when Chen Jiulin and other executives of China Aviation Oil of Singapore sent word on Sunday, Oct. 10, to their parent company in Beijing that they needed help.

By then, the Singapore company had lost $180 million by betting that oil prices would go down, and creditors were lining up demanding repayment.

Ten days later, the parent company, China Aviation Oil Holdings, sold a 15 percent stake in its subsidiary to institutional investors for $108 million, saying publicly that the money was for a strategic investment. In fact, Mr. Chen said in court papers filed this week, the money was quickly sent to the Singapore affiliate to help cover its losses.

But, it turns out, even that cash infusion fell short. By Nov. 25, the Singapore company, which had a virtual monopoly on jet fuel imports into China, had lost $550 million.

Last Monday, it filed for bankruptcy protection. On Wednesday, its chief executive, Mr. Chen, left Singapore and flew home to China, leaving in his wake angry shareholders, the start of numerous investigations and a scramble by China's airlines to secure alternative supplies of jet fuel.

'Someone kept mum about this,' said David Gerald, president of the Securities Association of Singapore, which represents 63,000 individual local investors and in 2002 named China Aviation Singapore one of the country's 'most transparent' companies. 'We want answers.'

Referring to Mr. Chen's abrupt return to China, Mr. Gerald said, 'There's a moral obligation for Mr. Chen to stay behind.'...

Parallels have already been drawn between China Aviation and a much larger derivatives disaster in Singapore: the British trader Nicholas W. Leeson and the $1.2 billion in losses he tried to cover up, only to end up sinking his employer, Barings bank, in 1995....

Just how the traders' division lost so much money remains the subject of conjecture. The best details of what went wrong have so far come from an affidavit filed in Singapore's High Court on Monday by Mr. Chen along with the company's petition for protection from creditors.

In the second half of 2003, the document said, China Aviation's traders began trading derivatives with the simple aim of making profits, as opposed to hedging risks on physical purchases. While investors are now criticizing the company for making speculative trades outside its core business, analysts said the trading was well disclosed as part of the company's strategy to bolster its profile in the marketplace.

According to Mr. Chen's affidavit, China Aviation's traders began trading in options, a derivative contract that gives a buyer the right to buy or sell a quantity of a security at a certain price before a specific date. Options give investors a highly leveraged means of betting on the direction of prices, since investors can earn profits from trading by putting down a fraction of the cost of the underlying security. If they are wrong, however, they lose 100 percent of the cost of the option.

China Aviation was lucky in its first foray: it bought options on two million barrels of oil and, according to Mr. Chen, made money.

To prevent large losses, China Aviation had established limits on how much any single trader could lose.

'In theory, if the risk management systems are in place the stop-loss is around $5 million,' said Chris Sanda, a transportation analyst at DBS Vickers, the brokerage arm of DBS Bank. 'If that's true, how did they end up losing $550 million?'

According to Mr. Chen's affidavit, China Aviation's traders were initially left with $5.8 million in unrealized losses on their bet that the price of oil would fall.

China Aviation Singapore's traders then made the same mistake Mr. Leeson and many gamblers do when they find themselves down: they raised their bet.

But oil prices continued upward, and by the end of June, the affidavit said, the company faced paper losses of $30 million. The company's traders raised the stake again.

The decline in hours is not very encouraging, as far as December hiring goes. Gift cards, the most popular holiday item so far this year, don't require as much labor to stock and sell as actual goods, so retail hiring may remain soft in the December report (though look for a big seasonally adjusted rise in retail employment in January and February). Ford and GM have announced yet another production cutback for Q1, so that element of factory hiring will not be so hot.

Oil prices are down, but the lag in the impact of high oil prices can be long. Unless those managers sitting on those bundles of cash have an epiphany, the drop in oil prices won't drive hiring for a few months, anyhow.

Having Andy Card take over Treasury should help, though.