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1 Global economy still vulnerable (Katie Allen in The Guardian) The outlook for the global economy has darkened as the prospects for emerging markets deteriorate and the US approaches another potentially catastrophic debt deadline, according to the Organisation for Economic Co-operation and Development. The thinktank upgraded its outlook for the UK but cut its forecasts for the global economy. The Paris-based group forecast that unemployment would remain stubbornly high in several of its 34 mainly rich countries, that growth would slow in many emerging markets and that there was a significant threat to financial stability from the US Federal Reserve unwinding its stimulus programme – a process known as tapering.
That outlook for next year is more optimistic than the 1.9% growth forecast by the International Monetary Fund and 1.8% predicted in March by the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster. For the wider OECD group of countries, the thinktank forecasts 2014 growth of 2.3%, unchanged from May. For the US it is pencilling in 2.9% and for the eurozone just 1%. Global GDP growth is now forecast at 3.6%, revised down from 4% predicted back in May.
Problems in emerging markets could ripple into other economies and hamper growth, particularly in Europe and Japan, the thinktank warns. For the US, the OECD is calling on the Federal Reserve to keep monetary policy accommodative for some time and to balance uncertainty about where demand and the jobs market are headed against the costs of postponing an exit from its quantitative easing scheme. In the euro area, the OECD feels the recovery is “lagging and uneven” while unemployment – especially among the young – remains very high and inflationary pressures are very subdued. It also sees weakness in the banking system as a major drag on growth in the euro area.
2 JP Morgan in $13bn settlement (BBC) US bank JP Morgan has agreed to a record $13bn settlement with US regulators for misleading investors during the housing crisis. It is the largest settlement ever between the US government and a corporation. The bank acknowledged it made “serious misrepresentations to the public”, but said it did not violate US laws. About $4bn of the settlement is to go to homeowners hurt by JP Morgan’s practices.
Another $7bn will be paid to settle federal and state civil claims relating to misleading mortgage securities sold by the bank, Some of that will be given to investors who lost money. The remaining $2bn will be paid to the US government as a fine. Although the settlement effectively concludes the US government’s civil investigation into the bank, a criminal investigation by the Department of Justice is ongoing.
According to the statement from the Department of Justice: “JP Morgan employees knew that the loans in question did not comply with those guidelines and were not otherwise appropriate for securitization, but they allowed the loans to be securitized – and those securities to be sold – without disclosing this information to investors.”
3 India may cut spending by $10bn (Prasanta Sahu in The Wall Street Journal) India is considering cutting spending by nearly 600 billion rupees, or $9.64 billion, in the current financial year to rein in its ballooning fiscal deficit, two finance ministry officials said. The Indian government has committed to keeping its fiscal deficit at 4.8% of gross domestic product, but the gap in the first six months has reached 76% of its target for the financial year. The higher-than-expected deficit was the result of expenditures outpacing revenues, the officials said.
The cuts under consideration amount to less than 4% of India’s planned expenditure of 16.65 trillion rupees for the current fiscal year ending on March 31. But reducing spending at this time is tricky for the government because it is trying to woo voters who head to the polls within the first half of next year for the general elections. The government is walking the tightrope of trying to hold off threats of a downgrade in the country’s credit rating, but also seeking favor with voters in the walk up to the general elections. They are expected to be held before May 2014, although a date hasn’t yet been set.
Analysts have expressed skepticism India can stick to its promise to keeping the fiscal deficit within 4.8% of GDP, which Finance Minister P. Chidambaram has pledged his government won’t cross. The government has reiterated this promise, fearing a breach could give ratings firms reason to make India a non-investment-grade country, making it difficult to draw foreign investment that is vital to building infrastructure and other economic goals.
4 The age of bubbles (Barry Ritholtz in Sydney Morning Herald) If you have been paying any kind of attention to the mainstream media the past few years, you may have noticed quite a bit of bubble chatter. We have a tech IPO bubble and a stock bubble and of course a bond bubble. This is caused by a global central bank QE bubble.
We had an Apple bubble, we had a fraud bubble, we had a derivatives bubble and a subprime bubble. Silicon Valley is having a startup bubble, and parts of south Florida and Manhattan are having mini-real-estate bubbles. The gold and oil bubbles came and went. The cover of Barron’s this weekend was literally a bubble – the second such bubble cover in two years. We have had so many bubbles that, as I first addressed in 2011, we are having a “bubble in bubbles.”
What say we step back and put this into a bit of context? First off, there have been several legitimate bubbles the past decade or so. In the late 1990s, we had a full-on dot.com bubble. The Nasdaq plummeted about 80 per cent peak to trough; it is still more than 20 per cent below its all-time highs. In the 2000s, what most people describe as the housing bubble, was actually more of a credit bubble. I hesitate to call the 2000s commodity boom a bubble. Commodities are priced in dollars, and the US dollar lost 41 per cent of its value from 2001 to 2008. Naturally, anything priced in US dollars was going to rally, and once the euro and yen decided to join the race to the bottom, commodities would be at risk.
Which leads me to the point of today’s discussion: In any historical asset bubble, we do not get bubble magazine covers in major news media at the height of the bubble. If anything, it’s the precise opposite. A positive story on gold on the cover on New York Times Magazine in 2011 marked the top. Perhaps the most infamous was the June 2005 Time Magazine cover on “Why We Love Housing.” I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.