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Tuesday, March 6, 2012

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Economic Events of the Week

Tuesday – Super Tuesday
Wednesday – Productivity
Thursday – Jobless Claims
Friday – Employment Situation

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Story of the Day
The Number of Poor People is Declining Everywhere (The Economist)

Washington Update
Romney Surges Before Super Tuesday (Financial Times)

Market Talk
Morgan Stanley Still Expects QE3 This Year (Real Time Economics)
Fisher: Investors Should Prepare for Less Easing (Bloomberg)
Service Sector Expands, Lifting Recovery Hopes (Wall Street Journal)
Scramble to Sell US Debt as Yields Hit Record Lows (Financial Times)

Editorials & Opinions
How Should We Think About the Destruction of Housing Wealth? (Reihan Salam in National Review)
Finance Isn’t As Immoral As It Seems (Robert Shiller in Bloomberg)

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Story of the Day

The Number of Poor People is Declining Everywhere (The Economist)

The past four years have seen the worst economic crisis since the 1930s and the biggest food-price increases since the 1970s. That must surely have swollen the ranks of the poor. Wrong. The best estimates for global poverty come from the World Bank’s Development Research Group, which has just updated from 2005 its figures for those living in absolute poverty (not be confused with the relative measure commonly used in rich countries). The new estimates show that in 2008, the first year of the finance-and-food crisis, both the number and share of the population living on less than $1.25 a day (at 2005 prices, the most commonly accepted poverty line) was falling in every part of the world. This was the first instance of declines across the board since the bank started collecting the figures in 1981.


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Washington Update

Romney Surges Before Super Tuesday (Financial Times)

A late surge in support for Mitt Romney has raised expectations that the Republican frontrunner can quash doubts about his candidacy on Super Tuesday, the biggest day of the 2012 nomination race. However, even as he begins to win more support among conservative voters, there are signs that President Barack Obama is pulling away from Mr Romney and the other Republican contenders in head-to-head matchups with the president. Of the 10 states up for grabs on Tuesday, Mr Romney is well placed to win at least five, including the bellwether state of Ohio – and possibly more, according to the latest polls, which would increase the pressure on other candidates to drop out.


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Market Talk

Morgan Stanley Still Expects QE3 This Year (Real Time Economics)

Morgan Stanley continues to think the Federal Reserve will provide more stimulus via bond buying this year, even as improving economic data have led many in the market to think the sun may be setting on that particular strategy. “For some time, our call has been that the Federal Reserve will undertake additional balance-sheet action in the first half of 2012,” writes Vincent Reinhart, an economist with the bank and a former top-level Fed staffer. He argues it’s most likely the Fed will act to expand its balance sheet via Treasury and mortgage bond buying — in market parlance, QE3 — at either the April or June Federal Open Market Committee, and that the ultimate size of the program could tack on $500 billion to $700 billion onto what is currently a $2.9 trillion balance sheet. There’s also a chance they will put in place a modified version of the current effort to sell short-dated bonds to buy longer-dated securities.

Fisher: Investors Should Prepare for Less Easing (Bloomberg)

Federal Reserve Bank of Dallas President Richard Fisher said he opposes additional Fed purchases of securities and urged Wall Street to get ready to become less dependent on monetary easing. “I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage,” Fisher said today in a speech in Dallas. Financial markets “have become hooked on the monetary morphine we provided” after the 2008 financial crisis, he said. Recent reports have highlighted that the U.S. expansion is broadening, with data today showing service industries unexpectedly expanded last month at the fastest pace in a year. Chairman Ben S. Bernanke gave no indication in congressional testimony last week that the Fed was considering altering record stimulus. The Federal Open Market Committee in January extended a plan to keep interest rates low at least through late 2014.

Service Sector Expands, Lifting Recovery Hopes (Wall Street Journal)

The U.S. services industry grew at its fastest pace in a year in February, bolstering hopes that the economic recovery has moved onto solid ground. The Institute for Supply Management's index of non-manufacturing activity rose to 57.3 last month, up from 56.8 in January—its best showing since February 2011. The report, released Monday, surprised many economists who had expected the index to decline slightly to 56. Readings over 50 indicate expansion. While signs are growing that the economy is finally picking up steam, the service sector, which accounts for more than 80% of U.S. jobs, has lagged behind the recovery in manufacturing. Economists said Monday's report suggested the recovery is broadening into more service sectors.

Scramble to Sell US Debt as Yields Hit Record Lows (Financial Times)

Companies lined up to sell dollar-denominated debt in what was the busiest day for issuance so far this year after yields in the corporate bond market fell to record lows. Corporate bonds have rallied in recent months as investors search for investments that offer a higher yield than US Treasuries. That demand, along with low benchmark rates on Treasuries, has driven yields on investment-grade bonds to consecutively new lows this year. Average yields on junk bonds have also fallen sharply this year to about 7 per cent but these remain slightly above all-time lows. Companies sold $19.8bn in investment grade and junk bonds by late Monday, the biggest daily issuance tally since November 7 when companies priced $20.7bn of bonds, according to Dealogic, the data tracker. But some deals were still awaited.


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Editorials & Opinions

How Should We Think About the Destruction of Housing Wealth? (Reihan Salam in National Review)

It is widely understood that a sharp decline in home prices is terrible news. But is it really? Lower home prices mean more affordable housing, for current homeowners as well as renters looking to buy. The fact that a majority of the electorate lives in owner-occupied housing is a big part of why the fate of housing wealth is being treated as an urgent policy matter while, say, the unfavorable tax treatment of renters is largely ignored. Remember that borrowing has to be paid back. So you bought a $100,000 house in 2005 with $10,000 down, and $1,000 per month mortgage. It goes up to $200,000. Great! Now you can refinance and take an extra $90,000 out of the house and go on that round the world cruise you had been hoping for. (Or start a business, or whatever.) Whoops. Except now you have to pay the loan back. You have to pay $2,000 per month on your bigger mortgage. As long as you want to live in the house – or another one of the same size – you didn’t get any more wealth. “Removing a borrowing constraint” is different from “having more wealth.”

Finance Isn’t As Immoral As It Seems (Robert Shiller in Bloomberg)

Many people assume there is something sleazy about the business of finance, or the people who practice it. This impression is probably behind the commonly voiced opinion that it is a shame so many young people today are going into finance-related occupations, when they could be doing something more high- minded in other fields. It’s true that many people in business do seem to feel rewarded, for the short run at least, in putting salesmanship ahead of purpose and in cutting legal corners. They seem too focused on money to have moral purpose in their business affairs. Yet if one lives in the real world, one has to work with, or even for, such people. They are a reality, and it makes sense to try to understand them -- to see if they are as simply sleazy as people think.


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