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Spain's cabinet announced new changes to labor laws to provide incentives to business to hire. Spain has some of the most restrictive labor laws in Europe and high unemployment. The unemployment rate reached 23% in December 2011, and about half of the people under 26 are unemployed. The cost of downsizing is so high in Spain that Spain's representative on the executive committe of the European Central Bank, Jose Manuel Gonzalez-Paramo, says companies prefer to close rather than downsize. The World Bank has singled out the labor laws as one of the main reasons for Spain's rising unemployment rate. New rules will reduce severance payments to 33 days per year of employment from 45 days. Severance packages will be reduced to a maximum of 24 months from 48 months. To encourage companies to hire permanent workers and depend less on temporary workers the new rules say employers must switch temporary workers to permanent contracts after two instead of three years. As an incentive for companies with a maximum of 50 employees to hire young people the rules give a 3000 euros corporate tax break for each new person hired under age 30. If the hired person was jobless he can still collect 25% of previous unemployment benefits for a limited period with 50% of the unemployment benefits going to the employer. Companies having losses for three consecutive quarters are allowed to pay less in severance payments- only 20 days per year of employment. Companies will now find it easier to leave collective bargaining agreements and make deals with their own staff. Luis Garicano, a professor at the London School of Economics, says this is a good step forward. He finds missing from the new rules subsidies to train young and unemployed people given the high dropout rates in Spanish schools. The government approved the rules by decree, but they will be discussed in the Spanish parliament. The government of prime minister Mariano Rajoy was recently elected with an overwhelming majority in parliament. This makes making major changes different from the process in Italy where a consensus has to be established....

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The National Association of Realtors reports that sales of previously owned homes dropped by 27.2% from June, to seasonally adjusted annual rate of 3.83 million homes. House prices gained ameasure of stability in 2009, after dropping since 2006. Now that measure of stability may be lost as house prices weaken. The expiry of a home-buyer tax credit was expected to dampen sales but not by this much. Paul Dales of Capital Economics expects a further drop of 5% in house prices. Combine this with sluggish consumer spending and prospects of deflation in 2011, a weak Obama administration HAMP homeowner relief program, fading stimulus and the likelihood of no further stimulus because of deficit fears; and the picture shows serious problems. The underlying picture of housing is not changing. One in four homeowners with mortgages owe more than their house is worth. Banks are handling over 5 million loans that are delinquent, if these loans are modified or short sales are permitted by banks, there would be support for housing prices. HAMP has failed in this regard, see the link to this....

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A recent study by the IMF shows that China has accumulated foreign exchange reserves that are twice what would be needed for traditional purposes such as supporting the economy in a financial crisis. China is still very much a developing country with per capita annual income of $3000, low consumer spending, and rising inflation. This makes the policy of accumulating reserves and preserving an undervalued exchange rate to support export companies counterproductive. There is growing debate about this as inflation is becoming difficult to control. Yu Yongding, an advisor to the PBOC monetary policy committee says China as a developing country should not be exporting capital, which should be used to raise living standards. A rising exchange rate would increase spending power of people throughout China. Fan Gang, head of China's National Economic Research Institute, was a member of the central bank monetary policy committee. He wrote in a recent essay arguing for a higher exchange rate, and societal, tax and other changes that help increase China's household spending. Central Bank governor Zhou Xiaochuan said recently that China's foreign exchange reserves have exceeded reasonable levels that the country needs, adding to inflation risks and making it difficult to conduct monetary policy. The reserves are now over $3 trillion, pasing that mark in March 2011 after increasing 25% in the last year....

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The U.S. Dow Jones Industrial Average passes 15,000 in May 2013. The DJIA average has increased by 130% after reaching a low in March 2009. The DJIA peaked at 14000 in July 2007 before falling 54% and recovering to the 14000 level in Feb 2013.

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Jeremy Grantham and Jason Zweig share the view that this market has gone up too fast too quickly. Stocks that went down the fastest of companies in industries like finance and banking, insurance and autos, went back up with government support. And many of these companies that have poor earnings prospects are issuing more shares to raise capital now that the credit markets are working, so that they have some cushion if credit markets tighten again. Grantham thinks this dilution of shares spreads future earnings thin over a larger number of shares. Zweig says whatever was garbage has done good, which suggests that what is seen as a recovery in the stock markets is not perceived as a healthy recovery. Grantham's comment that "the junky companies may be diluted to hell just to keep them alive," and Zweig's comment that these "garbage" stocks are hot, but can be expected to sink for precisely that reason, do not offer a reassuring view of this kind of fragile recovery. Companies with stable businesses and stable earnigs prospects haven't done as well as these so called "garbage" businesses to use Zweig's term. Companies like Microsoft, Procter and Gamble and Johnson, and Wal-Mart which have low debt and stable returns. Grantham sees them as offering value in today's market. ...

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Financial Planner Carl Richards, warns investors about relying too much on market predictions. He cites the law of small samples as one way things go wrong. Another is investment managers with good track records in one decade doing badly in the next decade- David Miller in the 70's and Bill Miller of the Legg Mason Value Fund are others. To show how ridiculous market predictions based on computer models can get he gives the example of a researcher who found that over a 13 year period butter production in Bangladesh 'explained' 75% of the fluctuations in the annual returns of the Standard & Poor's 500 stock index. Adding in U.S. cheese production and the total population of sheep in Bangladesh and the U.S., this researcher was able to forecast past U.S. stock returns with 99% accuracy.

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Equity markets in Europe and the U.S. are likely to see some of the 62 trillion yen, or $630 billion, which the Bank of Japan plans to add to holdings of banks and households in two years 2013-2014. A senior advisor to Deutsche Bank, Thomas Mayer, says equities of Germany, France and Britain are likey to see interest from Japanese investors, as are bonds and equities of the U.S. Japanese companies such as Toyota and consumer product companies such as Sony and Panasonic will now be able to better compete on price against their S. Korean, American and European competitors.

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The head of Italy's statistics agency Istat, Enrico Giovannini, says Italy's manufacturing sector has performed quite well, and the problem is with the services sector, in lagging sectors such as transport, communications, tourism, retail and social services. The manufacturing sector is only one sixth of the economy. He says productivity is poor and there is lack of investment in human capital and information technology for the services sector. IT's contribution to growth in Italy's labor productivity is the lowest in Europe, according to the European Investment Bank. Italy's total efficiency gains declined one half percentage point from 1995-2005. Retail and tourism sectors lack the needed productivity gains. This means actions taken by prime minister Monti to change labor laws and related changes will not be enough to generate confidence in the economy and economic growth. Giovannini says investment in human capital and productivity is badly needed, and shifting education and training to where there are new job opportunities....

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Applebaum describes how Obama as president took action on the stimulus after the 2008 financial crisis, but did not take the necessary action to stem foreclosures and aid a recovery in housing. This now appears to be one of the critical failures of his presidency.

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The European Stability Mechanism made its first short term debt auction Jan. 8, 2013, by selling 1.927 billion euros of treasury bills. Japan remains a key investor. Japanese finance minister, Taro Aso, said Japan plans to to be an active investor in the ESM bond sales. He told a news conference: "Japan will purchase some ESM bonds using its foreign exchange reserves as it monitors progress in efforts to stabilize the European situation." Japan holds $1.27 trillion in foreign exchange reserves. The move pushed the yen lower. Investors pay the ESM to keep cash for three months- the ESM treasury bills had an average yield of minus 0.0324%. The ESM fund will be used for aid to Spain's banking sector, Greece, Ireland and Portugal. Plans are for the ESM to issue three month and six month bills twice a month to reach 18.5 billion euros by the end of 1st quarter 2013. The ESM fund rating is Aa1 by Moody's Investors Service, and AAA by Fitch Ratings.

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During the Greek debt crisis in 2011 the ECB bought Greek bonds at a discount to face value to support the price of Greek bonds. It did so under the agreement that the bonds would be worth the full amount. Now as part of the negotiations between Greece and private bondholders (mostly French and German banks) about how much losses private bondholders will take- to make Greek debt serviceable as its economy shrinks and tax revenues decline- the ECB says it will take $11 billion in losses on these bonds as its contribution. The ECB will do this on the condition that Greece comes up with an agreement with private bondholders that makes debt serviceable. This could mean increasing private bondholder losses to 70%. from 50%. The central banks of EU countries hold $12 billion of Greek bonds. The ECB says this will not apply to these bonds. Negotiations are also underway between the EU and Greece for a 20% reduction in Greece's minimum wage and an additional 3 billion euros in government spending cuts, and pension cuts for retirees. The EU is asking for a written committment from the Greek government and from Antonio Samaras of the New Democracy party to the austerity program, as the measures are highly unpopular in Greece and are leading to continued street protests in Athens. ...

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Edward DeMarco is head of the Federal Housing Finance Agency (FHFA), which is the independent regulatory agency overseeing U.S. housing lenders Fannie Mae and Freddie Mac. The FHFA was formed in 2008 after merging two existing agencies. Later that year Fannie and Freddie were taken over by the government. FHFA head, DeMarco, is reluctant to help homeowners with underwater mortgages on their homes with reduced payments because this would mean losses to the taxpayer. He sees his mandate as protecting the taxpayer. Sheila Bair, former head of the FDIC, says she understands DeMarco's mandate is not to provide fiscal stimulus, and the Obama administration has been all over the place when it comes to providing homeowner assistance. The result is that there is little help by the U.S. government to homeowners with underwater mortgages since 2008, and this creates larger headwinds for the Federal Reserve Bank to provide momentum to the U.S. economy. Many experts see this as a serious problem and a well respected economist, Martin Feldstein, has made repeated proposals for structuring the help to homeowners since 2008. ...

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Yale's Robert Shiller, founder of the of the Shiller-Case survey, says that he does not see a turning point in the housing market at this time, based on the 5000 mailed questionnaires he sends out each year. He says this is not visible and hard to conclude from the responses. He also describes the bubble thinking and behaviours he sees from the responses, especially how people extrapolate into the long term the short term gains being made. Nowhere in these responses does he see the term bubble being used by respondents, as if it never existed.

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Gasoline pries hit $5.00 a gallon in California in October 2012.

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The influence of regional political parties in India continues as the Congress party depends on the Samajwadi party in Uttar Pradesh led by Mulam Singh Yadav for its majority in parliament in 2013. This follows the withdrawal of support first of the party of Mamta Banerjee in West Bengal in 2012 on retail foreign investment issue, and the withdrawal of support of the DMK party in Tamilnadu state over the Sri Lankan issue in 2013. Not only are the regional political parties based in a particular state, they are also dominated by political personalities, such as that of Yadav in Uttar Pradesh (UP), Banerjee in W. Bengal, and Karunanidhi in Tamilnadu. Tamilnadu is in the south with a language Tamil of Dravidian origin, and W. Bengal is in the northeast near the Burmese and Bangladesh border with its own language Bengali of very different origin and completely different script. The regional parties have little in common. Some like the DMK in Tamilnadu are small parties with 18 member in parliament. Congress coalition government has 230 members and needs 270 for a parliamentary majority....

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Former U.S. Treasury secretary Robert Rubin talks to Charlie Rose about the August 2 Debt Ceiling and Deficit legislation. He says there are two constructive things about the legislation. There are no serious cuts in 2011 and 2012, so there will be almost no loss in demand as spending cuts do not affect the immediate 18 month period. Former Treasury Secretary Summers also makes this point. And that the cuts include defense and non-defense. He favors the approach of the Bowles-Simpson Commission. On the overall situation Rubin points out the importance of getting a real public discussion going about what this means, what the consequences of decisions made now. Especially important for Rubin is public understanding of the importance of setting up a serious deficit reduction program that sets the date of implementation a couple of years into the future to give time to get back on track, and the need for increased revenues. A useful point Rubin makes is that the question of jobs and the question of getting into a sound position fiscally are really the same question. He cites his experience in 1993 when he helped President Clinton setup and implement a deficit reduction program- which had half spending cuts and half revenue increases. Bowles-Simpson Commission recommendations for closing loopholes for tax expenditures and Martin Feldstein's similiar proposal for limiting the deductions and exclusions to 2% of Adjusted Gross Income offer an option that creates revenues without any tax increases....