Wednesday, April 16, 2014

Today's Links

1---EZ Deflation Alert, Reuters

2---As growth slows, Bank of Japan “opens spigot” to the rich, wsws

The Japanese economy slowed markedly in the final quarter of 2013, pointing to an unraveling of Prime Minister Shinzo Abe’s much-vaunted “Abenomics.” Statistics released last week revealed that GDP grew by only 0.3 percent (1.2 percent annualised) for the quarter—less than half the expected 0.7 percent. Overall growth for 2013 was just 1.6 percent. The slowdown reflected weakening exports, private consumption and corporate capital spending.
After coming to office in December 2012, Abe proclaimed that his economic policy, dubbed Abenomics, had three “arrows.” The first was an unprecedented monetary easing policy to double Japan’s monetary base over 21 months, from its initiation in April 2013. As with the US “quantitative easing” program, the Bank of Japan (BOJ) pumps 60 to 70 trillion yen ($US585 to $680 billion) annually into the economy, mainly through government bond-buying. The central bank is aiming to achieve 2 percent inflation and end more than a decade of deflation. The second “arrow” involved a modest stimulus spending program.
The final “arrow” consisted of anti-working class “structural reforms.” These are yet to be announced in detail, but the general aim is to further dismantle job security and undermine wages and working conditions while cutting corporate taxes. At the World Economic Forum last month in Davos, Abe indicated that this was in store when he boasted of carrying out pro-market reforms previously thought impossible. A “new dawn [is]... breaking over Japan,” he declared, promising that “companies ... will find Japan among the most business-friendly places in the world.”

3---Abenomics Rout Makes Stocks Cheapest Versus Bonds, Bloomberg

Abe has yet to take new pro-growth steps even as the economy faces the sharpest quarterly contraction in three years after a sales-tax increase

4---Japan’s GDP back to peak levels: Auto sales and Toyota benefit , market realist

5---Japan bond market liquidity dries up as BOJ holding hits 200 trln yen, Reuters

6--The Greek economy lies in ruins, RT

The Greek economy lies in ruins. After six years (yes, six years!) of depression, 27.5 percent of the workforce, and some 58.3 percent of youth, are unemployed. Over a quarter of the economy (26 percent) has been destroyed on the sacrificial altar of saving the flawed euro, spurring Athens’ lost decade. True, unemployment peaked nearer to 30 percent, but the economy can barely be said to be recovering with gusto… Well, unless you belong to the curious ‘troika’ tribe who promised rescue loans. Rather, their austere prescription delivered damnation

7---US-backed crackdown threatens civil war in Ukraine, wsws

US and European support for the crackdown makes clear that their intervention in Ukraine is not motivated by concerns for Ukrainians’ democratic rights. From the outset it has been aimed at inciting a civil war in Ukraine and producing a confrontation with Russia. Having organized a fascist-led coup in Kiev, Washington, Berlin and Brussels are now denouncing the inevitable opposition of people in eastern Ukraine as a Russian plot, and using this lie to escalate the violence....

Washington is fully supporting this military operation backed by fascist thugs, which threatens the lives of countless thousands of civilians in eastern Ukraine.
White House spokesman Jay Carney signaled Washington’s support for the crackdown. After cynically declaring that the United States “agreed that the use of force is not a preferred option,” he proceeded to endorse the violent attack on protesters. “That said, the Ukrainian government has a responsibility,” he declared, “to provide law and order, and these provocations in eastern Ukraine are creating a situation in which the government has to respond. Ukraine has proceeded with great caution, has for days now been offering amnesty, dialogue, has been trying to resolve these conflicts peacefully.”

Carney made clear that the operation was directly planned and is now being carried out under the auspices of the Obama White House and the Central Intelligence Agency, whose director, John Brennan, traveled to Kiev this past weekend.
Asked what Brennan and other US officials told security forces in Kiev, Carney replied bluntly: “We urged the Ukrainian government to move forward, gradually, responsibly, and with all due caution, as it deals with this situation caused by armed militants… Let’s be clear: the way to ensure that violence does not occur is for these armed paramilitary groups, and these armed so-called pro-Russian separatists, to vacate the buildings and to lay down their arms.”

Carney’s praise of the Kiev regime’s “responsibility” and “due caution” as helicopter gunships were firing on the population and tanks were massing around major cities is a repulsive lie.
General Vasily Krutov—the first deputy head of the Ukrainian Security Service (SBU), who is leading the operation—summed up the policy Brennan and other US officials undoubtedly discussed with their stooges in Kiev. Krutov threatened to “destroy” anti-government activists, stating: “They must be warned; if they do not lay down their arms, they will be destroyed.”.

8---Bye Bye Bandar, ahram

9---Let’s not follow Harper’s tough talk on Crimea crisis , spirit de corps

Following the March 16 referendum in which the ethnic Russian majority voted for Crimea to become part of Russia, Ukrainian soldiers were offered the choice of returning to the mainland or changing their uniforms to join a Russian military force in the Crimea.
Only 11 per cent chose to remain in the Ukrainian military while an astonishing 89 per cent chose to volunteer for the Russian military. Again, without a shot fired, Ukrainian navy vessels hauled down their yellow and blue flags and happily hoisted the red, white and blue Russian flag up their masts

10--Special Report: How the Fed fueled an explosion in subprime auto loans, Reuters archive
 11--Subprime Loans Are Boosting Car Sales, Bloomberg

....according to Bloomberg, three-month rolling US auto sales are now only about 3% off their pre-crisis levels. On the other hand, US labour force participation is down to 63% while duration of unemployment remains fairly high.

So, if the country’s labour force participation is at its lowest level since 1978, how can car sales be very nearly back to their boom-year levels? The answer would seem to lie in the ease with which almost anyone in the US can obtain a loan to buy a car – with a great example of this detailed in the Bloomberg Business Week article
Subprime loans are boosting car sales

12---About That “Surge” In March Retail Sales , Testosterone Pit

Nevertheless, the Wall Street talking heads can’t help themselves with the constant ridiculous refrain that the consumer is back, and it's soon off the races:
The linchpin of economic growth, the consumer, is back,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.
Oh, really. Real wage and salary income is only 2% above its level 73 months ago when the economy last peaked. And after a salutary rebound in the savings rate during the Great Recession, the household savings rate has been drawn down to its unsustainable bubble lows. But pettifoggers like Rupkey just keep pouring the Kool-Aid.

So the Fed sponsored Wall Street bubble inflates to its final asymptote. When the inevitable bust occurs, it will trigger a sharp retrenchment in business inventories, investment and consumer spending, but  the usual suspects will say it's time to restart the Keynesian Clock. That being the one that is now permanently broken but never acknowledged by our rulers in the Wall Street-Washington corridor — who long ago threw sound money and the laws of economics to the winds in a desperate attempt to hang on to ill-gotten power and wealth.

In any event, in
today’s post by Jeffrey Snider, it is evident that we just had winter; that the three month retail spending average including the ballyhooed March bounce was the second weakest of this century, and that the fifth annual spring time leap into “escape velocity” is nowhere in sight.

13---Russian lawmaker calls Kiev's 'anti-terrorist operation' extremely cynical, Itar Tass

Speaker of the Federation Council's upper house of Russia's parliament Valentina Matviyenko has reiterated that Russia is insisting on a peaceful settlement of the Ukrainian crisis. Matviyenko said Kiev's decision to start an 'anti-terrorist operation' in the east of the country was extremely cynical.
"Russia has always called for peaceful ways of settlement, and Ukrainian national dialogue, and heeding regions' opinion and civilians' demands," Matviyenko said, adding that the decision by incumbent Ukrainian authorities to use force and start 'anti-terrorist operation' against the civilian population and unarmed persons in the east was extremely cynical.

The Federation Council speaker underlined that Moscow was trying to use all possible platforms to launch dialogue. However, she regretted the absence of response in the issue. Two weeks ago, the Federation Council had invited Ukrainian parliament speaker Oleksandr Turchynov and the Ukrainian delegation to participate in the session of the Parliamentary Assembly of the Commonwealth of Independent States due to take place in St. Petersburg later this week, in order to use this platform for dialogue, the search or peaceful solution and deescalation.

14---The "Housing Recovery" Is Complete: Major US Banks' Mortgage Originations Tumble To Record Low, zero hedge

15--Secular stagnation, the movie, econ view

16---The Housing “Recovery”, House of Debt
April 16, 2014
New housing starts for March are out today. Rather than focus on the short-term movements, it’s worth looking at the long run. Here is the graph from

It’s really quite an amazing graph. We are now five full years from the end of the recession (if you buy NBER dating). And housing starts are still below any level we’ve seen since the early 1990s!
So who out there thinks we are ever going to get back to the 1.5 million annualized rate? When?
It may be time to start taking seriously the idea that the boost to the economy from new residential construction in the long-run may be much lower than it was in the 10 years prior to the Great Recession. The anomaly is not the weakness now, but the strength in the late 1990s and early 2000s.

March’s bond issuance was the second lowest since the early 2000′s

March’s mortgage bond issuance was the second lowest since the early 2000’s, according to the latest Securitization Weekly report from Bank of America (BAC).
March saw only $54 billion in mortgage bonds issued, the smallest amount since the inception of the third round of quantitative easing.
The absence of the first-time homebuyer flags a secular shift reflective of lower affordability and tight lending standards,” Bank of America’s report states. …
With home prices on the rise and lending standards tightening, first-time homebuyers represent less than 28% of the market, down from a 36% market share in May 2011, the analysts state.

Tuesday, April 15, 2014

Today's Links

1---Corporate Profits Grow and Wages Slide, NYT

CORPORATE profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.
The Commerce Department last week estimated that corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes..... The effective corporate tax rate was nearly 55 percent, in sharp contrast to last year’s figure of under 20 percent....

The effective rate has been below 20 percent in three of the last five years. Before 2009, the rate had not been that low since 1931.
The statutory top corporate tax rate in the United States is 35 percent, and corporations have been vigorously lobbying to reduce that, saying it puts them at a competitive disadvantage against companies based in other countries, where rates are lower. But there are myriad tax credits, deductions and preferences available, particularly to multinational companies, and the result is that effective tax rates have fallen for many companies.
The Commerce Department also said total wages and salaries last year amounted to $7.1 trillion, or 42.5 percent of the entire economy. That was down from 42.6 percent in 2012 and was lower than in any year previously measured....

The accompanying charts compare President Obama’s administration with each of his predecessors, going back to Herbert Hoover. After-tax corporate profits in President Obama’s five years in office have averaged 9.3 percent of G.D.P. That is a full two percentage points higher than the 7.2 percent averages under Lyndon B. Johnson and George W. Bush, previously the presidents with the highest ratios of corporate profits.
The stock market has reflected that strong performance. Through the end of March, the Standard & Poor’s 500-stock index was up 133 percent since Mr. Obama’s inauguration in 2009. Of the 13 presidents since 1929, only Bill Clinton and Franklin D. Roosevelt saw a larger total increase

2---Abenomics: Are the good times over?, Testosterone Pit

3---Abenomics: 10-year JGB: No buyers, Reuters

The BOJ's next policy meeting is on April 30, when it will update its economic forecasts.
The BOJ's huge government bond purchases put the central bank's holdings over 200 trillion yen ($1.96 trillion), some 20 percent of outstanding issuance, data showed this week. This has sucked so much liquidity out of the market that the benchmark 10-year bond went untraded for almost two days, the first time in 13 years.

4---Why are car sales booming when US labour force participation  is at its lowest level since 1978?, Pieria

...according to Bloomberg, three-month rolling US auto sales are now only about 3% off their pre-crisis levels. On the other hand, US labour force participation is down to 63% while duration of unemployment remains fairly high.
So, if the country’s labour force participation is at its lowest level since 1978, how can car sales be very nearly back to their boom-year levels? The answer would seem to lie in the ease with which almost anyone in the US can obtain a loan to buy a car – with a great example of this detailed in the Bloomberg Business Week article Subprime loans are boosting car sales

5---Interest Rates and the Budget Outlook, Paul Krugman

the IMF, declaring that there is a long-term downward trend in real interest rates, that secular stagnation is a real risk, and that rates not much higher than what we see now may be the new normal.

6---CIA Chief visits Kiev to direct crackdown against pro-Russian civilians, wsws

In the clearest sign of intensifying US involvement in the Ukraine crisis, the White House admitted—after vehement denials—that CIA Director John Brennan flew into Kiev over the weekend. Brennan arrived, under a false name, for discussions on how to further exploit the crisis that the US and its allies deliberately triggered by orchestrating the February coup.

Russian Foreign Minister Sergey Lavrov demanded an explanation about the nature of the undercover visit, and deposed Ukrainian President Viktor Yanukovych accused Brennan of ordering a crackdown on protests in the east of the country.

The CIA initially ridiculed these accusations as “completely false.” Yesterday, however, White House spokesman Jay Carney declared: “We don’t normally comment on the CIA director’s travel, but given the extraordinary circumstances in this case and the false claims being leveled by the Russians at the CIA, we can confirm that the director was in Kiev as part of a trip to Europe.”
... The CIA has a documented record of orchestrating coups, plots and assassinations around the world, including in Indonesia in 1965–66 and Chile in 1973.

Brennan, nominated by Obama to take over as CIA chief after Obama’s 2012 re-election, is known for his close involvement in the US occupation of Iraq, the CIA’s use of torture against detainees, and US drone assassinations, including of American citizens. He is currently embroiled in a scandal over CIA spying on staff members of a US Senate committee reviewing the agency’s program of detention and “enhanced interrogation” under President George W. Bush.

Following Brennan’s discussions in Kiev, interim Ukrainian President Oleksandr Turchynov declared that the country was now “at war” with Russia. The head of Ukraine’s state security service (SBU), Valentyn Nalyvaichenko, ratcheted up the warnings of violence against the demonstrators now occupying official buildings in at least ten eastern Ukrainian cities—threatening to “annihilate them.”...

Yesterday’s Washington Post editorial declared: “It may be too late to prevent war in eastern Ukraine.”
The Wall Street Journal editorialised that “the Russian invasion of eastern Ukraine may already be underway,” adding that “the US ought to drop its illusion that Mr. Putin is interested in diplomacy.” Putin’s real goal, it alleged “is to redraw the postwar map of Europe to Russia’s advantage, with faux diplomacy if he can, by force if necessary.”

7---2014: Rough year for housing, HW

The next couple of quarters may be rough going for the housing and finance industry.
Housing prices and mortgage activity will stay highly sensitive to the Federal Reserve interest rate policy and guidance because of a weak job market, affordability challenges and the declining pool of first-time homebuyers.
Worse still, home price appreciation may level off and even dip into negative territory by the third quarter of 2014.

"Housing price appreciation (is) already on the decline, with only six cities in the Case-Shiller index showing strength in recent indexing – Dallas, Las Vegas, Miami, San Francisco, Tampa, and Washington,” says Tom Showalter, chief analytics officer at Digital Risk, which handles $8 billion in loan volume monthly. “Moreover, while home prices have increased, at least 25% of all homes are still under water."

December home sales showed that 40% of sales were all cash – suggesting strong investor participation. Originations are also at a 14-year low.
"As investors leave market, there is little evidence that typical retail buyer will take up the slack," Showalter said.....

“As a large portion of home purchases have been driven by speculating institutional and private investors the last two years, there could be a pull back. Let's hope the Fed is not right in its long-term outlook,” D’vari said.
Showalter said the writing is on the wall.

These issues have been compounded by the fact that “many banks and lenders are exiting mortgage lending as application rates hit ten year lows, complemented by increasing regulatory burdens and penalties, and increasing capital requirements.  New Basel III regs now require 5% capital ratios for mortgage lending, a requirement that is largely punitive," Showalter said. “The ultimate causes have nothing to do with the weather. Rather the issues are weak job market, flat consumer income and excessive regulation

8--Credit card delinquency rate is at its lowest recorded point since it has been tracked, FRED

9---Belgium loads up on US Treasuries. (More Fed fraud), zero hedge

10---Home Sellers’ Asking Prices Hit Five-Year High, wsj
If housing demand has softened, someone forgot to tell home sellers.
Sellers have pushed asking prices on their homes to a five-year high, but they are facing slightly more competition than they were one year ago.

Monday, April 14, 2014

Today's links

Today's quote:  "More and more people are turning against the EU and see it for what it is—a tool of the most powerful banks and corporations, directed against working people and creating the conditions not for the progressive unification of Europe, but for the intensification of nationalist conflicts." Peter Schwartz, world socialist we site

1---Recovery for Whom?, NYT

Another shocker is that those in the 25-to-34 age group are the best educated cohort in American history, with more than a third having a bachelor’s degree or higher. Education is important. But clearly, education alone does not create jobs and opportunities that lead to prosperity. For that, a fair and functional economy is needed — one in which the government plays a robust role, alongside consumers and businesses, to promote full employment and to ensure a just distribution of gains....

Americans age 25 to 34, the leading edge of the so-called millennials, the generation born in the 1980s and 1990s. They are worse off than Gen Xers (born from the mid-1960s to the late-1970s) were at that age and the baby boomers before them by nearly every economic measure — employment, income, student loan indebtedness, mobility, homeownership and other hallmarks of “household formation,” like moving out on their own, getting married and having children.

This group had the bad luck of entering the work force in the depressed and slow-growth years that started when the recession hit in 2007. Instead of spending the crucial early years of their work lives laying the groundwork for a solid economic future, many of them have struggled with unemployment and underemployment, and many have fallen so far behind where they would hope to be that recovering lost ground may well be impossible.

According to the latest census data, nearly 16 percent of those in their mid-20s to mid-30s were in poverty in 2012, compared with just above 10 percent of Gen Xers in 2000 and baby boomers in 1980. Nearly 14 percent of that age group were living with their parents in 2013, a higher percentage than in previous generations. And of those living at home, 43 percent (2.5 million people) would be counted as being in poverty if they were on their own. Only 38 percent of those who were on their own were homeowners, compared with 46 percent from this age group who were on their own in 2000.

The median household income of this age group — $51,381 in 2012 — is nearly $8,000 less than the median for the same age group in 2000 and virtually unchanged from 1980, adjusted for inflation...

 in a study by the Pew Research Center of the entire millennial generation, 74 percent were unmarried; many of them said they wanted to marry but lacked the economic wherewithal. Even among those age 25 to 34, only 44 percent were married in 2013, compared with 55 percent in 2000 and 66 percent in 1980.

2---U.S. Crude Reserves Hit Highest Levels in nearly 40 Years, oil price

3---The Consumer as a “Shadow of its Former Self”, House of Debt

Chicago Fed President Charles Evans noted last week that “the U.S. consumer is slowly improving but is just a shadow of its former self.” We couldn’t have said it better. Retail sales for March is out this morning, and we thought it would be a good time to examine why household spending has been so weak using data that were just updated through 2013.

The chart below plots spending of U.S. households from 2006 to 2013. We split states into five groups, and we plot household spending for the 20% of states that had the worst housing crash from 2006 to 2009 and the 20% of states that had the smallest decline in house prices over the same period. Both groups contain 20% of the population, and the states in the worst housing crash group are Arizona, California, Florida, Michigan, and Nevada. The states where house prices fell the least include about 15 states scattered throughout the country. Both series are indexed to be 100 in 2006, which allows one to calculate the percentage change relative to 2006 for any year by simply taking that year’s spending position on the y axis and subtracting 100.

Two things jump out. First, spending declined during the Great Recession by much more in states where house prices fell the most. This is something we have documented in our own research. But perhaps more importantly, the recovery in spending has been very weak in these areas. In 2013, spending in states where house prices fell the most finally increased above its 2006 level. It has taken 7 years for spending to recover in these states! This is related to an earlier post we did using furniture spending to see the legacy of the housing bust.
The chart above shows clearly that any explanation of the severe recession and weak recovery must have housing as a central feature. Even though house prices have risen more in areas that had the worst crashes.

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump. ...

he challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.” Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.
“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.”

Fast Retailing

The Topix index of shares fell for a seventh day, its longest losing streak since October. The gauge was down 0.1 percent at the close, extending its decline this year to 13 percent after climbing 52 percent in 2013. The yen was little changed at 101.62 per dollar at 4:12 p.m. in Tokyo.
Tadashi Yanai, the billionaire president of clothing retailer Fast Retailing Co., said April 10 that he’s not optimistic about the outlook for consumption, ahead of a plunge in his company’s shares that contributed to this year’s 13 percent slide in the Topix index.

Accelerated inflation would squeeze households, with wages excluding overtime and bonuses declining in February for a 21st straight month, down 0.3 percent from a year earlier, according to April 1 labor ministry data. Saito, ranked No. 3 forecaster last year, sees the risk of a 3.6 percent increase in the April consumer price gauge, which excludes fresh food, after a 1.3 percent gain in February.
A consumer confidence gauge fell for a third straight month in February to 38.3, down from a six-year high of 45.7 last May and the lowest since September 2011, according to a Cabinet Office survey. ...

The sales tax increase is Abe’s biggest attempt since he took office in December 2012 to a get grip on the world’s heaviest debt burden. While his reflationary effort has helped boost the job market, the blow from the higher levy is forecast to trigger a 3.35 percent annualized contraction in the three months from April, according to a survey of economists by Bloomberg.
Abe’s attack on deflation -- spearheaded by unprecedented easing by the central bank -- has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies....

The BOJ is ready to act if prospects for achieving its price target are at risk, Governor Haruhiko Kuroda said on April 11 in Washington, where he was meeting with finance and central bank officials from the Group of 20.
“If something happens to hobble our progress toward achieving price stability, we are of course prepared to make the necessary monetary policy adjustments,” Kuroda said.

Should data for the April to June period signal a risk to the BOJ’s scenario, there’s a “high likelihood” that the central bank will add to easing at its July meeting, when the board will review of its April Outlook Report, said Goldman Sachs economists Baba and Tanaka.

The central bank could double the 1 trillion yen annual pace it accumulates exchange-traded funds, boost purchases of long-dated government bonds and possibly extend the average maturity of its JGB purchases, the Goldman economists wrote in the April 12 report.

6---Christopher Whalen: The death of mortgage lending, HW

It's not the CFPB's fault

The reality is that mortgage lending is a tough, miserable business with shrinking spreads and rising costs. ....

In the most recent Q1 2014 earnings reported by JPMorgan Chase, for example, the bank reports that its loan applications fell by 57% year-over-year. The readers of HousingWire might be tempted to believe that this precipitous drop in new loan applications is the result of aforementioned regulatory pressures, but in fact the folks at Chase don’t really want to make mortgage loans.
Since 2010, it seems, the overall lack of profitability in mortgage lending has caused Chase, and others, to slowly move away from this asset class. This is why that total mortgage banking headcount at JPMorgan was down nearly 3,000 since the end of the year and about 14,000 since the beginning of last year, according to the conference call on Friday.

Areas such a commercial real estate, commercial lending, credit cards and investment management are going to receive the lion’s share of the capital and management attention. The gross yield on earning assets at all Federal Deposit Insurance Corp. insured banks focused on mortgage lending was less than 3.6% at the end of 2013, for example, but was more than 10% for credit card specialization banks. Even with a higher cost of funds, credit cards is a far better lending business that residential mortgage lending.....

Simply stated, there is nobody available to take that theoretical loan application.
“The new regulations are a very convenient excuse for the large banks to get away from what is a crappy business,” one former senior mortgage banker recently told me.  “When you look at mortgage lending compared to buying more Treasury bonds, the choice is clearly the latter. Mortgage lending was a loss leader even before the new CFPB regulations were put into place.”....

Were there no CFPB or Dodd-Frank Wall Street Reform and Consumer Protection Act, banks and non-banks alike would be backing away from the mortgage business. The significant withdrawal of players such as Nationstar and Bank of America from retail lending, and the collapse of the mortgage wholesale and correspondent markets, is just the start of a more generalized retreat of capital from residential mortgage lending that has its origins long before 2010, before Dodd-Frank passed and the CFPB was created.

The simple reason for this statement is that the mortgage business, as it stands today, is not particularly profitable, in a nominal sense.
If you actually take the time to look at mortgage lending based on a risk-adjusted return on capital, it quickly becomes clear that no rational investor would want to put capital behind a standalone lending operation.

7---Flashing Red Warning: Q1 Earnings Growth Plunges To Lowest Since 2012, zero hedge
Citi Mortgage Originations Drop To Record Low, zero hedge

8---"Teetering at the brink" of WW3, WSWS

The UN Security Council held an emergency meeting Sunday night in New York, a few hours after it was announced that Russia had requested “urgent consultations.”
In calling the meeting, Russia pointed to the danger posed by the declaration of the unelected, Western-backed regime in Kiev that it would launch large-scale military operations to crush protests across pro-Russian regions of eastern Ukraine. The Russian Foreign Ministry said the situation was “extremely dangerous,” adding: “It now depends on the West to avoid the possibility of civil war in Ukraine.”
The convening of an emergency meeting between the world’s leading nuclear-armed powers was an acknowledgment that the rise of civil war conditions in Ukraine, between a pro-Western regime and pro-Russian protests, could lead to a clash between the major powers—that is, of world war.
Russian ambassador to the UN Vitaly Churkin said: “Further escalation must be swiftly stopped.” He stated: “It is the West that will determine the opportunity to avoid civil war in Ukraine. Some people, including in this chamber, do not want to see the real reasons for what is happening in Ukraine and are constantly seeing the hand of Moscow in what is going on. Enough. That is enough.”

9---European Union: From economic community to alliance of warmongers, wsws

More and more people are turning against the EU and see it for what it is—a tool of the most powerful banks and corporations, directed against working people and creating the conditions not for the progressive unification of Europe, but for the intensification of nationalist conflicts.

NATO has begun to move aircraft, ships and troops toward the Russian border and carry out military maneuvers.

Social relations are strained to the breaking point. Within the EU, there are officially more than 26 million unemployed, corresponding to a rate of 11 percent. There is abject poverty in many regions, especially in the Eastern European countries that were incorporated into the EU 10 years ago and in the countries that have had to submit to the austerity programmes dictated by the EU and the International Monetary Fund. But even in supposedly rich Germany, one in three employees is deemed to be working under precarious conditions and 6 million people depend on welfare benefits.
More and more people are turning against the EU and see it for what it is—a tool of the most powerful banks and corporations, directed against working people and creating the conditions not for the progressive unification of Europe, but for the intensification of nationalist conflicts.

Sunday, April 13, 2014

Today's Links

1--Who Spends Extra Cash?, House of Debt

(Distribution matters)

Imagine we dropped cash on every household in the country. Who would spend it? Who would save it? The answer to this question matters a great deal given the rise in inequality before the Great Recession, and the fact that the economy is likely to be demand-constrained during severe downturns, especially if the economy hits the zero-lower bound on nominal interest rates. If all households reacted to a cash windfall the same, then the distribution of income or wealth wouldn’t matter much for cyclical policy.
We argued in a previous post that  lower income/wealth households have a much higher propensity to spend out of cash windfalls....

For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%. So even more evidence that lower income/wealth households spend a much larger fraction of cash windfalls.

4---Just don't call it a bubble, Testosterone Pit

But it’s not a bubble.”
That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:
We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations.... The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.
But no. “We think not,” she wrote. BofA Merrill Lynch makes lots of moolah pushing overpriced stocks to exuberant retail investors who’ve been driven by the Fed’s interest rate repression into the razor-like claws of risk. And besides, “the frothy spots appear well contained,” she added in central-banker lingo. And then the old saw: “Equity bubbles rarely happen when everybody is talking about bubbles.”

In late 1999 and early 2000, just before the bubble imploded spectacularly, “bubble” was the only thing everyone was talking about. Everybody tried to ride it up all the way and then get out. With predictable results. Repeat in 2007 and 2008.

That’s what analysts are doing. They see the bubble, and they benchmark it against the bubbles that blew up in 2000 and 2007, and they pull rationalizations out of thin air why this time it’s d.... Oops, they’re not using the d-word, which would make them the laughingstock of TP readers. They’re using logical-sounding arguments that border on superstitions – “Equity bubbles rarely happen when everybody is talking about bubbles” – to explain why it’s different. Exuberant retail investors are expected to swallow it hook, line, and sinker.

Meanwhile, the Smart Money is selling.
This week, it was once again private-equity mastodon Blackstone Group which dumped one of its LBOs, hotel chain La Quinta, into the lap of mutual funds and retail investors via an IPO. Blackstone has been busy dumping its LBOs. Other PE firms have been busy too. Valuations are enormous, and PE firms need months, sometimes years, to get out from under their priced possessions. So they plan ahead. And they’ve been selling everything that isn’t nailed down for over a year.
And hedge funds are bailing out of equities. Still in an orderly manner.
“We saw net exposure come way down,” explained Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business that deals with hedge funds. Hedge fund exposure to stocks in the US is “actually at the lowest level since August 2012,” during the euro turmoil before ECB President Mario Draghi saved the day with his whatever-it-takes pledge. “Funds have trimmed exposure, and they’ve added hedges.” The sharpest cuts occurred over the past month, he said. Hedge funds are “battening down the hatches to weather the storm

5---Wall Street and Multinationals Get Theirs While America Suffers, economic populist

Bonuses increased 15% and are back to their pre-financial crisis excesses  Corporations hording cash offshore increased 11.8% in 2013 to a whopping $1.95 trillion.
According to the New York State Comptroller, the average bonus paid on Wall Street was $164,530 in 2013, the third highest on record.  Below is a graph of Wall Street's average bonus and as we can see the greed and excesses just continue.  The average 2012 salary on Wall Street was $360,700.  This is 5.2 times larger than the average New York City private sector salary of $69,200.

average wall street bonus

The 2013 bonus pool was $26.7 billion spread over 165,200 workers  If an individual works 50 weeks, 40 hours a week for the $7.25/hr minimum wage, the gross annual income is $14,500.  Wall Street accounts for 22% of private sector salaries in New York City while being only 5% of those employed.

If Wall Street bonuses weren't bad enough, shipping good jobs overseas is clearly quite profitable for multinational corporations.  According to Bloomberg, corporations are stockpiling cash, tax free, abroad and added $206 billion to their coffers in 2013.  The offshore cash holdings now are $1.95 trillion.  Three of the biggest labor arbitragers and offshore outsourcers of them all, Microsoft, IBM and Apple, account for 18.2% of the 2013 offshore cash holdings increase.  All of these companies have fired top tier Scientists and Engineers and replaced them with cheaper foreign guest workers as well as moved R&D jobs offshore.  Their actual production and manufacturing jobs are long gone to India and China.  These companies also repackage copyrights, trademarks and patents into SPVs and park them offshore in the Cayman's and other tax havens.  According to a Congressional Research Service report, multinationals reported 43% of their 2008 overseas profits were in such tax havens.  Profit shifting is what it's all about instead of contributing to America and even innovating new products.
Bloomberg created a graphic, reprinted below.  Their visual really tells the story on how multinational corporations don't give a damn about America or even their own employees.  They live and breathe for their tax avoidance weasel game.

offshore corporate profits Bloomberg graph

6---Putting The "Bank Loans Are Rising & Animal Spirits Are Reviving" Meme In Context, zero hedge

(enjoy it while it lasts)

Much has been made of the "sharp acceleration" in bank lending in the last few months promulgated by the status quo huggers that 'animal spirits are reviving' and, despite a collapse in equity market valuations for 'growth' stocks, that escape velocity growth and that so-longed-for surge in Capex is just around the corner. However, when put in context... when looked at over more than a few months, and when considered against the typical economic cycle... this is anything but sustainable and merely reflects on the inventory-stacking mal-investment debacle of Q4 that is now unwinding en masse as hoped for 'aggregate demand' shows no signs of appearing...

The recent uptick corresponds with the economic push in the last quarter of 2013. It is very likely, given the recent economic weakness both domestically and internationally, that the recent surge in activity may well be very short lived.

7---"We can’t grow by adding more restaurant jobs,” Morici said in a phone interview., Marketwatch

Saturday, April 12, 2014

Today's Links

1--- Time to rebuild infrastructure, Lawrence Summers

Total incomes are about $1.5 trillion less today — or $5,000 per person — than was anticipated in 2007 before the financial crisis began. The share of American adults working has increased only slightly since the recession's trough, and more than 5 million fewer people are working than when employment was at peak levels in the mid-2000s. Median family incomes and hourly wages have remained essentially stagnant for more than a generation.

The single most important step the US government can take to reverse these discouraging trends is to mount a concerted, large-scale program directed at renewing our national infrastructure. At a time of unprecedented low interest rates and long-term unemployment, such a program is good economics but, more fundamentally, it is common sense....

There is increasing concern that we may be in an era of secular stagnation in which there is insufficient investment demand to absorb all the financial savings done by households and corporations, even with interest rates so low as to risk financial bubbles. Raising demand through greater infrastructure investment is an antidote for such malaise as well as a source of better employment and economic growth.
Why? Investing in infrastructure offers the prospect of expanded economic capacity
From the intercontinental railway to the interstate highway system to the Internet, American economic progress has depended on fundamental infrastructure investments. Our generation has not been doing its part. It is time for us to step up.

2---Larry Summers and "radical economic dysfunction", Rob Urie, counterpunch was the very same Larry Summers now pushing his structural stagnation theory who as part of the Obama administration publicly asserted the need for New Keynesian economic policies while doing everything in his power to assure that they were considered politically infeasible inside the administration. To his credit secular stagnation economist Paul Krugman warned at the launch of Mr. Obama’s economic ‘stimulus’ plan that it was (way) too small and that the likely political result would be to ‘prove’ that government spending to buy stuff and put people to work doesn’t result in stuff being bought and people being put to work. And to those who were otherwise occupied at the time, what followed was one of the more grotesque scam-fests in human history as Wall Street banks, under Mr. Summers’ and Treasury Secretary Timothy Geithner’s tutelage, used faux public interest initiatives like the mortgage ‘relief’ programs and mortgage ‘settlements’ to restore banker bonuses on the backs of the currently stagnated. This doesn’t mean that the secular stagnation crowd isn’t sincere in the present. But it does mean that concern is being kept at a level of abstraction that sees the second-order looting and transfer of trillions of dollars in public funds to culpable bankers as economically ‘neutral’ when they were the central economic accomplishments of the Obama administration and were / are socially catastrophic.

As was the case with Dorothy as she was about to depart the land of Oz, the way home for Western capitalism was always in theory but a few clicks of the heels away. There were a number of relatively straightforward policies that Mr. Obama could have implemented when he entered office that could have restored economic vitality reasonably quickly. Nationalizing the Wall Street banks and turning them into public utilities would have eliminated their extractive role in the broader economy and limited the financial plutocrats’ catastrophe generating hold over public policy. Using bailout funds to ‘buy-down’ negative housing equity would have had the dual effects of rendering banks and homeowners solvent and the housing bust but a distant memory. And a public jobs program that guaranteed employment at a living wage with full benefits to all comers could have reoriented the ‘makers / takers’ storyline to joint interest in solving social problems. The paths that were chosen of giving all of the bailout money to the banks while leaving those who were looted by them to fend for themselves and of adding insult to injury by setting up programs claimed to help the looted while in fact ‘foaming the runway’ with their misery and economic well-being set up the current dynamic of self-proclaimed ‘makers’ living large on the public dime while externally proclaimed ‘takers’ suffer the consequences of radical economic dysfunction. Larry Summers was at the heart of each and every one of these policies.
The dramatic upward redistribution of recent decades is the result of specific government policies and downward redistribution could in theory be accomplished in much the same way. This is an important point— upward redistribution has had little to do with ‘market’ forces and ‘correcting’ it would in capitalist economic theory ‘improve’ market outcomes. The political challenge of accomplishing this is (1) the myth that initial income and wealth distribution is the result of market forces provides the illusion that it is ‘natural’ and (2) the existing plutocracy controls the levers of official power that makes ‘official’ redistribution improbable. The social conditions that facilitated the New Deal were people in the streets willing to fight for a different way. The ‘secular stagnation’ argument isn’t going anywhere without large numbers of people being willing to force the issue. But then the question would be: why fight for half measures that preserve the existing order when it is the existing order that is responsible for current conditions?

3--Stocks face earnings blues after tech selloff, Reuters

4---G-20 lauds ‘Abenomics,’ tax hike but not reforms, JT (So, shrinking growth is good?)

Finance Minister Taro Aso said Friday that Japan’s efforts to boost the economy and restore its precarious fiscal health were welcomed at a two-day meeting of the Group of 20 finance chiefs in Washington.
Aso said he explained to his G-20 counterparts that Japan raised its consumption tax rate for the first time in 17 years to cover swelling social security costs for the graying population and has taken necessary steps to ease the negative impact of its first stage.

“Japan’s attempt to simultaneously achieve economic growth and fiscal rehabilitation was appreciated,” Aso said at a joint press conference with Bank of Japan Gov. Haruhiko Kuroda after the G-20 gathering was wrapped up.

5---Time to turn off the free money: US will not support more QE in Japan, JT

Japan Bank for International Cooperation Gov. Hiroshi Watanabe said additional BOJ easing measures would not be supported by the United States, which is gradually reducing its own bond purchasing program.
“I’m not sure whether it is good for the United States and Japan to look in much different directions,” Watanabe, a former vice finance minister for international affairs, said in a meeting with reporters earlier this month. “I don’t think the United States will support” further BOJ easing.

On April 4 last year, the BOJ embarked on an aggressive, well-advertised monetary easing program designed to end nearly two decades of deflation. The new program, coinciding with Kuroda’s appointment as BOJ chief, features unprecedentedly large purchases of government bonds aimed at doubling Japan’s monetary base to ¥270 trillion by the end of this year.

In light of the side effects of the radical program, which could also take a toll on the global economy, the BOJ must map out an exit strategy from what it calls “quantitative and qualitative monetary easing,” pundits said.
Some central banks have created a framework for avoiding the adverse impact of such policies, former BOJ Deputy Gov. Kazumasa Iwata said in a recent interview. “The BOJ also ought to set certain conditions and mechanisms toward the normalization of its current policy,” said Iwata....

Even within the BOJ, some policymakers have started to argue that the bank should not try to pump more money into the economy because there is a risk this will impede the financial markets.
“If the current large-scale monetary easing policy were to be protracted or such policy strengthened by additional measures, the associated side effects would instead outweigh the positive effects, and this would undermine economic stability in the long run,” BOJ Policy Board member Takahide Kiuchi said last month.....

Despite lingering market pressure on the Bank of Japan to take further easing steps, its Group of 20 counterparts might not welcome the central bank’s next move.
With concern mounting about how the BOJ’s unprecedented purchases of government bonds and risky assets will impact global markets, the G-20 finance chiefs might pressure the BOJ in the near future to clarify how it will phase out the deflation-busting measures.
 some experts have expressed caution that the BOJ may draw international criticism if it takes additional credit easing measures that could have strong side effects without preparing an exit strategy.
As the U.S. Federal Reserve has been asked by emerging economies at the G-20 gathering to communicate with the financial markets about how fast it will taper its own giant monetary stimulus program, the BOJ could soon find itself in the same situation.
Many observers say the BOJ is likely to take action early this year to achieve its 2 percent inflation target because the economy is widely expected to stall following the April 1 consumption tax hike — Japan’s first in 17 years.
On Tuesday, after the BOJ decided to leave its aggressive monetary easing policy in place, Kuroda said further easing was not on his mind. “We are not currently thinking about additional easing” because the economy is steadily on course to attain the 2 percent inflation target by spring 2015, he said.

The government said last month that the core consumer price index, which excludes fresh foods but not energy, rose 1.3 percent in February from a year earlier, rising for the ninth straight month. Kuroda said the BOJ will “not hesitate to make adjustments if necessary.”
Takeshi Minami, chief economist at Norinchukin Research Institute said, “There are few people who believe inflation will really rise to 2 percent in fiscal 2015, with expectations persisting that upward pressure on prices will ease” as the tax hike is set to cool domestic demand.
“Gov. Kuroda is likely to consider and carry out further monetary easing around summer in 2014, when price rises may show signs of peaking out,” Minami added.
Indeed, many analysts say the core CPI, minus the inflationary effect of the 3-point tax increase to 8 percent, is forecast to climb only 1 percent in fiscal 2014 ending March 2015, meaning the BOJ would fail to achieve the inflation target. But the bank is not in a position where it can decide alone whether to relax its monetary grip, given that its policy change will affect financial markets across the globe.

6---US defence secretary’s provocative tour of Asia, wsws

Washington’s anti-Chinese “pivot” is closely linked to the escalating US confrontation with Russia over Ukraine. The Obama administration is proceeding with US imperialism’s long-held ambition to dominate the vast Eurasian landmass—stretching from China through to Eastern Europe—which, in turn, is central to its strategy for global hegemony.

The capitalist regimes in Beijing and Moscow are obstacles that the US is no longer prepared to tolerate. Amid a deepening economic crisis of global capitalism, the US and its allies are engaged in a reckless drive to subordinate China and Russia, along with their markets and resources, to their direct exploitation. The whipping up of reactionary ethnic and linguistic divisions in Ukraine is a warning that the same methods will be used to fragment Russia and China and transform them into semi-colonies...

Just as it is encouraging German rearmament in Europe, the US is pressing for the remilitarisation of Japan. Washington has given its full support to the right-wing government of Prime Minister Shinzo Abe as it increased military spending, moved to end constitutional restrictions on the armed forces, established a National Security Council, and shifted Japan’s strategic orientation to “island defence”—that is, against China.

7--US-backed regime drops deadline against east Ukraine protesters, but threat of war remains, wsws

The fraud of the Western powers’ claims to be championing democracy has not been lost on people in eastern Ukraine. Interviewed by Russian Television, Aleksey, a Kharkiv student, commented: “In Crimea, people voted, overwhelmingly, to return to Russia … But the West calls it unconstitutional and undemocratic. In Ukraine itself, the democratically-elected government has been overthrown and policies that nobody really wants are being pushed down our throats. And … this is called democracy!”...

When Yatsenyuk and other officials travelled to Donetsk yesterday, they did not meet with the protesters, but instead met with the eastern Ukrainian governors and mayors imposed by the regime, as well as major business figures, notably tycoon Rinat Akhmetov, Ukraine’s richest man. Those in the talks included the appointed regional governor, a billionaire metals tycoon, Sergey A. Taruta, whose offices remain occupied by the self-proclaimed Donetsk People’s Republic.
Echoing the demands of the EU and IMF, Yatsenyuk laid out what he described as a recipe for national unity: “We must tell people that we know it’s tough, but we know how in the future to secure jobs, increase salaries, attract investors, distribute more authority, and what to do so people are content with life.”

The reality of the “tough” measures required by the IMF in return for a $27 billion loan is already being spelt out by a 120 percent hike in gas and heating prices, the cutting of social benefits, including free medical assistance, and the closure of several hospitals.
The Associated Press (AP) reported that there is also “an already lingering sense of injustice” over the inevitable requirements of the IMF for the closure of many of the region’s state-supported heavy industries. Since the dissolution of the Soviet Union in 1991, tens of thousands of jobs have already been destroyed in these industries, and wages have been driven down to near-starvation levels....

On Thursday, NATO’s supreme commander, General Philip Breedlove, published a set of commercial satellite photos purporting to show an estimated 40,000 Russian troops and long lines of tanks, armoured vehicles, artillery and aircraft massed along Russia’s border with Ukraine. On his Twitter feed he wrote: “Russian forces around Ukraine fully equipped/capable to invade. Public denial undermines progress. Images tell story.”
However, an official on the Russian military general staff said Thursday that the images were taken in August 2013 and showed no unusual military movements.....

Yesterday, it was confirmed that four-way talks on the crisis between the US, EU, Russia and the Ukrainian regime will be held in Geneva on April 17. Russia’s Foreign Ministry said Foreign Minister Sergei Lavrov phoned US Secretary of State John Kerry to encourage the Kiev regime “to have a dialogue with representatives of the (Ukrainian) regions to create conditions allowing for comprehensive constitutional reform.”
Also yesterday, Putin said Russia would fulfil its obligations to European gas clients and had no plans to halt deliveries to Ukraine—a day after warning that supplies to Europe could be disrupted by Ukraine’s failure to pay its $2.2 billion debt for Russian gas

8---Step down??  Deputy Prime Minister Igor Shuvalov told reporters “Russia is ready to participate in supporting Ukraine together with the IMF and the European Union, RT

Ukraine should recognize Crimea’s independence, reform the country’s constitution, regulate the crisis in its eastern regions and guarantee the rights of Russian speakers if it wants to get financial help from Moscow, Russia’s finance minister has said.
“If Ukraine fulfils these four conditions, then Russia will be able to propose further steps on additional help both on financial and gas issues,” Finance Minister Anton Siluanov said after meeting with his German counterpart, Wolfgang Schauble, in Washington.

Deescalating tensions in eastern Ukraine should be peaceful, based on Ukraine’s legislation, “without discrimination against Russian-speaking population, without victims and bloodshed,” Siluanov said.
It is necessary for Ukraine to conduct constitutional reform, hold legitimate presidential elections and “form a government with which one may negotiate,” he said...

Ukraine’s gas debt is now estimated at over $2.2 billion. On Thursday, President Vladimir Putin wrote letters to the leaders of 18 European countries, including Germany and France, warning that Ukraine’s debt crisis had reached a “critical” level and could threaten transit to Europe. He also called for urgent cooperation, urging Russia’s partners in the West to take action.
According to German Chancellor Angela Merkel "there are many reasons to seriously take into account this message […] and for Europe to deliver a joint European response.”
In total, Moscow has subsidized Ukraine’s economy to the tune of $35.4 billion, coupled with a $3 billion loan tranche in December. ...

Deputy Prime Minister Igor Shuvalov told reporters “Russia is ready to participate in supporting Ukraine together with the IMF and the European Union

9---Brzezinski Sees Finlandization of Ukraine as Deal Maker , Bloomberg

A resolution may be possible “in which Ukraine deals with us, by wanting to move closer to Europe, but has a relationship also with Russia like Finland does,” said Brzezinski. “That could be accommodated if we’re intelligent and if Putin becomes less romantic about his historic role and more practical.”
Still, he warned that Putin may move on Ukraine militarily, perhaps assuming little challenge will come from the new government in Kiev and its foreign supporters.

‘New Ballgame’

“I think its possible, I’m not predicting it,” said Brzezinski, who is counselor at the Center for Strategic and International Studies in Washington.
The Russians should recognize that, unlike in Crimea, the Ukrainians are likely to resist further Russian incursions, he said.
“If the Ukrainians resist, it’s a new ballgame,” he said. “In Crimea, it was a pushover because they didn’t resist. Here, if they resist, it becomes prolonged and could last a long time.”
It will be “very difficult” for the U.S. and European nations “to justify sitting simply on the sidelines” if that happens, he said, suggesting they may be drawn into providing weapons to the Ukrainians.

Friday, April 11, 2014

Today's "Must Read"

Chief Economist Of Central Banks' Central Bank: "It's Extremely Dangerous... I See Speculative Bubbles Like In 2007", zero hedge

Via Finanz Und Wirtschaft,

William White is worried. The former chief economist of the Bank for International Settlements is highly skeptical of the ultra loose monetary policy that most central banks are still pursuing. "It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin", he warns.

Mr. White, all the major central banks have been running expansive monetary policies for more than five years now. Have you ever experienced anything like this?

The honest truth is no one has ever seen anything like this. Not even during the Great Depression in the Thirties has monetary policy been this loose. And if you look at the details of what these central banks are doing, it’s all very experimental. They are making it up as they go along. I am very worried about any kind of policies that have that nature.

But didn’t the extreme circumstances after the collapse of Lehman Brothers warrant these extreme measures?

Yes, absolutely. After Lehman, many markets just seized up. Central bankers rightly tried to maintain the basic functioning of the system. That was good crisis management. But in my career I have always distinguished between crisis prevention, crisis management, and crisis resolution. Today, the Fed still acts as if it was in crisis management. But we’re six years past that. They are essentially doing more than what they did right in the beginning. There is something fundamentally wrong with that. Plus, the Fed has moved to a completely different motivation. From the attempt to get the markets going again, they suddenly and explicitly started to inflate asset prices again. The aim is to make people feel richer, make them spend more, and have it all trickle down to get the economy going again. Frankly, I don’t think it works, and I think this is extremely dangerous.

So, the first quantitative easing in November 2008 was warranted?


But they should have stopped these kinds of policies long ago?

Yes. But here’s the problem. When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs. That’s government policy, not central bank policy. Central banks can’t rescue insolvent institutions. All around the western world, and I include Japan, governments have resolutely failed to see that they bear the responsibility to deal with the underlying problems. With the ultraloose monetary policy, governments have no incentive to act. But if we don’t deal with this now, we will be in worse shape than before.

But wouldn’t large-scale debt write-offs hurt the banking sector again?

Absolutely. But you see, we have a lot of zombie companies and banks out there. That’s a particular worry in Europe, where the banking sector is just a continuous story of denial, denial and denial. With interest rates so low, banks just keep evergreening everything, pretending all the money is still there. But the more you do that, the more you keep the zombies alive, they pull down the healthy parts of the economy. When you have made bad investments, and the money is gone, it’s much better to write it off and get fifty percent than to pretend it’s still there and end up getting nothing. So yes, we need more debt reduction and more recapitalization of the banking system. This is called facing up to reality.

Where do you see the most acute negative effects of this monetary policy?

The first thing I would worry about are asset prices. Every asset price you could think of is in very odd territory. Equity prices are extremely high if you at valuation measures such as Tobin’s Q or a Shiller-type normalized P/E. Risk-free bond rates are at enormously low levels, spreads are very low, you have all these funny things like covenant-lite loans again. It all looks and feels like 2007. And frankly, I think it’s worse than 2007, because then, it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra-low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.

Do you see outright bubbles in financial markets?

Yes, I do. Investors try to attribute the rising stock markets to good fundamentals. But I don’t buy that. People are caught up in the momentum of all the liquidity that is provided by the central banks. This is a liquidity driven thing, not based on fundamentals.

So are we mostly seeing what the Fed has been doing since 1987 – provide liquidity and pump markets up again?

Absolutely. We just saw the last chapter of that long history. This is the last of a whole series of bubbles that have been blown. In the past, monetary policy has always succeeded in pulling up the economy. But each time, the Fed had to act more vigorously to achieve its results. So, logically, at a certain point, it won’t work anymore. Then we’ll be in big trouble. And we will have wasted many years in which we could have been following better policies that would have maintained growth in much more sustainable ways. Now, to make you feel better, I said the same in 1998, and I was way too early.

What about the moral hazard of all this?

The fact of the matter is that if you have had 25 years of central bank and government bailout whenever there was a problem, and the bankers come to appreciate that fact, then we are back in a world where the banks get all the profits, while the government socializes all the losses. Then it just gets worse and worse. So, in terms of curbing the financial system, my own sense is that all of the stuff that has been done until now, while very useful, Basel III and all that, is not going to be sufficient to deal with the moral hazard problem. I would have liked to see a return to limited banking, a return to private ownership, a return to people going to prison when they do bad things. Moral hazard is a real issue.

Do you have any indication that the Yellen Fed will be different than the Greenspan and Bernanke Fed?

Not really. The one person in the FOMC that was kicking up a real fuss about asset bubbles was Governor Jeremy Stein. Unfortunately, he has gone back to Harvard.

The markets seem to assume that the tapering will run very smoothly, though. Volatility, as measured by the Vix index, is low.

Don’t forget that the Vix was at record low in 2007. All that liquidity raises the asset prices and lowers the cost of insurance. I see at least three possible scenarios how this will all work out. One is: Maybe all this monetary stuff will work perfectly. I don’t think this is likely, but I could be wrong. I have been wrong so many times before. So if it works, the long bond rates can go up slowly and smoothly, and the financial system will adapt nicely. But even against the backdrop of strengthening growth, we could still see a disorderly reaction in financial markets, which would then feed back to destroy the economic recovery.


We are such a long way away from normal long term interest rates. Normal would be perhaps around four percent. Markets have a tendency to rush to the end point immediately. They overshoot. Keynes said in late Thirties that the long bond market could fluctuate at the wrong levels for decades. If fears of inflation suddenly re-appear, this can move interest rates quickly. Plus, there are other possible accidents. What about the fact that maybe most of the collateral you need for normal trading is all tied up now? What about the fact that the big investment dealers have got inventories that are 20 percent of what they were in 2007? When things start to move, the inventory for the market makers might not be there. That’s a particular worry in fields like corporate bonds, which can be quite illiquid to begin with. I’ve met so many people who are in the markets, thinking they are absolutely brilliantly smart, thinking they can get out in the right time. The problem is, they all think that. And when everyone races for the exit at the same time, we will have big problems. I’m not saying all of this will happen, but reasonable people should think about what could go wrong, even against a backdrop of faster growth.

And what is the third scenario?

The strengthening growth might be a mirage. And if it does not materialize, all those elevated prices will be way out of line of fundamentals.

Which of the major central banks runs the highest risk of something going seriously wrong?

At the moment what I am most worried about is Japan. I know there is an expression that the Japanese bond market is called the widowmaker. People have bet against it and lost money. The reason I worry now is that they are much further down the line even than the Americans. What is Abenomics really? As far as I see it, they print the money and tell people that there will be high inflation. But I don’t think it will work. The Japanese consumer will say prices are going up, but my wages won’t. Because they haven’t for years. So I am confronted with a real wage loss, and I have to hunker down. At the same time, financial markets might suddenly not want to hold Japanese Government Bonds anymore with a perspective of 2 percent inflation. This will end up being a double whammy, and Japan will just drop back into deflation. And now happens what Professor Peter Bernholz wrote in his latest book. Now we have a stagnating Japanese economy, tax revenues dropping like a stone, the deficit already at eight percent of GDP, debt at more than 200 percent and counting. I have no difficulty in seeing this thing tipping overnight into hyperinflation. If you go back into history, a lot of hyperinflations started with deflation.

Many people have warned of inflation in the past five years, but nothing has materialized. Isn’t the fear of inflation simply overblown?

One reason we don’t see inflation is because monetary policy is not working. The signals are not getting through. Consumers and corporates are not responding to the signals. We still have a disinflationary gap. There has been a huge increase in base money, but it has not translated into an increase in broader aggregates. And in Europe, the money supply is still shrinking. My worry is that at some point, people will look at this situation and lose confidence that stability will be maintained. If they do and they do start to fear inflation, that change in expectations can have very rapid effects.

The Swiss National Bank has increased its balance sheet the most in relation to Swiss GDP. Should the Swiss be worried?

Yes, I do think you should be concerned. But at the same time, remind you, what you have here is a very different beast from what you are seeing in other countries. The SNB has not increased base money because they wanted to pump up the economy, but to prevent the Swiss Franc from appreciating too much. And that was not a monetary, but a political decision. I would say barring some major shocks outside, what they have done was the right thing to do and highly successfully implemented. But you cannot deny the arithmetics that the balance sheet is huge, much of it in foreign currency, and if something bad happens outside, and then Switzerland will look like a refuge again, the pressure on the Franc will be huge.

While that policy is in place, Swiss domestic interest rates are too low. Should the SNB be worried about a real estate bubble?

Yes, absolutely. You are caught between a rock and a hard place. To prevent the Franc from going up, you have to introduce too easy monetary policy, and you don’t like that either. So the SNB has to introduce macroprudential measures, trying to cool off the real estate market. That’s the right thing to do, because housing tends to be the big thing that goes wrong when you have too easy financial conditions.

Thursday, April 10, 2014

Today's links

1--RLPC: More aggressive covenant-lite loans barrel through market, Reuters

.S. covenant-lite lending is moving into a more aggressive phase as banks make more concessions and loosen loan terms further to offer even greater flexibility to private equity companies and U.S. firms in a borrower's market.
The new deals, dubbed 'covenant-lite 2.0' by investors, allow companies to pile on more debt, encouraged by investors' seemingly insatiable demand for floating-rate loans.
Covenant-lite lending has already attracted the attention of regulators, who are concerned about overheating in the wider U.S. credit market.

A record $238 billion of U.S. covenant-lite loans were issued in 2013 and around $68 billion of covenant-lite loans have been issued so far this year, according to Thomson Reuters data...

Companies are mounting the size of restricted payments baskets, which usually limit the amount of debt that companies can use to pay dividends or other shareholder payouts, or are tweaking them so that they can be bypassed altogether if firms hit certain leverage ratios....

More aggressive covenant lite loans are appearing as leverage ratios are rising and the use of subordinated junior debt instruments is growing, all of which point to red-hot market conditions reminiscent of the peak of the market in 2007....

Looser lending standards could bring bigger losses to investors in the next default cycle. While the effects may not be immediate now, they could become more apparent in a worsening economy or when the Federal Reserve's liquidity spigot is turned off.
The speculative-grade default rate of 1.95 percent on a trailing 12-month basis in February, is the lowest level since December 2011, according to a March report from Standard & Poor's.

2---'Heartbleed' computer bug threat spreads to firewalls and beyond, Reuters

Hackers could crack email systems, security firewalls and possibly mobile phones through the "Heartbleed" computer bug, according to security experts who warned on Thursday that the risks extended beyond just Internet Web servers.

3---Japan's Nikkei falls to 6-month low on U.S. tech rout, yen, Reuters

4---What’s “up” with the labor force participation rate? Fred blog

The current economic recovery in the United States has featured an almost continuous decline in the labor force participation rate. While this decline is much discussed as a sign the economy may not be recovering, there has been a downward trend since the year 2000. So, the question is whether this decline has recently accelerated or not. Or, in other words, is it mostly cyclical or mostly structural? FRED offers plenty of more-detailed series to analyze this question. St. Louis Fed President James Bullard recently wrote a Review article about the labor force participation.

5---Biggest Credit Bubble in History Flashes Warning: ‘Seek Cover’ , Testosterone Pit
Hidden in the IMF’s just released 188-page Global Financial and Stability Report is a doozie of a chart that screams not only “credit bubble” but also flashes a red warning sign: “seek cover, implosion in sight.” It depicts US issuance of covenant-lite loans and second-lien loans since 2001, including their phenomenal bubble that so spectacularly collapsed in 2008, and the even greater bubble currently underway – with an equally spectacular future...

The IMF chart shows the prior bubble as expressed in covenant-lite loans (green line, right scale) and second-lien loans (red line, left scale) and where it all ended so spectacularly – namely in the financial crisis. It also shows the current bubble through 2013. Covenant-lite loans started setting new records last year, but second-lien loans, a particularly nasty contraption for banks, haven’t quite caught up yet. Up to us to figure out where it ends:

This year, it’s even worse.....Covenants are supposed to protect banks from those shenanigans – but aren’t anymore. Leverage ratios have been rising for a couple of years and now exceed those of the white-hot bubble market of 2007

6---U.S. Bank Repossessions Down 5 Percent in March, Lowest Since 2007 - world property channel

According to RealtyTrac's latest U.S. Foreclosure Market Report for March 2014, U.S. foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 117,485 U.S. properties in March, a 4 percent increase from February but still down 23 percent from a March 2013. The monthly increase in foreclosure activity was driven by a 7 percent month-over-month increase in foreclosure starts -- the initial public notice starting the foreclosure process -- and a 6 percent monthly increase in scheduled foreclosure auctions. Lenders repossessed 28,840 U.S. properties in March, down 5 percent from the previous month and down 34 percent from a year ago to the lowest level since July 2007 -- an 80-month low -...

Average time to complete foreclosure up to 572 days nationwide U.S. properties foreclosed in the first quarter of 2014 were in the foreclosure process an average of 572 days, up 1 percent from 564 days in previous quarter and up 20 percent from 477 days in first quarter of 2013.New Jersey overtook New York as the state with the longest average time to foreclose in the first quarter with an average of 1,103 days to complete foreclosure. That was followed by New York (986 days), Florida (935 days), Hawaii (840 days), and Illinois (830 days

7---Russia And China About To Sign "Holy Grail" Gas Deal, zero hedge

Russia is preparing the announcement of the "Holy Grail" energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis."
Reuters added, reflecting on the recent trip of Rosneft executive chairman to Asia, that "the underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.  The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West."

It's time for an update. According to Itar-Tass, "Russia's Gazprom and China are poised to conclude a gas supply contract in coming weeks, the first in a series of energy projects planned between the two countries. "We’re working now to sign a gas contract in May," said Deputy Prime Minister Arkady Dvorkovich. "Consultations are continuing and Gazprom's leaders are holding talks with Chinese partners on the contract terms. We hope to conclude the contract in May and believe it should come into effect by the year end."

8---The Most Important Difference Between 2007 and 2014, the reformed broker
Screen Shot 2014-04-09 at 12.23.41 PM

In the left pane we see that operating earnings are higher than what they were at the last peak – this demolishes claims that the entire stock market recovery is “because of the Fed.” The recovery is because Fed created conditions in which companies could ramp back up to normalized operating conditions, financing, hiring, innovating, etc.

In the top right pane, you’re looking at the upward trend in profit margins that began in the mid-eighties and has persisted to this day. Profit margins have been generally trending higher (with high lows during recessions and a vicious snapback from the ’09 crash) owing to a variety of factors – most importantly the fact that S&P 500 companies are doing more than half of their business overseas where profits can be higher. In addition, technology represents more than a fifth of the index, and it should not require explanation that selling software and monetizing intellectual property under patent protection is a higher margin business than turning wood into paper or iron and steel into railroad cars. The information technology revolution has given us a different, less labor and cost-intensive economy then we used to have, hence the persistence of higher margins.

Finally, in the bottom right pane you’re looking at total leverage of America’s large companies – as expressed by debt to total equity. The credit bubble of the mid-aughts led to all sorts of reckless behavior and the inevitable reckoning when it all came crashing down. Today we see exactly the opposite, the deleveraging cycle is moderating and credit is just now beginning to expand meaningfully. To me, this is the very starkest difference between 2007 and today – corporate cash as a percentage of total assets is now at 30%, in late 2007 it was 20% and everyone was borrowing.

9---Why We’re in a New Gilded Age, Paul Krugman

Tax burdens on high-income Americans have fallen across the board since the 1970s, but the biggest reductions have come on capital income—including a sharp fall in corporate taxes, which indirectly benefits stockholders—and inheritance. Sometimes it seems as if a substantial part of our political class is actively working to restore Piketty’s patrimonial capitalism. And if you look at the sources of political donations, many of which come from wealthy families, this possibility is a lot less outlandish than it might seem.

Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.

10--Larry Summer makes sense: De long
Lawrence Summers: An agenda for the IMF: "In the face of inadequate demand, the world’s primary strategy is easy money....
All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage.... We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes. A proper growth strategy would recognize that an era of low real interest rates presents opportunities as well as risks and would focus on the promotion of high-return investments... infrastructure spending... promote private investment, including authorizing oil and natural gas exports, bringing clarity to the future of corporate taxes... moving forward on international trade agreements.... Europe has moved back from the brink... But no strategy for durable growth is yet in place and the slide toward deflation continues.... A global growth strategy framed to resist secular stagnation rather than simply to muddle through with the palliative of easy money should be this week’s agenda."

11--Gazprom china deal, Bloomberg

On Wednesday, Gazprom chief executive Alexei Miller and China National Petroleum Corporation head Zhou Jiping apparently made progress on the price issue. The deal may be signed within weeks.
Both countries should have closed the gap long ago: Russia needs to diversify its markets and China is desperate to make the switch from coal to gas. Russia, however, had different priorities, investing in more pipelines to Europe where it was guaranteed high prices. Now, Russia needs the deal no less than China does as it looks for defensive moves in a Chess game with the U.S.
Energy resources have always been a geopolitical tool for Russia and Putin knows how to use it. Putting a squeeze on Russia by trying to strangle its energy exports will now be difficult: If Europe starts buying less of its natural gas imports from Gazprom, Gazprom can sell more to China.

12--President Vladimir Putin's letter to leaders of European countries. Full text, itar tass

 discounts on the prices for natural gas purchased by Ukraine’s chemical companies. This also concerns the discount granted in December 2013 for the duration of three months due to the critical state of Ukraine’s economy. Beginning with 2009, the total sum of these discounts stands at 17 billion US dollars. To this, we should add another 18.4 billion US dollars incurred by the Ukrainian side as a minimal take-or-pay fine.....

What about the European partners? Instead of offering Ukraine real support, there is talk about a declaration of intent. There are only promises that are not backed by any real actions. The European Union is using Ukraine’s economy as a source of raw foodstuffs, metal and mineral resources, and at the same time, as a market for selling its highly-processed ready-made commodities (machine engineering and chemicals), thereby creating a deficit in Ukraine’s trade balance amounting to more than 10 billion US dollars. This comes to almost two-thirds of Ukraine’s overall deficit for 2013.
To a large extent, the crisis in Ukraine’s economy has been precipitated by the unbalanced trade with the EU member states, and this, in turn has had a sharply negative impact on Ukraine’s fulfillment of its contractual obligations to pay for deliveries of natural gas supplied by Russia.

 Russia has been subsidizing Ukraine’s economy by offering slashed natural gas prices worth 35.4 billion US dollars. In addition, in December 2013, Russia granted Ukraine a loan of 3 billion US dollars. These very significant sums were directed towards maintaining the stability and creditability of the Ukrainian economy and preservation of jobs. No other country provided such support except Russia.

13--Russian media banned in Ukraine, itar tass

Moscow to ask UN Human Rights Council to consider Kiev’s attitude to Russian media

14--NATO maneuvers with Georgia, Ukraine threaten war with Russia, wsws

15--Russia warns Europe of gas supply cuts over Ukraine debt, Reuters

Russia meets 30 percent of Europe's natural gas demand and half of its gas transit to the EU goes through Ukraine.
State-controlled gas producer Gazprom stopped pumping gas to Ukraine during price disputes in the winters of 2005-2006 and 2008-2009, leading to reduced supplies in European countries that receive Russian gas via pipelines that cross Ukraine.
White House spokesman Jay Carney said he had not seen Putin's comments but: "We've made clear in the past that it is wholly inappropriate to use energy exports to achieve diplomatic or geopolitical objectives

16---The Rise of the Secular Stagnationist, parg cap

17--Curve flattening signals weak growth, prag cap
Will Fed-Driven Curve Flattening Impact Risk Multiples?
The final chart is from Martin Enlund at Handelsbanken Capital Markets.  Martin highlights the divergence between the slope of the 10y-5y curve in the bond market relative to P/E ratios on equities.  The bond market is sending a very clear message – growth will be weak.  Equities on the other hand, reflect an increasing reach for risk and higher prices despite the warnings from the bond market.


Will Fed-Driven Curve Flattening Impact Risk Multiples?
The final chart is from Martin Enlund at Handelsbanken Capital Markets.  Martin highlights the divergence between the slope of the 10y-5y curve in the bond market relative to P/E ratios on equities.  The bond market is sending a very clear message – growth will be weak.  Equities on the other hand, reflect an increasing reach for risk and higher prices despite the warnings from the bond market.


18---Investors want more Capex spending, prag cap

19--Japan’s Still-Clogged Economic Plumbing , wsj


As the chart’s first panel shows, the BOJ has succeeded in steering banks to curb their JGB holdings. But rather than use that money for loans or investments, the banks put much of it in an equally unproductive place: back at the BOJ in “excess reserves.” As the second panel shows, banks took the proceeds from JGB sales and parked them in their own deposit accounts, held at the central bank.
In other words, some of Japan’s old deflation-era habits die hard.

20--Two Middle-Class Incomes Don’t Add Up To a Home, redfin

21------Russia Announces Decoupling Trade From Dollar, info clearinghouse       
China will re-open the old Silk Road as a new trading route linking Germany, Russia and China

In addition, the BRICS are preparing to launch a new currency – composed by a basket of their local currencies – to be used for international trading, as well as for a new reserve currency, replacing the rather worthless debt ridden dollar – a welcome feat for the world.

Along with the new BRICS(A) currency will come a new international payment settlement system, replacing the SWIFT and IBAN exchanges, thereby breaking the hegemony of the infamous privately owned currency and gold manipulator, the Bank for International Settlement (BIS) in Basle, Switzerland – also called the central bank of all central banks.