Thursday, December 23, 2010

Today's links

1--No End In Sight To Equity Outflows As Stock Boycott Persists Despite Largest Bond Outflow Since Lehman Failure, zero hedge

Excerpt: For the second week in a row, those claiming that flows will shift away from bonds and go to equities are proven dead wrong. ICI has just reported that in the week ended December 15, not only was there another massive outflow, the 33rd in a row, from domestic equity mutual funds to the tune of $2.4 billion, but taxable and municipal bonds saw a stunning $8.6 billion in outflows, including another record $4.9 billion in muni outflows.

At this point absent another major pull back in bond prices, we anticipate that bond inflows will once again resume, even as stock outflows persist indefinitely. Year to date investors have pulled just under $100 billion in money from US-focused equity mutual funds, offset by just $16 billion in comparable inflows into equity strategies via ETFs as we described yesterday. The reason for this seemingly endless boycott of stocks via the bulk of the population was given best by Geoff Bobroff, who told Bloomberg: "I would guess most retail investors are staying put because you aren’t seeing the money go anywhere else." Another explanation, and just as spot on: nobody, save for a few hedge funds, gives a rats ass about manipulated stocks prices anymore.

2--Obama's tax deal: read the small print, Dean Baker, The Guardian

Excerpt: First, it is important to remember that although the total package is scored as costing almost $900bn over two years, almost everything in this package simply leaves in place current tax rates and spending. The biggest portion of the tax cut continues the tax rates put in place by President Bush in 2001. The continuation of these tax cuts, including a lower estate tax rate, accounts for almost $400bn of the $900bn.

Adding in the cost of a technical fix to the Alternative Minimum Tax, which is done every year, and the continuation of a series of smaller tax breaks, brings the total to $670bn. This portion of the package buys exactly zero stimulus, since it simply amounts to continuing tax policies already in place. Had these tax breaks not continued, it would have been a drag on growth, but their continuation does not provide any additional momentum to the economy. The $60bn cost of extending unemployment insurance for another year can also be put in this category.

The only net stimulus in this package comes from replacing the $60bn Making Work Pay tax credit in 2011 with a $110bn reduction in the payroll tax and the allowance full expensing of new investment. The latter is projected to cost $55bn a year for the next two years. The full expensing in this deal replaces a provision of the 2009 stimulus package that provided for 50% expensing, which means that the net boost to the economy is half this size.

In sum, the net stimulus for the economy from this package in 2011 will be in the range of $70bn, or about 0.5% of GDP. This is not likely to provide a substantial boost to growth.

3--Banks accused of illegally looting homes, New York Times

Excerpt: When Mimi Ash arrived at her mountain chalet here for a weekend ski trip, she discovered that someone had broken into the home and changed the locks.

When she finally got into the house, it was empty. All of her possessions were gone: furniture, her son’s ski medals, winter clothes and family photos.

Also missing was a wooden box, its top inscribed with the words “Together Forever,” that contained the ashes of her late husband, Robert.

The culprit, Ms. Ash soon learned, was not a burglar but her bank. According to a federal lawsuit filed in October by Ms. Ash, Bank of America had wrongfully foreclosed on her house and thrown out her belongings, without alerting Ms. Ash beforehand.

In an era when millions of homes have received foreclosure notices nationwide, lawsuits detailing bank break-ins like the one at Ms. Ash’s house keep surfacing.

4--The Tax-Payers' Tab: a Cool $9 Trillion and Then Some, Pam Martens, counterpunch

Excerpt: This mystery is further intensified by one Fed spread sheet showing that the largest Wall Street firms deposited a total of $2.1 trillion in stocks as collateral in order to obtain liquid funds from the Fed. Depositing stocks as collateral began on the day Lehman died and was done in large size by Lehman Brothers, Morgan Stanley, Merrill Lynch, and Citigroup. Raising additional red flags, tens of billions of dollars in stocks were posted as collateral by the London operations of Morgan, Merrill and Citi.

Was this publicly traded stock from the firms’ proprietary trading desks, otherwise known as the in-house casino? Was it illiquid private equity in which the firms had their money tied up? Was it equity tranches from the dubious Collateralized Debt Obligations (CDOs)? If it was either of the latter, how could it have been properly priced as collateral? The Fed describes the equity as follows: “Securities representing ownership interest in a private corporation….” Without knowing the details of these securities, or the other unspecified junk bonds used as collateral, we don’t know the extent of the trash the Fed was swapping for cash with Wall Street...

A July 2010 staff report from the Federal Reserve Bank of New York, titled “Shadow Banking,” noted the following about the shadow system in which conduits played a significant role:

“The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks….

“…this [shadow banking] system of public and private market participants has evolved and grown to a gross size of nearly $20 trillion in March 2008, which was significantly larger than the liabilities of the traditional banking system. However, market participants as well as regulators failed to synthesize the rich detail of otherwise publicly available information on either the scale of the shadow banking system or its interconnectedness with the traditional banking system…At a size of roughly $16 trillion in the first quarter of 2010, the shadow banking system remains an important, albeit shrinking source of credit for the real economy…”

In other words, the leverage in the system was not coming just from mortgage securitizations and esoteric derivatives but from off-balance-sheet debt parking schemes quite similar to that used by Enron.

5-- Inflation in 2011?, Calculated Risk

Excerpt: Inflation: With all the slack in the system, will the U.S. inflation rate stay below target? Will there be any spillover from rising inflation rates in China and elsewhere?

First lets look at the current situation. Over the last 12 months, several key measures of inflation have shown small increases: CPI (Consumer Price Index) rose 1.1%, the median CPI increased 0.5%, the trimmed-mean CPI increased 0.8%, core CPI (less food and energy) increased 0.8%, and core PCE prices increased 1.2% (Q3 2009 to Q3 2010).

For more on inflation, and a discussion of inflation measures, see Dr. Dave Altig's post today: An inflation (or lack thereof) chart show. Altig concludes:

I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.

I agree with Dr. Altig. My view is:

• I think the inflation rate (by these measures) will stay below the Fed's 2% target throughout 2011 (I'll guess close to 1%).

• I think rising prices in China, and rising commodity prices (like oil at $90 per barrel), will cause little spillover into U.S. inflation in 2011.

6--Weekly Initial Unemployment Claims at 420,000, Calculated Risk

Excerpt: The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 18, the advance figure for seasonally adjusted initial claims was 420,000, a decrease of 3,000 from the previous week's revised figure of 423,000. The 4-week moving average was 426,000, an increase of 2,500 from the previous week's revised average of 423,500.

The four-week average of weekly unemployment claims increased this week by 3,000 to 426,000.
In general the four-week moving average has been declining ... and that is good news.

7--Buy vs. Rent: An Update, New York Times

Excerpt: Below is an updated list of rent ratios — the price of a typical home divided by the annual cost of renting that home — for 55 metropolitan areas across the country.

We last covered this subject about eight months ago, and you’ll notice that most ratios have not changed much since then. A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years. (see chart)

8--The economic outrage of 2010: Cowardly leaders failed to help working people -- and coddled the rich, Joseph Stiglitz, New York Daily News

Excerpt: The bankers had used their money and political influence first to buy deregulation, then to get a massive bailout and finally, this year, to prevent effective reregulation.

Although the passage of the major Dodd-Frank financial sector regulation bill was a move in the right direction, it is riddled with exemptions and exceptions. It doesn't do what needs to be done with the too-big-to-fail banks - namely, break them up. It doesn't do what needed to be done about the risky credit default swaps and derivatives, which were responsible for the $180 billion bailout of AIG. While there may be debate over whether these are gambling instruments or insurance products, there should have been no debate that government-insured banks shouldn't be able to write these risky products. Yet they were allowed to continue to do so....

Some of the pain felt by the middle class could have been averted if our politicians had gotten up the gumption to pass a second round of stimulus.

Contrary to what you may have heard, the first round worked: But for the $800 billion stimulus passed in February 2009, unemployment would have peaked in excess of 12%. It just wasn't big enough, and wasn't well enough designed, to get unemployment down to an acceptable level.

Instead, Congress has now passed a tax cut, much of the benefit of which will go to the richest Americans - including the bankers responsible for the crisis.

9--North Korea threatens 'sacred war' with the South, CNN

Excerpt: Seoul, South Korea (CNN) -- North Korea threatened Thursday to launch a "sacred war" after South Korea completed large military exercises near the volatile inter-Korean border.

"The revolutionary armed forces of the DPRK (Democratic People's Republic of Korea) are getting fully prepared to launch a sacred war of justice of Korean style based on the nuclear deterrent at anytime necessary," North Korea's defense minister Kim Yong Chun said, according to the state-run news agency.

"The South Korean puppet forces perpetrated such grave military provocation as renewing their shelling against the DPRK during their recent exercises for a war of aggression in the West Sea of Korea," Chun said. "This indicates that the enemy's scenario for aggression aimed at the start of another Korean War, has reached the phase of its implementation.

The long-planned South Korean exercises, billed as the largest land and air winter drills, were conducted just 15 miles from the North Korean border....

South Korean President Lee Myung-bak had harsh words for North Korea on Thursday.
"In the case of another surprise attack, the country must launch a merciless counterattack," Lee said.

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