Monday, December 20, 2010

Today's Links

1--An inconvenient housing sector, Reuters

Excerpt: Wall Street banks have been gripped by a certain euphoria in recent weeks, with their economists touting a modest improvement in U.S. data as an omen of more robust growth to come in 2011.

Housing figures next week may inject a dose of sobriety into these forecasts. Anticipation of a strong expansion, coupled with worries about the budget deficit following a new tax deal in Washington, have pushed Treasury bond yields that directly affect mortgage rates sharply higher...

A report on Wednesday is expected to show existing U.S. home sales, which account for the bulk of the market, rose by about 300,000 units on an annualized basis to 4.71 million in November. That would mark a move further away from the 15-year low seen in the summer, but it would still be a far cry from record peaks over 7 million in 2005.

2--The coming municipal bond crisis, Pragmatic Capitalism

Excerpt: The following segment on 60 Minutes this evening is a must see. The segment covered the state and local funding crisis in the USA. Meredith Whitney was a special guest and predicted that the crisis would unfold in the “next 12 months”. Whitney says the states are susceptible to hundreds of billions in losses and local insolvencies could be widespread.

This is a particularly interesting development if it were to materialize. Of course, municipal bonds have been very jumpy in recent weeks and as revenue constrained entities (unlike the federal government) the states have been hit particularly hard by the crisis. The states are exactly like the nations of Europe so solvency is a very real concern here. Their bloated budgets and out of control spending has created severe balance sheets concerns. With a government that is leaning more and more towards small government it will be interesting to see if austerity impacts the US economy through the state funding channels.

3--Lessons from Iceland, The Economist

Excerpt: Evidence of economic recovery in Iceland means the Irish can no longer persuade themselves that things are worse elsewhere. Figures released on December 7th showed that Iceland’s GDP rose by 1.2% in the third quarter (Ireland’s third-quarter GDP rose by 0.5%, according to figures published on December 16th). The Icelandic central bank’s benchmark interest rate has fallen to 4.5%, from a peak of 18%. The halving of the dollar value of the Icelandic krona at the height of the crisis pushed inflation as high as 18.6%. It has since fallen close to the central bank’s 2.5% target. The “misery index”, a crude grading that sums unemployment and inflation rates, suggests Iceland is now doing better than Ireland

Iceland’s recuperation seems to offer two big lessons for Ireland and other troubled euro-zone countries. The first is that the extra cost to a country of not standing by its banks can be surprisingly small. Iceland let its banks fail and its GDP fell by 15% from its highest point before it reached bottom. Ireland “saved” its banks and saw its output drop by 14% from peak to trough.

A second lesson is that the benefits to a small country of being part of a big currency union are not all they were once cracked up to be. When panicky investors were rushing out of small currencies in the autumn of 2008, the euro seemed a haven. There was much talk in Iceland of fast-tracked membership of the European Union and, ultimately, the euro. Two years on, the euro looks more like a trap for countries struggling to regain export competitiveness. Greece and Ireland have lost the confidence of markets, even though both issue bonds in euros. Iceland’s voters are cooler about joining the EU and the euro.

4---GSEs: $1 Trillion Dumping Ground for Bad Bank Loans, The Big Picture

Excerpt: Post-receivership, the GSEs have become a government sanctioned back door bailout of regular banks. Any mortgage that cannot be refi’d or modified ends up on their books. This includes mortgages on the verge of default and foreclosure.

How much is the worst case scenario for the ongoing bailout of the banking sector, plus Fannie’s and Freddie’s own screw ups?

If everything goes precisely wrong, taxpayers are potentially on the hook for another $1 trillion bailout:

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts....

Its not a coincidence that many of these banks are finding the capital to pay back their bailout loans. The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs — and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.

Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans.

5--Fannie And Freddie And the Backdoor Bank Bailout, The Big Picture

Short video with Barry Ritholtz and Dean Baker

6--Largest High Grade Bond Outflow On Record, zero hedge

Excerpt: While it was no surprise to readers that equity mutual funds saw the 32nd consecutive outflow from domestic stock funds (for a total of $95 billion YTD), what was far more surprising is that flows out of credit, and particularly high grade, surged. As Bank of America notes, "high grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth occurrence this year so far, according to data from EPFR." The question then becomes where did, and will, all this cash go: if now following such a massive outflow from the traditional flow safe-haven, no money still goes to equities, then it will be fairly simple to conclude that no matter what happens, that equities are now thoroughly embargoed by the vast majority of retail investors: those that, incidentally, account for just under 40% of market capitalization (a number which curiously is almost comparable to the amount of stimulus notional, both fiscal and monetary, since the Lehman crash).

From B of A: High grade mutual funds saw outflows of $2.5 billion, the largest dollar amount on record and just the fourth occurrence this year so far, according to data from EPFR. As we highlighted yesterday, negative net flows in high grade funds tend to follow large sell offs in rates, which has occurred since the beginning of this month. In other asset classes, high yield mutual funds saw $222 million in net flows, the second consecutive weekly inflow, but lower than last week’s figure of $533 million. Factors pointed to a mild but positive number, as daily flow figures were inconsistent, with two positive and two negative readings.

7--Owner’s Equity in Real Estate Down 55.7%, The Big Picture

Excerpt: These two charts paint a devastating picture of the US housing market....Its not just that the market value of US residential real estate fell about $6.2 trillion dollars (versus Case Shiller’s 33%) peak to trough fall; the uglier number is the owners equity RE: It is off 55.7% over the same period....(must see charts)

8--Federal Government Cuts Off Recession Relief Money To States, Huffington Post

Excerpt: Despite soaring unemployment and the 19 million Americans currently living in "deep poverty," federal funds for the Temporary Assistance For Needy Families (TANF) program have entirely dried up for the first time since 1996, leaving states with an average of 15 percent less federal funding for the coming year to help an ever-increasing number of needy families.

TANF, the federal program that replaced welfare under the Clinton Administration, provides a lifeline for families and workers who have exhausted all of their unemployment benefits. According to a new report by the Center for Budget and Policy Priorities, "more homeless families will go without shelter, fewer low-wage workers will receive help with child care expenses, and fewer families involved with the child welfare system will receive preventive services" now that Congress has passed legislation that will end funding for the TANF Contingency Fund in 2011.

Congress also failed to reauthorize an emergency fund for a subsidized job program on September 30 that would have allowed states to provide emergency help to needy families and place low-income people in subsidized jobs.

In fiscal year 2011, every state except Wyoming will experience up to a 20 percent reduction in recession relief funds. The CBPP reports that many states have already drastically reduced their subsidized job programs after being cut off from federal funding, costing tens of thousands of people their jobs. Some states are also considering substantial cuts to programs for low-income families with children, including child care subsidies for working parents and programs that address substance abuse, caring for a disabled child, and other challenges.

9--When Zombies Win, Paul Krugman, Commentary, New York Times via Economist's View

Excerpt: When historians look back at 2008-10, what will puzzle them most, I believe, is the strange triumph of failed ideas. Free-market fundamentalists have been wrong about everything — yet they now dominate the political scene more thoroughly than ever. ...

It’s ... worth pointing out that everything the right said about why Obamanomics would fail was wrong. For two years we’ve been warned that government borrowing would send interest rates sky-high; in fact, rates have fluctuated with optimism or pessimism about recovery, but stayed consistently low by historical standards. For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued.....

Right now Mr. Obama is hailing the tax-cut deal as a boost to the economy — but Republicans are already talking about spending cuts that would offset any positive effects from the deal. And how effectively can he oppose these demands, when he himself has embraced the rhetoric of belt-tightening?

Yes, politics is the art of the possible. We all understand the need to deal with one’s political enemies. But it’s one thing to make deals to advance your goals; it’s another to open the door to zombie ideas. When you do that, the zombies end up eating your brain — and quite possibly your economy too.

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