Friday, January 14, 2011

Today's links

1--Pyrrhic Bond Auctions, Paul Krugman, New York Times

Excerpt: I’m with Calculated Risk here: it says something about the sheer desperation of the European situation that Portugal’s ability to sell 10-year bonds at an interest rate of “only” 6.7 percent is considered a success. If you think about the debt dynamics here — the burden of growing interest payments on an economy that is likely to face years of grinding debt deflation — an interest rate that high is little short of ruinous. But it is, indeed, not as bad as people were expecting last week; hence, success.

A few more successes and the European periphery will be destroyed.

2--For U.S., Portugal Is a Welcome Distraction, Kelly Evans, Wall Street Journal

Excerpt: Until the euro zone problem is resolved, sovereign-debt investors are likely to favor the least-worst market—U.S. government debt.

That should help the market absorb heavy U.S. debt issuance this week. Along with the three-year offering Tuesday, there will be telling auctions of 10-year and 30-year debt on Wednesday and Thursday, respectively.

U.S. interest rates have also moved up in recent months; the 10-year yield is about 3.3% now, compared with 2.5% back in August.

Unlike Portugal or Greece, though, that partly reflects brighter growth prospects for 2011.

A rebound in demand for U.S. debt could start to rein in that upward move. As such, one metric to watch this week is the level of foreign participation in the Treasury auctions.

3--Home price drops exceed Great Depression: Zillow, Reuters via

Excerpt: Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow.

Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month....

"For the next six to nine months, the larger factors affecting the housing market that will produce more home price declines will be the excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated employment, Stan Humphries, Zillow's chief economist, said in a blog post.

Declines are accelerating, and it will take a while before falling unemployment and other signs of economic improvement support the market, Zillow said.

4--The Foreclosure Dump, Diana Olick, CNBC via

Excerpt: It's coming, no question.

Today's report from RealtyTrac serves as a warning to big banks, Fannie, Freddie and local communities; The foreclosure glut is coming, and they'd better be ready to get rid of that glut in a big way.

2010 saw a record number of bank repossessions, over a million, even with a big drop in volume toward the end of the year, thanks to the robo-signing scandal and ensuing foreclosure freezes.

"Early indications in January were that this robo-signing related delay will be over by the end of first quarter if not sooner," says RealtyTrac's Rick Sharga. "I think we're going to see a significant spike in foreclosure activity early in 2011, and that will contribute in part to 2011 being a record year."

Sharga estimates as many as a quarter of a million foreclosures that should have happened in 2010 will now be pushed into the 2011 numbers, and added to an already huge supply of bank owned properties. The four biggest banks already have close to $7 billion worth of foreclosed properties (REO) on their books, and Fannie and Freddie have about $24 billion collectively. While REO sales make up about one third of all sales in the current market, there is an estimated 3 year supply.

5--European Banks Addicted to ECB Lending, Wall Street journal

Excerpt: The European Central Bank’s addicted bank problem continued through December, according to the latest lending figures from national central banks.

Irish banks borrowed 132 billion euros from ECB facilities as of the end of December, a 4.4-billion-euro drop from November, according to figures Friday from Ireland’s central bank. Irish banks still account for almost one-quarter of all ECB lending even though the economy accounts for less than 2% of euro zone GDP.

Spanish banks, meanwhile, tapped ECB funding to the tune of 70 billion euros last month, a nearly 6-billion-euro rise from November. Spanish banks account for about 15% of all ECB lending (Spain’s GDP is 11% of the euro zone). Before the crisis, banks there accounted for just 7% of ECB facilities.

Earlier in the week, Portugal’s central bank reported banks there borrowed 40.9 billion euros from the ECB in December, a 3-billion-euro rise from November.

Though some of last month’s rise in the three countries probably reflects normal year-end funding pressures, “there’s nothing to suggest any progress being made on weaning banks off ECB liquidity support,” Matthews says.


Excerpt: The latest Gallup data (via Business Insider) shows a pronounced decline in consumer spending in the first few weeks of 2011.

“Overall self-reported daily consumer spending in stores, restaurants, gas stations, and online averaged $55 per day in the week ending Jan. 9 — down as expected from the $75 average for the month of December, but also well below the $68 average for the same week in 2010.”

They find no signs of a recovery in consumer spending in 2011:

“Throughout 2010, consumer spending remained relatively close to that of 2009 — the “new normal” trend. Spending surged in December of each year and then fell back in January as expected, given seasonal spending trends; Gallup’s spending data are not seasonally adjusted. Weather may be partly responsible for the sharper drop in early January 2011 — Gallup has found that it can affect weekly spending. Regardless, there are no signs that an improvement in consumer spending is taking place in early January 2011.”

Gallup says the “new normal” is likely to persist as unemployment remains high, deleveraging continues and the wealth imbalance in the USA persists:

“As consumers continue to deleverage — by not only paying down their debts, but also using less new credit — it may be that the “new normal” spending patterns of 2009-2010 will continue unabated in 2011. Lower- and middle-income consumers, who remain focused on using cash, may spend more on holidays and for special events, but then feel the need to pull back on spending shortly thereafter to compensate. Upper-income consumers, who have more disposable income to spend, might splurge at certain points during the year, but hold back on their spending more generally, as they did in 2009 and 2010.

7--Global Risk and Reward in 2011, Nouriel Roubini, Project Syndicate

Excerpt: The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.

But there are downside and upside risks to this scenario. On the downside, one of the most important risks is further financial contagion in Europe if the eurozone’s problems spread – as seems likely – to Portugal, Spain, and Belgium. Given the current level of official resources at the disposal of the International Monetary Fund and the European Union, Spain now seems too big to fail yet too big to be bailed out.

The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.

In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later, with China, in particular, risking a hard landing. There is also a risk that capital inflows to emerging markets will be mismanaged, thus fueling credit and asset bubbles. Moreover, further increases in oil, energy, and commodity prices could lead to negative terms of trade and a reduction in real disposable income in net commodity-importing countries, while adding to inflationary pressures in emerging markets.

8--Record Foreclosure activity in 2010, Calculated Risk

Excerpt: From RealtyTrac: 2010 Year-End Foreclosure Report:

RealtyTrac® ... today released its Year-End 2010 U.S. Foreclosure Market Report™, which shows a total of 3,825,637 foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on a record 2,871,891 U.S. properties in 2010, an increase of nearly 2 percent from 2009 and an increase of 23 percent from 2008. ...

Foreclosure filings were reported on 257,747 U.S. properties in December, a decrease of nearly 2 percent from the previous month and down 26 percent from December 2009 — the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008.

“Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity — triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Even so, 2010 foreclosure activity still hit a record high for our report, and many of the foreclosure proceedings that were stopped in late 2010 — which we estimate may be as high as a quarter million — will likely be re-started and add to the numbers in early 2011.”

9--A Tale of Two Moralities, Paul Krugman, New York Times via Economist's View

Excerpt: One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.

The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.

There’s no middle ground between these views. ... Today’s G.O.P. sees much of what the modern federal government does as illegitimate; today’s Democratic Party does not. When people talk about partisan differences, they often seem to be implying that these differences are petty, matters that could be resolved with a bit of good will. But what we’re talking about here is a fundamental disagreement about the proper role of government...

In a way, politics as a whole now resembles the longstanding politics of abortion — a subject that puts fundamental values at odds, in which each side believes that the other side is morally in the wrong. Almost 38 years have passed since Roe v. Wade, and this dispute is no closer to resolution.

Yet we have, for the most part, managed to agree on certain ground rules in the abortion controversy: it’s acceptable to express your opinion and to criticize the other side, but it’s not acceptable either to engage in violence or to encourage others to do so.

What we need now is an extension of those ground rules to the wider national debate.
Right now, each side ... passionately believes that the other side is wrong. And it’s all right for them to say that. What’s not acceptable is the kind of violence and eliminationist rhetoric encouraging violence that has become all too common these past two years.

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