Friday, February 25, 2011

Weekend links

1--Sales of New U.S. Homes Fell More Than Forecast in January, Bloomberg

Excerpt: Purchases of new houses in the U.S. fell more than forecast in January, reflecting declines in the West and South that indicate a California tax credit and bad weather may have played a role.

Sales declined 13 percent to a 284,000 annual pace, figures from the Commerce Department showed today in Washington. The median estimate of economists surveyed by Bloomberg News projected a decrease to a 305,000 rate. Demand dropped 37 percent in the West and 13 percent in the South.

Foreclosures will keep depressing prices, making distressed, previously owned properties more attractive to prospective buyers than new houses. Combined with unemployment at 9 percent and tight credit standards, home construction may keep lagging behind the rest of the economy this year...

The supply of homes at the current sales rate rose to 7.9 month’s worth from 7 months in December. There were 188,000 new houses on the market at the end of January, the fewest since December 1967....

Rising borrowing costs represent another hurdle. The average rate on 30-year fixed mortgages matched or exceeded 5 percent for a third period in the week ended Feb. 18, the first time that’s happened since April, the Mortgage Bankers Association said this week. Rates have been rising from a record low of 4.21 percent reached in October.

2--CBO’s Estimates of ARRA’s Impact on Employment and Economic Output, Congressional Budget Office

Looking at recorded spending to date along with estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies and drawing on various mathematical models that represent the workings of the economy. Because those sources indicate a wide range of possible effects, CBO provides high and low estimates of the likely impact, aiming to encompass most economists’ views about the effects of different policies. On that basis, CBO estimates that ARRA’s policies had the following effects in the fourth quarter of calendar year 2010:

* They raised real (inflation-adjusted) gross domestic product by between 1.1 percent and 3.5 percent,
* Lowered the unemployment rate by between 0.7 percentage points and 1.9 percentage points,
* Increased the number of people employed by between 1.3 million and 3.5 million, and
* Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 5.0 million compared with what would have occurred otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers).

The effects of ARRA on output peaked in the first half of 2010 and are now diminishing, CBO estimates. The effects of ARRA on employment and unemployment are estimated to lag slightly behind the effects on output; they are expected to wane gradually beginning in the fourth quarter. CBO projects that the number of FTE jobs resulting from ARRA will drop sharply during 2011—from between 1.7 million and 4.7 million in the first quarter to less than half that number in the fourth quarter (between 0.8 million and 2.5 million). During 2012, CBO estimates that the impact on employment and economic output of ARRA will be small.

3--Does the U.S. Really Have a Fiscal Crisis?, Simon Johnson, New York Times

Excerpt: The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven....

The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-8. The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment.

The financial system poses a major risk to our fiscal outlook over the next few years. Unless you think that the Dodd-Frank reform bill really ended “too big to fail” and the associated excessive risk-taking culture, you should worry a great deal about the assumption of boom, bust, bailout and fiscal damage that the Bank of England now refers to routinely as the “doom loop.”

4--No Irish Spring: Emerald Isle as Credit Crunch Microcosm, The Big Picture

Excerpt: While the story of the collapse of the Celtic Tiger is not a new story, I did enjoy Theodore Dalrymple’s recent piece in City Journal: How the Irish Bubble Burst.

We are supposed to learn something from this incubator of a pure economic meltdown. I find this amazing:

Some 300,000 new dwellings now stand empty in the Irish Republic, a number whose equivalent in the United States would be approximately 21 million.

And the emigration begins…

Unemployment is now 13 percent in Ireland; it would be higher if 5 percent of the working-age population (principally the young and well-qualified) had not emigrated over the last two years.

A few months ago, I did a podcast interview with a friend of mine from Ireland who described the unsettling change in values during the boom a few years ago while on a family visit.

I observed what I later dubbed the “Irish Carpenter Syndrome” (my label for working and middle class Irish investors who were snapping up condos in Manhattan sight unseen) egged on by the currency imbalance.

The poster child for this phenomenon was The Centria Condo adjacent to Rockefeller Center (faces the famed Christmas Tree directly over the plaza) during the 2007 rush to snap up anything they could. 100% of the buyers in this building were reportedly Irish. The high flying Ireland-based marketing firm that sold these condos to investors, largely sight unseen, imploded along with the investors.

The urgency that permeated this NYT article harkens to another time.

“It’s an Irishman’s dream to be able to go to Manhattan and be able to buy property there,” said Mr. McCann, 36, who added that he hoped to buy more New York apartments.”

Yes, indeed.

5-- Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated, naked capitalism

Excerpt: ...Even so, the mortgage “settlement” trial balloon floated in the Wall Street Journal this evening is an offense to common sense and decency. Notice how the word “fraud” is pretty much verboten in the MSM; the latest code word for what went awry is “breakdown”. This implies a benign sort of neglect, simply of not doing sufficient maintenance which led fussy machinery to quit working....

The plan involves having servicers give borrowers principal mods, but obviously only to the extent of the fund amount. The WSJ story announces that mortgage investors will suffer no losses. This shows how backwards the logic here is. Investors would LOVE principal mods to qualified borrowers; it’s far better than taking 70%+ losses on foreclosures. So saving RMBS investors any pain should never have been a feature of the plan design. And that means it is really a fig leaf for avoiding writedowns on second liens, which are heavily concentrated in the four biggest TBTF banks....

The servicers, as well as Fannie and Freddie, would be required to provide principal mods. But given the meager settlement amount, this is a complete and utter joke. The mods will be too shallow and too few in number to help either borrowers or the housing market. Both J.C. Flowers and Wilbur Ross, both very tough minded investors, have found deep principal mods work, and research supports their views....

as Marcy Wheeler correctly points out, this program is really HAMP 2.0. When a small group of bloggers visited the Treasury last August, HAMP was such an obvious failure that the staff didn’t even try hard to defend it....The deal wouldn’t create any new government programs to reduce principal. Instead, it would allow banks to devise their own modifications or use existing government programs, people familiar with the matter said. Banks would also have to reduce second-lien mortgages when first mortgages are modified.

6--Austerity’s inauspicious historical precedents, Felix Salmon, Reuters

Excerpt: Macdonald has an economic historian’s view of the current austerity debate, and he was very clear: if you look at the history of countries trying to cut and deflate their way to prosperity while keeping their currencies pegged, it’s pretty grim — all the way back to Napoleonic times. Sometimes, the peg is gold. For a good example of the destructive abilities of that particular peg, look at the UK in the 1920s, which Macdonald says was arguably worse than the US in the 1930s: shallower, to be sure, but substantially longer. The devaluation of the pound, when it finally came, was very long overdue....

So from a historical perspective, the prospects for countries like Portugal, Ireland and Greece are pretty grim. They can cut their budgets drastically and stay pegged to the euro, but most of them would be better off in the position of Iceland, which can and did devalue in a crisis (and allowed its banks to default, too). So far, the Baltic states have stuck to their deflationary guns with the most determination and discipline, but such things work until they don’t: at some point it’s entirely possible that Latvia or Estonia could pull an Argentina and kickstart growth by devaluing.

All of this is relevant for the US states, of course, which are also locked into a currency union and facing very tough fiscal cuts, as Steven Pearlstein says today:

Will the pain come in the form of prolonged high unemployment? Or wage and salary cuts? Or reduction in the value of homes and financial assets? Or loss of ownership of American companies? Or price inflation? Or higher taxes? Or reductions in government services and benefits?

The right answer, of course, is “all of the above.”...

“The historical lesson of postcrisis austerity movements,” writes Leonhardt, “is a rich one,” and also clear: they don’t work, even if they’re “morally satisfying.”

7-- Matt Stoller: The Liquidation of Society versus the Global Labor Revival, naked capitalism

Excerpt: The problem for the elites is that the system of control is breaking down. I noted a week and a half ago that the Egyptian revolution was a labor uprising against Rubinites. So to the extent that global labor arbitrage relies on sweatshops and environmental degradation in poor countries for cheap goods, successful strikes in poor countries undercuts the whole system. The reason to outsource work in the first place is to prevent workers in rich countries from gaining pricing and political power. Now workers in poor countries are getting pricing and political power? It’s actually a fragile system of control, and can be broken through either crackdowns on tax havens and oligarchs in wealthy countries or protests/strikes where the goods are made.

The Egyptian revolution was really a series of protests and highly politicized strikes, which is why people in Madison are taking inspiration from Cairo. In fact, the actions in Egypt may be creating a wave of labor actions worldwide, rippling to Wisconsin, Indiana, and Ohio. All of these strikes are aimed at a collusive set of tight relationships....

Egyptians are trying to throw off the IMF-imposed austerity measures that created such a system for their country. The new government there is proposing raising taxes on oligarchs, increasing food subsidies, and reducing inequality. Their new cabinet is letting more people apply for “monthly portions of sugar, cooking oil, and rice.” The previous cabinet, “which was comprised of businessmen and former corporate executives”, had refused this.

And look at how Egypt is treating public employees: “Temporary workers who have spent at least three years working for the government will now be given permanent contracts that carry higher salaries, and benefits such as pension plans, and health and social insurance.”

Pension plans, health, and social insurance, oh my! How are they planning to pay for this? One member of a left-of-center party made it quite clear:

Confiscating wealth looted by cronies of the former regime, more egalitarian distribution of wealth, gradual taxation, better government oversight, and placing “a reasonable ceiling” on profitability of goods and services sold to the public are among the measures that should restore an economic balance to society, he said.

It is too early to pretend like this is a done deal, but it is certainly the case that the mass exercise of people-power in Egypt made this far more possible than it had been before. Even after Mubarak resigned, and even when the army tried to ban labor gatherings, the Egyptian labor movement continued to strike, gather, and make demands....

As commodity prices shoot up, and become more volatile, the pressure to liquidate America will only increase. These increases take the form of gifting public assets to oligarchs, taxing the middle class and poor, slashing social service budgets, and cutting wages through inflation and outright demotions (like the NYC sanitation workers that were demoted right before a giant blizzard). But civil unrest is intensifying it its most basic forms: protests and strikes, and in advanced forms, like the blowback at the national security state embodied in the HB Gary and WIkileaks fiasco.

What we are seeing is two political and economic systems, increasingly at odds – high trust and cooperative, or dominance-based and lowest common denominator. This is not, fundamentally, a debate about economics. It is true that neoclassical economics doesn’t work, leads to corruption, and is intellectually dishonest. But that’s why this isn’t a question of economics, because the dishonesty is part of a system of corrupted values.

8--From inflation to stagflation, FT Alphaville

Excerpt: (wonkish) Some grumbling from the belly of the US Treasury curve.

US Treasuries had a rollercoaster day on Wednesday as soaring crude sent the 10-year yield lower by 6 basis points. UST gains then reversed within a couple of hours. Meanwhile five-year breakeven rates (the spread between inflation-linked and regular US debt notes) rose to the highest since July 2008 on inflation concerns.

And indeed there’s been some active movement in the TIPS market — with short-end inflation expectations (as implied by two-year TIPS) rallying as much as 35 basis points over the past week as they react to those commodity prices.

So — inflation expectations for sure. But maybe something else too.

Here’s Bank of America Merrill Lynch analysts on recent UST moves:

The market contributes the [10-year] move as dealers getting ready for the supply of US$29bn 7y, but a detailed scrutiny reveals that the move follows a stagflation concern which is clear from the 5y bond: almost the entire rally came from the real yield (RY), and the sell-off, from breakeven inflation (BEI). Beginning to end, the 5y RY (USGGT05Y) and BEI (USGGBE05) were respectively (-0.32%, 2.14%) and (-0.42%, 2.2%). The lower real yield is one reason that the USD traded weak.

The spread between five-year real yields and five-year breakeven inflation also looks to have completely reversed its 2008 (deflationary) relationship.

Salutations, stagflation expectations.

9--Eurozone bond buybacks, unmoored, FT Alphaville

Excerpt: Portugal’s 10-year bonds now yield 7.5 per cent. Quite unmoored.

Long-term plans to resolve the eurozone crisis — joining them there, increasingly.

Everyone still seems to be digesting the results from a state election in Germany, in which Angela Merkel’s party was roundly trounced. Likely not for its European policies, but there’s still been a legislative backlash against eurozone bailout proposals all the same.

In particular, against allowing the European Stability Mechanism to buy debt of distressed sovereigns, or indeed lending to governments to allow it to buy it back themselves.

Not only that — but Merkel’s coalition partners also want a ’special’ deal on Greek debt buybacks to be ruled out before the ESM comes online in 2013, the FT reports.

Given their implications, we’re not sure these two objections have been digested nearly enough yet.

10--Why Stocks Tanked (It's Not Just Libya) , Wall Street Journal

Excerpt: It's not just about Libya. There's another reason the stock market just took a hit. Everyone had become way too bullish and way too complacent.

Pride, as they say, goeth before a fall. When everyone's bullish, who is left to come in?

We're slap-bang in the middle of another mania.

A few days ago, while everyone was watching events unfold across the Arab world, an intriguing document came across my desk. It was the monthly Bank of America/Merrill Lynch survey of the world's top investment managers.

Bank of America spoke to 270 institutional investment managers—with a thumping $773 billion in assets—around the world and asked them for their views on the markets.

In a nutshell? They were about as euphoric as they have been since the late 1990s. "Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan '06," reports Bank of America. Cash had fallen to 3.5% of assets—a dangerously low level. BofA research says that in the past, when it has fallen that low a stock market "correction" has usually followed in a matter of weeks.

Our old friends the hedge funds are back to where they were before the crash. According to the BofA report, hedge funds are betting as heavily on booming share prices as they were in July 2007, and the last time they were playing with this much borrowed money was in March 2008. Ah, the happy memories ...

It isn't just the institutions, either. The individual American investor, who has been selling stocks for most of the past couple of years, has suddenly turned tail and started buying again. Portfolio managers will tell you their clients have been back on the phone since the start of the year, eager to get in on the action. The Investment Company Institute, a trade organization for mutual funds, reports big inflows of new money into stock-market funds since early January. Indeed, inflows into U.S. stock funds have been running at levels not seen—but for a single brief spike in 2009—since well before the crash.

Sentiment is one thing. Valuation is another. And Wall Street is frankly expensive by most measures. The dividend yield on the overall market, according to FactSet, is a measly 1.5%. The last time it was this low for any length of time was during the great bubble years of 1997 to 2001. According to data tracked by Yale University economics professor Robert Shiller, the market overall is priced at about 24 times cyclically-adjusted corporate earnings. That is very high; the average is about 16. Last week I screened the stock market for good dividend stocks: blue-chip companies whose shares are selling cheaply and which offer decent yields. The ranks are pretty thin these days. Everything has boomed.

11--Germany’s Economic Fortress Could Come Toppling Down, Marshall Auerback, New deal 2.0

Excerpt: There is a long way to go before the private sector will have adequately restructured their balance sheets so that they will be prepared to spend freely again. Unless some other sector is willing to reduce its net saving (such as the external sector via trade) or increase its deficit spending (as with the federal budget balance of late), then the mere attempt by the domestic private sector to net save out of income flows, given the existing private debt overhang, can prove very disruptive.

Would that our officials recognized this. Instead, we have the spectacle of governments across the world engaged in significant fiscal retrenchment at a time when the private sector is demonstrating a strong predisposition to save. That’s understandable. Given prevailing high levels of unemployment, low capacity utilization ratios, and relatively sluggish aggregate demand, a greater predisposition by the private sector to save makes greater sense.

Who, then, can fill that gap? If it doesn’t come from exports (and it’s impossible for all nations to run current surpluses), then only the government can fill that gap. A lack of jobs is the result of a lack of spending. The government has the capacity to provide that extra aggregate demand, and could do so easily by directly creating the necessary work. Instead, we appear more focused on union-busting and rewarding the figures most responsible for creating this crisis in the first place.

12--Liquidations Coming: Hedge Fund Margin Debt Surges - Total Free Cash Lowest Since July 2007, Just Prior To Quant Wipe Out, zero hedge

Excerpt: The NYSE has released its January margin debt data. Not surprisingly, total margin debt hit a peak of $290 billion, the highest since September 2008, but the one category that shows just how much purchasing is occurring on margin is total Free Credit less Total Margin Debt drops to the lowest since the all time credit bubble peak in July of 2007! At ($45.9 billion) this number is just below the ($52.8) billion last seen just before the August 2007 quant wipe out which blew up Goldman's quant desk, and arguably was the catalyst for the beginning of the end. In other words, as we have shown, everyone is now purchasing on margin and the level of investor net worth is the lowest in over 3 years. Which means that should the market decline from this week persist and the Fed be unable to stop it, the margin calls will start coming in fast and furious, and unwinds in otherwise stable products like gold and silver are increasingly possible as hedge funds proceed to outright liquidations.

13--Household deleveraging and consumer-led growth, FT Alphaville

Excerpt: Back in October and November of last year, one of the reasons that cautious optimism returned to the US economy was the possibility that household deleveraging was far enough along that it could continue, perhaps at a slower pace, even while consumers felt comfortable spending again.

With government’s contribution to the economy declining and corporates continuing mostly to sit on their cash piles, consumption would have to carry a heavy burden for pushing the economy forward....Thus far, it seems, consumers are playing their part — increasing spending and continuing to deleverage. Greg Ip wrote in November that the ratio of household debt to disposable income had declined from its 2007 peak of 135 per cent to 123 per cent in the middle of last year. And since then it has fallen further to 118 per cent...

At the same time, if you look at a breakdown (via EconomPic Data) of last week’s GDP numbers, it’s clear that personal consumption is indeed what largely drove the economy in the fourth quarter...

(Yes, there was also a big contribution from declining imports, but James Hamilton explains that this positive contribution should be interpreted as having been offset by declining inventories, as these two variables have tended to move inversely of late, which is likely not a coincidence.)

This seems exactly like the scenario everybody was hoping for: a recovery that’s driven by rising income and demand, taking place even as households keep deleveraging.

In other words, the recovery can’t be just a consumer story forever. That spending is outpacing income is a welcome boost to the economy for now, but certainly nobody would think it healthy for the savings rate to fall again to the absurd, sub-1% levels it reached in 2005.

At some point, the recovery will need help from business investment (including higher employment) to be sustainable. And surely Tim Duy has a point when he writes that an element of global rebalancing needs to play a big role as well — a higher savings rate would help the US reduce its current account deficit and allow net exports to pull more weight.

As you may have guessed, there are additional complications.

One is that much of the deleveraging is happening through defaults on mortgages and consumer loans.

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