Tuesday, May 10, 2011

Today's links

1--Iraqi oil production cutback plan adds to global supply fear, Wall Street Journal

Excerpt: IRAQ is preparing to halve its official oil production target, forcing companies including BP and Shell to renegotiate their contracts.

The country's Oil Ministry, with backing from the Prime Minister Nouri al-Maliki, will set a new target to produce between 6.5 million and 7 million barrels per day by 2017, down from original plans to pump 12 million barrels, according to industry insiders.

Iraq, which is a member of the OPEC cartel that pumps 40 per cent of the world's oil, produces about 2.68 million barrels a day, barely higher than under Saddam Hussein.

It had been hoped that with a huge injection of foreign investment, it would be able to challenge Saudi Arabia as the world's biggest oil exporter this decade.

Confirmation it has scrapped the old target will add to fears that global supply will be unable to keep pace with demand in coming years.

2--Home Prices Hit New Post-Crash Lows, Nasdaq

Excerpt: U.S. home prices have fallen to new post-crash lows, confirming a predicted "double dip" in housing prices, according to new figures from housing data firm Clear Capital.

Nationally, home prices were down 4.9 percent compared to the previous quarter, according to Clear Capital's report for April. That decline put prices 0.7 percent below the previous post-crash low reported in March 2009, producing the so-called "double dip."

The quarterly decline reversed all the gains recorded over the previous year, with prices down 5.0 percent compared to their April 2010 level. The decline was blamed on a rising tide of foreclosed properties, known in the industry as REOs (real-estate owned), which made up 34.5 percent of all sales in the current report.

"The latest data through April shows a continued increase in the proportion of distressed sales that are taking hold in markets nationwide," said Alex Villacorta, Clear Capital director of research. "With more than one-third of national home sales being REO, market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales."

3--WSJ: Home Market Takes a Tumble, Calculated risk

Excerpt: From Nick Timiraos and Dawn Wotapa at the WSJ: Home Market Takes a Tumble

Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, pushed down by an abundance of foreclosed homes on the market, according to data to be released Monday by real-estate website Zillow.com. Prices have now fallen for 57 consecutive months, according to Zillow.
...
[Stan Humphries, Zillow's chief economist] now believes prices won't hit bottom before next year and expects they will fall by another 7% to 9%.
...
Prices are decelerating in large part because the many foreclosed properties that often sell at a discount force other sellers to lower their prices.

As I noted on Friday, Fannie and Freddie sold over 90,000 REOs in Q1; a new record. These foreclosure sales are pushing down house prices - and there are many more REOs coming (I'll try to summarize all the house price indexes, but most are showing prices at a post-bubble low).

4--NY Fed Q1 Report on Household Debt and Credit, Calculated Risk

Excerpt: From the NY Fed: New York Fed's Quarterly Report on Household Debt and Credit Shows Signs of Healing in Consumer Credit Markets Since Last Quarter

The Federal Reserve Bank of New York released the Quarterly Household Debt and Credit Report for the first quarter of 2011 today, which showed signs of healing in the consumer credit markets. Evidence of improvement includes:

• an increase in credit limits, by about $30 billion or 1%, for the first time since the third quarter of 2008;
• a steady number of open mortgage accounts, following a period of decline beginning in early 2008;
• continued decline of new foreclosures and new bankruptcies, down 17.7% and 13.3% respectively in the last quarter;
• a 15% decline of total delinquent balances, compared to a year ago; and
• a broad flattening of overall consumer debt balances outstanding.

Non-housing related debt, including credit cards, student loans, and auto loans, declined slightly (less than 1%), driven by a noticeable 4.6% decline in credit card balances. Credit inquiries, an indicator of consumer demand for new credit, came off their recent peak in the fourth quarter of 2010.

“We are beginning to see signs of credit markets healing gradually and evidence of greater willingness of consumers to borrow and banks to lend,” said Andrew Haughwout, vice president and New York Fed research economist....

From the NY Fed:

Aggregate consumer debt held essentially steady in the first quarter, ending a string of nine consecutive declining quarters. As of March 31, 2011, total consumer indebtedness was $11.5 trillion, a reduction of $1.03 trillion (8.2%) from its peak level at the close of 2008Q3, and $33 billion (0.3%) above its December 31, 2010 level.

5--The Unwisdom of Elites, Paul Krugman, New York Times

Excerpt: The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious. ...

Let me focus mainly on what happened in the United States... These days Americans get constant lectures about the need to reduce the budget deficit. ... What happened to the budget surplus the federal government had in 2000?

The answer is, three main things. First,...President George W. Bush cut taxes in the service of his party’s ideology... — and the bulk of the cuts went to a small, affluent minority.

Similarly, Mr. Bush chose to invade Iraq because that was something he and his advisers wanted to do,... it took a highly deceptive sales campaign to get Americans to support the invasion...

Finally, the Great Recession was brought on by a runaway financial sector, empowered by reckless deregulation. And who was responsible for that deregulation? Powerful people in Washington with close ties to the financial industry...

So it was the bad judgment of the elite, not the greediness of the common man, that caused America’s deficit. And much the same is true of the European crisis.

6--Boehner Must Reassure Markets on Debt Ceiling, Bloomberg

Excerpt: House Speaker John Boehner’s appearance before Wall Street leaders tonight challenges him to provide reassurance that Congress will raise the U.S. debt limit without undercutting Republican demands for spending controls.

Investors attending Boehner’s speech to the Economic Club of New York dinner will be listening for the Ohio Republican to describe the path to an agreement on raising the debt ceiling and installing new deficit controls between the Republican-run House and Democrats led by President Barack Obama.

“What Wall Street wants to hear is that they are going to raise the debt ceiling in a timely way,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

Investors expect “policy makers are going to negotiate and debate, but at the end of the day” they want assurances that “when it comes down to brass tracks they are going to raise that debt ceiling,” Zandi said....

Boehner, who negotiated an 11th-hour package of $38 billion in spending cuts to avert a government shutdown last month, will explain to results-oriented investors that without budget reforms there are not enough votes in the Republican-run House to raise the debt ceiling, said a Republican leadership aide speaking on condition of anonymity....

The speaker vowed that Republicans “will not increase the debt limit without real spending cuts and budget reform.”

7--The Invisible Bond Vigilantes Have Resumed Their Invisible Attack, Paul Krugman, New York Times

Excerpt: It’s truly amazing that Washington debate is dominated by fear of the bond market. And it’s also truly amazing that nobody is suggesting that a government able to borrow long term at a real interest rate of 0.7 percent really should be taking advantage of those rates to finance some much-needed infrastructure investment.

Update: On a related issue, Real Time Economics suggests that it’s not the bond vigilantes we need to be worried about, it’s the “dollar vigilantes”, who push the dollar down on perceptions that American policy is too weak.

Lots of things to criticize there, but let me just point out one crucial difference. If investors push up U.S. interest rates, that hurts our economic recovery. But if they push down the dollar, that helps our recovery, by making US goods more competitive on world markets. So if we really face dollar vigilantes (which I doubt), we should send them a thank-you note (maybe written in invisible ink?).

8--No, Virginia, the Housing Market Has Not Yet Bottomed, The Big Picture

Excerpt: In depth WSJ column that essentially states that there is more downside to come in Residential RE, and how many economists were fooled by the price action:

“Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.

Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, pushed down by an abundance of foreclosed homes on the market, according to data to be released Monday by real-estate website Zillow.com. Prices have now fallen for 57 consecutive months, according to Zillow.

Last year, the housing market showed signs of improving as price depreciation slowed in some markets and stabilized in others. In response, a number of economists began forecasting that housing would hit a bottom in late 2011, then begin to recover. But the improvements, spurred by federal programs that gave buyers up to $8,000 in tax credits, proved fleeting. Sales collapsed when the credits expired last summer, and prices in many markets have been falling ever since.”

9--What Rebalancing?, Willem Thorbecke, Project Syndicate

Excerpt: Many researchers warned in 2005 that imbalances between the US and East Asia were unsustainable, noting that they were driven by excess spending in the US and undervalued exchange rates in East Asia. Excess spending was fueled by deterioration in the US fiscal balance, from a surplus of 2% of GDP in 2000 to a deficit of 4% of GDP in 2004. Undervalued exchange rates in Asia were supported by accumulated reserves of almost $1 trillion in China, plus hundreds of billions of dollars elsewhere in the region.

Since 2005, US budget deficits have increased by another 6% of GDP, while China’s external reserves have increased by $2 trillion. It is likely that at some point investors will be unwilling to continue lending to the US at low interest rates, and that China will regard continued reserve accumulation as a bad investment. At that point, the US trade deficit will shrink.

If imbalances between the US and China are thus unsustainable, it makes sense for policymakers to pursue a soft landing. In the case of the US, this requires recognizing that the government faces a budget constraint. For China, it means redirecting saving away from reserve accumulation towards cash-strapped small and medium-size enterprises, as well as much-needed investments in education, health care, and affordable housing.

10--A deadly symbiosis has developed between politicians and banks, Wall Street Journal

Excerpt: When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.

The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders....

In a true market economy, bad choices get penalized. Not here. When the inevitable failure of overindebted euro-zone countries came to light, a secret pact was made.

Instead of accepting losses on unsound investments—which would have led to the probable collapse and national bailout of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund, Ireland's NAMA and a lineup of special-purpose vehicles that make Enron look simple. Some politicians understood this; others just panicked and did as they were told.

The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds....

Setting up the European Stability Mechanism is no solution. It would institutionalize the system of wealth transfers from private citizens to compromised politicians and otherwise failed bankers, creating a huge moral hazard and destroying what remains of Europe's competitive banking landscape....

nsolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.

If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.

11--Ireland is facing economic ruin, Morgan Kelly, Irish Times

Excerpt: Ireland is heading for bankruptcy, which would be catastrophic for a country that trades on its reputation as a safe place to do business...

WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.

Ireland is facing economic ruin.

While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

12---The financing pyramid and margin debt, FT.Alphaville

Excerpt: Here’s an interesting point from Cullen Roche at Pragmatic Capitalism on Monday....Margin debt — the amount that speculators borrow to buy stocks (or other assets for that matter) — is rising quickly.

As Roche noted back in April — via a point raised by David Rosenberg at Gluskin Sheff — “current levels of margin debt are now consistent with the Nasdaq bubble and just shy of the levels seen before the credit crisis”....

Roche goes on to cite the CIO of a boutique investment firm on how all of this fits in with the quantitative easing and the equity rally — especially given the notable correlation between the start of QE1 and QE2 and rising margin debt levels overall.

Consider, for example, that stock-market prices are more of a reflection of leverage than any sort of money inflation. In that case, he argues, there is only really speculative non-bank ‘horizontal’ money sloshing around. Thus, whatever commodity inflation exists — just as Ben Bernanke says – is indeed probably transitory because it relies on a type of permanent Ponzi condition, made up of leveraged commodity holdings which in turn depend on prices being higher to satisfy liabilities.

As the CIO explains:

So it seems that the central banks distortions of the last several years are creating some imbalances that are unintended and unwanted, which is to increase speculative volatility in things like oil, which goes from $40 to $150 to $50 to $130 over and over. Paper profits change accounts but the real economy is not theoretically affected, except that it is held hostage to this casino game of rapidly changing prices for basic materials and necessities that businesses and consumers use to make decisions. So the economy is in actuality disrupted by the casino, the casino creates no net wealth, and everyone is worse off as this charade continues.

13--Financial Turmoil Timeline, New York Federal Reserve

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