Thursday, July 28, 2011

Today's links

1--BofA Donates Then Demolishes Houses to Cut Glut, Bloomberg

Excerpt: Bank of America Corp. (BAC), faced with a glut of foreclosed and abandoned houses it can’t sell, has a new tool to get rid of the most decrepit ones: a bulldozer.

The biggest U.S. mortgage servicer will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition in partnership with a local agency that manages blighted property. The bank has similar plans in Detroit and Chicago, with more cities to come, and Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Fannie Mae are either conducting or considering their own programs.

Disposing of repossessed homes is one of the biggest headaches for lenders in the U.S., where 1,679,125 houses, or one in every 77, were in some stage of foreclosure as of June, according to research firm RealtyTrac Inc. of Irvine, California. The prospect of those properties flooding the market has depressed prices and driven off buyers concerned that housing values will keep dropping.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works with lenders, government officials and homeowners to salvage vacant homes. “The best thing we can do to stabilize the market is to get the garbage off.”

Donating a house may create an income-tax deduction, said Robert Willens, an independent accounting analyst based in New York. A bank might deduct as much as the fair market value if a home wasn’t acquired with the explicit intent of knocking it down, he said.

2--Hurtling toward economic chaos, Mike Davis, LA Times

Excerpt: China, of course, now holds up the world, but the question is: For how much longer? Officially, the People's Republic of China is in the midst of an epochal transition from an export-based economy to a consumer-based one. The ultimate goal of which is not only to turn the average Chinese into a suburban motorist but to break the perverse dependency that ties that country's growth to an American trade deficit Beijing must, in turn, finance to keep the yuan from appreciating.

Unfortunately for the Chinese, and possibly the world, that country's planned consumer boom is quickly morphing into a dangerous real estate bubble. China has caught the Dubai virus and now, every city there with more than 1 million inhabitants (at least 160 at last count) aspires to brand itself with a Rem Koolhaas skyscraper or a destination mega-mall. The result has been an orgy of overconstruction.

Despite the reassuring image of omniscient Beijing mandarins in cool control of the financial system, China actually seems to be functioning more like 160 iterations of "Boardwalk Empire," in which big-city political bosses and allied private developers are able to forge their own backdoor deals with giant state banks.

In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Moody's Investors Service reported this month that the Chinese banking system was concealing $500 billion in problematic loans, mainly for municipal vanity projects. Another rating service warned that nonperforming loans could constitute as much as 30% of bank portfolios.

Real estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.

So, will Chengdu become the next Orlando, Fla., or China Construction Bank the next Lehman Bros.?

3--Watchdog Sees Financial Weak Spots, Wall Street Journal

Excerpt: Federal officials said the U.S. financial system remains vulnerable to shocks and called for better protection in several areas that exacerbated the 2008 financial crisis.

The Financial Stability Oversight Council, a new body created by last year's Dodd-Frank financial law, said several areas could pose broad risk to the financial system, including a $2.7 trillion short-term funding market used by Wall Street firms and money-market mutual funds. It also warned the U.S. faces risk related to Europe's debt crisis and said U.S. financial institutions need to improve their balance sheets to protect against potential losses.

The FSOC, in an annual report required by Congress, said it "cannot predict the precise threats that may face the financial system" and warned regulators must meet assumptions of market stability with "a heavy dose of skepticism."...

In particular, the FSOC said weaknesses exist in the "triparty repo" market, in which banks make and receive short-term loans on a day-to-day basis. The repo market temporarily froze during the financial crisis, drying up a key source of funding for many Wall Street firms. The FSOC said critical overhauls are needed, including strengthening the collateral practices backing the securities that are being loaned and borrowed...

Regulators also warned risks still exist in money-market funds, which are used by individuals and corporations as a low-risk place for parking cash. To increase stability and reduce the funds' "susceptibility to runs," the FSOC recommended that the Securities and Exchange Commission consider changes such as moving to a floating share price, instead of a fixed $1 price, and imposing capital buffers to absorb losses.

During the crisis, one money fund, Reserve Primary Fund, "broke the buck," or saw its share price fall below the stable $1 that money funds aim to maintain. The U.S. ultimately stepped in to guarantee money-market mutual funds.

The report also reiterated a call for national mortgage servicing standards, saying the industry was ill-prepared to handle the "rapid increase in defaults and foreclosures" related to the housing bust. The problems are now subject to settlement talks among banks and officials on the federal and state level.

4--Alternatives to USAAA, equities edition, FT.Alphaville

Excerpt: The search for the elusive US-AAA alternative continues.

As Nomura’s Charles St-Arnaud and Lefteris Farmakis already pointed out on Wednesday, there’s not really all that many options left.

Though Credit Suisse’s global equity strategy team seems to have one idea. Invest in companies which are currently perceived to be safer than sovereigns.

As they wrote on Wednesday:

Worries about the US public finances, will likely bring investors to focus on ultra-safe equities: companies with a CDS spreads [sic] below that of G7 sovereigns, yet offering dividend yields above government bond yields....

Regardless of the outcome of the negotiations over the debt ceiling, we think investors should focus on ultra-safe corporates (those that offer a CDS spread below that of the average G7 sovereign in combination with a dividend yield above the average G7 government bond yield). To the extent that the debt ceiling negotiation in the US and the worries about peripheral Europe drive home the uncertain outlook for government finances, the strong financial position of these corporates will appear increasingly attractive.

While a US default is definitely not their central scenario (they see a rise in the ceiling by August 2), in the unthinkable event it does happen, here’s how they see the situation playing out:

If the US does default, there are massive ramifications. According to Credit Suisse chief economist Neal Soss, the repo market would probably cease to work. It is hard to imagine money market funds operating under this scenario. The inter-bank market would freeze up. The fallout would be far worse than after the Lehman’s default. Back then, the US government could at least spend and do the ‘right thing’, while now the only back-stop would be the Fed.

Into a default, the US would have to balance its primary balance and that alone would require fiscal tightening of 8% of GDP, on IMF data. If the US defaulted, then others could follow (Portugal, Ireland, Greece). There would be a very big decline in US GDP (5% is quite possible). Lastly, it would be horrible to think of what happens to the dollar if the Fed hint that they would offset the growth damage of default and subsequent fiscal tightening with QE 3.

5--Alternatives to the USAAA – there’s not much, FT. Alphaville

Excerpt: Still seeking something else to buy should the US be downgraded after its debt ceiling folly?

The world’s pool of AAA-rated material is rapidly dwindling, and any destruction of the US triple-A will mean it shrinks even further. According to Nomura’s Charles St-Arnaud and Lefteris Farmakis, US Treasuries are by far the largest pool of investable AAA-rated assets with $11,151bn outstanding....

(The reason the remaining AAA-pile is so low, is because it’s by no means clear what will happen to the almost $6,000bn-sized heap of agency Mortgage-Backed Securities (MBS). These are backed by a stream of future cash flows, but their triple-A is also largely derived from a US government guarantee.)

Anyway, the most obvious substitution would be to switch into other AAA-rated government debt. Germany is the next biggest available pool, with about $1,720bn worth of outstanding Bunds. Though Germany is not without its own, eurozone-sized debt problems and contingent liabilities...

One wonders how the financial world will react to that shrinking pool of AAA, which they’ve essentially been able to use as risk-free credit. Will they simply adapt to a world with fewer ‘safe’ securities?

Or will they somehow seek or encourage a new crop of triple-A assets to be grown?

6--Obamageddon Coming to a City near you?, The American Interest

Excerpt: The 21st century urban crisis has five main features: the devastating impact of what for most Blacks is a still-deepening recession; the unfolding effects of the fiscal crisis meshed with the decline of the blue social model; competition for jobs, resources and power between African Americans and mostly Spanish speaking immigrants; the increased fragmentation and disintegration of Black political leadership; and the contrast between the high hopes of 2008 and the grim realities that have come clear since.

“Devastating” is an overused word when it comes to unemployment and the inner city, but the Department of Labor’s latest report (Black Employment in the Recovery) * tells an eye-popping story of failure and decline....Now for the bad. Blacks are more likely to be unemployed than whites (16 percent Black unemployment rate vs. 8.7 percent for whites), they stay unemployed for longer when they lose their jobs, and they are more likely to be unemployed for the long term. The states where unemployment rates for African Americans are relatively low are states where not many African Americans live: Alaska (5.4 percent Black unemployment), Wyoming (6.2 percent), Idaho (8.0 percent), Hawaii (9.6 percent) and (at 10.3 percent) New Hampshire. Except for Hawaii all are generally conservative, low-tax states. The states with the highest unemployment rates for African Americans are staunchly blue: Wisconsin (25 percent), Michigan (23.9 percent), Minnesota (22 percent), Maine (21.4 percent) and Washington (21.4 percent)....

As government resources dry up, competition between different groups for what remains will intensify. Tension between African Americans and Hispanics is already high in some cities. There is nothing pathological about this tension or peculiar to the two groups: American cities have been battlegrounds of ethnic politics for 150 years. But fights over shrinking pies are nastier than fights over growing ones. Whether Republicans or Democrats control Washington and most state capitals in the coming years, discretionary spending at all level of government is almost certain to shrink, leaving immigrants and urban Blacks in a zero-sum scramble for what’s left.....

If we add to this the mounting frustration among many young and poor Blacks (and not only them) about the failure of “hope and change” to make their lives better in any way, we have an explosive mix. Conditions are bad, leadership struggles to rise to the times, hope has soured into disillusion. It now looks increasingly likely that the recovery will continue to move slowly everywhere and especially slowly for Blacks. Out of frustration and economic need, Black politics will shift away from establishment liberalism toward more left wing or Black nationalist options even as whites continue moving toward the right. If that is where we are headed, then President Obama’s election will look to many angry young Blacks less like a milestone for Black America and more like proof that ordinary politics cannot change their lives. The establishment leaders who urge them to keep calm and be patient will not have their confidence or trust.

Worst case, some very hot times could loom not too far ahead.

Dr Tim Morgan, global head of research at Tullett Prebon, has been honing his argument that there is far too much private debt still weighing on the UK. Honing it into a view that further growth will be stifled under this weight, and that this will perforce undermine the government’s attempts to reduce public borrowing. Cue massive sovereign crisis.

It’s not a cheery view. But one of Morgan’s starting points rings familiar on another topic — the AAA bubble. As Morgan argues:

What really happened in 2008… was less a matter of intervention per se but of government stepping in to sustain the aggregate level of borrowing once mortgage and credit expansion collapsed. The expedient of replacing private with public borrowing was always time-limited and has now reached end-point, but there has been no recovery at all in private borrowing.

7--The Biggest Driver in the Deficit Battle: Standard & Poor’s, Robert Reich via Economist's View

Excerpt: ...All of America’s big credit-rating agencies — Moody’s, Fitch, and Standard & Poor’s — have warned they might cut America’s credit rating if a deal isn’t reached soon to raise the debt ceiling. ... But Standard & Poor’s has gone a step further: It... insists any deal must also ... reduce the nation’s long-term budget deficit by $4 trillion — something neither Harry Reid’s nor John Boehner’s plans do.

If Standard & Poor’s downgrades America’s debt, the other two big credit-raters are likely to follow. The result: You’ll be paying higher interest on ... every ... penny you borrow. ... In other words, Standard & Poor’s is threatening that if the ten-year budget deficit isn’t cut by $4 trillion..., you’ll pay more – even if the debt ceiling is lifted next week.

With Republicans in the majority in the House, there’s no way to lop $4 trillion of the budget without harming Social Security, Medicare, and Medicaid, as well as education, Pell grants, healthcare, highways and bridges, and everything else the middle class and poor rely on.
And you thought Republicans were the only extortionists around.

Who is Standard & Poor’s to tell America how much debt it has to shed in order to keep its credit rating?

Standard & Poor’s didn’t exactly distinguish itself prior to Wall Street’s financial meltdown... Had they done their job and warned investors how much risk Wall Street was taking on,... taxpayers wouldn’t have had to bail out Wall Street; millions ... would ... be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus...; and far more tax revenue would now be pouring into the Treasury... In other words, had Standard & Poor’s done its job, today’s budget deficit would be far smaller.

And where was Standard & Poor’s (and the two others) during the George W. Bush administration – when W. turned a ... budget surplus ... into a gaping deficit? Standard & Poor didn’t object to Bush’s giant tax cuts for the wealthy. Nor did it raise a warning about his huge Medicare drug benefit (i.e., corporate welfare for Big Pharma), or his decision to fight two expensive wars without paying for them. ...

So why has Standard & Poor’s decided now’s the time to crack down on the federal budget — when it gave free passes to Wall Street’s risky securities and George W. Bush’s giant tax cuts ... thereby contributing to the very crisis it's now demanding be addressed?

Could it have anything to do with the fact that the Street pays Standard & Poor’s bills?
Is there any evidence that ratings agencies are influenced by the fact that Wall Street pays their bills?:

8--Read China's Lips, Stephen Roach, Project Syndicate

Excerpt: The Chinese have long admired America’s economic dynamism. But they have lost confidence in America’s government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.

Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”

China is no innocent bystander in America’s race to the abyss. In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.

Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.

Those days are raising the consumption share of its GDP, China will also absorb much of its surplus saving. That could bring its current account into balance – or even into slight deficit – by 2015. That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets.

So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets?

China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.

9--What's Wrong With America's Job Engine?, Wall Street Journal

Excerpt: Over the past 10 years:

• The U.S. economy's output of goods and services has expanded 19%.

• Nonfinancial corporate profits have risen 85%.

• The labor force has grown by 10.1 million.

• But the number of private-sector jobs has fallen by nearly two million.

• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

What's wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: "Sales have come back, but people have not.''

That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.

Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring....

Executives call it "structural cost reduction" or "flexibility." Northwestern University economist Robert Gordon calls it the rise of "the disposable worker," shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree....

In the most recent recession and the previous two—in 1990-91 and 2001—employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire. As a result, the "jobless recovery" has become the norm....

In a survey of 2,000 companies earlier this year, McKinsey Global Institute, the think tank arm of the big consulting firm, found 58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more "outsourced or offshored" workers....

Hal Sirkin of Boston Consulting Group says rising wages in China are dulling its edge as a low-wage nirvana. In 2000, wages of Chinese production workers averaged 3% of what their American counterparts made. Today, they are at 9%. BCG expects the figure to reach 17% by 2015. Mr. Sirkin predicts that will prompt some manufacturers to move jobs back to the U.S.

How many? He is still working on an estimate. But one thing is clear, though, "These are $15-an-hour jobs," he says, "not $30-an-hour jobs."

10--UPS: Asian growth is slowing, Pragmatic Capitalism

Excerpt: The macroeconomic thesis remains relatively simple in my opinion. The USA and most of Europe are in balance sheet recessions. This means that the private sector is likely to remain sluggish which will result in slow growth. Thus far, deficit spending in the USA is allowing consumers to muddle through. Austerity in Europe is depressing many of their economies. Emerging markets are relatively healthy on the other hand and have served as a crutch for the rest of the world. This has been particularly important for corporate profits where the combination of cost cuts, slow domestic growth and high international growth is creating healthy profits.

The major risks to the downside in this scenario are a worsening crisis in Europe, austerity in the USA and a slow-down in China. Europe has kicked the can once again with their most recent bailout package. This means Europe is going to remain weak as austerity takes hold. The USA is not headed into full-blown austerity yet, but the end of the fiscal stimulus combined with the possibility of harsh budget cuts stemming from the debt ceiling debates should put downside pressure on the US economy in the coming year. Still, with double digit deficits the private sector should be able to muddle through. Emerging markets are the real key here and according to UPS and their latest earnings report the picture is becoming more precarious.

Below are some snippets from this morning’s conference call:

“The current forecast call for second half GDP growth of more than 3%. Given all the uncertainty that exists in the U.S. economy, it could end up being anywhere from 1.5% to 3.5%. Bottom line, economic growth expectations have slowed from where they were at the start of 2011. ”

…Despite slowing economic growth expectations, I’m encouraged by the progress we are making.”

…Now let’s turn to the International segment. Revenue was up more than 13% on strong volume growth of 6.2%. Export volumes increased over 8% with growth around the world. Europe and China continued their momentum of solid growth, although we did see slowing in the rest of Asia.”

…Given the softness in the U.S. economy, we expect third quarter volume growth to be slow and operating margins to be similar to last year. In the fourth quarter, we expect year-over-year operating margin expansion. In International, we expect second half operating profit growth of mid-to upper teens, compared to last year as the impact of our hedging programs is mostly behind us. The Supply Chain and Freight segment will continue to see the margin expansion and revenue growth, as we expect to experience operating profit growth in Freight and strong operating margins in Forwarding.

To wrap this up, as Scott indicated, economic conditions have slowed since we last provided guidance. A good example, U.S. GDP growth expectation for 2011 was at 3.1%. It was revised downward to 2.9% and now sits at 2.5%.”

So, for now, if UPS is our guide (and they’re a pretty good one), we can expect more of the sluggish growth that we’ve been seeing although the slow-down risk in Asia appears to be gaining some momentum.

11--The New Normal, Smirking Chimp

Excerpt: What's caused this problem is lack of effective consumer demand for goods and services due to falling average real incomes over the past thirty years. Debt served to both delay the crisis and make it worse than it would otherwise be once it arrived. But even debt is not the real problem. Debt, both public and private, is due to a three decade long surge in borrowing. This is due to the fact that capitalists refuse to pay both growing real wages and higher taxes. The end result was an overgrown financial sector which, though profitable for Wall Street until the recent crash, began to feed on American society. Now the proverbial chickens have come home to roost.

The problem is that only the working and middle classes are suffering for the crimes of the super rich who are hypocritically blaming the victims for their alleged "excess consumption" and "addiction to debt" as if the much higher corporate debt and the unsustainable, levels of leveraged financial investment that existed for a decade before the current recession began aren't a far worse problem. Surely, Wall Street was much more culpable for the current economic crisis. Keynes's notion of "the paradox of thrift" shows that while changing our consumption habits may be very good for the environment it won't help economic recovery. The far right doesn't get it and thus their ill conceived policies generate high levels of chronic unemployment, especially long term unemployment. Such high levels of chronic joblessness over longer and longer time spans may become "the new normal". During the latest recession, record numbers of people were unemployed for twenty seven weeks or more despite an overall moderation in the growth of the US workforce.

Consumerism isn't the problem; consumer spending hit an historic post-1980 low in the second quarter of 2009 before rising again briefly the following year. It is now set to fall once again as the decline in housing and auto sales slows the economy even further cutting short a brief and shallow recovery.

13--Cowboy Capitalism and the State, 4ss

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