Friday, October 7, 2011

Weekend links

1--Homeownership rate at lowest level in 70 years, Housingwire

Excerpt: The U.S. homeownership rate in 2010 fell to the lowest level in 70 years, dropping to 65.1%, down from 66.2% in 2000, according to data from the Census Bureau.

The decline came even as the nation added 15.8 million housing units, increasing the total housing inventory by 13.6%, the Census Bureau said Thursday.

Eleven states suffered declines of at least two percentage points in their homeownership rates, led by South Carolina, with a decrease of 2.88 percentage points.

2--Poverty Swallows America, Counterpunch

Excerpt: Poverty Swallows America

Not even a full year has passed and yet the signs of wreckage couldn’t be clearer. It’s as if Hurricane Irene had swept through the American economy. Consider this statistic: between 1999 and 2009, the net jobs gain in the American workforce was zero. In the six previous decades, the number of jobs added rose by at least 20% per decade.

Then there’s income. In 2010, the average middle-class family took home $49,445, a drop of $3,719 or 7%, in yearly earnings from 10 years earlier. In other words, that family now earns the same amount as in 1996. After peaking in 1999, middle-class income dwindled through the early years of the George W. Bush presidency, climbing briefly during the housing boom, then nosediving in its aftermath.

In this lost decade, according to economist Jared Bernstein, poor families watched their income shrivel by 12%, falling from $13,538 to $11,904. Even families in the 90th percentile of earners suffered a 1% percent hit, dropping on average from $141,032 to $138,923. Only among the staggeringly wealthy was this not a lost decade: the top 1% of earners enjoyed 65% of all income growth in America for much of the decade, one hell of a run, only briefly interrupted by the financial meltdown of 2008 and now, by the look of things, back on track.

The swelling ranks of the American poor tell an even more dismal story. In September, the Census Bureau rolled out its latest snapshot of poverty in the United States, counting more than 46 million men, women, and children among this country’s poor. In other words, 15.1% of all Americans are now living in officially defined poverty, the most since 1993. (Last year, the poverty line for a family of four was set at $22,113; for a single working-age person, $11,334.) Unlike in the lost decade, the poverty rate decreased for much of the 1990s, and in 2000 was at about 11%....

America’s lost decade also did a remarkable job of destroying the wealth of nonwhite families, the Pew Research Center reported in July. Between 2005 and 2009, the household wealth of a typical black family dropped off a cliff, plunging by a whopping 53%; for a typical Hispanic family, it was even worse, at 66%. For white middle-class households, losses on average totaled “only” 16%....

3--China’s shadow banking sector needs a bail-out, says SocGen, FT Alphaville

Excerpt: Troubled enterprises are usually heavily involved in underground banking, which is basically direct and informal lending and borrowing between family members, friends, and people from the same community or locality. These unnerving stories always begin with PBoC’s lending curbs on formal banks, followed by surging underground banking, and then at some point – there is always such a point – inevitable and abrupt breaks in liquidity chains, and ending finally with run-away business owners or their suicide.

Yao says there have been 19 such bankruptcies reported since the beginning of the year — of which, nine were in September. The prefecture-level city of Wenzhou is probably worst, he says.

According to the PBoC’s Wenzhou branch office, the size of the underground banking in the city is estimated to have reached CNY 110bn, equivalent to 18% of Wenzhou’s CNY 602bn formal bank loans. The central bank also estimates that close to 90% of households and 60% of local enterprises are participating in this credit boom.

Scary stuff, especially when the interest rates are estimated to range from 20 to 180 per cent. So who would be willing to borrow on such extreme terms? Well, usurers and speculators, for sure...

Yao says some of the bankrupt businesses appear to have been “innocents”: SMEs (small to medium size enterprizes) frozen out of the formal credit system while banks favour big companies and state-owned enterprises. Not so great, that. And especially when “other” loans are becoming a bigger source of funding for the property developers than banks.

4--EU works on banks, Obama urges swift action, Reuters

Excerpt: European Union moves to shore up ailing banks moved into higher gear on Thursday as President Barack Obama urged European leaders to act faster to tackle a sovereign debt crisis that threatens global economic recovery.

The EU's executive arm said it would present a plan for member states to coordinate a recapitalization of their banks, as regulators met in London to reassess the capital buffers of stressed lenders that received a clean bill of health in July.

The European Central Bank threw a lifeline to commercial banks by turning up its liquidity pumps to provide longer-term cheap money for the growing number of European lenders which have seen wholesale funding dry up as market confidence ebbs....

a senior EU official told Reuters there would be no common European mechanism to deal with toxic assets, and no joint "bad bank" for Europe.

5--Central Banks in Europe Move to Support Economy, New York Times

Excerpt: The European Central Bank increased aid to cash-strapped financial institutions Thursday, but disappointed those expecting more drastic measures to combat slowing growth and address a deepening bank emergency.

The E.C.B.’s restraint came in contrast to the action of the Bank of England, which announced another round of bond buying to support the slowing British economy. The pound fell against all major currencies after the announcement; the euro rose against the dollar.

As a slump in German factory orders provided the latest sign of a looming recession, the E.C.B. left its benchmark rate unchanged, at 1.5 percent. The Bank of England also left its main rate unchanged, at 0.5 percent.

Those fears were intensified by the woes of the French-Belgian bank Dexia, which is seeking its second taxpayer-financed bailout in three years and said Thursday that it was close to selling its Luxembourg unit.

The central bank will spend €40 billion, or $53.6 billion, in the coming year buying so-called covered bonds, a form of debt secured by payments received on assets like packages of loans.

Covered bonds are one of the main ways that European banks raise money. The E.C.B. also bought covered bonds in 2009 to alleviate the bank financing squeeze that followed the collapse of the U.S. investment firm Lehman Brothers in 2008.

The E.C.B. measure, however, was dwarfed by the Bank of England’s plans to widen its so-called quantitative easing program to £275 billion from £200 billion.

6--BBC Does It Again: "In The Absence Of A Credible Plan We Will Have A Global Financial Meltdown In Two To Three Weeks" - IMF Advisor

Excerpt: In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

7--Vital Signs: Rising Financial Stress, Wall Street Journal

Excerpt: U.S. financial stress has been rising. The St. Louis Fed’s Financial Stress Index — based on interest rates, stock and bond option prices and other measures — rose to 1.08 in the week ended Friday from 0.97 a week earlier. That was the highest level of stress the gauge registered since September 2009, though well below its October 2008 peak of 5.37.

8--A Tale of Two Recessions, Modeled Behavior

Excerpt: I think we have basically two recessions going on in the United States. One is a standard recession in which the rate of inflation is too low and the real interest rate is two high.

This is causing the accumulation of capital and durables goods to be depressed from their long term equilibrium.

Why do I say depressed and not a return to normal?

Well, because as of the last few years the auto fleet in the United States has begun to shrink. That is, we are scrapping cars at a faster rate than we are producing them.

Unless something changes in the next 18 months, our scrappage rate will begin to exceed new cars sales by the millions of units per year. In a country that is still growing in population and still adding drivers every year its hard to explain why the optimal path is suddenly for the vehicle fleet to shrink.

The same thing is becoming true with houses. New homes starts are roughly were demolitions are. We are scrapping about as many new homes every year as we are creating.

It will be a while before the stock of new homes appreciably declines but it will not be too long before homes per person in the United States falls to multi-decade lows.

9--BRICs to the rescue, Credit Writedowns

Excerpt: Here is the global problem as I see it. For much of the past decade before the crisis high global growth rates were driven by three things. Most importantly US and peripheral Europe experienced very rapid consumption growth driven by rising debt. Second, rising debt also created a boom in real estate investment in those regions. Third, developing counties, especially China, had very high rates of investment.

Since the crisis we have seen consumption growth in the US and peripheral Europe drop sharply as households deleveraged. Of course we have also seen real estate investment in both regions drop sharply. The only mitigating trend was the surge in developing-country investment, with China driving that surge to astonishing levels, which created some additional global demand to counterbalance the decline in all the other major sources.

But even leaving aside the fact that much of the increased investment will almost certainly turn out to be value destroying, the purpose of investment today is to serve consumption tomorrow. I do not believe that US and European consumption growth will return for many years, and the fact that the investment surge in places like China, because they are generating debt-servicing costs much faster than they are generating additional economic wealth, will themselves prevent domestic consumption from rising quickly enough, we still have to wait for the second shoe to drop. And that shoe will drop when investment growth in China and the rest of the developing world drops sharply in the next three years, and remains low for many years.

So where will increased global demand come from? It won’t.

9--Merrill Lynch: China bust upon us, Macrobussiness

Excerpt: Zarathustra wrote earlier this week:

Deutsche Bank is expecting a 10% correction in home prices because it would be a disaster if prices are allowed to fall by, say, 30%:

Those who understand China’s political economy should know that a 15% decline in average property prices in 35 cities within a few months must be accompanied by a range of economic and social consequences. These will include a sharp decline in real estate transactions, a visible deceleration in real estate investments, rising unemployment in the property construction and agency sectors, a further decline in construction material prices, demand destruction due to inventory destocking, and finally a worrying decline in GDP growth and the resulting concern of social stability. In other words, the government will most likely not tolerate a 30% drop, and probably not even 15% in our view. We expect real estate policies will likely be relaxed way before a 30% price decline is observed.

I hear that!

The next question is, however, can you be happy to allow some property developers to fail miserably while at the same time limit the fall in home prices to within 10% so that you can avoid “a range of economic and social consequences”, in other words, hard landing?...

Well, that question has just been cast into stark relief by the following from a Merrill Lynch note:

Credit to Chinese developers is rapidly drying up which will be the trigger for a construction collapse. The rising cost of funding shows the pressure: (see chart)

The yields on existing Chinese developers’ bonds in Hong Kong has exploded to around 30%. This means that this source of funding is now shut, as developers could not issue bonds at a 30-35% rate....

The rate on bank acceptances, another unconventional source of credit, are also surging. The extension of reserve requirements has had a material effect on the willingness of banks to make loans through unconventional channels.

Remember that the developers have a massive need for credit because construction has substantially exceeded sales over the past 18 months. This was never a sustainable situation, but the collapse in credit availability will be the trigger for a slowdown. Apartment construction is 25% of steel demand, so 180 mt of steel demand are now under threat.

As we approach the construction endgame in China we strongly recommend underweights in resource companies and mining services

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