Monday, January 30, 2012

Today's links

1--The ECB is Plugging Holes, Economonitor


Excerpt: Today the ECB released its monthly data on monetary developments in the Euro area (EA), as measured by M3 and its components. The market usually focuses on the marketable assets portion of M3, M3-M2, as a representation of funding access – here’s an FT Alphaville post highlighting as much. In December 2011, M3-M2 declined 0.2% over the year, its first annual decline since early 2010. What’s going on here? The ECB’s plugging holes.

There’s an evolution in marketable debt that is telling a very interesting story regarding bank funding through December 2011. As each private funding market shuts down, the ECB compensates by relaxing its lending facilities and collateral rules, effectively shoring up bank liquidity.

Look at the chart below: it maps out the dynamics of the components of marketable instruments in the EA, M3-M2, in levels of seasonally adjusted billion €. See Table 1 of the release, or download the data here. Since September 2011, the level of repo lending dropped 21%, or – €107 billion. Not coincidentally, the ECB started to introduce longer-term refinancing operations starting with the 1-yr in LTRO October. Holdings of debt instruments <2 years increased €40 billion, as banks use the securities for collateral under the ECB’s lending operations....

It’s pretty clear what the ECB is doing: plugging up the bank funding holes left exposed by private capital markets. What’s next?

2--The Role of Austerity, NY Times

Excerpt: The chart here offers one of the better recent snapshots of the American economy that you will find.

The blue line shows the rate at which the government — federal, state and local — has been growing or shrinking. The red line shows the same for the private sector. (Chart) The brief version of the story is that the government, which helped mitigate the recession, has been a significant drag on growth for more than a year now.

In 2007, both the private sector and government were growing. The government continued growing through 2008 and most of 2009, with the exception of one quarter when military spending fell. The private sector, though, began to shrink in 2008 and by late 2008, as the financial crisis took hold, it was shrinking rapidly.

3--FHA serious delinquency rate inches up while originations decline, Housingwire

Excerpt: The serious delinquency rate for Federal Housing Administration mortgages reached 9.6% in December, the highest level in more than two years, the Department of Housing and Urban Development said.

More than 711,000 FHA-insured loans were seriously delinquent, up 18.9% from one year earlier, according to the HUD report. It's also a 3.2% increase from the month before. The delinquency rate has been steadily increasing since passing 8.2% last summer.

Meanwhile, originations are down. In December, the FHA insured 93,700 mortgages, a nearly 30% decline from the 133,000 insured in December 2010.

4--Why Europe’s crisis can’t be averted, Feklix Salmon, Reuters

Excerpt: Politically, we still seem to be very far away from a fiscal solution to Europe’s problems, and the baseline scenario has to be that we’re not going to get one — ever. The result is likely to be a series of countries exiting the euro, and/or the “East Germanification” of much of Europe’s periphery: flows of money and human capital away from countries like Greece and Portugal, and towards the more prosperous countries with healthy economies and substantial trade surpluses. Essentially, those countries would become holiday resorts for the north, with all the real economic activity being concentrated in more prosperous nations. If you’re a smart young Spaniard, it’s much more attractive to seek your fortune in the UK than it is to take your chances in a deflating country with a stratospheric youth-unemployment rate.

Certainly there seems to be no belief at all, even among the well-intentioned technocrats at Davos, that coordinated international action will or should solve this particular crisis. And the inevitable conclusion is that the crisis is not going to be averted: it’s only going to get worse. It’s a very scary prospect — but one which it’s very important for global elites to come to terms with. And that’s exactly what they’re doing in Davos this week.

5--4Q GDP; Getting it right, CEPR

Excerpt: There are always a number of random factors that will affect measured GDP in any given quarter. Often they average out so that the measured GDP is pretty much in line with what we may view as the underlying rate of growth. Sometimes they don't average out so that the headline number might be notably better or worse than the economy's underlying growth rate. This is the situation for the last two quarters.

The most obvious wildcard in GDP numbers is inventory changes. These are erratic. Sometimes they reflect conscious decisions of firms to build-up or run-down inventories. Sometimes firms accumulate inventories because they didn't sell as much as expected. Sometimes it is just the timing of when items get counted in stock.

Whatever the cause, inventory fluctuations often have a very large impact on GDP growth. And, this impact is often reversed in the following quarter. (The impact on growth is the change in the change. If inventories grow by $50 billion in both the third and fourth quarters then inventories add zero to growth. The $50 billion growth in inventories only boosts growth in the fourth quarter if we added less than $50 billion in the third quarter.)

This is worth noting because more than the entire difference between the third quarter growth rate and the fourth quarter growth rate can be explained by the movement in inventories. Inventories subtracted 1.35 percentage points from growth in the third quarter, when they rose at just a $5.5 billion annual rate. They added 1.95 percentage points to growth in the fourth quarter when they rose at a strong $63.6 billion annual rate.

Needless to say, this speedup in the rate of inventory accumulation will not continue. In future quarters inventories are likely to grow at a somewhat slower pace. In the absence of this inventory growth we would have been looking at 0.9 percent growth rate in the fourth quarter....

The long and short is that there was likely little change in the underlying rate of growth from the third quarter to the fourth quarter. The winding down of the stimulus, coupled with the negative impact from the Japan earthquake brought growth to a near halt in the first half of the year.

Now that the stimulus has almost fully unwound we are back on a growth path of around 2.5 percent -- pretty much the economy's trend rate of growth. This means that we are making up little or none of the ground loss during the recession. That is a really bad story.

6-- Permanent Zero and Personal Interest Income, credit writedowns

Excerpt: If you are an American retiree or near-retiree, you’re not happy these days. Five years ago, you were getting a decent return on your fixed income investments. But since then, the Fed has trashed the fixed income market by reducing interest rates to zero percent for "an extended period". The thinking is that this will get people to take on more credit. But the reality is that a lot of people are stuffed to the gills with existing credit and are not creditworthy. The Fed is pushing on a string.

Meanwhile, it is sucking money out of the economy. Ross Perot would tell you that giant sucking sound is the fed reaching into your pocket and giving your interest income to the Treasury by buying up government debt and keeping interest rates at zero. (chart shows personal interest income dropped more than $400 bil in 2011)

Prediction: The next recession will see significant deleveraging and financial distress. The Fed will then move to purchasing municipal bonds, stocks and real assets for fear of a deflationary spiral.

P.S. – If you’re close to retirement, you are going to have to postpone that retirement for "an extended period".

7--MONEY MARKETS-Shrug off Greek talks setback as cash buffer anchors rates, Reuters

Excerpt: Strong demand for short-term debt from the euro zone's lower-rated countries also continued, with Spanish borrowing costs for 3- and 6-month Treasury bills falling sharply, supported by cash-flush domestic banks.



EGGS IN ONE BASKET?

Despite being awash with cash after the injection of nearly half a trillion euros in 3-year loans in December, there was no easing in banks' appetite for central bank funds.

Banks took up 130.3 billion euros at the ECB's weekly tender, up from 126 billion euros last week and the same level of demand as before looser ECB reserve rules kicked in last month, freeing up more bank funds.

Focus is now on how much of the 44 billion euros in 3-month loans maturing on Wednesday they will roll over, with a lower uptake likely to signal that banks are sticking to very short-term funding to keep collateral free for the ECB's next injection of 3-year loans on Feb. 29.

8--The Real Money Goes under the Mattress, TrimTabs

Excerpt: Checking and Savings Accounts Get More Than Eight Times More Money Than Stock and Bond Mutual Funds and Exchange-Traded Funds in First Eleven Months of 2011.

The Federal Reserve is doing almost everything in its power to entice investors to speculate in overpriced asset markets. Yet investors are generally refusing to embrace speculation. The real money these days is going under the mattress.

In the first 11 months of 2011, investors poured a stunning $889 billion into checking and savings accounts. This inflow is more than eight times higher than the $109 billion that flowed into stock and bond mutual funds and exchange-traded funds.

Inflows into checking and savings accounts peaked at $208 billion in July 2011 and $207 billion in August 2011 as the Standard & Poor’s downgrade of the U.S. credit rating and the Eurozone debt crisis rattled markets. Yet inflows into checking and savings accounts outstripped inflows into stock and bond mutual funds and ETFs in every single month of 2011, including in tax season.

Most portfolio managers desperately want to believe that the economy will improve this year so they can pocket bigger bonus checks for 2012 than they will for 2011. But our real-time indicators suggest the economy is still sluggish. Wages and salaries, which we track each day in real time, are falling slightly sequentially, mostly because Wall Street players are getting smaller bonuses. Meanwhile, postings on online job boards are rising only slightly sequentially.

Given the economy’s weakness and the constant interventions in markets by central bankers and politicians, it’s no wonder investors are hunkering down in bank accounts. As long as most investors keep stuffing most of their money under the mattress, the economy is unlikely to get off to the races anytime soon.

9--Obama administration bolsters homeowner lifeline, Reuters

Excerpt: "DeMarco said he is willing to reconsider principal reduction for mortgages backed by Fannie and Freddie, if, in his words, 'a source of funds outside the enterprises emerge to cover some portion of the costs associated with reducing principal,'" Senator Jack Reed, a member of the Senate Banking, Housing & Urban Affairs Committee, said in a statement.

"The administration has now made those funds available," Reed, a Rhode Island Democrat, said. "I expect FHFA to promptly reconsider their analysis and help more Americans avoid foreclosures."...

The Obama administration, in an election-year bid to help distressed homeowners, on Friday expanded its main foreclosure prevention program, and pushed for Fannie Mae and Freddie Mac to forgive mortgage debt.

The administration said it would extend the life of the Home Affordable Mortgage Program by a year through 2013 and widen it to reach more heavily indebted homeowners.

It also said it would provide incentives to encourage Fannie Mae and Freddie Mac, the government-controlled mortgage finance providers, to write down loans, an idea which their regulator has worried would unnecessarily add to the cost of taxpayer bailouts for the two firms.

The regulator, the Federal Housing Finance Agency, withheld final judgment on the proposal, saying it would study it further.

Fannie Mae and Freddie Mac own or guarantee about half of all U.S. home loans, and their participation in principal reduction under HAMP could greatly expand the reach of the $29.9 billion program

Nearly 11 million Americans are underwater on their mortgages - meaning they owe more than their homes are worth. With some key electoral swing states among the hardest hit by the housing crisis, the sector's health could become an important factor in November's elections....

When the administration launched the program in 2009, it expected as many as 4 million loans would be modified. So far, only about 900,000 households have permanently won new loan terms.

As of the end of last year, only about $3 billion had been spent of the $29 billion set aside for HAMP.

EXPANDING ITS REACH

As part of its effort to reach more Americans, both the Treasury Department and the Department of Housing and Urban Development said they would seek to aid homeowners pinched by other types of debt, including credit cards and medical bills.

In addition, the administration said it was tripling the incentives paid to investors when they reduce loan balances. Investors who rent out properties would also be able to access mortgage aid under the revamped program.

10--(From the archives) Americans buy record numbers of guns for Christmas, Telegraph

Excerpt: Americans bought record numbers of guns last month amid an apparent surge in popularity for weapons as Christmas presents.

According to the FBI, over 1.5 million background checks on customers were requested by gun dealers to the National Instant Criminal Background Check System in December. Nearly 500,000 of those were in the six days before Christmas.

It was the highest number ever in a single month, surpassing the previous record set in November.

On Dec 23 alone there were 102,222 background checks, making it the second busiest single day for buying guns in history.

The actual number of guns bought may have been even higher if individual customers took home more than one each.

Explanations for America's surge in gun buying include that it is a response to the stalled economy with people fearing crime waves. Another theory is that buyers are rushing to gun shops because they believe tighter firearms laws will be introduced in the future.

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