Wednesday, February 29, 2012

Today's links

1--The Great Repression, Big Picture

Excerpt: We’re baffled anybody still looks to the U.S. bond market for signals of future economic activity, inflation, or even risk aversion. Case in point is today’s 7-year bond auction, which CNBC’s Rick Santelli rated an eleven on a scale of ten, i.e., a slam dunk!

Go no further, however, than the chart below to see which maturities on the yield curve are the most repressed. Prior to today’s auction, for example, the Fed owned 43 percent of all Treasury coupon securities maturing in 2019 and more than 50 percent in three of the seven issues maturing in that year....

Finally, we view long-term Treasury interest rates as one of, if not, the most important price in the world. Because of direct financial repression the information it now provides and the signal it sends, which is so important to capital allocation decisions, has, at best, been severely distorted. No wonder corporations are hoarding cash and reluctant to invest.

2--Corporate Profits Rise…but Wages Fail to keep Pace with Inflation, All Gov

Excerpt: American corporations continue to enjoy healthy profit margins, while the average worker is watching inflation outpace wages.

Earnings for businesses began to rebound in early 2010 and have continued to do well ever since. By the third quarter of last year, pre-tax corporate profits climbed to a record $1.97 trillion.

Meanwhile, the consumer price index, which is used to measure the rate of inflation, reveals that inflation went up 2.3% from last year to now. During this same period, average hourly earnings climbed only 1.5%.

Michael Feroli, chief U.S. economist at JPMorgan Chase, told Bloomberg that the decline in inflation-adjusted wages means it will be difficult for the economy to sustain growth because wage earners will not be able to increase their purchases of consumer goods. The tax cuts, stimulus spending and increases in social benefits by the federal government have helped make up for the weak earnings, but eventually the impact of those government fixes will level off.

3--Margins Widen at U.S. Companies as Wages Lag Behind: Economy, Bloomberg

Excerpt: Companies are improving margins and generating profits as wage growth for the American worker lags behind the prices of goods and services.

The year-over-year change in the so-called core consumer price index, which excludes volatile food and fuel, has outpaced hourly earnings for the last four months. In January, average hourly earnings climbed 1.5 percent from a year earlier, while core inflation was up 2.3 percent.

“A lot of the outperformance of profits has been due to the fact that margins are expanding,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Firms have been able to keep prices intact even though labor costs have been declining.”

While benefiting the bottom line for businesses, the decline in inflation-adjusted wages bodes ill for the sustainability of economic growth as consumers may eventually be forced to cut back, Feroli said. Businesses have also been slow to redeploy their profits into new hiring.

“So far what you’ve had is the government has been able to step in and prop up household purchasing power by various cuts in payroll taxes, various increases in social benefits,” said Feroli. “That has sort of kept the whole thing going, but you might worry with real wages being hit spending is going to decline.”

4--John O’Brien: Mortgage Settlement Fails to Address Banking Criminal Enterprise, economonitor

Excerpt: As Dave Dayen has pointed out, it was two county registers of deeds, Jeff Thigpen in Guiford County, North Carolina, and John O’Brien of South Essex County, Massachusettes, who were the first to look at their own records to see how extensive the frauds were. O’Brien has called his office a “crime scene” and refused to register any more fraudulent deeds. He also performed a study of his own, and the results were released in June 2011. As Dayen reported, the study found widespread failures and apparent fraud, just like the later San Francisco exam:

Register John O’Brien revealed the results of an independent audit of his registry. The audit, which is released as a legal affidavit was performed by McDonnell Property Analytics, examined assignments of mortgage recorded in the Essex Southern District Registry of Deeds issued to and from JPMorgan Chase Bank, Wells Fargo Bank, and Bank of America during 2010. In total, 565 assignments related to 473 unique mortgages were analyzed.

McDonnell’s Report includes the following key findings:

• Only 16% of assignments of mortgage are valid

• 75% of assignments of mortgage are invalid.

• 9% of assignments of mortgage are questionable

• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.

• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)

• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

5--Main Street's $100 Billion Stock-Market Blunder, smart money

Arends: The market may be back to pre-crisis levels, but many regular investors have missed out.

Excerpt: Back in the spring of 2009 I was approached by a middle-class investor in a panic. She had dumped all her stocks in the fall of 2008, following the Lehman Brothers collapse. She just couldn't stand watching her life's savings evaporate before her eyes. By the time we spoke, the stock market had already rallied sharply, but she was too afraid to jump back in. She just didn't trust it. I couldn't coax her. She was terrified...

It's a typical story, and the results are plain to see. Last week, the Dow Jones Industrial Average hit 13000 for the first time since the crash. It has recovered most of the ground lost from the peak. When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.

But for all the cheering on Wall Street, there's a sorry tale behind the headlines.

While we've seen a stock-market boom that has made plenty of people rich, much of Main Street America has missed out. Instead of buying, they've been selling. The few moments when they've steeled themselves and turned buyers have been, on the whole, the worst times to do so.

In total, over the last five years the investors in ordinary domestic mutual funds have withdrawn $490 billion from the U.S. stock market, according to data compiled by the Investment Company Institute, the industry trade group. There have been only a few brief periods during which they were buying. The first was the spring of 2008 -- just before the market collapsed. The second was the spring of 2009, after the stock market had already rallied. The third was the start of last year, shortly before the market slumped again.

6--Hours flat and wages up modestly, EPI

Excerpt: The length of the average workweek was unchanged in January at 34.5 hours, still below the December 2007 level of 34.6. Average hourly wages increased by 4 cents in January, and a 1.4 percent annualized rate over the last three months. This remains far below the pre-recession growth rate (3.3 percent from December 2006 to December 2007), as persistent high unemployment has exerted strong downward pressure on wage growth. Average weekly wages grew more strongly at $1.38, and a 2.6 percent annualized rate over the last three months

Labor force participation and the employment-to-population ratio

The labor force participation rate was 63.7 percent in January, its lowest point since the downturn began. Remarkably, the labor force has grown by less than half a million workers since the recession started in December 2007, though the working-age population has grown by nearly 10 million in that time. There are currently 2.8 million “marginally attached” workers—workers who want a job, are available to work, but have given up actively seeking work. If these workers were in the labor force and counted as unemployed, the unemployment rate would be 9.9 percent right now instead of 8.3 percent.

At a time like this, with the labor force not growing at a steady pace, arguably the cleanest measure for assessing labor market trends is the employment-to-population ratio, which is simply the share of working-age people who have a job. The ratio was 58.5 percent in January, also not far from its low of 58.2 percent last summer. The labor market still has substantial ground to make up: The employment-to-population ratio was 63.3 percent five years ago, in January 2007, before the recession started.


The jobs deficit left from losses in 2008–2009 remains in excess of 11 million jobs (when you take into account both the 5.6 million fewer jobs we have now than we did before the recession started, and the fact that we should have added more than five million jobs to keep up with normal growth in the working-age population). To fully fill the gap in three years, by the start of 2015, we would have to add around 440,000 jobs every month between now and then. But that’s not expected to happen. The Congressional Budget Office projects that the unemployment rate will be 8.0 percent at the start of 2015, three years from now. Millions are being needlessly condemned to joblessness for years to come.

7--FASB Sold Out; Expected Results Followed, Big Picture

Excerpt: In the height of the financial crisis, the Financial Accounting Standards Board were pressured to pass FASB 157 (“Fair-value accounting”).

Banks were complaining that some of their holdings were difficult to value, thinly traded, tough to mark. So 157 passes and it allows the accountants at banks to mark these to a model rather than the last trade.

Derided as “Mark-to-Make-Believe” it leads to this unfortunate situation: The same models that led to the unfortunate money-losing purchase decision in the first place are now being used to actually value these holdings. regardless of the obvious flaw in the model in the first place.

As these bad buys plummet in price, investors in banks have no insight into the loss potential — they are hidden from view, along with the true financial condition of the company. This sort of accounting fuckery would never be tolerated in a nation where investors mattered more than insiders and bankers. Instead, it rewards the incompetent and allows near insolvent banks to pretend they are solvent, thereby allowing the granting of huge bonuses.

Almost three years later, we see the results of the Accounting Board’s move. The large bailed out banks remain weakened. Like all wounded animals, they are very dangerous. They have institutionalized fraud, made forgery a business expense. ZIRP exists for the primary reason of allowing these banks to rehabilitate their faulty balance sheets. Savers get punished.

The same could have been accomplished much more quickly and cheaply through prepackaged bankruptcies. That would have required an uncorrupted Congress, an honest Accounting board and a willingness to allow capitalism in America. Instead, we had foisted upon us a convoluted form of Socialism for Financiers.

If you want to know why the Fed has maintained zero interest rates, you need only look at who remains employed at banks, at who gets blamed for their failure. The record low approval rating of Congress at least imply that the public isn’t utterly blinded by the scam.

All to save the asses of a few reckless, incompetent bankers. Something is very, very wrong with this system

8--Mass layoffs expose myth of US economic “recovery”, WSWS

Excerpt: The recent announcements of mass layoffs by the US Postal Service, Procter & Gamble, and Archer Daniels Midland, together with the bankruptcies of Fuller Brush and American Airlines, have upended claims that the United States is in the midst of an “economic recovery.”

In fact, the US economy remains mired in mass unemployment, with falling real wages and growing poverty a fact of life for millions of people. Small and medium businesses, facing immense pressures to cut costs, are collapsing by the tens of thousands.

The worst of the recent job cuts was conducted by the government itself: the US Postal Service announced last week that it would wipe out 35,000 jobs by the end of September, part of a longer-term plan to eliminate 150,000 job...

The reality is completely different. In 2011, the US economy created 1.5 million jobs, but the population grew by 2.2 million, and a roughly equivalent number of young people entered the work force. The employment-population ratio, meanwhile, remains at record lows after having dropped by about 5 percentage points between 2008 and 2010....

The Obama administration set the model for this whole process during the restructuring of the auto industry, where the administration demanded an expansion of super-exploited new hires making $14 per hour as a condition for bailing out the Big Three.

This points to the fundamental nature of the economic crisis, which has been utilized by the ruling class to lower wages and slash social spending throughout the economy, with the aim of boosting corporate profits and the incomes of the super-rich.

Nearly three years after the official end of the recession in June 2009, it is becoming increasingly clear that the crisis of 2008 was not merely another recession, but a transition to a “new normal” where high unemployment is a permanent fixture, real wages are perpetually falling, and third-world poverty a reality for millions of people.

This is because the present downturn is not merely the operation of the normal business cycle, but a general crisis of world capitalism. It reflects the breakdown of the postwar economic order and the historical decline of American capitalism in particular.

The ruling class has responded to the crisis with single-minded determination to destroy the incomes and living standards of working people.

9--Delinquent Debt Shrinks while Real Estate Debt Continues to Fall, NY Fed

Excerpt: Aggregate consumer debt fell $126 billion to $11.53 trillion in the fourth quarter of 2011 according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit, a 1.1 percent decrease from the $11.66 trillion reported in the prior quarter’s findings. The report, which includes data on a variety of household debt levels, also revealed further declines in real estate debt and delinquencies, while showing that other forms of consumer indebtedness increased.

Mortgage and home equity lines of credit (HELOC) balances fell a combined $146 billion, a sign that consumers continue to reduce housing related debt.

After a mild uptick in the third quarter, total household delinquency rates resumed their downward trend in the fourth quarter. The report finds that $1.12 trillion of consumer debt (or 9.8 percent of outstanding debt) is currently delinquent, with $824 billion seriously delinquent (at least 90 days late). Meanwhile about 2.2 percent of mortgage balances transitioned into delinquency during the fourth quarter, resuming the recent trend of reductions in this measure. However, delinquency rates remain elevated compared to historical figures.

"While we continue to see improvements in the delinquent balances and delinquency transition rates this quarter, there has been a noticeable decrease in the rate of improvement compared to 2009-2010," said Andrew Haughwout, vice president and economist at the New York Fed. "Overall it appears that delinquency rates are stabilizing at levels that remain significantly higher than pre-crisis levels."

10--Federal judge weighs whether to let regulators rein in oil speculators, McClatchy

Excerpt: A federal judge on Monday refused to halt efforts by a key regulator to limit excessive speculation in the trading of oil contracts — which is driving up oil and gasoline prices — but hinted that he might soon rule in favor of Wall Street and let speculation go unchecked.

Robert Wilkins, a judge on the U.S. District Court for the District of Columbia, declined a request for a preliminary injunction to halt the Commodity Futures Trading Commission from implementing a congressional mandate to limit how many oil contracts any single financial speculator or company can control.

However, Wilkins told both the CFTC and lawyers for the Securities Industry and Financial Markets Association and the International Swap and Derivatives Association that he expected to make a ruling soon on whether to hear the case. His line of questioning left both sides with the impression that he was concerned about how the regulatory agency has proceeded...

The judge directed most of his questions at the CFTC’s Marcus, grilling him on financial sector complaints that the cost of complying with the new rules was burdensome and that there had not been enough analysis of costs vs. benefits. Marcus countered the judge’s questioning by noting that the Dodd-Frank Act explicitly directed the agency in four different places to quickly impose limits and called the costs to industry “minuscule” compared to their earnings.

11--Corporations don't need tax cuts. Why is Obama proposing them?, Chritian Science Monitor

Excerpt: The Obama administration is proposing to lower corporate taxes from the current 35 percent to 28 percent for most companies and to 25 percent for manufacturers. But American companies are booking higher profits than ever....

It’s not as if corporations are hurting. Quite the contrary. American companies are booking higher profits than ever. They’re sitting on $2 trillion of cash they don’t know what to do with.

12-- Real Data Does Not Corroborate Pollyanna, Trim Tabs

Excerpt: ...many on Wall Street want to believe that a stock market up by more than $9 trillion, or 100% from the March 2009 low, has to mean that the US economy is in a healthy long term recovery. Unfortunately, the Pollyannas are wrong. Their evidence of an improved labor market, higher corporate earnings and the return of the housing market are all based upon misleading data.

The TrimTabs analytical method starts with the question, where is the new cash is coming from? Currently new cash is not coming from the normal source; which has always been income.

The only increase in cash since the March 2009 has been the Federal Reserve giving newly created money away as payment for government expenses. Over the four fiscal years, since 2009 the US Government collected an average of $2.3 trillion annually and has spent, close to $3.6 trillion annually. The combined $4 trillion deficit, when added to the $1.4 trillion given away to banks to buy their worthless mortgages equals the $5 trillion increase is US debt.

For what it is worth, in the peak year of 2007 the federal government collected $2.6 trillion but only spent $2.7 trillion. That was a deficit of only $100 billion.

To go back to the real time data available about the economy, all that is available with which to count current income is withheld income and employment taxes paid by employers to the U.S. Treasury for all 131 million salaried workers. Our analysis says after-tax income is growing at just under 3.0% year over year, not keeping up with inflation. And yes, the BEA and BLS refuse to use this real time data. Why? Ask them. I have, and they’ve never responded.

The reality is that if income tax collections are not growing very fast than neither are the number of new jobs. That calls into question the recent BLS press release that said jobs are growing fast.

The Pollyannas say that declining unemployment claim numbers support the belief that jobs are growing faster. But the reality is that without seasonal adjustments unemployment claims are currently down the same 10% year over year as the past six months. In other words by counting year over year numbers, there is no improvement in the rate of new claims for unemployment. So jobs in reality cannot be growing any faster now than at the end of last year.

So, even if jobs are not growing fast, corporate earnings are, right? The reality is that corporate earnings are no longer growing rapidly. As Jim Bianco reports, when you subtract the Q4 earnings of Apple (AAPL) and AIG (AIG), the rest of corporate America is growing earnings at a meager 5% year over year. What is worse, earnings guidance for 2012 keeps declining.

So if jobs are not growing very fast and neither are corporate earnings, at least the housing market is doing better right? All the seasonally adjusted numbers say so, right? Well, as we reported last week Mark Hanson, of, says real-time data, ignoring seasonal adjustments and counting year over
year numbers, indicate both prices and sales of new and existing home sales are pretty much unchanged from year end 2011. The sole reason the current sales numbers look like big improvements are due to seasonal adjustments that makes a small weather based January gain seem huge. While the real estate market is probably at a bottom at the low end, but higher end home prices will continue decline primarily because there is no jumbo mortgage money easily available.

Yes the stock market has been going up, but that does not have to mean the US economy is improving. While US and European stocks have been going up, gold keeps rising faster. That means it is not gold that is a chimera, or a phantom, it is the US currency that is a phantom.

13--Is it time to buy?, CNBC

Excerpt: Housing appears to be rated a “buy” these days, especially among investors, who see a ripe and rising rental market and big potential for income. But is it the right time yet for what I call “organic” buyers to get in? By this I mean people buying a home to actually live in it, raise a family in it, let the dog run around in the back yard. If prices are still falling, couldn’t an even better deal be waiting down the road a bit?

No. House prices will continue to fall on a national basis at least through 2012, but you have to look past national headlines to your local market, which is likely already recovering nicely. The trouble with the national numbers is that they are heavily weighted toward the lower end of the market and to the distressed end of the market.

Around 73 percent of homes that sold in January were priced below $250,000, according to the National Association of Realtors. Forty-seven percent of homes sold that same month were considered “distressed,” which is either a foreclosure or a short sale (where the lender allows the borrower to sell for less than the value of the mortgage). With all the activity in these areas, no surprise that prices skew lower.

The $250,000 to $500,000 price range may now be the sweet spot for the market. Sales in January were up in this price range, and if you have good credit, you are within GSE and FHA loan limits in most markets. While FHA just raised its insurance premiums, which may hurt much-needed first-time homebuyer demand, it is still one of the best loan products out there today, especially for those with lower down payments.

You cannot time housing any more than you can time the stock market. True, housing moves far more slowly, but that works to its benefit, as prices don’t rise and fall on daily news or even on major events. Sales have clearly bottomed in housing, and prices always lag sales. They will lag longer this time around, no question, but they will come back. Supply and demand will eventually win out, even after an historic crash. If you can’t get a good mortgage now, then perhaps it’s not your time, but if you can, waiting may not buy you much.

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