Tuesday, May 1, 2012

Today's links

1--Obama Fails to Stem Middle-Class Slide He Blamed on Bush, Bloomberg

Excerpt:  Barack Obama campaigned four years ago assailing President George W. Bush for wage losses suffered by the middle class. More than three years into Obama’s own presidency, those declines have only deepened.

The rebound from the worst recession since the 1930s has generated relatively few of the moderately skilled jobs that once supported the middle class, tightening the financial squeeze on many Americans, even those who are employed.

“It started long before Obama, but he hasn’t done anything,” said John Forsyth, 58, a railroad-car inspector and political independent from Lebanon, Ohio. “He kept pushing this change, change, change, and he hasn’t done anything.”
Underlying the erosion of the middle class, defined by some economists as the middle 60 percent of income earners, are trends that stretch back decades, including competition from lower-wage workers overseas and technological advances that allow factories and offices to produce more with less labor.

Yet real median household income in March was down $4,300 since Obama took office in January 2009 and down $2,900 since the June 2009 start of the economic recovery, according to an analysis of census data by Sentier Research, an economic- consulting firm in Annapolis, Maryland.

1% Get 93%

A president who attacked Bush’s policies for favoring the rich has overseen a recovery in which the wealthiest 1 percent captured 93 percent of per-capita real income gains in 2010, according to an analysis of tax data by Emmanuel Saez, an economics professor at the University of California at Berkeley.

On average, families in the top 1 percent saw their inflation-adjusted incomes rise by $105,637 that year from 2009, according to Saez.

Just 19 percent of registered voters believe the president’s policies favor the middle class, compared with 25 percent who say they benefit the rich, according to a CBS-New York Times poll conducted Feb. 8-13. Still, asked to choose which candidate would do a better job protecting the middle class, 49 percent say Obama and 39 percent Romney, according to an April 5-8 ABC News-Washington Post poll.

“The economic crisis, deep recession and wage stagnation weren’t created overnight and they won’t be solved overnight,” Amy Brundage, a White House spokeswoman, said in an e-mail. “While we are making progress and the economy is growing and creating jobs, too many middle class families are still struggling to recover from the worst financial crisis of our lifetimes caused by the reckless economic policies of the past.”

2--Biderman’s Daily Edge 4/30/2012: QE to Infinity and Beyond!, TrimTabs

Excerpt:   Today is the last day of April 2012. The stock market peaked, topped out, the last day of April 2010 and then again the last day of April 2011. Then, in May 2010 and again in May 2011, the stock market started a sell-off that lasted several months. Will that happen again this year? I actually do think we are at the start of another stock market decline.

Why? Because the ups and downs of the stock market are all due to the actions of the Federal Reserve. It is their money we are playing with.

Before the Fed took over control of the stock market, new money for stocks used to come from the amount of wages and salaries and other income not spent, also called savings. But no, not anymore.

In March 2009, the Fed announced an $800 billion QE1. Stock prices, which were cut more than half to a $9 trillion low from a $22 trillion peak in 2007, soared back to $17 trillion by April 2010, recouping 70% of the top to bottom decline in stock market prices.

On the other hand, how did the overall economy do during QE1? Nowhere near as well. While stocks recouped 70% of the decline, taxpayers after tax income, including capital gains, barely rose by the end of QE1.

QE1 ended in March 2010, From May 2010 stock prices dropped from $17 trillion, to just over $15 trillion by August 2010. Then in August 2010, the Fed announced stimulus package two, a $600 billion QE2. Stocks took off again and peaked at just over $19 trillion at the end of April 2011; two months before QE2 ended.

So after the post QE2 selloff stocks ended up at just the same $15 trillion level they ended up after the post QE1 selloff. Interesting. The real economy? Barely moving. By early 2011 take home pay was growing at about 1% after inflation. That is pretty much where we are today.

So stocks sold off starting two months before QE2 ended and by September 2011, the Fed announced stimulus package three, the $500 billion Operation Twist.

Guess what? Stocks took off again, rising over seven months to around $19 trillion today. To repeat, each of the three times the Fed has announced a stimulus package stock prices took off. Last year stocks started to sell off two months before stimulus package 2 was over. So here we are again, two months before the end of round three of extra Fed money printing. And I cannot see any reason why stocks will not sell off again.

Real time data says wages and salaries are barely growing ahead of inflation. Europe is a disaster and the emerging world is growing slower. Without the Feds new money, where will the cash come to take stocks higher?

Yes, over the past three years, the market has gone up each time the Fed announced a stimulus package. However, stimulus package number 3 so far has only gotten stock prices back to the stimulus package number 2 peak.

Obviously I believe stimulus package 4 will be announced before the presidential election. The real question to me is will stimulus package 4 again boost stocks prices? And if stocks do go up, for how long this time?

3--Lost manufacturing jobs in the US, The Big Picture
See chart

4--Falling home prices drag new buyers under water, Reuters

Excerpt:  More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.

That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.

It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.

As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity - in which the outstanding loan balance exceeds the value of the home - were FHA-insured mortgages, according to CoreLogic.

Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.

Even for loans taken out in December - less than four months ago and the last month for which data is available - nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.

"The overwhelming majority of the U.S. is still seeing home prices decline," said CoreLogic senior economist Sam Khater. "Many borrowers continue to be quickly wiped out."

Coulter said beginning in 2009, FHA took a number of steps to tighten qualification standards for the government-insured loans.

In January 2009, the minimum down payment for an FHA loan rose from 3 percent to 3.5 percent, and the upfront premium for mortgage insurance has also been raised.

In October 2010, only borrowers with a credit score of 580 or above could get a loan with a 3.5 percent down payment. Those with credit scores between 500 and 579 faced a 10 percent down payment. Those with credit scores below 500 do not qualify for an FHA loan.

FHA officials say the credit score of the agency's average borrower is 700.

A Fair Isaac Corporation score - known as FICO and the standard evaluation of creditworthiness in the United States. - of less than 620 is usually considered sub-prime.

5--Eurozone retail sales weakest since 2008 - French Retail PMI at record lows, Sober Look

Excerpt:  BBC: - Retail sales in the three largest eurozone economies - Germany, France and Italy - have fallen to their second lowest level on record, a survey says.

The purchasing managers' index (PMI) for the three countries, compiled by research firm Markit, fell to 41.3 in April, down from 49.1 in March and the weakest reading since November 2008.

A reading below 50 indicates shrinking activity. (See charts)

6--Iceland recovers, Reuters

Excerpt: Only a few years ago, a banking boom in which the sector's assets grew to 10 times the country's GDP lured many of Iceland's 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate...

Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.

Iceland's GDP growth estimated at some 2.6 percent this year will outshine even powerhouses like Sweden.

"These are among the highest numbers in Europe," said Finance Minister Steingrimur Sigfusson. "Sometimes it is easier to turn a small boat around than a big ship."

Currency depreciation though is only part of the picture.

Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.

Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.

7--Europe redux, Satyajit Das, naked capitalism

Excerpt:  Economist Walter Bagehot advised that in a crisis central banks should lend freely but at a penalty rate and secured by good collateral. The ECB does not appear to have quite understood Bagehot’s commandment. The rate is below market rates, amounting to a subsidy to banks. The ECB and Euro-Zone central banks have loosened standards, agreeing to lend against all manner of collateral. In effect, the ECB is now functioning as a financial institution, assuming significant credit and interest rate risks on its loans.

If the European Financial Stability Fund (“EFSF”) was a Collateralised Debt Obligation, the ECB increasingly resembles a highly leveraged bank.

The ECB balance sheet is now around €3 trillion, an increase of about 30 percent just since Mario Draghi took office in November 2012. It is supported by it own capital (scheduled to increase to €10 billion) and the capital of Euro-Zone central banks (€80 billion). This equates to a leverage of around 38 times.

Critically, the LTRO cannot address fundamental issues.

It does not reduce the level of debt in problem countries, merely finances them in the short-run. Europe is relying on its austerity program to reduce debt. As Greece demonstrated and Ireland, Portugal, Spain and Italy are demonstrating, massive fiscal tightening when combined with private sector reduction in debt merely puts the economy into recession. As public finance deteriorate rather than improve, it results in an increase not decrease in public debt....

As with the sovereigns, the LTRO does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks. It is government sponsored Ponzi scheme where weak banks are supporting weak sovereigns who in turn are standing behind the banks – a process which can be best described as two drowning people clinging to each other for mutual support.

The LTRO has not materially increased the supply of credit to individual and businesses. The money is being used by banks to finance themselves as they reduce borrowings by selling off assets to reduce dependence on volatile funding markets. The LTRO does little to promote desperately needed economic growth in the Euro-Zone.

The initial euphoria faded as a number of concerns re-emerged, manifesting themselves in the form of increasing rates on Spanish and Italian debt which now hover around the key level of 6.00% per annum.

Increasingly poor economic growth figures from Europe pointed to a lack of growth and progress on debt reduction.

8--Breaking Down Gains in Income, Spending, WSJ  (2 minute audio)

9--Spain’s economic and social crisis “of huge proportions, WSWS

Excerpt:   According to the report, “Exclusion and social development 2012,” issued by the Fundación Foessa of the charity Cáritas, poverty in Spain is “more extensive, more intensive and chronic than ever before”.

The percentage of Spanish homes below the poverty threshold is 22 percent and a further 25 percent are in an “at risk situation”. In other words, nearly half the population are living in or close to poverty. It is reported that of the 84 million poor people in the European Union, 10.7 percent of them are in Spain.

Cáritas General Secretary Sebastián Mora commented, “The constant increase in inequality and the wage gap between the rich and the poor, which widened enormously at the beginning of the crisis, threatens to continue increasing, which will lead to the polarisation of society”....

Homelessness is on the rise because evictions are increasing and mortgages are becoming more difficult to get. Although the value of houses has dropped by nearly 29 percent since 2007, the number of mortgages has gone down by 45.7 percent.

The government has cut the amount of money provided to the municipalities for the care of elderly people at home and has forced pensioners to pay 10 percent of the cost of their medicines, which were previously provided free. This will affect eight million old people. Charges for medicines are also being increased by 10 percent for the rest of the “active population”.

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