Saturday, May 5, 2012

weekend links

1--What if housing doesn't recover for another decade? Dr Housing Bubble

Excerpt: We have an employment-population ratio that is similar to that from the 1980s.  How is this good for household formation?  More importantly, this reflects a troubling demographic reality for housing.  You have 75 million baby boomers that as a group, are wealthier than their student loan indebted children but who will boomers sell their properties to?  To other baby boomers?  Over 10,000,000 properties today are in a negative equity position.  Many younger Americans have no savings and because of the weak economy are 5 to 10 years behind their parents in terms of starting their careers.  They also start out with a significant amount of student debt that was not really an issue for any previous generation (certainly not to the level we are seeing with student debt far surpassing credit card debt..

Employment absolutely matters. The last couple of years the housing market has been held together with FHA insured loans that bring back low-down payment mortgages and the Federal Reserve buying trillions of dollars in mortgages to keep rates artificially low. If you didn’t notice, rates made another record low this week. Yet rates are not truly reflecting the real risk in the market and you already see that rates do not have the power to suddenly increase home values because people still have to document income to take out a loan.

This does boil down to a household income issue and consequently an employment issue (it always did). From 1997 to 2007 the bubble in home values did not reflect solid wage increases but a flood of easy to get loans where a pulse was the only requirement to buy. With all of that removed, we have had 5 million completed foreclosures and trillions of dollars of faux equity evaporated into thin air. Prices are back to levels last seen a decade ago and 10,000,000 homes are underwater with another 5.8 million in foreclosure or with at least one missed payment. All of this in spite of historically low interest rates and low down payment products like FHA insured loans.

2--Consumer outlook: "Bleak"; Gary Shilling, pragmatic capitalism

Excerpt: The 3.1 million additional people who aren’t paying their mortgages are essentially living rent-free by not paying their monthly $1,721 mortgage payments, assuming they’re still living in those houses and that their skipped payments are the same as the national average. Since 2006, they have increased their purchasing power by $64 billion at annual rates, or the equivalent of 5.4% of after-tax income.

Spending, Saving And Debt

After higher gasoline costs, money generated by living rent-free and other side issues are factored in, the bottom line is that U.S. consumer spending has been rising while saving has dropped (Chart 12). Household debt, including mortgages, student, auto and credit card loans, has fallen relative to disposable personal income (Chart 13) but largely because of writeoffs of troubled mortgages, according to our analysis of incomplete data. Revolving consumer credit, largely on credit cards, is no longer being liquidated....
So, contrary to my steadfast belief that consumers are being forced to save more and reduce debt to rebuild net worth, they’ve been doing the opposite lately. In making my case for a long run saving spree, I point to the volatility of stocks starting in 2000 that ended the conviction of many individual shareholders in the 1980s and 1990s that ever-rising stock portfolios would substitute for saving out of current income and put their kids through college, finance early retirement and pay for a few ‘round-the-world cruises in between.

3--The triumph of Obamanism (gov jobs plunge), chart, streetlight blog

4--Hitler and Mussolini rose to prominence as a result of pro-cyclical government economic policy, credit writedowns

Excerpt:  Tom Hickey turned me on to this post at the Daily Mail:

‘The Nazis came to power only in 1933, as an immediate consequence of the deflationary spiral that resulted from what Mr Wolf [commentator Martin Wolf, in an earlier article] refers to aptly as the "catastrophic austerity" introduced by Bruning.’

This jives with what I understand about economic history and I have cited this as well when discussing rising economic nationalism last April. My point in that article was that the US, a creditor nation, was fighting boom time inflation and turned to ‘austerity’ to defeat it. Europe on the other hand was seeing a debt-laden deflationary episode after the Great War:

…[In the US,] 1921 was an inflation-fighting recession, not a deflation-fighting one. So the macro environment was entirely different. The potential for an extreme deflationary or inflationary spiral was much less. Weimar Germany or Mussolini’s Italy are the correct analogues from 1921…

5--  Growth compact still equals austerity, IFR

Excerpt:   The peripheral countries face opposite challenges of deleveraging, deflation of wages and high/rising unemployment. The fact that austerity remains a priority and that the ECB is unwilling to step in with further stimulus point to a scenario that can only worsen. Indeed, accelerating downside momentum to growth will have a feedback loop to the fiscal trajectory, and if austerity is dominant then the economic outlook will only worsen further.

The political implications of such a feedback loop have already seen many governments replaced and a desire to focus on growth. The problem is that there is little agreement on how to boost growth, and if it were simple to do this at a national level then such measures would have already been adopted. Indeed, even Draghi’s version of a ’growth compact’ does not involve increased government spending or stopping fiscal consolidation.

Crisis without pre-emptive action

With the ECB choosing to remain on the sidelines and viewing policy as already being asymmetrically biased towards troubled countries, and with politicians fiscally constrained, it is difficult to see how growth can be supported. It will take another crisis to force a change in crisis management either at the political level or at the ECB. Pre-emptive action is not the forte of eurozone policy makers.

6-- A Reason Not to Trust Friday’s BLS Numbers, TrimTabs

Excerpt:   It is sad to me that the BLS and everyone else but us ignores the fact that real time data is readily available on how many people are working and how much they are making. Where? Embedded in the withheld income and employment taxes sent to the US Treasury every day by all employers.

The truth is that the initial BLS new jobs number is a joke even in the eyes of the BLS. How do I know that? I just reread some BLS footnotes for the first time in several years.

By the way back in 1971, after getting a Harvard MBA, my first real job on Wall Street was as an investigative reporter working for Alan Abelson at Barrons Financial Weekly. Whenever Alan asked me to look for bad stuff at some company, what I did first was start in the footnotes. That is where the truth is usually hidden.

The BLS monthly job survey has a footnote called the Employment Situation Technical Note.

I doubt that very many of the press and particularly traders have ever looked at that footnote. What is in there confirms my worst fears about the quality of the data.

First of all the unemployment percentage number comes from a Census Bureau survey, snail mailed to 60,000 households the week of the month that includes the 12th. The footnote does not disclose how many actually respond by the end of the month, but I would guess that no more than half do. In other words the unemployment percentage number touted and argued about endlessly is the result of 30,000 responders out of millions of households. How accurate can that be? There is no way to even attempt to true that.

Then there is this Fridays payroll jobs number which is based upon a survey of 141,000 businesses and government agencies. The footnote says the active sample includes approximately one-third of all nonfarm payroll employees. However, the note does not say what percentage respond within two weeks of being queried? My understanding is that probably two-thirds or so respond, in other words employers of about a quarter of the workforce.

So, how accurate is a survey of about a quarter of all employers? The BLS footnote itself says not very. The BLS says that they have 90% confidence that their monthly estimate is accurate to within plus or minus 100,000 jobs either way. That means that if this Fridays number is reported as 100,000 new payroll jobs, in reality the job gain could be anywhere from 0 to 200,000. And the nitwits would treat the 100,000 number as the gospel truth.

This is nuts. We live in a real time trading world, and the government puts out data with an accuracy range wide enough to sink an entire trading portfolio. All this and real time data on jobs, income and spending is readily available and accessible

7--European loans defect to the US, IFR

Excerpt: “Any deal requiring more than €1.4bn to €1.5bn of leveraged loans will struggle to raise them in Europe. It would be very difficult,” a banker said.

The situation has prompted purely European companies such as Iglo to consider setting up US companies to get around withholding tax, as getting dollar funding turns from a “nice to have” into a “need to have” scenario.

The lack of liquidity in Europe is accentuated by CLOs in the region coming to the end of their reinvestment periods, and banks have less appetite for risk due to increasing regulations. But bankers warn that European investors risk becoming irrelevant.

“European investors have to decide whether they want to stick around and have a life. How will they raise funds if they don’t invest in anything?” a second banker said.

Questions remain as to how long this transatlantic trade can continue, since looming regulation including the Foreign Account Tax Compliance Act could turn off the tap to US liquidity, potentially plunging the European market into greater turmoil.

8--Trouble in repo market, Nasdaq

Excerpt:  Still, there are a "host of potential financial-stability concerns" that are not entirely visible and the "various shadow-banking channels are one of them," he said. Shadow banking is a system of credit and financing outside banking such as money-market funds and securitization.

In his prepared remarks, Tarullo endorsed a plan by the Securities & Exchange Commission to tighten regulations on U.S. money-market funds, citing the industry as a vulnerability of the U.S. financial system.

Tarullo, who is overseeing the central bank's financial-regulation efforts, endorsed SEC Chairman Mary Schapiro's plan to shore up the $2.6 trillion money-market-mutual-fund industry.

During the financial crisis, the Treasury Department and Federal Reserve headed off a wave of panic by vowing to backstop all money funds after a large fund with exposure to Lehman Brothers debt "broke the buck," which happens when a fund's net asset value falls below $1.

In response, the SEC imposed rules on the kinds of investments money funds could hold in 2010. Those changes "were a step in the right direction," Tarullo said. "But the combination of fixed net asset value, the lack of loss-absorption capacity, and the demonstrated propensity for institutional investors to run together make clear that Chairman Schapiro is right to call for additional measures."

The industry, however, has criticized the plan, contending it could put some funds out of business. Groups representing local officials have said the plan would raise borrowing costs for states and towns.

Tarullo also noted weaknesses exist in the "triparty repo" market, in which banks make and receive short-term loans on a day-to-day basis. That market temporarily froze during the financial crisis, drying up a source of funding for many Wall Street firms.

"A major vulnerability lies in the large amount of intraday credit extended by clearing banks on a daily basis," Tarullo said. While an industry initiative to tackle those problems led to some improvements, he said it "fell short of dealing comprehensively" with the problem.

"It now falls to the regulatory agencies to take appropriate regulatory and supervisory measures to mitigate these and other risks," Tarullo said.

In answering a question about the return of private-label-mortgage securitization or the process of bundling mortgages into bonds and selling them to investors, Tarullo said it is "reasonably clear" to him "we are not likely to see the restart of a well-functioning private-securitization market" unless the roles of the government agencies like Fannie Mae (FNMA) and Freddie Mac (FMCC) are known.

9--More must be done on shadow banking -Fed's Tarullo, Reuters

Excerpt: U.S. regulators should take steps soon to strengthen government oversight of money market funds and short-term bank funding markets so that the "shadow" banking system can be better policed, a top Federal Reserve official said on Wednesday.

Fed Governor Daniel Tarullo said that while regulators have taken many steps since the 2007-2009 financial crisis to better regulate banks once considered "too big to fail," less work has been done to make funding markets outside the traditional banking system less risky.

"Although some elements of pre-crisis shadow banking are probably gone forever, others persist," Tarullo said in remarks prepared to be delivered at the Council on Foreign Relations in New York. "Moreover, as time passes, memories fade, and the financial system normalizes, it seems likely that new forms of shadow banking will emerge."

Tarullo singled out money market and tri-party repo markets as areas where action should be taken in the "short-run."

Tarullo is the Fed's leading voice on regulation and his public support for stricter oversight gives weight to efforts by Securities and Exchange Commission Chairman Mary Schapiro to introduce new regulations for money markets.

Schapiro has so far been unsuccessful in gaining enough support within the commission for tougher reforms for the $2.6 trillion money market fund industry.

She has said further steps are needed to stop potential problems at money funds from spreading throughout the financial system, as happened in the 2008 credit crisis when the Reserve Primary Fund "broke the buck" with its net asset value falling below $1.

The agency is considering requiring that funds set aside capital against losses, restrict a portion of withdrawals or eliminate fixed share prices.

"Chairman Schapiro is right to call for additional measures," Tarullo said.

The tri-party agreements, or repos, are a prime source of short-term bank funding and are backed by Treasuries or riskier collateral, including mortgage-backed debt.

Fed officials, including Chairman Ben Bernanke, have pointed to problems in the repo market as a leading contributor to the financial crisis.

Earlier this year the New York Fed said it was considering restrictions on repo markets after becoming dissatisfied with an industry committee's efforts to address concerns about the loans' risks.

The industry effort "fell short of dealing comprehensively with this problem," Tarullo said. "So it now falls to the regulatory agencies to take appropriate regulatory and supervisory measures to mitigate these and other risks."

10--Tri-party repo’s problems are deep and unresolved, Repowatch

Excerpt: Despite these accomplishments, the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged.

To achieve the goals stated in the task force’s final report, large commitments of time and money lie ahead. Technology upgrades alone will cost about $15 million, with the two clearing banks bearing 66 percent of the cost, dealers 27 percent, and lenders 7 percent, according to the Celent study.

Still, the clearing banks say they are charging forward with a plan to reach “Target State” by 2016, by which they mean to eliminate the intraday credit. They say they’re determined to succeed.

At this stage, it is clear that for some aspects of the Target State, a substantial amount of IT work must be done …. Nonetheless, all parties represented on the Task Force including both Clearing Banks have fully endorsed the Target State.

Meanwhile, the New York Fed said in its February 15 statement that it will work with tri-party users to consider additional steps, including (1) restricting the types of collateral that can be financed on the tri-party market and (2) requiring the industry to fund a special bank that would help repo lenders who suddenly find themselves stuck with collateral from a defaulted borrower.

Bruce Tuckman, director of financial markets research at the Center for Financial Stability in New York, thinks it’s odd that it falls to the Fed to care about the quality of the collateral. From a February 16 paper:

One might have thought that the clearing banks, particularly since they were extending such large amounts of intra-day credit, would have insisted that collateral be relatively easy to price and margin. For some reason, however, this did not prove to be the case: during the crisis clearing banks were holding seriously problematic collateral......

In tri-party jargon, JP Morgan unwound the repo in the morning and rewound it in the evening. Even if the repurchase agreement was a long-term contract, say for 30 days, JP Morgan unwound it every morning.

Why? JP Morgan did this because Lehman wanted to use its securities during the day, maybe several times during the day, to get other repo loans, to lend, to short stock, and to do other trades.

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