Thursday, June 7, 2012

Today's links

1--US deleveraging has resumed, zero hedge

Last quarter, upon the release of the Q4 2011 Z.1 (Flow of Funds) report, we penned "The US Deleveraging Is Now Over", because, well, it was: all the categories tracked by the Fed's Credit Market Debt Outstanding series posted a sequential increase over Q3.

Most importantly, there was an increase in the net debt held by the US Household Sector: this was only the first time after 14 quarters of declines, that US consumers had levered up. Sure enough, many took this as an indication that the economy was now fixed, and that with everyone levering up, inflation was sure to follow, and the virtuous cycle was back (also leading to the scare when the yield on the 10 year spiked, however briefly, to the mid 2% range).

As it turns out, the entire "releveraging" was merely a one time artifact of consumers relying more than ever on credit to purchase items in the holiday season. Because as the just released update from the Fed indicates, deleveraging is back with a vengeance. In Q1 the Household sector saw its total debt decline by $81 billion, or the most since Q1 of 2011, to $12.85 trillion. That this happened even as overall net worth supposedly soared by $2.8 trillion as noted in the previous article is truly disturbing, and confirms what everyone knows: not only is nothing fixed in the US economy, but the deleveraging wave continues on its merry way. (see chart)

2--Merkel supports a two-speed European Union, Bloomberg

With Spain struggling to avoid a bailout and Greece at risk of exiting the euro, Cameron and President Barack Obama called on Europe’s leaders yesterday for an “immediate” plan to resolve the crisis. Merkel has stepped up her opposition to debt sharing in the euro region and rejects proposals that Spain’s banks be allowed direct access to the euro bailout funds.

Speaking earlier, Merkel said that she supports a two-speed European Union, with a core group in the euro pressing ahead with deeper integration and the U.K. among others relegated to Europe’s margins. Her comments, made in an interview with ARD television today, underscore her differences with Cameron as he presses for more aggressive action by euro countries to counter the financial crisis.

3--Clinton's role in the current crisis, CEPR

...the seeds of the current disaster were put in place by the policies of the Clinton administration. President Clinton did nothing to try to check the rise of the stock bubble. Its collapse in 2000-2002 led to the longest period without job creation since the Great Depression, until the current downturn.

The economy only recovered from this downturn and began creating jobs again with the rise of the housing bubble. The burst of that bubble of course gave us our current downturn.

The stock bubble, not Clinton's tax increases or spending cuts, was the reason that we had budget surpluses. In 1996, after all the Clinton era tax increases and spending cuts were already in place, the Congressional Budget Office still projected a deficit equal to 2.5 percent of GDP for 2000. The reason that we instead had a surplus of roughly the same size was that capital gains created by the bubble led to much higher tax collections than projected and the more rapid growth from the bubble caused spending to fall relative to the size of the economy.

The Clinton administration also laid the basis for the huge trade deficit the country now faces with its engineering of the bailout of the East Asian financial crisis. The harsh conditions of this bailout led developing countries to place a huge premium of acquiring reserves, the most important of which is the dollar. As a result, the dollar was pushed up to levels that made our goods uncompetitive internationally.

The resulting trade deficit is the fundamental imbalance in the U.S. economy today. Because of this trade deficit, by definition the country must either have negative private savings, as when the housing boom driven consumption boom pushed the savings rate to zero, or negative public savings (i.e. budget deficits).

While President Bush had ample opportunity in his two terms in office to reverse the economy's course before it led to disaster in 2008, it was President Clinton who set the economy on the road to collapse. If the public does not understand this fact, it speaks to the awful state of economic reporting.

4--Monetary policy is the wrong weapon, IFR

It is truly hard to imagine that there is not enough monetary stimulus in the system with policy rates in most parts of the industrialised world at or close to zero and assets on central bank balance sheets tripling since the crisis began to an unheard-of 30-percent-plus share of GDP. But such indeed is the case and, frankly, is more a reason to be cautious,” David Rosenberg of Gluskin, Sheff wrote in a note to clients.

Quantitative easing has clearly had an impact on financial markets but the carry-through to economic activity is less clear. The first rounds in 2009 came as financial and lending markets were paralysed by fear. The effect was electric, in part because investors reasoned that it would allow for time to rebuild capital and spark inflation and growth which would make debt proportionally easier to bear.

Clearly the U.S. did a good job rebuilding bank capital, but keeping a banking system going is necessary but not sufficient for growth. Instead you could argue, and JP Morgan’s derivatives misadventure supports this, that having very low rates and ample liquidity but in a low-growth, debt-heavy economy has only set up incentives for speculation rather than long-term investment.

Growth has been slow and borrowers who should have failed kept alive, more in service to bank capital than to themselves or the broader economy.

We’ve seen a pattern of diminishing returns to extraordinary monetary policy efforts since 2009, with economic growth remaining subdued and periods of euphoria and relief in financial markets becoming ever shorter.

The ECB’s long-term refinancing options (LTRO) are an example: easing conditions for euro zone state and bank borrowers for less time on each successive occasion.

Surely, of course, central bankers can create as much money as they wish, and just as surely this must inevitably have an effect on prices, or rather on nominal prices. But the idea that monetary policy can, by itself, rekindle animal spirits may have reached something like the end of the line.

If the easing comes at a time when the euro zone and Washington cannot give a credible account of what they are doing to resolve the underlying issues, quantitative easing may this time drive money under mattresses or into electronic last resorts rather than productive investments.

5--Hey Brother, Can You Spare $500 Billion for America's Banks?, Marketplace

It may be spring in much of the country, but the air in the financial world carries a definite chill reminiscent of the fall of 2008.

So we have to ask again: is the world's banking system strong enough to withstand the forces of a global recession? A number of prominent people - more on them below - are dubious that the banking system is as strong as it should be. They believe that "systemic risk" - defined as the risk that most of the financial system will fail together - is on the upswing again.

If you forgot the term "systemic risk" from your 2009-vintage financial crisis dictionary, it refers to the state of affairs when the financial system as a whole is "undercapitalized" - which means that banks don't have enough money to continue doing business. The whole system becomes at risk - thus, "systemic risk." Systemic risk could be prompted when something -- usually a shock like the fall of Lehman Brothers - causes banks to stop lending to each other and investors like money market funds to pull their money out of the banking system. Right now, Europe's financial crisis is seen as a potential systemic risk that could wound the banking system.

One Nobel Prize winner - economist Robert Engle- has some pretty chilling predictions on just how much money it would take us to bail out a struggling financial system.

So what would American banks need to survive another crisis? Using Engle's calculations, it would take $513.65 billion in fresh capital for the top firms including JP Morgan, Goldman Sachs and Citigroup.

Here's the chilling part: How does that compare to 2008? It's about the same amount. Back then, those top banks would have needed to raise $539.4 billion

Here are Engle's measures of what the top American banks would need, according to his calculations, to get through a crisis. The numbers in parentheses are what they would have needed August 29, 2008, before Lehman Brothers collapsed.

•JP Morgan: $145.1 billion (2008: $110.9 billion)

•Bank of America: $129.2 billion (2008: $97.3 billion)

•Citigroup: $118.95 billion (2008: $136.7 billion)

•Morgan Stanley: $50.6 billion (2008: $70.5 billion)

•Goldman Sachs: $49.9 billion (2008: $57.7 billion)

•AIG: $19.9 billion (2008: $66.3 billion)

So it's no suprise that Sheila Bair, the former chairman of the FDIC, has stepped forward to lead a private group called the Systemic Risk Council, and she's brought the big guns with her: former Federal Reserve chairman Paul Volcker and outspoken former Commodity Futures Trading Commission Brooksley Born, who saw the 2008 financial catastrophe coming. Marketplace host Kai Ryssdal talked to Sheila Bair today about her thoughts, which I'll update here later today.

In the meantime: Baffled bankers, worried regulators, tetchy credit markets, and a largely unwary populace. We had four years to figure it all out, yet here we are again.

6--The Wrong Austerity Cure, Laura Tyson,  Project Syndicate

Fiscal profligacy did not cause the sovereign-debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.

In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had. Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy’s chronically large sovereign debt. Indeed, Italy boasted the lowest deficit-to-GDP ratio in the eurozone, and the Italian government had no problem refinancing at attractive interest rates. Even Greece, despite its rapidly eroding competitiveness and increasingly unsustainable fiscal path, could attract the capital that it needed.

CommentsView/Create comment on this paragraphDeluded by the convergence of bond yields that followed the euro’s launch, investors fed a decade-long private-sector credit boom in Europe’s less-developed periphery countries, and failed to recognize real-estate bubbles in Spain and Ireland, and Greece’s slide into insolvency. When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialize private-sector liabilities, and fiscal deficits and debt soared.

CommentsView/Create comment on this paragraphWith the exception of Greece, the deterioration in public finances was a symptom of the crisis, not its cause. Moreover, the deterioration was predictable: history shows that the real stock of government debt explodes in the wake of recessions caused by financial crises....

In the long run, many eurozone countries, including Germany, require fiscal consolidation in order to stabilize and reduce their debt-to-GDP ratios. But the process should be gradual and back-loaded – with much of the consolidation coming after Europe’s economies have returned to a sustainable growth path.

CommentsView/Create comment on this paragraphStructural reforms are also necessary in most European economies to bolster competitiveness and boost potential growth. But such reforms take time: German Chancellor Angela Merkel appears to have forgotten that it took more than a decade and roughly €2 trillion ($2.5 trillion) in subsidies for structural reforms to make the former East Germany competitive with the rest of the country

7--Rate cut signals deepening slowdown in China, IFR

The expectation was that the PBOC will wait until the data this weekend but instead we have a 25bp cut in both the lending and deposit rates. This is the first rate cut since the financial crisis and in addition to the rate cut the PBOC has also lowered the lending rate floor....

The rate cut also means that it is more likely that the data this weekend will be weak and how weak the data is will determine market expectations on the timing of the next move....

Stimulus from the PBOC while positive illustrates that we are very likely to get very bad May data (released this weekend) after dismal April data that was released on May 11. The rate cut is unlikely to be sufficient to help allay concerns over the growth slowdown in China/EM which has been an added headache for investors on top of the eurozone debt crisis.

8--Home sales have decline 8% due to lack of inventory, OCHousing

Quite predictably, pending home sales have declined precipitously due to the lack of available inventory.

Lenders have a variety of reasons for withholding inventory right now, but among the biggest reasons is their desire to cause house prices to bottom. Lenders make the false assumption that supply and demand controls all pricing. It does not. Withholding supply may help buoy prices in the short term, but affordability puts a cap on prices stopping them from rising.

Lenders hope active buyers raise their bids and push prices higher. After all, that’s what buyers did during most of the housing bubble. Buyers have some ability to raise their bids by substituting to inferior housing stock, and some buyers do raise their bids only to be knocked down by an appraiser rooted in reality. Unfortunately for lenders, buyers are limited in what they can borrow by prudent lending standards. Fearful of a forced buyback on a GSE or FHA loan, the originating lender aggressively verifies income and strictly limits the borrower to conforming loan standards. This prevents prospective buyers from raising their bids irrespective on any limitations of supply. In other words, lenders can restrict supply all they want, it isn’t going to make buyers bid any higher and close the deal.

Those pesky CAr banana peels strike again. Apparently, the bullshit artists at CAr decided the word “slipped” sounds innocuous and won’t alarm anyone to the fact that sales went DOWN. A slip is a temporary setback of little consequence, or at least that’s what CAr wants prospective buyers to think. Perhaps this is a “slip,” but sales very rarely “slip” between April and May. Spring is the beginning of the prime selling season, and sales almost always go up each month from March through August. A sharp decline, and this was a sharp decline, is not a positive sign....

Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.

By CAr’s own admission, a declining pending home sales index means the housing market is weakening and should be heading down soon. The spring rally is going to fizzle out just like it did last year.

“Inventory constraints could be a contributing factor to lower pending sales,” said C.A.R. President LeFrancis Arnold. “The tight inventory we’ve been experiencing in the distressed market over the past several months is now spreading to equity properties, essentially affecting the supply conditions of both the distressed and non-distressed markets..

Does anything this guy said make any sense? How does tight inventory spread to equity properties? There are plenty of equity properties on the market. Most of them are ridiculously overpriced rendering them unsalable, but they are on the market. Further, there is no distinction between the distressed and non-distressed market.

There is only one real estate market. It is composed of reasonably priced REOs and short sales and WTF priced discretionary sellers. The REOs and short sales sell while the WTF priced properties do not. These are not separate markets. Both properties coexist in the same market, although based on what some discretionary seller ask for their properties, an argument can be made that they live in an alternate reality.

Existing home sales decline in March (remaining headline NAr bullshit)

WASHINGTON (April 19, 2012) – Existing-home sales were down in March but continue to outpace year-ago levels, while inventory tightened and home prices are showing further signs of stabilizing, according to the National Association of realtors

Notice how the NAr dresses up the negative truth with bullshit positive spin?

Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 2.6 percent to a seasonally adjusted annual rate of 4.48 million in March ….

Sales don’t decline at this time of year unless something is terribly wrong with the market. The spring rally in 2011 also fizzled out in May due to the market headwinds that still exist today....

This is the prime selling season. Sales should be moving up briskly as compared to the first months of the year. The fact that they are not is ominous..

With job growth, low interest rates, bargain home prices and an improving economy, the pent-up demand is coming to market and we expect housing to be notably better this year.”

The old “pent-up demand” bullshit. Desire is not demand. The NAr always expects housing to be notably better. Any improvement will be touted as a great comeback, and if the market disappoints (which it may), then it will be written off as some unexpected anomaly rather than a direct result of the obvious problems overhanging the market

9--2012 Feeling Like 2008, Except Then Policy Makers Were Ready to Act, WSJ
The past few weeks have seen the same “we’re going to hell in a handbasket” jitters that were evident in September 2008 — before the financial markets collapsed.

This time the nail-biting centers on Greece and Spain, but the reactions are the same: Stock prices swing widely, businesses are reluctant to expand payrolls or facilities, consumers feel gloomier.

Heading into 2012, demand momentum and improved financial conditions suggested U.S. real gross domestic product could grow about 2.5%. Now the potential chain reactions from Europe–along with fiscal uncertainty here at home–raise the chances of a growth recession. That’s when GDP still posts growth, but the pace is so puny it feels like a recession to U.S. businesses and consumers and the foreign producers who sell to them.

What is critically different this time from 2008 is the lack of help coming from monetary or fiscal policy makers in both Europe and the U.S.

The Federal Reserve slashed interest rates to near 0% in 2008 and introduced forms of quantitative easing since then. Today, the Fed is talking up its capability to do more — but central bankers themselves seem split on the next policy move.

More importantly, the impact on growth from QE2 and “Operation Twist” seems questionable; what good would QE3 do to stimulate demand among businesses and consumers? Additionally, if more accommodation weakens the dollar, the euro zone, already in recession, will face even tougher growth prospects.

Across the pond, the European Central Bank is reluctant to help pull the euro zone out of its death spiral. It’s all about price stability for the ECB even as the bank acknowledges economic growth faces “downside risks.”

ECB President Mario Draghi instead implied politicians need to step up. “I don’t think it would be right for monetary policy to fill in for other institutions’ lack of action,” he said at a Wednesday press conference.

Yet three years into the crisis, euro-zone politicians still can’t agree on how to stave off a euro split.
Yes, long-term reforms are desperately needed, but short-run austerity isn’t working in Greece (or in the nonmember U.K., for that matter). Only Germany seems to have the money and credit rating to move the ball, but Chancellor Angela Merkel has resisted.

The lack of fiscal action is the same in the U.S. — but for different reasons. President Barack Obama is focused on getting re-elected and Republican leaders see no upside politically to boosting the economy or job growth.

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