Tuesday, July 31, 2012

Today's links

1--ECB Chief Draghi Being Investigated for Membership in the Group of Thirty, naked capitalism

. Draghi should not be involved with the G30 while he is active at the ECB. And if the EU Obudsman does find Draghi’s membership to be a conflict of interest, that has to be just as true for the other EU central bankers that are current participants.

2--More on Draghi’s “The ECB is All In” Bluff , naked capitalism
An article in Der Spiegel confirmed the skeptics’ reading. It depicts Draghi as having make his commitment without getting the support of the ECB council. One assumes he might have hoped to present them with a fait accompli, but that kind of approach can backfire. Per Der Spiegel:

Meanwhile, experts at the central banks of the euro zone’s 17 member states had no idea what to do with the news. Draghi’s remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then....

The Eurozone is increasingly looking like a zero sum exercise to its members: that there are no win-win strategies, only dividing up a fixed pie. And with austerity on in full force, it’s actually worse than that: the power that be are haggling over a pie that is shrinking before their very eyes. There’s declining trust and no willingness to consider alternatives that would put economies on a better trajectory. There’s now lip service being given to the need for growth, but the neoliberal budget-cutting religion is very much intact: the only alternatives under consideration are delaying the wearing of hairshirts, not considering completely different options.

3--Euro-Area Unemployment Rate Reaches Record 11.2%: Economy, Bloomberg

4--Democrats Are not Proposing to Regulate Not For Profit Colleges, They Want to Put Restrictions on Government Student Loans and Aid, CEPR

5--Fed Watch: Quick Euro Update, economists view

Tim Duy: Quick Euro Update, by Tim Duy: Mostly quiet on the Euro front today, but there are some bits and pieces worth chewing over. To recap, ECB President Mario Draghi raised expectations that a big plan was in the works to save the Euro. In short, Draghi's commitment to do everything necessary to save the Euro was interpretted to mean that the ECB was prepared to act as a lender of last resort to bring down yields in struggling periphery nations.

There is an alternative explanation. Draghi was simply making some off-the-cuff remarks, saying things he thought he largely said before, and not intending to illicit the subsequent market response. If so, market participants may be set up for a phenomenal dissapointment this week.

With that in mind, Spiegel says that Draghi dropped a bomb on other ECB members:

It was an illustrious meeting that British Prime Minister David Cameron was hosting on the evening before the opening of the Olympic Games in London...

..It was meant to be a day of glamour, but then Mario Draghi, the president of the European Central Bank (ECB), made a seemingly trivial remark -- but one that ensured that the 200 prominent guests were swiftly brought back to gloomy reality. His organization, he promised, would do "whatever it takes to preserve the euro."

The audience treated the remark as just another platitude coming from a politician. But International financial traders understood it as an announcement that the ECB was about to buy up Italian and Spanish government bonds in a big way. So they did what they always do when central banks suggest they might soon be firing up the money-printing presses: They clicked on the "buy" button...

...Meanwhile, experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

This doesn't sound like Draghi has much time to build a concensus. Interestingly, Spiegel claims that the pressure on Draghi is becoming unbearable:

A deep-seated feeling of mistrust has taken hold at Frankfurt's Eurotower, the ECB's headquarters, and even Draghi, who is normally seen as the epitome of level-headedness among central bankers, has recently shown signs of nervousness. At a dinner in early July, the ECB chief and his fellow governors were discussing the question of whether the ECB's loans to Ireland's government-owned "bad bank" were consistent with the bank's current bylaws

6--How the ECB came to control the fate of the world economy, Guardian

they have refused to end the crisis for a nefarious political reason: in order to force the weaker economies of Europe to accept a regressive political agenda – including cuts in minimum wages and pensions, weakening of labor laws and collective bargaining, and shrinking the state.

The ECB and its allies feared that if they stabilized these bond markets, their leverage over the peripheral countries would be reduced. So, for more than six months now, the ECB has refused to buy Spanish bonds, which would push down yields as it did in similar crises last year. This is a nasty and dangerous game of chicken, because the ECB obviously doesn't want to reach a point where the crisis spins out of control.

7--For Greece there is an alternative to austerity – as Argentina proved, Guardian

There are reasons why Greece's economy can be expected to perform either better or worse than Argentina's did a decade ago. We will only know for sure if it actually does go the default route, but even if it took a year to get back on a healthy growth path, Greece is still likely to look quite good to Spain and Italy. Both countries could easily face a decade of recession or stagnation on the troika's path.

As long as no country takes the euro exit route, politicians can get away with telling their constituents that there is no alternative. They must accept the austerity prescribed by the troika no matter how painful it is. Once Greece leaves the euro, this is no longer a plausible claim. And if the Greek economy turns around and grows at a healthy pace, then the troika's path is likely to prove unacceptable to the people of Spain and Italy.

This is the situation that Germany must fear. However many times Greece misses its targets, the troika is likely to come back and move the goalposts again. They don't want anyone in the eurozone to recognise that there is an alternative to permanent austerity and they will make whatever concessions are necessary to ensure that neither Greece nor anyone else ever discovers the truth.

8--Depression in the Eurozone’s Periphery and how to restore Aggregate Demand without creating new bubbles, Yanis Varoufakis

Certain Eurozone economies remain depressed and with a level of aggregate demand that is falling daily. Their depression increases the probability of a Eurozone breakup while the increases in the probability of a Eurozone breakup boost their depression. Something has to give. If Spain’s, Greece’s, Portugal’s depression is not addressed by policy makers, the Eurozone will simply shrivel and die. Alas, due to the Eurozone’s faulty underpinnings, the Periphery’s Depression cannot be addressed by standard macroeconomic aggregate demand management. Unless a euro is ‘forced’ to have the same value across the Eurozone, the Periphery’s Depression will get worse and the Eurozone will perish. Unless some debt mutualisation is effected, without asking German taxpayers to guarantee others’ debts, the Periphery’s Depression will conspire with the Euro Crisis to end the European Union. Lastly, the last thing Europe needs is another bubble to restore aggregate demand. No, we need to eradicate not only the Crisis’ symptoms but also its underlying causes (i.e. the imbalance in productive investments). In short, we need a cleverly designed New Deal for Europe, with the EIB at its forefront.

9--Consumer spending falls again in June, marketwatch

Second straight decline as Americans pocket increase in wages

U.S. consumers reduced spending for the second straight month despite a sharp increase in wages, boosting their savings rate to the highest level in a year.

The slower pace of consumer spending over the past four months dovetails with slowing jobs growth and a weaker economy. Consumer spending accounts for more than two-thirds of U.S. growth, so any reduction in demand filters through to businesses and hurts the rest of the economy.

Personal spending fell less than 0.1% in June, the Commerce Department reported Tuesday. Spending for May was revised down slightly to a 0.1% decline.

It’s the first time consumer spending has fallen two straight months since early 2009, near the end of the last recession.

The pullback in consumer spending, one of many indicators pointing to a downshifting economy, suggests growth is unlikely to pick up anytime soon.

“This gets the current quarter started on a really sour note,” said chief economist Stephen Stanley of Pierpont Securities.

The drop in spending occurred despite a 0.5% uptick in personal income last month, mainly the result of employees working longer hours. Incomes have risen by at least that amount in four of the first six months of 2012 after doing so only once in the prior year.

What’s more, consumers had significantly more buying power in June than they did at the start of the year when inflation is factored out. Real disposable income, or money left over after taxes, has increased 1.7% over the past 12 months, largely because of lower gasoline prices.

As recently as January the actual buying power of consumers had dropped slightly on a year-over-year basis.

Yet instead of spending the extra cash in their paychecks, consumers boosted their savings rate to the highest level since June 2011. The savings rate jumped to 4.4% from 4.0% in May.

As recently as last November, the savings rate had fallen to a more than two-year low of 3.2%.

While some of the increase stems from the normal pattern of consumers rebuilding their savings, the quick escalation also suggests growing anxiety about the health of the economy. People usually save more when they get worried about losing their jobs or the value of their investments decline.

Inflation, meanwhile, remained tame. An inflation index linked to consumer spending that excludes food and gas rose 0.2% last month, but it was unchanged at 1.8% over the past 12 months.

10--Federal Spending Cutbacks Slow Recovery, WSJ

Sharp Drop in Military, Stimulus Spending Take a Toll on Economic Rebound.
Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.

Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.

"It's unbelievable how much the economy is getting hurt already by the sharp drop in federal spending," said Joe LaVorgna, chief U.S. economist for Deutsche Bank....

the budget cuts come at a tough time for the U.S. economy, which has lost steam after appearing to accelerate earlier this year. Recession in much of Europe and slowing growth in China have cut into demand for U.S. exports, hurting manufacturing, which had been a key source of strength earlier in the recovery. Weak job growth and shaky financial markets have hit consumer spending, which some economists had hoped would drive economic growth this year. The overall economy grew at an annual rate of 1.5% in the second quarter, down from 2% in the first quarter, and most economists expect continued weak growth for the rest of the year.

The federal cuts are a reversal from the recession, when Presidents George W. Bush and Barack Obama tried to spark growth by increasing federal spending through bailouts and stimulus programs. Most economists believe the stimulus programs played at least some role in softening the recession's blow, though some argue their effectiveness was limited because many households and companies ended up saving extra cash rather than spending it.

Now, the stimulus funds are drying up. State and local governments are projected to receive $20.8 billion in federal stimulus funds in the 2012 fiscal year, ending in September, down from a combined $180.7 billion in fiscal 2010 and 2011, according to the Government Accountability Office. In the 2013 fiscal year, stimulus funding to states and localities will fall to a projected $14.3 billion...

The federal cuts are hitting just as state and local governments are starting to recover. Last year, state tax revenue eclipsed its prerecession peak, in 2008, for the first time. State tax revenue was $776 billion in 2011, up 0.2% from 2008, according to the Nelson A. Rockefeller Institute of Government. State-level job cuts are slowing, too, although layoffs are continuing at the local level.

The cuts are especially significant for communities that rely heavily on the military, such as Florida's Okaloosa County, home to Eglin Air Force Base. Said Jim Breitenfeld, a manager in the county's economic-development office: "When someone in D.C. sneezes on a military-defense issue, we say 'achoo.' "

Federal employment, meanwhile, is falling for the first time in the recovery. The biggest cuts are coming among postal workers, who count as federal employees but aren't funded out of the federal budget. But even removing the Postal Service, federal employment is down by 34,000 in the past year—a small number in the context of the overall economy but enough to push public-sector payrolls into negative territory in June for the fourth consecutive month.

11--How Forgiveness Fits in Housing-Fix Toolkit, WSJ

Policy makers are wrestling with a dilemma about the overhang of mortgage debt from the housing bust: to forgive or not to forgive?

With prices down by one-third from their 2006 peak, more than 11 million homeowners are underwater, or owe more than their homes are worth. That is about 24% of all homeowners with a mortgage, according to data firm CoreLogic.

The massive debt overhang—totaling almost $700 billion—is troubling not only because it leaves homeowners more exposed to foreclosure, which further erodes property values. It also weighs on the economy, making homeowners less likely to spruce up their properties and unable to tap equity to start businesses or pay for things like college tuition.

Housing demand also suffers. Without equity, young families are less likely to trade up to bigger places while empty-nesters may be unable to downsize...

Another concern: Many borrowers who are underwater have second mortgages, which are primarily owned by banks, sitting behind the first mortgages that are primarily owned by Fannie, Freddie, and private investors. Writing down taxpayer-backed first mortgages without extinguishing bank-owned seconds is both politically dicey and an inversion of property rights. Is there a way to end this stalemate? 

12--Housing bust is over, WSJ (video)

13--Recession Looks a Bit Less Bad Thanks to Government, WSJ

Real gross domestic product shrank 4.7% between late 2007 and the middle of 2009 — not the 5.1% initially estimated, the Commerce Department says. In 2009, America’s economy contracted 3.1%, much less than the earlier estimate of 3.5%. (The government’s “positive” revisions to the first and second quarters of 2009 were the biggest ones they made.)

So, what happened? It wasn’t consumer spending or business investments; those estimates were pretty much left alone. Net exports of goods and services abroad were a little stronger than initially thought, but that also doesn’t account for the change. That leaves “government consumption expenditures and gross investment,” which jumped far more in 2009 than initially estimated.

Instead of rising 1.7% in 2009 from the previous year, government spending soared 3.7%. Instead of shrinking 0.9%, spending by state and local governments actually grew 2.2% in 2009 — probably a reflection of the Obama administration’s efforts to provide emergency cash to states during the depths of the recession.

This isn’t the only example of government policies fueling growth

14--Fed Eases Toward More Unconventional Action, WSJ

... with long-term borrowing costs already at record lows, it is unclear how much more borrowing a third round of quantitative easing, or QE3, would create. The Fed would likely try to get a bit more oomph out of its debt buying by focusing on mortgage-backed securities, because that would affect household borrowing costs more directly than would Treasury purchases. Even so, the scope for even lower mortgage rates to increase household borrowing is limited at a time when bank lending policies have become more stringent and many consumers are hesitant to take on more debt.

The other way quantitative easing can help the economy is by cheering investors, who bid up stocks and other risky assets—hopefully boosting the confidence of consumers and companies to spend and hire.

It is hard to know how much glee the stock market might take in QE3. But given that investors have seen several rounds of unconventional easing from the Fed since 2008, with the economy so far failing to achieve escape velocity, the risk is that it will be short lived. And stocks are already back within a whisker of their postcrisis highs even as earnings growth slows.

Meanwhile, there is a question of who would actually reap QE3's benefits.

15--Banks Need Just One Thing to Spur Lending: Borrowers, WSJ

Lend more. That has been the message to banks from consumers, politicians and the Federal Reserve.

This reflects a belief among many that banks are somehow holding back on lending and, thus, choking off the recovery. Even the Fed is reportedly considering a new approach that would allow banks to borrow funds cheaply from it if they use the money for new business or consumer loans. Another possible option is for the Fed to stop paying interest on excess reserves that banks keep with it in the hope that they will put the money to use elsewhere.

While overall loans and leases at commercial banks have shown positive year-over-year growth for the past four quarters, they still are 3% lower than a peak of $7.32 trillion in October 2008. That's even more striking considering the big shrinkage of credit outside of banks during that time.

Banks contend they would gladly lend more but that demand just isn't there. Falling levels of interest income at many banks, along with soggy share prices, suggest their argument is more than just bluster. After all, they would be lending if they thought it would raise lackluster profits. Given this, it isn't clear how much benefit will result from further attempts to juice the supply of lending....

One obvious remedy? More loans. J.P. Morgan Chase in the second quarter earned an average rate on trading assets of 3.96% and 2.42% on securities that its holds. Loans were far more lucrative, generating a 4.96% rate....

potential borrowers aren't necessarily clamoring for new loans. Business loans have picked up of late, yet many companies remain flush and are sitting on record cash piles. Consumers still are largely in debt-shedding mode as they try to restore household balance sheets.

Many banks are desperate to boost revenue, profit and their share prices. If increasing the volume of more-lucrative loans was easy, they would have already done it

Monday, July 30, 2012

Today's links

1--Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move, Bloomberg

Excess reserves have mushroomed as the Fed bought securities from banks in its bid to lower long-term interest rates. The amount of such reserves at the Fed was $1.49 trillion on July 25, up from $991 billion at the end of 2010 and $2.4 billion at the end of 2007, Fed data show...
Clearly the market is purchasing some lottery tickets in case the Fed does cut the IOER,” Lee said. The Fed has held the rate at 25 basis points since December 2008.

What you’re actually doing by this is sort of incentivizing the banks” to “keep their excess reserves at the Fed,” Representative Scott Garrett, a Republican from New Jersey, said to Bernanke during Feb. 29 congressional testimony by the central bank chief. “Isn’t that sort of counter to what your policy should be?”

2--Bill Keller Wants to Take Away Your Social Security and Is Either Too Ignorant or Dishonest to Acknowledge that He Is Not a Typical Baby Boomer, CEPR

Does Keller know that the typical near retiree has total wealth of $170,000. This includes everything in their 401(k), all their other financial assets and the equity in their homes. Another way to put this is that the typical near retiree (between the ages of 55-64) could take all their wealth and pay off their mortgage. After that they would be entirely dependent on their Social Security to cover all their living costs.

3--The Draghi Put Will Be Stillborn, Trimtabs

Let us step back and look again at the European big picture. What I see is a bunch of economies whose citizens are making less money than before. And even before the current recessions European economies were not generating enough taxable income to pay current government expenses. Now, a worsening recession means there will less taxable income for governments to fund ever growing entitlements. Add that to a huge pile of moldering away bad debts. And what I see is not a solvable problem the way the world works today.

Neither Draghi or any of the bankers even bothers to talk about the real problem of not enough regional income and too much government spending. Draghi’s only solution is some form of money printing. Printing money to pay bills maybe will work over the short term. But long term, it cannot. If money printing works in the real world why not print and give every one a billion dollars, Euros or Yen?

The most Draghi can do is have the ECB print money to service existing bad debts made by banks and governments. But printing money to pay interest and principle on loans is not debt service! That is called money printing, debasing the currency whatever. Yes, governments want to do whatever possible to avoid bad times for its citizens. But, as someone else once said, the road to hell is paved with good intentions.

4--What is the quid-pro-quo for restarting SMP?, IFR

The key to Draghi’s comment on Thursday is that he is focused on how sovereign premia are hampering the “functioning of the monetary policy transmission channels”.

It was after all problems with the functioning of the transmission mechanism that led the ECB to start the SMP in the first place citing “dysfunctional markets”. It is thus easy to see the ECB taking action via the SMP or even helping to restart the sovereign carry trade via another 3-year LTRO. The ECB could either act now or wait until the day of the ECB meeting next week.

The SMP would certainly help investors as it would provide an avenue to exit and a willing buyer on the other side. The same would be true if the ESM were to be given a bank licence but on both investors will still worry about being subordinated.

The fact that more novel steps are now on the table highlights how the crisis management script in the eurozone has shifted as Spain and Italy prove too big to ignore.

A shift from the ECB in utilising its balance sheet is a game changer but the SMP by itself will not be enough especially if they are conducted in a similar manner to which that has already been seen.

A more lasting solution would involve the ECB providing the EFSF/ESM with a banking licence but the quid-pro-quo for such action will be for speedy political movement toward a more integrated eurozone. These are the very same pillars that Draghi helped script involving fiscal union, banking union, economic union and political union.

5--ESM armed with a banking license - the ultimate bailout "bazooka", sober look

It's a powerful concept because being a bank, the ESM could tap the ECB's unlimited lending facilities to leverage its holdings of sovereign paper. By granting the ESM a banking license, it can effectively buy Spanish and Italian bonds "on margin", with the ECB being the margin provider. This entity would wield buying power several times larger than the Eurozone's original ESM commitment, making it the ultimate bailout "bazooka"....

However there is a political problem with this scenario. The ESM now has a €500bn cap on total debt purchases. That means no matter what leverage is available to the entity, it can only purchase bonds of up to the amount of the cap. An increase in its buying power would require (among other things) Germany's approval. And with the elections coming up in Germany next year, the chances of German politicians agreeing to this increase are quite low.

Barclays Capital: - From a political perspective and in view of the German national elections scheduled for September 2013, we do not see much of a chance that the German government would agree to another increase in the ceiling until then, or to more fundamental changes implying the mutualisation of national, public debt. This constraint may be relaxed if the crisis picks up pace rapidly and moves into the core.

Nevertheless the rumors of the ESM being armed with a banking license are flying (and even moving the "risk" markets on Friday).

CNBC: - Reports (vague rumors) that ECB head Mario Draghi may have reached out to Bundesbank head Jens Weidmann moved the Dow more than a hundred points in the middle of Friday's trading day.

It certainly wouldn't be surprising that they talk, but the rumor mill threw in a rich tidbit: that they had discussed giving the EU's permanent bailout fund (the ESM) a banking license.

The danger of course is that after this buildup, the "bazooka" and other expectations from the Eurozone may not materialize. Without a decisive follow-through, the "risk" markets may retrace their recent gains and then some. After all when it comes to the Eurozone crisis, the EU leadership has a knack of over-promising and under-delivering.

6--Growth in U.S. Slows as Consumers Restrain Spending, Bloomberg

The world’s largest economy cooled in the second quarter as limited job growth prompted Americans to curb spending while state and local governments cut back.

Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department data showed today in Washington. Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year....

Economies around the world are showing signs of weakening,” Chief Executive Officer Scott Davis said on a July 24 call with analysts. “In the U.S., uncertainty stemming from this year’s elections and the looming fiscal cliff constrains the ability of businesses to make important decisions such as hiring new employees, making capital investments, and restocking inventories.”

The so-called fiscal cliff represents more than $600 billion in higher taxes and reductions in defense and other government programs next year that will occur automatically without action by U.S. lawmakers, threatening to push the economy into recession....

Another report today showed consumer confidence in July dropped to the lowest level this year. The Thomson Reuters/University of Michigan final index of sentiment declined to 72.3 this month from 73.2 in June. The gauge was projected to hold at the preliminary reading of 72, according to the median forecast of economists surveyed by Bloomberg.

Recent data signal consumers are reluctant to step up purchases. Retail sales fell in June for a third consecutive month, the longest period of declines since 2008. Same-store sales rose less than analysts’ estimates at retailers including Target Corp. (TGT) and Macy’s Inc. (M) ...
Consumers may remain cautious until hiring accelerates. Payroll gains averaged 75,000 in the second quarter, down from 226,000 in the prior three months and the weakest in almost two years. The unemployment rate, which held at 8.2 percent in June, has exceeded 8 percent for 41 straight months. ...

Cutbacks by government agencies continued to hinder growth as spending dropped at a 1.4 percent annual rate in the first quarter, the ninth decrease in the last 10 periods. The decline was led by a 2.1 percent fall at the state and local level that marked an 11th consecutive drop.

Business investment cooled last quarter, reflecting stagnant spending on commercial construction projects. Corporate spending on equipment and software improved, climbing at a 7.2 percent pace, up from a 5.4 percent increase in the previous quarter.

A report yesterday showed the corporate spending outlook has dimmed

7--Federal Spending Cutbacks Slow Recovery, WSJ
8--Banks are the Achilles’ heel of capitalism, The Big Picture

Edward Yardeni of Yardeni Research in this week’s Barron’s:

“The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations.

In my opinion, banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

9--From Bank of America, Shipwrecked, zero hedge

That sinking feeling

Sifting through our strategists’ top reports this week, we can’t help but notice one overarching theme – it’s been a fun ride, but prepare for a global slowdown. US stocks have been particularly volatile this week on earnings and we’ve also had the biggest weekly outflows in equities this year. Headlines continue to be macrodominated and it’s not easy to be a captain of a ship in such troubled global waters....
Likely next steps: forward guidance extension and QE3
We have revised our Fed call. We now believe the Fed will extend its forward guidance to “at least through late-2015” on August 1, rather than through “mid-2015”. We also expect the announcement of a $600bn QE program in Treasuries and MBS on September 13, up from $500bn in our old forecast. We expect lower 5-10y rates in the near term and recommend fading any significant knee-jerk back-up in rates on a QE3 announcement. We believe QE3 will be much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy....

ECB purchases first, then EFSF/ESM once ESM is ratified

In our view, bond market intervention would first take the form of SMP, which could have an important impact on yields given the lack of liquidity in the bond markets. The temporary nature and limited efficacy of such intervention, should the bond market pressure not wane, could call for larger official intervention. But this would require countries under pressure to request such support, which could take several weeks or months to materialize in the current environment. For the time being, we think Spain has some room to maneuver: 1) it is under limited pressure probably until year end, even in current market conditions; and 2) the ESM will not be in place until October, thus limiting the size of EFSF/ESM interventions. Should a problem occur, it would likely be in the form of bank liquidity access, which the ECB tends to fix by lowering collateral requirements.

10--Stagnating Corporate Profits...prag cap

This earning’s season is starting to raise some red flags. As expected, corporate profits are starting to show some serious signs of deterioration. Q3 is expected to show a year over year decline in earnings now and Q4 is expected to show a sharp bounce back. As uncertainty is likely to persist into Q3 I would expect those Q4 estimates to come down some. Factset has some details on this quarters earning trends:

“Of the 265 companies in the index that have reported earnings to date for Q2 2012, 71% have reported actual EPS above the mean EPS estimate. This percentage is consistent with the average over the past four quarters (72%). In terms of revenues, just 43% of companies have reported actual sales above estimated sales. This percentage is well below the average over the past four quarters (63%). If 43% is the final percentage, it would mark the lowest number since Q1 2009 (37%).

11--Regional Fed Surveys Paint a Dreary Picture of Economic Growth….prag cap

Recent regional manufacturing data has been notably weak with the Philly Fed Survey posting -12.9, KC Fed posting +5, Richmond Fed posting -17, Empire State posting 7.4, and then today’s Dallas Fed survey at -13.   It all paints a picture of weakening trend growth.  The consensus reading is now pointing to a ISM reading below 50.

12--Restaurants Blame Weak Consumer Confidence for Sales Slowdown, WSJ

Overall, U.S. economic growth pulled back during the second quarter, the Commerce Department said Friday, as consumer spending slowed. The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June: a reading that suggests domestic fiscal worries may be having a greater impact on consumer confidence.

McDonald’s Corp., Starbucks Corp. and Chipotle Mexican Grill Inc., which have in the past proved resilient during tough economic times, said they saw a bit of a slowdown in U.S. guest count-growth in the second quarter, which took some executives by surprise.

“The U.S. continues to build sales and guest counts. It is, however, happening at a slower pace amid an unpredictable economic environment and increased competition,” McDonald’s Chief Executive Don Thompson said on a recent conference call.

Starbucks’ Chief Executive Howard Schultz said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July. “So, this is not a Starbucks issue, this is a macro problem,” he said on a conference call.

13--Halfway Through, 2012 Has Been a Disappointment, WSJ

14--Obama’s Second Term Agenda: Cutting Social Security, Medicare, and/or Medicaid, naked capitalism

Barack Obama continues in this fine tradition of Democratic policymaking, and his advisors are quietly laying plans to cut Social Security, Medicare, and/or Medicaid in the second term of his administration. Obama appointed Erskine Bowles, who now works for a Wall Street botique, to head up his commission on fiscal responsibility. Bowles, along with an old man named Alan Simpson, came out with a set of proposals to cut the programs. And while Obama couldn’t get the Republicans to agree to it in 2011, he will try in his second term. Here’s the New Yorker laying out the plan.

There is a possibility that a second Obama term could begin with major deficit reduction and serious reform of taxes and entitlements. A similar opportunity arose in the second terms of Reagan (who in 1986 signed into law a historic tax-reform bill) and Clinton (who in 1997 reached a significant budget deal with Republicans). Although both victories occurred when the two parties were less polarized, many White House officials regard the successes as encouraging precedents. Several senior Clinton officials involved in the 1997 deal now work for Obama, including Jacob Lew, Obama’s chief of staff, and Gene Sperling, the head of the National Economic Council....

It’s useful to remember, this election season, that the way the debate is framed matters. That Obama isn’t choosing to discuss in public what he will do to cut Social Security, Medicare, and Medicaid, and that Romney isn’t specific about it either, should show you who this election is for. But in addition, that both Bush, Clinton, and Obama (in his first term) failed at cutting Social Security means that an aroused public can stop austerity, when politicians feel their office is at risk. Clinton chose to abandon his plans to gut entitlements when facing impeachment and Bush chose to stop when his plan threatened the Republican Congress.

The joke during the transition in 2008 was that the people who supported Obama got a President, and those who supported Clinton got a job. The Clintonistas didn’t manage to gut entitlements in the 1990s, but they will sure try again and again until they succeed or someone takes their keys to the White House away.

This election, aside from not being much of an election for anyone but the billionaire funders who have the real votes, doesn’t really matter. But keeping in mind who is doing what does. Because if there’s a chance to save anything for anyone who isn’t ultra-wealthy from 2013 going forward, it’s going to require being able to create credible threats to the politicians making the policy.

15--Will Draghi really cross the Rubicon, naked capitalism

Moreover, even if German political leadership were to change its stance, that would not be sufficient for the ECB to move into high gear. The Bundesbank, as well as German members of the ECB, appear to remain firmly against dramatic new measures. Bloomberg tells us that the Bundesbank said in the wake of the ECB statement that it is opposed to more bond purchases. On Friday, the Bundesbank reiterated its objection to reviving the securities markets program which allowed for direct bond buying (and truth be told, when it was implemented last year, it made matters worse). The German central bank no doubt continues to disapprove of giving the soon-to-be-live European Stability Mechanism a banking license, which would allow the ECB to monetize sovereign debt (note that Draghi has not officially changed his stance of being against that option).

While it is hard to be certain from this remove, it looks as if the EBC’s efforts to mount a full court press on the German political leadership and Bundesbank, both via the media talking up Armageddon (a replay of the scare tactics used to get the TARP passed) and private arm-twisting, are not getting the needed traction.

The big date is next Thursday, when the ECB’s governing council meets. Draghi has raised expectations, and the lack of meaningful follow-through on Thursday would be proof that he was unable to overcome opposition. Note that even if the pro-bailout forces are gaining ground on the holdouts, the longer the to-and-fro goes on, the less leverage the proponents have. If Spain about to go into financial asphyxiation and Italy starting to go critical won’t produce a change in posture, it’s hard to see what would.

And even if the ECB were to pull the trigger, would it act decisively? To be effective, the ECB would need to make clear it is willing to act on a monster scale. Half a trillion, or even a trillion won’t cut it. But the ECB has less latitude that the Fed did in the crisis. It isn’t permitted to rescue sovereigns directly. And that brings us to the second problem, that the so-called core nations (the creditor countries) as well as in some cases the ECB itself is blocking the path to ways to get around this impediment....

By e-mail, Marshall Auerback mused as to whether things were already past the point of no return:

Dealing with this issue means an unconditional backing of all of the national sovereigns including, yes, Greece. Because failing to stand behind ALL of the members of the eurozone contradicts the currency union’s central premise: namely, that it is permanent and indissoluble...

What kind of a banking system is this? A dysfunctional and a highly unstable one. One would have a set of banks on the periphery that are massively dependent on ECB lender of last resort financing. That would probably be dysfunctional, as they would be disinclined to lend to their normal client base. What does “whatever it takes” really mean? It’s a paradox. To make his “whatever it takes” pledge credible, Mr. Draghi has to go well beyond the traditional boundaries of economic and central banking orthodoxy. But in going well beyond these boundaries, does Mr. Draghi risk creating another crisis of confidence in the euro?

And will the Germans and others let him?

Despite the reports of wavering, the answer still appears to be “nein”. And the window for changing their mind is about to close.

16--The jobs crisis and the 2012 elections, WSWS

17--Do the benefits of shadow inventory outweigh the costs?, OC Housing News



Wednesday, July 25, 2012

Today's links

1--David Stockman: "People who have been speculating will be carried out on a stretcher", zero hedge

The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.

2--US position on Syria directly endorses terrorism - Lavrov, RT

Washington’s reaction to blasts in Damascus is a downright justification of terrorism, slams Russian Foreign Minister Sergey Lavrov. US State Department announced that terror acts in Syria are not surprising in light of the Assad regime’s actions.

“This is direct endorsement of terrorism. How are we supposed to understand that?” Sergey Lavrov shared his astonishment at a press conference in Moscow. “This is a sinister position, I cannot find words to express our attitude towards that.”

Lavrov also expressed his surprise that the UN Security Council refused to condemn acts of terror in Syria. The US permanent representative to the UN Susan Rice has stated that terror acts in Damascus contribute to speeding up the adoption of a resolution on Syria according to the Chapter 7 of the UN Statute, which implies harsh sanctions, including resorting to force.

“In other words this means ‘We are going to support such acts of terrorism until the UNSC does what we want’,” Lavrov commented on the US representative's actions.


I didn't think it was possible, but my confidence in the ability of European policymakers to pull the Continent out of crisis continues to fall. This is saying a lot because I had virtually no confidence to begin with.

...The Greeks were never given a bailout plan that had any hope of success.

...Whether or not Greece can be forced from the Euro with little impact elsewhere remains to be seen. I doubt we will need to wait much longer to learn the outcome of Grexit. But the devastating train that is the debt crisis keeps rolling right along, currently crashing through Spain's economy.

And make no mistake, European policymakers have learned nothing from the Greek experience. One gets the sense that policymakers think the prescription was correct, but that the patient was simply unwilling to take the medicine. Where Greece failed, Spain will succeed ...

4--Yield Stories: "The economy is going to be depressed for a long time", Paul Krugman, NY Times

Low interest rates on the bonds of just about every country that still has its own currency have created a small industry of would-be explainers. It’s a bubble; no, it’s the global shortage of safe assets; no, it’s “disaster economics“.

Maybe there’s some truth to some of these stories. But surely the dominant story is very simple: it reflects market perceptions that the economy is going to be depressed for a long time.

5--Europe is sleepwalking towards imminent disaster, warn top economists, Telegraph

The euro has completely broken down as a workable system and faces collapse with “incalculable economic losses and human suffering” unless there is a drastic change of course, according to a group of leading economists.

6--US big banks' glory days feared to be gone for good, IFR

Seven of the 10 biggest U.S. banks beat analysts’ average earnings expectations in the second quarter. But much of that came from cutting costs and dipping into money previously set aside to offset bad loans, rather than from growth in their main businesses, which is what investors want to see.

Revenue from lending, trading and advising corporate clients on mergers is still weak, and low interest rates continue to squeeze profits on loans and other investments. Banks and their already depressed stocks appear headed for a long, grim future.

Nancy Bush, who has been a bank analyst and investor for three decades, said she is ready to throw in the towel on banks of all sizes.

“What’s left at this point, barring a really significant improvement to the economy and a miraculous ramp-up in lending?” Bush asked. “Why invest in these companies?...
Even if banks are making more loans to better borrowers, they are doing so less profitably.

A protracted period of low interest rates puts a lot of pressure on balance sheets,” said Consector’s Black.

Bankers on their second-quarter calls also raised concerns by warning that the mortgage refinancing boom will likely have run its course by year end....

One sign of trouble: loan growth is not keeping up with deposit growth.

In March 2010, banks loaned out about 99 percent of money collected from depositors. In March 2012, the figure plunged below 77 percent, the lowest ratio in more than a decade, according to the Federal Deposit Insurance Corp...

For many banks, however, issues go deeper than just a slowing economy. Capital markets businesses, including trading stocks and bonds, are just not as profitable as they used to be...

JPMorgan Chase & Co’s JPM.N almost $6 billion of derivative losses and the Libor interest-rate-fixing scandal in the last few months proved to be the “proverbial straw that broke this camel’s back,” Ackman wrote to his clients at Pershing Square Capital Management. (Full Story)

For months, JPMorgan Chief Executive Jamie Dimon had no idea of the size of the losses brewing inside his bank, signaling to many investors that major banks are too big and too complex to manage, investors said.

“If I don’t think that even insiders have a great handle on what’s going on, I’m certainly not comfortable about investing my capital there,” said Consector Capital’s Black.

7--Why We’re 100% Bearish, Trimtabs

The key reasons we are more bearish start with there is almost nothing the Fed can do to boost the economy. Creditworthy borrowers can already borrow at almost nothing and dropping short rates to zero would bankrupt the entire money market world, creating untold havoc much worse then the two commodity trading house frauds.

Equally as important to the bearish call is that growth in the US economy has slowed to just about zero. Wages and salaries are barely growing year over year and what’s worse the modest growth rate has been slowing each of the past two months. To remind you all, we estimate wages and salaries based upon real time income and employments taxes withheld from all employees with a W2. Jobs are barely growing. Our TrimTabs Online Job Posting Index is growing at its slowest rate since February 2010 and the year over year growth in new unemployment claims is at its highest since April.

Then there is Europe and slowing global economies. China real world is in recession and remember low tides uncover all the hidden garbage created by booms. I predict we will start to see major Chinese financial frauds being uncovered by this years end.

Finally supply and demand of stock and money is also now bearish. The Biderman Market Theory says all there is in the stock market are shares of stock; and money flows in and out of the checking accounts of institutions. What we are now seeing is more corporate selling then buying. Also our Demand Index based upon 21 investor activity variables plunged to a six month low last week and is down 36% from the early April which coincided with this years stock market peak

8--The Bernanke Put is Dying, Trimtabs

 I would expect the sell off eventually could approach or even drop below the March 2009 market bottom. Remember, in March 2009 the Fed announced a new round of quantitative prices whose purpose was to rig the market. The law of karma being what it is, when all the rigging becomes undone, I would not be surprised if stock prices ended up below the Fed created March 2009 bottom...

The Bernanke put is dying. When the Fed demonstrates that the next easing will not work even to boost stock prices, then the stock market will collapse and the Black Swan will enjoy its meal.

9--No Housing Recovery In These Three Charts, zero hedge

10--HELOC abusers and lenders face day of recast reckoning, OC Housing

11--US Housing Inventory Requiring Deleveraging: 30 Million Units, Big Picture

12--Zillow: "Housing Market Turns Corner", calculated risk

From Zillow: U.S. Home Values Post First Annual Increase In Nearly Five Years

Home values in the United States have reached a bottom. The Zillow Home Value Index (ZHVI) rose on an annual basis for the first time since 2007, increasing 0.2 percent year-over-year to $149,300, according to Zillow’s second quarter Real Estate Market Reports. Values have risen for four consecutive months.

...“After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values,” said Zillow Chief Economist Dr. Stan Humphries. “The housing recovery is holding together despite lower-than-expected job growth, indicating that it has some organic strength of its own.

“Of course, there is still some risk as we look down the foreclosure pipeline and see foreclosure starts picking up. This will translate into more homes on the market by the end of the year, but we think demand will rise to absorb that, particularly in markets where there are acute inventory shortages now. Looking forward, we expect home values to remain relatively flat as the market works through a backlog of foreclosures and high rates of negative equity.”

13--Home Price Bottom or Bubble? , CNBC

Home prices rose, just barely, in the second quarter of this year annually for the first time since 2007, according to online real estate firm Zillow. That prompted the popular site to call a “bottom” to home prices nationally. The increase was a mere 0.2 percent, but in today’s touch and go housing recovery, that was enough.

Nearly one third of the 167 markets Zillow tracks in this survey saw annual price gains from a year ago.

“After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values,” said Zillow Chief Economist Dr. Stan Humphries. “The housing recovery is holding together despite lower-than-expected job growth, indicating that it has some organic strength of its own.”

14--Home Values Post First Year-Over-Year Increase Since 2007, Bloomberg

15--Housing landscape, The Big Picture (Graphic)

16--Radar Logic: “Housing Still a Short”, The Big Picture

Key observations from the May 2012 RPX Monthly Housing Market Report:

• Evidence that the housing market has bottomed is not conclusive
• Data from the second half of the year tells more about price trends than data from the first half;
• Reports of diminishing supply are greatly exaggerated;
• Psychology and total inventory – including both “visible” and “shadow” inventory suggest housing is a short

17--Second mortgages hold short sellers hostage, OC Housing

Axon, working with co-investors, buys distressed U.S. home- equity loans and other junior real estate liens, often for pennies on the dollar. Investors like Axon have to be dealt with whenever a home is sold in a short sale, a transaction in which the lenders agree to accept less than what’s owed on the property.

“The short-sale brokers know us — they know we’re not cupcakes,” Axon, 60, chairman of Jersey City, New Jersey-based mortgage-servicer Franklin Credit Management Corp., said in an interview. “At the end of the day, my friend, you signed a contract. You owe money and we’re willing to reach an accommodation that is commensurate with your ability to pay.”

Vultures buying distressed second mortgage debt is a big business. They make a profit by squeezing a few more pennies out of a second mortgage than a large bank felt they could get. They have little incentive to be accommodating because any such accommodation comes out of their bottom line....

Roadblocks involving second liens are standing in the way of more short sales, which reached the highest number in three years in the first quarter — 133,192 total transactions — said Daren Blomquist, vice president at RealtyTrac Inc., a real estate information service in Irvine, California.

While about 39 percent of homes that have entered the foreclosure process have more than one lien, just 4.2 percent of short sales — 5,658 transactions — completed in the first quarter were on homes with second mortgages, according to an analysis RealtyTrac performed for Bloomberg....

Homes with second mortgages were twice as likely to be underwater, according to a July 12 report by real estate information provider CoreLogic Inc. That makes them candidates for short sales, even if they don’t have delinquent loans, because their mortgage debt is greater than their resale value. The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, California-based CoreLogic said.

Two-thirds of underwater borrowers are there because of their second mortgages...

Fannie Mae tries to put a limit on negotiations by capping the amount junior-mortgage owners can receive at $6,000 or 6 percent of the unpaid balance, whichever is less. The company’s guidelines don’t allow any party to the transaction, including the buyer, seller or real estate agent, to kick additional money to the junior-lien holder. ...

Largest Banks

The four largest U.S. banks — Bank of America Corp., Wells Fargo & Co., JPMorgan and Citigroup Inc. — held 48 percent of the $849.5 billion in second liens as of March 31, according to the newsletter Inside Mortgage Finance. Home equity lines of credit accounted for $590 billion, or 69 percent of the value of second liens, as of that date, according to Amherst Securities Group LP....

The major banks better hope they collect more than 6% of the $849.5 billion in outstanding second liens

18--Home prices are driven by controlled inventory and low interest rates, Dr Housing Bubble

It is now almost a universal mainstream headline that housing has reached a bottom. Of course little is mentioned about the ridiculously low mortgage rates that have aided in covering up stagnant incomes to accomplish this task. Yet a nationwide bottom should not be confused with regional troughs. The summer selling season has been hot for California. Home prices are now at two year highs coming in at a median price of $274,000 (still far from the $484,000 peak reached in 2007). Yet is this positive with California facing a 20 percent underemployment rate and massive budget deficits? There is no doubt that the recent push has come from two sources; low interest rates and controlled inventory. Roughly 30 percent of California home owners are underwater. This works out to be 1.5+ million households. Yet California only has about 170,000 homes for sale on the MLS! You have nearly 10 times the number of underwater homeowners compared to the homes listed on the MLS....

Keep in mind interest rates were already historically low just one year ago. In the last year, the 30-year conventional fixed mortgage saw rates fall by a stunning 20 percent. For most of this time, home prices fell. Starting this year home prices are now up 1.4 percent. In California, and here is the kicker, home prices are up 8.3 percent year-over-year. So you begin to realize that lower interest rates are largely a boon for high priced metro areas.

Compare a $150,000 loan that will get you a home in most states versus say a $400,000 loan for a starter shack in California:

20% drop in interest rate for a $150,000 = $87 monthly savings in Principal and Interest
20% drop in interest rate for a $400,000 = $232 monthly savings in Principal and Interest

It should be abundantly clear that the recent rise in home prices is being driven purely by controlled inventory and the insanely low interest rate.

19--Bob Janjuah: "You Have Been Warned", zero hedge

"The global growth picture is, as per our long-term contention, weak and deteriorating, pretty much everywhere – in the US, in the eurozone and in the emerging markets/BRICs.... We in the Global Macro Strategy team still think the market consensus is far too optimistic on policy expectations both in terms of the likelihood of seeing more (timely) fiscal and/or monetary policy assistance (globally), and in terms of any meaningful and/or lasting success of any such policy moves. In particular, we think that the period August through to November (inclusive) represents a major global policy and political vacuum. Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011!


Monday, July 23, 2012

Today's links

1--Home Sales Held Hostage by Junior Lien Holders: Mortgages, Bloomberg

The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, California-based CoreLogic said....

The four largest U.S. banks -- Bank of America Corp., Wells Fargo & Co. (WFC), JPMorgan and Citigroup Inc. (C) -- held 48 percent of the $849.5 billion in second liens as of March 31, according to the newsletter Inside Mortgage Finance. Home equity lines of credit accounted for $590 billion, or 69 percent of the value of second liens, as of that date, according to Amherst Securities Group LP.

Risks associated with home-equity loans “may escalate” as borrowers face rising obligations to pay down principal on lines of credit, according to a July 5 report by the Office of the Comptroller of the Currency. Borrowers, who were allowed to make nominal or interest-only payments on the credit lines for as long as 10 years, will be obligated to pay down $15 billion in principal in 2013, $29 billion in 2014 and $53 billion in 2015, according to the report. ...

Loan Writedowns ... The four largest banks reported $2.43 billion in writedowns on their second liens in the quarter ended June 30, down 13 percent from the previous three months. ...

While Axon of Franklin Credit Management declined to say how much his company collects on average, he said it’s higher than the industry standard of 6 percent of the unpaid balance...

Homeowners are “the ones being stubborn. They’re the ones who got their money and bought their boat, and now they want their boat for free. The fact is we’re willing to discount the obligation, get this behind them, and have them fulfill their obligations. If everybody gave everybody what they got for free, we wouldn’t have a banking system.”

2--Prosecutors, regulators close to making Libor arrests, IFR

U.S. prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rigging scandal.

Federal prosecutors in Washington, D.C., have recently contacted lawyers representing some of the suspects to notify them that criminal charges and arrests could be imminent, said two of those sources, who asked not to be identified because the investigation is ongoing.

Defence lawyers, some of whom represent suspects, said prosecutors have indicated they plan to begin making arrests and filing criminal charges in the next few weeks. In long-running financial investigations it is not uncommon for prosecutors to contact defence lawyers before filing charges to offer suspects a chance to cooperate or take a plea, these lawyers said.

3--Greece Back at Center of Euro Crisis as Spain Yields Soar, Bloomberg

Europe was plunged into fresh market turmoil as this week’s visit by Greece’s creditors rekindled concern the currency union will splinter and the first call for bailout aid by a Spanish region caused borrowing costs to surge.

4--U.S. poverty on track to rise to highest since 1960s, USA Today

The ranks of America's poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and fraying government safety net...

The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965.

Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. Suburbs are seeing increases in poverty, including in such political battlegrounds as Colorado, Florida and Nevada, where voters are coping with a new norm of living hand to mouth....

Poverty is closely tied to joblessness. While the unemployment rate improved from 9.6 percent in 2010 to 8.9 percent in 2011, the employment-population ratio remained largely unchanged, meaning many discouraged workers simply stopped looking for work. Food stamp rolls, another indicator of poverty, also grew.

Demographers also say:

—Poverty will remain above the pre-recession level of 12.5 percent for many more years. Several predicted that peak poverty levels — 15 percent to 16 percent — will last at least until 2014, due to expiring unemployment benefits, a jobless rate persistently above 6 percent and weak wage growth

5--“Thievery is what unregulated capitalism is all about.”, Robert Sherrill by Randall Wray, naked capitalism
After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.

Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets....

I see two scenarios playing out. In the first, we allow Wall Street to carry on its merry way, as the foreclosure crisis continues and Wall Street steals all homes, packaging them into bundles to be sold for pennies on the dollar to hedge funds. All wealth will be redistributed to the top 1% who will become modern day feudal lords with the other 99% living at their pleasure on huge feudal estates.

6--Here is Kalecki describing with preternatural precision the so-called “Great Moderation”,


The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

7--Plan to cut SS to follow elections, CEPR

While the rest of us are wasting our time worrying about whether Barack Obama or Mitt Romney are sitting in the White House the next four years, Pearlstein tells us (approvingly) that these honchos are scurrying through back rooms in Washington trying to carve out a deficit deal.

The plan is that we will get the rich folks' deal regardless of who wins the election. It is difficult to imagine a more contemptuous attitude toward democracy.

The deal that this gang (led by Morgan Stanley director Erskine Bowles) is hatching will inevitably include some amount of tax increases and also large budget cuts. At the top of the list, as Pearlstein proudly tells us, are cuts to Social Security and Medicare. At a time when we have seen an unprecedented transfer of income to the top one percent, these deficit warriors are placing a top priority on snatching away a portion of Social Security checks that average $1,200 a month. Yes, the country needs this....

Social Security amounts to 90 percent or more of the income for one-third of seniors. For this group, the proposed cut in benefits would be a considerably larger share of their income that the higher taxes faced by someone earning $300,000 a year as a result of the repeal of the Bush tax cuts on high income earners. The latter is supposed to be a big deal, therefore the proposed cuts to Social Security are also a big deal.

The most likely Medicare cut is an increase in the qualifying age from 65 to 67. Those who pay attention to policy issues know that the health insurance market for people in their sixties is a disaster. And, if they could be bothered to look at the Congressional Budget Office's analysis, they would know that this change would hugely increase the cost of care for the country as a whole, even if it saved the federal government money. In other words, it is exactly the sort of budget cut we would expect from a group of cynical rich people.

Just about everything in Pearlstein's piece is upside down. Of course the major problem facing the country at present is massive unemployment. If the economy was near full employment we wouldn't have a big deficit. The long-term story behind the deficit projections is of course projections of exploding private sector health care costs, as every budget analyst knows.That should lead to a discussion about fixing the health care system, not a discussion of the budget.

Pearlstein even bizarrely brags that his deficit fighting crew has been warning about the problem for the last decade. Well, we haven't had a deficit problem for the last decade. We had a housing bubble problem. And because the Washington Post and other elite media outlets obsessed in reporting about the deficit non-problem, the housing bubble continued to grow unchecked.

Eventually the housing bubble blew up and wrecked the economy and also gave us large deficits. So now who does the Post turn to as authorities on the economy, naturally the people who ignored the housing bubble. And they wonder why the country has contempt for the Washington elite.

8--'The Escape Artist': Christina Romer Advised Obama To Push $1.8 Trillion Stimulus, Huff Post (archive)
9--Euro exit and depreciation would bring economic gains, Telegraph

To return to prosperity, these countries clearly need a depreciation of what economists call the real exchange rate; that is, the level of their prices and costs compared to other countries’, as translated through the exchange rate ruling between their currencies. Clearly, the financial and economic aspects of the crisis are closely intertwined.

For countries afflicted by the twin problems of excessive debt and uncompetitiveness, leaving the euro and letting their new currency fall potentially offers not just a feasible but even an attractive way out. If successful, it would help support an economic recovery through increased net exports, while not increasing the burden of debt as a share of GDP through domestic deflation.

Indeed, the higher inflation unleashed by devaluation would reduce real interest rates and thereby tend to boost spending. Moreover, outside the euro there would be some scope to operate a policy of quantitative easing. This might also help to boost domestic demand. If the troubled peripheral eurozone economies were able successfully to deploy this adjustment mechanism, then they would not only improve their own GDP outlook, but also help to allay concerns about the long-term sustainability of their debt situation and, thus, bolster the long-term stability of the “core” countries, too.

10--State Data Highlight Limp Job Market, WSJ

The labor market continued to limp along across most of the country after a winter of solid growth, according state-by-state data on unemployment.

The national unemployment rate stood at 8.2% in June, the same as the prior month, the Labor Department said earlier this month. Friday, the agency released further details showing that the jobless rate rose in more than half the states, dropped in 11 states and Washington, D.C., and held steady in a dozen states.

11--Obama spending binge never happened, Commentary: Government outlays rising at slowest pace since 1950s, Marketwatch

Of all the falsehoods told about President Barack Obama, the biggest whopper is the one about his reckless spending spree.

As would-be president Mitt Romney tells it: “I will lead us out of this debt and spending inferno.”

Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true.

But it didn’t happen. Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.

Even hapless Herbert Hoover managed to increase spending more than Obama has.
Here are the facts...

12--Two-thirds of Dodd-Frank still not in place, CNN Money

Two years after Congress enacted sweeping reforms intended to rein in risky practices on Wall Street, only a third of the new rules are actually in force.

The rest of the so-called Dodd-Frank rules are either stuck in a regulatory bog, ready-to-go but delayed, or substantially weaker than originally envisioned after pressure from financial industry lobbyists, according to data compiled by the law firm Davis Polk.

Former FDIC chief Sheila Bair said the reforms are "drowning in a sea of complexity." Regulators charged with carrying out the rules aren't doing their job in a "muscular enough" way, she added.

13--'Merkel Is Driving Europe into the Abyss', der speigel

Left-leaning daily Die Tageszeitung writes:

"The discontent (among politicians over the euro crisis) is more than justified. However, euro-zone leaders ought to take a hard look at themselves. They have only themselves to blame for the fact that -- after Greece, Ireland and Portugal -- now Spain is also on the brink. They recognized far too late that, in addition to a debt crisis, a banking crisis was swelling, too. And the strategy with which they are battling these crises is far too cowardly. Instead of seizing the problem at its roots and restructuring the financial sector (which would also mean bank failures), they are adding to the burdens of the states. This is only exacerbating the vicious circle of debt and banking crises."

"Chancellor Merkel is among the first to blame for this. She forced Spain under the bailout fund and is now trying to sell this as a success. But, in reality, Merkel is driving Europe into the abyss bit by bit."
14--Prime season existing-home sales plummet 6.9 percent in West, OC Housing News

The consensus among economists for June home sales was that sales volumes would continue to increase. Proving their fallibility, the consensus of economists was wrong — very wrong. June and July are typically the best months for sales volume in the prime selling season, and sales volumes dropped in every region in the US. A large decline in existing home sales is further evidence that the house price bottom the consensus of economists is also predicting is in jeopardy. Nominal prices are moving higher, but it isn’t based on the strength of demand, it is due to the restriction of supply. And with millions of homes in shadow inventory, weakening demand is not a good sign for the housing market. The consensus of economists may turn out to be right with their bottom call, but not for the right reasons. Further, there is a real chance, the consensus could be very wrong again....

5.4% decline in sales volumes in June is huge. I recently asked, Will dwindling housing supply cause resale prices to rise or sales volumes to fall? I think we have our answer.

Lawrence Yun, NAR chief economist, said the bigger story is lower inventory and the recovery in home prices. “Despite the frictions related to obtaining mortgages, buyer interest remains solid.”

Bullshit. All-cash investor interest for low-end properties remains strong, but demand among owner occupants using financing is dismal and showing no signs of improvement.
The lack of bank REO inventory being cleared out at reasonable prices is the main reason sales volumes have plummeted. When lenders were processing foreclosures at the maximum rate of market absorption, both first-time homebuyers and investors were eagerly buying up properties. Now that the inventory these two groups were buying is not being put on the market, sales volumes are plummeting. And sales volumes will continue to drop until this inventory returns. Cashflow investors will not raise their prices significantly because the rate of return doesn’t make sense at higher prices. First-time homebuyers won’t raise their bids because most of them can’t....

Foreclosures do not sell for below market value. Foreclosures establish market value. Whatever a property sells for is market value....

The worst part about Yun’s statement is that he likely knows better. He is purposefully misrepresenting the dangers current buyers face because he doesn’t care what happens to them. He just wants to convince them to buy homes to generate commissions....

the whole pent-up demand meme is nonsense realtors throw out whenever they have nothing else positive to say. To suggest that demand is what’s causing the tightening inventory is more bullshit. The demand is unchanged. It’s the supply of REO that has dropped off. He is right to point out that WTF asking prices from discretionary sellers do not attract buyers. Anyone who has looked at the MLS lately has been greeted with scores of ridiculous asking prices. Few of those are selling.

First-time buyers accounted for 32 percent of purchasers in June, compared with 34 percent in May and 31 percent in June 2011. “A healthy market share of first-time buyers would be about 40 percent, so these figures show that tight inventory in the lower price ranges, along with unnecessarily tight credit standards, are holding back entry level activity,” Yun said.....
Single-family home sales declined 5.1 percent to a seasonally adjusted annual rate of 3.90 million in June from 4.11 million in May, but are 4.8 percent above the 3.72 million-unit pace in June 2011. The median existing single-family home price was $190,100 in June, up 8.0 percent from a year ago...

Existing-home sales in the West fell 6.9 percent to an annual level of 1.08 million in June and are 3.6 percent below a year ago. The median price in the West was $233,300, up 13.3 percent from May 2011. Given tight supply in both the low and middle price ranges in this region, sales in the West are stronger in the higher price ranges.

Even the NAr acknowledges that the big jump in the median does not reflect the increase in values of individual properties. My $/SF data hasn’t turned positive over last year yet. We are up off the lows, but not by much...

The bottom line is that a significant decline in sales volume is because lenders have withdrawn the only affordable properties from the market. Potential homebuyers cannot simply raise their bids because the product gets scarce, so it isn’t a foregone conclusion that prices must go up. Most people stretch to get the most house they can for the money, and if prices go up, they must either substitute to a lesser quality home or chose not to buy. Right now, many are wisely choosing not to buy, so sales volumes are plummeting. Plus, I don’t see any end in sight. Nothing is changing that will bring more supply to the market. Little or no inventory and super low sales volume is the new normal

Friday, July 20, 2012

Weekend links

1--Evidence of Coming Recession Is Overwhelming, comstock partners

We first noticed the first signs that the economy was beginning to soften about three months ago. Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession. We cite the following as evidence.

Retail sales (both total and non-auto) have dropped for three consecutive months. This has happened only five times since 1967—-four times in 2008, and one now. Vehicle sales have tapered off with May and June being the two weakest months of the year. Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012.

On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.

The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery. The ISM non-manufacturing index for June dropped to its lowest level since January 2010. Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.

The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months. Plans for capital spending and new hiring have dropped sharply.

Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year. In addition mortgage applications for home purchases have been range-bound since October.

Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers cited above indicate the weakness is likely to continue.

The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers. The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.

The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead. In addition the foreign economies will be a drag as well. A number of European nations are already in recession and others are on the cusp. The debt, deficit and balance sheet problems of the EU’s southern tier are a long way from any solution, and will not remain out of the news for long. China is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing. The Shanghai Composite is in a major downtrend, declining 28% since April 2011. The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.

The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn’t do it in 2000 or 2007 when it had plenty of weapons at its disposal. Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke’s Senate testimony. In sum, we believe that the stock market is in store for a huge disappointment

2--China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Mish

Pettis On China Price Deflation...

China’s official GDP growth rate has fallen sharply – on Friday Beijing announced that GDP growth for the second quarter of 2012 was a lower-than-expected 7.6% year on year, the lowest level since 2009 and well below the 8.1% generated in the first quarter. This implies of course that quarterly growth is substantially below 7.6%.  Industrial production was also much lower than expected, at 9.5% year on year. 

In fact China’s real GDP growth may have been even lower than the official numbers.  This is certainly what electricity consumption numbers, which have been flat, imply, and there have been rumors all year of businesses being advised by local governments to exaggerate their revenue growth numbers in order to provide a better picture of the economy.  Some economists are arguing that flat electricity consumption is consistent with 7.6% GDP growth because of pressure on Chinese businesses to improve energy efficiency, but this is a little hard to believe.  That “pressure” has been there almost as long as I have been in China (over ten years) and it would be startling if only now did it have an impact, especially with such a huge impact occurring so suddenly...

Adding to the slow economic growth, the country may be tipping into deflation.

3-- American Pie in the Sky, Nouriel Roubini, Commentary, Project Syndicate

 While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed. For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth. That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come.

Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.

The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed.
After explaining the reasons, Roubini concludes:

Policy responses will have very limited effect in stemming the US economy’s deceleration toward stall speed: even with only a mild fiscal drag on growth, the US dollar is likely to strengthen as the eurozone crisis weakens the euro and as global risk aversion returns. The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending. Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing.

Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability.

A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.

4--Economy Remains Soft In Output And Housing, NY Times

Data on home sales and factory production released on Thursday indicate a weakening United States economy.

Americans bought fewer homes in June than in May, manufacturing in the Federal Reserve’s Philadelphia region contracted for a third consecutive month, and the number of Americans seeking unemployment benefits rose last week.

The National Association of Realtors said on Thursday that sales of previously occupied homes fell 5.4 percent from May to June to a seasonally adjusted annual rate of 4.37 million homes — the fewest since October.

Compared with a year ago, sales are up 4.5 percent. But the annual sales pace is well below the six million that economists consider healthy.

“It is only one month, and the rest of the housing indicators have all continued to show improvement,” said Jennifer Lee, a senior economist at BMO Capital Markets. “Let’s hope this June decline is a blip.”

The few pieces of good economic news lately have been confined mainly to housing. On Wednesday, for example, the government said builders broke ground last month on the most homes in nearly four years.

Manufacturing in the Philadelphia region contracted for the third consecutive month in July, a sign of further feebleness in the economy. But some analysts say the report mostly reflects a regional slowdown.

The Federal Reserve Bank of Philadelphia says its index of regional manufacturing activity rose to minus 12.9, up from minus 16.6 in June. Any reading below zero indicates a contraction.

Some parts of the report improved. New orders and shipments rose, though both remained negative. An index measuring employment dropped sharply from 1.8 to minus 8.4.

The Philadelphia Fed’s reading “suggests the factory sector is still in recessionary territory,” Paul Ashworth, chief United States economist for Capital Economics, said in a note to clients. “But the downturn doesn’t appear to be quite as bad” as this survey suggested.

The number of Americans seeking unemployment benefits rose 34,000 last week. Normally, that would signal an increase in layoffs. But the figure was skewed higher by seasonal factors that made it hard to tell whether the job market might be worsening.

The government tries to adjust its unemployment benefits data to reflect temporary summertime layoffs in the auto industry. But this year, many automakers skipped those shutdowns to keep up with demand. That led to fewer layoffs, which the Labor Department did not anticipate.

Once those statistical distortions fade, Joshua Shapiro, chief United States economist at MFR, wrote in a note to clients, “We suspect that the data will point to a soggy labor market.”

Also, a gauge of future economic activity in the United States fell in June.

Measures of the overall economy, though, suggest the recovery may be in danger of stalling. The Conference Board’s index of leading economic indicators slipped in June. The index fell 0.3 percent after a 0.4 percent increase in May. It had dropped 0.1 percent in April, its first decline in seven months.

The leading indicators index “is pointing to no strengthening over the next few months, as the economy continues to sail through strong headwinds domestically and internationally,” said Ken Goldstein, an economist with the Conference Board.

5--Russia Accuses West of Inciting Syrian Rebels, antiwar.com

Western officials point to ongoing violence as a Security Council vote on Syria is postponed until Thursday

6--Venezuela: A Threat to Washington?, Eva Golinger, global research

From the first time Hugo Chavez was elected President of Venezuela in 1998, Washington and its allies have been trying to undermine his government. When Chavez was just a presidential candidate, the US State Department denied his visa to participate in television interviews in Miami. Later, when he won the presidential elections, Ambassador John Maisto called him personally to congratulate him and offer him a visa. The following months were filled with attempts to “buy” the newly elected President of Venezuela. Businessmen, politicians and heads of state from Washington and Spain pressured him to submit to their agendas. “Come with us”, urged Spanish Prime Minister Jose Maria Aznar, trying to seduce him with offers of wealth and luxury in turn for obeying orders.

When Chavez refused to be bought, he was ousted in a coup d’etat April 11, 2002, funded and planned by Washington. When the coup failed and Chavez’s supporters rescued their democracy and president in less than 48 hours, attempts to destabilize his government continued. “We must make it difficult for him to govern”, said former US State Department chief Lawrence Eagleberger.

Soon, Venezuela was overrun with economic sabotage, oil industry strikes, chaos in the streets and a brutal media war that distorted the reality of the country on a national and international level. A plan to assassinate Chavez with Colombian paramilitaries in May 2004 was impeded by state security forces. Months later, the US-backed opposition tried to revoke his mandate in a recall referendum, but again, the people saved him in a 60-40 landslide victory.

The more popular Chavez became, the more millions of dollars flowed from US agencies to anti-Chavez groups to destabilize, descredit, delegitimize, overthrow, assassinate or remove him from power by any means possible. In December 2006, Chavez was reelected president with 64% of the vote. His approval rating grew in Venezuela and throughout Latin America. New governments in Argentina, Brazil, Bolivia, Ecuador, Honduras, Nicaragua, Uruguay and several Caribbean nations joined regional initiatives of integration, cooperation, sovereignty and unity, encouraged by Caracas. Washington began to lose its influence and control over its former “backyard”. ...

Obama increased funding to anti-Chavez groups this year. More than $20 million in US taxpayer dollars have been channelled from US agencies to help fund the opposition’s campaign in Venezuela.

Is Venezuela a threat to Washington? In Venezuela, the only “terrorists” are the groups trying to destabilize the country, the majority with political and financial support from the US. The drug traffickers are in Colombia, where the production and transit of drugs has increased during the US invasion disguised as Plan Colombia. Relations with Iran, Cuba, China, Russia and the rest of the world are normal bilateral – and multilateral – ties between countries. There are no bombs, no attack plans, no sinister secrets.

No, Venezuela is not that kind of threat to Washington.

Poverty has been reduced by more than 50% since Chavez came to power in 1998. The inclusionary policies of his government have created a society with mass participation in economic, political and social decisions. His social programs – called missions – have guaranteed free medical care and education, from basic to advanced levels, and provided basic food items at affordable costs, along with tools to create and maintain cooperatives, small and medium businesses, community organizations and communes. Venezuelan culture has been rescued and treasured, recovering national pride and identity, and creating a sentiment of dignity instead of inferiority. Communication media have proliferated during the last decade, assuring spaces for the expression of all.

The oil industry, nationalized in 1976 but operating as a private company, has been recuperated for the benefit of the country, and not for multinationals and the elite. Over 60% of the annual budget is dedicated to social programs in the country, with the principal focus on eradicating poverty.

7--Existing homes sales fizzle, The Big Picture  (see chart)

The Housing Recovery is awesome — until you actually look at the sales data.

Then, not so much.

The NAR notes that “Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 25 percent of June sales (13 percent were foreclosures and 12 percent were short sales), unchanged from May but down from 30 percent in June 2011.”

Hence, a huge drop in distressed sales pressuring prices (which would have caused even more distressed sales) is an artificial benefit of the voluntary foreclosure abatements — which have now ended.

The present RRE situation can be best described as massive Fed stimulus + government induced foreclosure abatements = some stabilization.

Anything beyond that statement falls between wishful thinking and a guess. . .

8--Practical advice for today’s prospective homebuyers, OC Housing News

The last crash took more than a decade to work through—and this market could take an especially long time because the huge accumulation of empty, foreclosed houses will hold down prices for all properties.

When adjusted for inflation, the Case-Shiller index didn’t return to its 1989 peak until 2000. Some markets, such as New York and Los Angeles, didn’t hit new highs until 2002. This time may be even worse because the bubble was much, much bigger. Some locations may not recover their inflation-adjusted peak in our lifetimes.

9--The return of auto subprime lending, ft.com

The subprime auto lending market is exhibiting some characteristics last seen during the early- to mid-1990s, when overheated competition led to poor underwriting and drove unexpectedly high losses that put many smaller lenders out of business.

Then, as now, investor capital flowed into the sector, lured by the profit potential from the ability to charge high loan rates while enjoying low funding costs. When the lending boom in the 1990s eventually went bust, the number of lenders contracted drastically, and subprime auto ABS investors suffered losses.

If today’s subprime auto lending market were to deteriorate as it did back then, investors could suffer comparable or greater losses, especially in the absence of monoline guarantors or other controlling parties available to minimize or absorb their losses.

Over the last two years, the sector’s profit potential has lured private equity investment into subprime auto lenders, many of which are relatively small, specialty finance companies that exhibit speculative characteristics and relatively high medium-term default probabilities. As a result, the subprime autoloan ABS market in the US is booming, with 2012 issuance on pace to exceed the robust issuance of 2011...

The credit quality of pools securitized in 2011 and 2012 indicate that credit has loosened since 2010. Recent data from Experian show that the average APR on loans for used autos decreased to its lowest level since 2008, to 8.61% from 8.71% between the fourth quarters of 2010 and 2011, even as the average borrower credit score also decreased, to 670 from 679

10--Stop the pointless demonization of Putin, Reuters

Russian democratization began in Soviet Russia, under Mikhail Gorbachev, in 1989-91. “De-democratization,” as it is often called, began not under Putin but under Yeltsin, in the period from 1993 to 1996, when the first Russian president used armed force to destroy a popularly elected parliament; enacted a super-presidential constitution; “privatized” the former Soviet state’s richest assets on behalf of a small group of rapacious insiders; turned the national media over to that emerging financial oligarchy; launched a murderous war in the breakaway province of Chechnya; and rigged his own re-election. (On February 20, outgoing president Dmitri Medvedev shocked a small group of visitors by finally admitting that Yeltsin had not actually won that election against the Communist leader Gennadi Zyuganov.) Putin may have only moderated those fateful policies, but he certainly did not initiate them.

11--Putin’s Censored Press Conference, global research (from the archive)

Putin: “AN ARMS RACE IS UNFOLDING. Was it we who withdrew from the ABM Treaty? We must react to what our partners do. We already told them two years ago, “don’t do this, you don’t need to do this. What are you doing? YOU ARE DESTROYING THE SYSTEM OF INTERNATIONAL SECURITY. You must understand that you are forcing us to take retaliatory steps.” …we warned them. No, they did not listen to us. Then we heard about them developing low-yield nuclear weapons and they are continuing to develop these weapons.” We told them that “it would be better to look for other ways to fight terrorism than create low-yield nuclear weapons and lower the threshold for using nuclear weapons, and thereby put humankind on the brink of nuclear catastrophe. But they don’t listen to us. They are not looking for compromise. Their entire point of view can be summed-up in one sentence: ‘Whoever is not with us is against us.’”

Putin asks, “So what should we do?” The present predicament has brought us “the brink of disaster”.

Putin: “Some people have the illusion that you can do everything just as you want, regardless of the interests of other people. Of course it is for precisely this reason that the international situation gets worse and eventually results in an arms race as you pointed out. But we are not the instigators. We do not want it. Why would we want to divert resources to this? And we are not jeopardizing our relations with anyone. But we must respond.

Name even one step that we have taken or one action of ours designed to worsen the situation. There are none. We are not interested in that. We are interested in having a good atmosphere, environment and energy dialogue around Russia”.

12--Economic downturn in China worse than official data, WSWS

13--Implications of the Summer Drought, pragmatic capitalism

14--Dean Baker, CEPR (quote)

The real argument between left and right has little to do with government intervention in the market. The real issue is whether the goal is to steer the economy in a direction that will allow the benefits of growth to be broadly shared or whether to structure the economy in a way that directs income upward.