Wednesday, July 18, 2012

Today's links

1--Drought In U.S. Now Worst Since 1956; Food Prices To Spike, Economy To Suffer, NPR

2--Can The Banking Industry Make It 24 Hours Without A New Scandal?, The Big Picture

In the last 10 days...• The LIBOR inquiry in London early last week revealed that the Bank of England pressed Barclays to lower their quoted rate.

• The next day it was discovered that Peregrine Financial Group was missing $215 million of customer money.

• Later we found out that for many years Peregrine was submitting falsified financial statements to the National Futures Association (NFA). No one at the NFA independently verified these statements with the banks supposedly holding these funds.

• At the end of the week, JP Morgan’s quarterly call revealed that CDS prices were made up to the point that Q1 earnings need to be restated and a criminal probe is underway. A similar mispricing of CDS at UBS led to prison time.

• After the close on Friday we learned that the New York Federal Reserve (headed by Tim Geithner at the time) was aware of Barclay’s LIBOR scandal and essentially did nothing about it.

• Yesterday, as detailed above, we found out that HSBC has been used as a money-laundering and terrorist financing operation (Senate Probe Faults HSBC).

3--Modern Financial History, Big Picture (great graphics)

4--China's off-balance sheet problem, macrobusiness

The really shocking number from the Financial Stability Report is that the size of banks’ off-balance sheet activities, which have grown to a staggeringly large number. By the end of 2011, the size of off-balance assets has reached RMB39.16 trillion, or 35.1% of total assets according to the PBOC’s financial stability report, an increased of 17.98% from a year ago. The off-balance sheet business experienced rapid growth when the PBOC was tightening credit. As credit from formal channels was tightened, banks appeared to have designed ways to circumvent regulations and lend via off-balance sheet vehicles. Entrusted loans, for instance, increased by 29.38%. Meanwhile, the outstanding wealth management products have reached RMB4 trillion.

I am shocked by this number, which looks unreal (I was hoping it was a misprint and it was actually RMB3.916 trillion instead). The size of off-balance banking assets amounted to 83% of nominal GDP of 2011 on top of the banking assets (presumably on balance sheet) of roughly 239.7% of GDP

5--Roubini: “Global perfect storm” looms, IFR (video)

Next year the world’s problems – from the sputtering recovery in the U.S. to monetary crisis in Europe to the slowdown in China – could overwhelm the economy, says NYU economist Nouriel Roubini in this interview with Thomson Reuters Digital Editor Chrystia Freeland.

6--The Scramble for the Horn of Africa, Ethiopian Regime Crumbles: Enter CIA, counterpunch
With its foundations irreparably cracked and its edifices of power crumbling the Ethiopian regime headed by Meles Zenawi is turning more and more to the CIA to make the critical decisions in the ministries of power in the capital Addis Ababa.

Faced with growing nationalist insurgencies, an ongoing economic crisis and calls for regime change from the heights of the religious community, the isolation surrounding Meles Zenawi grows almost by the day. Addis Ababa has become home to an ever shrinking inner circle of regime insiders allowed to share in the spoils of power but with no one able to replace Meles himself as head of state.

7--RE/MAX rosy on housing recovery, Housingwire

Rising house prices. More home sales closing. Fewer days on market. Higher demand and lower supply. These are four of the reasons RE/MAX cites in calling the housing recovery a "real" event.

According to the real estate agent franchise firm, annual home sales rose for one-year straight as prices inched higher for the past five months.

The data is found in the RE/MAX national housing report for July.

The median sales price of homes sold in June was $170,067. This price marks a 2.5% rise from the median in May and a 3.7% increase from June 2011.

"This selling season is the best in years, and those who thought that the positive trends would quickly correct have been proven wrong, because many consumers again feel comfortable buying or selling a home," said Margaret Kelly, CEO of RE/MAX.

Although the housing market has a long way to go to make a full recovery, all signs now show that it’s on the right path and has improved every month so far this year,” Kelly said.

8--Unions’ Past May Hold Key to Their Future, NY Times

Organized labor is in free fall. The number of workers who belong to a union has plummeted about 20 percent over the last decade. Only 8 percent of all workers are unionized. And leading labor activists are wringing their hands over the seemingly inevitable death of a movement unable to cope with technological change. ...

Today, fewer than one in 14 private sector workers belongs to a union, half the portion of 15 years ago. Where unions matter most — fighting for workers’ share of the spoils of economic growth — they lost the battle long ago. Despite soaring worker productivity, the typical American worker takes home today only 2 percent more than a quarter of a century ago, after adjusting for inflation...

Only about one in five Americans say they trust unions, according to polling by Gallup, the same share that trust banks or big business. And unions’ once impressive political clout has been overwhelmed by a wave of corporate money

9--Gloomy Forecast for States, Even if Economy Rebounds, NY Times

10--JPMorgan scandal: The tip of the iceberg, WSWS

JPMorgan Chase, the biggest US bank by assets, announced Friday that the trading loss from derivatives bets made by its Chief Investment Office (CIO) had reached $5.8 billion, nearly three times the amount the company had revealed in May. It added that the bad bets could result in an additional $1.7 billion in losses over the rest of the year.

In its second quarter filing with the Securities and Exchange Commission (SEC), the bank admitted that it had failed to report $459 million in losses from the trades in its first quarter report, released April 13. CEO Jamie Dimon and other top executives attempted to lay the blame on “certain individuals” who “may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter”—an allusion to several traders in the London office of the bank’s CIO who have since been forced out of the firm.

Bloomberg News reported that this explanation seemed implausible to former JPMorgan executives it interviewed, who said the company had mechanisms in place to make sure traders could not simply hide their losses. In fact, JPMorgan’s report to the SEC on Friday indicates that the bank recorded a $718 million loss from the London trades on its internal accounts, but did not report the loss in its first quarter earnings statement.

In other words, JPMorgan deliberately falsified its first quarter report to the SEC in order to conceal its massive gambling losses. This is a crime

11--It is now official: The Eurozone’s monetary transmission system is broken, Yanis Varoufakis

Under normal conditions, the interest rates that you and I must pay on a home loan, a car loan, our credit card, a business loan are pegged onto two crucial rates. One is the rate that banks charge one another in order to borrow from each other. The other is the Central Bank’s overnight rate. Alas, neither of these interest rates matter during this Crisis. While such ‘official’ rates are tending to zero (as Central Banks try to squeeze the costs of borrowing to nothing), the interest rates people and firms pay are much, much higher and track indices of fear and subjective estimates of the Eurozone’s disintegration.

12--Idle corporate cash piles up, Reuters

IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.

The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure.

Why the huge gap?

The Fed gets its data from the IRS, but only measures the flow of funds in the domestic economy. The IRS reports the worldwide holdings of U.S. companies, which I think is the more revealing measure.

13--Whither China?, econbrowser

Recent economic reports from China are, at the least, mixed. The responses to Friday’s GDP report are illustrative.

From IHS-Global Insight (Xianfeng Ren):

China has reported the worst quarterly GDP growth, 7.6%, in almost three years. This is a less vicious downslide compared with the Global Financial Crisis if measured by peak-to-trough deceleration, but nearly as bad as in the Asian Financial Crisis. The length of consecutive quarterly GDP growth deceleration is even longer than in the slide following the Asian Financial Crisis—six straight quarters of deceleration, vs. five in the Asian Financial Crisis. Domestic macro control and weakening external demand are the causes of the slowdown, but it is policy miscalculation and larger-than-anticipated shock from the Euro Zone which have caused the stalling in Q2. ... What is more dismal than the dismal growth is China’s inability to absorb slower growth. A 7.8% growth in the first half already feels quite hard in terms of impact, inflicting huge pain: a downward spiral of producer prices, surging manufacturers’ inventories, plunging profits, bankruptcies and pay cuts. ...

China takes on heightened importance because China was one of the bright spots in the world economy, contributing one of the largest increments to world GDP [1]. As illustrated in the IMF’s World Economic Outlook update, released yesterday, forecasts finalized even before Friday’s GDP release marked down in a noticeable fashion. Forecasted 2012 and 2013 y/y growth rates have been reduced by 0.2 and 0.3 percentage points, respectively.

What do the leading indicators suggest? The OECD’s indicate a downturn (where numbers below 100 indicate that growth will be below trend).

14--Revenues vs earnings, zero hedge

73% of companies reporting have surprised positively on EPS while 65% have surprised negatively on Revenues. Industrials stand out in the liberal sprinkling of accounting fairy dust with 100% of the firms having missed top-line while 88% beat bottom-line. Is it any wonder that unemployment is rising once again and CapEx is falling?

15--Gathering shadows, zero hedge

The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. Accoring to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market.

Once one takes the number of homeowners 30- to 90-days late on their mortgage payments and includes the likely default of those that have negative equity on their homes, there is a strong possibility more than 6.5 million additional foreclosures will enter the pipeline. The addition of homes that banks may be holding back suggests a much larger number. Laurie Goodman of Amherst Securities Group has testified before Congress that it could be as high as between 8 and 10 million.


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