Saturday, September 8, 2012

Weekend links

1--Some "good news" for a change?, sober look

The contributors to the recent uptick include positive surprises from ISM Non-manufacturing Composite, Initial Jobless Claims, US Factory Orders, various housing indices (15% YoY in pending home sales for example), chain store sales, and auto sales. Growth in the US is clearly subpar, but the economy is not headed for a "double-dip" as many had predicted. People also need to come to terms that slow growth, driven by weak global demand, is the "new normal".

2--America's hidden austerity program, (chart), Big Picture   3--Financial fragmentation across the Eurozone can not be ended by extending ECB credit to periphery governments, sober look 

ECB's asset purchases are unlikely to convince depositors to reverse this trend of capital flight. What's more, many Eurozone periphery citizens will continue to move deposits out of the Eurozone altogether. These euros will then be "trapped" as part of the foreign reserve accounts of the Swiss National Bank (discussed here) and Danmark's Nationalbank (discussed here).

Bloomberg: - Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that.

4--Equity trading volumes in the US continue to shrink, sober look

As as sign of sharply declining share trading volumes in the US, the broad measure of exchange volume computed by Bloomberg (below) is at a level not seen since 2008....

Another explanation is that retail investors, burned by a series of market shocks, are simply staying away.

USA Today: - Part of the reason volume is low is because retail investors have been turned off by stocks, says Ryan Detrick of Schaeffer's Investment Research.

5--Subprime auto nation, Burning Platform

The average payment on a new car in 2012 is $461. For used cars, the average monthly payment is $346. Today, 77% of new car purchases are financed. About half of all used vehicles involve financing. Of those cars financed, 89% are through a loan vs. 11% with a lease. A critical thinking person might wonder how a country with 4 million less employed people than we had in 2007, median household net worth down 35%, and real wages lower than they were in 2007, could be experiencing an auto boom. The answer is a government/corporate/banker/media effort to funnel taxpayer funds to deadbeats across the land in a fruitless attempt to create a facade of recovery. Our governing elite are convinced that more debt peddled to the masses is the path to recovery for an economy that imploded due to excessive debt peddled to the masses in the first place. Essentially, it comes down to who benefits from the peddling of debt. It isn’t the masses, as they become enslaved in the chains of debt and monthly payments in perpetuity. Debt peddling benefits Wall Street bankers, politicians, and mega-corporations selling crap to the masses.

The storyline being sold to the vegetative dupes (watching Honey Boo Boo) that occupy space in this delusional paradise we call America, by the corporate media, is that consumers have deleveraged and are ready to resume their “normal” pattern of spending money they don’t have on stuff they don’t need....

The category of debt that barely budged in the 2009 collapse was non-revolving credit. It stayed in the $1.5 trillion range in 2009 and has since surged to over $1.7 trillion in 2012. What could possibly have made this debt skyrocket by 33% when the GDP has only grown by 12% over the same time frame? You guessed it – your corporate fascist friends in Washington DC and on Wall Street. Non-revolving debt consists of auto loan debt of $663 billion and student loan debt of approximately $1 trillion. Student loan debt has shot up by $300 billion since 2008. This student loan debt is being distributed, like candy by a pedophile, from the Federal government in an effort to artificially hold down the unemployment rate....

Approximately $500 billion of the student loan debt is held directly by the Federal government, up from $100 billion in 2008. The Feds guarantee the majority of the remaining student loan debt. Can you think of a more subprime borrower than a 40 year old former construction worker getting a liberal arts degree from the University of Phoenix, sitting at his computer in his underwear scratching his balls, and paying with a $10,000 Federal student loan from you?...

During the first quarter of this year, total U.S. car loans totaled $52.5 billion. That’s 49% higher than the same period in 2009. Also during the first quarter, the average amount financed on new vehicles rose by $589, to $25,995, and for used cars by $411, to $17,050. Furthermore, buyers are stretching out payments for longer terms: The average length of new- and used-vehicle loans jumped a full month during the first three months of this year, to 64 and 59 months, respectively. The surge in auto sales is being completely driven by doling out more loans for a longer time frame to deadbeat borrowers. Subprime auto loans now make up 45% of all car loans and the vast majority of all used car loans. They have even created a category called Deep Subprime. Borrowers classified as “deep subprime” (i.e. those with Vantage scores below 600) account for 10.7% of auto loans. You can also classify them as loans that will never be repaid....

What could possibly go wrong providing loans for more than the value of the asset to people with a history of not paying their debts?

•Subprime borrowers received 56.46% of loans on used cars in the quarter, up from 52.70% a year earlier.
•The average loan-to-value on new cars was 109.55%
•The average used car loan-to-value ratio rose to 126.62%
•77% of Subprime Auto Loans are for a period greater than five years
It’s amazing how many cars you can sell when you aren’t worried about getting paid.

Offers of 7 year financing at 0% interest and monthly lease offers of $150 to $200 for brand new cars now are understandable. The newer model BMWs, Cadillac Escalades, Volvos, and Jaguars I see parked in front of the low income luxury gated townhome community in West Philadelphia now makes sense. A pizza delivery guy driving a new Lexus is now explainable...

The master plan is fairly simple. The Federal Reserve lends money to the Wall Street banks for 0% interest. These banks then turn around and provide credit card debt at 13% interest, new & used car loans to prime borrowers at 5% interest, and new & used car loans to subprime borrowers at 16%. When you can borrow for free, you can take a chance that a significant number of your borrowers will default. Essentially, Ben Bernanke is screwing the prudent savers and senior citizens by paying them 0.15% on their savings in order to subsidize the bankers that destroyed the country so they can make auto loans to the same people who took out the zero percent down interest only no doc mortgage loans in 2005. In addition, Wall Street knows the Bernanke Put is still in place. If and when these subprime loans explode in their faces again, Bennie, Timmy and Obamaney will come to the rescue with your tax dollars. Its heads you lose, tails you lose, again.

The chart below is like a who’s who of TARP recipients. The top 20 auto lenders control half the market. And look at the leader of the pack. Our friends at Ally Bank are the market share leader. You remember Ally Bank – they conveniently changed their name from GMAC (also known as Ditech – biggest subprime mortgage lender) after losing billions and being bailed out by you. They still owe you $11 billion and are 85% owned by the U.S. Treasury. No conflict of interest there. You have the biggest auto lender on earth controlled by the Obama administration. Do you think they have an incentive to make as many loans as humanly possible to help Obama create the illusion of an auto recovery? The only downside is for the American taxpayer when we have to eat billions more in Ally/GMAC losses. This insolvent excuse for a lending institution has been extremely aggressive in the subprime auto lending market and has forced the other wannabes – Wells Fargo, JP Morgan, Capital One and Bank of America – to lower their lending standards. Does this scenario ring a bell?

6--U.S. Jobless Rate Drops for the Worst of All Reasons, Businessweek

The U.S. economy added just 96,000 jobs in August, falling short of expectations and showing that with a presidential election just two months away, the nation still has a long ways to go to heal from the deep 2007-09 recession. The unemployment rate fell to 8.1 percent from 8.3 percent, but that was only because 368,000 people left the labor force. The share of working-age people who are either working or looking for work—known as the labor-force participation rate—fell to its lowest level since September 1981.

7--Investors yank $3.7 billion out of stocks, CNN Money

8--DNC Convention Slogan: “Give Me More Time”, naked capitalism

Obama, through various programs centering on the Wall Street bailout, basically reinflated financial assets owned by the wealthy while foreclosing on everyone else. The data shows the result – inequality has gotten worse, faster, under Obama, than it did under Bush. There are new jobs, but they are sparse, and low-paying. Corporations are beginning to recognize that the end of the middle class is a permanent condition, and shifting their marketing to a “barbell” model, selling products to the high and low end. And today, while people are focusing on a poor jobs report, negotiations for the large and secretive Trans-Pacific Partnership, the so-called NAFTA on steroids, are going on in Virginia.

The reason there has been no discussion of this real agenda is because Romney agrees with it, as does most of the elite political class. The new shape of the American experiment is taking place.

The larger consequences of having two candidates who share similar policy ideas, who both believe in police state tactics to suppress whistle-blowers, who both are driven by their allegiance to a wealthy political class, are not acknowledged. It isn’t that American democracy is at risk. American democracy was at risk, perhaps four or eight or 12 years ago. Today, speaking of democracy in America is quaint — the country increasingly resembles an undemocratic state, with a free wealthy elite and a much larger poorer populace, constrained by monopolistic corporations that collude with the government.

In fact, the lesson of the 2012 election, if we are honest with ourselves, is simple, and disturbing. America is shifting from a democracy into an authoritarian state.

9--Draghi's OMT --Outright Monetary Transactions, (Structured adjustment?), IFR

...the plan is very clever. Until the governments in question put their hands up and publicly ’fess up to the mess they are in, go to the EFSF first and accept that they need to implement strict fiscal discipline, they get nothing. Only then does the ECB open its wallet but when it does, it will do it in size.

10--Markets Applaud Draghi’s New, Improved Kick the Can Down the Road Strategy, naked capitalism

On Thursday, ECB chief Mario Draghi announced a bond-buying program that had been largely leaked the day prior, namely that of a new bond buying program, the Outright Monetary Transactions, or OMT. Bond yields in Italy and Spain had already come down on the rumor, and stock markets around the world rallied on the news.

The enthusiasm appears overdone when you look at the sketchy details. Draghi is implementing an improved version of the Securities Market Program, which only temporarily suppressed periphery country bond yields. As hedge fund manager Scott commented via e-mail: I don’t think this is anything but the SMP with more conditionality and pari passu treatment. Markets seem to like it, though.” “Conditionality” is Eurocrat-speak for “debtor countries must agree to wear the particular austerity hair shirt we have designed for them before they get any dough.”

11--BLS numbers are wrong, TrimTabs

The BLS August jobs numbers are in and they reported the US economy added a positively dismal 96,000 jobs.  Meanwhile, we reported August job growth was 185,000, nearly twice what the BLS reported....

Going back to August, let’s review the facts. Year-over-year growth in withholding taxes was up modestly in August relative to June and July. That tells us two things; 1) there was positive growth in wages and salaries, and 2) there was positive growth in jobs.

We believe job growth was due to three factors: 1) The small uptick in housing; 2) the mini-boom in mortgage refinancing; and 3) the nearly 20% growth in vehicle sales relative to a year ago.

Will this growth last? We don’t think so.

Why? The home selling season is nearly over. The mortgage refi boomlet shut off three weeks ago with the increase in 30-year mortgage interest rates. Combine that with the massive level of uncertaintly concerning the approaching $300 billion to $500 billion dollar “fiscal cliff” and we are pretty sure the economy will continue to muddle along its sub-2% GDP growth path for the foreseeable future.

One thing for sure however, the very poor August BLS report gives the Federal Reserve cover to announce yet another massive monetary easing program. We believe that announcement will likely come as soon as next Thursday.

12--'What Krugman & Stiglitz Can Tell Us', economists view

13--America on the Brink of Oligarchy, New Republic

14--President Obama Calls for Cutting Social Security by 3 Percent, Raising Normal Retirement Age in Acceptance Speech, CEPR

15--Number of the Week: Young People Lead Labor-Force Drop Outs, WSJ

16--Economists Expect Fed to Deliver QE3 and More Next Week, WSJ

17--Men See Lowest Participation Rate on Record, WSJ

18--Five Key Takeaways From Jobs Report, WSJ

19--Deep Subprime’ Auto Loans Losing Stigma, Attracting Investors, WSJ

Stigmas associated with subprime-debt investing are fading fast. Nowhere is that more true than in the “deep subprime” segment of U.S. auto loans, where companies like used-car dealer J.D. Byrider have pounced on opportunities for growth.

The franchiser of “buy here, pay here” dealers in May closed on $145 million in its first issue of asset-backed securities as one of several newcomers to the market that finances one-fifth of all car loans.

Many of the company’s borrowers live “very much on the edge” and may have no credit history but place a high priority on their transportation, said Bill Brunner, chief financial officer of the Carmel, Ind.-based firm.

20--Bubba and Barack Go to Bank of America Stadium, Rob Urie, counterpunch

To trot out former President Bill Clinton as the incarnation of ‘elder statesman’ required an even grander imagination— one where the last twenty years either didn’t happen or didn’t matter. In fact, and despite the teary-eyed windbaggery of liberal nostalgia, Dot-com Bill and his financial deregulatin’ is nearly single handedly responsible for the economic plight that still grips the West. His promotion of right-wing talking points (‘The end of the era of big government,’ ‘the end of welfare as we know it’) attached to his right-wing policies begs the question of where Democrats think right-wing ‘crazies’ got their ideas about small government and economic self-reliance from? And with his welfare ‘reform’ Mr. Clinton began the job of gutting the social safety net that Barack Obama now welcomes as his own. Welcome back Mr. President

21--Israeli DM: Military Ready to ‘Conquer and Rule’ Gaza Strip, antiwar

22--The bankers’ dictatorship in Greece, WSWS

Details revealed this week of a letter to the Greek Labour Ministry by the so-called troika—the International Monetary Fund, European Commission, and the European Central Bank—make clear that the European working class stand at the crossroads. The financial elite is calling for a fundamental assault on all the gains of the working class in the twentieth century.

Some 150 years after the first struggles for an eight-hour day, and a century after the introduction of the first five-day work week, the troika is demanding that workers in Greece work 6 or 7 days a week for subsistence wages, or less. To this end the troika wants further cuts to Greece’s already miserly minimum wage (€586, or US$736, per month), plus new powers for employers to sack workers.

The troika’s letter cynically implies that its measures will combat mass unemployment. In fact, the current record level of 30 percent unemployment in Greece is a direct result of the austerity measures imposed by the troika, which have devastated the Greek economy. The troika’s comments make clear, however, that the capitalist class will accept to re-hire workers only under conditions of virtual slave labor.

Just before the troika letter was published, Martin Schulz, the President of the European Parliament, called for establishing special economic zones (SEZs) in Greece. Such zones, modeled on cheap labor facilities in poor Asian or African countries, would provide tax-free havens for companies to exploit workers to the bone. Schulz declared that such SEZs would be administered by a “European growth agency”—so that similar zones could be established across the continent after their implementation in Greece...

In the second decade of the 21st century, all the ills described by chroniclers of early capitalism are re-emerging in Europe. Earlier this year Le Monde reported on child labour in Italy, where tens of thousands of children now quit school to find work to support their parents. The paper quoted Naples’ deputy mayor: “Of course, we are the poorest region in Italy. But we haven’t seen a situation like this since the end of the Second World War… At age 10, these kids are already working 12 hours a day.”

In Germany nearly one quarter of the workforce is employed in the cheap-labour sector, and millions must rely on social welfare payments. A recent report reveals that the number of Germans dependent on regular food handouts increased by 300,000 in 2011, to 1.5 million.

The consequence of the austerity measures demanded by the financial elite and administered by the EU and national governments is mass poverty. Last month Unilever’s chief of European operations, Jan Zijderveld, declared that his company was reconsidering its sales strategy in light of the “return of poverty” to Europe...

The immiseration of the working class described by Marx, and long derided as a fantasy by his petty-bourgeois critics, is being ruthlessly organised by a small, parasitic and fantastically wealthy elite....

The state of international class relations was most aptly summed up by Marx in A Contribution to a Critique of Political Economy: “At a certain stage of their development, the material productive forces of society come in conflict with the existing relations of production, or—what is but a legal expression for the same thing—with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution.”

23--Another dismal US jobs report, WSWS

Despite the continued persistence in mass unemployment in the United States, both parties are continuing with their plans to let federal extended unemployment benefits lapse at the start of next year, which will abruptly end unemployment payments to two million people the week after Christmas.

Commenting on Friday’s report, Chad Stone, Chief Economist of the Center on Budget and Policy Priorities, said, “Policymakers have enacted emergency federal UI in every major recession since 1958, and they have never allowed any of these previous programs to expire before unemployment fell to 7.2 percent or lower.”

If the extended unemployment benefits are allowed to lapse, then only about one quarter of unemployed people would be receiving jobless benefits, the lowest on record, according to the Economic Policy Institute.

The latest jobs report, and the response it has produced from both parties, points to the truth about mass unemployment in the United States. Far from being seen in ruling circles as undesirable, mass unemployment is being used to drive down wages and impose speedups, with the aim of boosting the profits of the corporations and banks that control both the Democratic and Republican parties.

24--A new stage in the attacks on the European working class, WSWS

25--The ECB as financial dictator of eurozone, WSWS

The ECB will increasingly act as a financial dictator over the euro zone, enforcing ever-deeper cuts in the living standards of the working class to provide funds to financial markets for their speculative activities....

No doubt there will be attempts to portray the ECB decisions as a step on the road to economic recovery in Europe. But such assertions are looking increasingly threadbare as millions of people across the continent experience the real impact of government austerity programs that form the core of all financial measures.

Draghi made clear that the austerity measures needed to be continued and deepened. However, such measures set up a vicious circle. By cutting back spending both by governments and workers as a result of increased unemployment and wage-cutting, they reduce tax and other government revenues. This in turn worsens government indebtedness and intensifies the financial crisis.

26--Obama continues the policies of George W. Bush, WSWS

On issue after issue, Obama continued the policies of George W. Bush. He embraced the Wall Street bailout, insuring that countless trillions of Treasury dollars were made available to save the banks, while millions of homeowners were plunged into foreclosure and eviction without any government rescue. His stimulus package consisted largely of tax cuts, designed to win Republican support, and the White House refused to launch a public works program or take any other direct action to create jobs for the millions of unemployed workers. Obama pushed through the bailout and reorganization of the auto industry at the expense of the workers, slashing pay for new hires by 50 percent and cutting pensions and health care benefits for retirees.

After winning the Democratic nomination as the supposedly most antiwar candidate, Obama embraced the Bush administration warmongers, retaining Bush’s defense secretary Robert Gates, barring any prosecution of Bush officials for the lies that accompanied the war in Iraq or the use of torture, and keeping open Guantanamo Bay and other US torture centers. Obama tripled the number of troops in Afghanistan, waged war in Libya, and ordered drone missile strikes that have incinerated men, women and children in half a dozen countries. He is the first US president to assert the right to assassinate any American citizen, anywhere on the globe, based solely on his executive authority, without either legal or judicial sanction.

Obama’s signature social policy initiative, the healthcare “reform” legislation, was a compendium of reactionary measures—some borrowed from the Republicans, like the “individual mandate,” a regressive tax on lower-income working people—implemented for a reactionary purpose: to cut the health care costs of US corporations and the government, by forcing working people either to use fewer health care services or pay for them out of pocket. This was not a genuine social reform, like Social Security or Medicare, but a major step towards denying millions the healthcare they need, an effort that will accelerate after the election, regardless of which candidate wins the presidency.

27--Housing: Less supply does not necessarily mean higher prices, OC Housing

For as long as records on delinquencies were kept, rarely did the rate exceed 2%. Currently, it is over 10%! To make matters worse, the delinquency rate for commercial banks is not declining as fast as delinquencies overall. Over the last two years, the rate dropped from from a peak of 11.2% to the current 10.2%. If lenders continue at that pace, it will take another 16 years for delinquency rates to get back to historic norms.
Are we really at the bottom?

To me it is a source of some consternation that more than 10% of all residential mortgages held by the banks are delinquent. What is the future of those borrowers and their properties. Isn’t it likely that many, if not most, of these properties will be distressed sales as either short sales or foreclosures? Won’t those sales pressure prices?

I consider loan modifications can-kicking. Few of these borrowers are going to permanently cure their loans and sell with equity. Lenders are merely hoping to delay their losses and hope prices will go up which will minimize the carnage. Unfortunately, the liquidation of these bad loans requires an MLS sale — an additional sale the market would not ordinarily absorb. These sales will serve as a drag on appreciation if not a cause of outright price declines. That isn’t what lenders fantasize about....

With ordinary goods and services, buyers are not limited in their ability to raise their bids. With housing they are. A precipitous drop in supply may prompt those few with the ability to bid higher to do so, but it may also serve to drastically reduce sales volumes, which is what’s happening here in the West. This is an important point because most pundits like this guy fail to understand (perhaps through willful ignorance) that less supply does not automatically mean house prices will go up....

There are several reasons to remain skeptical…. Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%. (Read Steve Schaefer‘s piece, Why The U.S. Housing Recovery May Be Due For A Stumble for more on this).

And most of this reduction is entirely due to policy changes at the major banks to comply with the settlement agreement. Lenders simply stopped taking on more REO in hopes they can resolve these bad loans through short sales instead. When banks finally reach their quotas, likely by next spring, they will turn their attention to forcing out the committed squatters....

While the number of distressed sales vis-à-vis regular sales has fallen quite dramatically since March 2009, its decline was more moderate from May 2011 to May 2012, when it went from 31% to 25%. The historical average, though, is far away, at about 5%.

So not just are the bank’s residential loan delinquency rates more than five times historic norms, the share of distressed sales is also five times historic norms. That sounds like a recipe for a housing market bottom, right?

While Goldman expects the percentage of distressed sales to slowly tend toward this average, they understand this could take many years:

In our view, returning to a more normal proportion of distressed sales will take several years, given the large number of borrowers with negative equity, the large current delinquency and foreclosure inventory, and the long current foreclosure timelines.

In other words, the bank’s can-kicking is dragging this out

28--Canadian housing bubble goes into full mania mode – Canadian debt-to-personal income ratio near 145% while US at peak of the housing bubble was at 125%, Dr Housing Bubble
29--Home Prices Are Not Rebounding as Fast as You Think, CNBC   Bottom line, when you un-adjust, normalize, handicap, overlay stimulus periods, and analyze -- based on the massive increase in rates driven purchase power, the distressed mix shift positive skew, pulled-forward effect, and the overwhelmingly more positive sentiment -- the June year-over-year Case-Shiller indices only up 0.1 percent and 0.5 percent respectively and July CoreLogic Home Price Index only up 3.8 percent can be viewed as ‘net’ house price depreciation…and should be very disappointing for those looking for ‘escape velocity’ and a ‘durable recovery,’” says housing analyst Mark Hanson.


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