Friday, September 21, 2012

Weekend links

 1--Ireland timelapse photo journal, The Atlantic

2--Consumer collapse draws nearer, Burning Platform

3--Time to Abolish the American Dream; The Waning of the Modern Ages, counterpunch

4--Most institutional investors believe QE will fail, Trimtabs

 Three years from today, what will be your opinion of the ECB’s unlimited bond buying and the Fed’s open ended purchases? No surprise to me, 77% are saying that the easings will be a complete failure that actually hurts the economies. Only 10% believe that it will be a modest success. Even worse 4% say they will be a big success. The rest say they are not sure.

 Despite this long term negative outlook by professional investors stocks are up 16% since the current form of easing was pre-announced early in June. What is going on? Is this crazy or am I crazy? I think we are living in a matrix reality where the global central banks can currently get away with artificially elevating asset prices via printing money.

 The other day I reported that everyone seems to believe that as long as the Fed agrees to print money forever, the stock market cannot go down. Forget the fact that there is no new investor money going into stocks. Forget the fact that the only buyer over the past year and half, companies who had been shrinking the float, buying back more shares then selling, have become net sellers. Companies are now selling more shares then they are buying for the first time since this past April. What happened this past April? Stocks started selling off, dropping 11% before this QE was pre announced early June.

 We can now add Japan to Europe and US central bank printing huge amounts of money. None of this means anything except maybe to keep stock prices elevated and help get Mr. Obama reelected.

5--France's economic conditions dim; Eurozone core growth in trouble, sober look

6--Here comes the kool aid: HELOC abuse projected to rise, OC Housing news

Home prices in the second quarter increased 2.2 percent from the previous three months, the best performance since the fourth quarter of 2005, according to S&P/Case-Shiller data. The lowest mortgage rates on record, a smaller inventory of available homes and a drop in distressed property sales have fostered the pickup.

7--Betting the house with the Fed – Stock market at levels last seen in December of 2007 – Examining what has changed and impact of Federal Reserve on housing. QE3 preemptive strike on fiscal cliff?Dr. Housing Bubble
The Case Shiller Index is 23 percent lower than it was in December of 2007.  As previously noted, home prices have started moving up in 2012 but this is largely a function of low interest rates (probably another reason for QE3) and stifled inventory.  The same issues of weak household income are popping up this time around.  That is why FHA insured loans are so popular during this recent move up with housing values.  Do not confuse this with a booming economy.  This is merely a system that is allowing more leverage with stagnant household incomes.

Take a look at the U6 measure of underemployment between 2007 and 2012.  In December of 2007 this was at 8.8 percent and today it is at 14.7 percent.  Again, you need to try to examine where this recent stock run has come from.  Take a look at government debt.  From 2007 to 2012 the Federal Government went from $9.4 trillion in debt to over $16 trillion.  A 70 percent increase in national debt resulted in GDP going up 9 percent over this half decade.

Take a look at the Fed balance sheet.  This is up a stunning 220 percent over the last five years.  So much for that being a temporary move.  With QE3 on the horizon they are likely to push this above $3 trillion.  This is why you are now seeing inflation stick in items like food, healthcare, education, and energy.  However household incomes are not moving up.

New home sales are down 39 percent from where they were in December of 2007.  Total household debt has deleveraged by 6.5 percent in this exact period.  Does this justify the current move in stock values?  Domestically it would appear this is not the case but remember many US companies now largely derive profits from abroad.

 8--Bank-Owned Sales Fall to Lowest Point Since April ’09, Seattle Bubble
Are banks withholding distressed inventory?
You be the judge.

9--Home Sales on Track to Hit 5-Year High, Realty Check

Sales of existing single family homes and condominiums beat expectations for August, rising to the highest level since May of 2010, when the government’s home buyer tax credit juiced sales temporarily. This time it could be argued that the government stimulus behind sales is record low mortgage rates, but that may not be all of it.

 Close to one third of the homes that sold in August went to buyers using all cash, despite average rates on the 30-year fixed sitting around 3.6 percent. Rates appear to have less of an impact than hoped. Witness mortgage applications to purchase a home fell 4 percent last week, even as rates fell to record lows on the Mortgage Bankers Association’s weekly survey.

“The strengthening housing market is occurring even with difficult mortgage qualifying conditions, which is testament to the sizable stored-up housing demand that accumulated in the past five years,” said the National Association of Realtors’ chief economist Lawrence Yun.

 With the August jump of 7.8 percent from July, Realtors now say they are confident that home sales for all of 2012 will hit their highest level in five years. They do warn that there are still “frictions” in the market, not the least of which are about 12 million borrowers who owe more on their mortgages than their homes are worth. These so-called “underwater” borrowers are largely stuck in place, unable to cover their debt and unable to move up.

 Bottom line, housing continues to recover, but the bounce still has to be put into the perspective of how much damage was done,” notes Peter Boockvar at Miller Tabak. “Looking specifically at single family homes, at a sales level of 4.30mm, it's back to where it was in 1998 and of course still well below the bubble high of 6.34mm in Sept '05.”

10--: Mortgage Rates Back To Record Lows, calculated risk
 First, from Freddie Mac: Mortgage Rates Back To Record Lows

    Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing fixed mortgage rates at or near their all-time record lows helping to keep homebuyer affordability high. The average 30-year fixed rate mortgage matched its all-time record low at 3.49 percent, and the average 15-year fixed fell to a new all-time record low at 2.77 percent.

And from David Wessel at the WSJ: Depression Lessons: Should Fed Stand Down to Compel Congressional Action?

    As [economist James] Tobin put it in the American Economic Review in June 1965: “The monetary authorities should have tried harder to promote expansion in 1933-36 and 1937-40 — nothing would have been lost and something might have been gained. Throughout the period the authorities were too little concerned with deflationary risks immediately at hand and too much concerned to forestall the hypothetical future dangers of excess liquidity.”

    ... Friedman and co-author Anna Schwartz quote at length from a December 1935 technical memo from Fed files that made the case for tightening the credit spigot. ... The subsequent tightening by the Fed was, Friedman and Schwartz concluded, a mistake followed by “a failure to recognize that the action had misfired.”

11--MOST: “The reflation trade may not have long legs”, ft.com

Economic theory suggests that a highly dovish Fed should increase inflation premiums. The fact that inflation expectations have remained well behaved is very notable, in our view. They could yet keep moving higher, but the absence of a more significant jump suggests that the reflation trade may not have long legs.More relevant though is what inflation expectations say about growth. Growth and inflation are close cousins, and it’s doubtful that there will be a meaningful move higher in inflation expectations until the recovery appears more significant and durable. Given the modest move higher thus far, it doesn’t bode well for growth and thus the path for risk assets, in our view.

12--A Flaw in the QE Expectational Transmission Mechanism, pragmatic capitalism
“Inflation expectations can rise in the near-term without a long-term follow-thru in wage inflation. It’s my belief that people tend to spend out of current/expected income. So, if inflation expectations rise then there will only be a follow-thru spending effect if wages actually rise as a result (or subsequently rise to sustain current spending)....

 What you see is two big spikes in inflation in the last few years from QE1 and QE2.  But what you also see is a persistent decline in wages.  Ie, the spending power of consumers isn’t following through from the higher inflation expectations.  The result is weak demand and a weak economy.  Ie, QE worked in QE1 because we were in a deflationary spiral, but QE2 failed and QE3 is also likely to fail because it won’t result in a follow-thru in consumer spending because it lacks a transmission mechanism to cause a wage spike.”...

 inflation expectations surged when QE2 was unveiled.  And CPI rebounded briefly before it became clear that QE2 wasn’t causing the hyperinflation or even high inflation that many expected.  More recently, we have a spike in inflation expectations following QE3.

But look at the one constant through all of this – declining wages.  The impact of falling wages and the relationship with inflation is much clearer in figure 1, but the basic gist of the thinking here is that it doesn’t matter at all what near-term inflation expectations are if there isn’t a transmission mechanism for sustained translation of higher expected inflation into wage inflation which would be consistent with higher economic output and lower unemployment.

Instead, what we’re seeing is a glorious environment for corporations where they’re earning record profits, employees have no pricing power, margins are surging and the sagging demand from the weak consumer results in no urgency to boost wages or hire en masse.  And so the problem with QE is that there is no transmission mechanism through which it sustains high inflation expectations which lead to sustained wage inflation.  As Fed governor Evans said yesterday, fears of Fed-fueled inflation have been “consistently wrong.”  That’s because the transmission mechanism to cause sustained inflation is very weak.  Of course, the Fed isn’t just trying to generate inflation, but the environment they’re trying to create would certainly be consistent with higher inflation.  So in the near-term markets fret about “money printing” and hope for lasting impacts from “wealth effects”, but the expectations consistently fade without any lasting impact….

 13--Net worth of richest Americans soars by 13 percent in 2012, WSWS

14--Incomes Fell or Stagnated in Most States Last Year, WSJ

15--First Spanish Bailouts Conditions Revealed: Pension Freeze, Retirement Age Hike, zero hedge


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