Wednesday, October 3, 2012

Today's links

1--Why we Need to Implement an Energy Transition - Quickly, oil price

2--Refinancing activity hits 3-YR high, mortgage apps shoot up 16.6%, Housingwire

3--US car sales soar, IFR

US car sales for September reported as strongly as could be hoped for and the rising trend continues. Annualised sales were forecast to be running at 14.5 million but came up in lights at 14.88 million. This not a trifle.

During the “pre-crash” consumer boom, the run rate for US auto sales was commonly in the region of between 16 and 17 million. This fell off the cliff (not the fiscal one) in 2008, bottoming out in 2009 at under 10 million, representing a loss of over 40% of sales. No wonder General Motors went to the wall – or would have done, had the Bush administration (not the O’Bama one) stepped up and effectively nationalised the remains of the company.
Since then, new car sales have been on a pretty steady growth trajectory and should the trend continue, then we should be back to sales of 16 million by mid 2013. That is a pretty powerful recovery in anyone’s book and one which both underlines and underpins America’s economic recovery.

4--Bowlesing Toward Betrayal, NYT

So, is my timing good or not? Right after I warn about the risk that Democrats, including the president, might betray the mandate they seem likely to get for preserving the safety net, we learn that Senate leaders are at work on a plan based around, well, you guessed it:
If those efforts failed, another plan would take effect, probably a close derivative of the proposal by President Obama’s fiscal commission led by Erskine B. Bowles, the Clinton White House chief of staff, and former Senator Alan K. Simpson of Wyoming, a Republican. Those recommendations included changes to Social Security, broad cuts in federal programs and actions that would lower tax rates over all but eliminate or pare enough deductions and credits to yield as much as $2 trillion in additional revenue.
Just to say, this would be politically stupid as well as a betrayal of the electorate. If you don’t think Republicans would turn around and accuse Democrats of cutting Social Security — probably even before the ink was dry — you’ve been living under a rock.

5--Bernanke attempted to convince people that what the Fed is doing is reversible, zero hedge
His words:

"At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size."

 Let me first focus on Ben’s last words, “return its balance sheet to a more normal size”. What Ben has admitted is that the current balance sheet of the Fed is “abnormal”. He has also said that he is going to grow the balance sheet further to make it more abnormal (QE3).

5--Court upholds NDAA; stay extended on indefinite detention injunction, RT

6--Who has the most debt in the US?, The Wilder View

7--Fiddling at the fire, Nouriel Roubini, economonitor

a hard landing becomes more likely in 2013, as the stimulus fades, non-performing loans rise, the investment bust accelerates, and the problem of rolling over the debts of provincial governments and their special investment vehicles can no longer be papered over. And, given a new leadership’s caution as it establishes its power, reforms will occur at a snail’s pace, making social and political unrest more likely.

8--The Fed will buy over half of all new agency MBS, sober look
So much for shifting the US mortgage business into the private markets. Going forward the Fed will be a buyer of more than half of all new agency MBS issued. At this point one might as well make the GSEs part of the Fed or give the central bank a mortgage origination capability.
9--Agency MBS market will be shrinking rapidly, sober look
The chart below shows fixed rate agency MBS issuance since the financial crisis. With the Fed taking out some half of this gross issuance (see post), one would think there should be paper left for other investors, right
10--Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened, Bloomberg
11--How Obama plans to sellout supporters following election, NYT
First, senators would come to an agreement on a deficit reduction target — likely to be around $4 trillion over 10 years — to be reached through revenue raised by an overhaul of the tax code, savings from changes to social programs like Medicare and Social Security, and cuts to federal programs. Once the framework is approved, lawmakers would vote on expedited instructions to relevant Congressional committees to draft the details over six months to a year.
If those efforts failed, another plan would take effect, probably a close derivative of the proposal by President Obama’s fiscal commission led by Erskine B. Bowles, the Clinton White House chief of staff, and former Senator Alan K. Simpson of Wyoming, a Republican. Those recommendations included changes to Social Security, broad cuts in federal programs and actions that would lower tax rates over all but eliminate or pare enough deductions and credits to yield as much as $2 trillion in additional revenue.
Finally, they would vote to put off the automatic spending cuts, known as sequestration, and tax increases scheduled to hit all at once in January — but with some deficit reduction down payment to signal how serious Congress is.
Mr. Obama has said he would not allow Congress to simply pass a new law to override the $1 trillion in automatic cuts agreed to in the Budget Control Act of 2011, but senators said they believed the White House would go along with a deal that locks in as much as four times those savings in exchange for canceling the automatic cuts.
In the final years of the German Weimar Republic, between 1930 and 1932, the austerity program implemented by the BrĂ¼ning government in response to the flight of capital and the world economic crisis precipitated the catastrophe that followed: mass unemployment, Nazism and war. For years, this has been regarded as evident and was taught in schools. However, the present developments in Europe show that the ruling class is not capable of learning from history.
In recent days, the Greek and Spanish governments have agreed to austerity measures that far exceed the emergency measures implemented by the BrĂ¼ning government.
Even though Greece has been in recession for six years, the Greek government has agreed a further round of austerity amounting to €11.5 billion. According to the government’s own calculations, economic output will sink by 25 percent compared to 2008—a staggering decline. Most of the cuts are being made in pensions, health and social expenditure, impacting the poorest layers of the population....It is not reason and noble ideals that determine the politics of the ruling class, but social interests....

Without breaking the power of the financial aristocracy, a catastrophe cannot be avoided. What is called for is a social revolution. The major banks and corporations must be expropriated and placed under democratic control, the profits of the speculators must be confiscated, and huge fortunes must be massively taxed.
The “fiscal cliff” is being seized upon by the White House and both big business parties as a pretext to implement austerity measures of historic proportions. Cuts targeting Medicare and Medicaid, Social Security, public education, food stamps and other vital social programs will mean impoverishment and suffering for millions of working class families.
There is a conspiracy of silence between the Democrats and Republicans and the presidential campaigns of Barack Obama and Mitt Romney, aided by the media, to exclude these bipartisan budget-cutting plans from the election campaign. The American people are to be given no opportunity when they go to the polls to express their will in relation to measures that will impact them severely. Instead, the election hype is being used as a smokescreen behind which the ruling class plots an intensification of its anti-working class agenda....

According to the Times, a bipartisan group of senators is joining forces in a three-step process to head off the “fiscal cliff” of tax increases and sequestrations. They will first try to reach agreement on a deficit reduction target—in the area of $4 trillion over a decade—to be attained through an overhaul of the tax code and cuts to Medicare, Social Security and other federal programs. Congressional committees would be tasked with drawing up the details for implementing the cuts....

Behind the spectacle of political mudslinging, mind-numbing attack ads and empty campaign rhetoric, class war is being prepared at home and military war is being prepared internationally, with Iran looming as the first target.

15--Banks Make Out like Bandits on QE3, economic populist

Quantitative easing was all about mortgage backed securities. We warned about QE3 being a gift to banks here and in this in depth piece.
The Financial Times:
Bank profits from new mortgages have soared since the Federal Reserve began its third round of bond purchases two weeks ago, fuelling the debate over the fallout of the latest dose of quantitative easing.
“For banks which are mortgage originators this [QE3] was some of the best news they could possibly have heard,” said Steven Abrahams, mortgage strategist at Deutsche. “They will continue originating loans and selling them into the market at a significant premium.”
The interest banks pay on mortgage bonds has dropped from 2.36 per cent on September 12, the day before the Fed announced its programme, to as low as 1.65 per cent last week. It edged up to 1.85 per cent on Monday.
That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4 per cent and selling the loans into the secondary market has risen to around 1.6 per cent. That is higher than the 1.44 per cent spread they pocketed before QE3 and significantly greater than the 0.5 per cent they earned on average in the decade between 2000 and 2010.
16--Refis soar, Businessweek

President Barack Obama’s administration has helped fuel gains in refinancing this year by making it easier for borrowers with Fannie Mae and Freddie Mac loans without home equity to qualify and by reducing costs for homeowners with older Federal Housing Administration loans.

17--Severely underwater borrowers could refinance to lower monthly mortgage rates, free rate

HARP, also known as Obama Refinance, is a non-traditional mortgage refinance program which runs through the end of 2013. This program is for borrowers who have loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009. With the latest update, now called HARP 2.0, loan to value maximums were removed so that even severely underwater borrowers could refinance to lower monthly mortgage rates. HARP does not require an appraisal or other documentation, although borrowers may find that each lender is different with some having their own requirements.


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