Saturday, November 3, 2012

Today's links

1--A new turn in the euro zone financial crisis, WSWS

The eurozone financial crisis is set to deepen following this week’s release of debt projections for the Greek economy. Budget estimates show that instead of peaking at 167 percent of gross domestic product, as predicted last March when the so-called bailout package was put in place, the debt ratio will hit 189 percent this year, rising to 192 percent in 2014—well above the worst case scenarios of just eight months ago.

With the Greek government expected to effectively run out of money by November 16, the eurozone crisis is certain to be a major issue at the G-20 finance ministers’ meeting beginning in Mexico City on Sunday. The German government’s refusal to make available any more money means that threat of a Greek default and a full-blown financial breakdown is back on the agenda.

2--After the AAPL announcement, earnings expectations for S&P500 take a sharp turn for the worse; Barclays remains bearish, sober look Europe, PMIs were broadly weaker, suggesting downside risk to euro area 4Q12 GDP forecasts. The decline in the EU new orders-less-inventories was particularly discouraging; we had viewed improvement in these series in August and September as an early sign that Asian exports and global trade would stabilize and improve in 4Q12 and into 2013.
So, broadly, although some signs of stabilization have emerged, data remain mixed and do not yet support a pickup in growth in S&P 500 forward earnings. We think the moderation in expectations is a step in the right direction, but believe there is more right-sizing to come.

3--The Economist on Romney’s Fiscal Policy, Baseline Scenario

“Yet far from being the voice of fiscal prudence, Mr Romney wants to start with huge tax cuts (which will disproportionately favour the wealthy), while dramatically increasing defence spending. Together those measures would add $7 trillion to the ten-year deficit. He would balance the books through eliminating loopholes (a good idea, but he will not specify which ones) and through savage cuts to programmes that help America’s poor (a bad idea, which will increase inequality still further). At least Mr Obama, although he distanced himself from Bowles-Simpson, has made it clear that any long-term solution has to involve both entitlement reform and tax rises. Mr Romney is still in the cloud-cuckoo-land of thinking you can do it entirely through spending cuts: the Republican even rejected a ratio of ten parts spending cuts to one part tax rises.”
4--Obama's Social Security Reform: A Grand Bargain or Betrayal?, real news video

5--America's savings surprise, project syndicate

There is no way to predict what the saving rate will do next. Households’ need to rebuild wealth, and the lack of access to credit, implies that the saving rate could continue to rise from the 6.4% recorded in June (the most recent month for which data are available) to the 9% rate that America averaged in the decades before 1985. If that were to happen quickly, total spending could decline, pushing the economy into a double-dip recession. But if households instead become optimistic about the pace of recovery, they might choose to cut back on their saving in order to maintain consumption, despite weak earnings. Only time will tell.
6--Nonpartisan Tax Report Withdrawn After G.O.P. Protest, NYT

The Congressional Research Service has withdrawn an economic report that found no correlation between top tax rates and economic growth, a central tenet of conservative economic theory, after Senate Republicans raised concerns about the paper’s findings and wording

7--Factory Orders Rise 4.8% but Still Point to Weak Investment, money news

Demand for core capital goods, viewed as a good proxy for business investment plans, edged up a slight 0.2 percent in September following a 0.3 percent rise in August. The two modest gains followed two months of huge declines as business investment remains weak.

Businesses have grown more cautious for a number of reasons. Many are concerned about the economic outlook overseas. Europe's financial crisis has pushed many countries in the region into recession. That has cut into U.S. exports and corporate profits. Growth has also slowed in China, Brazil and other big developing nations which are major markets for American exports.

Companies are also hesitant to commit the money to major expansion and modernization projects without knowing whether large tax increases and big government spending cuts will take effect in January should Congress fail to reach a budget deal to avert them.

8---Hedge Funds Drawn to Fannie-Freddie Risk-Sharing Plan, Bloomberg

. Only 0.11 percent of loans guaranteed by Fannie Mae in 2011 were more than 90 days delinquent as of June 30, compared with 12.3 percent for 2008 debt, according to the company’s disclosures. ...

Taxpayer Responsibility
“The taxpayer is directly on the hook for nine out of every 10 loans getting made,” Michael Heid, president of Wells Fargo & Co.’s home-loan unit said at the Mortgage Bankers Association annual conference last week. That includes loans backed by the Federal Housing Administration, and other agencies.

Discussions Involve
The discussions involve recent mortgages with loan-to-value ratios, or LTVs, of less than 80 percent, he said. Insurers typically focus on debt with higher ratios because Fannie Mae and Freddie Mac’s federal charters only require such protection when homebuyers use downpayments of less than 20 percent

9--Reaction to the BLS: Wrong Again – Overstates October Employment Growth, trimtabs

Beginning in June we observed a steady increase in year-over-year growth in real-time income tax withholdings. That means wages and salaries were growing due to an increase in jobs. In fact, wage and salary growth began to accelerate in July, continued in August, peaked in September and then slowed in October. The BLS completely missed the June through September acceleration in growth. Worse still, the BLS is missing the deceleration in growth in October.

We postulated that the increase in tax withholdings over the summer was due to job growth in interest rate sensitive sectors of the economy, such as single family and multi-family construction, home sales, mortgage refinancing, and vehicle sale. But, we had one big caveat. In our August and September reports, we stated that growth was probably temporary and would end in October due to the seasonal nature of construction and home selling activities. Our predictions have been correct. Of particular concern, however, is that beginning in October, year-over-year growth in real-time income tax withholdings has slowed. That means there has been a slowdown in job growth. Our tax based employment model, therefore, reported a 33% pullback in October job growth to 140,000, down from our September estimate of 210,000.

How does that square with what the BLS just reported? The BLS reported that 171,000 jobs were created in October compared to our estimate of 140,000. But what is really important here is the fact that the BLS is reporting increasing job growth while we are reporting a decrease in job growth. The BLS completely missed the job growth pop this past summer that is now becoming apparent two months late. Worse still, the BLS is also going to miss the slowdown in employment that is going on right now and will likely continue through the end of the year

So what, in our view, is driving the current slowdown?

We believe the slowdown is due to uncertainty surrounding the massive new taxes associated with Obamacare, expiring federal stimulus programs, and likely cuts in military spending all beginning January first. Without additional clarity concerning taxes and spending priorities, we expect the negative impact on economic growth to continue.

10--Home prices increase while wages stagnate, Dr Housing Bubble

This current momentum in housing isn’t being caused by flush state budgets or solid wage growth. No, this is being caused by low inventory, big investors crowding out households, and a concerted effort to push mortgage rates lower

11---What Today's Jobs Report Says About the Housing Market, CNBC

When you dig down into the numbers, however, you can see where the numbers are not quite as rosy as some would hope for both home buyers and builders.

While overall construction added 17,000 jobs in October, residential-building construction employment fell by 2,000. Residential specialty contractor jobs increased by 6,700, which speaks to the real root of today's housing recovery.

All-cash investors are leading the gains; they buy distressed properties and then repair and remodel them to turn them into rentals. It's no wonder remodelers are seeing greater gains than the home builders.

An industry index of remodeling finally climbed into the positive in October, making a significant jump to its highest level since the end of 2005. Both current conditions and future expectations saw gains on the National Association of Home Builders' remodeling index (RMI). The builders claim it is not just investors, but a result of rising home equity.
Pending mortgage regulations could lock today’s tight lending standards in place and result in nearly 20% fewer mortgages being issued in the coming years, restraining home sales and construction, according to a new study....
Together, the new rules “will raise the cost of borrowing for millions of home buyers and tighten access to credit beyond pre-boom standards, a period of much more responsible lending than in the lead-up to the housing crisis,” says the AAF paper.
Yes, it will. These regulations should be embraced by everyone who cares about seeing their tax dollars kept safe from dodgy loan originators.
Of course, regulators have yet to finalize the “qualified mortgage” and “qualified residential mortgage” rules. As a proxy for where those rules might land, the report roughly assumes that today’s tighter lending standards won’t return to those that prevailed before the housing boom as a result of the impending regulation.
It would make permanent the current, tighter standards,” says Douglas Holtz-Eakin, the president of the AAF. While he says he won’t pretend that his estimate is “perfect,” he says it is a “sensible” forecast.
13--97% of All U.S. Mortgages are Backed by the Government, washington's blog

I heard a recent talk by Richard Wolff – Professor of Economics Emeritus at the University of Massachusetts in Amherst (PhD in Economics from Yale) – where Wolff said that 97% of all U.S. mortgages are either written or guaranteed by the government.
As Bloomberg explained last August:
Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009.
There are supposedly plans in Washington to wind down Fannie and Freddie. Critics say that would destroy the “recovery” in housing.
If continuing to throw money at Fannie and Freddie would stabilize the economy, I might be for it – even though it is not free market capitalism. I am not wed to either liberal or conservative ideologies, and am instead simply motivated to do whatever will work to stabilize the economy and help the most people.
But as I noted in January:
Most independent experts say that the government’s housing programs have been a failure. That’s too bad, given that the housing slump is now – according to Zillow’s – worse than during the Great Depression.
Indeed, PhD economists John Hussman and Dean Baker, fund manager and financial writer Barry Ritholtz and New York Times’ writer Gretchen Morgenson say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.
Many also accuse Obama’s foreclosure relief programs as being backdoor bailouts for the banks. (See this, this, this and this).
And Freddie and Fannie’s recent settlement with Bank of America – a couple of billion – has been criticized by many as being a bailout.
In “BofA Freddie Mac Putbacks Resolved for 1¢ on $”, Barry Ritholtz notes:
Bank of America settled numerous claims with Fannie Mae for an astonishingly cheap rate, according to a Bloomberg report.
A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac....
[Edward] Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp., which has enough problems to deal with. Though BofA would surely dispute that analysis, it’s easy enough to see where the feds don’t want that outcome.
But how sharp is Freddie if all it can do is squeeze a $1.28 billion payment out of a giant customer in exchange for relinquishing fraud claims on $117 billion worth of outstanding loans? The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?...

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: “This is not a monetary problem.”
The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.
The fraud and obfuscation now underway in Washington to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason. 

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