Saturday, December 1, 2012

Today's links

1--It’s 2007 again, thanks to the US Fed, FT
There are several downsides, quite apart from the fact that the Fed’s policies cannot continue indefinitely and their efficacy diminishes with each round of easing. That is one reason why Jeff Aronson, co-founder of Centerbridge Partners, returned money to investors recently. At this point, after so much credit spread tightening, there is far more potential downside than upside. Other drawbacks, of course, are that households cannot earn anything on their savings, pension funds are badly underfunded and insurers cannot generate enough investment income. The real beneficiaries of easy money are speculators.

Meanwhile, from a narrow financial markets point of view, yet another downside is the fact that market prices have lost any real meaning. Prices suggest that the world is a safer place but is it really?
Probably not. The world is much more frightening today than it was in 2008. Growth in most parts of the world is far slower, while Europe looks to be in recession. Joblessness is a challenge in many parts of the globe. The geopolitical situation is far less stable. Governments are cash strapped and have far less room to support either their economies or their banks.

Yet prices don’t reflect risk at all.

2--Real Median Household Income in the 21st Century, Big Picture (graph)

3--Japan Manufacturing Contracts at Sharpest Rate for 19 Months; New Orders and Output Plunge; Watch the Yen, Mish

4--Downpayments, oc housing news

It was almost required that you have a 20% downpayment to purchase a home for people of those generations. FHA and private mortgage insurance did exist but it was rarely used. It was the very first test you need to past to prove you could own a home the downpayment requirement. When those generations moved into a home their was at least 20% equity already in the home. This protected banks in case of default, it was less risky for them. The homeowner also worked extremely hard to accumulate this downpayment. Therefore they didn’t want to go into default and lose their downpayment, any paid off debt, or gained equity. Unlike current situation, many homeowners had skin in the game
mortgage debt at around $5 trillion in Q1 2003 and, after a peak just over $9 trillion in Q3 2008, slightly lower, at $8.03 trillion (the report provides the exact number), in Q3 2012.
Which means that mortgage debt may have come down by about 11% over the past 4 years (while home prices, mind you, fell 33%, as per Case-Shiller), but it's still 60% (!) higher than it was in 2003. And one thing is certain: it can't stay there, and it won't. We can discuss till we're blue in the face how much it still has to go on the way south, and we can argue about how long that will take, but I would think the main point is very clear.

That is, an economic recovery in the US is not possible when households still have to deleverage to the tune of $2-3 trillion. And no, it's not different here, or this time, and no, Americans cannot carry a 40% mortgage debt increase in 10 years either, so another $2 trillion move south is really the minimum.

Home prices are rising a little, says Case-Shiller now. If that were to last, mortgage debt would even rise again. Unless enormous amounts of the old existing debt were cancelled, forgiven, restructured. Well, it took more than four years to shave off 11%. So you tell me, where would that sudden drop come from?

It's not going to happen, is it? So unless you would want to argue that $8.03 trillion is the new black, something's got to give. Rising home sales and rising home construction only serve to increase the debt. While the graph leaves no doubt that the debt must decrease. By about 25-30% from where it is now ($2-3 trillion of $8 trillion), and 40-60% of the $5 trillion it was in 2003.

6---Against Willful Denseness, The Gods Themselves Contend In Vain, NYT

From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.

This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.

7--'The Outlook Has Already Improved', Laura D’Andrea Tyson, NYT
... The single most important factor behind the projected growth in federal spending is the growth in health care spending, driven primarily by the growth in Medicare spending per beneficiary.
The outlook has already improved as a result of significant changes in the delivery and payment of health care services in the Affordable Care Act. Asa result of these changes, growth in Medicare spending per enrollee is projected to slow to 3.1 percent a year during the next decade, about the same as the annual growth of nominal G.D.P. per capita and about two percentage points slower than the annual growth of private insurance premiums per beneficiary.
Speeding up the pace of the Affordable Care Act changes along with others, such as reducing subsidies for high-income beneficiaries and drug benefits and introducing small co-pays on home health-care services, would mean even larger Medicare savings.
8--- Banking reform: Do we know what has to be done? , VOX

We knew about systemic risk before the crisis

Even before the crisis, it was well known that our financial system was exposed to some key risks. Generations of students have been taught that financial institutions financing long-term investments with short-term liabilities may face bank runs (Stern and Feldman 2004). Pre-crisis, it was also well understood that governments have an incentive to bail out large financial institutions. The implications of a bank going bust for the rest of the financial system and the economy could be dire, so perverse incentives for ‘too big to fail’ institutions to take on too much risk remained (Daníelsson et al. 2001). It was even recognised that risk is endogenous, and that Basel II had the potential to exacerbate this problem (ibid.). For example, in response to an aggregate drop in asset prices, banks may want to – or, because of legislation, have to – sell assets, which in turn leads to a further drop in asset prices and an increase in the chance of default.

9--NDAA 2013: White House and Senate fight over indefinite detention, RT

Now with the Senate’s approval of Sen. Feinstein’s amendment, the indefinite detention provisions from the 2012 NDAA stand a chance of being stripped off next year’s bill. Citing completely unrelated reasons, though, the Obama White House said on Thursday that the president is not likely to accept the defense bill in its current form.

According to the White House, the impetus behind Pres. Obama’s reluctance this time around isn’t that a veto will reauthorize his ability to imprison his own citizens without charge. Instead, the administration argues that separate provisions on the current draft of the NDAA would hinder Pres. Obama’s efforts to relocate the foreign terror suspects currently held at the United States’ military prison at Guantanamo Bay, Cuba.

“When he signed past versions of this legislation, the president objected to the restrictions carried forward by section 1031, promised to work towards their repeal, and warned the Congress that the restrictions on transferring detainees from Guantanamo Bay to foreign countries would in certain circumstances interfere with constitutional responsibilities committed to the Executive Branch,”

reads a statement published this week from the White House Office of Management and Budget.
"Since these restrictions have been on the books, they have limited the Executive's ability to manage military operations in an ongoing armed conflict, harmed the country's diplomatic relations with allies and counterterrorism partners and provided no benefit whatsoever to our national security.”

10--How Rising Home Prices May Actually Stall the Recovery, CNBC

Home prices have been rising steadily for the past several months, but some fear the rapid increase could actually start hurting the housing recovery.

The reason is that the rise in prices is mainly due to investors, mostly large hedge funds, that have been swooping into the most distressed markets and inhaling properties as fast as their plentiful cash will allow. They are turning those properties into rentals, and getting anywhere from 8 to 12 percent returns on their investments, thanks to still hot demand. The trouble is, as home prices rise, those returns shrink.

“The worry with investment demand is that the very recovery in prices that it is driving will eventually reduce rental yields and undermine the investment case,” warns Paul Diggle of Capital Economics.
Buyers are coming back to the housing market in ever greater numbers, as an industry index measuring contracts to purchase existing homes surged 5.2 percent in October from September.
The monthly gauge of pending home sales from the National Association of Realtors was also revised higher in September and is now up 13.2 percent from October of 2011. This is a forward looking indicator for closed sales one to two months from now.
“We’ve had very good housing affordability conditions for quite some time, but we’re seeing more impact now from steady job creation and rising consumer confidence about home buying now that home prices have clearly turned positive,” wrote Lawrence Yun, chief economist for the NAR in a release.

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