Thursday, December 27, 2012

Today's links

1---Tokyo Almost As Irradiated As Fukushima, washington's blog

 We’ve documented the spread of radiation from Fukushima to Tokyo for a year and a half. See this, this, this, this, this and this.
Unfortunately, as the following recent headlines from Ene News show, things are only getting worse:
  • Tokyo getting 5 times more radioactive fallout than prefectures closer to Fukushima
And we’ve previously noted that the radiation will spread worldwide (by water and air). For example:
A new study says that the West Coast will get slammed with radioactive cesium starting in 2015

2---The inner workings of house prices and housing markets (redux), oc housing

3---Mortgage Recovery Still Rocky, CNBC

Up to now the housing recovery had been fuelled by investors buying up thousands of distressed properties, the bulk of them in western states like Arizona, Nevada and California. This helped shrink supplies in those states and boost prices by double digits. While it may seem like the distress is quickly flying out of the market, that may not be the case just yet.

The percentage of mortgages 30 to 59 days past due rose just over 10 percent in the third quarter of this year from the previous quarter and is now up 3.6 percent from a year ago, according to a new report from the Office of the Comptroller of the Currency (OCC).
Seriously delinquent mortgages, defined as 60 or more days past due, remained unchanged from the previous quarter and are down nearly 11 percent from a year ago.

4---The echo housing bubble across the United States – Rising home prices in the face of stagnant household incomes. How the Fed is manipulating the monthly payment to keep home prices inflated., Dr Housing Bubble

I’ve gotten countless e-mails from people being outbid for homes that they would like to purchase to live in and start a family because a flipper or a big Wall Street fund is seeking a better yield got their first. This is a modern problem in our housing market. Remember Paulson on his knees begging Congress for the banking bailouts to help the working and middle class? So much for that because many of these same banks are offloading properties to other financial institutions so they can jack prices up and rent them out or flip them to Americans that actually bailed out the financial sector in the first place. Higher home prices do very little good if incomes are not rising. That was lesson number one from the first housing bubble.

5---MBS investors’ trade group moves to counter adverse put-back rulings, Reuters

6---It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! zero hedge

...But that's just the beginning - the rabbit hole goes so much deeper...
Recall that as we have been describing for the past 3 years, a primary driver of "growth" in the US market, if not economy, has been the ability to transform asset and liability exposure off the books using various shadow conduits. The primary such conduit is and has always been repo funding (and various other forms of limited and/or unlimited rehypothecation made so popular after the collapse of MF Global). What repo does is it allows banks to exchange their holdings of Security X (in this case trasury) in exchange for nearly par cash courtesy of some custodian bank - and when it comes to the US non tri-party repo market there are only two: State Street and Bank of New York.

The biggest benefit of Repo financing is that the bank can still hold the original pledged security on its books for Fed "supervision" purposes, even as it obtains fungible cash equivalents via repo, cash which it can then use for whatever downstream purposes it desires such as purchasing stocks. This is where it gets confusing, and certainly confused our friends at Bloomberg who arrived at the wrong conclusion in their analysis.

A good summary of what really happens under the hood when account for repo comes from Citi's brilliant head of credit, Matt King, and his legendary note from September 5, 2008 "Are The Brokers Broken?" (which should be required reading for everyone), where he described the scheme as follows:

Paragraph 15 of the accounting rule FAS 140 stipulates that the amount referred to on the balance sheet statement need only be “collateral pledged to counterparties which can be repledged to other counterparties”. A further portion of the financial instruments owned – which is in many cases substantial – is reported in the 10-Q footnotes of “collateral pledged to counterparties which cannot be repledged”. An example might be tri-party repo, where until recently some custodians could not cope with the administrative complications of rerepoing received collateral. Although the assets themselves have always featured on the balance sheet, the fact that this non-repledgeable portion too is funded on repo is less widely appreciated. The combined volume – once it is arrived at – comes close to 50% of all financial instruments owned.
And this is where everyone loses the plotline, because the reality is that virtually half the balance sheet of US brokers can be repoed back to custodians, in the process leading to double, triple, and x-ple counting a single asset serving as deliverable collateral, and using and reusing (if need be), the cash proceeds, net of a token haircut (or no haircut in the case of English rehypotecation transactions), every single time purchasing riskier assets to generate a return on a return on a return of the original investment. In short: the magic of off-balance sheet accounting which allows brokers to abuse their already TBTF status and lever any underlying asset to the helt and beyond.

Think of Shadow Banking as your own in house synthetic structured product, allowing virtually unlimited leverage.

7---The Most Overlooked Statistic in Economics Is Poised for an Epic Comeback: Household Formation, Atlantic

Housing probably isn't going to snap back to its pre-bubble peak in the next year. But even normal growth in residential investment would be huge. If residential investment simply returns to its long-term average (going back to the 1990s), "it would add 1.7 percentage points to overall growth in the coming year," Neil Irwin reported for the Washington Post, which would put overall growth in the coming year at about 3.2% -- almost twice as strong as economic growth in 2011, the year that supplies most of these graphs' data.
Housing is the key. And it all starts with formation.

8---US investors exiting equity mutual funds, sober look
2012 was another rough year for equity mutual funds business. In spite of relatively strong stock market performance, retail investors continued to pull their money out. This trend has been in place for quite some time (see discussion), but has accelerated this year. The outflows from US equity mutual funds were roughly $154bn this year.

Source: ISI Group
9---The S.E.C. at a Turning Point, NYT

10--Canada's dirty little sub prime loan secret threatens to sink housing market, peoples world

11---The Soft Landing, The Greater Fool

Across Canada resales have dipped below year-ago sales levels for eight consecutive months. New home construction has tanked, and everywhere new project financing is drying up. Mortgage broker ranks have thinned dramatically, and suddenly it seems letting residential real estate suck up a third of the national economy was, er, a bad idea. At least if you’re going to purposefully deflate it.
So what’s this?

While making a big deal of capping CMHC mortgage insurance as it nears $600 billion – theoretically putting the brakes on high-ratio, high-risk 5%-down deals – F has now thrown a new $50 billion into the marketplace, but this time to the private sector. Companies like Genworth have just received a massive 20% hike in their allowable coverage, which means the federal government will guarantee $300 billion worth of that company’s debt, up from $250 billion.

In fact so quiet was this announcement, it wasn’t announced at all. Genworth revealed F’s little Yuletide yummy in a media release that helped its stock soar last week, jumping 3% in a single day. And why not? It’s a gift. New legislation about to take effect lets Genworth provide bulk insurance coverage at the same time CMHC is being pushed out of that market. It also allows Genworth to take money previously earmarked for a guarantee fund and use it, presumably for more high-ratio lending.
Already taxpayers are on the hook for over half the $1.2 trillion in residential mortgages outstanding in Canada. It’s been this ocean of money which banks can hand out without risk – knowing any default will be covered by fed-backed insurance – which helped push prices skyward. Should the housing market stall and crash back to earth, Ottawa would suddenly have a liability the size of the entire national debt to deal with.


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