Thursday, January 31, 2013

Today's links

1---The only chart you need on the GDP report, WA Post


The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

2---Bull market or prelude to a bust? MSN Money

The markets are nearing levels not seen since 2007 -- but let's not forget the crash that followed those highs. Conditions now look eerily similar.....
Risks remain
People are ignoring the very real fiscal policy risks the U.S. faces over the next few weeks; yes, the debt-ceiling debate was postponed until May, but the "sequester" budget cuts and the need for a new federal spending plan hit much sooner.
We're also seeing rising resistance of inflation hawks at the Federal Reserve, the European Central Bank and elsewhere to the rich world's experiment with extreme monetary policy easing (which is growing increasingly ineffectual).
People believe Europe has been fixed. (It hasn't, and Germany is falling into recession.)
People believe 2% inflation will end Japan's multidecade malaise. (It won't.)
People believe tapped-out U.S. consumers and the nervous corporate sector will spend and invest despite the uncertainty, stagnant wages and new taxes. (They won't.)
People believe both earnings growth and growth of the gross domestic product will reaccelerate later this year, yet I see clear signs of lost ...

The CBOE Market Volatility Index ($VIX -0.07%), a commonly used gauge of market unease, is finally showing signs of caution. A more obscure gauge of this in the options market, the Credit Suisse Fear Barometer, has been showing the same for weeks. Maybe the fog of irrationality and lingering good vibes from the fiscal cliff deal are ending. Whatever the cause, options traders are starting to worry about downside risk again -- and are paying up for protection from downside losses.
  •  Despite impressions to the contrary, fourth-quarter earnings season is turning into a dud. As of Jan. 25, with 47% of the S&P 500 reporting, earnings are tracking 6% below the $25.51 consensus estimate on Jan. 4. Of those companies that have reported, they've collectively missed the consensus estimate for their share of total S&P 500 earnings by 13%. Because of this, the 53% of companies left to report had better be bringing good numbers, or we could be looking at an outright drop in earnings per share versus last year.
  • So while we face the prospect of negative EPS growth this quarter, bottom-up Wall Street analysts (a traditionally bullish bunch) are looking for earnings growth to reaccelerate to a mind-numbing 23% rate by the fourth quarter of 2013.
    That just won't happen. Nor is GDP growth going to reaccelerate to more than 3% later this year, as many economists believe.

    Weak earnings. Weak economy. Fiscal austerity and political uncertainty. Higher taxes. Narrowing market participation. Weakness in industrial metals.
    And yet, extreme bullish sentiment and one of the least volatile rallies in the past 40 years.
    By all indications, the current surge is a blow-off top, just like the one we had in 2007.

    3---Bernanke Still Pouring Shots Of QE To Markets Already Drunk On Liquidity, Forbes

    ....the holdings of cash and marketable securities of the top 100 companies in the S&P 500 (SPY) and Nasdaq composite recently reached $1.1 trillion. The top five companies alone – Apple (AAPL), General Electric (GE), Microsoft (MSFT), Google (GOOG), and Cisco Systems (CSCO) – accounted for $426 billion in cash hoards.
    We are now seeing signs that those balances are beginning to migrate into the economy. In today’s GDP report, investment in equipment and software advanced by 12.4% on an annual basis in the most recent quarter.

    Similarly, money and confidence in the U.S. financial system is increasing. At the Center for Financial Stability, we specifically measure the banking system and broader money supplyexisting in the private sector. This is critical. For instance, money created by the Fed or total reserves held by banks at the Fed represent a mere 8% of the broader money supply in the U.S. economy, so it is no wonder that the economy barely responded to monetary policy actions over the last few years....

    The broadest measure of money available today (CFS Divisia M4) gained 6.9% in December 2012 on a year-over-year basis. This represents the most rapid expansion in broad money in the economy since 2008. So, the financial system and the economy are on the mend.....

    Bond valuations remain troublesome. Distortions across the yield curve represent an equal and offsetting reaction to direct purchases by the Federal Reserve in the US Treasury (TLT) and mortgage-backed securities (MBS) markets (MBB). A more rapid drop in the unemployment rate, a modest move higher of inflation on a sustained basis, or question surrounding the credit quality of sovereign assets could readily reverse valuations that are already stretched and pulled to extremes.
    This week, the Federal Reserve is likely to re-embrace its plan to purchase $45 billion per month in longer-term Treasury securities in future months. It is too soon to alter the recently altered policy course. So, events will likely support equity markets in coming weeks at the expense of overvalued bonds. However, extreme risks will remain over the longer term due to cumulative effects of direct central bank asset purchases over the last five years

    4---(Archive) Bankers Are Still Wrecking Housing Market Fundamentals, Firedog Lake

    Banks Are Manipulating Inventory
    Given the grim reality of too many houses at crazy high prices, how come we’re seeing a spate of good housing news stories? Well, those stories reported supply had shrunk so much, prices were rising. One of the most comprehensive was by Nick Tiramos for the Wall Street Journal, detailing that shrunken inventory was leading to some bidding wars in several markets. Local pieces, this Arizona Republic story, continued the theme. Both articles noted that the bidding wars didn’t mean prices had recovered much compared to the bubble years. Nonetheless, if the decreased inventory is for real, the optimism’s justified, right?

    Too bad the inventory decrease seems artificial, the result of bank manipulation. Take Phoenix: RealtyTrac identifies 6,611 “bank-owned” properties there. An Arizona realty website lists only 275 for sale. Similarly, Yahoo real estate claims there’s over 8,000 foreclosure properties in Phoenix, but lists less than 4,000 homes of any type. lists a bit over 4,000, plus 312 foreclosures and shortsales. So are the foreclosures in Phoenix on the order of 300 or 6,600? Makes a wee bit of difference when the non-”distressed” market is about 4,000, don’t you think?
    (To Tiramos’s credit, his piece acknowledges the good news may not last because of the bank owned backlog; the more cheerleading articles don’t.)

    Phoenix isn’t the only place where banks are holding properties off the market. In Portland, Oregon, banks aren’t selling 80% of the homes they own, The Oregonian reports. All the bank owned inventory statewide represents more than a year and half’s supply of houses all by itself, according to a RealtyTrac executive quoted in the piece. If the housing inventory is that distorted in Oregon, what’s it like in the hardest hit states?

    By holding off inventory, the banks provide temporary support to prices, but for how long? The inventory will make its way to market–there’s just too many houses held in reserve for the banks to manage and maintain the properties in a market-price optimizing way. Moreover, this artificial control of inventory means foreclosures do not help a market to bottom; foreclosing cannot “clear” the market.

    5---December Income Surge Sets Up January Collapse, WSJ

    What December bringeth, January will taketh away.
    Personal income jumped as expected last month, although the size of the gain, 2.6%, was much bigger than economists had expected. But the windfall was all about the tax code, not a sign of economic strength.
    Companies paid out dividends and bonuses in December to beat the higher tax rates that kicked in 2013. The one-time nature of the income swing was illustrated by the fact that households decided to stash away rather than spend the bonuses and dividends. The saving rate jumped to 6.5% last month while consumer spending increased just 0.2%, as forecast.
    Expect a big drop in income in January thanks to the absence of the bonuses and dividends that would normally have been paid. Additionally, disposable income is taking a hit because of the end of the payroll tax holiday.
    How will consumer respond to falling incomes?
    Those who can will tap into the savings socked away in December. But many others will have to rein in their spending. Weekly retail sales already look weak. The big test of spending resilience–or retrenchment–will be Friday’s report of vehicle sales.
    Economists expect sales ran at an annual rate of 15.2 million this month, not much different than the 15.3 million sold in December. A bigger drop may indicate consumers are responding to fiscal tightening by rethinking their spending plans.
    That’s bad news for an economy as dependent on consumer demand as the U.S. is.
    What could help January income would be a solid gain in hiring this month. Additional people earning paychecks would mitigate the drag from smaller paychecks for existing workers

    Today's links

    1---Spain's Rajoy, ruling party deny secret payment scheme, Reuters

    2--IMF always recommends austerity, Mark Weisbrot, naked capitalism

    Part of what they found is unsurprising: the IMF loves telling client states to shrink spending and government overall, and they are particularly keen on cutting social safety nets. But their advice is even more cookie-cutter than you might anticipate (emphasis ours):
    Fiscal consolidation is recommended for all 27 EU countries, and expenditure cuts are generally preferred to tax increases. In some cases there are targets or limits on public debt/GDP ratios or fiscal deficits that are below those of the Maastricht treaty. There is repeated emphasis on cutting public pensions and “increasing the efficiency” of health care expenditures. Raising the retirement age is a standard recommendation, without any correlation to a country’s life expectancy. Although slowing population growth can have important benefits (not the least of which is reduced pressure on the world’s resources and climate change), an aging population is seen throughout these agreements as a threat to the fiscal sustainability of government expenditures. This is not demonstrated through empirical evidence, for example, which might take into account productivity growth that would support a rise in the ratio of retirees to workers, while allowing for rising living standards for both, as has been the case in prior decades. There also appears to be a predilection for increasing labor supply, irrespective of unemployment or labor force participation rates. This includes such measures as reducing eligibility for disability payments or cutting unemployment compensation, as well as raising the retirement age.
    Th article recaps the recent embarrassment of the IMF having to admit that it got its fiscal multipliers all wrong. If you believe austerity works, you have to think fiscal multipliers are lower than one, meaning cutting expenditures won’t shrink the economy even more than the reduction in spending. But whoops! They ‘fessed up they are typically bigger than one.

    3---Bernanke Still Pouring Shots Of QE To Markets Already Drunk On Liquidity, Forbes

    4---Biggest Defense Spending Dive Since Vietnam Shows Risk of Cuts, Bloomberg

    The year-end plunge in U.S. defense spending may provide the industry with more ammunition to fight automatic budget cuts it says will harm the economy.

    Defense purchases in the fourth quarter plummeted 22 percent, the Commerce Department said yesterday. It was the biggest decline since 1972, when military spending slumped as the Vietnam War ebbed, and it contributed to the economy shrinking at a 0.1 percent annual rate in the quarter....

    “Those politicians are all on notice now,” Eric DeMarco, chief executive officer of San Diego-based Kratos Defense & Security Solutions Inc. (KTOS), said in a phone interview. “If they don’t fix this, the country is going back into recession.

    The recent quarter’s figures “may be a harbinger of what’s to come” under the automatic cuts, said Dan Stohr, a spokesman for the Aerospace Industries Association, an Arlington, Virginia-based organization that represents contractors. The group has led efforts to prevent the cuts, saying the reductions would result in more than 1 million jobs lost....

    The fourth-quarter decline partly reflects a spike in defense spending in the previous three-month period, Kevin Brancato, an analyst at Bloomberg Government, said in a phone interview.....

    Third-quarter defense spending rose 13 percent compared with the previous three months, an increase that may have been sharper than usual this year because government buyers sought to award as many contracts as possible before a year-end deadline for the automatic cuts, he said. In a last-minute deal between the White House and Congress, the reductions were delayed for two months.
    “These numbers do on a monthly and quarterly basis move around,” Byron Callan, a defense industry analyst at Capital Alpha Partners LLC in Washington, said in a telephone interview. “It should be viewed more as an aberration as opposed to some new baseline or trend that people ought to think about in the balance of this year...

    The Obama administration’s top economist had a different view of the figures.
    The 22 percent drop in defense outlays is probably due to “uncertainty concerning the automatic spending cuts,” Alan Krueger, chairman of the White House Council of Economic Advisers, wrote in a blog post yesterday after the Commerce Department released the figures.

    Contracting Slowdown

    The Commerce Department’s figures echoed a similar decline in the Pentagon’s announced contracts, which include only awards of $6.5 million or more.

    5---Libor Lies Revealed in Rigging of $300 Trillion Benchmark, Bloomberg

    “We will never know the amounts of money involved, but it has to be the biggest financial fraud of all time,” says Adrian Blundell-Wignall, a special adviser to the secretary-general of the Organization for Economic Cooperation and Development in Paris. “Libor is the basis for calculating practically every derivative known to man.”

    6---RealtyTrac: Foreclosure activity picked up in 120 metros, Housingwire

    The majority of metropolitan areas surveyed by foreclosure data firm RealtyTrac experienced year-over-year spikes in foreclosure activity in 2012.
    Of the 212 metropolitan statistical areas studied by the California-based research firm, 120 markets, or 57% of all surveyed MSAs, saw foreclosure activity pick up in 2012 when compared to year earlier levels.
    The MSAs studied maintain populations of 200,000 or more people.
    Despite an overall uptick in foreclosure activity in a majority of U.S. markets last year, 12 of the nation's largest metros experienced sharp year-over-year declines in foreclosure activity, with Phoenix leading the way as foreclosures plummeted 37% from 2011.
    San Francisco foreclosure activity also experienced a 30% decline in foreclosure activity year-over-year, followed by Detroit (down 26%), Los Angeles (down 24%), and San Diego (down 85%).

    7----Inventories Are the Last Refuge of the Fiscal Cliff Scoundrels, CEPR

    The data has not been kind to the economists and reporters who were hyping the line that uncertainties over the fiscal cliff were slowing growth last year. Strong consumption data, capped by a jump in retail sales in December seemed to dispel the idea that consumers were being cautious due to cliff concerns. Durable goods orders, led by a big jump in capital goods orders in November, suggested that businesses were acting as though the outcome of the standoff would not have a big impact on the economy.

    Yesterday's release of data on 4th quarter GDP should have been the final death knell for the fiscal cliff economic drag story. There was strong growth in both equipment and software investment by businesses and purchases of durable goods by consumers. Obviously these folks didn't get the memo about being cautious

    8----Where did all the inventory go? Dr Housing Bubble

    A large part of this has to do with the external forces interacting with housing. One has to do with banks holding on selectively to distressed properties while another is the dragging out of the foreclosure process. Next, you still have roughly 10 million Americans that are underwater on their mortgages. Think of that when you realize that only about 1.8 million homes are listed for sale. Those 5 million homes in distress either because of foreclosure or missing payments sure would relieve some of the pressure current buyers are facing.

    Inventory keeps moving lower
    The reason we have yet to see a massive boom in building similar to what we saw in the 2000s with the first housing bubble is that builders realize these underlying dynamics. In fact, about one third of new building projects are going to multi-family units to meet market demands for a less affluent young generation. Remember those 2 million younger Americans living at home because of the recession? Their first step is likely to be a rental before buying a home.
    The fact that roughly 1.8 million homes are listed today, nearly the same as we had in January of 2001 is stunning. We’ve added over 33 million people in that time to the country. The inventory pressures are larger in certain markets like California where some areas have seen inventory decline year-over-year by 50, 60, and even 70 percent:

    9---Is the Refi 'Apocalypse' Really Upon Us?, CNBC

    Mortgage rates today are very low, but U.S. borrowers have a very short memory. They forget that the rate on the 30-year fixed, which sits around 3.6 percent today, was a full percentage point higher a year ago, and above 5 percent in January of 2010. The purchasing power gained through today's low rates have arguably helped fuel the recovery in home sales. Low rates have also sparked a boom in mortgage refinancing, which in turn has put more spending money in consumers' pockets.
    Still, the slightest move higher has dramatic effects.
    (Read More: US Mortgage Applications Fall as Refi Demand Drops )
    Witness the 10 percent drop in refinance applications from a week ago, on the Mortgage Bankers Association's weekly report. The rate on the 30-year fixed moved from 3.62 percent to 3.67 percent.....

    That may be, but 88 percent of loans outstanding today are fixed, according to the Mortgage Bankers Association. Just 12 percent are adjustable rate. Even if rates do not rise any higher than they are today, which they may not, they would have to fall below last year's lows to see the high refinance volume of 2012 continue in 2013.

    "The refi apocalypse is upon us," says Mark Hanson, a mortgage analyst in Northern California. "The thought is that there are a bunch of homeowners on the fence who haven't refi'd who will all jump in thinking they will miss out. The theory is 100 percent nonsense. The series will simply plunge. That's because after 16 months of sub 4 percent rates -- and every bank loan officer and mortgage broker doing everything they can after a long mortgage banking income drought that ended with Twist -- there is nobody left to refi. In fact, the only reason refi applications stayed flat in Q3 and Q4 was because they passed a new law allowing refinances regardless of the LTV [loan to value]...the HARP unlimited LTV refi."....

    While refinances may suffer under even slightly higher rates, more important to the housing recovery is new mortgages to purchase homes. Purchase applications are still running at half the rate they were in 2007, when last the Dow hit a new high. Small moves in mortgage rates do affect purchasing power, but lending standards are a far bigger driver today. New regulations for lenders and a consolidation of lending overall to the mega-banks are certainly slowing, and in some cases stalling, the process for some would-be buyers.

    10----Alexander Cockburn's FBI File, antiwar

    11---US economy contracted in fourth quarter of 2012, wsws

    The dismal report on the US economy follows downwardly revised estimates for world economic growth issued this month by both the World Bank and the International Monetary Fund (IMF). The Commerce Department statement reflects the impact on the US of stagnation and decline in major centers of the world economy as well as the lack of any genuine recovery in the real economy of the United States.

    The major factors in the plunge from slowdown to outright contraction were a sharp decline in government spending, centered in a 22 percent drop in defense spending, a pronounced drawdown in business inventories, and a 5.7 percent fall in US exports. While the scale of the declines in government spending and inventories may not be repeated in coming months, the drop in exports reflects a marked slowdown in global economic growth that shows no signs of ending.

    The 17-nation euro zone is in recession and is expected to contract further in 2013, Britain is also in recession, Japan’s economy is barely growing, and growth in the so-called “emerging economies” of China, India and Brazil is decelerating. The result is a decline in markets for US exports, which fell for the first time since the beginning of 2009, the low point of the world recession.

    For all of 2012, the US economy grew by 2.2 percent, according to Wednesday’s report. While a slight improvement over the 1.8 percent growth rate for 2011, this pace of economic expansion is far too slow to significantly lower the unemployment rate, currently at 7.8 percent. For that to occur, the US would have to enjoy growth of more than 3.0 percent over a sustained period....

    The US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan are all pumping virtually free cash into the financial markets, essentially by printing money, in order to prop up the banks, guaranteeing them huge profits, while inflating asset values such as stocks and bonds.
    This immense exercise in financial parasitism does virtually nothing to revive the real economy. On the contrary, the counterpart to ever bigger bank and corporate bailouts is a brutal policy of austerity aimed at destroying the past social gains of the working class and reducing workers to poverty. This attack on jobs, wages and social benefits undermines any sustainable economic growth and creates the conditions for deeper slump.
    Just this month, as stock markets were soaring around the world, the International Labour Organization reported that the ranks of the unemployed would hit a new record high in 2013, increasing by 5.1 million to 202 million people. A US study reported a dramatic growth in the number of “working poor,” with the total number of people in low-income working families reaching 47.5 million—accounting for nearly one-third of all working families and 15 percent of the US population.


    Wednesday, January 30, 2013

    Today's links

    1---(archive--July, 2012) ‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest“, naked capitalism
    As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.
    Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said..
    And the article presents the obvious conclusion, that keeping homes off the market is leading to higher prices than you’d see if they were put up for sale:
    In fact, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.
    “If they let the dam essentially break. It could be a catastrophic disaster for the U.S. economy,” he said, predicting that some major banks would fail and home prices would nosedive by 20 percent.
    That doomsday scenario has many industry professionals supporting lenders’ tactics of holding onto most of their REOs. Otherwise, they would be “causing the floor to fall out from underneath the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork required to put all their foreclosures on the market.
    2--NYSE Margin Debt Rises To Fresh Five Year High As Short Interest Slide Continues, zero hedge

    According to the latest NYSE margin debt data, the December of margin debt used for various leveraging activities rose for the fifth consecutive month, reaching $331 billion - the highest since February 2008, when the market was declining, and back to the levels from May 2007 when the market was ramping ever higher to its all time highs which would be hit 3 short months later, and just as the subprime bubble popped.

    3---The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent, zero hedge

    4---Obama Recession’ or Full Employment?, counterpunch

    There are lots of interesting economic stories in the last week, but we want to focus your attention on two topics. One shows the only path out of the economic collapse. The other shows the direction that will most assuredly take us into deeper collapse. So far, the bi-partisans in Washington, DC are on the path to an ‘Obama Recession.’
    First, the wrong path: austerity. Great Britain has shown the world what austerity will bring – deeper recession. Britain may be going into its third economic collapse in four years with a 0.3% decline in its GDP in the last quarter and its worst year for manufacturing on record. David Cameron was elected on the promise of austerity and he delivered. The result is Britain has the worst economy on record dating back to 1830. That’s right, since the before the reign of Queen Victoria!...

    Jobs. Job creation is the one solution that has not been tried by government. Jobs are the solution to so many economic problems. The deficit, which the bi-partisans in Washington are fixated on, is directly related and the only path to reducing the deficit is moving toward full employment. Full employment solves so many other problems: poverty and hunger, eviction and foreclosure, personal debt, retirement savings – all are ameliorated by full employment. But, when was the last time you heard any elected official utter the phrase “full employment”?

    5---Grading the deficit hawks, counterpunch

    Instead of focusing on the fact that the economy is down more than 9 million jobs from its trend growth path, and that the real wage of the typical worker has risen by just 2 percent over the last decade, the policy people in Washington are debating the best way to reduce the deficit. This makes about as much sense as debating the right color to paint the White House kitchen.

    6---U.S. homeownership rate continues to slip, Housingwire

    12---Treasury 10-Year Yield at Almost 9-Month High Before Fed, Bloomberg

    13---Real GDP decreased 0.1% Annualized in Q4, calculated risk

    14---Shiller on Housing: "Maybe housing will go down...People should think of it as a risky investment.", WSJ (video)  "Experts do not think we are going back to the same boom. But the rhetoric--the "cheap talk"--is that we are "off to the races again". But among the people who think about it seriously, doubt it". (Shiller dismisses housing recovery idea)

    15---“The True Story of the Bilderberg Group” and What They May Be Planning Now, global research

    16---Obama's regressive immigration plan, wsws

    Obama made clear that his vision of immigration “reform” was based on the same draconian principles as those advanced by the bipartisan Senate group. He touted his administration’s record number of deportations—nearly 410,000 last year alone and 1.2 million in his first term—and doubling the number of “boots on the ground” at the US-Mexico border compared to 2004.
    .......In a move toward establishing a form of national identity card, the plan would also mandate development of a “fraud-resistant, tamper-resistant Social Security card” as well as creating “a voluntary pilot program to evaluate new methods to authenticate identity and combat identity theft.”

    17---Bad news for Bernanke: 10 year Treasuries touch 2%, Bloomberg

    Benchmark 10-year notes yielded 2 percent for a second day, the highest level since April, amid better-than-forecast economic data. The five-year notes drew a yield of 0.889 percent, versus an average forecast of 0.887 percent in a Bloomberg News survey of seven of the Fed’s primary dealers. Investors increased bets to the highest level since 2011 that the price of Treasuries will drop, a JPMorgan Chase & Co. surveyed showed. Trading in options that profit if Treasury yields rise surged yesterday to the highest since 2007.

    “There’s a shift in sentiment on where the next level is in the marketplace,” said Scott Graham, head of government bond trading at Bank of Montreal (BMO)’s BMO Capital Markets unit in Chicago, one of the 21 primary dealers required to bid at U.S. debt auctions. “This 2 percent level will be a meaningful buy level for accounts.”
    The 10-year note yield rose four basis points, or 0.04 percentage point, to 2 percent at 5 p.m. in New York,

    Tuesday, January 29, 2013

    Today's links

    1--QE to continue indefinitely, Bloomberg
    2---It’s too early to turn bearish on stock market, Trimtabs

     the Federal Reserve each day now creates $4 billion of new money and uses that new money to buy mortgage bonds and longer term treasuries. Those who sold their bonds to the government got newly created money with which to buy other risk assets. Which means that some of that new money has probably gone into equities as the new money moves down the chain of risk assets. In other words, the Fed is investing in US stocks and in essence is rigging the equity markets.

    3---Libor Lies Revealed in Rigging of $300 Trillion Benchmark, Bloomberg

    4---LBO leverage creeping up, credit not reaching smaller firms, sober look

    5---Consumer Confidence in U.S. Falls to Lowest Level Since 2011, Bloomberg

    6---Home prices decline in November, Case-Shiller says, Marketwatch

    7---Immigration policy in police state USA, wsws

    8---The human cost of Italian austerity, wsws

    9---Political lessons of the Athens subway strike, wsws

    10---Sexual assault crisis tempers euphoria over end of combat ban, Guardian

    11---Companies Ignored Cliff Chatter, but Taxes, Spending Cuts Will Have Real Bite, WSJ

    Monday, January 28, 2013

    Today's links

    1---Pending Home Sales index declines in December, calculated risk

    2---Are Main Street investors warming up to stocks?, USA Today

    The Wilshire 5000, the broadest measure of the U.S. stock market, on Thursday crossed over its all-time high of 15,813.52, meaning that the nearly $11 trillion in stock market wealth lost in the bear market has now been restored.....
    Optimism is rising. Bullishness reading of 52.3% the week ended Jan. 23 was the highest in two years, says American Association of Individual Investors.

    3---The Coming Oil War ... Against al-Qaeda,

    The International News Safety Institute said it was alerted by "credible sources'" that terrorist groups may be planning attacks on oil fields in Libya. The warning said it considered Benghazi a likely target given the large number of oil fields in the western port city. INSI's advisory came as the U.S. and British government issued similar warning for citizens remaining in Libya.

    4--Capitulation Everywhere, John Hussman Funds

    What we actually observed prior to QEternity was a market decline of just 8%, and a subsequent recovery that has now run about 11%. Investors have already enjoyed most of the likely benefit of QEternity. It’s possible that continued quantitative easing will help to mute the potential for sustained market weakness until investors have a sense that the Fed will discontinue its purchases, but in my view, the likelihood of further material gain is limited. With no prior 6-month losses to recover, it seems likely that other factors will exert a stronger effect on market returns going forward than if the Fed’s easing had been initiated in response to a major low.

    5---Shiller: Housing market comeback may be an illusion, Bloomberg

    “The housing market has been declining for something like six years now, it could go on, that’s my worry,” Shiller told Tom Keene in a Bloomberg Television interview today in Davos, Switzerland. “The short-term indicators are up now, it definitely looks better, but we saw that in 2009.”....
    “It’s a good housing market in the sense that mortgage rates are very low and prices have come down to normal levels, so yes, it’s a good time to buy if nothing bad happens,” Shiller said. “But it’s also a very bad housing market in that most of the mortgages are being supported by the government, and we have the Fed and this buying program. It’s a very abnormal market. There’s a lot of uncertainty going forward.”...

    We’ve been five years in a slow economy, and it could go quite a bit longer,” he said. “We’ve seen gross domestic product growth at sub-normal levels.”
    He added, “I think we’re pretty far from irrational exuberance, maybe 50 years away.”

    6---Pending Home Sales Fall Due to Dwindling Supply, CNBC

    Much of last year's gains in existing home sales was driven by investor demand for foreclosures and other distressed properties. Millions of dollars, largely in cash, from private equity, flowed into the market, pushing supplies down dramatically and even causing bidding wars in some of the previously hardest hit markets. That pushed prices up in the double-digit range, but critics caution that this is not a real organic recovery in the overall market. These existing sales numbers as well as a disappointing read last week on sales of newly built homes are bolstering that warning.

    7---Financial Market Outlook for 2013--"The end is nigh", Robert Oak, economic populist

    On December 12, the Fed quietly announced it would be buying $45 billion every month in Treasuries from the market, and when you put this together with its other regular purchases, the Fed will buy over 75% of all of the debt issued by the federal government in 2013.

    This is a very, very bad thing, and that can’t be overemphasized. A government which has to buy its own debt either is issuing too much debt, or is not as credit-worthy as it once was, or it has somehow perverted the pricing mechanism to prevent interest rates from reflecting the true cost of selling so much debt. All three of these things are at play here. Interest rates are being artificially kept low by the Fed’s Zero Interest Rate Policy, which it has announced will be in place at least through 2015.

     This isn’t a matter of convenience or of intelligent monetary policy – this is a necessity. The US Treasury after 2008 ceased to issue any new paper with maturities much beyond two years; it is in a sense hiding out in the tall grass of the short end of the maturity spectrum, where the Fed can protect it because the Fed can keep short term interest rates close to zero. The Fed has far less control over interest rates beyond two years, and the Treasury knows this, which is why it does not dare show itself in public in the Treasury note or bond market.

    Because the Treasury no longer is issuing paper with maturities beyond two years, the long end of the bond market is shrinking, and this is made much worse by the Fed’s practice of buying up for itself whatever paper is out there (Operation Twist, for example, specialized in buying 10 year notes). Prior to 2008, the Fed had very few holdings in this part of the maturity spectrum – its balance sheet consisted of $800 billion of Treasury bills and some paper out to five years. Now it has a balance sheet that just passed $3 trillion, consisting of highly illiquid mortgage backed securities, and a great deal of Treasury bonds with 10 – 30 year maturities. In some of these issues, the Fed owns up to 70% of the paper auctioned, which is its limit in any issue......

    What is left in the market is a much smaller pool of Treasuries in private hands, which means less liquidity in the market, which means more volatility in pricing. We are already seeing the effect of this. On December 12 when the Fed announced its new $45 billion monthly Treasury buying program, rates should have gone down and prices gone up on news of the increased demand. The opposite happened; 30 year bond prices moved from 2.69% to 3.15%. They now appear to be heading to 3.50%. The market is less liquid now, and it takes but a few large players to get nervous and begin selling in order to create a sharp move in rates.

    Bubbles Everywhere
    Remember December 12, 2012. It may have been the day when the financial markets finally said “enough is enough” to the Fed. Enough destruction of the bond market. Enough monetizing of the deficit (Bernanke says he is not doing that, but he would have to say that). If it is such a brilliant idea for one arm of government to buy on the open market the debt issued by another arm of that same government, central banks would have been doing this for years. The fact is, every time it has been tried has been a disaster, going as far back as the hyperinflation situation in Weimar Germany to the most recent hyperinflation in Zimbabwe (and now also in Iran).

    One bond guru after another in the US has been warning about hyperinflation, including the famous Bill Gross of Pimco. You don’t need hyperinflation to inflict grievous damage on the economy. Out of control inflation will do, and especially the type that the Fed deliberately ignores – asset inflation. We’ve already chronicled how a mini bubble exists in the housing market, and one more in the government securities market. Even some of the Fed governors are noticing the phenomenon, and a few have cited the explosion in farm land prices, or the out-of-control student loan market

    We forgot one last thing – the stock market bubble. This is a deliberate distortion of the equity markets by the Fed – they have said for quite some time now that their Quantitative Easing programs, along with Zero Interest Rates, are designed to force savers into speculating in the stock market, which they hope will be higher “than it otherwise would be.” Boy, did they get that right....

    Another study showed that intraday, the stock market moves ahead every time the Fed finishes a bond purchase, all of which are telegraphed in advance to the banks who have to find the paper to deliver to the Fed in exchange for cash. It is as if these banks turn around immediately and place the cash in the stock market, and the equity traders position themselves in advance. The third tell that the stock market is in a Fed-induced bubble is that on those infrequent spells when the Fed is not pumping the economy full of liquidity, the stock market suffers a setback. Late last year Goldman Sachs published a study that showed that not just the stock market, but the entire US economy, moves in cyclical synchronicity with Fed liquidity programs. Why this is, is not exactly clear, but it seems to indicate that all economic actors in the US are focused first and foremost on whether the government is continuing to push cash into the economy to keep it afloat.

    When the Fed takes its foot off the monetary pedal, the economy begins to sink again. A curtain is drawn back, revealing the real underlying economic conditions: non-existent growth in real personal income, mediocre individual consumption, stagnant industrial and manufacturing production, flat corporate revenues, a chronic trade and current account deficit, and declining consumer sentiment and confidence in the economy. ....

    Even if another credit blow-out occurred, we all know how that would end – very badly, as in 2008 credit crisis all over again. Unfortunately, without another credit splurge the results are the same. When the credit stops flowing, income is hit hard, because most of the growth in income in the economy is produced by debt, and it is not organic growth that would result from a normal recovery generated through capital investment, wage and benefit increases, revenue advances, and expanded global trade. This is precisely what the Fed understands, and why it is expanding its balance sheet ceaselessly, and enabling the Congress and Administration to build up debt at the tune of a trillion dollars a year. All this credit is the lifeblood of the economy, allowing the government to make Social Security and Medicare/Medicaid payments, feed 48 million people through food stamps, fight wars in multiple hot spots around the world, pay interest on the debt to keep bondholders happy, and shift unemployment money to the states.

    The problem for the Fed is that the unraveling is already beginning...

    This does not contradict what I wrote earlier – that the Fed cannot reduce its balance sheet. True as that is, the Fed does not need to begin selling securities it already owns. To damage the economy, all it needs to do is stop buying any more securities. As we’ve seen in the past, that constitutes a form of monetary tightening that effects the economy immediately and for the worse.....

    This does not contradict what I wrote earlier – that the Fed cannot reduce its balance sheet. True as that is, the Fed does not need to begin selling securities it already owns. To damage the economy, all it needs to do is stop buying any more securities. As we’ve seen in the past, that constitutes a form of monetary tightening that effects the economy immediately and for the worse.

    The Fed Loses Control Over Interest Rates I noted that the Fed has never had strict control over long term rates, and that 30 year bond rates have begun creeping up despite the Fed being an active purchaser of bonds in that maturity. Fed control over short term rates is assumed, but what if this assumption is wrong? Could short term rates begin to head up in the market despite the Fed? The link between the Fed, commercial banks, and the economy is broken to a degree already. Zero interest rates have served to benefit the banks, but have not been passed on to the economy. Nobody on the consumer side is allowed to borrow money at anywhere near zero percent. Credit card rates are still anywhere from 15% to 35%., and fees in that business have expanded to encompass just about any mistake a consumer can make. Even 30 year mortgage rates, quoted at 3.5%, are given only to a small number of very wealthy clients; everyone else borrows near 5.0%. So ZIRP has been a bust, other than to serve as a way to transfer wealth to banks. Short term interest rates could therefore creep higher still no matter what the Fed does. The Fed could jawbone banks and pressure them to keep rates stable, but when self-interest or self-survival comes into play, the banks will and in fact must ignore the Fed. The Fed could begin buying Treasury bills for maturities under one year, but the FOMC is already nervous about expanding the central bank’s balance sheet any further. Statistics have shown over the years that the Fed follows the market when setting rates, and if the market deems that even short term rates are too low, inevitably the Fed must to some degree accept this. As to why the market would come to such a conclusion, it really is all a matter of confidence. If investors lose confidence that the US will ever gets its fiscal house in order, one hundred years of global economic dominance and reserve currency status is not going to save the day for America.

    Asset Inflation Breaks Out Elsewhere Currently asset inflation is contained to the US, but it could occur globally now that central banks in the UK, Europe, China, and Japan have all joined the Fed in its unlimited quantitative easing program......

    Multinational corporations have been beneficiaries and instigators of global labor arbitrage and the deflation which ensues (everyday low prices at Wal-Mart, as an example), and their power remains unchecked at this point. A global deflationary collapse of the financial system has remained an increasing risk in this environment, and was only forestalled in 2008 by the concerted efforts of central banks and governments to prop up the major banks. Ever since then, central banks have been obliged to replace commercial banks as the purveyors of credit to the global market. This is a game the central banks cannot win. The global forces of deflation are too strong, unless you assume a billion Chinese citizens are going to be pushed backed into subsistence living under Communism, and so the central banks can only fight this battle by constantly escalating their efforts until no more escalation is possible. Compared to a year ago, the global economy has seen massive escalation of money printing, yet growth has shrunk or been converted into economic contraction in the UK and other parts of Europe, and in Japan. This is a losing battle; at some point living standards in the developed world are going to have to ratchet down to meet up with rising living standards of the middle classes in China and India. That “lurch down” is what we are worried about. It will be dramatic, and permanent, making this current depression much worse and far more memorable than anything that happened in the 1930s. The collapse of the system which propped up Western living standards for 25 or more years – a system built on credit and debt – is closer than ever. No one can predict when it will occur, but that it will happen is harder to deny as we all watch the central banks pull out every conceivable money printing trick, with no success to show for their efforts other than holding off the inevitable.

    Sunday, January 27, 2013

    Today's links

    1--Home Builders Turn to Rental Apartments, CNBC-

    Since 2005, according to the U.S. Census Bureau, every new household formed has been a rental household. The sector has been underbuilt since 2004, so there is a lack of product available, which in turn has caused rents to rise steadily in most markets. New construction is increasing, but it is not even close to outpacing demand....

    There were just over 200,000 multi-family housing starts in 2012, according to the U.S. Commerce Department, far lower than the annual average of 340,000 over the past decade.
    "We are still woefully short of what's going to be coming in terms of demand," says Buck Horne, a housing analyst at Raymond James. "Lennar is going where the demand is going to be. They're going where they know they can make money."

    2---In California, flipping houses is back with a vengeance, Dr Housing Bubble

     A massive drop in listings, a big jump in sales, and prices are going gangbusters.

    3---Federal Reserve transcripts show top US policymakers vastly underestimated crisis, wsws

    The blindness of the Fed was rooted in definite material and social interests. The entire financial and political establishment had a vested interest in keeping the housing bubble, based on little more than a Ponzi scheme, going.

    Wall Street had driven the frenzy of sub-prime lending, buying up toxic mortgages by the fistful in order to bundle them into securities and CDOs, which they then sold to investors all over the world at an enormous profit. The regulatory agencies, including the Fed, blessed the operation and gutted all government oversight to allow the banks to engage in reckless and quasi-criminal activities. The credit rating firms such as Moody’s and Standard & Poor’s made huge profits by giving the mortgage-backed bonds their highest ratings.

    While industry was being decimated, productive investment scaled backed, and the wages and living standards of the working class driven down, American capitalism generated an ever-increasing share of profits from financial machinations and outright fraud.

    By downplaying the disastrous implications of a collapse in sub-prime mortgages, the Federal Reserve objectively aided and abetted the Wall Street banks, providing them with the time they needed to offload their sub-prime mortgage holdings and begin making large bets against the housing market and the securities they themselves had created.

    Yet the release of the transcripts has been met with a deadening silence from lawmakers as well as the media. There are no calls for congressional hearings or any public accounting for the abject failure of these supposed custodians of the economy to detect the greatest economic crisis since the Great Depression. This only underscores the complete subordination of the entire political system, and both of its parties, to the financial aristocracy.

    4---Bill Black--"liar's loans", naked capitalism
    Forty-five percent of the home mortgage loans in the UK were liar’s loans – and the new “supervisor” believes that the bank officers made these loans because they all went simultaneously delusional and believed that there was an infinite bubble

    5---Japan’s currency war, WSWS

    Japan’s inherent economic vulnerabilities are being exposed. As an island nation largely devoid of natural resources, Japanese capitalism has always been heavily dependent on export markets and access to cheap raw materials. The air of desperation surrounding the Abe government’s aggressive monetary policy and renewed economic stimulus measures echoes Japan’s response in the 1930s.

    Hard hit by the Great Depression and a dramatic slump in exports, the Japanese government that assumed office in December 1931 ended the gold backing for the yen, greatly expanded public spending, especially on the military, and cut interest rates to stimulate business. The value of the yen plunged by 60 percent against the US dollar and 44 percent against the pound sterling.

    Writing in Britain’s Daily Telegraph, business commentator Ambrose Evans-Pritchard
     described Abe’s policies as “a copy of what happened in the early 1930s under [Finance Minister] Korehiyo Takahashi, the first of his era to tear up the rule book and pull his country out of the Great Depression... Few dispute that Japan pioneered the world’s most successful [economic] experiment from 1932 to 1936. The trick was to hit hard and combine all forms of stimulus, each leavening the other.”

    This so-called “success,” however, came at a terrible price. Takahashi’s policies were in line with the beggar-thy-neighbour agenda increasingly pursued by all the imperialist powers, which greatly heightened geo-political tensions. Moreover, Japan’s economic program was accompanied by police-state repression against the working class at home and military aggression abroad to open up markets and access to raw materials. Japan’s invasion of Manchuria in 1931 and China in 1937 set the stage for the eruption the Pacific War in 1941, with devastating consequences for the working class.

    Today, the right-wing Abe government is pursuing a similarly perilous mixture of nationalist economic policies and militarism—and it is not alone. The Obama administration’s resort to unlimited quantitative easing and its aggressive “pivot to Asia” to contain China have encouraged Abe to fire his own shot in the developing international currency wars, as well as to remilitarise Japan
    6---Treasury Investors Fret About Fed Danger Zone, WSJ

    7---Prices of Energy, Food Hurt Americans' Finances Most, Gallup

    These results provide clear insights into the areas that are causing Americans the most financial pain. Leaders, including elected representatives, may find that actions aimed at reducing the costs of life necessities -- energy, food, and healthcare, along with reducing taxes -- could have the greatest impact on Americans' financial situations.

    8---Over 65 and working, conversable economist

    The proportion of U.S. adults who are "in the labor force"--that is, who either have jobs or are unemployed and looking for a job--has been falling for a decade, as I explored in an April 26, 2012, post on "Falling Labor Force Participation." But for one demographic group, the elderly, labor force participation is rising substantially...

    figures show that for men over age 62, rates of labor force participation were falling through the 1980s, bottomed out around 1990, and have been rising since then.

    9--Martial law in Greece, wsws

    The use of dictatorial laws and state violence amounts to the criminalization of any form of collective resistance by workers to the vicious and ongoing assault on their jobs and living standards. This attack, now in its fourth year, is being carried out under the auspices of the European Union and implemented by the Greek ruling class to satisfy the demand of the Greek and international banks that the full cost of the capitalist crisis be born by the working class

    10---A New Housing Boom? Don’t Count on It,  Robert Shiller,  NY Times:

     We're beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target?
    It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down..., any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years. ...
    The bottom line for potential home buyers or sellers is probably this: Don’t do anything dramatic or difficult. There is too much uncertainty... If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don’t stay up worrying about home prices any more than you do about stock prices. ..

    11---Monetary alchemy, fiscal science, jeff frankel's weblog

     John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression. Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall.  ...

    The austerity-versus-stimulus debate has been thoroughly hashed out. On the one hand, proponents of austerity correctly point out that the long-term consequences of permanently expansionary macroeconomic policy [both fiscal and monetary] are unsustainable deficits, debts, and inflation. On the other hand, proponents of stimulus correctly point out that in the aftermath of a recession, when unemployment is high and inflation low, the immediate consequences of contractionary macroeconomic policy are continued unemployment, slow growth, and debt/GDP ratios that go up rather than down. Procyclicalists, both in the US and Europe, represent the worst of both worlds: they push in the direction of expansion during booms such as 2003-07 and in the direction of contraction during recessions such as 2008-2012, thereby exacerbating both the upswings and downswings. Countercyclicalists have it right: working in the direction of fiscal and monetary discipline during booms and ease during recessions.

    Less thoroughly aired recently is the question whether — given recent conditions - monetary or fiscal expansion is the more effective instrument. This question was addressed clearly in 1937 by Sir John Hicks in a once-famous article titled “Mr. Keynes and the Classics.” The graphical model is known to many generations of undergraduate students in macroeconomics under the label “IS-LM.”

                    The answer to the question which form of policy is more effective: under the circumstances that held in the 1930s and that hold again now - which are conditions not just of high unemployment and low inflation, but also near-zero interest rates — stimulus in the specific form of fiscal expansion is much more likely to be effective in the short-term than stimulus in the form of monetary expansion. Monetary expansion is rendered relatively less effective because interest rates can’t be pushed below zero. This situation, labeled by Keynes a liquidity trap, is today called the Zero Lower Bound. In addition, firms are less likely to react to easy money by investing in new plant and equipment if they can’t sell the goods they are producing in the factories they already have. The hoary — but still evocative — metaphor is “pushing on a string.” Meanwhile, fiscal expansion is rendered relatively more effective, in that it doesn’t push up those rock-bottom interest rates and thereby crowd out private-sector demand. ...

    That monetary policy is less effective than fiscal policy under conditions of high unemployment and zero interest rates should not be a novel position. But many economists have forgotten much of what they knew and politicians may not have even heard the proposition.
    Introductory economics textbooks have long talked about the Keynesian multiplier effect: the recipients of federal spending (or of consumer spending stimulated by tax cuts or transfers) respond to the increase in their incomes by spending more as well, as do the recipients of that spending, and so on. Again, the multiplier is much more relevant under current conditions than in the normal situation where the expansion goes partly into inflation and interest rates and thus crowds out private spending. By the time of the 2008-09 global recession even those who believed that fiscal stimulus works had marked down their estimates of the fiscal multiplier — intimidated, perhaps, by newer theories of policy ineffectiveness. The subsequent continuing severity of recessions in the United Kingdom and other countries pursuing contractionary fiscal policies, apparently to the surprise of the politicians enacting them, suggested that multipliers are not just positive, but greater than one, as the old wisdom had it. The IMF Research Department has now reacted to this recent evidence and bravely confessed that official forecasts, including even its own, had been operating with under-estimates of multiplier magnitudes.


    Saturday, January 26, 2013

    Today's links

    1---The "great housing rebound" in one picture, (first graph), calculated risk

    We're back to 1991. Crack the champagne!

    2---The 4 stages of a bull market, Big Picture

    Can you see the effects of QE1, QE2, QE3, Operation Twist?

    3---Visualizing The Euphoria, zero hedge

    With Credit Risk Appetite well beyond any previous record high and Global Risk Appetite at its highest since 2006, perhaps it is time to consider the hedging discussion we had yesterday? With the euphoria dramatically dislocated from fundamentals and empirical world wealth trough-to-peak moves indicating a turning point, the lack of bearish arguments is deafening.

    4---British Economy Is WORSE than During the Great Depression, washington blog

    It’s the worst economic performance since at least 1830, outside of post-war demobilisations,” he told The Daily Telegraph. “It’s worse than the 1920s, it’s worse than the Great Depression.”

    He said the economy has been “heading this way for a long time” because of the scale of the problems that came to a head in the 2008 financial crash.

     The top economist at RBS, which is mostly owned by the Government, said it is difficult to recover when much of the world is facing similar problems.

     “It’s the scale of what happened in 2008 but also the build-up to that,” he said. “Compared with other recessions [like in the 1980s and 1990s], this is happening all over the world. There’s not a quick and easy way to export your way out of this.”.....

    Mark McHugh reports:
    Velocity of money is the frequency with which a unit of money is spent on new goods and services. It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales of men’s underwear (which Greenspan was fond of ogling). In a healthy economy, the same dollar is collected as payment and subsequently spent many times over. In a depression, the velocity of money goes catatonic. Velocity of money is calculated by simply dividing GDP by a given money supply. This VoM chart using monetary base should end any discussion of what ”this” is and whether or not anybody should be using the word “recovery” with a straight face:

     British Economy Is WORSE than During the Great Depression

    In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression.
    5----Market performance update, greater fool

    the S&P 500 is ahead 4.81% in the last three weeks, and 13.7% in the past year. It’s at a level last seen five years ago, and 4% below its all-time peak. The Dow is even closer, dangling just 2% under its best-ever showing in the autumn of 2007.

    This advance has come because of corporate profits and economic growth. Of companies reporting Q4 earnings, like Google and IBM, 73% of them have beat expectations. The latest jobless claims numbers shocked because they were so positive, dropping to a five-year low.

    6----How to Minimize the Drag of Austerity, counterpunch

    ...revenue increases on upper-income households and corporations are, per dollar, the least economically damaging policy option for deficit reduction—see the table below. (Again, why policymakers are abandoning what works and fixating on damaging an economy already depressed nearly $1 trillion—or 5.6 percent below potential output—with bleak prospects for emerging from depression, is a question for another post.) Some simple math helps underscore the benefit of increasing the revenue share in hitting a fixed deficit reduction target.

    7---HARP success could trickle down to non-agency borrowers, Housingwire

    With the success of the Home Affordable Refinance Program for Fannie and Freddie borrowers, there is an expected push on the part of the Obama Administration to offer performing borrowers falling outside the agency's purview a way to lower their mortgage payments – through either a refinance or loan modification, Amherst Securities Group said.

    Amherst's latest Mortgage Insight Report focuses on the implications of both Sen. Jeff Merkley's plan for refinancing underwater borrowers and the Treasury proposal for modifying mortgages in private-label securitizations.

    The mechanics of the refinance plans are different in that under the Merkley Plan and other refinancing proposals, the loan is removed from the private label securitization trust (PLS trust), whereas under the Treasury plan, the mortgage loans remain in the PLS trust. Sen. Jeff Merkley, D-Ore., introduced his plan last year, proposing that the government would buy underwater mortgages from banks, reduce the principal for eligible borrowers and refinance the loan into a new Federal Housing Administration-backed mortgage....

    In regards to the implementation of the proposed Treasury plan, borrowers with loan-to-value ratios greater than 125 would automatically be eligible while those with LTVs in the 100-to-125 range would need to show "hardship," to see a modification.

    8---Treasury Likes Non-Agency HARP-Like Proposal, mortgage finance

    A proposal by Sen. Jeff Merkley, D-OR, to help refinance non-agency borrowers with negative equity has support from the Obama administration and could begin tests without action from Congress. The proposed “Rebuilding American Homeownership” has been characterized as a Home Affordable Refinance Program for non-agency mortgages. “I think the policy is very good; it’s very well designed,” Treasury Department Secretary Timothy Geithner said in testimony last week before the Senate Committee on Banking, Housing and Urban Affairs ...

    9---Fed Intervention For Dummies - What A Record $3 Trillion In Fed Assets Gets You, zero hedge

    The Market vs The Jobs...

     and the real wealth effect...

    10---S&P 500 Post Longest Winning Streak Since 2004 on Profits, Bloomberg

    U.S. stocks rose, giving the Standard & Poor’s 500 Index its longest winning streak since 2004, as Starbucks Corp. and Procter & Gamble Co. reported increased profit and German business confidence beat forecasts....

    The S&P 500 added 0.5 percent to 1,502.96 in New York. The benchmark gauge closed above 1,500 for the first time since December 2007 and gained for eight straight days, the longest string of advances since November 2004. The Dow Jones Industrial Average gained 70.65 points, or 0.5 percent, to 13,895.98 today. About 6.3 billion shares traded hands on U.S. exchanges today, in line with the three-month average. .....

    11---The Visible Hand Of The Fed, dshort

    1--Better than expected earnings - not counting the fact that expectations had been dramatically lowered over the last quarter. If you lower the bar enough you will get better results. However, if expectations levels had remained where they were previously every single report would have missed so far.
    2-- Stronger economic growth ahead - expectations are once again, as we have seen over the last 3 years, that the economy will grow at 3% or better in the coming year. Unfortunately, most of the economic data suggests that 2013 will remain mired closer to 2% after a very lackluster first half of the year. ....

    The point to made here is that each time the market has rallied the media, and analysts, try to attribute the rally to a fundamental support. In most cases the arguments boil down to "hope" more than "reality." However, what is really driving the current rally is likely far more simplistic: $85 billion a month.
    With the Federal Reserve currently engaged in two simultaneous quantitative easing programs (QE 3 and 4) totaling $85 billion a month in purchases of both mortgage backed and treasury bonds - the excess reserve accounts of the banks have soared in recent weeks. There is a very high historical correlation (85%) between the expansion of the Fed's balance sheet and the stock market.
    The chart below shows the relationship between the financial market and the expansion/contraction of excess reserves held by banks. Historically, these excess reserves, prior to 2008, averaged about 18.9 billion. Today those excess reserves amount to $1.58 Trillion.
    It is clear that the visible hand of the Federal Reserve is firmly in control of the markets at the moment as liquidity flows are increased. However, extrapolating the current advance indefinitely into the future becomes somewhat dangerous. Each previous program cycle has ended with a fairly nasty decline, in both the markets and the economy, as the fundamental drivers were being supported solely by artificial interventions. Those declines would have likely been far worse had they not been halted by the next round of "liquidity injected goodness.....

    Will the markets continue to play out as the chart above potentially forecasts? I haven't a clue. With the Fed fully engaged in stimulus programs domestically, as well as the ECB and Japan globally, there is excess liquidity sloshing throughout the financial system. The market rally could well rise farther, for longer, than most would expect possible.

    The current belief is that the central banks will have the foresight to withdraw the stimulus before the next bubble is formed, unfortunately, there is no historical precedent that supports that claim. However, with the markets fully inflated, we have reached the point that where even a small exogenous shock will likely have an exaggerated effect on the markets. There are times when investors can safely "buy and hold" investments. This likely isn't one of them.

    12---Then vs. now: Obama’s first term by the numbers, msnbc

    The Dow Jones Industrial Average is up more than 5,500 points, just shy of the 14,000 mark. The economy is growing rather than contracting; in the first quarter of 2009, the Gross Domestic Product shrank 6.1%, it grew 3.1% in the third quarter of 2009, when last measured. Consumer confidence has nearly doubled. And a larger percentage of Americans–35% according to NBC News’ last poll–believe the country is headed in the right direction, up from 26% in January of 2009.

    On the other hand, there is also plenty of data to support that idea that the country isn’t much better off than it was four years ago–and that the struggling economy continues to take a toll on families. Median household income is lower than it was in 2009. And to further mar his image, 46 million American live below the poverty line, several million more than four years ago.

    The federal public debt has increased from $10.6 trillion in January 2009 to $16.4 trillion now.
    But one number that is exactly the same as it was four years ago: the unemployment rate of 7.8%, though it’s down from a high of 10% in October of 2009.

    13---The market is not worried about anything, CNBC

    Market professionals, as measured by the Investors Intelligence survey of investors newsletters, are bullish by a 53.2 percent to 22.3 percent margin, the largest spread in four months. The last time the gap was this big preceded a 7 percent market drop in a month, which in turn preceded the current rally.
    Finally, the more than 470 days the market has gone without a correction - or 10 percent market drop - marks the 10th longest such streak in market history and the best run since the record 2,553 days that lasted from 1990-97. Three-quarters of the Standard & Poor's 500 stocks are in overbought territory, according to Bespoke Investment Group.

    "If the market keeps moving higher, not worrying about anything, it's going to be difficult for the bulls," said Quincy Krosby, chief market strategist at Prudential Annuity. "The market's not climbing a wall of worry - it's not worrying about anything. Typically when that happens something will come along to pull it back."

    14---Is the Dow Record-Bound?, motley fool

    When the Dow Jones Industrials  dropped below 7,000 in early 2009, many investors thought the venerable market measure might never return to its glory of 2007, when it seemed to set new highs all the time, eventually topping out above 14,000 before its historic plunge in the financial crisis. But with the latest push higher in the stock market, the Dow is within 400 points of its closing high of 14,164.53, set on Oct. 9, 2007. Will the Dow get there?

    15--Stocks Confront Painful Past, WSJ

    The stock market is on the verge of new all-time highs, or the mother of all head-and-shoulders crashes.
    The S&P 500 crested over the 1500 level Thursday, a milepost it hasn’t seen since 2007. The Dow Jones Industrial Average is near 14000. The Dow transports index is already in record territory. The Wilshire 5000 hit a record high Thursday as well.

    These big, round numbers—1500, 14000—often get more attention than they merit. The S&P 500, after all, is up only 2.5% since its September high. Yet the market appears to be in a buying mood and record levels are on the radar.
    But just looking at a chart of the S&P 500 over the past 16 years presents a stark warning that the market has been here twice before—twice, in fact—and it hasn’t been pretty.