Friday, January 25, 2013

Today's links

1---Sinister goings-on at Lehman (video) repo 105--naked capitalism

The whole thing is sinister and astonishing in equal measure. The reason that no director of Lehman Brothers has been brought to book would appear to be that US financial regulator the Securities & Exchange Commission, which had a dedicated team inside Lehmans’ headquarters at 745 Seventh Avenue prior to the uber-leveraged bank’s collapse, knew all this chicanery was going on, and must therefore have given it the nod at the time. The SEC may therefore be complicit in the alleged crime and no less guilty than Lehman. Shades of the FSA’s hopelessly compromised position where failed UK banks like Royal Bank of Scotland and HBOS are concerned?

2---Denial, panic and doubt in Davos, Guardian

First there was denial, then panic, then hope – now there is nagging concern this downturn simply won't come to an end...
Many businesses are cash rich after laying off staff, mothballing investment and keeping the lid on wages, but the PwC report suggests they are in no hurry to invest their accumulated reserves.
This also comes as no surprise. Businesses will only invest if they perceive growing demand for their goods and services. But the dilemma for the CEOs gathered in Davos is that the policies they have championed in the past – fiscal austerity, weaker trade unions, aggressive cost cutting – have hammered consumer spending. In the past, spending could be supported by rising household debt, but the banks don't want to lend and consumers don't want to borrow.

This is a recipe for continued economic torpor. Three things would help: fixing the banks, a reining back of austerity and a new social compact to ensure that productivity gains are once again shared by capital and labour.

3---Fed Pushes Into Uncharted Territory as Assets Hit $3 Trillion, Bloomberg

You’d be hard pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York, and a former Fed economist. “It’s at least as revolutionary as Paul Volcker coming in and saying we’re going to hike rates until inflation” declines

4---Mortgage Purchase Index the highest since 2010, sober look
As discussed earlier (see post), mortgage rates have bottomed. In spite of that, mortgage activity for home purchases (as opposed to refinancing) has risen to the highest level since 2010. The chart below shows 30y fixed mortgage rate relative to the "Purchase Index" - a measure of mortgage applications to buy a home. Mortgage rates are still near historical lows, with small increases unlikely to deter buyers.
5---Risk appetite hits new highs, sober look
Global Risk Appetite index continues to march higher as investors embrace the "risk-on" trade.
6---Bears on the Brink: 'I Can't Fight It Anymore', 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....

"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."
How long that will take and at what point investors ought to pull some cash off the table is much more difficult to forecast, made all the harder because the bears are fighting the indomitable Federal Reserve and its money printers. The Fed has injected nearly $3 trillion in liquidity already and is promising another

7---Shiller: Housing Malaise Could Resemble Japan’s Lost Decade, CNBC

Yes, there have been a lot of positive signs in housing," Shiller conceded in a live interview on CNBC, but it's only been that way for 6 months...

Japan is the classic example," he said. "Their housing market peaked in 1991 and for the next 20 years it either went down or, at the very least, it didn't go up."
Schiller worries that jobs or the lack thereof introduces a wild card that could trigger an American lost decade in housing. "Employment has been slow to recover," he said. "This isn't what was predicted."
Historically, high unemployment isn't compatible with gains in housing prices because it creates financial anxiety. In turn, that makes people reluctant to make large purchases – especially a purchase as large as a house
"Real estate still faces risks," Shiller concluded.

8---We shall fight for Chavez "till our last breath", :Interview Venezuelan vice president Nicolas Maduro, RT

Each of us is first and foremost a fighter, a man of the street. We walk to work, or take the subway. We’ve been engaged in struggle ever since we were kids. Caracas and its various locations have been our battleground, where we engaged in the student movement and the alternative union movement, which dates back to the 1990s, just as Hugo Chavez emerged as a leader. Once he came out in public and made his address to the nation on February 4, 1992, wearing his beret, we told ourselves, “This is the road we shall take.” And ever since that day, there wasn’t a day in my life when I wouldn’t be working for Chavez, because working for him means working for the sake of the country.
That will be the case till our last breath.

We don’t believe in “making a successful career in politics,” as some people’s aspirations are described. That kind of thinking belongs in a bourgeois political culture, which is no longer in our country. The only career we know is one of revolutionary struggle, as soldiers fighting for the cause of Chavez. This is who we are: soldiers who fight for the cause of Chavez, and we’ll go wherever our duty takes us.

The US is, in fact, an empire that was established as a union of 13 independent colonies located on North America’s East coast. Throughout the 19th century, this nation expanded its territory, asserted its military might and imposed its policies and its trade on neighboring countries, and in the 20th century, it emerged as a global superpower. Ever since the Bolivarian era the US has looked down on Latin America and the Caribbean as its backyard. But President Chavez and the Bolivarian Revolutionary Movement expect that, sooner rather than later, the elite that run that mighty empire will find themselves forced to recognize our region’s independence and respect our leaders.

This is absolutely inevitable. Yet it’s not that they will do us a favor and grant us independence, like we are a former colony of theirs, but as a result of our own efforts. Today, the nations of Latin America and the Caribbean are winning independence once more, just as they did back in the 19th century. In Venezuela, we run our own country, thanks to Hugo Chavez and the victorious people’s revolution. And in tune with the other nations of our continent, our government has conveyed a message to President Obama on behalf of President Chavez during a recent ministerial meeting, saying that we wouldn’t mind improving our relations with the US and restoring mutual respect between our nations as far as possible.

But whenever we would attempt a rapprochement with the Obama administration, we would always face sabotage from the conservatives who build the core of the US military-industrial and media complex, which oppressively controls the entire nation, the same way as it oppresses the rest of the world.

That said, we wouldn’t mind restoring a fully functional relationship with the US based on mutual respect. If it eventually works out, we would be happy with that. But we will not be dominated.
The US is the only country in the world that has that much trouble dealing with other nations, because they haven’t come to grips with the new global reality yet. But they will have to soon. We have been telling them for years, and it’s time they should realize that the world has changed, and they can no longer dominate through air strikes and intimidation

9---Deficit Hawk Down, Paul Krugman, NYT

...the third reason the deficit scolds have lost influence: the ... claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice. Consider ... the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies,... the sudden, severe medicine ... threw the nation back into recession.
At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But ... there was also ... a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout. ... Prominent deficit scolds can no longer count on being treated as if their wisdom, probity and public-spiritedness were beyond question. But what difference will that make?
Sad to say, G.O.P. control of the House means that we won’t do what we should be doing: spend more, not less, until the recovery is complete. But the fading of deficit hysteria means that the president can turn his focus to real problems. And that’s a move in the right direction.
10---Blind about subprime, economic populist

From the newly released 2007 FOMC meeting transcripts:
On August 10, 2007, the Committee reviewed developments in money and credit markets, where strains had worsened in the days since its last meeting. Participants discussed the condition of domestic and foreign financial markets, the Open Market Desk's approach to open market operations, possible adjustments to the discount rate, and the statement to be issued immediately after the conference call. On August 16, 2007, the Committee again met by conference call. With financial market conditions having deteriorated further, meeting participants discussed the potential usefulness of various policy responses. The discussion focused primarily on changes associated with the discount window that would be directed at improving the functioning of the money markets....

On August 10th, 2007 was the subprime jig was up. Other institutions wanted to stop buying derivatives based on subprime mortgage loans due to dependencies. This started freezing up credit markets. ....

More amazing is how short the August 10th meeting actually is. A 100 foot financial tsunami was visible in the distance and not a alarm bell was sounded. Only Jeff Lacker asked a question as to why commercial paper was freezing up and the Fed asset repurchasing involved mortgage backed securities intervention. William Dudley's response on their $19 billion dollar repurchase of one derivative as an intervention gets the prize for how much in denial the FOMC were about subprime backed derivatives.
Our feeling is that the $19 billion we added today should be more than enough, and so we would expect the fed funds rate to come off.
And so began the series of mortgage backed securities repurchasing that is still going on today, five years later.

11---Banks are controlling the flow of distressed properties onto the market, Dr Housing Bubble

Nearly 10 percent of borrowers are still in deep trouble with loan-to-value ratios above 125 percent. 22 percent of properties with a mortgage are still underwater and this is a sizable amount. The drastic drop in inventory is uncharacteristic but does make sense. Banks are controlling the flow of distressed properties onto the market. We currently have over 5 million homes in some sort of distress (foreclosure or with at least one missed payment). This has been going on since the housing bubble popped. The total completed foreclosure count is somewhere around 5 million.

12--Shadow banking; Paul Mcculley (archive), zero hedge

The invisible hand, however, naturally wanted to get
the oligopoly profits associated with banking while reducing the impact
of some regulation. Thus, the Shadow Banking System came into
existence, where the net interest margin associated with maturity,
liquidity and quality transformation could be earned on a much smaller
capital base.

And, in fact, that’s what happened starting
essentially in the mid-1970s, accelerating through the 1980s and 1990s,
and then exploding in the first decade of this century.

The birth of the Shadow Banking System required that
capitalists be able to come up with an asset – which actually for
shadow bankers is a liability – that was perceived by the public as
just as good as a bank deposit. Remember, the public has an ex-ante
demand for something that trades on demand at par. Therefore, shadow
bankers had to be able to persuade the public that its asset – which is
actually the shadow banker’s liability – was just as good as the real
thing. If they could do that, then they could have one whale of a good
On August 9, 2007, game over. If you have
to pick a day for the Minsky Moment, it was August 9. And, actually, it
didn’t happen here in the United States. It happened in France, when
Paribas Bank (BNP) said that it could not value the toxic mortgage
assets in three of its off-balance sheet vehicles, and that, therefore,
the liability holders, who thought they could get out at any time, were
frozen. I remember the day like my son’s birthday. And that happens
every year. Because the unraveling started on that day. In fact, it was
later that month that I actually coined the term “Shadow Banking
System” at the Fed’s annual symposium in Jackson Hole.
while the run commenced on August 9th of 2007, it was pretty much an orderly run up
until September 15, 2008. And it was orderly primarily because the Fed
– and here I give the Fed credit, not criticism – evoked Section 13-3
of the Federal Reserve Act in March of 2008 in order to facilitate the
merger of under-a-run Bear Stearns into JPMorgan....
But then came the run on Lehman Brothers, and the
Fed didn’t have the legal power to implement a Bear-like rescue. And
then the Reserve Fund broke the buck. That week will be one that we
remember for the rest of our lives. It will also be one that we will
remember where the Fed was at its finest hour. The Fed created a whole
host of facilities to stop the run. In fact, they expanded the Primary
Dealer Credit Facility to what are known as Schedule 2 assets, which
meant that dealers could rediscount anything at the Fed that they could
borrow against in the tri-party repo market.....
bottom line, you had the Fed step up and provide
its public good to the Shadow Banking System. You had the FDIC step up
and do the same thing with its public good. And as Paul Volcker was
noting this afternoon, you had the Treasury step up and provide a
similar public good for the money market mutual funds, using the
Foreign Exchange Stabilization Fund. It was a triple-thick milk shake
of socialism. And it was good. Again, I’m not being pejorative. I’m
being descriptive.
Banking is inherently a joint venture between the
private sector and the public sector. Banking inherently cannot be a
solely capitalistic affair. I put that on the table as an article of
fact. And, in fact, speaking at a Minsky Conference, I know I’m
preaching to the converted. Big bank and big government are part of our
catechism. And, in fact, that’s exactly what came to the fore to save
us from Depression 2.0....
 If you’re going to act like a
bank, you’re going to be regulated like a bank. That simple
Obama has repeatedly signaled his willingness to revive a tentative deal with House Speaker John Boehner, reached in July 2011, which called for substantial cuts in both Medicare and Social Security: raising the eligibility age for Medicare from 65 to 67, and cutting future cost-of-living increases for Social Security recipients by changing the formula by which they are calculated.

The Obama administration was quick to welcome the Republican move on the debt ceiling because, while it is concerned about the status of US treasuries, it is united with Republicans on its commitment to enforce unpopular cuts to key social programs.

Liberal commentators have hailed Obama’s Second Inaugural address as a renewed commitment to “modern liberalism.” What this means is the combination of empty demagogy and identity politics with a historic attack on the working class

14---QE pushes Dow towards 2007 record high, motley fool

When the Dow Jones Industrials (DJINDICES: ^DJI ) 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?


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