Wednesday, February 13, 2013

Today's links

1---Sequestration: Cuts to Defense Are Puny, Won’t Hurt Economy or Security, antiwar

Via the Cato Institute’s Malou Innocent, this study from the Center for International Policy finds that “Pentagon spending is an especially poor job creator” compared to “virtually any other use of the same money, from a tax cut to investments in infrastructure to spending on education.”
Warnings of doom to the economy, or to national security, are groundless scare stories coming from the groups of people who benefit most from the government’s most lucrative and deadly welfare program.
Over the last decade Russia’s Central Bank acquired 570 metric tonnes of gold. The amount is almost triple the weight of the American Statue of Liberty and makes Russia the world’s biggest buyer of gold.

The amount is a qurter more than runner-up China, Bloomberg reported on Monday.
Countries like Russia and China use such stockpiles as an economic buffer against another wave of economic crisis or US dollar devaluation, as both remain weary of the US Federal Reserve’s stability and prefer to edge their bets on gold.

It’s also proven a sound investment and opportunity for the Russian state to make money, with gold prices crawling upwards over the past 12 years, gaining 12% in 2012 alone. On Monday gold traded at $1650 per ounce and analysts expect the price to keep growing in 2013 to reach $1825 by the end of the year. However French investment bank Natixis dampened the outlook by forecasting a drop in price to $1500 by 2014, reports

4---Fewer Borrowers Are Behind on Mortgages, but for How Long?, CNBC

The declines in the mortgage delinquency rate will likely be muted for the foreseeable futures as the foreclosure process in some states can take more than 1,000 days," notes Tim Martin, of TransUnion's financial services business unit. "It is not clear yet, but recently announced regulatory rules related to mortgage servicing may tend to slow down this process further.
Delinquencies dropped 6 percent annually in 2011 and 7 percent in 2010. This after jumping over 50 percent in each of the previous two years. The trouble is not with new loans but with a long legacy of troubled loans from the housing boom. While these loans make up 60 percent of mortgages outstanding, they account for 90 percent of loans gone bad. Attempts at loan modifications as well as long delays in the foreclosure process have kept these loans stuck in a bloated pipeline

There are borrowers today that have not made a mortgage payment in several years but have still not lost their homes. New laws in California and Nevada slowed the foreclosure process considerably, while New York and New Jersey are still facing huge backlogs of bad loans that will take years to make their way through the states' court process.
(Read More: New Housing Fears: Home Prices Are Rising Too.)
Nationally, the mortgage delinquency rate now stands at 5.19 percent, down from 6.01 percent a year ago, but still far from the historical average of around one to two percent. While loans made in the past few years, using far stricter underwriting, are faring very well, there is a concern that thousands of mortgage modifications made during the same time will default again. Negative equity, while improving, continues to plague millions of borrowers and makes selling the home impossible. Should these borrowers need to move, they will likely have to default on their home loans..

5---  Rich Continue to Get Richer: the Top 1% Got 121% of Income Gains Since 2009, naked capitalism

6---Australia's real estate bubble, macrobusiness

In conclusion, the data presented should provide more than enough evidence to suggest that Australia’s residential property market (specifically land market) is vastly overvalued, driven by debt-financed speculation and the relative non-taxation of land rent. While land bubbles have been a continual feature of the Australian economy, what separates this cycle is the relative enormity of the boom in both land values and private debt. A smaller private debt to GDP ratio during the 1880s and 1920s was enough to produce two devastating depressions, including a number of recessions during the mid-1970s, early 1980s and early 1990s.

The question is often asked why housing prices are so high. Instead, the real question is to ask why prices are so low. The banking and financial system is ready to lend absurd amounts of debt to the willing army of “greater fools,” and has constructed an elaborate chain from mortgage brokers’ offices through to the business development managers (BDMs) at the banks in order to commit extensive fraud by manipulating loan application forms. This is the “six degrees of separation” Denise Brailey has uncovered. Consequently, the only determinant that prevents the banks from lending more credit is debtors’ ability to finance repayments out of current income. Only when it becomes difficult to finance repayments will the housing and land markets finally capitulate.

7---TARP: not a sucess story, marketwatch

8---Your new landlord lives on Wall Street, New Republic

According to a recent JPMorgan Chase report, Wall Street has already raised or committed as much as $10 billion for REO-to-rental, enough to purchase 15 percent of all bank-owned homes. The hedge fund Blackstone, a market leader with at least $2.7 billion in purchases already, announced in November the intention to buy $100 million worth of homes every week, with $1 billion in homes just in the Tampa Bay area. JPMorgan Chase recently put money from wealthy clients into the purchase of 5,000 single-family homes for rent in Arizona, California, Nevada and Florida, the so-called “sand states” which saw the greatest collapse during the foreclosure crisis. One study from the Urban Strategies Council showed that 42 percent of all homes that fell into foreclosure in Oakland, California between 2007 and 2011 have gone to investors. “Anybody here in Florida can see the rental signs; they’re everywhere,” said Michael Olenick, a housing data analyst based in the West Palm Beach area.

Government policy has helped this along: Mortgage giants Fannie Mae and Freddie Mac have pilot programs to sell their foreclosed properties for rental conversion in bulk. But these programs have proven slow and unwieldy, so Wall Street firms have made the lion’s share of the purchases directly. And they have all begun to compete with one another for the rapidly dwindling inventory. “It’s hard to find a private equity firm on the planet that doesn’t have a strategy in this space,” said Gary Beasley in January at a conference of the American Securitization Forum. Beasley is chief executive of the Oakland, California-based Waypoint Homes, an early adopter of REO-to-rental, purchasing thousands of single-family homes since 2011....

Moreover, this is distorting the housing markets in these communities. Investors rushed into Phoenix to snap up foreclosed homes, buying 36 percent of all properties in August 2012. That number coincided with a big run-up in prices; Phoenix home prices shot up 34 percent year-over-year in November, according to one estimate. There is no logical reason why Phoenix home prices should have moved this much based on the fundamentals, absent the factor of speculative investor purchases. And a spectacular run-up like that absent a real economic boom is a prelude to a crash, as we saw during the financial crisis.
This trend has occurred practically everywhere the REO-to-rental investors have intervened, including several markets in California, Tampa, Orlando, Charlotte, Las Vegas, Chicago and Atlanta. The rising prices have only accelerated the purchases, as the investor groups competing with one another try to secure as many properties as possible before the window closes. First-time home buyers and shoppers looking to get into the market have found it difficult to compete, getting outbid by the investors. “It’s weird that we have this housing recovery with no homeowners involved,” said Bashiri of Occupy Our Homes Atlanta...

It begs the question of whether the incipient housing recovery itself is artificial, driven up by the investor gold rush. A recent research note from RadarLogic makes the point that there’s no reason to believe that the run-up in institutional investor demand will somehow connect to future household demand, especially given stagnant wages and tighter mortgage standards. As the Financial Times’ Stephen Foley wrote, “the risk is that the flippers represent an overhang of inventory that will keep a lid on prices, as they trickle their properties out into the market.” After all, the eventual investor strategy is to sell the homes. If prices continue to escalate in these markets, investors will not be able to meet their returns and will look to sell more quickly. If they dump large segments of their properties onto the market at once, they’ll create a glut in supply. “That has the potential to unleash a new wave of declining home prices,” says Michael Olenick, the housing data analyst
Analysts insist that REO-to-rental does not represent a bubble, that the rental revenue streams will satisfy investors and prevent a mass sell-off. But any disruption in the economy would affect the market for rental housing, leading to longer vacancies and lower returns on investment. And the textbook definition of a bubble consists of speculation chasing an appreciating asset. This is precisely what we have in REO-to-rental. In the words of analyst Josh Rosner of Graham Fisher, “the speculative boom has returned.”Investors have begun to pull out of one of the leading edge markets, Phoenix, as most of the foreclosed properties worth purchasing have been snapped up. The big run-up in prices there could collapse as demand collapses, depressing prices and putting the recovery in jeopardy. And any economic downturn would increase rental vacancies and send this entire market reeling. We may not only have a bubble, but already the beginnings of a bust....

One sign that this resembles a speculative bubble is that REO-to-rental has become a new asset class. Real Estate Investment Trusts (REITs), kind of a mutual fund for real estate that eliminates tax liability for the issuers, have been established as a conduit for capital formation. REITs like Silver Bay and Altisource Residential went public in December 2012, and many of the Wall Street firms buying in this space expect to create public REITs in the near future. They promise dividends from the rental income for their investors in the 5-7 percent range, though other investment groups promise even higher returns. In a time of low interest rates, that’s an attractive option. There’s a dearth of investable assets for institutional investors,” says Josh Rosner. While investors have questions about the long-term viability of bulk rental property management, the money keeps flowing into the space.
Perhaps worst of all, Wall Street has begun to explore the option of securitizing the rental revenue, much in the way that they used mortgage-backed securities to ramp up capital in the bubble years. Three separate REO-to-rental trusts appeared on the market, under the administration of Wells Fargo, in the past couple months. These are non-public offshore trusts that are unregistered with the SEC, and in all likelihood have no credit ratings, as the rating agencies have this time shied away from rating an unproven product. But they’ve attracted enough interest to move forward.

Data from the Federal Reserve Bank of New York shows that securitization inevitably leads to riskier behavior. There’s no reason on earth financial institutions should be able to convince investors again that, through sophisticated alchemy, they can slice the rental revenue pools into tranches and guarantee returns no matter the vacancy rate or the economic climate. But we’ve seen this movie before, and the first one ended rather badly.

9--"Distressed" home sales dry up, calculated risk

Short Sales ShareForeclosure Sales ShareTotal "Distressed" Share
Las Vegas36.2%28.1%12.5%45.5%48.7%73.6%
Mid-Atlantic (MRIS)13.1%16.4%12.7%16.9%25.8%33.3%
Hampton Roads34.9%37.2%
Metro Detroit36.3%54.5%
*share of existing home sales, based on property records

10---Home Prices Rise in 88% of U.S. Cities as Recovery Gains, Bloomberg

11---The Deficit Chart That Should Embarrass Budget Hawks,

Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession.

To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn't. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.
Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession.

Far steeper deficit cuts during the demobilization from World War II and in 1937-38 both precipitated economic reversals.
Now the deficit is shrinking about 50% faster than it did during the booming late 1990s, when the jobless rate was falling south of 5% and tax revenues were soaring — without tax hikes.
That's not to say that a recession is in the cards now, as the Federal Reserve applies its might to keep housing on a recovery path and helps propel the stock market higher. But growth is likely to be disappointingly weak yet again.
The Congressional Budget Office projects just 100,000 jobs will be added per month this year, the jobless rate will remain stuck around 8% and the economy will grow 1.4% if the sequester takes effect, but that may be too optimistic.

12---Economists Who Could not See an $8 Trillion Housing Bubble Say that We Need $4 Trillion in Deficit Reduction, CEPR

In his State of the Union Address last night President Obama told the country that unspecified economists say that we need to reduce the deficit over the next decade by $4 trillion from the levels projected in 2010. It would have been worth noting that almost all of the economists who say this completely missed the $8 trillion housing bubble whose collapse sank the economy. There is no reason to believe that their understanding of the economy has improved in the last 5 or 6 years.

It would be helpful to remind listeners that President Obama is apparently having his economic policy dictated by economists who do not seem to know how the economy works.

13--Obama discusses state of housing, urges refi bill passage, housingwire

14---The Growing Corporate Cash Hoard, economix

According to the Federal Reserve, nonfinancial corporations historically held liquid assets of 25 to 30 percent of their short-term liabilities. But this percentage began rising in 2001 and now tends to be in the 45 to 50 percent range. In the third quarter of 2012, it was 44.9 percent.

Federal Reserve Bank of St. Louis analysis of Compustat data
15---The GOPs "Big Lie", Robert Reich
Perhaps most importantly, it advances the Republican’s biggest economic lie – that the budget deficit is “the transcendent issue of our time,” in McConnell’s words, and that balancing the budget will solve America’s economic problems.
Big lies can do great damage in a democracy. This one could help Republicans in their coming showdowns. But it could keep the economy in first gear for years, right up through the 2014 midterm elections, maybe all the way to the next presidential election.
Perhaps this has occurred to McConnell and other Republicans.
Here’s the truth: After the housing bubble burst, American consumers had to pull in their belts so tightly that consumption plummeted – which in turn fueled unemployment. Consumer spending accounts for 70 percent of economic activity in the U.S. No business can keep people employed without enough customers, and none will hire people back until consumers return.
That meant government had to step in as consumer of last resort – which it did, but not enough to make up for the gaping shortfall in consumer demand.
The result has been one of the most anemic recoveries on record. In the three years after the Great Recession ended, economic growth averaged only 2.2 percent per year. In the last quarter of 2012 the economy contracted. Almost no one believes it will grow much more than 2 percent this year.
In the wake of the previous ten recessions the U.S. economy grew twice as fast on average — 4.6 percent per year. It used to be that the deeper the recession, the faster the bounce back. The Great Depression bottomed out in 1933. In 1934, the economy grew more than 8 percent; in 1935, 8.2 percent; in 1936, almost 14 percent.
Not this time. Unemployment is still sky high. The current official rate of 7.9 percent doesn’t include 8 million people (5.6 percent of the workforce) working part-time who’d rather be working full time. Nor those too discouraged even to look for work. The ratio of workers to non-workers in the adult population is lower than any time in the last thirty years – and that’s hardly explained by boomer retirements.
Wages continue to drop because the only way many Americans can find (or keep) jobs is by settling for lower pay. Most new jobs created since the depth of the Great Recession pay less than the jobs that were lost. That’s why the real median wage is now 8 percent below what it was in 2000
Republicans who say the budget deficit is responsible for this are living on another planet. Consumers still don’t have the jobs and wages, nor ability to borrow, they had before the recession. So their belts are still tight. To make matters worse, the temporary cut in Social Security taxes ended January 1, subtracting an additional $1,000 from the typical American paycheck. Sales taxes are increasing in many states.
Under these circumstances, government deficits are not a problem. To the contrary, they’re now essential. (Yes, we have to bring down the long-term deficit, but that’s mostly a matter of reining in rising healthcare costs – which, incidentally, are beginning to slow.)
If Republicans paid attention they’d see how fast the deficit is already shrinking. It was 8.7 percent of the Gross Domestic Product in 2011. The Congressional Budget Office forecasts it will shrivel to 5.3 percent by the end of 2013 if we go over the fiscal cliff on March 1 — and some $85 billion is cut from this year’s federal budget. Even if March’s fiscal cliff is avoided, the CBO expects the deficit to shrink to 5.5 percent of the GDP, in light of deficit reduction already scheduled to occur.
This is not something to celebrate. It translates into a significant drop in demand, with nothing to pick up the slack.
Look what happened in the fourth quarter of 2012. The economy contracted, largely because of a precipitous drop in defense spending. That may have been an anomaly; no one expects the economy to contract in the first quarter of 2013. But you’d be foolish to rule out a recession later this year.
The budget deficit and cumulative debt are not the “transcendent issue of our time.” The transcendent issue is jobs and wages. Cutting the budget deficit now will only result in higher unemployment, lower wages, and more suffering
The budget deficit in 2013 is expected to fall below $1 trillion for the first time in five years. Perhaps policy makers in Washington can now focus on the other $1 trillion deficit, one that gets next to no attention yet is much more threatening to the well-being of American families: our sluggish economic growth.....
Growth this year will average only 1.4 percent, according to the budget office’s latest forecast. By the time we recover to our potential — which the C.B.O. expects will take until 2017 — the Great Recession set off by the implosion of the housing bubble more than five years ago will have cost us nearly half of one year’s entire economic production: about $7.5 trillion.
We will be paying the price for years. The slump is hindering capital investment, stunting the careers of college graduates and encouraging workers to drop out of the labor force, potentially blighting the economy over the long term. The C.B.O. expects unemployment to remain above 7.5 percent through next year.
And low growth is crimping government finances — reducing tax revenue while, at the same time, increasing the cost of programs like unemployment insurance. Last year, the budget office calculated that sluggish growth alone was responsible for more than a quarter of the budget deficit over the last four years.

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