Tuesday, April 30, 2013

Today's links

1---U.S. Stocks Fall as Business Activity Unexpectedly Drops, Bloomberg

Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, a sign manufacturing may be a smaller contributor to economic growth this quarter. The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month. A reading less than 50 signals contraction...

Earnings season has been OK, but it’s not like it’s growing strongly,” Brad Thompson, director of research at Frost Investment Advisors LLC in San Antonio, Texas, said in a phone interview. His firm manages $9 billion.

2---Congressional Democrats Pushing Back Against Obama’s Austerity Budget, Firedog Lake

3---Consumer agency risks credibility on new ruling, Firedog Lake

the “qualified mortgage,” set by the CFPB, and the “qualified residential mortgage,” set by a different committee of regulators. This short primer from the Virginia Association of Realtors explains the difference.
The standard for QMs is fairly broad: A lender must ensure that any borrower has the ability to repay the loan. (There are nine standards that determine this.)
Just about every loan is going to be a QM — there are legal penalties for banks that write loans that don’t meet the standards. And by meeting the standards, lenders are shielded from some liability. (Borrowers won’t be able to say “The bank should have known I couldn’t pay.”)
QRMs, on the other hand, are a subset those loans. They have to meet stricter standards — standards that still haven’t been determined, and could include the infamous 20%-down requirement.
 Banks and other lenders are free to make non-QRM loans, but there are discouragements. For one, the lender could only sell 95% of the loan to the secondary mortgage market; it would have to keep 5% on its books as “skin in the game.”
More importantly, neither Fannie Mae nor Freddie Mac will buy any part of a non-QRM loan. Considering they own 90+ percent of the secondary mortgage market, that means it will be pretty hard for any lender to sell a loan that doesn’t meet QRM standards.
The part I highlighted the blockquote is pretty revealing. The industry assumed last year that lenders would get a shield from liability on qualified mortgages. But the statute always granted an undefined set of protections from liability, presumably just on the concept of ability to repay, as stated above.
But there’s no real reason to provide this gift to the mortgage industry for doing their job. Mortgages happen to be more profitable than ever; the spread between what lenders get for selling loans in the secondary market and what they charge in an interest rate to a borrower have never been higher.

Every major bank that reported earnings this quarter so far showed that their mortgage business brought in massive profits. Lenders will be enticed to sell qualified mortgages because there’s lots of money to be made in qualified mortgages.

But lenders want something more. They want to basically short-circuit the judicial foreclosure process as much as possible, getting a blanket safe harbor for as many qualified mortgages as possible. Liability wasn’t determined specifically in the statute, so the rule has some leeway here. The Mortgage Bankers Association is quoted in the WSJ piece as seeking protections for subprime loans as well as higher-quality ones. ...

Obviously CFPB is concerned about writing a rule that leads to a perception of constricting credit. But they are going way too far in the direction of leniency toward the banks. The last industry to which anybody should be granting legal safe harbor is the mortgage industry, given past (and present) experience. This just invites lax lending standards and all the abuses of the bubble years, without any of the aftermath for lenders.

CFPB’s credibility is on the line with this rule.

4---CBO: Deficit Shrinking At Fastest Pace Since WWII As GDP Sputters, investors

The main take-away from the Congressional Budget Office's new fiscal and economic outlook is that, collectively, Washington has put deficit reduction way ahead of jobs and growth.

After a burst of stimulus and financial rescue outlays in 2009, the
fiscal retrenchment over the past three years was arguably steeper than at any time since World War II (see chart). Now, with stimulus and bailouts no longer clouding the picture, there's no question that the deficit is shrinking faster than it has in more than 60 years. Based on existing policies, CBO projects the deficit will shrink to 5.3% of GDP in fiscal 2013, down 3.7 percentage points since 2010.

Even during the '90s economic boom, the deficit never fell by more than 3 percentage points over any three-year period, but at that point the economy was growing twice as fast in real terms, producing a revenue windfall.

Now, after the economy crawled ahead at a growth rate barely above 2% over the past three years, the confounding response from inside the Beltway has seemingly been, "Too fast!"
Thanks to the fiscal cliff tax hikes approaching $200 billion in 2013, as well as automatic spending cuts set to take effect in March, the new fiscal and economic outlook from the Congressional Budget Office projects real GDP growth of 1.4%.
The jobless rate, now 7.9%, is seen ending the year at 8%, with the average 100,000 jobs added a month not enough to keep up with growth in the working population.
A look at U.S. fiscal history would seem to confirm that the deficit is shrinking much too fast.

Outside of the demobilization from WWII, the only time the deficit has fallen faster was when the economy relapsed in 1937, turning the Great Depression into a decadelong affair.
Other occasions when the federal deficit contracted by much more than 1 percentage point a year have also coincided with a recession, including 1960 and 1969.

A long-term deficit problem needs to be addressed, but we're going about it the wrong way, at an unnecessarily high cost.

 Even if the automatic spending cuts did not go into effect this year, the deficit of 5.5% of GDP would still show by far the biggest three-year improvement since World War II.
On the one hand, it seems that the deficit scolds need to get their priorities right.
On the other hand, it seems that until we wrestle with the full spectrum of entitlement programs, our deficits and demographics will create a psychological hurdle to growth

5---A scary graph from G Sax, WA Post


 On Friday,” writes Alec Phillips, an economist at Goldman Sachs, “we lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect.”

With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Here’s their graph, which adds a bit of historical perspective:

Goldman Sachs
Goldman Sachs
“Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years,” writes Phillips. Ouch. That’s a very big drop in a very weak economy

6---Maybe no housing rebound for a generation: Shiller, Reuters

7---No doc refis, DS News

8---Report: Originations Total $500B in Q1, DS News

Additionally, with rates low and origination volume remaining strong, FBR expects the second quarter is well-positioned to surpass the first.

“As such, we continue to believe our expectations for a $1.7 trillion market in 2013 are realistic given a significantly longer tail to refinancing volumes than expected by [Wall] Street,” the firm said. “Additionally, we believe the upcoming government marketing campaigns and improving housing/purchase markets will act as further boons to already strong tailwinds

9---Fitch: Recent Price Gains May Not Be Here to Stay, DS News

10--Pending home sales at a 3-year high, USA Today

11---Moody's: Home Prices to Increase, Loss Severities to Remain High , DS News

Recent price gains have resulted from high affordability, soaring investor interest, and low inventories with declining foreclosure inventories playing a major role. ...

Distressed and foreclosed homes “will still distort house price trends over the next year or two, but to a far lesser extent, particularly for the states with especially wild swings,” Moody’s said.
States with lengthy foreclosure timelines will continue to be hindered by their foreclosure inventories, but the slow pace will prevent a flood on the market.

Nationally, the market holds about 3 million homes in serious delinquency or foreclosure—which is about 3 times the normal level, according to Moody’s.

Foreclosures increased 12 percent year-over-year in February, according to RealtyTrac. However, Moody’s points out a few states claim the lion’s share of this increase—New York, New Jersey, Illinois, Ohio, and Florida. When these states are taken out of the equation, foreclosures declined 11 percent over the year.

Outward economic factors will play positively on housing markets in the South and West, while the Northeast and Midwest will continue to struggle in the near future.

Regardless of the overall price increased expected across the nation, Moody’s expects residential mortgage-backed securities (RMBS) loss severities to remain elevated for the next year.
Almost 40 percent of delinquent loans have been delinquent for three or more years, which translates to much greater losses than on loans in delinquency for shorter time periods.

Aged delinquencies are more likely to encounter hiccups with titles, documentation, and judicial backlogs, while expenses continue to accumulate.

Bank of America and Chase hold high levels of delinquencies aged three years or more—46 percent and 43 percent, respectively—when compared to their counterparts, according to Moody’s.
Therefore, they “will generally realize higher loss severities than others,” Moody’s said.

Today's links

1---Debt and Growth: A Response to Reinhart and Rogoff, NYT

 There is no evidence in these most recent years for any drop-off at all in economic growth when public debt exceeds 90 percent of G.D.P....
Ms. Reinhart and Mr. Rogoff have published several other papers, including a 2010 academic article, “Growth in a Time of Debt.” It found that economic growth was notably lower when a country’s gross public debt equaled or exceeded 90 percent of its gross domestic product.
Earlier this month, we posted a working paper, co-written with Thomas Herndon, finding fault with this conclusion. We identified a spreadsheet coding error — which Ms. Reinhart and Mr. Rogoff promptly acknowledged — that affected their calculations of growth rates for big economies since World War II. We also asserted that the two of them erred by omitting some data and improperly weighting other statistics. In an Op-Ed essay and appendix last week, Ms. Reinhart and Mr. Rogoff denied those accusations.
They referred to this debate as an “academic kerfuffle,” but we believe the debate has been constructive, because it has brought greater clarity over the ideas shaping austerity policies in both the United States and Europe.
The most important insight for anyone following this debate, and one that Ms. Reinhart and Mr. Rogoff acknowledge, is that there is no evidence supporting the claim that countries will consistently experience a sharp decline in economic growth once public debt levels exceed 90 percent of G.D.P. Although the two of them partly backed away from that claim in a 2012 paper in The Journal of Economic Perspectives, they have now done so more definitively, saying the 90 percent figure is not “a magic threshold that transforms outcomes, as conservative politicians have suggested.”
However, Ms. Reinhart and Mr. Rogoff stubbornly maintain that “growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product,” a core finding of their 2010 paper.
There are serious problems with this claim....
We agree with Ms. Reinhart and Mr. Rogoff that the United States and Europe face extremely difficult challenges in trying to recover from the 2007-8 financial crisis and the Great Recession that followed. Sadly, in our view, they abetted, or at least failed to stop, the use of their scholarship by politicians who latched on to their findings — in particular the now discredited 90 percent figure — to call for severe cuts in government budgets and services, layoffs of public-sector employees and tax increases.
What this debate has demonstrated is that policy makers cannot defend these austerity measures on the grounds that public debt exceeding 90 percent of G.D.P. will consistently produce sharp declines in economic growth.
Here is the OECD report, dancing: "The public debt ratio has risen steadily for two decades, to over 200% of GDP. Strong and protracted consolidation is therefore necessary to restore fiscal sustainability, which is Japan's paramount policy challenge. ... Stopping and reversing the rise in the debt-to-GDP ratio is crucial. Stabilising the public debt ratio by 2020 may require, depending on the evolution of GDP and interest rates, an improvement of the primary fiscal balance from a deficit of 9% of GDP in 2012 to a surplus as high as 4% by 2020. Controlling expenditures, particularly for social security in the face of rapid population ageing, is key. Substantial tax increases will be needed as well, although this will also have a negative impact on growth. Given the size and duration of fiscal consolidation, Japan faces the risk of a marked rise in interest rates, threatening a banking system that is highly exposed to Japanese government debt."

Contemplate that for a moment: the recommendation is for moving from a deficit of 9% of GDP in 2012 to a surplus of 4% of GDP by 2020--that is, a swing in the government budget balance position of 13% of GDP in just 8 years. 

The U.S. debt situation differs from that of Japan in two ways: 1) the U.S. debt/GDP ratio is far smaller; and 2) domestic savings in Japan are high enough that the country can finance its government borrowing from domestic sources. In contrast, the U.S. government has depended for years on inflows of foreign investment capital to finance its debts. Thus, Japan's government needs to be concerned that its domestic savers will start looking elsewhere for higher rates of return, while the U.S. government needs to be concerned as to whether international investors will continue to put their money in Treasury bonds.
The sequester will slow growth, but the real problem is Obama has ceded so much to the Republicans' deficit-cutting agenda 
The big talk in Washington, DC this month is the sequester. These cuts account for roughly 8% of most discretionary spending, both military and domestic. While the cuts became effective at the start of March, many will first begin to feel the pinch this month, since government contracts generally require 30 days' notice for leaves or furloughs. This means that cuts in areas like airport security, food quality and air traffic control are just now taking effect. ....
In addition, the reduction in spending at a time when the economy is already weak will further slow down growth and weaken job creation. The March jobs report reminded everyone of this problem (April's is due later this week): the economy created only 88,000 jobs in March, less the number needed just to keep pace with the growth of the labor force.

The economy was growing at just a 1.7% annual rate in the second half of last year. The most recent data on new orders for equipment show that investment was just even with its pace last year. The rate of job creation over the prior five months was actually down from this time last year, by an average of 40,000 jobs. ...

None of this looks like a story of accelerating growth. Thankfully, the March jobs report helped bring discussion on the economy back to reality: the experts again recognize that we have a problem of a seriously depressed economy, which, at best, is growing just rapidly enough to keep pace with its underlying potential – and thus making up none of the lost ground from the downturn.

In this context, the hit from the sequester is clearly bad news. The Congressional Budget Office projects that it will reduce growth in 2013 by 0.5%, which will cost as many as 700,000 jobs. With the sequester in place, there is a high probability that the unemployment rate will be higher at the end of the year than it was at the beginning.

But there is a limit to how much President Obama and the Democrats can really complain. The reason is that President Obama himself set a course for large cuts in discretionary spending. His budget for 2012 called for discretionary spending to be 7% less in 2021 than it had been in 2010, in nominal dollars. This budget would have implied cuts in services of more than 40%, since the economy was projected to be more than 60% larger in 2021 than in 2012. This means that most of the bad stories we're hearing about the sequester cuts likely would have been the result of the cuts that the president himself planned for, even if they would have been phased in more slowly.

5---ECB's emergency liquidity programs will not increase private sector demand for credit, naked capitalism

My own opinion is that this is fundamentally important and a somewhat overlooked fact of what we see in the EZ. France is an economic microcosm to understand why the ECB’s programs of OMT and LTRO can’t actually solve anything with the Eurozone. As I talked about back last September the ECB offers liquidity to the banking system via asset swaps, but if there is no private sector demand for credit, due to private sector retrenchment, then this will do bugger all to help the economies of periphery Europe. As I said then:
So QE and OMT are monetary programs that, in part, aim at increasing the leverage of the private sector, but they have only attempted to address the supply side of the equation. Fiscal policy in the EZ is continuing to lower the private sector wealth and by doing so is reducing the demand for credit which in turn is further weakening the economy. This dynamic appears to be more that offsetting the expansionary monetary program which is why you have seen the ECB’s response continue to become larger and larger over time. The Eurozone is therefore likely to continue to see poor economic outcomes even under the open-ended OMT because the insistence on the fiscal compact as a pre-cursor to renewed intervention is likely to be completely counter-productive.

6---Earnings down, Jesse
7---Russia's looters were in CIA: Putin, RIA Novoski

Experts on Harvard University’s scandal-ridden role in Russia’s privatization process in the 1990s expressed skepticism Thursday at Russian President Vladimir Putin’s assertion that US advisers to privatization czar Anatoly Chubais were operatives of the US Central Intelligence Agency (CIA).

Putin did not identify the alleged CIA agents by name during his live Q&A session with the Russian public Thursday, but his mention of the individuals’ alleged financial shenanigans suggests he may have been speaking about respected economist Andrei Shleifer and lawyer Jonathan Hay.

The two men, along with Harvard University, paid a $30 million fine in 2005 to settle US federal charges that they illegally profited off of Russian privatizations. Russian media reports have accused Shleifer and Hay of being CIA officers, though there is nothing in the public domain to suggest either man was employed by the agency.

Janine Wedel, an expert on the Harvard-Russia scandal of the 1990s, said US prosecutors thoroughly documented Shleifer and Hay’s alleged misdeeds while the men advised Chubais and other Russian officials under a Harvard-run program funded by the United States Agency for International Development (USAID)....

The privatization process in Russia in the 1990s, which saw the rapid economic rise of a well-connected class of businessmen and politicians as much of the country sank into poverty, is widely despised by Russians who see the transition as a Western-sponsored plan to enrich an anointed few by hawking the jewels of the collapsed Soviet empires

8---Large down payments provide stability to the housing market, oc housing

9---Justice O’Connor: Maybe Bush V. Gore Was A Mistake, TPM 

10---Starving the Beast: Obama proves better than Reagan, NYT

Source: Bureau of Economic Analysis, via Haver Analytics

Source: Bureau of Labor Statistics, via Haver Analytics
11---The beatings will continue, NYT

Sometimes economists in official positions give bad advice; sometimes they give very, very bad advice; and sometimes they work at the OECD.

It’s almost exactly three years since the Paris-based OECD gave what may have been the worst advice of any major international organization — worse than the European Commission, worse than the ECB. Not only did it join in the demand for fiscal austerity, it also demanded that the US start raising interest rates rapidly, so as to head off the threat of inflation — even though its own models showed no such threat.

So here we are three years later. No inflation takeoff in America (and the Fed trying to find ways to boost demand at a zero rate); austerity economics has crashed and burned; the latest numbers from Eurostat look like this

And what is the OECD’s chief economist (still the same person) saying?
The euro zone is at risk of snatching defeat from the jaws of victory by abandoning efforts to cut budget deficits and fix long-standing economic problems, the Organization for Economic Cooperation and Development‘s chief economist warned Monday.

Mr. Padoan said the growing perception that austerity has been futile is incorrect.
“Fiscal consolidation is producing results, the pain is producing results,” he said.
He added that euro-zone policy makers need to do a better job of communicating their successes to a weary population.
I believe that’s eurospeak for “the beatings will continue until morale improves.”

12---HUD homes add to inventory-starved market, Housingwire

Genis added, "Inventory is there, just not being released during the banks/servicers review of the loan/mortgage documents."

"In the case of HUD properties, HUD homes are back," he continued. "FHA financing went away with the 'creative' financing of the 80/20 loans, and now with the increase of FHA financing, these government-backed loans guarantee that if the borrower defaults, HUD will pay off the mortgage, obtain the deed and re-sell the home."

13---A slowdown in US lending or a ramp up in shadow banking? , sober look

Inside Mortgage Finance: - The private-label market is "showing new signs of life," according to Standard & Poor’s, which predicted that banks are likely to increase their securitization of jumbo mortgages. In a report released late last week, S&P projected $14 billion in non-agency jumbo MBS in 2013. Redwood alone set a goal of issuing $7 billion in non-agency MBS this year and is on pace to exceed that volume, helped by a pending $425 million deal, its sixth of the year. PennyMac Mortgage Investment Trust is also aiming to issue a non-agency jumbo MBS in the Redwood mold in the third quarter of 2013.

The demand for fixed income product has manifested itself in the so-called "private-label" MBS, allowing banks to securitize mortgages that don't qualify for Freddie and Fannie. Once again, it's not about lending less - which is how some economists are reading the first chart above. It's about originating product, collecting fees, and then selling into the hot securitization market - public or private. And taking those loans off the balance sheet creates room to do it all over again (the "recycling" of capital.) As one banker put it, "I want to be in the origination and fee business, not in long-term warehousing ..."

14---From S&P: Home Prices Rise in February 2013 According to the S&P/Case-Shiller Home Price Indices, cal risk
Data through February 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed average home prices increased 8.6% and 9.3% for the 10- and 20-City Composites in the 12 months ending in February 2013. The 10- and 20-City Composites rose 0.4% and 0.3% from January to February

15---Krugman: "Austerity is a “monstrous exercise in unethical human experimentation”, Bloomberg

Bond shortage?

The strong demand for bonds across markets is being driven by a combination of a huge liquidity rush from central banks and slowdown in growth,” Salman Ahmed, a London-based global strategist at Lombard Odier Investment Managers, which oversees $46 billion, said by telephone on April 24....

Austerity is a “monstrous exercise in unethical human experimentation” Nobel economics laureate Paul Krugman of Princeton University said in an interview with Bloomberg Businessweek on April 11. He favors governments borrowing at record-low interest rates to fund spending programs.
A March 2012 study by University of California at Berkeley economist Bradford DeLong and Lawrence Summers, who was Treasury Secretary under President Bill Clinton, concluded that stimulus may generate so much growth that it would pay for itself.

Fiscal Multiplier

Key to the debate is a number called the fiscal multiplier, a gauge of how much growth can be generated for each dollar spent by the U.S. government. With short-term rates near zero, DeLong and Summers say the multiplier is at its most powerful.

The U.S. debt-to-GDP ratio will rise to 108.1 percent this year from 98.2 percent in 2010, according to the IMF’s forecast this month. Growth will increase to 2.7 percent next year from 2 percent in 2013, according to more than 75 economist estimates compiled by Bloomberg.

Advocates of stimulus say now is the time to spend because inflation is slowing.

The U.S. core consumer price index, which strips out food and energy prices, rose at a 1.9 percent annual rate in March, the smallest increase since July 2011. A report in Japan last week showed consumer prices, excluding the impact of a sales-tax increase and fresh food costs, tumbled by 0.5 percent in March, the most in two years....

There seems to be no sign of a let-up in bond demand around the world,” Frances Hudson, a strategist at Standard Life Investments in London, which manages $248 billion, said in an interview on April 23. “I see no prospect of central banks withdrawing their bond-buying programs any time soon. The global recovery is going through a soft patch and inflation is not a concern. This suits the bond market.” 

16---Housing: Fed vs BoJ, Dr Housing Bubble

Housing prices have moved up because of three major reasons; investor demand, low supply, and historically low interest rates.  Each one of these reasons can be traced to the Fed either directly or indirectly.  Can an aggressive central bank with a low rate environment re-inflate asset prices?...

What gives?  Well first, economic growth has been weak and so has household income growth.  This typically goes hand and hand.  Over a longer period of time, incomes do matter.  So real estate can only increase by so much even with mortgage rates that are lower than those we currently have in the US.  Next, Japan’s savings rate has been falling for a couple of decades.  So in spite of the Bank of Japan flooding the market with all these measures, prices are falling in many categories....

If we are in a solid recovery, why is the Fed balance sheet looking like it was still 2009?  In fact, the Fed balance sheet continues to grow and will continue to grow with QE3.  The balance sheet is now over $3.3 trillion.  A big part of the holdings are mortgage backed securities that no one in the open market will buy.  Is there a consequence for this?  No one can really answer that because we’ve never gone into this kind of aggressive monetary policy.  But to think this is a clear cut case of reviving the economy, just look at Japan and see that it isn’t as easy as using quantitative easing and expecting the economy to jump back up.

Household incomes
Household income growth has been incredibly weak in the 21st Century:
household income
In this regard we are very similar to Japan.  While the stock market is at all-time highs and real estate prices continue to move up, the same cannot be said for overall household income growth.  You can see the big drops above and most came after the recession was over.

It should be obvious that the rise in stocks and housing prices are not coming from household income growth.  Much of it is coming from low rates brought on by the Fed, investor demand, and very low supply.  Japan isn’t exactly evidence that we should be going full steam ahead with quantitative easing but that is the path we have taken.  Even with mortgage rates in the 1 percent range Japan’s economy is still stuck in the mud.  While there are similarities and differences, one thing is clear and that is both the BoJ and Fed have gone into uncharted central bank territory

17---Bank of Japan stands firm while deflation worsens, CNN

18---The New York Times and terrorism, wsws

The attitude of the Times, and the US media and political establishment as a whole, to the word “terrorism” is entirely determined by its impact on the far-flung operations of US military and intelligence agencies. When the target of attacks is a government that has run afoul of US imperialism, the perpetrators are not terrorists. When the target is the US government or an allied regime, any and all armed opposition is labeled terrorist.

It should be noted that the Times is not alone in its reticence to use the word “terrorism” in relation to Monday’s attacks in Damascus. The Washington Post writes that while no one claimed responsibility, the Syrian news agency blamed “terrorists.” In language almost identical to the that of the Times, the Post offers, “The government has repeatedly cast its rivals—ranging from civilian opposition activists to hardened extremist fighters—as “terrorists” in a bid to win support for its battle…”

Both the Times and the Post are well aware that the Syrian opposition is dominated by the Al Qaeda-allied Al Nusra Front, which has carried out repeated bloody attacks on civilian targets, with devastating consequences. This year alone, a series of bombings in February killed 80 and injured at least 250 in Damascus, including a massive car bomb that killed 59, mainly civilians; an explosion at the Eman Mosque in Damascus killed 42 and wounded 82 in March; and a bombing at the Syrian Central Bank killed 15 and wounded 53 in April...

The “war on terror” has been utilized by the American ruling class, with the support of the media, as a catch-all justification for war abroad and the dismantling of democratic rights at home. Yet in the midst of this campaign, the US has maintained a working alliance with Al Qaeda, the supposed target of this phony war.

19---Austerity and health care, RT

Monday, April 29, 2013

Today's links

1---Inflation Nation Not, P Krugman, NYT

Hey, does anyone remember the great inflation panic of 2011? All the usual suspects were issuing dire warnings about soaring inflation, and ridiculing the Fed for focusing on core inflation rather than headline changes. So, how’s it going?
Actually, at this point the Fed is worried that inflation is too low.

2---Earnings Crunch, WSJ

More from the WSJ:
With earnings reports in from more than half the companies in the Standard & Poor's 500-stock index, first-quarter revenue for the group is expected to shrink 0.3% from a year earlier, according to Thomson Reuters. That would cut short the sales improvement reported at the end of last year and mark the third quarter out of the past four in which revenues have failed to grow by 1% or more.

The sales figures are a troubling sign that business and consumer demand remain weak nearly four years after the recession. They are also evidence that a soft patch is developing in the U.S. economy, as optimism earlier in the year gives way to more sobering data on growth in gross domestic product, retail sales and manufacturing. In response, many companies are cutting jobs and curbing investments in an effort to prop up profits, moves that could make it harder for demand to recover.

3---It keeps getting crazier and crazier, DS News

Starting July 1, large numbers of non-paying borrowers will have the opportunity to modify existing mortgages through a more streamlined process. process.

This sounds like a good way to reduce foreclosures and prop up home prices, but as we will shortly see, the proposed program is oddly risky and likely to encourage additional defaults.
According to the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac will offer “a new, simplified loan modification initiative” to borrowers who are at least 90 days late with their mortgage payments. Modifications can include a lower rate, a loan term stretched to 40 years and principal forbearance in some cases.
“The loan,” says FHFA, “must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent. Loans that have been modified at least two times previously are not eligible...

No-Doc Modifications
FHFA says the “key difference is that borrowers will not be required to document their hardship or financial situation, but will be able to accept a Streamlined Modification Offer by simply making the trial period payments and agreeing to the terms of the modification.” 

Today's links

1--Can the Fed offset contractionary fiscal policy?, Economist

MIKE KONCZAL writes that 2013 is shaping up to be a grand experiment, testing an important macroeconomic proposition: that expansionary monetary policy can offset fiscal cuts. In the second half of last year, the Federal Reserve began shifting its policy framework to provide more accommodation to the American economy. And from the beginning of this year, the pace of fiscal consolidation has quickened. Mr Konczal reckons that recent data show that fiscal policy is "winning":
The first is inflation expectations, as calculated by the Federal Reserve Bank of Cleveland. One-year inflation expectations initially bumped up for December 2012, which many commentators viewed as a positive sign for the new Fed policy. However, in 2013, it has fallen back down, to an average rate lower than that of 2012...
 You can also look at long-term interest rates as a sign of how well the economy is doing. An increase in interest rates would signal inflation, higher expected growth and less demand for safe assets. Here, too, there was an initial boost after the December announcement, but as 2013 has continued, interest rates have dropped back down. Growth in GDP, as noted from yesterday, has also come in below expectations, with government spending a main culprit.

2---The Story of Our Time,  Paul Krugman, NYT

 Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
My sense, however, is that many people still don’t understand ... the nature of our economic woes, and why this remains a very bad time for spending cuts.
Let’s start with ... what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment ... that persists to this day. ...
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions,... government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. ...
Now, just to be clear,... let’s try to reduce deficits and bring down government indebtedness once normal conditions return... But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. ...
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.
What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

3---Rogoff and Reinhardt again, CEPR

So we have two Harvard professors who used their status to push through work that was central to the most important economic policy debates in decades, based on analysis that was by their own admission incomplete. They also refused to make any of the data available long after it was being widely cited in these debates. And, they routinely encouraged political figures to infer causality from debt to growth, when they were careful to deny any such claims when challenged by other economists.

4---Subprime is back and this time borrowers and lenders know exactly what they’re getting into, the Los Angeles Times claims in a new report, Housingwire

Apparently, some Americans with shoddy credit scores and past foreclosures want in on today's rising real estate prices and they're ready and willing to buy homes now. The LA Times notes in a new article that despite this being the era of “tightfisted banking,” at least one couple interviewed managed to get a subprime loan with a 10% interest rate after going through a foreclosure and the bankruptcy of a business.

Of course to get the loan, the homeowners had to put down a 35% downpayment. But with the right amount of money up front, the article says lenders are going subprime again. To protect themselves, lenders are looking more deeply at collateral, downpayments and the borrowers’ ability to repay the debt. Lenders also are holding loans on their own books in the hopes that a private secondary market will eventually be there to buy them in the future.  Click here to read more

5---A Grand Coalition for austerity in Italy, wsws
      The formation of a Grand Coalition in Italy, centred on Prime Minister Enrico Letta’s Democratic Party and Silvio Berlusconi’s People of Freedom (PdL) party, shows the degree to which the global financial oligarchy dominates political life.
The official description of this government as a coalition of the “left” and “right” only highlights the fact that such terms, used to describe the establishment parties, have been stripped of any serious meaning. The new government is an austerity regime, installed in defiance of the clearly expressed wishes of the electorate and acting solely in the interests of a parasitic layer of the super-rich.

This is a government imposed on the Italian working class just as surely as the former European Union Commissioner Mario Monti’s technocratic administration installed in November 2011. All of Italy’s parties are committed to serving the same social interests.

The manner in which this government was installed, as a result of secret talks and sordid manoeuvres carried out behind the backs of the people, testifies to the evisceration of all democratic norms and the ever clearer emergence of a dictatorship of finance capital, barely concealed behind the threadbare trappings of parliamentary procedure....

In the election, the slate headed by Monti received only 10 percent of the vote. What Letta has, in fact, achieved is to bring together the main parties responsible for two years of brutal austerity behind a programme for its continuation.

All those seeking an alternative to the policies of austerity have been brought face-to-face with the absence of any such alternative within the Italian political establishment. The Democrats are a product of the breakup of the Communist Party of Italy, once the largest Stalinist party in Western Europe. The Stalinists and ex-Stalinists have now emerged as the linchpin of bourgeois rule in Italy and the chief party of government. They preside over an overtly right-wing organization dominated by figures from the Christian Democrats such as Letta, while the rival Stalinist faction Communist Refoundation has all but collapsed due to its own history of rotten manoeuvres.

This leaves Beppe Grillo’s 5-Star movement, which received 25 percent of the vote in February, able to dominate opposition to the new government. However, the conservatism of Grillo’s political and economic agenda is barely concealed by the bluster of his rhetoric....

More than 31,000 companies folded in the first quarter of this year. Italy’s economy has shrunk by 6.9 percent since 2007 and contracted by fully 2.4 percent last year. Public debt has actually risen from 121 percent to 127 percent of gross domestic product (GDP), and is set to increase yet further as a second Italian and European recession looms.
The social impact has been brutal. Unemployment is at 11.6 percent, and among the young it is 37.8 percent—rising to more than 50 percent in Naples and other more deprived southern regions.

6---Governing coalition suffers huge losses in Iceland, wsws

7---US Savings Rate Near Record Low, Per Capita Disposable Income Almost Back To December 2006 Level, zero hedge

8--Noam Chomsky: Obama's Attack on Civil Liberties Has Gone Way Beyond Imagination, alternet

9---CIA’s ‘Bags of Cash’ Fueled Afghan Corruption, Bought Little Influence, antiwar
 A Decade Later, CIA Still Throwing Money at Karzai

10--Hussman: Smaller deficits mean smaller earnings, Yahoo

According to Hussman, corporate profits are near 11% of GDP and 70% above the historical norm. (Hussman agrees with Warren Buffett that one has to be wildly optimistic to believe corporate profits -- as a percent of GDP -- can hold above 6% for a sustained period.)

So what’s the catalyst that will drive corporate profits over the cliff?

"Even marginal improvements in the federal deficit and in household savings, which are necessary because of the debt burdens households have taken on…we are likely to see -12% earnings growth annualized over the next three to four years - in other words substantial weakness in corporate profits," Hussman tells The Daily Ticker...

Here’s Hussman’s rationale. He says the deficit of one sector has to emerge as the surplus of another sector. Record deficits for households and the government combined have to show up as a surplus somewhere. Hussman argues that we see a mirror image of record deficits for households and the government, and record surpluses at the corporate level as a fraction of GDP.

11---New questions on Boston bombing suspects’ ties to US intelligence, wsws

As the events in Boston graphically demonstrated, this will only facilitate plans already well advanced for the imposition of dictatorial forms of rule. The Boston Marathon bombing was seized upon as the pretext for placing the entire city of Boston and a number of its suburbs under a police-military lockdown and carrying out house-to-house warrantless searches.....

Powerful sections of the American ruling class have long given support to Chechen separatism. The American Committee for Peace in the Caucasus (ACPC), sponsored by the right-wing organization Freedom House, has led such efforts for many years. A 2004 article in the British Guardian newspaper entitled “The Chechens’ American Friends” noted that ACPC portrayed Chechen separatism as a “fashionable ‘Muslim’ cause,” deserving and requiring US support.
The director of programs in the Caucasus for the Jamestown Foundation formerly worked for Freedom House....

The US intelligence community is so familiar with the consequences of losing control of its former assets that it has coined a term for it: blowback. However, the media have avoided raising any possibility that the Boston bombings might be an example of blowback, or an operation carried out with the tacit support or assistance of forces within the state.

12---Canada Housing Crash Could Take Economy Down With It, Analyst Says, Huffington Post

13---Fitch: Recent Price Gains May Not Be Here to Stay, DS News

Sunday, April 28, 2013

Today's links

1---Shiller: Today’s Dream House May Not Be Tomorrow’s, NYT

 A MacArthur Foundation survey, conducted by Hart Research Associates in February and March, asked Americans if they thought that, “given our nation’s current situation,” buying a home had become more or less appealing. Fifty-seven percent said it had become less so, with only 27 percent saying it had become more appealing. When asked if they agreed with the statement, “For the most part, renters can be just as successful as owners at achieving the American dream,” some 61 percent agreed; 28 percent did not....

If you want to settle down for a quiet life and watch your children grow up in a nice neighborhood, you might well act now to lock in an ultralow mortgage rate. Then again, if you’re restless, ambitious and determined to be mobile, it might be sensible to rent rather than own. Calculating the best economic return may not even be possible, given the uncertain investment potential.

2---Heading the wrong way, NYT

Since the recession ended in mid-2009, quarterly growth has averaged around 2 percent. Every acceleration from that pace has inevitably petered out, which is why unemployment is high and pay is low nearly four years into what is officially an economic recovery.
Worse, there are signs in the latest report of a renewed slowdown. Excluding inventories, which tend to artificially depress growth in some quarters and raise it in others, growth in the first quarter of 2013 was only 1.5 percent, compared with 1.9 percent in the fourth quarter of 2012 and 2.4 percent in the third quarter.
Underneath it all is the fiscal drag from ill-advised and ill-timed austerity measures. With the expiration this year of the payroll tax break, personal income declined sharply last quarter, forcing consumers to draw on their savings to support their spending. That is unsustainable, presaging weaker consumption in the months to come and, with it, weaker overall growth.
At the same time, cutbacks in government spending took a big chunk out of growth, reflecting, in part, the onset of automatic budget cuts under the sequester. The hit from lower public spending will only intensify in the quarters to come as the sequester takes full effect, threatening to push growth below its already paltry 2 percent average.
There is a tendency, in the gloom, to look for bright spots. Housing, for example, showed continued growth in the first quarter, but it was more than offset by the drag from cuts in government spending. If overall growth remains sluggish or even slows down, that could overwhelm the housing recovery, because the pace of home sales is inseparable from the pace of the economy. Without enough growth to power jobs and pay, potential homeowners will simply not have the income and credit profiles to buy.
Lack of demand is also bound to take an increasing toll on corporate earnings, which also have been a bright spot. Already, some prominent companies, including I.B.M. and Caterpillar, have reported disappointing results, a reflection of waning demand not only in the United States but in recessionary Europe and in China, where growth has been below expectations. The longer and more widespread the weakness is, the less faith investors will have in the ability of the Federal Reserve to engineer a rebound. The real danger in the Fed’s efforts to revive the economy is not that its actions will cause inflation — of which there is no evidence — but that they will fail to revive the economy by any meaningful measure, denting investor confidence and, in the process, the stock market.
That is not to blame the Fed. For years, Congress and the Obama administration have been working at cross-purposes to the Fed, as strategies to cut the budget have taken priority over strategies to increase growth, jobs and pay. Republicans have insisted on austerity for ideological and political reasons. The administration has done better by adding new taxes and investments to the cuts, but the reductions are still deep and damaging. The budget fights have endured even as the intellectual arguments for near-term deficit reduction have collapsed. They have endured even as the economies that have enforced budget cuts most strenuously have contracted, notably in Britain and in much of the rest of Europe. And they endure even as the United States remains impaired by fiscal wounds that are, unfortunately and undeniably, self-inflicted
In an audit last year, then-San Francisco Assessor-Recorder Phil Ting found apparent legal violations in 84 percent of foreclosures in the city between 2009 and 2011. These ranged from procedural defects, such as not alerting homeowners that they were in default, to significant breaches of the law, including transferring loans in which banks appeared to have no legal ownership right......
Despite recent settlements with state and federal regulators and a new California law that tightens rules for the mortgage industry, banks and their subsidiaries continue to file invalid documents and foreclose on properties to which they appear to have no legal right, an analysis of thousands of pages of property records and wrongful foreclosure lawsuits shows. 
At the center of much of this is Bank of America, which plays the largest role of any bank in Bay Area foreclosures. From July 2008 through October, Bank of America's foreclosure trustee, ReconTrust, handled 1 in 5 defaulted properties in the Bay Area, roughly 70 percent more than the next biggest trustee, according to RealtyTrac Inc., a real estate information company. During the past five years, 184,000 Bay Area properties went into default; last year, the value of these loans exceeded $11.6 billion.
Jay Patterson, a forensic accountant and certified fraud examiner in Arkansas; Ben Weber, who formerly worked for the city of San Francisco analyzing property records; and Marie McDonnell, a private auditor in Massachusetts, reviewed hundreds of loan documents and property records for this story at the request of CIR and NBC Bay Area. All three agreed there is evidence that Bank of America and its subsidiaries skirted proper procedures in foreclosure filings. These practices included lying on fraudulent loan transfers and altering dates on property records, which allowed Bank of America to initiate foreclosure and collect payments and fees for home loans it did not own.
Patterson said an average homeowner looking through property records cannot tell if they are fraudulent; a public document that appears to transfer ownership of a mortgage can be fabricated. Patterson traced the true chain of ownership for mortgages on behalf of CIR and found that in many cases, banks were filing false documents.

“Banks didn’t have them and were making them up to foreclose,” said Patterson, who serves as an expert witness for plaintiffs' attorneys in wrongful foreclosure lawsuits.

5---How to Fix the Great Real Estate After-Bubble, Huffington Post

What could prevent this disaster? Homeowners who bought or refinanced during the bubble period up to 2008 found themselves "underwater" after the crash, owing more on their mortgages than the value of their homes. The lost value is gone -- or rather it wasn't there in the first place. Many homeowners have defaulted and gone into foreclosure; many more will default in coming years. Banks could prevent these foreclosures by writing down mortgage principal to the new low market value. There's even a Treasury and Housing Department Principal Reduction Alternative program to help homeowners get a write-down from banks; it's not working because it's voluntary. The big banks, though they have been willing to lower interest payments, understandably fear that mortgage principal write-downs will set a bad precedent. They'd rather foreclose and sell to the real estate companies.

Congress could remove this obstacle by legislating a mandatory write-down program strictly limited to those owner-occupants who purchased or refinanced during the bubble years before 2008. Otherwise the senseless destruction of lives and housing will continue.

6---Roundup, An Herbicide, Could Be Linked To Parkinson's, Cancer And Other Health Issues, Study Shows, HP

7---The Iraqi Civil War, Round Two, antiwar

8---Pick Your Dystopia, counterpunch

What we don’t have is a political/philosophical vision of the future. Or a historical political program; political parties are only worried about winning the next election.

How would a post-state system look like? Independent minds don’t trust mammoth, asymmetrical, wobbly blocs like the EU, or the G-20, or even aspiring multipolars such as the BRICS (Brazil, Russia, India, China, South Africa – which still do not represent a real alternative to the Western-controlled system). No one is thinking in terms of a structural mutation of the system. Marx was beyond right on this: what determines history are objective, concrete, palpable processes – some of them very complex – affecting the economic and technological infrastructure.

What is possible to infer is that the real historical subject from now on is technology – as Jean-Francois Lyotard and Paul Virilio were already conceptualizing in the 1980s and 1990s. Technology will keep advancing way beyond the capitalist system. Techno-science is on the driving seat of history. But that also means war.

War and technology are Siamese twins; virtually all technology gets going as military technology. The best example is how the Internet completely changed our lives, with immense geo-economic and political ramifications; Beijing, in a 2010 white paper, may have hailed the Internet as a “crystallization of human wisdom”, but no state filters more information on the Internet than China. Pushing the scenario to a dystopian limit, Google’s Eric Schmidt argues, correctly, that with a flip of a switch, soon an entire country could even disappear from the Internet.

9---Wealthiest Americans Only Winners in Recovery, Pew Says, Bloomberg

10---Canada is toast, Huffington Post

Ben Rabidoux

Nearly half of Canada's GDP growth since 2005 has been driven by housing-related industries, to the point that the finance, insurance and real estate sector makes up about 27 per cent of the country's GDP, he said.
As Canada's housing industry ramped up development, it began to employ more people in construction. In 1998, slightly more than five per cent of the labour force worked in construction, compared with 7.4 per cent today. Those jobs could be vulnerable to a housing slowdown.
But housing-related jobs aren't just limited to construction. They also include mortgage lenders, realtors and appraisers, all of whom could see their earnings fall as a result of a slowing market.
Ultimately, if Canada's housing starts were to drop to 150,000 (they were close to 180,000 in January of this year, down from 250,000 in 2012), it could mean up to 250,000 job losses in the housing industry, Rabidoux said.
"That's going to hurt, that's not a soft landing," he said....

I'll just say that the narrative floating around out there is that the banks are insulated from a housing correction ... I can spend more time explaining why I think that's wrong, but there's a lot of exposure that the banks have to housing and associated industries, so let's say that."

11--Canada: On thin ice, Economist

12---Canada's Reckless Banks Inflate House Price Bubble, thetyee


And the problem is that housing is still the only source of real growth in the economy. While most people would assume, from all the talk about the stupendous wealth of the tar sands, that we are a "resource-driven" economy, the truth is that resources pale in comparison to housing and related financial services. According to the Conference Board of Canada, the resource sector (energy, forestry, mining, agriculture) accounted for a mere seven per cent of GDP in 2012 while housing (finance, real estate, construction) accounted for 27 per cent. If the housing market goes south, just what sector does Mr. Carney think is going to replace it as a growth driver? He has now given "certainty" that rates won't rise until late 2014 -- something that is supposed to spur business investment.

But the additional certainty was insignificant and will not have the desired effect. No one expected Carney to touch the rate and even with a one per cent interest rate the economy grew by a pathetic annualized rate of .6 per cent in the third quarter and .5 per cent in the last quarter of 2012. Over two-thirds of the economy is domestic and Canadians are amongst the most indebted people in the world: personal debt is at 160 per cent of annual income compared to the U.S. at 110 per cent. We are a citizenry maxed out on credit and borrowing like mad on our slowly devaluing houses. Home equity loans total $206 billion, equal to 12 per cent of Canadian GDP. In the U.S. the equivalent figure is four per cent. Exports are down and staying there, so just why would business (which is already sitting on some $600 billion in cash) go to the banks to borrow when there is no prospect for new demand?

Here comes the glut
The fact is, neither Flaherty nor Carney have a clue what to do about the housing market or sluggish economic growth. Flaherty's dilemma is that he dare not deal any more decisively with the mortgage madness for fear of driving the economy into recession. Housing sales are already down across the country due to his credit tightening but building continues at a rapid pace in places like Toronto (with some 50,000 units in the pipe). So just as re-sales slow, tens of thousands of new units will come on the market in 2013 creating a new glut and pushing prices further down.
No one can fix this.

13---The Biggest Housing Bubble in the World Is in ... Canada, Atlantic

The chart below, from The Economist, looks at the price-to-rent ratios across different countries, and measures how under-or-overvalued housing is, with negative numbers corresponding to the former and positive ones to the latter.

It's the biggest hit-the-brakes we've seen in land investment."  George Carras, president Realnet
March, 2013 New Home Sales
High rise sales down -47% from last year
Low rise sales also down -47% from last year
In total this is the second worst March sales figures in over a decade!
New condo sales in Toronto fell 47 per cent in the last quarter of 2012, even as the number of units under construction hit an all-time high, according to data from market research firm Urbanation.
There were 3,841 new condos sold in Toronto in the last three months of 2012, compared with 7,226 sales in the same period a year earlier.
At the same time, the number of total condo units under construction in Toronto hit a record high of 56,866 in 2012. The number of construction starts also hit an all-time high, at 24,388.

Yet Urbanation doesn’t appear concerned about overbuilding in the country’s largest real estate market — something that has worried some policy makers, including Bank of Canada governor Mark Carney, in recent years.
“Despite concerns over the level of unsold supply in the new condominium market, the ratio of sold to unsold units has consistently been above the long-run average in recent years,” Urbanation executive vice president Ben Myers said in a statement, noting the ratio of sold units in Toronto was 79 per cent, just higher than the long-run average of 78 per cent.
However, the record-high number of condos under construction is not reflected in current sales data, because those condos are not yet on the market except in the form of pre-sales.

16---Canadian housing and economic trends: The good, the bad, and the ugly, economic analyst

Consumer and mortgage credit growth: Slowing dramatically
Difficult to know whether this is a "good" data point or not.  Certainly most (including the Bank of Canada) agree that consumer debt levels in Canada are dangerously high, so a consumer deleveraging of sorts is in the long-term best interest of the country.  But short term economic pain associated with a consumer deleveraging is anything but good.  Long term gain for short term pain!  On the mortgage front, we find credit growth has slowed to decade lows, while in the non-mortgage consumer credit front, growth is currently running at 20 year lows.

Toronto's condo market: All-time high inventory, loads more in the pipeline
In March, active MLS inventory in the Toronto condo market hit a new all-time high for the month.  And with a record 55,000 condo units under construction in the GTA, with the bulk of them set to complete in late 2013 and through 2014, this is one market worth following closely.  But believe it or not, there are at least three other major metros with condo markets WAY uglier than Toronto's at present...

Bankruptcy filings:  Starting to rise in key provinces
Most of the country continues to see consumer insolvencies (bankruptcies + consumer proposals) fall on a y/y basis.  The very notable exception is Quebec where Q4 2012 saw the first quarterly insolvency reading that was up on a y/y basis for the first time since mid 2009.  The trend continued in January 2013 when insolvencies surged almost 20% y/y.  Ontario and BC also saw small jumps in consumer insolvencies in January.

3)  Housing starts:  Moderating....more to come...

Manufacturing PMI: First sub 50 print since index created
A major miss in the Canadian PMI (Purchasing Manager's Index) for March.  For those not familiar with the index, PMIs are widely-followed measures of manufacturing activity in various countries.  They tend to give a glimpse into the future strength of the economy.  Bottom line here is that a sub-50 print is bad news.  Canada's manufacturing PMI came in at 49.3 last month.

1)  Vancouver's housing market: Sales down dramatically, inventory up, prices down
You can't say you didn't see this one coming.  I laid it out as clearly as I could in this post last August when it was blatantly obvious the market was rolling over.  Things have gone from bad to worse in Vancouver, where sales remain very weak (March sales were almost 20% below an already-weak 2012 level) and existing MLS inventory remains elevated.  To add insult to injury, the backlog of unsold new homes is growing, units under construction remain high, and the strong population growth needed to absorb all this inventory is nowhere to be found.  It's going to be another rough year for Vancouver, but on the bright side, we can expect the y/y comparisons to get more favourable throughout the year.  Vancouver sales fell off a cliff in late 2012.  It's quite unlikely we'll be seeing 20-30% y/y declines come late summer given how depressed sales were last year. ...

Employment:  Huge private sector job losses in March.  More to come?
The Labour Force Survey produced by Stats Canada is notoriously volatile.  At the risk of making a mountain of a statistical molehill, I will point out how unbelievably attrocious the March employment numbers really were.  The headline figure showed a net loss of 55,000 jobs in Canada, but note below that March saw the second largest monthly decline in private sector employment since at least 2000 as the Canadian economy shed 85,000 private sector positions (all of them full-time).  Thankfully that terrible reading was partially offset by a curiously large jump in the "self employed" category, otherwise the headline print could have been markedly worse.

5)  Canadians' exposure to the housing market in their investment portfolios: A hard landing will hurt!

17---The coffin corner, macronomics

The financial markets are currently riddled with divergences and contradictions. High debt, low growth; record high stocks, record low bond yields; a bull market in US and Japanese real estate stocks; a bear market in Chinese real estate stocks. The Great Divergences are best explained by the war between deflationary debt fundamentals and aggressive reflationary policies. Real estate and banks remain the best barometer of policy success." - source Bank of America Merrill Lynch.

Could the below picture be the picture of the "Coffin Corner? Low growth and high debt:
- Source Bank of America Merrill Lynch.

Or could that be the one when one looks at the discrepancy between record low bond yields and record high equities?
- Source Bank of America Merrill Lynch....
Tightening policies to preserve price stability and unwind some of the trillions of dollars pumped into global economies since 2007 via quantitative easing will require interest rate hikes, and may also necessitate asset sales by central banks, according to April's IMF Stability Report. Increased credit and securities losses would be the major negative impacts for banks as rates rise. Bank funding may also be disrupted if asset sales do take place." - source Bloomberg

Saturday, April 27, 2013

Today's links

1---Report on US economic growth points to continuing stagnation, wsws
The US economy grew at an annualized rate of 2.5 percent in the first three months of 2013, according to an initial estimate released Friday by the Commerce Department’s Bureau of Economic Analysis. This rate, far lower than economists’ projections of 3.0 percent to 3.2 percent, reflects a continuation of the stagnation since the financial crash of 2008 that has left unemployment at near-Depression levels and fueled the growth of poverty, homelessness and social inequality.

A growth rate of 2.5 percent in the country’s gross domestic product (GDP) is too weak to significantly impact the jobs crisis. US employers added only 88,000 new jobs in March, according to the employment report released on April 5 by the Labor Department. The official jobless rate declined to 7.6 percent only because a staggering 496,000 people gave up looking for work and dropped out of the labor market.
The $85 billion in across-the-board US sequester cuts this fiscal year took effect only at the beginning of March. Those cuts, combined with the ending January 1 of a two-year reduction in the payroll tax, are already having a negative effect on workers’ income. The Commerce Department report noted that real disposable personal income fell by 5.3 percent in the first quarter of this year, the biggest drop since the third quarter of 2009.

Meanwhile, corporate profits continue to soar, buoyed by wage-cutting and the Federal Reserve Board’s infusion into the financial markets of $85 billion a month in virtually free credit. In the current round of first quarter corporate profit reports, more than two-thirds of firms have surpassed the earnings projections of Wall Street economists.

The gap between the financial elite and everyone else, which, according to a report released this week by the Pew Research Center, saw the wealth of the bottom 93 percent fall during the so-called “recovery” while that of the top 7 percent jumped 28 percent, will only grow wider....

A major factor in holding back growth was a further cutback in spending at all levels of government—federal, state and local. Non-defense federal spending fell by 2.0 percent and defense spending contracted by 11.5 percent. State and local government spending fell by 1.2 percent. Overall, government spending fell at an annual rate of 8.4 percent, after decreasing by 14.8 percent in the previous quarter.

A rise in the US trade deficit cut another 0.5 percentage points from the GDP figure.
The GDP report follows a raft of poor economic data. As Bloomberg News put it on Friday, “On the whole, the information we have been gathering about the health of the economy has been overwhelmingly negative.”

On Wednesday, the Commerce Department reported that durable goods orders fell sharply in March. Orders for such goods—those meant to last three years or more—dropped by 5.7 percent after a downwardly revised gain of 4.3 percent in February. This was the biggest fall in seven months.

The flash Purchasing Managers Index (PMI) for the US, released this week, showed a fall to 52 in April, down from 54.6 in March and the lowest figure since last November. The PMI is a key indicator of industrial output.
(Fewer loans, fewer jobs)
The Wall Street Journal reported Friday, citing Federal Reserve data, that US companies are pulling back on borrowing, resulting in a 9 percent decline in outstanding loans by the biggest banks in the first two weeks of April, as compared to the end of March. Speaking of the sudden drying up of loans, the chairman and CEO of BB&T bank, Kelly King, said, “We didn’t expect the wall we hit.”

2---The great Spanish nation can end its crucifixion at will by leaving EMU, Telegraph

3---Change in Real Wages since Q1 2000

Source: NYT
The G.D.P. report released Friday states the total government part of G.D.P. – federal, state and local – came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier.
Those are nominal figures, not adjusted for inflation (as are the figures in the chart below). On a real basis, the decline was 6.5 percent.

Governments as a group had 648,000 fewer employees in March than they had three years earlier. Some of that decline – 87,000 jobs – reflects temporary employment for the 2010 census, but the rest reflects real cutbacks. Most of that decline has been in local government jobs, and most of the fall in local government jobs has come in schools.
Source: Bureau of Labor Statistics, via Haver Analytics
In the G.D.P. numbers, state and local spending is up a little over the last three years, measured in nominal terms. The decline came from federal spending.
Aides to Ronald Reagan used to talk about “starving the beast.” In the Obama years, it is happening

6---The Government’s Mortgage Fix Is Failing, Realty Check

7--American austerity, NYT

There is some tendency among economic commentators to think that austerity policies in a deeply depressed economy are mainly a European thing; you even find a fair number of people imagining that the United States is still engaged in fiscal stimulus. But the truth is that federal stimulus is years behind us, while state and local governments have cut back, so the overall story is one of fiscal contraction that’s smaller than in Europe, but not by that much.

To see what’s going on, you need to do two things. First, you should include state and local; second, you shouldn’t divide by GDP, because a depressed GDP can cause the spending/GDP ratio to rise even if spending falls. So it’s useful to look at the ratio of overall government expenditure to potential GDP — what the economy would be producing if it were at full employment; CBO provides standard estimates of this number. And here’s what we see:
Spending is down to what it was before the recession, and also significantly lower than it was under Reagan. Bear in mind that in the years since the recession began we’ve seen a significant number of boomers reach retirement age, which would ordinarily have led to rising spending, not to mention the effects of rising health care costs. Bear in mind also that the private sector is still deleveraging, which means that government should be spending more to help sustain the economy. So this is actually a picture of very bad policy.

8--More on austerity, NYT

1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment

9--Enormous DHS Bullet Usage Defies Common Sense, antiwar

10---Syria: U.S. manipulating chemical weapons evidence, like it did with Iraq, antiwar

12---GDP according to the experts, WSJ

The most remarkable story of the first quarter GDP report is, however, consumer spending. Despite the expiration of the payroll tax at the end of 2012, real consumer spending rose a strong 3.2% — the fastest quarterly increase since the fourth quarter of 2010. Driven by rising demand for motor vehicles, durables were up another strong 8.1% (after +13.6% and +8.9% in the previous two quarters). Moreover, consumption of services picked up 3.1%, which in turn is the strongest increase since the second quarter 2005. The acceleration in services is a very important development, as this category accounts for almost 50% of consumer spending. We think that this development reflects positive spillovers from the housing recovery to certain service industries–Harm Bandholz, Unicredit
While the consumption figures were better than expected, real disposable income saw its biggest drop since 2009 while the savings rate fell to the lowest since the end of 2007. That is not a positive. –Dan Greenhaus, BTIG LLC
The consensus always looked a bit on the hopeful side, given evidence of sustained weakness in government spending. And so it proved, with the fourth quarter’s massive 22.1% plunge in the defense component followed by an 11.5% drop in the first quarter. Non-defense and state/local spending dipped too. –Ian Shepherdson, Pantheon Macroeconomic Advisors
The expiry of the payroll tax cut contributed to a 5.3% annualized slump in real disposable incomes and government spending contracted by a further 4.1%, led by an 11.5% drop in defense spending. Remember, that drop in defense spending comes on the heels of a 22.1% slump in the final quarter of last year. The decline in government expenditure over the past two quarters is the biggest six-month contraction since the Korean war ended and it has taken the level back to where it was in mid-2007,–Paul Ashworth, Capital Economics
The effects of the sequester are only starting to be implemented and will become magnified in the coming quarters. The cuts in the first quarter were largely unrelated to the sequester; as such, the public sector is poised to further drag on growth in the quarters ahead. With the outlook for business investment still unclear, exports constrained by weakness outside the U.S., and government spending set to decline, can consumers carry the load to keep the economy moving forward over the next few quarters? That remains an open question. –Jim Baird, Plante Moran Financial Advisors..
There is no clear indication that underlying demand has either strengthened nor slowed in the recovery cycle to date. However, with significant fiscal tightening in the pipeline, we expect a modestly softer picture in the remainder of the year, sufficient to keep the majority of monetary policymakers happy to maintain the current stance of accommodation. –Peter Newland, Barclays Capital
Trade was a substantial negative, subtracting 0.5 percentage point from growth in the first quarter. Exports rose 2.9 percent at an annual rate for the quarter, after falling 2.8 percent in the fourth quarter. But imports rose even more strongly, increasing 5.4 percent at an annual rate in the first quarter–higher imports subtract from GDP. With the global economy still soft given the ongoing recession in Europe and disappointing growth in Asia, imports are increasing more quickly than exports, weighing on growth. –Augustine Faucher, PNC

The party pooper was the government. Real federal spending contracted by 8.4% on top of a 14.8% plunge in the fourth quarter. Economists at J.P. Morgan pointed out the back-to-back drops in defense outlays were the weakest two-quarter run since the end of the Korean War.
Add in a drop in state-and-local spending and the government sector cut 0.8 percentage point from first-quarter GDP growth.

If anyone was partying last quarter, it was consumers. Real household spending grew by 3.2%, the fastest clip since the fourth quarter of 2010.

The festivities came at a price, however. Higher taxes and costlier energy caused a large 5.3% drop in disposable income. To increase spending, consumers had to save less. The saving rate declined to 2.6%, the weakest quarterly rate since the end of 2007.

The strategy is unsustainable. True, the gains in home values and equity prices are making many consumers feel richer and they may feel they can stash less money away. But the aging population and long-run fiscal problems argue U.S. households have to save more, not less. Absent a sustained jump in hiring, consumers will have to adjust their spending this quarter.

That’s not to suggest a shopper retrenchment: According to Friday’s Reuters/University of Michigan final-April sentiment index, consumers feel better about the economy this month. So they will likely increase spending but not at a 3%-plus robust clip.

14---Is Abenomics working?, prag cap

We’re getting deeper and deeper into the experiment now known as “Abenomics” in Japan.  Ultimately, the plan is designed to defeat the decades of deflationary pressures in the Japanese economy.  They’ve announced a massive fiscal plan, an official 2% inflation “target” a doubling of the BOJ’s balance sheet and as a result the Yen has declined 30% in a matter of months and the Japanese stock market has surged over 60%.  By the looks of the market reaction you’d think that something had not just changed, but that we’d be looking at a new economy entirely.

But the latest CPI report shows that the deflation is actually WORSENING.   The Statistics Bureau in Japan reported that Japan’s National Core CPI fell to -0.5% in march, down from -0.3%.  This was worse than expectations of -0.4%.  The headline rate fell to -0.9% versus expectations of -0.8%.

The latest reading is the worst reading since 2010.  In fact, it’s the worst reading this year and down almost 1% from when the aggressive Japanese easing was first announced.  In other words, if Abenomics is inflating prices it certainly isn’t working in the real economy and appears to only be “working” where gamblers are placing bets that it will eventually show itself….
Chart via Orcam Investment Research:

15---Iraq's descent into chaos, wsws

Since December, Iraqi Sunnis, including those with ties to forces active in Syria, have been protesting discrimination, arbitrary arrests, detention and the execution of oppositionists by the Shi’ite-led coalition government of Nouri Al-Maliki. They are particularly opposed to the sweeping anti-terrorism law they claim targets them for being members of Al Qaeda or of the Ba’ath Party of former President Saddam Hussein. They have called for Maliki’s resignation.

Hundreds of thousands have been locked up for years, many without charges, in prisons run by sectarian militias. More than 1,400 people face execution.

The government’s reliance on dictatorial methods is bound up with the rising level of unemployment and seething discontent over the lack of electricity, water, sanitation and the failure to rebuild the infrastructure destroyed by US sanctions and war. This is despite the fact that oil production grew by 24 percent last year, with Iraq overtaking Iran to become the biggest member, after Saudi Arabia, in the Organization of Petroleum Exporting Countries.....

Incapable of resolving the vast socio-economic problems besetting Iraq, the neo-colonial regime in Baghdad, installed by Washington and supported by Iran, is focused on dividing and oppressing the Iraqi working class. Maliki has concentrated power in his own hands, holding the defence and interior posts, and used the anti-terrorist laws against his Sunni rivals, whipping up sectarian tensions to divide the working class.

A key factor is the on-going sectarian war for regime change in Syria that has pitted Sunni Islamist militias against the government of President Bashar al-Assad, a member of the Alawite sect, an offshoot of Shi’ism. This has been sponsored, financed and supplied by Iran’s Sunni Gulf rivals, and also Turkey, at Washington’s behest.
They also fear that Maliki, whose installation as prime minister was sanctioned by Washington, is too close to Tehran. They are acutely conscious of the seething discontent among their own increasingly embittered populations, many of whom are Shi’ite, who have not shared in the ruling families’ oil- and gas-based wealth.

16--Archive: Richard Koo, prag cap

Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.”

17---Koo: Currency Markets Are Misinterpreting the Impact of QE, prag cap

18---Chart of the Day: Corporate Profits vs the S&P 500, prag cap

(Large deficits lead to corp profits, not QE)
 First, look at Europe where QE has also been implemented and stock markets like Greece, Italy and Spain have been decimated.  Then look at a country like the USA where QE has been implemented and yet stocks soar.  Then ask yourself what the big difference is between these countries?  The answer: austerity versus massive deficit spending.

It might be easy to scoff at such an observation, but the reality of the picture is that corporate profits have been largely driven by the deficit in this cycle.  As net investment collapsed the traditional driver of profits was overtaken by government spending (see figure 1).  This makes sense if you’re familiar with Kalecki and his profits equation.  It makes even more sense if you’d been working under Richard Koo’s balance sheet recession theory in recent years.  The impact of government deficit spending in such an environment has been massive.  All those people screaming about the ill effects of deficit spending and hyperinflation in recent years missed the very explainable and fundamental driver of the profits momentum.
19---More Koo, prag cap
The decline in private-sector credit in the US and the UK is attributable to both the unwillingness of banks to lend and theunwillingness of the private sector to borrow. The two factors are rooted in balance sheet problems and are indications that bothcountries remain in balance sheet recessions.
When a bubble collapses, the value of assets drops, leaving only the corresponding liabilities on the balance sheets of businesses and households. To fix their “underwater” balance sheets, companies and individuals do whatever they can to paydown debt and avoid borrowing new money even though interest rates have fallen to zero. Banks, for their part, are notinterested in lending to overly indebted companies or individuals, and often have their own balance sheet problems. With noborrowers or lenders, the deposit-growth process described above stops functioning altogether.
US banks now appear slightly more willing to lend money, although that is not the case in the UK. In neither country, however,are there any signs of greater willingness to borrow among businesses and households.”
He goes on to argue that QE2 only generated a portfolio rebalancing effect.  But Koo, rightly argues that this is only justified if the assets rise in accordance with their real underlying fundamentals:
“While this may demonstrate the portfolio rebalancing effect of QE2, the real problems are yet to come. Asset prices, after all,are supposed to be determined by the future cash flows generated by the asset. More specifically, the fair value of an asset—ieits discounted cash flow (DCF) value—is defined as the sum of the asset’s future cash flows discounted by an appropriateinterest rate.
A bubble is defined as a situation in which asset prices rise to levels far in excess of their DCF values.
In the immediate aftermath of a burst bubble, investors tend to pay extremely close attention to DCF analysis. That is hardlysurprising, since they lost money because they ignored DCF values and chased prices higher.”

20--Did QE2 work?, prag cap

We’re now nearing the end of QE2 and some concrete conclusions can be made.   I’ll save my overall analysis of the program until after its conclusion, but I think the impact of QE2 can be pretty much summed up with the following chart:
Economic growth peaked with QE2′s inception
Real GDP peaked as soon as QE2 began.. Now, this shouldn’t be shocking to anyone who has been reading pragcap over the duration of this program.  From its onset I said QE2 would do nothing for the real economy.  In fact, operationally, it could do nothing.  But its impacts actually appear to have been damaging to bottom line growth.  How so?  QE2 helped contribute to a massive surge in speculation in commodity prices.
You see, QE2 didn’t monetize anything.  It didn’t cause the money supply to explode.  It didn’t really do anything except cause a great deal of confusion and generate an enormous amount of speculation in financial markets that now appears to be contributing to turmoil and strife around the globe.  Operationally, it is no different than what the Fed does at the short end when they implement monetary policy.  The important distinction, however, is that this policy was implemented incorrectly.  Instead of targeting price they targeted size.  And the results in the bond market speak for themselves.  Rates have meandered up and down and up and down without a care in the world for the Fed’s $600B purchase program.  In other words, the program had no impact on rates. 
21---Richard Koo: Charts, Business Insider
Fed pumping doesn't work. These liquidity injections don't make it into the money supply.