Wednesday, May 29, 2013

Today's links

 Yields go up for 3 reasons: a) Fed tightening, b) higher inflation, c) increased demand for capital.

1---China Credit-Bubble Call Pits Fitch’s Chu Against S&P, Bloomberg

Chinese banks are adding assets at the rate of an entire U.S. banking system in five years. To Charlene Chu of Fitch Ratings, that signals a crisis is brewing.

Total lending from banks and other financial institutions in China was 198 percent of gross domestic product last year, compared with 125 percent four years earlier, according to calculations by Chu, the company’s Beijing-based head of China financial institutions. Fitch cut the nation’s long-term local-currency debt rating last month, in the first downgrade by one of the top three rating companies in 14 years.

There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast,” Chu, 41, said in an interview.
Chu’s view puts her in a minority among those charting the future of the world’s biggest nation. She questions how long China can maintain the model of growth driven by bank lending that has allowed its economy to sidestep the global financial crisis. ...

Amid the global credit crunch of 2008, China ramped up lending by state-controlled banks to prevent an economic slowdown. The assets of Chinese banks expanded by 71 trillion yuan ($11.2 trillion) in the four years through 2012, according to government data. They may increase by as much as 20 trillion yuan this year, Chu said April 23. That will exceed the $13.4 trillion of assets held by U.S. commercial banks at the end of last year, according to the Federal Deposit Insurance Corp.
Chu says companies’ ability to pay back what they owe is wearing away, as China gets less economic growth for every yuan of lending.

China’s expansion of credit hasn’t caused a surge in the proportion of bad loans, data from the banking regulator show.
While loans overdue for at least three months have grown for six straight quarters to reach 526.5 billion yuan at the end of March, the ratio of nonperforming loans declined to 0.96 percent as of March 31 from 2.42 percent at the end of 2008, according to the China Banking Regulatory Commission.

Bad Loans

Chu, who has covered Chinese financial institutions at Fitch for seven years, says these figures are distorted. The ratio of nonperforming loans to total lending has declined mainly because credit has surged, she said. Moreover, the regulator’s data doesn’t reflect the real amount of debt because of the ways banks move loans off their books, Chu said.
Some loans, often for real estate, are bundled together and sold to savers as so-called wealth-management products, while other assets are sold to non-bank financial institutions, including trusts, to lower the lenders’ bad debt levels, according to Chu. Wealth management products and trusts are sold to investors eager to get more than the government-mandated benchmark of 3 percent annual interest on bank savings accounts. ...

Chu calculated China’s total credit at 198 percent of GDP last year by adding off-balance-sheet assets such as letters of credit, financing by non-bank institutions and offshore loans by foreign banks to figures for all forms of financing in the economy published by the central bank. The Chinese government doesn’t provide an estimate for total credit to GDP....

Slower Economy

Chinese banks extended 2.8 trillion yuan of loans in the first quarter, 12 percent more than a year earlier and the second-largest quarterly total on record, government data show. Economic growth in the period slowed to 7.7 percent from 7.9 percent in the fourth quarter.
Only 29 percent of last year’s aggregate financing translated into economic growth, the lowest rate on record, as borrowers use more resources to finance outstanding debt and less for investment, Sanford C. Bernstein & Co. analyst Michael Werner wrote in January.
“Companies are taking on a lot of debt but not getting comparable returns,” Chu said. “If they’re not getting sufficient returns, at some point they will have problems repaying the debt.” 

2----Will the Expected End of QE Lead to a Bond Meltdown?, naked capitalism

Yesterday, bonds fell sharply due to stronger-than-expected housing price and consumer confidence reports. That reflects the belief that the economy is mending, and as a result, the Fed will deliver on its promise to dial back and then end QE. Ten year Treasury yields rose to the 2.10%-2.11% level. Various commentators claim that rates will zoom higher either right over that point or at 2.25%. Russ Certo of Brean Capital claim’s there’s a “technical vacuum” at 2.11% that will lead 10 year rates to gap up to 2.25%. And Bruce Krasting wrote over the long weekend about an apparently widespread concern among investors, that convexity in mortgage-backed securities market could produce a nasty feedback loop, or convexity vortex, at 10-year Treasury yields of around 2.25%.
The guts of his argument, starting with a quote from a hedgie buddy:
Some familiar with it say the vortex is 19 bps away..2.2% on ten year treasury, 3% on the CMM..if breaks, MBS holders subject to extension and duration risk. Would now have to increase convexity hedging. Would lead to price gaps and significant selling. With shortage of treasuries due to bernank and co. and low liquidity, could be very disruptive...

Marshall Auerback also pointed out that the danger isn’t the Fed but the state of the economy:
The real problem is the withdrawal of fiscal support. If the market begins to fall, everybody will say that this has been exacerbated by the threatened end of QE, even though I think it is more to do with the sharply declining US budget deficit, which is sucking more and more income out of the US economy.
Comments:
A few points:
1. Rates are at all-time lows and the vast majority can not imagine these going up.
2. This low rate environment discourages long-term planning so if we want any improvement whatsoever, yields must go up.
3. In this low rate environment, borrowers who have not locked in these low long rates only have themselves to blame and deserve to get pounded.
4. Bailouts and mispricing of risk will not last forever.
5. Corporate profits-to-GDP are at historical highs due to multiple factors: all-time low taxes and rates, low wages, low DD&A, etc. They are due to drop and one ore more of these factors will help contract margins.

3---Osborne: Carry On Regardless! (The world's biggest fool), zero hedge

4---Haunted By The Last Housing Bubble, Fitch Warns "Gains Are Outpacing Fundamentals", zero hedge

FITCH: US RESIDENTIAL RECOVERY TOO FAST IN SOME LOCAL ECONOMIES

Fitch Ratings believes the recent home price gains recorded in several residential markets are outpacing improvements in fundamentals and could stall or possibly reverse. Many of these areas are in California, which has seen price increases of 13% over the last year.

In many markets, fundamentals are improving as unemployment rates continue declining, while low prices and low interest rates have kept affordability high. However, especially in cities that never fully unwound the mid-2000s bubble, rapidly increasing price levels are a potential cause for concern. For example, in Los Angeles, prices are up more than 10% in the past year despite a stubborn unemployment rate that remains above 10% and real incomes that have declined over the past two years. Prices are now more than 75% above pre-2000 levels.

Several factors are combining to form an environment supportive of brisk home price growth, but few are capable of providing long-term support to sustain the recent pace of improvement. Primarily, restricted supply and bolstered demand factors are bidding prices up.  

The demand is artificially high as borrowers remain on the side lines waiting for prices to stabilize. We believe this level of housing demand is likely to abate once the pent-up demand is satisfied.

The supply is also artificially low, as recent regulations have limited the pace of foreclosure sales and the large percentage of underwater borrowers continues to hope for further price increases to be able to sell their homes at a profit.

The supply-demand imbalance is even more pronounced in regional markets that are seeing strong institutional and retail bids for rental properties. The low rate and steep drop in prices, coupled with the decline in homeownership, have attracted an estimated $8-$10 billion of new capital to this sector. Many markets have a large number of buyers vying for a limited number of homes.

5---Robert Pape; The roots of terrorism, naked capitalism

The meme that terrorism is driven mostly by some form of Muslim ideology was developed and is promoted by conservatives, but it has almost no basis in fact, as studies have shown. Terrorism is driven not by ideology, but by occupation by hostile forces. This has been most famously proven by a conservative scholar, Robert Pape, who examined the motivations of 300+ suicide terrorist bombers, virtually every known act of suicide terrorism from 1980 to 2005, and found that more than 90% of the acts of terrorism were motivated by foreign occupation, not ideology.

Other studies of Osama bin Laden [a Saudi] have shown that while he adhered to a mutated form of Islam, his attack on the World Trade Center was motivated by the role the US plays in propping up the autocratic Saudi Arabian regime—which is a form of occupation.

After Pape’s study, in 2006 the DoD commissioned a study of the roots of terrorism by the RAND Corporation and the Rand study came to exactly the same conclusion as Pape—ideology plays a very small role in fomenting terrorism. The major role is the reaction to occupation, and the Rand report recommended that the most effective way to reduce terrorism in the Middle East would be for the US to vastly reduce its military footprint in the Middle East.
Near as I can tell, both the Pape study and the RAND study have been completely ignored by US policymakers, and Obama’s speech continues the pattern of studied ignorance.

6----Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble , Mish

7---Regulators scrutinize Payday loans, Bloomberg

A yearlong consumer bureau study concluded that payday borrowers can get ensnared in “debt traps” as they take out new loans to cover previous ones. The study found that 48 percent of those borrowing from storefront firms had more than 10 transactions with payday lenders in a 12-month period

8---U.S. Stock Futures Decline Amid Fed Tapering Concern, Bloomberg

The S&P 500 rose 0.6 percent yesterday and the Dow returned to a record after data showed consumer confidence climbed to the highest level since 2008 and house prices jumped the most in seven years. The S&P 500 dropped 1.1 percent last week as Fed Chairman Ben S. Bernanke said the central bank may reduce monetary stimulus if the economy continues to improve.

9---The latest reading on April margin debt at the NYSE showed an all-time high, prag cap

10--4% 30 Year Mortgage Rates? , cal risk

11---Why hasn’t austerity been more of a drag on the U.S. economy, WA Post

This is the U.S. economy in a nutshell, as revealed in Tuesday’s news ticker: Housing prices rose  faster over the past year than they have in the past seven. Consumer confidence hit its highest level in five years. The stock market rallied another 0.9 percent to hover near an all-time high, as measured by the Standard & Poor’s 500. And the national retail price of gasoline has fallen for six days straight and is down 16 cents a gallon since late February, providing nice relief to drivers.
Which all raises an obvious question: Whatever happened to the austerity economy...

So far, the positives seem to be winning. Gross domestic product rose at a 2.5 percent rate in the first quarter, a bit better than the average over the past several years, and the nation added an average of 196,000 jobs a month in the first four months of 2013, a solid step up from the past few years.

There have been boosts to Americans’ financial situation: Those with higher incomes are wealthier thanks to the stock market’s 17 percent rise so far in 2013 (those in the upper brackets are much more likely to hold stock investments than the rest). Middle-income Americans, whose wealth is disproportionately tied up in their homes, are becoming wealthier thanks to higher home prices (home prices are up 10.2 percent in 20 major cities in the year that ended in March, according to the S&P/Case-Shiller home price index released Tuesday). And lower- and middle-income people have benefited from falling gasoline prices....

2 percentage point increase in payroll taxes that took effect Jan. 1, reducing the take-home pay of all American workers, would be expected to put a big damper on consumer spending. But  personal consumption expenditures rose at a 1.2 percent annual rate in the first quarter, a not-too-shabby result given the drag on after-tax income.
Similarly, while there are ample reports of sequestration spending cuts, which went into effect March 1, reducing incomes (for government contractors who are furloughed, for example, or recipients of unemployment insurance payments that have been reduced), the effects are not really evident so far in data capturing the overall state of the economy...

Indeed, the full economic brunt of sequestration probably hasn’t hit yet

12---Taxing the Rich, Krugman, NYT

For my sins (and, yes, an honorarium too), I’m doing this. So it’s worth putting out some of the basics.
First, over the past three decades we’ve seen a soaring share of income going to the very top of the income distribution (right scale) even as tax rates on high incomes have fallen sharply, with the recent Obama increases clawing back only a fraction of the previous cuts:


13---MBS tapering imminent?, Housingwire

Credit market and mortgage bond investors now view the central bank’s continued supportive stance (quantitative easing) as dependent upon continued weak economic data. This, by extension, means that the timing of the Federal Reserve tapering of mortgage-backed securities is becoming less predictable, analysts claim — based on continued improving economic fundamentals.
Time to price it in, they say.
It's now a familiar dynamic for homebuilding investors – the positive effect of better economic data is offset by its potential to lead to higher rates, thus causing the market to see-saw between good and bad news, according to Barclays.
"It is our view that concerns of a material spike in the 30-year mortgage rate are somewhat premature, and that long rates will likely remain range-bound until Fed tapering is imminent – probably closer to year-end," analysts at Barclays ($19.64 0%) stated.

14--Radical Remaking of the Economy is Taking Root, counterpunch

On top of this, over the last 60 years there has been a dramatic change in the tax system to a more regressive tax. Payroll taxes now make up 35 percent of all federal government tax receipts, up from 11 percent in 1950. Corporate income taxes, meanwhile, now make up less than 10 percent of federal revenue, down from about 26 percent in 1950. Again, the corruption of government by concentrated corporate power is the root cause.

15---Syria escalation poses growing risk of regional war, wsws

16---Foreclosures vanish, Dr Housing Bubble

The peak occurred in early 2009 when 58 percent of sales were foreclosure re-sales (today it is down at 13 percent).  This past year or so, foreclosure re-sales became a tiny portion of total sales so the median price reflects a much higher price because of this shfit.  For example, the median price is up 28 percent according to the California Association of Realtors or 22 percent according to DataQuick.  The Case Shiller, a better measure has price up over 10+ percent which is still very strong.  This is an unbelievable pace and is clearly unsupportable.  I think that goes without saying but what will be interesting moving forward is how year-over-year data will be impacted as the shift in the selling mixture will start to emerge.  So where did all the foreclosures go?

Foreclosures
In California foreclosure filings are down 45 percent year-over-year but are up 13 percent over the last month:...

The bailout of the banking industry was under the pretense that it would help the average homeowner.  What is interesting, is that we are now subsidizing the foreclosure process for many of these homes to be sold to investors.  In California, roughly one-third of home sales for the last couple of years have gone to investors.

17---Hot money planning to exit housing, Dr Housing Bubble

The whispers about private equity exiting the rental market are now out in the open.  A few reports are highlighting that some private equity investors are testing the waters for an exit via IPOs.  Some have asked why it is necessary for these investors to hold onto properties for a few years before exiting.  One of the main reasons is for valuation purposes given that it takes a few years to gather enough workable data on say a block of 1,000 homes and their overall vacancy rates, rental rates, and expense ratios.  This would be important if this pool of homes were to be converted into an income stream for investors.  Yet many are now looking to exit given how hot the stock market is.  You want to sell into momentum.  A few other key points include rents falling in places like Las Vegas where investor demand has been incredibly high.  Is the hot money planning an exit?

18--Inflation, deflation, QE, Coppola comment

19---Colony Capital sees Housing bubble, Bloomberg video
 

  

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