Sunday, June 30, 2013

Today's links

1---Deflation By Any Other Name Would Smell As Foul, oftwominds

Over the weekend, the BIS came with a curious number on the losses, as quoted by Reuters :

The BIS said in its annual report that a rise in bond yields of 3 percentage points across the maturity spectrum would inflict losses on U.S. bond investors - excluding the Federal Reserve - of more than $1 trillion, or 8% of U.S. gross domestic product.
The potential loss of value in government debt as a share of GDP is at a record high for most advanced economies, ranging from about 15% to 35% in France, Italy, Japan and Britain.
"As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care," the BIS said.

Curious, because a 3 percentage point rise is a large number (so large it may well have been picked to throw people off) and losses will already be very substantial at a much lower percentage too. Moreover, in the $82 trillion or so global bond markets, a $1 trillion loss looks very low in comparison, certainly when you see the BIS claim that France, Italy, Japan and Britain can see their bonds lose a third of their value. But still, again, this is deflation.

Perhaps the clearest, most down to earth and black and white illustration of deflation comes from two graphs that Ambrose Evans-Pritchard posted overnight . Remember, deflation does not equal falling prices, they're just a consequence. Deflation is the combination of the money and credit supply with the velocity of money. We know what that means for Japan, where velocity is extremely low, and PM Abe finds out that he can try to increase the money supply, but he has no control over the velocity. Here are M1 and velocity for the US:

Not a picture that leaves many questions open, it would seem. Still, it would be good to note that these developments didn't start with the latest market turmoil. If anything, they're the best illustration we can hope for of the failure of QE and other stimulus to induce an economic recovery. It's still impossible for all intents and purposes to find even one single politician or "expert" who does not talk about a return to growth and recovery, and that, in view of what we see out there, is taking on a bizarre character.

2---Real wages decline; literally no one notices, angry bear
Cross-posted from Middle Class Political Economist.
Your read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was  more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.

Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year.

3---Wages Falling, angry bear

And an op ed by David Cay Johnston this last week:
Breaking news alert! Wages fell at the fastest rate ever recorded during the first quarter of this year, the government’s Bureau of Labor Statistics reported.
Hourly wages fell 3.8 percent in the first quarter, the biggest drop since the BLS began tracking compensation in 1947. Productivity rose half a percentage point. The result was that what economists call “labor unit costs” fell 4.3 percent.
In plain English, that means paychecks overall shrank, but work output grew. If you are a business owner, that is news worthy of a toast with a bottle of the finest Cristal champagne, which at $595 is more than the $518 that a median-wage worker earns in a week.

If you have not heard this news about plummeting wages, it is not surprising. Except for right-wing websites, and an item at the liberal Huffington Post, the June 5 announcement went unreported.
The networks and the major newspapers all have staffs of business reporters, yet they missed the third paragraph of the official government announcement that contained this important news.
That is because they are mostly assigned to write about hedge funds, high finance and the latest smartphone app. Hardly any business reporters cover workers or work, and when they do, it is often from the perspective of company executives and investors.

4---New threats to China's property bubble , sober look

based on the house price to wage ratio compiled by the IMF, China's large cities have the most expensive real estate in the world. Beijing is particularly expensive, as party officials deploy their "hard-earned" cash.

Source: Credit Suisse

The recent madness in China's money markets and PBoC's "delayed reaction" to tight monetary conditions (see discussion) could potentially spill over into the broader credit markets, resulting in increased lending rates and tighter credit conditions in general. That's not great news for property markets.
JPMorgan: - We expect liquidity conditions to ease in July, but in the near term, there is a risk that the tough line taken by the PBOC will create an artificial liquidity squeeze and cause an increase in the lending rate to the real sector (the SHIBOR rate also increased significantly, to 5.4%), putting further pressure on already-weak economic activity. In our view, the PBOC should reintroduce reverse-repo [injecting liquidity] operations very soon to calm the panic in the interbank market.
These threats to China's property markets, combined with weakness in manufacturing, do not bode well for China's near term growth prospects

5---QE's awesome failure in one chart:  Richard Koo on the ineffectiveness of monetary expansion, zero hedge

Koo: As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down. At the moment, however, that is not yet the case, as the sharp fall of the yen following the announcement of Abenomics with its commitment to monetary easing amply demonstrates...

 The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limited impact...

 In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging

Koo affirms that fiscal spending and not monetary policy saved the US from the Great Depression:

Koo: Unfortunately there was a period in economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.

The asset side of banks’ balance sheet clearly indicates that it was lending to the government that grew during this period (chart below). The lending to the private sector did not grow at all during this period because the sector was still repairing its balance sheets. And the government was borrowing because the Roosevelt Administration needed to finance its New Deal fiscal stimulus. In other words, it was Roosevelt’s fiscal stimulus that increased both the GDP and money supply after 1933...

Although deficit spending is frequently associated with crowding out and misallocation of resources, during balance sheet recessions, the opposite is true...

About Japan’s Abeconomics:

Koo: In Japan, the new governor of Bank of Japan Mr. Kuroda, who has no prior experience with monetary policy, is still clinging to the obsolete idea that additional bond purchases will somehow get the economic activity and inflation rates to pick up.

About the withdrawal of liquidity by central banks:

Koo: But once the private sector finishes repairing balance sheets and regains its appetite for borrowings, the central bank will be forced to remove the massive reserves in the banking system before both money supply and inflation go through the roof. The benefit of implementation QE and the cost of its removal are not symmetrical because the two take place at different phases of the economy. At this juncture, a QE of $200 billion or $2 trillion really does not make much difference because the money multiplier is dead in the water...

This time, however, the US and UK central banks are in the long end of the market. This means the removal of QE will have much larger effect at the long end of the yield curve, with equally larger impact on the economy just when the economy is regaining its health and willingness to borrow (The risks outweigh the benefits?) 

6----Abennomics; The false hope of "trickle down", NYT

A wide recovery in consumer spending has been the weakest link in “Abenomics,” the bold economic stimulus strategy that Mr. Abe has pushed since taking office in late December.
Abenomics has already brought big profit bumps to the nation’s exporters, thanks to a yen made weaker by Mr. Abe’s aggressive policies. He found a kindred spirit in Haruhiko Kuroda, the Bank of Japan’s new governor, who has committed the central bank to easing the money supply and reinflating the economy. Stock markets have rallied, as foreign investors jumped back into a country they had all but written off for its seemingly unshakable stagnation.
Numbers released on Friday by the government provided more proof of Japan’s corporate recovery. Industrial production rose by a robust 2 percent in May from the previous month. Tokyo’s benchmark Nikkei index climbed 3.5 percent Friday on the strong showing.
Reversing a 15-year-long slide in prices, which Mr. Abe has singled out as both a cause and a symptom of waning profits, wages and consumption, is a tougher order. For companies to feel confident enough to start raising prices, Japan’s consumers have to start spending again, and data confirming that trend is still mixed.
Separate figures released on Friday showed that household spending fell 1.6 percent in May from a year earlier, confounding economists’ expectations of a 1.3 percent rise. Still, for the first time in seven months, Japan’s core consumer prices in May did not fall compared to the previous year, staying flat for that month after falling 0.4 percent the previous month.
“We are comfortable with our view that the uptrend of consumption continues,” Masamichi Adachi, Tokyo-based economist at JPMorgan Securities Japan, said in a note Friday. “An expected rise in summer bonuses, paid in June and July, and improvement in general sentiment are the main reasons,” he said.
There are some signs that after years of penny-pinching, conspicuous spending is on the rise again in Japan. But for now, it is starting at the very top, among the financiers, professionals and other well-to-do Japanese who have benefited from the recent stock market gains.
Sales of Ferrari cars in Japan have jumped almost 20 percent so far this year, figures from the Japan Automobile Importers Association show, thanks to this newfound exuberance among the nation’s rich.
“We’ve seen confidence start to explode over the last months ...
Consumers grew accustomed to expecting that the longer they waited, the cheaper goods would become. And they held back on spending. That led to even less demand and more years of deflation.
The challenge for Mr. Abe has been to reverse those entrenched expectations. For now, he is helped by a weak yen, which inflates the price of imported products. And enthusiasm over signs of life in the stock market, as well as over expectations for a recovery, are lifting spirits. (expectations don't matter if wages are falling. Wages have been falling for 20 years in Japan.)
The president of the European parliament has demanded an explanation from US authorities over the latest revelation that EU diplomatic missions in Washington, New York and Brussels were under electronic surveillance from the NSA.
“I am deeply worried and shocked about the allegations of US authorities spying on EU offices,” said the President of the European Parliament Martin Schulz. “If the allegations prove to be true, it would be an extremely serious matter which will have a severe impact on EU-US relations.”
“On behalf of the European Parliament, I demand full clarification and require further information speedily from the US authorities with regard to these allegations," he added


Saturday, June 29, 2013

Today's links

1---Bernanke Admits QE Raises Stock Prices, Force Investors Into stocks, CNBC (video)

2---How could markets possibly have misunderstood? , Economist

New York Fed president Bill Dudley pushed back hard as well, saying among other things:
Some commentators have interpreted the recent shift in the market-implied path of short-term interest rates as indicating that market participants now expect the first increases in the federal funds rate target to come much earlier than previously thought. Setting aside whether this is the correct interpretation of recent price moves, let me emphasize that such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants

As it happens, markets have in fact leveled out. The rate on the 10-year Treasury soared to 2.6%, but has since fallen back to around 2.5%. The S&P 500 has rebounded almost 3% since Monday. But in my Monday post I also wrote:
[I]t's frustrating that the message reversal, when it comes, will probably reflect thinking within the Fed that, "markets misinterpreted what we were saying, and so we had to set them straight". That's not what will have happened. Whether the Fed gets it or not, it set a tighter monetary policy last week. And if a new policy message calms markets it will be because the Fed is effectively setting a more accommodative policy than it did on the 19th.
The comments above illustrate the point perfectly. "Policy hasn't changed!" they all insist; "Markets just misunderstood us!" But that's wrong. The market reaction is the policy. When bond and equity prices fall, inflation expectations, drop, and the dollar jumps in response to your statement, policy got tighter, whatever the intention was. Furthermore, the market reaction strikes me as a totally reasonable response to the Fed's statement. The Fed clarified its definition of "substantial improvement" in a meaningful and disappointing way: to mean virtually no improvement relative to the labour-market trend that has persisted since 2011. And it suggested that current trends were likely to justify a complete end to QE3 despite the fact that unemployment is well above the natural rate and inflation is well below the Fed's target and falling.

And the Fed, by saying that the market overreacted, is saying that it goofed when it tightened policy last week. Again, I am happy that the Fed is saying, albeit unwittingly, that it goofed and that the policy stance is easing. But the conclusion to my Monday post still stands:
The past few days have made it overwhelmingly clear that the Fed is steering this recovery. That should be comforting; all it has to do is steer things in a more expansionary direction! But it isn't, because the Fed keeps looking around and wondering, who's got the wheel?

3---The Big Picture
Wall St boom, Main St bust
Source: FT Alphaville

3---US backed al Qaida "behead" victims, RT video

A video purportedly showing an extrajudicial public beheading of two Bashar Assad loyalists has been uploaded onto the internet. Its authenticity has been verified by pro and anti-Assad sources, though it remains unclear who is behind the execution.

4---The political crisis in Australia, wsws

Gillard began the shift to austerity, entrenching a long term budget schedule of deep spending cuts, targeting single parents, the unemployed and other welfare recipients. But the ruling elite is demanding nothing less than a European-style social counter-revolution, with permanent, sweeping spending cuts to public education, healthcare, welfare, other basic services and social infrastructure.

The world economic crisis has likewise accelerated, and is now finding far more direct expression in Australia. The China-driven mining export boom, which provided a certain buffer for Australian capitalism in the immediate aftermath of the global financial crash, is now over.

A Bloomberg article, published yesterday, compared the Australian economy to a collateralised debt obligation (CDO), one of the “toxic assets” that triggered the financial crash in 2008. “Australia is a leveraged time bomb waiting to blow,” Albert Edwards, Société Générale SA’s London-based global strategist, declared. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
Already several Australian states are in official recession

5---NYSE Margin Debt Posts First Monthly Decline in a Year, pragmatic capitalism

NYSE margin debt declined to $377MM in May from April’s record reading of $384MM.   This was the first decline on a monthly basis since last June.

Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on.  I often refer to this as evidence of a disaggregation of credit or the way credit is often employed in our economy for productive and unproductive uses.

6---Corporate creditworthiness in the U.S. is deteriorating at the fastest pace since 2009 with earnings growth slowing as yields rise from record lows. , Bloomberg
(Bank loans to issue dividends?? falling profits! and --rather than pay down debt--corps are buying their own stock)

The Federal Reserve has pumped more than $2.5 trillion into the financial system since markets froze in 2008, helping companies improve profitability by lowering their borrowing costs. Policy makers are considering curtailing $85 billion in monthly bond buying intended to prop up the economy as analysts surveyed by Bloomberg forecast earnings growth of 2.5 percent in the current quarter, the least in a year.
“The trend of improving credit quality has slowed as profits are slowing,” Ben Garber, an economist at Moody’s Analytics in New York, said in a telephone interview. “As the recovery matures, companies are liable to get more aggressive in taking on share buybacks and dividends.”

Buybacks, Dividends

Rather than using cash to pay down debt, companies in the S&P 500 Index are attempting to boost their share prices by buying back almost $700 billion of stock this year, approaching the 2007 record of $731 billion, said Rob Leiphart, an analyst at equity researcher Birinyi Associates in Westport, Connecticut.
Borrowers controlled by buyout firms are on pace to raise more than $72.7 billion this year through dividends financed by bank loans, surpassing last year’s record of $48.8 billion, according to S&P Capital IQ Leveraged Commentary & Data.
After cutting expenses as much as they could to improve profitability, companies “will need to see further revenue growth to boost earnings from here,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., which oversees $350 billion, said in a telephone interview.

Investors are pulling back from auto debt, the largest part of the asset-backed market, threatening to constrain financing to borrowers with blemished credit histories. Subprime vehicle debt accounted for 13.2 percent of asset-backed issuance this year compared with 10.5 percent in 2012, Wells Fargo & Co. analysts led by John McElravey said in a June 7 report. ...

Sales Slow

S&P, the world’s largest credit rater, has cut 138 U.S. companies this year through June 17 and upgraded 114 companies.
Credit markets have been roiled since Fed Chairman Ben S. Bernanke told Congress on May 22 that the central bank’s policy-setting board could start scaling back purchases of $40 billion in mortgage bonds and $45 billion in Treasuries in its “next few meetings” if the U.S. employment outlook shows sustained improvement. After the Fed’s meeting on June 19, Bernanke said the policy could end entirely by mid-2014.
With yields on 10-year Treasuries at the most in almost two years, corporate borrowing costs have reached 4.28 percent, the highest level since June 2012, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.
Issuance has slowed, following the busiest May on record, as company yields have soared from a record low 3.35 percent on May 2. Bond sales last week of $16.5 billion fell below the 2013 average for the fourth straight period, according to data compiled by Bloomberg.

‘Apprehensive’ Raters

Earnings growth at S&P 500 companies is poised to slow from 2.7 percent in the first quarter and 8 percent in the final three months of last year, Bloomberg data show.
The ratio of cash to total assets for S&P 500 companies stands at about 10.3 percent, close to a record high 10.4 percent reached June 19, Bloomberg data show. The ratio was as low as 5.6 percent in March 2007.
“Companies have done a great job cleaning up their balance sheets but now the focus has moved on to dividends and share buybacks,” Rajeev Sharma, who manages $1.5 billion of fixed-income assets in New York at First Investors Management Co., said in a telephone interview. “That’s what makes the ratings agencies get apprehensive.

7---Fed QE Exit Impact: Lower EPS, Fewer Dividends Seen, IBD

Investors could see corporations return less capital and report weaker profits as the era of cheap debt appears to be winding down.
Corporate bond issuance has collapsed to the lowest level since late 2011 amid fears the Federal Reserve will soon taper the pace of monetary stimulus, sending debt yields of all kinds sharply higher.

June bond sales in the U.S. totaled $43.9 billion through Thursday night, down from $127.5 billion in May, according to Dealogic. The number of issuers tumbled to 72 from 188.
A similar trend can be seen in corporate debt globally, and municipalities have withdrawn planned bond sales as their borrowing costs soar. Sovereign bond yields have spiked as well, especially in emerging markets.

Funds holding debt of all kinds have sold off sharply. Investors pulled $61.7 billion from U.S.-listed bond mutual funds and exchange-traded funds in the month to June 24, TrimTabs Investment Research said, easily topping the previous record outflow of $41.8 billion set during the financial crash in October 2008.
It marks a sharp reversal from just a few months ago. In April, for example, Apple (AAPL) set a corporate-bond record by selling $17 billion of debt amid demand that topped $50 billion....

Bottom-Line Boost
Companies had rushed to load up on cheap cash, despite the economy offering scant encouragement to invest and expand.
So they instead used the easy money to refinance and cut debt-servicing costs, providing a boost to the bottom line as tepid growth held back the top line.
"It definitely helped on the earnings side," said Andy Richman, managing director of fixed income at SunTrust's (STI) investment advisory.
Q1 revenue from S&P 500 companies was flat vs. a year earlier, according to Thomson Reuters, which sees Q2 growth at 1.8%.
Companies also showered shareholders with dividends and stock repurchases. The start of the year saw a record number of dividend hikes, following a flood of payouts at the end of 2012 ahead of tax hikes.
The money was used for mergers and acquisitions too, and 2013 began with a flurry of megadeals, like $28 billion for Heinz and $24 billion for Virgin Media, though the pace has slowed.
Roll Over
But any companies that need to roll over maturing debt with new borrowing will see higher rates now. And firms that didn't use the debt to invest in their operations when borrowing costs were low may suffer as the economy picks up again, said Minyi Chen, operating chief for TrimTabs Investment Research.


Friday, June 28, 2013

Today's links

1---China's shadow lending problem, zero hedge

Shadow lending flourishes in China because an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, according to Citic Securities Co., and savers are seeking higher returns. The industry may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan Chase & Co. estimated last month. The crackdown may damage the economy by shrinking funding for smaller companies, Barclays Plc said on May 20....

“The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process, but it’s very difficult to do so in an orderly way,” said Michael Pettis, a finance professor at Peking University “There’s always a risk that the unwinding of the debt becomes disorderly and the PBOC will be blamed for mismanaging the process

2---Fed Officials Intensify Effort to Curb Surge in Interest Rates, Bloomberg

Federal Reserve officials intensified efforts to curb a growth-threatening rise in long-term interest rates, seeking to clarify comments by Chairman Ben S. Bernanke that triggered turmoil in global financial markets.
William C. Dudley, president of the Federal Reserve Bank of New York, said yesterday any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and that an increase in the Fed’s benchmark interest rate is “very likely to be a long way off.” He said bond purchases could be prolonged if economic performance fails to meet the Fed’s forecasts.

Concerns the Fed may curtail accommodation helped push the yield on the 10-year Treasury note as high as 2.61 percent this week from as low as 1.63 percent in May. The remarks by Dudley, who also serves as vice chairman of the policy-setting Federal Open Market Committee, along with Fed Governor Jerome Powell and Atlanta Fed President Dennis Lockhart sought to damp expectations that an increase in the benchmark interest rate will come sooner than previously forecast.

“Such an expectation would be quite out of sync with both FOMC statements and the expectations of most FOMC participants,” said Dudley, 60, a former chief U.S. economist for Goldman Sachs Group Inc.
The Standard & Poor’s 500 Index rose 0.6 percent to 1,613.20 at the close of trading in New York, while the yield on the 10-year Treasury note fell to 2.47 percent from 2.54 percent on June 26. ...

The FOMC has said it will keep its benchmark rate close to zero as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.
“Not only will it likely take considerable time to reach the FOMC’s 6.5 percent unemployment rate threshold, but also the FOMC could wait considerably longer before raising short-term rates,” Dudley said. “The fact that inflation is coming in well below the FOMC’s 2 percent objective is relevant here. Most FOMC participants currently do not expect short-term rates to begin to rise until 2015.”

The strategy Bernanke laid out for tapering bond purchases was predicated on the economy growing in line with the FOMC’s forecasts. Central bankers expect growth of 2.3 percent to 2.6 percent this year, according to projections released last week. The economy grew at a 1.8 percent rate from January through March, down from a prior reading of 2.4 percent.

3---U.S. Bond Funds Have Record $61.7 Billion in Redemptions, Bloomberg

U.S.-listed bond mutual funds and exchange-traded funds saw record monthly redemptions of $61.7 billion through June 24 amid signs the country’s central bank may scale back its unprecedented stimulus.
The redemptions surpassed the previous monthly record of $41.8 billion, set in October 2008, according to an e-mailed statement by TrimTabs Investment Research in Sausalito, California. Investors withdrew $52.8 billion from bond mutual funds and $8.9 billion from ETFs during the period, said Richard Stern, a spokesman for TrimTabs. ...

The unprecedented liquidation of bonds this month is a dramatic departure from recent trends,” David Santschi, chief executive officer of TrimTabs, said in the statement. “Before June, bond funds had posted inflows for 21 consecutive months.”

4---The Fed Just 'Doesn't Understand' Bond Market: Allen Sinai, CNBC

Dudley has not told us anything that we don't know," Sinai, chief global economist for Decision Economics, told CNBC's "Squawk on the Street".
If the Fed begins to taper, demand for Treasurys will diminish, taking the key interest rate on 10-year Treasurys upward, he said. "If I'm a trader in the fixed income side, I can't be long until I see how that plays out," Sinai said. 

  Over the long term, he added, one way or another we'll see a better economy, rising inflation and higher interest rates. Short term, however, the markets "overdid it" on the move in interest rates, but playing higher rates from here is "the only way to look at it from an investment point of view," he said.

  What Dudley said "doesn't matter," Sinai added. "The Fed doesn't understand the dynamics of short-term movements in markets. In the short run, you just can't be long on bonds. That's also why corporate bond yields are rising."

"It's important to remind financial markets that the economy has yet to strengthen by enough to unambiguously justify even the thought of a winding down of Fed bond purchases," said Lonski, of Moody's Capital Markets Research Group.
"The corporate bond market has responded even more negatively than the Treasury bond market of late," he said, noting that the move in corporates have far outpaced that in Treasurys by a "very wide margin." 

Lonski said the corporate bond market is still concerned that the economy isn't strong enough to sustain a 2.5 percent yield on
10-year Treasurys.  

  "There's really no convincing evidence that we're about to enter a period of persistently faster economic growth," he said. "The reality is, of late, both business sales and corporate profits are rising at rates that are well under their long-term averages."
"This is no time for higher borrowing costs," he added.

5---Japan factory output jumps but deflation remains, yahoo

Japan's April jobless rate was flat at a multi-year low of 4.1 percent.
"There has been a clear recovery in demand for labour in manufacturing likely on the back of stabilisation in exports and thus industrial production," said Credit Agricole economist Yoshiro Sato.
Huge infrastructure projects following Japan's quake-tsunami disaster two years ago were helping prop up demand for workers, Sato added.

On Friday the International Monetary Fund kept its 1.6 percent growth forecast for Japan's economy this year, giving Abe's plan a thumbs up. The economy expanded again in the first quarter, confirming its exit from recession.
But the IMF also warned of "considerable downside risks" if Japan doesn't chop its massive national debt -- the worst among industrialized nations at more than twice the size of the economy.

A manufacturer survey on Friday showed Japanese producers remain cautious, expecting May factory output to be flat before slipping 1.4 percent in June.
Household spending was also weaker than expected while consumer prices fell 0.4 percent on-year in April, underscoring the tough task in reversing years of deflation that has crimped private spending and business investment.
A small 0.1 percent increase in Tokyo-area prices for May, the first in about four years, offered some hope amid reports that luxury brands including Chanel and Germany's Montblanc were set to raise their local prices by about 10 percent in response to the yen's drop against the dollar....

The BoJ's huge monetary easing measures -- similar to the US Federal Reserve's bond-buying programme, known as quantitative easing -- have driven down the yen, which traded around 101 against the dollar Friday, about 25 percent lower than late last year.
A weaker currency makes exporters more competitive overseas and inflates repatriated foreign income which, in turn, tends to lift their shares.
But it also makes imports more expensive and has sent Japan's energy bills soaring as Tokyo turned to pricey fossil-fuel alternatives after shutting nuclear reactors following the Fukushima atomic crisis two years ago.

6---How Much Are the NSA and CIA Front Running Markets?, naked capitalism


7---Mortgage rates soar to 4.46% - biggest jump in 26 years, CNN Money

8---Redistribution policies at the root of the Eurozone Crisis, VOX

In theory, ‘one market’ should be accompanied not only by ‘one money’ but also by a shared concern about distributional issues. Not only theory, but also pre-crisis empirical patterns and a crisis deepened and prolonged by revision of the convergence implications of economic and monetary integration as well as by lack of risk-sharing buffers for the asymmetric impact of global shocks, indicate that that a robust and coherent European market and policy-integration process would require implementation of the behavioural constraints and redistribution schemes that operate, not without difficulties, within national socioeconomic systems.

9---Home Builder Sales at Risk Due to Rising Mortgage Rates, cnbc

Sales of newly built homes rose to their highest level in five years in May, according to numbers compiled by the U.S. Census, but those numbers are at risk of being wrong. They are based on signed contracts, not closings, for homes, many of which have not yet been built. Those contracts were signed well before a huge spike in mortgage rates, and those closings could be up to nine months away, when the homes are completed. ...

Bottom line, 70 percent of all May 'sales' are suspect with respect to locked mortgage financing, which is a key metric to how much the buyer can pay for the house," says Hanson.
"Not all of these will fall out. Some will move to a higher-risk adjustable rate mortgages in order to save the deal. However, builder sales fall-out will spike and the May new home "sales" number will be revised sharply lower unless rates comply or builders help to soften the blow of the house being 20 percent more expensive to own than originally thought."

10--The Las Vegas housing fiasco, Dr Housing Bubble

I find this very interesting.  Even today, nearly 60 percent of all buying activity is going to investors (at record levels).  Just look at the crazy level of all cash buying:
las vegas home buyers with cash
Source:  DataQuick
Investors are hungry for yield.  Returns just got much more lucrative outside of real estate with rates going up dramatically in the last few weeks

The fact that investor demand is still feverish and the economic fundamentals stopped making sense a year ago this market is safely into mania mode.  Will anyone step in?  Absolutely not.  Our economic system seems to be “ride it until the wheels fall off” so put on your helmets because the RPMs are starting to redline.

11---Dwindling investment in "torpid" US economy, wsws

The central bankers’ statements came after investors pulled $8.6 billion from US bonds over the past week, sending total withdrawals over the past four weeks to $23.7 billion, the largest monthly outflow from bond markets since the 2008 crash. So far this year, four-fifths of bond funds tracked by Lipper, the financial data firm, have lost money for investors.

The most recent bond selloff has led to significant increases in interest rates, a trend that is already impacting the real economy. Rates on 30-year mortgages stood at 4.56 percent Wednesday, up from 3.74 percent a month ago, while high-grade corporate bonds hit 3.47 percent, up from 2.73 percent in the same period.

The most significant factor in the downward revision of the first-quarter gross domestic product (GDP) figure was a decline in the growth rate of consumer spending, which fell from 3.4 percent to 2.6 percent. A portion of this drop was the result of the expiration in January of a two-year payroll tax cut, which reduced a typical worker's take-home pay by $20.

At the same time, business investment remained stagnant, rising by just 0.4 percent.....

The torpid state of the real US economy was outlined in a Thursday Wall Street Journal article entitled “Companies Still Wary Despite Hefty Profits.” The article noted that US corporations, while holding vast quantities of cash, have failed to make any significant increases in investment or hiring, while manufacturing faces a protracted slump.

The report noted, “Despite stellar profits and lean payrolls, US firms remain scarred by the deep downturn,” and that “their appetite for investing continues to be patchy and their hiring slow.”
The report noted that capital investment by US companies is four percent below its pre-2007 level, and total manufacturing output in May was five percent less than before the crash.

This was despite the fact that US corporations are drowning in cash and profits. The Journal noted that non-financial US companies are sitting on $1.8 trillion in cash and cash equivalents, up by 30 percent from 2008. Corporate profits, meanwhile, are at a post-World War II record of 12 percent of economic output, with this figure having nearly doubled over the past ten years

12---Margin debt drops after Fed announcement (as planned), prag cap

NYSE margin debt declined to $377MM in May from April’s record reading of $384MM.   This was the first decline on a monthly basis since last June.
Historically, margin debt has a strong correlation with the S&P 500 as investors tend to lever up as the market advances and the mood shifts from risk off to risk on.  I often refer to this as evidence of a disaggregation of credit or the way credit is often employed in our economy for productive and unproductive uses.

13---Fukushima Daiichi: The radiation exposures are going up, Fairwinds

You know, when you turn a nuclear power plant on, there is no off switch. The heat remains for 10 years and the radiation remains for 100,000 years. So you can’t change your mind. Throwing that switch on is a 100,000 year commitment. There is no off switch with nuclear power.
AK:     So in other words, we produced a car – an automobile car without a brake

The people in the prefecture especially, but then also the people in Japan, received very high radiation exposures, higher than the IAEA is willing to discuss. The evidence is clearly in that the accident released three times more radiation in the form of noble gases than compared to Chernobyl, and roughly the same amount of Cesium as Chernobyl did. So this is a world-class event that has been downplayed by the Japanese government. So you’ve got a latency period of 5 to 10 years, and in some cases 30 years, for cancers to develop, which gets me back to fighting the dragon you cannot see. These people have been exposed. ...

NWJ:   Are we not already seeing reports of cysts on the thyroid glands of children throughout the prefecture of Fukushima as well as the rest of Japan?

CK:     Children already had thyroid cancer removed. And some were suspected of having thyroid cancer just among 38,000 children. They are testing more and more children but the first study already showed that the three confirmed cancer, so that’s quite alarming. But then what’s more concerning is the fact that even today – I just heard on the radio that the UN officially concluded that the cancer derived from Fukushima Daiichi accident will not be increased. I mean there won’t be increased cancer in Japan because of the accident. That was today’s report. And I think that really compounds the problem, and especially psychologically damaging to people living in the area because they know people are getting sick. They know they are sick. They know people are dying. And yet the world has written them off in a sense; that if they get sick, well, don’t blame the accident. It’s your fault. And that’s the part that bothers me the most.

AM:    This has already happened before, the case after Chernobyl accident. That within 5 years, UN, IAEA concluded the same conclusion, that there was no serious case for children. But after 5 years, 10 years, and now, there are so many children that suffer from the thyroid. So Helen Caldicott said this doesn’t appear until 5 years, 10 years. So it is irresponsible that the UN concludes at this point now....

you’ve got an enormous amount of radiation sitting on the roof of a building that’s been compromised because it exploded. There’s no doubt that the building is not as strong as it was; and in fact, there’s a bulge at the bottom of a couple of inches called a first mode oil or strut bulge, which is another indication of a seismic problem. We focus on unit 4 because it has the most and hottest radioactive fuel, but to my mind, unit 3 is just as bad. It doesn’t have quite as much nuclear fuel in it but it’s the one that had the most devastating explosion. So from a seismic standpoint, it’s probably more likely to topple. If unit 4 were to topple, there’s more dose consequence. But either way, it’s really a bad scenario

14---John Maynard Keynes: The General Theory of Employment, Interest and Money, from Chapter 24: Tuesday Hoisted from the Non-Internet of 57 Years Ago Weblogging, Delong
The General Theory of Employment, Interest and Money:
The central controls [my theory claims are] necessary to ensure full employment will, of course, involve a large extension of the traditional functions of government. Furthermore, the modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. ....

Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.

For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.
(Summary: "Look, guys. High unemployment pisses people off and leads to political change, and sometimes to the end of capitalism itself. So, wise up. We can fix this by using gov deficits to increase demand and put more people to work. Of course, some of your money grubbing Ponzi scams will have to be suspended (temporarily) but the alternative is much worse"....This is Keynes in a nutshell)

15---Pettis on China, Mish

  • , we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing’s determination to control credit growth.
  • Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.
  • During the coming week I believe that a significant amount of Wealth Management Prodiucts (WMP) will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
  • If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.

    Thursday, June 27, 2013

    Today's links

     1---First-Quarter GDP Growth Rate Revised Down to 1.8%, WSJ

    The revision was due largely to slower growth in consumption, which eased to a 2.6% gain from the earlier estimate of 3.4%. Consumer spending, which accounts for two-thirds of economic output, was likely hit by a rise in payroll taxes at the start of the year and relatively stagnant incomes, two forces that have pushed the saving rate lower.
    Spending on legal services, personal care and health care all were weaker than previously estimated, the Commerce Department said....
    Fed Chairman Ben Bernanke last week said the "main drag" to growth this year is federal fiscal policy. "Our judgment is that, given that very heavy headwind, the fact that the economy is still moving ahead at at least a moderate pace is indicative that the underlying factors are improving," he said. "Obviously, we haven't seen the full effect yet of the fiscal-policy changes. We'll want to see how that evolves as we get through that fiscal impact. But we're hopeful."

    The latest figures raise questions about how much consumers—buoyed by strengthening housing and jobs markets—will be able to prop up growth for the second quarter and offset cuts from the government sector.
    The recovery in global banks' balance sheets is under threat from a surge in bond yields, according to senior bank executives and analysts preparing for quarterly earnings season.
    Banks have built giant portfolios of liquid securities, partly at the behest of regulators and also because they have not found better opportunities to lend a flood of deposits. Under new capital rules, unrealized losses in these "available for sale" portfolios hit banks' equity capital.
    "I would think most institutions are going to have a fairly sizeable hit to their equity," said a senior executive of a top U.S. bank. "You've really had this concentrated one-to-two week period where all hell is breaking loose."
    The composition of the balance sheets leaves banks vulnerable to the spike in interest rates. For example, Bank of America has a $315 billion securities portfolio, 90 percent of which is invested in mortgage-backed securities and Treasurys. As yields rise, prices fall.
    In the U.S., the unrealised net gains on "available for sale" portfolios has slumped to $16.7 billion, its lowest level in two years, according to the latest Federal Reserve data. The metric tracks the performance of banks' AFS portfolios, largely comprised of mortgage-backed securities and Treasuries, and the fall represents a drop of more than 50 percent in two months.

    3---Consumer Spending in U.S. Rebounds as Incomes Increase, Bloomberg
    Saving Improves
    The saving rate increased to 3.2 percent from 3 percent. Wages and salaries climbed 0.3 percent.
    Disposable income, or the money left over after taxes, increased 0.4 percent after adjusting for inflation, today’s report showed. It climbed 0.3 percent in the prior month.
    Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.2 percent in May after a 0.1 percent decrease in the previous month, today’s report showed.

    Price-adjusted spending on durable goods, including automobiles, increased 1 percent in May, the biggest gain so far this year, after a 0.2 percent advance the prior month. Purchases of non-durable goods, which include gasoline, rose 0.5 percent...

    While there are signs of a better economy, the improvement is not robust,” David Dillon, chief executive officer, said in a June 20 earnings call. “Consumer sentiment is gradually improving, but remains fragile. We continue to see high variability in sales comparisons between days and weeks.”

    4--U.S. wages fall amid overseas pressure, post gazette

    Competition from China and other low-wage rivals, coupled with fallout from the 2007-09 financial crisis, has put American wages under such unprecedented strain that they have shifted into reverse -- not merely stagnating, but falling.

    "Water finds its equilibrium, its own level," said Jeff Joerres, chief executive of Milwaukee-based global staffing giant ManpowerGroup Inc., who refers to this accelerating leveling of wages as "global labor arbitrage."

    "It's happening so fast on a global scale that it's scary," Mr. Joerres said.
    In the U.S., the phenomenon is not limited to isolated and vulnerable sectors, such as commodity manufacturing. Rather, wages have fallen across the entire national economy -- down 1.1 percent in the 12-month period from September 2011 to September 2012, the most recent comparisons available.

    "Average weekly wages declined in every industry except for information," the U.S. Bureau of Labor Statistics reported in its latest economic census.

    5---The failure of Abenomics, Businessweek

    Deregulation Targets
    Abe on June 5 vowed to deregulate the energy, health and infrastructure industries and double foreign investment to 35 trillion yen ($357 billion) by 2020.

    He also plans to boost power industry investment to 30 trillion yen within a decade and triple the use of public-private partnerships to 12 trillion yen to fund infrastructure projects such as airports, waterworks and highways. He didn’t address changing labor laws making it easier for companies to eliminate jobs.

    “I want the government to hammer out policies that can get rid of obstacles for businesses and energize the private sector, not just provide them with subsidies,” Miyauchi said

    6---Rethinking Abenomics, WSJ.
    Inflation expectations have certainly risen on the back of the yen’s fall, but once the rise in import and energy prices pass through, there’s a strong prospect that inflation will trend down again.

    It’s worth noting that foreign investors have been large net buyers of Japanese equities, to the tune of around 8.5 trillion yen ($85 billion) since the market started rising last autumn. Maybe it’s because foreigners have more faith in Abenomics than the Japanese do themselves. And maybe that’s because the Japanese have longer memories, knowing all too well how over the past twenty years successive stimulus plans have been greeted by investor enthusiasm only to run into economic reality after a couple of years

    7---Desperately seeking income, naked capitalism

    To make matters worse, real average hourly wages are still 0.5% lower than their June 2009 level, with real weekly wages (inflation-adjusted take-home pay) having grown by only 1.3% over the past four years (see next chart).
    And while households have benefited from lower interest rates, this boost to discretionary incomes has been offset by rising health care and gasoline costs, meaning that real discretionary incomes have not grown since 2006 (see next chart).
    This all leaves Westpac to conclude:
    It is little wonder then that consumption growth has failed to accelerate in a significant and sustainable fashion. Not only do households continue to be weighed down by large historic debt burdens, they are having their purchasing power eaten away by price rises for life’s ssentials.
    It is all well and good for asset price gains to bolster confidence, but real improvements in spending power are necessary to see broad-based, persistent spending growth. This is not the case at the current juncture; and, in the absence of a positive exogenous shock, seems unlikely for the foreseeable future.

    8---Why China's crunch is serious this time, Business Spectator

    First of all, let’s recap what happened. In early June, data for May indicated a slowdown in construction and manufacturing, while exports posted their lowest growth at 1 per cent over a year. This was reflected in the imports of major metals such as copper and alumina falling at double digit rates, while energy usage such as coal also dropped sharply. In April, housing sales declined sharply. Figures for April revealed that new homes sales in Beijing fell over 57 per cent compared to the month before, while sales in pre-owned homes fell 88.1 per cent compared to the month before.

    The standard analysis that China could miss its growth target of 7.5 per cent for the year by a few basis points was disappointing but hardly cause for concern. In reality, growth has been far lower. Even Premier Li Keqiang once admitted a few years back that official growth numbers were ‘man-made’ (read ‘made up’) and could not be believed. Historical forensic analysis consistently shows that the most reliable indicator has been electricity usage, with 85 per cent accuracy in indicating actual growth rates for the country once economists and accountants pour over old and revised data. Worryingly, electricity usage in May grew at around 2.9 per cent
    Beijing is concerned about two related things. The first is the explosion in credit growth, especially since 2009, resulting in a surge of unneeded and wasteful fixed investment. I have written about this several times in previous columns. (For example, see China grasps for a growth alternativeSeptember 3, 2012.) As another indicator of investment inefficiency or capital factor productivity, every $100 lent now generates only $17 in GDP, falling from $29 in 2012 and $83 in 2007.

    The second and related problem is the shadow banking system. So-called ‘shadow’ lenders get money by borrowing it from traditional banks, and also raising it from wealthy individuals wanting a higher return on their capital. These lenders then issue loans that would not suit the traditional risk profile for normal commercial and retail bank lending – at substantially higher rates. Financial vehicles to facilitate such lending include trusts, insurance firms, leasing companies and pawnbrokers. Given the decade of easy money, almost every type of corporate entity is involved in setting up these vehicles: from large and small banks, SOEs, large private corporates and local governments.

    It is no wonder that central authorities want to crack down on this kind of activity. According to JP Morgan Chase estimates, the debt issued by the country’s shadow banking sector has grown from about $US2.9 trillion in 2010, to $US4.3 trillion in 2011, to about $US5.7 trillion in 2012. The common argument that Chinese financial system is not a heavily leveraged one clearly only looks at standard ‘vanilla’ loans.

    9---Changing market leaves investors cautious on housing, Housingwire

    ...investor demand is waning as the pipeline of distressed properties shrinks and affordability declines.

    "This will be part of the transition back to a more normal housing market, but also another reason to expect slowing price appreciation in coming years," explained Chris Flanagan, Michelle Meyer and Justin Borst, mortgage-backed securities strategists for BofAML ($12.76 0%).
    Institutional investor buying is concentrated in key markets today....

    Overall, investor participation should start to decline given the drop in affordability and shrinking share of distressed homes.
    This is evident in markets that are further along in the healing process of the housing recovery.

    "In light of the changing prospects for US monetary policy, we have revised our 10-year Treasury yield forecasts higher," said analysts for Capital Economics.
    They added, "Accordingly, recent gains in 30-year mortgage rates are unlikely to be unwound and could well be extended.

    10---Subprime Loans Fuel Increase in Auto Loan Delinquency Rate, collections and credit risk

    11--Pending Home Sales Soar 6.7 Percent to Reach 6-Year High, CNBC

    12---The big one, plunging incomes, zero hedge
    And as mentioned above, real per-capita disposable income took another hit: it is now reported to have dropped by an annualized $796 from quarter to quarter. Real per-capita disposable income is now down $209 annually from 1Q-2011 — a full two years ago.

    Their summary:
    At best this new release reports an economy with lackluster growth, created at great expense by a combination of unprecedented fiscal and monetary stimulus that have obviously progressed well past the point of diminishing returns. To be fair, many other national governments would be thrilled to be reporting a 1.78% annualized growth rate. But that observation in itself (without mentioning the plunging export numbers) also reflect global economic headwinds that do not bode well for sustaining even lackluster numbers over the balance of the year.

    And we continue to note the one truly serious domestic issue within the data:

    – Real per capita disposable incomes took yet another hit. The astonishing annualized contraction of real per capita disposable income has now reached -9.21% — dwarfing the -7.52% contraction rate recorded in the first quarter of 2009 (the worst quarterly contraction recorded during the official duration of the “Great Recession”).

    From time to time we may quarrel with the quality of the BEA’s deflaters. And frankly we may even find that at face value the lackluster numbers amount to nothing more than a sham “recovery.” But the most shocking part of this report is glaringly obvious from the real per capita disposable income numbers: all of the unprecedented fiscal and monetary stimulus has left American households materially worse off than they were two years ago.

    13---Labor’s Declining Share Is an International Problem, NYT

    14---Risk of 1937 relapse as Fed gives up fight against deflation, Telegraph
    The US Federal Reserve has jumped the gun. It has mishandled its exit strategy from quantitative easing, triggering a global bond rout that it did not anticipate, and is struggling to control

    15--- What caused China's money market crunch?, Reuters

    16---Study shows most Americans have inadequate savings, wsws

    17---David Cay Johnston: The National Memo » Wages Fall At Record Pace, national memo
    Breaking news alert! Wages fell at the fastest rate ever recorded during the first quarter of this year, the government’s Bureau of Labor Statistics reported.
    Hourly wages fell 3.8 percent in the first quarter, the biggest drop since the BLS began tracking compensation in 1947. Productivity rose half a percentage point. The result was that what economists call “labor unit costs” fell 4.3 percent. 
    In plain English, that means paychecks overall shrank, but work output grew. If you are a business owner, that is news worthy of a toast with a bottle of the finest Cristal champagne...
    Pay for most jobs has been falling because of a combination of anti-union rules that have reduced membership to its lowest level in almost a century, trade deals with China that have destroyed 2.8 million jobs and put pressure on workers to accept lower pay to compete with imports, and the severe cuts in welfare benefits over the past two decades, which have flooded the market with low-wage workers. America ranks second only to South Korea in the share of workers earning low wages, both at about one job in four.
     At the same time, taxpayers have been giving ever-larger subsidies to employers, notably Walmart, many of whose workers need food stamps.
    From 2007 to 2011 the average pretax income of the bottom 90 percent fell from $35,173 to $30,437. That is a drop of more than $4,500. It is also a decline of nearly 13 percent. 
    The 2012 data are likely to show that drop has worsened, with the vast majority’s average income likely to be down $5,000, or roughly $100 per week. We’ll see how well that gets reported in the fall when new data becomes available.
    By the way, if you make a good living, or your household enjoys two above-average incomes, don’t think that you are exempt from this trend toward less.
    During the same period, the threshold to enter the top 10 percent fell by 6.5 percent, a drop of $7,665 to $110,651, analysis of the latest IRS data by economists Emmanuel Saez and Thomas Piketty shows.
    This drop in income is part of a long-term trend in which the economy grows, but nearly all the gains go to the top. From 2009 to 2011 the top 1 percent got 121 percent of all the gains, which was possible only because the 99 percent got less.






    Wednesday, June 26, 2013

    Today's links

    1---Italy could need EU rescue within six months, warns Mediobanca, Telegraph

    Italy is likely to need an EU rescue within six months as the country slides into deeper economic crisis and a credit crunch spreads to large companies, a top Italian bank has warned privately. ...

    Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signaled last week that it will begin to drain dollar liquidity from the global system....

    Julian Callow from Barclays said the Fed, the Bank of Japan, China’s central bank and others have bought almost the entire $2 trillion issuance of AAA bonds over the past year. The effect of this has been to drive banks, insurers, and pension funds into riskier assets such as the eurozone periphery. This has helped prop up the eurozone, and camouflaged festering problems. “The Fed’s shift towards tightening is highly significant, and it is causing a very dramatic rise in real yields,” he said.

    Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

    Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

    2---President's promises fail to calm Brazil , aljazeera

    Protesters in Brazil have returned to the streets in low-income suburbs of Sao Paulo to demand better education, transport and health services, one day after President Dilma Rousseff proposed a wide range of actions to reform the country's political system...

    Rousseff told governors and mayors on Monday that her administration would allocate $23bn for new spending on urban public transport, but did not provide details on what the new projects would be.

    3---Time to sober up as America and China remove punch bowl , Telegraph

    The term "Perfect Storm" is banned by the Telegraph as a lamentable cliché, so let us just say that this is the moment we long been fearing or waiting for – depending on taste – when markets are no longer given what they want.

    The Bernanke Put has become the Bernanke Call. The Politburo Put has become the Politburo Call. Rather than putting a floor under asset markets whenever there is trouble, they are instead putting a roof on asset price rises....He choose to overlook the fall in core PCE inflation to 1.1pc, deeming it "transitory...

    As for the PBOC in Beijing, we are seeing a cold-eyed refusal to intervene with liquidity to stabilize the interbank lending market, where Shibor rates have surged to record highs.
    It seems they really do wish to flush out the excesses in the shadow banking system. They view the rampant credit growth after the Lehman crash as a mistake, as indeed it was, and are furious that banks have evaded property lending curbs by going off books.

    Credit has grown to 200pc of GDP, up 75 points in less than five years. Fitch says total credit has jumped from $9 trillion to $23 trillion, adding the equivalent of the entire US commercial banking system in five years.

    It no longer buttering many turnips. The efficiency of credit – the extra GDP added by each extra yuan of loans – has fallen from a ratio of 0.85 to 0.15. At this point it risks becoming a pure Ponzi scheme, as SocGen's Wei Yao calls it.
    So yes, the Chinese are right to be tough, but that does not mean they can easily control the denouement. After all, the Bank of Japan deliberately popped the Nikkei Bubble in 1990, and the Fed deliberately popped the Wall Street bubble in 1929. Whether or not it is deliberate is a greatly overrated element.
    At best, we are heading for choppy waters.

    4---When good intentions go wrong: Effects of bank deregulation and governance on risk taking, VOX (What could go wrong?)

    Our study has two clear policy implications: first, economic liberalisation should take into account the institutions’ (or industry’s) governance structure and its impact on economic behavior, especially risk taking. Second, liberalisation that unleashes growth might lead to undesirable outcomes if the former regulation was designed to inhibit risk taking or to maintain minimum safety standards

    5---(The latest mortgage scam) Freddie Mac gears up for RMBS risk-sharing deals, Housingwire

    Their strategy consists of drafting a bill to replace the GSEs with a new government guarantor, known as the Federal Mortgage Insurance Corp. The draft legislation is known as the Housing Finance Reform and Taxpayer Protection Act of 2013.
    The bill is set up to develop risk-sharing mechanisms that require private financiers in securities insured by the corporation to assume first-loss positions.
    Additionally, the proposal would require private investors to take a loss of 10% of the principal underlying securities
    (Note: You don't need gov agencies and guarantees for bonds that generate profits for privately-owned financial institutions)

    6---Helicopter Ben Miscommunicates, Big Picture

    Taken alone, the FOMC minutes were positive for the market as nothing indicated that policy was going to change course. The indices acted accordingly, swaying between green and red. Then we found out that those sources were no more well-placed than a convertible parked beneath a tree with hanging bird feeders. First, the FOMC projections were released showing that the targeted 6.5% unemployment rate was now forecast to occur in 2014, not 2015, and that GDP growth was accelerating. Then, just prior to the reporter from TMZ asking Bernanke about his personal plans, his prepared remarks were released. Therein, Helicopter Ben dropped not more cash, but the bomb:
    “We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains—a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.”
    So here we are: the transparency thing as Bernanke explained the Fed’s thought process. The FOMC will apparently begin to cut back this year and, depending upon the next jobs number, may do so before the third quarter ends. The point that we reach 6.5% has been moved up but that is no longer the trigger; now it is 7% accompanied by an upward bias in the economy and inflation at 2%.
    If only the Fed kept that information to themselves we could have read the minutes and gone on our merry way as the market stabilized and perhaps moved higher. Instead, traders relied traditionally unreliable FOMC forecasts – a flawed strategy in itself – and panicked

    7---Loan applications decline as mortgage interest rates skyrocket, Housingwire

    8---Zillow expects more rate-volatility to come, Housingwire

    Mortgage rates are skyrocketing with one real estate firm reporting a 50-basis point hike for the 30-year, fixed-rate mortgage in just the past week.
    That honor goes to Zillow, which released data showing that on Tuesday the 30-year, FRM hit 4.38%, up 50 basis points from seven days ago.
    A week ago, the same mortgage rate came in at 3.88%, according to data from Zillow. 
    And Zillow ($56.25 0%) isn't the only one reporting high rates. Last week’s Freddie Mac 30-year, FRM came in at 3.93%, while Bankrate data showed mortgage rates at 4.12%. 
    While rates tend to differ from entity to entity, the speed at which they’re rising has remained consistent. 

    Zillow’s director of Mortgage Marketplace, Erin Lantz, believes there will be some more fluctuation still to come, including dips back lower. However, the longer term direction is up over the next 12 to 18 months, she told HousingWire. 
    "Last week rates spiked to levels not seen since July 2011 after Federal Reserve Chairman Ben Bernanke reiterated the Fed’s commitment to scale back its stimulus program later this year," said Lantz.

    9---No Lehman in China, but shadow run possible, Michael Pettis

    The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks’ events were likely to have been simply an exacerbation of those strains.

    I believe talk in the market of China’s experiencing its own “Lehman moment” are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.

    There are however two important lessons to be drawn. First, we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing’s determination to control credit growth.
    Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.

    During the coming week I believe that a significant amount of WMP will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
    If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.

    Probably the main lesson of last week is that systems in which volatility is suppressed often seem less volatile, but this is only true when shocks are small. Large shocks tend to result in increases in volatility that far exceed expectations.

    10--The Slow Jobs Recovery in Charts, WSJ

    11---USTs: Albatross or Opportunity, sober look

    Credit Suisse: – A break into “panic” territory has historically been a strong signal for a turning point in the bond market, indicating that the market has become very oversold in the short run. Since the start of the index in 1995, there have been seven such signals. Six out of seven times that translated into longer-dated US bonds outperforming bills over a period of 3-6 months. In recent years, panic deeps have on average become shorter and shallower, resulting in even stronger signals.

    12---Bonds Look Cheap, Lance Roberts, prag cap

    For all of these reasons I am bullish on the bond market through the end of this year.   Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower – bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream.

    13--Bernanke's Bursting Bubble, sober look

    May 22; Bernanke: – We’re trying to make an assessment of whether or not we have seen real and sustainable progress in the labor market outlook. If we see continued improvement and we have confidence that that is going to be sustained, then we could in – in the next few meetings — we could take a step down in our pace of purchases.
    Intentionally or not, the Chairman burst the market bubble just before it hit “euphoria”. It was clear that the Fed was becoming concerned about froth forming in fixed income markets (Bernanke spoke about it - see this post). It was time to end it.
    The unfortunate outcome of this action however is that it remains unclear whether the economy would have been better off if QE3 was never launched at all. The next 12 months will be filled with uncertainties about the exit timing, rising rates, and shaky credit markets. Anecdotal evidence suggests that some banks are becoming jittery about growing their balance sheets in this environment. As a result, loan growth is already slowing. That can’t be good for business growth and hiring. When the dust settles, the economy may end up being in worse shape than it would have been if the Fed left it alone in August of 2012.

    14---Mortgages: 30-year fixed rate has jumped a point since early May, LA Times

    Residential mortgage rates aren’t just up from the bottom — they have zoomed a full percentage point above recent record lows, reaching the mid-4% range.
    The average rate for a 30-year fixed-rate home loan hit 4.63% on Monday, according to HSH Associates, up from the 4.33% that HSH recorded Friday and a record average low of 3.44% for the week that ended Dec. 14.

    The rocketing rates are choking off a boom in home refinances that hit high gear in September 2011, when the 30-year fixed rate dropped below 4% for the first time on record.

    15---Sales of U.S. Homes to Foreign Buyers Decline 17 Percent, Bloomberg

    16---76% of Americans are living paycheck-to-paycheck , CNN Money

    Roughly three-quarters of Americans are living paycheck-to-paycheck, with little to no emergency savings, according to a survey released by Monday.
    Fewer than one in four Americans have enough money in their savings account to cover at least six months of expenses, enough to help cushion the blow of a job loss, medical emergency or some other unexpected event, according to the survey of 1,000 adults. Meanwhile, 50% of those surveyed have less than a three-month cushion and 27% had no savings at all.

    “It’s disappointing,” said Greg McBride,’s senior financial analyst. “Nothing helps you sleep better at night than knowing you have money tucked away for unplanned expenses.”
    Even more disappointing; The savings rates have barely changed over the past three years, even though a larger percentage of consumers report an increase in job security, a higher net worth and an overall better financial situation.

    Last week, online lender CashNetUSA said 22% of the 1,000 people it recently surveyed had less than $100 in savings to cover an emergency, while 46% had less than $800. After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn’t enough money left over for saving more.

    17---Investor Activity Falls Sharply in May, DS News

    As prices rise, investors are having a harder time justifying housing market purchases, according to a recent Campbell/Inside Mortgage Finance HousingPulse Tracking survey.
    In May, the share of home purchases from investors fell to the lowest level in more than three years, dropping to 20.2 percent from 22 percent in April, according to the survey.

    Previously, investors were drawn to damaged REOs and short sales due to the discounts that were generally offered and for the opportunities to flip or rent out the properties.
    Though, HousePulse survey respondents explained investor incentives have weakened as profit margins dwindled due to rising prices.

    Real estate agents who responded to the HousingPulse survey also said small investors are selling off their inventory of rental properties.

    Although investor interest has waned, both current homeowners and first-time homebuyers have ramped up activity over the last two months. In May, current homeowners represented 43.8 percent of home purchases, while first-time homebuyers accounted for 36 percent of purchases, according to the survey, which includes responses from about 2,000 real estate agents nationwide each month.

    18---CFPB Proposes Revisions to Mortgage Rules, DS News
    Another triumph for the banks

    19---The 30 year fixed rate mortgage is now up by 40 percent in the last payments just got 20 to 25 percent more expensive in the last few months, Dr Housing Bubble

    If you weren’t paying attention, you might have missed one of the most dramatic moves in the history of the mortgage market.  There was a sense that the Fed had all the power in the world to push mortgage rates to whatever level they desired.  This seemed to be the case when rates touched a low around 3.25 to 3.29 percent.  Slowly, rates have crept back up even before Ben Bernanke mentioned a tapering off of the Fed’s MBS purchasing binge.  How dramatic was the move?  The 30 year fixed rate mortgage is now up by 40 percent in the last 52 weeks.  We now get to test the resiliency of the housing market without the full unbridled support of the Fed.  The bond market movement is stunning.  I love the mentality out in the current market.  “Well the Fed is devaluing money so might as well borrow, buy something tangible, and ride this puppy until the wheels come flying off in a blaze of glory.”  Sounds like a good foundation for a strong economy right?  The Fed realizes that the market is overheating for all the wrong reasons.  The financially connected have leveraged incredibly low rates to play this game to a point where hedge funds are buying rentals to lease out all in the name of higher yields.  So how dramatic was this move?

    30 year rate dramatic move     
    I have a few colleagues in the industry that have e-mailed me on how sudden this move was.  Let us examine this on a chart:
    30 year rate

    The increase in rates has occurred across the board:
    30 year rate change
    This big movement in rates comes at a time when expensive area buyers are going all in with jumbo loans stretching every penny they have.  ...

    Make no mistake in that this was a big move in the mortgage markets.  Over the last few years, every panic in the market actually pushed rates lower.  What is different this time is the falling in stocks is happening because rates are going higher.  Bill Gross is right in that mortgage payments just got 20 to 25 percent more expensive in the last few months.  The biggest budget expense of Americans just got that more expensive and you already know the trend for household income.  In California, this can be anywhere from $500 to $750 a month on a jumbo mortgage (which is now back in fashion and people are stretching just to buy homes).  FHA insured loans are already very expensive given the mortgage insurance changes in June.
    Another interesting observation on the market:
    “The volatility in mortgage rates has been unprecedented. Daily swings cause changes intraday and unfortunately that creates distortion for consumers. ...We went from low 3′s to high 4′s in a couple of weeks, and this morning we were possibly talking 5′s. the day is not over and the week just begun. ” -Constantine Floropoulos, Quontic Bank”

    20---Chinese Premier Li Keqiang turns towards austerity, liberalization, "reforms", deregulation, Reuters

    Accustomed to China's previous government where leaders bent over backwards to produce stellar rates of growth, Beijing's new stance has shocked investors.
    China's stock market dived to 4-1/2-year lows on Tuesday as investors worried that steep money market rates, by raising the cost of borrowing, might be a defacto tightening of monetary policy that could stifle investment and consumption.

    Some investors said the central bank's brinkmanship could backfire if it triggered a banking crisis.
    Others lauded Premier Li's tactics as tough love that could gird China for other challenging economic reforms such as further slimming down giant state firms to make them more efficient.
    Li took office in March, along with President Xi Jinping. As premier, Li is responsible for managing the economy.
    His grit is reminiscent of former Premier Zhu Rongji, credited for leading China's previous round of major economic reforms in the late 1990s when he sacked more than 50 million workers at state firms to trim the bloated sector.

    "Welcome to Doctor Li Keqiang's surgery," analysts from Standard Chartered said in a note.
    "We had suspected that Premier Li would want to drive significant reforms. We underestimated, however, his apparent willingness to make policy choices that would risk putting further downside pressure on the economy."
    In May, Li said there was limited room for policy stimulus because such measures carried risks and were not sustainable. China has a debt hangover from spending 4 trillion yuan ($650.9 billion) at the height of the global financial crisis in 2008/2009 to boost the economy...

    Some said the attitude was a sign Li had no qualms angering others to put China's economy on a more sustainable growth path.
    The aggressive Zhu Rongji-style of governance means China may sacrifice growth in the short-term to achieve more balanced expansion, analysts said.

    And with Zhu's former lieutenants holding top jobs in China today, including Central Bank Governor Zhou Xiaochuan, hopes for change are high.
    "We believe there is likely to be more economic pain down the road," said Zhang Zhiwei, an economist at Nomura.

    Growth in the world's second-biggest economy, already suffering from falling exports and sluggish domestic demand, could keep cooling to miss the government's 7.5 percent target this year and hit a 23-year low, he said.
    Indeed, China faces its biggest challenge in at last a decade to change the way it does business: depend less on exports and investment for growth and more on consumption

    21---China liquidity squeeze impacts banks, zero hedge

    From Caixin:
    A number of banks have temporarily halted lending to businesses and individuals apparently due to mounting pressure from liquidity shortages.

    They include some branches of Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC), sources from the two banks said.

    The bank was already having a hard time keeping up with deposit-to-loan ratio requirements even before the liquidity shortages hit, not to mention executives' recent determination to sort out the bank's liquidity management and control loans.

    BOC plans to resume lending on July 15, he said.

    As for ICBC branches, the amount of loans they can make is routinely capped under a monthly limit set by headquarters, a source from the bank's Shenzhen branch said. It was not unusual for branch banks to reach lending quotas before the end of month, he said. What was rare, however, was that headquarters had cut down on the quotas to make room for its own operations.

    "All of our loans have been put on hold," the source said, "There may be some credit line when it comes to July, but it will definitely be used up in a few days."

    * * *

    The tightened liquidity, which started about June 6, has affected the interbank market, stock market, government bond underwriting and securities refinancing operations.

    On June 23, ICBC customers had trouble using its online, counter and ATM services. This included making withdrawals and paying bills. The same thing happened to BOC users a day later

    22---Gangster Supremes gut voting rights act, wsws

    Roberts, Antonin Scalia, Clarence Thomas, Samuel Alito and Anthony Kennedy will go down in history alongside those high court justices who issued the pro-slavery Dred Scott decision in 1857. On the eve of the 150th anniversary of the battle of Gettysburg, these minions of American capitalism have demonstrated that the US ruling class is opposed to the democratic principles for which millions of working people have given their lives.

    The narrow majority dropped any pretense to judicial restraint or respect for the separation of powers, overturning a law that was reauthorized only seven years ago by overwhelming votes—92-0 in the Senate, 390-33 in the House of Representatives—and signed into law by a Republican president, George W. Bush.

    In striking down a key section of the Voting Rights Act, the court majority defied the plain language of the Constitution. The Fifteenth Amendment, adopted in the wake of the Civil War, reads:
    Section 1. The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any State on account of race, color, or previous condition of servitude.
    Section 2. The Congress shall have power to enforce this article by appropriate legislation.

    23---U.S. stock futures trim gains as GDP cut, marketwatch

    Gross domestic product rose by 1.8% from January to March, down from an earlier estimate of 2.4%, with the reduction largely due to less consumer spending on services and softer business investment, the Commerce Department reported.