Wednesday, June 12, 2013

Today's links

1---Analysis: Asia's ticking time bonds; time to cut and run?, Reuters

Efforts to make the global financial system safer could be making Asia more - not less - vulnerable to any credit market shocks, leaving bond traders worried that a sharp selloff since late May could turn into a rout.
Low global interest rates have made it easier than ever to sell new bonds denominated in dollars, euros or yen, resulting in a boom in issuance that has made Asia and its companies ever more dependent on debt.

But the market for trading those bonds is slowly drying up, leaving it susceptible to a sharper selloff if holders of these so-called G3 bonds decide it is time to head for the exit.

"The issue is that if any of them choose to sell their holdings, the market may not have the capacity to absorb these flows. If we reach a stage like that then liquidity could dry up very quickly and that can have a spiraling effect," said Dhimant Shah, a fund manager at Mackenzie Investments in Singapore.

Bond markets in Asia have generally trended higher since the Lehman crisis during the global financial crisis in 2008, partly aided by the flood of cash from Western central banks aimed at reviving their economies. By one measure, a JP Morgan basket of credit, the debt market hit its highest level in May since the global financial crisis....

In the last month though, bonds have stumbled on jitters over when the U.S. Federal Reserve will start to unwind its stimulus program. Yields, which move inversely to prices, on the debt tracked by the JP Morgan basket have jumped in the past month more than 60 basis points, largely in the past two weeks. The yield on Indonesian government bonds due in 2020 have risen even faster, nearly 100 basis points in the past month.
Asia's low market liquidity could create a more explosive selloff in which a lack of trading creates a price vacuum, leading to sharper price declines as investors scramble to sell assets for cash, a scenario similar to the dark days of the Lehman crisis.
"I don't recall in recent memory bonds falling so quickly without a tail-risk event as they did in the last month," said Richard Cohen, head of credit trading in the Asia Pacific for Credit Suisse. Tail-risk refers to a sudden event that has a major impact on financial markets.

Ultra-low interest rates have fuelled record issuance of new debt, but they have also helped reduce the risk of debt default as many companies refinanced outstanding debt into longer-dated maturities.
That means that, even if yields on 10-year U.S. Treasuries lurch higher after a 64 basis points rise since early May to 2.26 percent, it is unlikely to cause panic among cash-rich Asian companies.

2---Global Tumult Grips Markets, WSJ  Question for Investors: Bumpy Return to Normal or New Volatility as Central Banks Step Back?

The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.
For the past few years, the global economy, struggling to recover from a financial crisis, has relied on a few constants: The U.S. would print plenty of money and keep interest rates very low. China would provide a lot of demand and vacuum up commodities from around the world. And Japan was largely irrelevant.

Suddenly, all three of those are being questioned in markets, triggering paroxysms in stocks, bonds, commodities and—particularly, in the past couple days—the currencies of emerging markets.

3---Subprime Bonds, Bloomberg

GM Financial plans to sell $1 billion of securities linked to subprime auto loans, according to people with knowledge of the transaction who asked not to be identified because terms aren’t public. Barclays, Credit Suisse Group AG, Deutsche Bank AG and Morgan Stanley are managing the transaction for the Fort Worth, Texas-based company.

Sales of bonds linked to subprime vehicle debt are climbing, accounting for 13.2 percent of asset-backed issuance this year compared with 10.5 percent in 2012, according to Wells Fargo & Co. Borrowers have sold about $10 billion of the securities to date, analysts at the bank led by John McElravey in Charlotte, North Carolina, wrote in a June 7 report. 

4---Obama Axes Bank-Harrassing Gary Gensler at CFTC, Plans to Install Lightweight Ex-Goldmanite, naked capitalism

5---Obama Nominates America’s Biggest Walmart Cheerleader as His Chief Economic Adviser
,naked capitalism  

Walmart has lowered prices for American customers, though not as much as Furman claims, but it has also helped to kill the American labor movement which ensures workers a fair shake, it has helped to send jobs overseas, and it has instilled practices, like relying on part-time employees whose wages are so low they can’t sustain themselves without relying on government assistance, that spread misery everywhere. In the maniacal quest to lower prices, it has pioneered the use of ever-cheaper materials and lowered the quality of consumer goods. It has been accused of predatory pricing, a practice in which a business sets a price on an item very low, even incurring a loss, in order to drive a competitor out of business and establish a monopoly. In emphasizing shareholder value over all else, it has forgotten its responsibiltiy to other stakeholders in the company, like workers or taxpayers whose investments help the company succeed. The negative impact of Walmart’s business model impacts people whether or not they shop at the store, a phenomenon explored by Charles Fisher in his book, The Wal-Mart Effect.
Progressives may be unhappy about Obama’s choice, but conservatives are tickled pink. Over at the American Enterprise Institute, home to the country’s most fervent free-market fundamentalists, no fewer than 11 economists have announced their support for the Jason Furman nomination:
We are pleased that President Obama … nominated … Furman …Although we often disagree with the administration’s policies and differ with Jason on a number of issues, we respect him as a superb analytical economist. If the Senate confirms his nomination to be the president’s chief economic adviser, we are confident that he will serve the president and the nation with distinction.
‘Nuff said.

6---Michael Ratner on Edward Snowden, RT

7---Are higher mortgage rates impacting housing? , sober look

8---Home Prices are Not Affordable, CEPR

A NYT blogpost on the impact of the rise in interest rates on the economy commented:
"Many real estate analysts say that homes are so affordable that even a considerable rise in interest rates would not do much to undermine the housing recovery, especially if the economy is growing at a healthy rate."
Actually homes are not especially affordable. Inflation adjusted house prices nationwide are more than 15 percent higher than their long-term trend. They are still down considerably from their bubble peaks, but that hardly means that prices are low. Of course even with the recent rise in mortgage interest rates, mortgage rates are still at extraordinarily low levels

9---Can Abenomics generate inflation?, pragmatic capitalism

10---The long-term impact of rate stimulus, oc housing

The math is inescapable. As interest rates rise, affordability drops. Unless wage growth picks up the slack, which doesn’t seem likely given our weak economy, prices are likely to experience a long, slow grind...

Nationally, asking prices increased 9.5 percent year-over-year in May, but in the ten least affordable metros, asking prices spiked 16.3 percent during the same time period....
Among the least affordable markets, seven were in California. Honolulu was found to be the least affordable metro, where 74 percent of monthly household income is used to pay a mortgage. In San Francisco, households spend 55 percent of their monthly wages on their mortgage...

Overall, eight of the least affordable markets saw asking prices increase at a faster rate than the national average.
Among the 10 most affordable metros, asking prices averaged the same rate as the national rate at 9.5 percent. Detroit ranked as the most affordable metro, where just 8 percent of household income is used to pay a mortgage...
the least affordable markets risk a mini-bubble that will deflate as this stimulus is removed...

Banks are in survival mode. They must reflate the housing bubble, or the losses on their non-performing single-family residential loans will wipe them out. In order to reflate the bubble, the banks must keep these properties off the MLS, a task they are currently succeeding at, and mortgage interest rates must remain low so buyers can bid up prices to peak levels so banks can liquidate without a loss.

The chart above shows the $144.75 billion exposure they have just on their non-performing loans. Since these non-performing loans only represent 9% of the total number of underwater borrowers, the total potential exposure is more than 10 times larger. As I noted, banks are still exposed to $1 trillion in unsecured mortgage debt.

11---Fed Report Proposes Use of Eminent Domain for Underwater Mortgages, DS News

Thus, this collective action problem requires a collective agent in the form of state and municipal governments who can use their power of eminent domain to purchase and restructure underwater mortgages.
Hockett further explained “these governments can step in to purchase underwater loans at fair value, deal directly with the trustees of the private-label securitization trusts, and sidestep the rigidities of the pooling and servicing agreements. They can then reduce the principal on these loans, lowering the ‘water’ and thereby reducing the risk of default.”
To finance the purchases, Hockett suggested using monies lent by federal agencies and/or from private investors.
Mortgage Resolution Partners (MRP) is one firm that has been actively approaching local governments, proposing the controversial use of eminent domain to purchase underwater mortgages, which would then be refinanced. As part of MRP’s proposal, the firm would provide funding for the purchases

12---Restoring Japan's Economic Growth, By Adam S. Posen comments section economist's view
Fiscal Policy Works When It Is Tried

If the current Japanese stagnation is indeed the result of insufficient aggregate demand, what should be the policy response? Fiscal stimulus would appear to be called for, especially in a period following extended over-investment that has rendered monetary policy extremely weak. Yet the statement is often made that fiscal policy has already been tried and failed in Japan. Claims are made of variously 65 to 75 trillion yen spent in total stimulus efforts since 1991, even before the currently announced package. Both the Japanese experience of the late 1970s of public spending as a ''locomotive'' to little-lasting domestic benefit, and the worldwide praise for government austerity in the 1990s, have predisposed many observers to dismissing deficit spending as ineffective, if not wasteful. Could there really have been this much stimulus effort having so little effect?...

13--Finally, something intelligent on deflation: From economists view comments section:

Japan has been in a Long Wave Downwave debt-deflationary regime since '98, not unlike the historical periods of the 1820s-40s, 1870s-90s, and 1930s-40s, counteracted by unprecedented bank/central bank and gov't deficit spending intervention.

The US began our debt-deflationary regime in '08. The banks/Fed have printed more and faster than the BOJ did, but it has only resulted in our arriving at Japan's fiscal debt- and demographics-induced denouement sooner than otherwise would have occurred.

Japan has a weak demographic Echo Boom underway into late decade, but the prospective positive Echo Boom effects (like our Millennial Echo Boomer effects) will be overwhelmed by the larger debt/GDP and the relatively smaller size of the Echo Boom as a share of population.

Demographically, economically, and fiscally, Japan is 10 years ahead of the US, whereas China is 7-8 years behind the US and about to "grow old before becoming rich".

The MASSIVE global private and public debt overhang and aging populations in the West, Japan, and eventually China is structurally DEFLATIONARY and a hard limit on the rate of growth of real GDP per capita.

Only a massive debt/asset deflation (NOT VIA ACCELERATING PRICE INFLATION) of 50% and an acceleration of wages/GDP vs. financial capital's return to GDP for a generation will relieve the overwhelming global structural constraints to real GDP per capita growth.

However, historically, the capital-owning class and their politicians have chosen increasing scale of war and mass destruction to reduce surplus population, labor underutilization, and capacity, and as a justification to repudiate debt obligations of the state and reorder the geopolitical landscape.

But the US has already tried imperial wars and occupation in Central Asia and the Middle East, and all we got in return was unprecedented debt obligations to GDP, thousands of disabled young men and women, and no real GDP growth per capita for 5 years.

Now there is economic contraction and social instability breaking out all over, including MENA, Turkey, Pakistan, the EU, Russia, South Africa, parts of South America, and increasing numbers of failed states elsewhere in Africa.

Many argue that FDR's deficit spending got the US out of the Great Depression, whereas the gov't takeover of the goods-producing sector and mass mobilization and execution of WW II was arguably the cause of the end of the deflationary regime. But both implied resolutions leave out the fact that the US experienced first a debt-deflationary contraction in 1929-33 that resulted in bank loans contracting 40-50%, which cleared the financial system of the 1920s bubble-era debt inflation, which was followed by a dollar devaluation of 40% against the price of gold. ...

Debt growth to wages and GDP, peak demographic effects, and the historical Long Wave pattern all predicted what has happened since '00 and '07. The banks/Fed and US gov't have been fighting the epic battle against debt and price deflation of the Long Wave since 9/11 and with increasing intensity since '08, yet the global structural deflationary forces are increasing.

Eventually the forces of debt and price deflation will win; it's only a matter of time and what the banksers and their captured gov't do.
Will it be overt debt jubilee to clear the decks while protecting depositors and letting the top 0.1-1% equity and debt holders eat the losses?

Or will they choose world war and mass destruction, domestic reaction, and further consolidation of wealth, power, and control to the rentier-oligarchic elite and their corporate-state's executive branch, military, and state security apparatus?
History, human nature, and the will to power implies the latter.

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