Friday, June 14, 2013

Today's links

1---US Treasuries selloff abroad, Bloomberg

Net selling of Treasury bonds and notes by private investors was a record $30.8 billion, the department said, while net sales by official entities of long-term Treasuries totaled $23.7 billion.

China stayed the biggest foreign owner of U.S. Treasuries in April even after its holdings fell $5.4 billion to $1.26 trillion, according to the Treasury. Japan, the second-largest holder, lowered its holdings by $14 billion to $1.1 trillion

2---Is Congress Creating Another Lehman Brothers in the U.S. Housing Market?, Lawrence MacDonald

Last Monday, Bloomberg reported a bipartisan group of U.S. senators is putting the final touches on a bill that would liquidate Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities behind private capital.
The legislation, written by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, with input from other senators, is likely to be the first detailed blueprint
reflecting a growing consensus in Washington.  
An increasing number of Democrats and Republicans feel the government’s role in mortgage finance should be limited to assuming risk only in catastrophic circumstances. 
The Bill also reflects the prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist in their current form.
Named the Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013, it seeks to enhance the liquidity and availability of mortgage credit in the secondary mortgage market.  This would be accomplished by winding down Fannie Mae and Freddie Mac (GSEs), and establishing in its place the Federal Mortgage Insurance Corporation (FMIC).  
The FMIC will then encourage private market participants to assume first loss risk by developing standard form credit risk-sharing mechanisms, but they will also provide insurance for covered securities to the extent that private market holders do not assume a first loss position.  In other words, Uncle Sam acts like a super, back up reinsurer.
The FMIC hopes to be for mortgage issuers what the FDIC is for banks.
The Act establishes an umbrella-like structure in which the FMIC approves various entities to issue covered securities and purchase insurance offered by the FMIC.
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.
5---America Is Feeling a Bit Less IndustriousGraphic
Source: WSJ
Despite QE3, core inflation just hit a 50-year low
Inflation shouldn't be going down now. But, as you can see in the chart below of core PCE inflation, the Fed's preferred measure, that's exactly what's happened since last September.

It's not clear what is going on here. But, as Bullard argues, it's probably not a story about commodities. If it was just about low demand in the rest of the world translating into low inflation here because of lower oil and food prices, we wouldn't see core prices falling quite as much. But they are. Indeed, as I mentioned before, core inflation is at its lowest level since 1963. It's lower now than the worrying low level it hit in 2010 that scared the Fed into launching QE2 to avert deflation.

Okay, but what are the possible culprits in this disinflationary whodunit?
Is it the austerity, stupid? That giant sucking sound you hear is the government taking demand out of the economy. As you can see on the left axis above, total government spending -- that is, federal plus state and local -- as a percent of potential GDP has been on a steady downward trend since 2010. It's a three-act story of bad policy. First, the stimulus peaked, and then reversed prematurely; then, state and local governments began slashing budgets to balance them as they are required; and now, the federal government is cutting spending in the dumbest way Congress could come up with -- the sequester. Now, QE2 did manage to increase inflation despite some austerity, but there's more of it this time around. The chart above only shows total spending through January 2013; it doesn't include the sequester, or, for that matter, the tax side of austerity. Between the spending cuts and the expiring payroll tax cut, the fiscal contraction the past six months has probably overwhelmed any "money-printing".
The government gives direct student loans. This saves money by eliminating the financial intermediaries. Is there some reason that it can't do the same with mortgages, that is a reason other than banks need to rip off the public with the government's assistance?

Jesse Eisinger has a good piece pointing out that the most politically likely paths for reforming Fannie Mae and Freddie Mac are likely to mean big profits for banks and incorporate few of the lessons from the housing bubble.

8---Radar Logic: Seven reasons home price gains are not sustainable, oc housing

Rising house prices are supposed to be driven by robust growth of high paying jobs. This drives household formation, and the high wages allows buyers to borrow large sums to drive up prices. This demand creates a shortage in housing as households compete with one another for the available housing stock. This prompts homebuilders into action to provide more supply to meet the demand. Those are the conditions that drive sustained price increases. Obviously, that isn’t what’s happening today....

Negative and low equity
The primary constraint on supply may be negative equity on the part of homeowners. According to the NAR, 10.2 million out of a total of about 50 million U.S. homeowners are still “underwater”, meaning they owe more on their mortgage than their home is worth and are therefore unable or unwilling to sell their homes.
Unorthodox Demand
While the supply of homes for sale has been severely limited over the past year, demand for homes has increased. Unfortunately, this increase in demand has been driven by unorthodox market forces–artificially low mortgage rates and institutional investor activity-which are liable to disappear in the near future. When they do, slackening demand will slow and perhaps reverse current trends in home prices

9--Tepid boom heads for a bust, moneyweek

10---Will lenders and investors find owner-occupant buyers when they liquidate?, oc housing

11---Remembering Russell Means, info clearinghouse

12--Bidding Wars Ease in May as Inventory Rises, DS News

13---Boy, Is There Ever No Wage Inflation in This Economy, jared Bernstein

You see total comp growing around 4% before the recession slammed the brakes on the rate of growth, and while there have been some wiggles, the most recent reading is around 1% (1.3%, 2012q1-2013q1)–and remember, this is average compensation, so it includes high-end earners with phat benefit packages.  That 1.3% is around the rate of inflation, so that means flat hourly comp in real terms, on average.

One question this raises is how the heck are we getting anything like the decent consumer spending numbers in recent GDP reports?  My answers are:
–these are hourly wages, so as we add jobs, we add aggregate hours worked, and that helps drive income and consumer spending;
–lately savings rates have come down so that’s another source of some spending;
–non-labor income such as capital gains and dividends are up, along with corporate profitability, and that stuff decidedly doesn’t show up in paychecks;

–increased housing wealth is probably contributing as well.

Jeez, that all sounds depressingly familiar—weak wage growth in the midst of growing inequality with consumer spending supported by housing wealth and drawing on savings.  What could go wrong?


14---FHFA: 45% of HARP Refis in Q1 Were for Underwater Borrowers, DS News

15--Fitch Doles Out Upgrades But Insists RMBS Still Vulnerable, DS News

16--Radar Logic: Forces Driving Up Prices Are Temporary, DS News
While Humphries does not make the connection to rising bank repossessions in the report, his numbers do. They show inventory easing much more on the low end of the market, where distressed homes tend to be.
"The greatest year-over-year decreases in inventory were among more expensive homes, with the availability of top-tier and middle-tier properties each falling 15.7 percent year over year. The number of bottom-tier properties for sale on Zillow nationwide fell only 2.5 percent in early June compared to June 2012."
As more bank-owned homes hit the market, inventories are likely to turn positive again in the near future.

18---Japanese stocks plunge amid global financial turmoil, wsws

19--George Galloway's blistering attack on Sky News bimbo, you tube


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