Monday, June 17, 2013

Today's links

1---Chart that seems to violate key principles of money creation, sober look
The chart below shows a clear divergence in trends of the total loans and leases on US banks' balance sheets and the broad money supply measure (M2). Loan balance growth is slowing, while the money supply keeps growing at a steady rate of around 7%.

Source: FRB (H.8)
This is enough to give some economists nightmares. That's because they may view this divergence as a violation of principles they hold dear. Many still believe that bank loan balances and M2 money supply have to be tightly linked because the creation of deposits (the money supply) is entirely tied to lending. And this chart shatters that belief.

But in spite of the divergence in the chart above, the "loans create deposits" axiom still stands - deposits are still created through bank credit. What's at play here is shadow banking. Two key developments explain much of this divergence without violating these principles.

1. Loans on banks' balance sheets do not represent the entirety of credit creation. Loans originated by banks increase deposits, but banks often sell some loans into the shadow banking system, such as Fannie and Freddie. A material portion of these mortgages then ends up back on banks' balance sheets in the form of Agency MBS. These securities are exempt from the Volcker Rule, allowing banks to hold substantial amounts. That process reduces total loan balances without reducing deposits, thus contributing to the divergence in the chart above.
2---The Fed will not taper, macronomics (wonkish)
...the U.S. core consumer price index’s increase since the latest recession ended in June 2009 is the smallest for any multiyear recovery since the 1970s. The gauge of prices excluding food and energy rose 6.3 percent through April, according to the Labor Department.
“There is no pressure on inflation that could lead the Fed to act more quickly than it would like” in scaling back a bond-buying program and raising interest rates, Pierre Lapointe, the Montreal-based head of global strategy and research at Pavilion, and two colleagues wrote yesterday in a report.
Core consumer prices were 7 percent higher at the same point in the previous recovery, which started in December 2001, as the chart shows. The biggest increase in the inflation gauge was 29 percent, posted in a recovery that began in April 1975.
These and other inflation statistics are at odds with the magnitude of losses in U.S. bonds, according to David R. Kotok, chief investment officer at Cumberland Advisors.
The Investment Company Institute estimated that bond mutual funds posted a huge net outflow of $10.9bn in the week ended June 5. This was the second largest weekly outflow in the history of this series, which extends back through 2007. The largest outflow recorded was during the darkest days of the financial crisis, in the week ended October 15, 2008 (-$17.6bn). Investors apparently didn’t rotate into equity mutual funds in early June, as equities also saw a net outflow, albeit a much smaller one. In the week ended June 5, investors withdrew a net of $942mn from equity mutual funds.  Hybrid mutual funds posted a small net inflow of $347mn in that week." - source Credit Suisse

So much for the "great rotation" story: 
"Since the beginning of the year we have not bought into the story of the "Great Rotation" from bonds to equities. One of the reason being on one hand demography with the growing numbers of baby boomers retiring, the other one being pension asset allocation trends." - Macronomics, "Goodhart's law".

We will touch more on the deflationary forces at play and the importance of demography after our overview
3---Absurd, Bloomberg
“The Fed tightening, that’s good for stocks,” John Canally, investment strategist at Boston-based LPL Financial Corp., which has $373 billion in advisory and brokerage assets, said in a June 12 phone interview. “You have to remember why they’re doing this, because they think the economy is in a self-sustaining phase, which ultimately is good for profits, which is good for stocks.”
The number of Napa homes purchased with all cash reached almost 40 percent in 2012, the result of high investor interest, a difficult mortgage environment and perceived higher returns on investment, a real estate information service reported.
In 2011, 354 Napa County properties were bought with all cash. In 2012 that number reached 490, San Diego-based DataQuick reported earlier this year. That’s a 38.4 percent increase.
Halfway through 2013, those involved with the local real estate industry report that all-cash offers are still common but aren’t always required to make a successful offer. 
Many buyers think “cash is king,” but according to Randy Gularte of Heritage Sotheby’s International Realty, that’s not always the case. He’s seen a slight decrease in all-cash buyers over the past six months, from an estimated 35 percent to about 25 percent.
When dealing with homes priced at around $800,000 and below, “I’m seeing less cash buyers,” Gularte said....
There are always some rich people, also buyers from abroad, but in a normal market the biggest single category would be retirees and empty-nesters who are downsizing. Today, a lot of buyers are chasing what they view as the deal of a lifetime,” Walsh said.
Cash purchases accounted for a record 32.4 percent of California’s overall home sales last year, up from 30.4 percent in 2011 and more than double the annual average of 15.6 percent since 1991, when DataQuick’s cash statistics begin.
6----Protests everywhere, but only Turkey attracts the media, naked capitalism (Can you say "political agenda?")
So, I was trawling the twitter earlier this evening, and I ran across mention of a large, ongoing “protest” (we’ll call it*) in Sao Paolo, Brazil. I’ve been following events in Turkey, of course, which seem to be on scale of Tahrir Square/Puerta del Sol/capitol occupations/Zucotti Park/carr√© rouge, but the Sao Paolo protest seemed of a similar scale, and yet I hadn’t heard anything about it in our famously free press. So I thought I would do a quick and totally unscientific survey of protests round the world to see what was up. What follows is a quote dump of protests by country; as it turns out, there are rather a lot of them! Note that most of this material comes from official media, and I’m not making any representations as to accuracy or justification; I’m just trying to get a rough idea of scale
Exclusive: phones were monitored and fake internet cafes set up to gather information from allies in London in 2009
Inventories have dropped over the past two years as banks have slowed down foreclosures and as investors have bought more homes with an eye towards renting them out.
As I’ve pointed out many times, the increase in demand over the last year and a half has been entirely due to investors.

Many sellers, meanwhile, have held their homes off the market because they’re unwilling or unable to sell at big discounts.... 
Corelogic believes home price appreciation will wane in 2013.
The six markets with the largest year-over-year inventory declines were all in California. Listings were down by 43.4% in Orange County compared with last May, though they increased by 16.5% from April. Listings fell by 36.5% in Los Angeles; 35.3% in San Jose; 34.7% in Oakland; 33% in Ventura; and 32.2% in San Diego 

10--Bidding wars easing up, Dr Housing Bubble

11---Wall Street is winning the long war against post-crash regulation, by Heidi Moore, ..

.There are no such things as borders in the world of finance; it's an integrated whole. ... That's why it's so baffling that the House of Representatives came down, this week, on the side of ignoring abuses of US-made derivatives – known as swaps – as soon as they're wired overseas. These swaps were at the heart of the London Whale trading debacle...
The House voted overwhelmingly to let the measure – labeled the London Whale Loophole Act by critics – pass. It's one of several measures that the House has taken to weaken oversight of derivatives; the other two will come up for debate soon.
It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate. According to MapLight:
"On average, House agriculture committee members voting for HR 992 [one of the derivatives bills] have received 7.8 times as much money from the top four banks as House agriculture committee members voting against the bill."

It's no surprise, of course – given the well-known influence of Wall Street in writing and influencing the bills that regulate Wall Street. Citigroup lobbyists infamously drafted 70 lines of an 85-line amendment that protected a large acreage of derivatives from regulation.
There is more to add. ... [adds more] ...
All of this is part of the process of killing off the one flailing, pathetic attempt at financial reform: the Dodd-Frank Act. Dodd-Frank, bloated and vague from the beginning, was never a threat to Wall Street. Big banks thought they could wait out the outrage, then start undermining the intent of the law.
They were right, this time. But when they're wrong – and when those derivatives cause another crisis – it'll be Americans who pay the price
12---Higher inflation; Just what the Dr ordered?, WA Post

It’s a well-established fact, across time and geography, that there is “nominal wage rigidity.” That is, people hate, hate, hate seeing their wages cut, and businesses are thus reluctant to cut salaries even when business conditions would seem to warrant it. This is an important factor behind why recessions tend to result in higher unemployment, rather than lower wages. If the labor market worked the way most markets do, when demand for workers fell, prices (in this case, wages) would fall, and the same number of people would have jobs, just at lower pay rates. But because of nominal wage rigidity, wages don’t fall, and so the market fails to clear. There are more people who want to work than there are jobs (in other words, high unemployment).

But inflation offers a workaround to the problem of rigid nominal wages. What happened in Britain from 2010 to 2012 seems to be this: Many people, as experience suggests, saw their wages frozen in place. But because inflation was quite high, their “real,” or inflation-adjusted wages, actually fell a good bit.

That meant that employers who would be expected to have slashed jobs due to weak demand (remember, there was little to no economic growth in this period) instead kept employing people at lower rates. Weak demand translated into lower real wages rather than higher unemployment.
That would help explain why Britain has about the same unemployment rate as the United States right now (7.7 percent versus 7.6 percent here), despite much weaker growth since the end of the recession in 2009.

13---"The  blood is on the hands of both parties of the conflict, not only Bashar Assad’s government but also the rebels, Russia’s President Vladimir Putin stressed at the press conference at 10 Downing Street. RT

"I think you will not deny that one does not really need to support the people who not only kill their enemies, but open up their bodies, eat their intestines, in front of the public and cameras," Putin said referring to a video footage on the Internet of a rebel fighter eating the heart of a government soldier. Later however it was concluded the fighter was holding a lung.
"Is it them who you want to supply with weapons?" he said adding that it does not correspond with international humanitarian norms.
Putin also defended Russia's arms supplies to the official government of Syria saying they are "in accordance with  international laws

14---Social counterrevolution in Detroit, wsws

15---JPMorgan calls for authoritarian regimes in Europe, wsws

The harshest criticisms in the document, however, are reserved for national governments that have been much too tardy in implementing the type of authoritarian measures necessary to impose austerity. The process of such “political reform,” the study notes, has “hardly even begun.”

Towards the end of the document, the authors explain what they mean by “political reform.” They write: “In the early days of the crisis it was thought that these national legacy problems were largely economic,” but “it has become apparent that there are deep-seated political problems in the periphery, which, in our view, need to change if EMU (the European Monetary Union) is to function in the long run.”
The paper then details problems in the political systems of the peripheral countries of the European Union—Greece, Spain, Portugal and Italy—that have been at the center of the European debt crisis.
The authors write: “The political systems in the periphery were established in the aftermath of dictatorship, and were defined by that experience. Constitutions tend to show a strong socialist influence, reflecting the political strength that left-wing parties gained after the defeat of fascism.
“Political systems around the periphery typically display several of the following features: weak executives; weak central states relative to regions; constitutional protection of labour rights;
consensus-building systems which foster political clientalism; and the right to protest if unwelcome changes are made to the political status quo. The shortcomings of this political legacy have been revealed by the crisis. “ Whatever the historical inaccuracies in their analysis, there can not be the slightest doubt that the authors of the JPMorgan report are arguing for governments to adopt dictatorial-type powers to complete the process of social counterrevolution that is already well underway across Europe....

For JPMorgan, however, this is not enough. In order to avoid social revolution in the coming period, its analysts warn, it is necessary for capitalist governments across Europe to move as quickly as possible to set up dictatorial forms of rule.

At the end of the document, the authors put forward a series of scenarios that they claim could result from the failure of European governments to erect authoritarian systems. These variants include: “1) the collapse of several reform-minded governments in the European south, 2) a collapse in support for the euro or the EU, 3) an outright electoral victory for radical anti-European parties somewhere in the region, or 4) the effective ungovernability of some Member States once social costs (particularly unemployment) pass a particular level.”
This is the unadulterated voice of finance capital speaking.

16--Zbigniew Brzezinski US engaging in mass propaganda on Syria, info clearinghouse

17---Japan and Abenomics, economist

The Shinzo Abe shaking up Japan’s economy seems a different man from the one whose previous premiership was marked by nationalistic posturing. He isn’t


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