Monday, June 3, 2013

Today's links

1---Washington & Wall Street: Bernanke's Housing Bubble is Unsustainable, Breitbart

...the Fed’s efforts to boost home prices are working, but not for the reasons most people want to believe.  Instead of a steady flow of newly formed households and first time home buyers, what we see is a speculative frenzy driven by the Fed’s zero interest rate policies.  A limited number of American families are competing with highly leveraged institutional investors for an even more limited supply of properties.  And mortgage rates, no surprise, are rising.

When the music stops, look for some of the same big investors who are now paying 120% of BPO to come under pressure to sell homes into a declining market. Indeed, smart managers at institutional funds and commercial banks are selling right now into Bernanke’s housing bubble.  So when your stock broker calls to talk about investment opportunities in single family homes, just put down the phone.

2---5-27 Hanson…Per Zillow…>44% of US Homeowners are Zombified; Over 60% when including income/credit restrictions, Mark Hanson

3---China's Minsky Moment, macrobusiness

Late last week, Society Generale published a succinct note explaining its view of why China’s credit growth is accelerating but its growth is not.
In the first quarter, China’s total credit growth – bank loans, shadow banking credit and corporate bond together – accelerated to the north of 20% yoy, more than twice the pace of nominal GDP growth. This gap has been widening since early 2012.
chian
True, the gap was once close to 30ppt in 2009 and credit growth looked like leading economic growth most of the time in the past ten years. However, we still think the recent divergence is particularly worrying.
Since 2009, China’s credit growth has outpaced nominal GDP growth in every quarter except one (Q4 11), whereas, in previous years, economic growth managed to better credit growth more than half of the time. The excess borrowing that occurred in 2009 has never been absorbed by the real economy and now more borrowing is being piled on top of this.
Debt snowball

 A fast rising debt load of an economy suggests either deteriorating growth efficiency or high and rising debt service cost, or in many cases both. There is clear evidence that China is suffering from both of these. We have written extensively on the point of declining growth and summarised the causes as: 1) excess capacity resulting from inefficient investment in the past and 2) increasingly marginalised private sector
4---No-doc loan modifications available now!, oc housing

The loan modification programs were really being designed and promoted by the banks that wanted to extend their foreclosure timelines as long as possible in hopes that rising prices would restore collateral value behind their bad loans and prevent them from losing a trillion dollars. So far, in California where prices are rising rapidly, the policy is working. In the Northeast where prices are still inflated because no significant foreclosure processing has occurred over the last six years, this policy is not working very well today....

On March 27, 2013, the Federal Housing Finance Administration (FHFA) announced the introduction of still another mortgage modification program. Entitled the Streamlined Modification Program, it was intended to enable distressed borrowers to more easily qualify for a modification.

Unlike the HAMP modification program, borrowers will not have to show any financial hardship whatsoever in order to qualify. If their first lien is owned or guaranteed by either Fannie Mae or Freddie Mac, the only requirement is that they be delinquent for 90 days or more and complete a 3-month trial period. Also – they cannot be delinquent for more than two years and cannot have had two or more previous modifications.

The program was supposed to begin on July 1. But on May 12, FHFA announced that the program would become effective immediately. Servicers are required to send modification offers to all eligible borrowers.
The Failure of HAMP
The government’s HAMP mortgage modification program was begun in the spring of 2009 at the height of the credit crisis. Although they had expected it to help as many as 3 – 4 million distressed borrowers, only 816,000 permanent modifications were still outstanding at the end of March 2013.
According to the latest report from the TARP Inspector General, more than 26% of all permanent modifications had already re-defaulted. Over 1 million trial modifications had been canceled due to non-fulfillment of the terms by the borrower.

As early as April 2010, the Congressional Oversight Panel reported that more than half of borrowers who had received a permanent modification under HAMP were seriously underwater. Their average loan-to-value ratio (LTV) was 145%.
Even worse, this percentage included only first mortgages. The Obama Administration had estimated that roughly half of all at-risk borrowers were also saddled with second liens on their property. So the true LTV for borrowers under HAMP was clearly much higher.

Mortgage Modification Problem Goes Well Beyond HAMP
In June 2012, the credit reporting firm Trans Union issued the results of a study based on an examination of 600,000 borrowers from its enormous database who had received a mortgage modification between January 2008 and July 2011. It found that nearly 6 out of every 10 borrowers had re-defaulted within 18 months after receiving the modification.
The problem of re-defaults goes well beyond HAMP modifications. There are roughly $900 billion securitized mortgages outstanding which are not guaranteed by Fannie or Freddie. Take a good look at this shocking graph from TCW showing the re-default rate for loans modified in different years.

Source: TCW
You can see that in the early years of modifications, nearly 80% have re-defaulted. For the most recent years of 2010 – 2011, the percentage is already approaching 40% and headed higher.
...

As late as the fall of 2009, a study published by Equifax Capital Markets found that 45% of prime borrowers with securitized first mortgage loans that were still current in July 2009 also had a HELOC. Worse yet, the average outstanding balance on these HELOCs increased steadily from roughly $83,000 in mid-2005 to $118,000 four years later.

If you add in installment second liens, there are a total of roughly 15 million second mortgages still outstanding on homes throughout the nation. I estimate that at least 90% of these properties are now underwater. This situation is rarely discussed in the media but presents a problem that no modification program can solve.

5--Bernie Sanders; The majority want socialism, economists view

According to a Gallup poll, nearly six out of 10 believe that money and wealth should be more evenly distributed among a larger percentage of the people in the US, while only a third of Americans think the current distribution is fair. A record-breaking 52% of the American people believe that the federal "government should redistribute wealth by heavy taxes on the rich".

6---Fed watch: Inflation-deflation, economists view

But, you wisely say, but what about inflation? Because inflation is clearly not a problem - or, more specifically, high inflation is not a problem. Arguably low inflation is a problem:
PCEINF0531
Clearly trending down and away from the Fed's definition of price stability, or 2% inflation. Smoking gun, you say. The Fed can't think about backing off QE with inflation trending down.
Perhaps. But let me offer another interpretation. Consider the claim that the failure of inflation to fall further was taken by some as evidence that the economy was near potential output, and that much of the unemployment was structural. The counterargument was that downward nominal wage rigidities keep a floor on wage gains, and thus there is a floor on inflation as well. Thus, the failure of inflation to fall even further, or tip into deflation, tells us little about structural unemployment.

7--The shredded safety net, American prospect

8---More and more Americans are feeling the effects of the sequester, WA Post

Whatever happened to the sequester? Is it still a big deal? We decided to check in on what was going on around the country. As it turns out, plenty of people have started to notice — about 37 percent in a May 19 poll said they’d been personally affected. And the sequester is starting to have an impact around the country, although many of the cuts haven’t yet sunk in. Here’s a round-up:

An ABC News/Washington Post poll in May found that 37 percent of Americans say they’ve been negatively affected, up from 25 percent in March. And 18 percent say they’ve felt a “major impact.”

9---Hezbollah Clash with Syrian Rebels in Eastern Lebanon Kills 12, antiwar

10---For David Rosenberg The Legacy Of The Bernanke Regime Will Be Stagflation, zero hedge

It also means that higher wages for those workers who are in demand (and perpetual part-time status for those who aren't) will lead to another unpleasant side effect for those forecasting soaring EPS for the S&P: a further drop in corporate margins, which as we keep on showing are now the lowest they have been in over two years: "But the flip side is that as the labour share of the national income pie mean reverts off its all-time lows, we are likely to see profit margins pinched. This is the big risk: margin compression affects the 'E', while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E."

Some claim to see this in the chart of the Labor Share of income, which to the delight of Marxists everywhere, may have finally broken its long term downtrend and found a support level:



But wrapping it all together, there is one word for what follows: stagflation.

The next major theme is stagflation — this will be the legacy of the Bernanke regime. You cannot keep real short-term rates negative for this long in the face of even modestly positive real economic growth without generating financial excesses today and inflationary pressures in the future

11--Chinese PMI contracts in May, prag cap

12--Wages: The good and bad news, WSJ

The Bureau of Labor Statistics released its report on real earnings — wages adjusted for inflation — at 8:30 a.m., in conjunction with the consumer prices index. The latter gets all the attention, but if you want to understand the true health of the economy, the former is the one to watch.

Average weekly earnings rose 0.3% in March from a year ago, using the data from the consumer prices report to adjust for inflation, according to this morning’s report from the Bureau of Labor Statistics. That’s a static growth rate, and it’s one more drag on a working class that hasn’t recovered from the crash of 2008.

The good news in all this: wages overall are up since the recession’s start. The bad news: They’re down from the end of 2008, broadly flat over the past decade, and on an inflation-adjusted basis, wages peaked in 1973, fully 40 years ago. Apart from brief lapses, like in the late 1990s, wages have been falling for a generation.

Of course, in the upside down world of the markets, where a bad economy means lower rates from the Federal Reserve, this report isn’t going to make the markets shake, today. But over the long term, wage growth is the best tell on the economy’s true health and the market’s trajectory.

Wage growth provides a clean, clear picture of the health of the citizenry. If wages are rising at a healthy clip, it speaks to a healthy labor force. If wages aren’t growing, it speaks to a labor force under pressure. An economy as dependent upon consumer spending as the U.S. can’t remain strong if wages aren’t growing.

A single, real-world example illustrates this. In the first decade of this century, when housing prices were doubling in a matter of years, wages were largely stagnant. You didn’t need to know about securitizations or leverage to understood that housing prices couldn’t outpace wage growth at that exponential rate without repercussions.

“We’re just not going to see big increases in wages when we have unemployment this high,” said Heidi Scheirholz, an economist at the Economic Policy Institute. Stagnant wages are hitting low-income workers the most, she noted, but it’s also affected the middle class as well. People with college degrees haven’t seen any wage growth in a decade, she noted. “Wage stagnation is about so much more than people not having the right skills.”
Flat of falling wages have been papered over for years; consumers have taken on more credit, for instance, and raided their savings. The Fed’s monetary policies since 2008 have also cushioned some of the blow. But none of that is a panacea.

“Neither low interest rates nor low savings are likely to prove sustainable over the long term,” Russ Koesterich, chief investment strategist at BlackRock’s iShares Funds, wrote last month. “The Federal Reserve is likely to eventually raise rates and without faster personal income growth, consumers are likely to run out of savings, especially considering the massive amount of debt they are still unwinding.
“If consumption and the broader economy are to remain resilient going forward in the face of consumer deleveraging, they will need to be supported by an improving labor market leading to faster personal income growth.”

Obviously, wage growth is tied at the hip to job growth, and that presents another problem. At the current rate of jobs growth, EPI’s Sheirholz said, the nation won’t reach full employment again until 2019. “We’re going to see downward pressure on wage growth for a very long time,” she said.
That means that the next five years could look a lot like the last five years. Except for the generational low in the stock market, of course.

13---Wealth from economic “recovery” has gone to the richest Americans, wsws

new study from the St. Louis Federal Reserve documents the vast disparity in the fortunes of American families since the financial crisis of 2007-08, with the bulk of the “recovery” in aggregate wealth going to the richest layers of the population.
The report, “After the Fall: Rebuilding Family Balance Sheets, Rebuilding the Economy,” found that “only about 45 percent of the average inflation-adjusted household wealth that was lost since the onset of the downturn in 2007 has been recovered.”

However, this masks the enormous growth of inequality. Of the $14.7 trillion accrued since 2009, the majority, $9.1. trillion, “was due to higher stock-market wealth,” the majority of which is owned by the wealthiest families. With more than a touch of understatement, the report states: “Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.”
The wealth of the rich has surpassed pre-recession highs, while that of the vast majority has stagnated. In other words, the net impact of the crisis has been an aggregate transfer of wealth from the poor to the rich.

This outcome is a direct product of the response of the American ruling class, led by the Obama administration, to the crisis. Trillions of dollars have been allocated to bail out the banks, and the US Federal Reserve pumps $85 billion into the financial markets every month to maintain the new asset bubble. At the same, wages have been driven down and social services slashed, while nothing has been done to help those most severely impacted by the crisis....

A number of recent reports corroborate the St. Louis Fed’s findings. Last year, a US Federal Reserve study found that the global economic recession had set families back by nearly 20 years, erasing 39 percent of all household wealth between 2007 and 2010.
Another recent study, released by the University of California, found that since 2009 average real income for families had grown by only 1.7 percent. However, behind this 1.7 percent growth, the top one percent saw their incomes jump by over 11 percent, while the income of the bottom 99 percent declined by half a percentage point during the same period.

Nearly five years after the onset of the greatest financial crisis in a century, bankers and wealthy hedge fund managers have been supplied with access to virtually endless funds by the Obama administratio, while simultaneously declaring there is “no money” for basic social programs benefiting the working class.

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