Tuesday, July 30, 2013

Today's links

1---Obama to Urge Business Tax Rewrite to Help Spur New Jobs, Bloomberg

The economy grew at a 1.8 percent rate during the first three months of the year, more slowly than its 2.5 percent average pace during the last two decades. The unemployment rate, at 7.6 percent in June, remains above its 6 percent average over the past 20 years.

While the benchmark Standard & Poor’s 500 stock index is up more than 18 percent this year and has almost doubled since Obama took office in 2009, the median household income of $51,500 in May is 5 percent lower than in June 2009, the official end of the recession, according to estimates by Sentier Research

2---Rent-backed securities? What could go wrong?, WSJ

3---American Dream erased as homeownership hits 18-year-low, Financial Post

The U.S. homeownership rate, which soared to a record high 69% in 2004, is back where it was two decades ago, before the housing bubble inflated, busted and ripped more than 7 million Americans from their homes.

With ownership at 65% and home values rising, housing industry and consumer groups are pressing lawmakers to make the American Dream more inclusive by ensuring new mortgage standards designed to prevent another crash are flexible enough that more families can benefit from the recovery. Regulators are close to proposing a softened version of a rule requiring banks to keep a stake in risky mortgages they securitize, according to five people familiar with the discussions

4---James Galbraith on Social Breakdown and Financial Stress in Europe and Why the Word “Stimulus” Needs to be Banned, naked capitalism

5---Vital Signs Chart: Home Sales Remain Near Postcrash Highs, WSJ

6--The US turns Japanese, WSJ

Is the U.S. Turning Japanese?

In the 1970s, many Americans feared Japan would set the tone for growth in the 21st century economy. One research group says that may be the case — but not in the way feared decades ago.
The Economic Cycle Research Institute, a private research firm that has been bearish on the U.S. economy, says the U.S.’s performance in this recovery is looking ominously similar to that of Japan’s “lost decades,” the period from 2Q 1992 until 1Q 2013, when Japan suffered through little economic growth and steep deflation.
The business cycle group looked at average yearly GDP growth for major developed nations as well as China for the periods of 1Q 1980 to 1Q 2001 (green bars on chart), 1Q 2001 to 1Q 2013 (yellow) and the last five years 1Q 2008 to 1Q 2013 (blue). For Japan, ECRI divided the periods to 2Q 1992, the lost decades (red), and the last five years.
The research showed that over the last five years, the U.S. grew just 0.7%, a notch below the 0.8% pace recorded during Japan’s lost decades.
“Basically the U.S. is already becoming like Japan during the lost decades,” says ECRI director, Lakshman Achuthan.

The downshift in growth is not a U.S. phenomenon. Major European economies also have seen growth slow across the three periods. And that is a major point of ECRI’s research

7--Consumer confidence dips, WSJ

8----The Logical (and Coming) End to the US Empire, counterpunch

Regarding the scarcity of resources issue, none other than the World Bank produced a detailed study of demand and supply projections for the immediate future. The study projects that, on the basis of current consumption and immediately precedent rises in it, the demand for food will rise by 50% by 2030, for meat by 85%, for oil by 20 million barrels a day, and for water by 32%, all by the same year. This is met by alarming statistics and predictions from the supply side. In their report, they state that global food growth rates fell by 1.1% over the past decade, and are continuing to fall, while global food consumption outstripped production in seven of the eight years between 2000 and 2008. Further, the Food and Agricultural Organization and the UN Environment Program estimate that 16% of the arable land used now is degraded. Intensifying competition between different land uses is likely to emerge in future, including food crops, livestock, etc., and the world’s expanding cities. Current rates of water extraction from rivers, groundwater and other sources are already unsustainable in many parts of the world. Over one billion people live in water basins in which the physical scarcity of water is absolute; by 2025, the figure is projected to rise two billion, with up to two thirds of the world’s population living in water-stressed conditions (mainly in non-OECD countries). On oil, the International Energy Agency has warned consistently that there is a significant risk of a new “supply crunch” as the global economy “recovers.” Additionally, the IEA’s chief economist argues that peak production could take place by 2020 (from the “World Development Report 2011, Background Paper: Resource Scarcity, Climate Change and the Risk of Violent Conflict,” www.worldbank.org ).

The conclusion from all of these points is nearly obvious: if resources are even relatively scarce, and the habits of and desires for consumption continue to rise among nations, and especially among the citizens of Empire (as has been documented in part above), and if control over those resources is the goal of Empire, but if the Empire consumes more resources than it can logistically or economically control due to natural limitations of those resources themselves, and/or to the consumption of more resources than is either available to it or that it needs to survive, then the power of the Empire will naturally-logically end in a sharp decline, and soon (For applicable details on this, see Richard Heinberg, “The Brief, Tragic Reign of Consumerism—and the Birth of a Happy Alternative,” www.postcarbon.org ).

9---Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities, calculated risk

First a comment from Zillow Economist Dr. Svenja Gudell:
“Three straight months of national home value appreciation above 10 percent is not normal, not sustainable and, frankly, not very believable. As the overall housing market continues to improve, the impact of foreclosure re-sales on the Case-Shiller indices continues to be pronounced, as homes previously sold under duress trade again under more normal circumstances, leading to inflated and misleading markups in price,” said Zillow Senior Economist Svenja Gudell. “It’s increasingly critical that the average American homeowner not read numbers like today’s Case-Shiller results and assume their homes must also have appreciated at these levels over the past year, or will continue to appreciate at these levels going forward. In reality, typical home values have appreciated at roughly half this pace for the past several months, which is still very robust. Looking ahead, a combination of rising mortgage interest rates, flagging investor demand and more inventory entering the market will all help to moderate the pace of home value appreciation and stabilize the market.”
emphasis added
I agree with Gudell on these two key points: 1) I also think right now the Case-Shiller index is overstating price increases for most homeowners (both because of the handling of distressed sales and weighting of some coastal areas), and 2) I also think price appreciation will slow going forward.

Monday, July 29, 2013

Today's links

1--This is our world, naked capitalism

....a single megapower has, since September 2001, been in a financing and construction frenzy to create the first global surveillance state; its torturers run free; its kidnappers serve time at liberty in this country and are rescued if they venture abroad; and its whistleblowers — those who would let the rest of us know what “our” government is doing in our name — are pilloried.  And so it goes.
All of it adds up to a way of life and the everyday tradecraft of a one-superpower world

2--Taper to begin in September, sober look

 Impact on interest rates: Certainly with the Fed exiting treasury purchases, the demand for US government paper should will be reduced, pushing yields higher. But given the recent fiscal tightening in the US (due in large part to the sequester), treasury issuance is expected to decline - at least in the near term (chart below). The Fed will view this decline in the federal government's borrowing needs as counteracting its reduction in purchases and keeping rates under control in the near term...

 the Fed is likely to shave off some $15-$20bn from its monthly purchases. With Bernanke likely departing early next year, the Fed is eager to wrap up this latest round of purchases soon and focus on the more traditional policy tools such as short-term rates and forward guidance

3---Wall Street wins again: No down, no risk-retention loans (guaranteed by Uncle Sam)  to become norm; housingwire

HousingWire caught up with Stevens this week after rumors surfaced, suggesting regulators would scrap a 20% downpayment requirement for any financial institutions that wants to avoid retaining a 5% stake in mortgage securitizations sold off onto the secondary market.

In other words, the qualified-residential mortgage rule may be re-proposed without a strict downpayment requirement to allow more firms to avoid risk-retention, the Wall Street Journal first reported.

"Assuming this is true, it is the right move for consumers and homebuyers," Stevens told HousingWire.

"The qualified mortgage rule, which has already been released by the CFPB, clearly defines what is a safe and sound mortgage, and the qualified mortgage rule gets rids of all unsafe products that caused so many problems for the country."

Without some tweaks to the original QRM proposal, the requirements would only "tighten credit in an already tightened market," Stevens noted.

Stevens also is generally positive about all the housing-related legislation moving slowly, but diligently, through the House and Senate.

There’s the Corker-Warner bill in the Senate, the Johnson-Crapo FHA reform bill in the same chamber and Rep. Hensarling’s GSE and FHA reform legislation.
"There is a lot of momentum to do something legislatively … to get a solution to determine the government’s role in housing finance. All of that is very positive," Stevens said.
He admits all of the bills still need diligent tweaking, but he’s focused on the end-goal of watching some type of final proposal come into fruition.

"Getting overly agitated about any one of the bills is less productive than really getting into the debate and insuring that the core aspects of the bills are the most effective," he explained.
As for the to-be-announced market, Stevens reiterated his long-term push for the preservation of some type of government guarantee. This is one of the areas where he questions part of House Financial Services Chairman Jeb Hensarling's GSE reform legislation

4---"Housing" - Is It Really Recovering? Streettalk Live

Home Ownership
The simple reality is that there has really been very little actual recovery in housing, and as shown in the first chart above, which explains its weak contribution to economic growth.  The chart of home ownership really shows the lack of recovery the best.
At 65% the current level of home ownership is the lowest that it has been since the early 1980's. ...
REO To Rent
While the Federal Reserve and the current Administration have tried a litany of programs to jump start the housing market nothing has worked as well as the "REO to Rent" program.  With Fannie Mae/Freddie Mac, and the banks loaded with delinquent and vacant properties, the idea was to sell huge blocks of properties to institutional investors to be put out as rentals.  This has worked very well.  
The chart below shows the number of homes that are renter occupied versus the seasonally adjusted home ownership rate.
Do you see the potential problem here?  Speculators have flooded the market with a majority of the properties being paid for in cash and then turned into rentals.  As this activity drives the prices of homes higher, reduces inventory and increases rental rates - it prices out "first time homebuyers" who would become longer term home owners.  The problem is that when the herd of speculative buyers turn into mass sellers - there will not be a large enough pool of qualified buyers to absorb the inventory which will lead to a sharp reversion in prices
5--2009 archive: Obama ALWAYS supported austerity---Obama Planning to Slash Deficit, Despite Stimulus Spending, NYT
So, are we in a 2007 or 2000 type environment?  Yes.  I would say we are given that the data is confirming the same sort of market trends and debt trends.  But the question is what’s the trigger?  The market is kind of like a Jenga set at this stage in the cycle.  Everyone knows it can probably be toppled by the wrong move.  But that move might not come this year, nexy year or in the next few years.  As Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent.”
For more than four decades, the ruling elite has been dismantling the country’s industrial infrastructure and shifting its investments to financial manipulation and speculation. The result has been a staggering growth of financial parasitism, embodied in the immense power wielded by Wall Street and the stock market over every aspect of economic, social and political life.
The increasing separation of the process of wealth creation for the ruling elite from the creation of real value has led to a rotting out of the economic foundations of the United States. Today, over 50 percent of US profits are generated by the financial sector.

This process of financialization has created within the ruling class a powerful constituency for the most rapacious and outright criminal policies, both at home and abroad. This financial aristocracy will brook no retreat from a policy of war and aggression internationally, and economic plunder within the US. The banks and hedge funds that hold Detroit’s municipal bonds speak for Wall Street as a whole in demanding the destruction of workers’ pensions and health benefits and the stripping of any public assets that can be turned into cold cash for themselves.

Militarism abroad and social counterrevolution at home require the preparation of dictatorial forms of rule to suppress and terrorize the population. Hence the erection of vast and illegal spying networks and the buildup of the police powers of the state......

There are today overwhelming economic, social and political obstacles to any, even modest, policy of social reform, such as that carried out by Franklin Roosevelt in the 1930s or Kennedy and Johnson in the 1960s. There is no basis within the framework of bourgeois policies for progressive change.....
One would hardly have known, based simply on the interview, that he has been in office for four-and-a-half years, let alone that he has been pursuing, and continues to pursue, policies that have devastated the living standards of working people and contributed to a deepening of the economic slump.
Most striking was Obama’s failure to mention—and the failure of the Times to raise—the bankruptcy of Detroit, which had been announced just six days prior to the interview. Obama’s supposed “obsession” with the plight of ordinary people somehow failed to take into account an unprecedented action whose overt purpose is to use unelected officials to rip up agreements and drastically slash the pensions and health benefits of city workers and their families—a landmark event that is widely being trumpeted as the model for other cities across the United States.

This was not an oversight. Obama could hardly mention Detroit while posturing as the tribune of working people, since his administration is refusing to provide any aid to the city and, in fact, supports the bankruptcy filing and attack on workers’ pensions.
Moreover, amidst the rhetoric about helping the “middle class,” Obama made clear that he supports more cuts in social spending. He is, he declared, for “the right cuts, smart cuts.” The government, he said, should make sure that “the drop-off in government spending on vital things like education and infrastructure [doesn’t] go down too fast…”

Further on, he proclaimed his commitment to a “path that will grow the economy faster, put more people back to work, that doesn’t involve massive new federal spending programs…”
In other words, despite his attempt to conjure up a vast difference between his economic policies and those of the Republicans, there is agreement that no serious programs will be enacted to address the deepest social crisis since the Great Depression. On the contrary, what remains of past programs will be slashed further, the differences between his administration and the Republicans boiling down to the small change of timing and tactics.

Obama rules out any significant spending for jobs, health care, housing, education, etc., having allocated trillions to bail out the banks and rescue Chrysler and General Motors with loans stipulating a 50 percent wage cut for newly hired workers. He made sure in his interview to defend the bailout of Wall Street (“We had to make sure the banking system wasn’t collapsing”) even as he foreswore any serious spending to alleviate the social crisis.

9---Chart Of The Day: Monthly Home Payment Soars 40% To 2008 Levels, zero hedge

The following chart from Credit Suisse fully explains why the US housing "recovery" has just ground to a halt: in a few short weeks, US housing affordability (a topic we first covered a month ago) has collapsed as a result of the monthly payment on the median home sold soaring by nearly 40% from under $800 to just shy of $1100, a level not seen since 2008. Now if only US personal incomes would keep pace, instead of doing this...

10---Investor activity to plummet, resale home sales volumes will drop, oc housing

Sunday, July 28, 2013

Today's links

1---80 Percent Of U.S. Adults Face Near-Poverty, Unemployment: Survey, AP

Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.
Survey data exclusive to The Associated Press points to an increasingly globalized U.S. economy, the widening gap between rich and poor, and the loss of good-paying manufacturing jobs as reasons for the trend.
The findings come as President Barack Obama tries to renew his administration's emphasis on the economy, saying in recent speeches that his highest priority is to "rebuild ladders of opportunity" and reverse income inequality....

As nonwhites approach a numerical majority in the U.S., one question is how public programs to lift the disadvantaged should be best focused – on the affirmative action that historically has tried to eliminate the racial barriers seen as the major impediment to economic equality, or simply on improving socioeconomic status for all, regardless of race.
Hardship is particularly growing among whites, based on several measures. Pessimism among that racial group about their families' economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy "poor."...

While racial and ethnic minorities are more likely to live in poverty, race disparities in the poverty rate have narrowed substantially since the 1970s, census data show. Economic insecurity among whites also is more pervasive than is shown in the government's poverty data, engulfing more than 76 percent of white adults by the time they turn 60, according to a new economic gauge being published next year by the Oxford University Press.....

The gauge defines "economic insecurity" as experiencing unemployment during the year, or a year or more of reliance on government aid such as food stamps or income below 150 percent of the poverty line. Measured across all races, the risk of economic insecurity rises to 79 percent.

Marriage rates are in decline across all races, and the number of white mother-headed households living in poverty has risen to the level of black ones.
"It's time that America comes to understand that many of the nation's biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position," said William Julius Wilson, a Harvard professor who specializes in race and poverty. He noted that despite continuing economic difficulties, minorities have more optimism about the future after Obama's election, while struggling whites do not....

"There is the real possibility that white alienation will increase if steps are not taken to highlight and address inequality on a broad front," Wilson said....

Higher recent rates of unemployment mean the lifetime risk of experiencing economic insecurity now runs even higher: 79 percent, or 4 in 5 adults, by the time they turn 60.
By race, nonwhites still have a higher risk of being economically insecure, at 90 percent. But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.
By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the U.S. will experience bouts of economic insecurity.
"Poverty is no longer an issue of `them', it's an issue of `us'," says Mark Rank, a professor at Washington University in St. Louis who calculated the numbers. "Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need."...

Going back to the 1980s, never have whites been so pessimistic about their futures, according to the General Social Survey, a biannual survey conducted by NORC at the University of Chicago. Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America

2---Mortgage Default Rate Spikes In June: LPS, The Street

The national mortgage delinquency rate rose sharply in June, after declining for five consecutive months, according to a "First Look" mortgage monitor report from Lender Processing Services (LPS).

The percentage of borrowers who are 30 days or more past due on their mortgage loans but not in foreclosure rose to 6.7%. That's an increase of 10% from the previous month and is at the highest level since February.
Some of this increase is seasonal, according to LPS, though the seasonal increase is usually not this large. Last June, the default rate rose by 3.4%.
The foreclosure inventory rate, meanwhile, continues to decline as banks process fewer foreclosures and opt for short sales and loan modifications instead. Foreclosures declined 4% in June from the previous month and are down 30% year-over-year.
In total, there are about 4.8 million U.S. residential properties that are either 30 or more days delinquent or in foreclosure.

3---Who is buying US debt?, Testosterone Pit

Foreigners recycling their trade surpluses have been an important source of purchases for US government debt. As you can see from the chart of long-term securities purchases by foreigners, that buying collapsed during the crisis. And, interestingly, it has recently fallen sharply again.
Offsetting the reduction in purchases of US debt by foreigners, the Fed has stepped in with multiple quantitative easings (QE), buying government securities itself in order to add liquidity and drive interest rates down.

4----Mortgage delinquencies take a sharp turn up, CNBC

Despite receding from the high levels during the housing crash, 4.8 million loans are delinquent or in foreclosure, according to LPS. ...

The  Home Affordable Modification Program has helped 865,100 homeowners avoid foreclosure, but more than 306,000 could not keep up with even the modified monthly payments, according to the Special Inspector General for the Troubled Asset Relief Program. The program does not force banks to write down mortgage principal.

Overall mortgage delinquencies are still down 6.5 percent from a year ago, according to Lender Processing Services. Some of the spike may be attributed to "a seasonal phenomenon," according to LPS analysts, but this particular spike is larger than usual. Delinquencies ticked up just 3.4 percent in June 2012. The rise also spanned products and regions.

5---Wall Street Overwhelmingly Favors Yellen Over Summers For Fed Chair: CNBC Poll , Mark Gongloff

6---The Political Right's Affection for QE, P Krugman

This (from Paul Krugman) describes my position on QE:
...QE, in the eyes of its most enthusiastic advocates, can return us to Milton’s Eden. And they are determined to read the evidence as confirming that hopeful notion.
Yet there are many economists, myself included, who regard this view as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have....

Comments: Dan Kervick said...
You know, I can understand the motives of those who think QE is the only game in town. But what is frustrating is those who have insistently claimed that it is the only game in town when they themselves participated in making it the only game in town by carrying water for the fiscal contraction agenda of the White House.
Obama now seems frustrated about his inability to develop political traction for even the modest spending plans he has proposed. He should recognize that this kind of public diffidence is the natural political effect of frightening the country with the bogus message we are "out of money" and spending years on grand bargaineering and sounding debt alarms.

He has received woefully bad advice. But maybe his own instincts are to blame too.
I really think the case for expansion of stepped up government consumption and gros
s investment, and for public role in job creation, would be helped if people would stop relying so much on the term and concept of "stimulus". That's a lame and rhetorically unpersuasive approach, and also fails to grasp with the larger opportunities and challenges. We need to rely on something more like Mariana Mazzucato's analysis of role of "the entrepreneurial state" in driving the innovations of the past. The American people need to be made to understand that the US (and Europe as well) are risking their children's future and giving us a dangerous "investment gap" of our own making. We are an irresponsible and feckless can't-do generation that has talked ourselves into a gloomy image of persistent managed decline, where there is nothing left to do but bean-count the diminished expectations for 2030, 2040 and beyond

7---QE:  The new monetary ideology , Economist

QUANTITATIVE easing, which almost no one had heard of five years ago, is the great new discovery in macroeconomic policy. Policymakers put their faith in it as the engine of recovery; variations in the quantity of money supplied by the central bank has graduated from an emergency measure to a permanent tool. As Adam Posen recently put it, given the failure of interest-rate policy alone to determine the economy’s credit conditions, future central bank governors ‘will have to make unconventional monetary policy conventional’.

This new enthusiasm for unconventional monetary policy is the more remarkable in that no one is quite sure how it works. There are several possible transmission mechanisms from money to prices (or nominal income) – notably the bank lending channel and the portfolio rebalancing channel. They have been extensively tested, with inconclusive results.

All of this led John Kay to wonder why so much attention was given to unconventional monetary policies ‘with no clear explanation of how they might be expected to work and little evidence of effectiveness?’ His answer: they are helpful to the financial services and those who work in them.
Here is another answer, given by the Chicago University economist Robert Lucas in the Wall Street Journal. Quantitative Easing, he wrote,  “entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls in the operation of individual businesses, and no government role in the allocation of capital...These seem to me important virtues”.
In short, a happy mix of self-interest and ideology.

8---Japan: Wages and deflation, sober look

Japan has been experiencing relentless downward pressure on wages, contributing to ongoing deflation.

Source: Barclays Capital

Barclays researchers argue that another key factor pushing wages lower has been the disappearance of "downward rigidity". In the US when things get tough, companies cut costs by laying off workers (volume adjustment). In Japan costs are more commonly reduced through wage cuts (price adjustment)....

rising inflation and falling wages could be a recipe for disaster. It's OK to take a pay cut when prices are falling, but it just doesn't work in a positive inflation environment. That is why, according to Barclays, the most important task for Japan's new government will be to implement labor reform in order to allow wages to rise with inflation.
Barclays: - As long as Japan targets 2% CPI inflation on a sustainable basis, it must create an economy conducive to higher wages. We believe this requires a determination to change the structure of the economy, especially the labor market.
Monetary policy has the power to raise prices and price variables such as nominal wages to a certain extent. However, monetary policy does not have the capacity to determine the relative relationship between nominal wages and prices ...

... So when considering whether Japan can escape deflation with an accompanying rise in real wages, there is a need to think about labor productivity in addition to monetary policy....

9---The confluence of tight housing conditions and weak household incomes, sober look

We are seeing the confluence of tight housing conditions and weak household incomes. As JCHS points out "most types of households have seen their real incomes decline over the past decade". This is particularly true for growing households.

Source: JCHS

4. As a result, "the total number of households paying more than half their incomes for housing soared by 6.7 million from 2001 to 2011, a jump of 49 percent...

 On top of all this is the fact that households are now forming at a rate of about a million per year. The market is demanding a million new residential units each year. Unless construction can keep up and prices decline or incomes rise (neither seems likely right now), this trend will drive up the number of households with "housing cost burdens" (already over 40 million; see #4 above) - for both homeowners and renters

10--Massacre in Egypt: US-backed junta kills scores, wounds thousands of people, wsws

11---Greece and Detroit—a new stage in the social counterrevolution, wsws

12---Growth From the Middle Out, and How It Works, NYT

13--New Homes: There is "no question" that higher rates have affected demand, sober look

According to D.R. Horton's there is "no question" that higher rates have affected demand. Homebuilders have seen a slowdown in order growth.
Bloomberg: - PulteGroup, based in Bloomfield Hills, Michigan, said second-quarter orders fell 12 percent on a lower community count. D.R. Horton said orders increased 12 percent, which was below analysts’ forecast for 28 percent growth, according to Adam Rudiger, an analyst at Wells Fargo & Co. in Boston.

Rising mortgage rates contributed to increased cancellations and a dropoff in traffic in June, according to Fort Worth, Texas-based D.R. Horton. Borrowing costs have surged in the past two months on expectations that the Federal Reserve will scale back bond purchases. The 30-year average fixed mortgage rate was 4.31 percent in the week ended today, up from a near-record low of 3.35 percent in May, Freddie Mac said.

We got our first indication today that consumers are feeling the effect of rising rates on their purchasing power,” Peter Martin, a San Francisco-based analyst with JMP Securities LLC, said in a telephone interview.
Orders are rising, but not nearly as fast as was implied by stock valuations. The equity markets have priced in a significant momentum in residential construction growth over the past couple of years. Now higher mortgage rates are taking some of that momentum out, which is showing up in homebuilder underperformance. It's an interesting consideration for the Fed, as the September decision on securities purchases looms large.


Thursday, July 25, 2013

Today's links

1---About That US Recession...zero hedge
Whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession. Where is this number now: +0.8%, and declining fast. Feeling lucky?


2---Watchdog: Borrowers in Obama housing program re-defaulting, CNN
                         306,000 borrowers have re-defaulted on their loans, SIGTARP says

Nearly 1.2 million mortgage modifications have been completed since the Home Affordable Modification Program (HAMP) was first launched four years ago. Yet more than 306,000 borrowers have re-defaulted on their loans and more than 88,000 are at risk of following suit, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) found in its quarterly report to Congress.
In addition, the watchdog found that the longer a homeowner stays in the HAMP modification program, the more likely they are to default. Those who have been in the program since 2009, are re-defaulting at a rate of 46%, the inspector general found.
HAMP, which was launched by the Treasury Department at the height of the foreclosure crisis, aimed to help as many as 4 million borrowers avoid foreclosure by making their payments more affordable through reduced interest rates, extended loan terms or, in some cases, reduced mortgage principals.
Not only has the program fallen far short of that goal but with each year of the program, a growing number of homeowners have re-defaulted, the inspector general found.
"Treasury needs to research why so many borrowers are dropping out of the program," said Christy Romero, the head of SIGTARP.
Abenomics is working," says Klaus Baader, from Societe Generale. The economy has roared back to life with growth of 4pc over the past two quarters – the best in the G7 bloc this year. The Bank of Japan's business index is the highest since 2007. Equities have jumped 70pc since November, an electric wealth shock.
"Escaping 15 years of deflation is no easy matter," said Mr Abe this week, after winning control over both houses of parliament, yet it may at last be happening.
Prices have been rising for three months, and for six months in Tokyo. Department store sales rose 7.2pc in June from a year earlier, the strongest in 20 years. ...

Above all, Abenomics has shifted the yen," said Mr Baader. The 22pc devaluation since October has held, rather than snapping back as usual. The psychology of yen appreciation is breaking. Exports have jumped 7.4pc from a year ago.
The nasty side-effect is a deflationary trade shock for China, now paying the price for pegging its currency to the US dollar. Veterans will remember the Asian crisis in 1997-98 when Fed tightening slowly choked China's economy.

Yet for Japan the weak yen is the Holy Grail. We forget that it rose 45pc on a trade-weighted basis from 2007 to late 2012, and by 70pc against the euro and 90pc against Korea's won. The strong yen -"Endaka" – had itself become the driving force of deflation....

Mr Abe has created a tailwind before he launches his blast of Thatcherite reforms, or "Third Arrow", intended to drag Japan's pre-modern service sector kicking and screaming into the 21st century, to open the rice paddies to commercial farming, to open the country to the world and, in theory, to demolish the edifice of vested interests, using the Trans Pacific Partnership as a sledgehammer.

5---US healthcare now double the global average, Bloomberg video

6---The Systematic, Unrelenting Deterioration Of Japan’s Trade, Testosterone Pit 
The all-out effort by Japanese Prime Minister Shinzo Abe to print money, stir up inflation, devalue the yen, blow asset bubbles, and pile on even more government debt – a newfangled religion called Abenomics – is bearing fruit. But the primary objective, creating a trade surplus to crank up the real economy, is failing miserably.

Exports rose 7.4% in June, but imports jumped 11.8%, and the balance of trade swung from a surplus in June 2012 to a deficit of ¥180 billion ($1.8 billion). By US standards, that would be great: a deficit so small that it would disappear in statistical noise. We’d jubilate because we haven’t seen anything this good since the no-holds-barred offshoring boom took off in earnest in the early 1990s. But Japan’s June trade deficit confirms a terrible trend – for an economy that has become dependent on a trade surplus.

In June 2012, Japan had a surplus of ¥60.3 billion, one of the only two surpluses of the year. In June 2011, it had a surplus of ¥69.3 billion, one of five surpluses that year. By that time, the shutdown of its nuclear reactors had already started. In June 2010, before the shutdowns, the trade surplus was ¥670 billion. Even during the financial crisis, when major trade aberrations occurred, Japan had a trade surplus in June. Since the beginning of the data series in 1979, Japan has always had a trade surplus in June.

So June 2013 became the first modern June on record when Japan ran a trade deficit. It set another record: it was the 12th month in a row of trade deficits. And another record: for the first half of 2013, the trade deficit jumped 70% from the same period last year to ¥4.8 trillion!

Japan has entered a new frontier. June was the worst June ever, May the worst May ever, April the worst April ever..... The deterioration has been systematic, unrelenting, and fierce. The chart, going back to 2011, shows how the trade deficit in each month of 2013 deteriorated from the equivalent month in 2012; and how it had deteriorated in 2012 from the equivalent month in 2011. ...

Part of it was due to the yen that dropped 22% against the dollar from June last year and thus inflated the value of imports. Part of it was the wealth effect and corporate optimism that induced Japan Inc. and wealthy individuals, flush with freshly printed money, to splurge

7---Bankers own the world, information clearinghouse

8---More bad news on China's economy, sober look

9---House listings increase, but MLS inventory still at very low levels, oc housing

10--New-Home Sales Surge But Home Builders Still Crumble, Barron's

Yet the report did include some disappointments. Sales in May were weaker than initially reported. The figure was revised down to a 459,000 annual rate from an initially reported 476,000.
It’s been a rough week for housing. Recent data on housing starts, existing home sales and home prices all missed expectations. And today, home building stocks were down across the board.

11---Why slower U.S. home sales signal a good recovery, Fortune

12---Investor frenzy over housing has peaked, Fortune

13---With  stagnant wages, what will cause rents and home prices to rise?, oc housing
Average hourly wages were unchanged from May to June after adjusting for inflation, the latest sign of households struggling to gain purchasing power in the aftermath of the Great Recession.

The flat result stemmed from a 0.4% increase in average hourly earnings being offset by a rise in the consumer price index. Over the last 12 months, inflation-adjusted hourly wages have risen by just 0.4%.
Given that the CPI readings on inflation has been tame, even nominal wages are growing very slowly. ....

14----Leading Economic Indicators Flat in June, DS News

The Conference Board’s Leading Economic Index (LEI) for the United States was unchanged at 95.3 in June following increases in April and May, the group reported.
“Declines in building permits, new orders and stock prices were offset by gains in consumer expectations, initial claims for unemployment insurance, and other financial indicators,” said Ataman Ozyildirim, economist for the Conference Board. “However, the LEI’s six-month growth rate remains positive, suggesting the economy will continue expanding through the end of the year.”

15---Softened Mortgage Rule Said to Be Proposed Soon by U.S. Agencies, Bloomberg

16---Survey: Current Homeowners Increase Purchases, Investors Exit Market, DS News

17---Softened Mortgage Rule Said to Be Proposed Soon by U.S. Agencies,

A panel of six financial regulators is close to proposing a softened version of a pending rule requiring lenders to keep a stake in risky mortgages that they securitize, according to five people with knowledge of the discussions.
The Federal Reserve and the Securities and Exchange Commission, among others, plan to suggest that lenders must keep a share in the risk of mortgages issued to borrowers who spend more than 43 percent of their income on debt, said the people, who asked to remain anonymous because the discussions are not yet final.

The move would mark a victory for a coalition that includes the National Association of Realtors, the Mortgage Bankers Association, and dozens of other housing-industry participants and consumer groups who protested when the agencies in 2011 released a more stringent draft of the rule, commonly known as the Qualified Residential Mortgage or QRM rule. That proposal would have required lenders to keep a share of mortgages with down payments of less than 20 percent and those issued to borrowers spending more than 36 percent of their income on debt
“If what we’ve heard about the proposed QRM rule is true, then we are very pleased that the agencies are moving towards a broad definition that will benefit the American people by ensuring access to safe, affordable options for buying a home,” Gary Thomas, president of the National Association of Realtors, said today in an e-mailed statement.
Dodd-Frank Act

18---Pacifist Japan no more? Tokyo to consider pre-emptive strike strategy, RT

19---Bagram: The other Guantanamo, Rolling Stone

20---Obama combines demagogy and right-wing policies in speech on economy, wsws

21---Treasury yields climb, WSJ

22---Mortgage rates reverse, Wa Post

Tuesday, July 23, 2013

Today's links

1--The (not-so) green shoots of recovery , Economist

Two big factors lie behind the poor overall output numbers. First, the financial sector remains dislocated. The US has dealt much more aggressively with the problem of bad loans and is now enjoying a stronger recovery. British (and European) banks remain reluctant to lend as they re-build their balance sheets and are not enforcing covenants over bad loans. This forbearance has meant less insolvency and more jobs in the short-run, but creates “zombie firms” who would exit in normal times. Low rates of new lending hits new firms with high growth potential particularly hard, which shores up problem in the future. Much productivity growth comes from start-ups with innovative ideas.

Second, the blast of austerity unleashed in Britain and euro zone has depressed demand. The 40% cuts in British public investment have been hugely counter-productive. Rather than taking advantage of low interest rates and spare resources to rebuild much needed- infrastructure, the UK government and its predecessor did the opposite. The underestimation of the impact of austerity on output (the “fiscal multiplier”) when interest rates are near zero has, as the IMF and others have pointed out, substantially reduced growth in the UK and other austerity minded nations.

The upshot of these twin evils has been an investment collapse (Figure 4). Business Investment is now 30% lower than what it was in 2007

2---Over 500 ‘Al-Qaeda militants’ escape Iraq’s Abu Ghraib in violent break-out, RT

3---Decrease in Starts Curbs U.S. Housing Rebound: Economy, Bloomberg

The residential real-estate rebound suffered a setback in June as housing starts unexpectedly fell to the lowest level in almost a year, curbing how much construction contributed to U.S. economic growth last quarter. ...

Apartment Construction

Work on multifamily projects such as apartment buildings slumped to an annualized rate of 245,000 last month, the least since August 2012, following a 28.2 percent surge in May, today’s report from the Commerce Department showed.
Construction of single-family houses fell 0.8 percent to a 591,000 rate, the fewest since November, from 596,000 the prior month......

The market remains shy of the heights reached at the peak of the housing boom. Builders began work on 780,000 homes in 2012, a 28 percent increase from the prior year and the third-straight annual advance. Starts peaked at 2.1 million in 2005, which was a three-decade high.

4---U.S. SEC urges money funds to be prepared for tri-party repo defaults, Reuters (5 years later, the problem that caused the meltdown still not fixed)

U.S. securities regulators are warning the $2.6 trillion money market fund industry to be careful of the risks in the so-called repo market, part of the unregulated shadow banking system that large investment banks use to fund their business.

The U.S. Securities and Exchange Commission on July 17 quietly issued new guidance to money funds that spells out the risks they could face if borrowers in the tri-party repurchase market collapse.
"There are a variety of ways in which a money fund and its adviser may be able to prepare for handling a default of a tri-party repo held in the fund's portfolio," the SEC wrote. "Such advance preparation could be part of broader efforts by the money market fund and its adviser to follow best practices in risk management."...

But in 2008, the collapse of Lehman Brothers caused major problems for one of the largest money funds, exposing potential systemic weaknesses in the short-term lending market.
Panicked investors rushed to pull out their money from the Reserve Primary Fund, a large prime institutional fund, after learning it was exposed to collapsed bank Lehman Brother's short-term debt.
The fund eventually "broke the buck" when its net asset value fell below $1 per share, and the U.S. government was forced to create a temporary program to guarantee money market funds.
Although money market funds and the repo market both experienced major shocks during the crisis, the 2010 Dodd-Frank law did not address these two areas.

As a result, the Financial Stability Oversight Council, a body of regulators chaired by the Treasury Secretary, has been advocating for new rules for both money funds and repos.
In previous annual reports, the FSOC has labeled money funds and repo markets as areas of emerging risks.

Regulators say they fear money market funds could be at risk in the event that a financially stressed broker-dealer needs to quickly sell assets it can no longer finance.
If the dealer's securities decline in value and they cannot return the money from a repo transaction, then creditors could initiate a run.

Last November, when a deadlocked SEC could not come to a consensus on money fund reforms, the FSOC stepped in and issued its own proposal in an effort to spur the SEC to act.
In June, under the leadership of new SEC Chair Mary Jo White, the SEC finally proposed new rules that could require large institutional prime funds to offer a floating, instead of a fixed, net asset value.
But little so far has been done on repo markets and the potential risks that may be posed by defaults.
The SEC's guidance appears to be an early step toward addressing the issue

5---A Federal Bailout For Detroit's Pensions? , Huffington Post

Does $1,500 a month after hauling garbage cans your whole adult life really sound like a fortune?

6---Sales of Existing Homes in U.S. Unexpectedly Decline, Bloomberg

Sales of previously owned houses unexpectedly dropped in June, hurt by a lack of supply and rising mortgage rates that will slow the rebound in the U.S. real-estate market.
Purchases (ETSLTOTL) fell 1.2 percent to a 5.08 million annualized rate, the National Association of Realtors reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg called for a 5.26 million pace. The pace of the demand was the second strongest since November 2009 following May’s downwardly revised 5.14 million rate. ...

Estimates in the Bloomberg survey of economists ranged from 4.99 million to 5.5 million. The prior month’s pace was revised from a previously reported 5.18 million.

Prices Climb

The median price of an existing home climbed 13.5 percent to $214,200 last month from $188,800 a year earlier, today’s report showed

7---Investors moving out of housing--here's why, CNBC

They swarmed the distressed housing market, buying thousands of foreclosed properties and pushing prices higher faster than anyone expected. Now investors are pulling back, dissuaded by the higher prices they themselves brought about.
"Perhaps the numbers aren't working out," said Lawrence Yun, chief economist of the National Association of Realtors, which reported that just 15 percent of June sales were by investors. That is the lowest share since the Realtors began tracking this cohort in October of 2008....

At the height of the foreclosure crisis investors, some individual and some larger funds, were making up more than a third of home buyers. Most of their sights were set in the West, where the crisis hit hardest. That is why prices in that region are up more than 20 percent now from a year ago, but prices are still way off from where they were at the peak of the boom.

"Everybody else seems to be getting out OK on this one, and here we are just the perfect timing and circumstance to be on the outside looking in," said David. "There's this theoretical wealth creation all around us, and yet we're not participating in it, so yeah it's pretty frustrating."
First-time homebuyers could say the same. Usually about 40 to 45 percent of the market, they made up just 29 percent of buyers in June, according to the Realtors. A lack of supply has made the market far too competitive for these buyers, who usually need financing and have smaller down payments.

"We can thank investors for that limited inventory of course as many entry level buyers are now going to have no choice but to rent," said Peter Boockvar of The Lindsey Group.
Even as investors move out, cash is still king in this market. Thirty-one percent of sales were all cash. That share is usually below 10 percent. June's home sales were largely unaffected by the recent rise in mortgage rates, as contracts for those sales were signed in April and May.

The Realtors expect higher rates will slow sales in the coming months, and if investors, who drove the market for so long, continue to exit, those sales could be even slower.

8---Existing home sales dip monthly but rise 15.2% annually, Housingwire

Existing-home sales fell in June, but have stayed well above year-ago levels for the past two years. For seven consecutive months, the median price saw double-digit year-over-year increases, according to the National Association of Realtors.
Total existing-home sales — completed transactions involving single-family homes, townhomes, condominiums and co-ops — dropped 1.2% to a seasonally adjusted annual rate of 5.08 million in June from a downwardly revised 5.14 million in May. However, sales are 15.2% higher than the 4.41 million units reached in June 2012.

NAR Chief Economist Lawrence Yun said there is enough momentum in the market, even with higher interest rates. “Affordability conditions remain favorable in most of the country, and we’re still dealing with a large pent-up demand,” he said. “However, higher mortgage interest rates will bite into high-cost regions of California, Hawaii and the New York City metro area market.”

9--SELLOUT: SEC watchdog cashes in big, NYT

lawyers briefed on the matter say, Mr. (Robert) Khuzami has accepted a job that pays more than $5 million a year at Kirkland & Ellis, one of the nation’s biggest corporate law firms. In doing so, he is following the quintessential Washington script: an influential government insider becoming a paid advocate for industries he once policed.

As a partner at Kirkland, Mr. Khuzami will represent some of the same corporations that the S.E.C. oversees. Critics say this revolving door — common at the S.E.C. — undermines the agency’s independence and links it inextricably to Wall Street. Mr. Khuzami, who spent 17 years in the government and has publicly called for lawyers to build public and private experience, called defense work essential to the justice system.

“It’s both aggressive enforcement and vigorous defense that are critical to justice and fairness,” Mr. Khuzami, who will start in Kirkland’s Washington office around Labor Day, said in an interview.
His compensation package, the lawyers briefed on the matter said, is guaranteed for at least two years. Kirkland, known for lavishing its star partners with some of the highest salaries in the industry, also hired one of Mr. Khuzami’s lieutenants at the S.E.C., Kenneth R. Lench. Kirkland is expected to announce the personnel moves on Tuesday.

10--Loose lending makes a comeback, Denver post

11--China Maneuvers To Take Away US' Dominant Reserve Currency Status, zero hedge

12---Survey: 54% of YouWalkAway Clients Past Due but Not in Foreclosure, DS News
YouWalkAWay.com, a national foreclosure agency, recently released a June 2013 survey of its customers and found 54 percent are in pre-foreclosure, meaning they have defaulted on their mortgage but have not received an official foreclosure notice.

Data from the agency revealed Georgia has the highest share of YouWalkAway clinets in pre-foreclosure, at 82 percent. On average, clients in the state were behind by 18 months, but still haven’t been served with an official foreclosure notice.

In Minnesota and Arizona, 79 and 74 percent of clients, respectively, were in pre-foreclosure status. Customers in those states were behind by over 20 months.

The state that saw the biggest year-over-year decrease in clients in pre-foreclosure inventory was Florida, where 23 percent of clients were in pre-foreclosure, down from 45 percent in 2012.
The average number of months past due though increased from 17 months in 2012 to 23 months in 201

13---A call to action: Oppose the Detroit bankruptcy!, wsws

14--No country for firsttime home buyer, zero hedge

15---Existing Home Sales…Should have been much stronger. What’s going on??? “Low Inventory” a Red-Herring, mark hanson

Monday, July 22, 2013

Today's links

1--Flipping is back, marketplace economy

Though we have barely crawled out of the hole created by excess speculation in the housing market, investors are getting back into real estate with a vengeance. A new report from RealtyTrac shows the number of people flipping houses -- the practice of buying a house and re-selling it again within six months -- is up 74 percent in the last two years across the nation.

So, investors are flipping again -- but in different places. You could
 say the geography of flipping has, well, flipped. No longer are Southern California and Arizona the hot spots. Now, New York state is more attractive to investors, with a 400 percent increase in flipping in the last year. In Nebraska, house-flipping rose 262 percent. Arkansas saw similar numbers....

“We’re seeing higher levels of flipping than we saw even back during the housing bubble of 2004 to 2008. Which is a little bit of a red flag,” says RealtyTrac vice president Daren Blomquist. Even though flipping helped create the last real estate meltdown, Blomquist doesn’t expect a repeat performance. For one thing, he says banks no longer give away easy money

2---Goldman Sachs, JP Morgan Chase: Pulling an Enron With Commodities , Huff Post

Metro International Trade Services, a company Goldman Sachs purchased in 2010 for $500 million, has enabled the bank to manipulate the spot market in aluminum and artificially generate profits in the billions of dollars.
The London Metal Exchange, which is supposed to guard against these kinds of rip-offs (and was recently sold to a Hong Kong company), "is made up of executives of various banks, trading companies and storage companies -- including the president of Goldman's Metro International." (This arrangement echoes the LIBOR scandal where financial insiders rig the game they're supposed to be refereeing.)

Every time Goldman CEO Lloyd Blankfein and JP Morgan CEO Jamie Dimon testify before Congress they offer up boilerplate about how their companies' "market making" helps to "allocate capital," spark "innovation," and "hedge against risk." But it's all a pack of lies. What they're really doing is the age-old technique of market manipulation, spruced up with a new complexity via financial "instruments" that dance out of the heads of people like Blythe Masters.

3---Why the Fed has failed to lower unemployment, Bloomberg

Central banks can raise or lower short-term interest rates, and buy or sell securities. That’s it. Those actions are a long way from creating more jobs. In contrast, fiscal policy can be surgically precise, aiding the unemployed by extending and fattening unemployment benefits.

The Fed’s program to spark job-creation is a five-step process that is supposed to work like this: First, the central bank buys Treasuries or mortgage-related securities. Second, the sellers reinvest the proceeds in stocks, commodities, real estate and other assets, pushing up prices. Third, higher asset prices have a wealth effect by making their owners feel richer. Fourth, consumers and businesses spend on goods and services and capital equipment. Fifth, that spending spurs production and demand for labor.

Nevertheless, the Fed’s efforts haven’t worked very efficiently when it comes to the last three steps. The U.S. unemployment rate, at 7.6 percent in June, remains high by historical standards. Despite a recovery, payroll employment remains well below the previous peak in January 2008.

Furthermore, there have been virtually no follow-on effects from the Fed’s creation of member bank reserves. When the central bank buys securities, the proceeds clear through the seller’s bank and end up as additions to that bank’s reserves at the Fed. In normal times, those reserves are lent out by the bank with successive relending in the fractional reserve system, and each dollar in reserves created by the Fed turns into $70 of M2 money. But since August 2008, when the crisis started, the multiplier has been only $1.5. As a result, the unused cash has piled up in the Fed’s member bank accounts, and the excess reserves -- the difference between total and required reserves - - now exceed $1.9 trillion...

If the labor force participation rate were the same as in February 2000, the pool would be larger by 9.5 million people.
Because the unemployment rate in 2000 was 4.1 percent, this implies 9.11 million more jobholders. And at that rate, an additional 5.4 million people would be employed, for a total of 14.5 million. That’s a lot of workers to absorb, even with the annual real gross domestic product growth of about 3.5 percent that should resume in five years or so when global deleveraging is completed. And that pace of growth surpasses recent economic performance. Since deleveraging began in the fourth quarter of 2007, annual growth has averaged just 0.6 percent; it has been 2.1 percent since the recovery began in the second quarter of 2009, and 1.7 percent since the previous cyclical peak in the first quarter of 2001...

Just since the December 2007 peak in household survey employment, the civilian population has increased by 12.4 million, though the labor force has grown by only 1.9 million. The number of those not employed or actively looking for a job rose 10.1 million, and of those, 2.6 million -- more than the labor force increase -- say they want to work. Total employment in the household survey is down by 1.8 million since the December 2007 peak.

4---Right wing fanatic Abe wins majority in upper house, Bloomberg

The Topix Index (TPX) of stocks has climbed 59 percent in the past eight months on optimism that Abe’s three-pronged economic strategy of monetary stimulus, a flexible fiscal stance and business deregulation will end two decades of malaise. The yen has tumbled about 19 percent against the dollar in that time, offering exporters a more competitive exchange rate. ...

Decisions loom on whether to cut the corporate tax burden; reduce labor regulations dating from the 1960s that offered lifetime employment at larger enterprises; make it easier to consolidate agricultural land; allow greater access to foreign goods and services through the Trans Pacific Partnership trade talks; streamline the approval of medical-industry products; restart nuclear reactors to cut energy costs; and address funding shortfalls in the social-security system.

Sales Tax

Abe must also decide whether to proceed with a scheduled increase in sales taxes designed to pare the fiscal deficit in a nation with the world’s largest public debt burden....

Tomoko Kida, a 27-year-old company employee on maternity leave, said her focus in voting for the LDP was on the economy. “Share prices are rising, but no one around me is feeling the benefit. I want him to introduce some policies that raise wages. (JNLSUCTL)
Wages haven’t risen in Japan on a sustained basis since the bursting of the asset bubble in the early 1990s, as companies focused on fixing balance sheets and consumers reined in their spending. Labor cash earnings fell 0.1 percent in May from a year before....

“We want corporate taxes in line with other nations,” Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp. (5401), said at a gathering of industry leaders last week in Karuizawa, northwest of Tokyo.
Abe, who took office as prime minister for the second time in December after leading the LDP to victory in lower house elections, has already overseen a recalibration of the nation’s monetary policy. He installed inflation-target advocate Haruhiko Kuroda in March. Kuroda followed through with an unprecedented plan to double the monetary base over two years.

Consumer Prices

Consumer prices excluding fresh food are forecast to rise 0.3 percent in June from a year before, the first increase in 14 months, based on the median estimate of economists surveyed by Bloomberg news before a July 26 report.
Meantime, slowing growth risks stoking dissent among LDP lawmakers just as Abe embarks on his reform legislation. Gross domestic product rose an annualized 2.8 percent in the three months through June, compared with 4.1 percent in the first quarter, a survey of 29 economists by Bloomberg indicates.

5---Detroit bankruptcy sets stage for national assault on public-sector pensions, wsws

6---The historical crisis of mankind, he declared, “is reduced to the crisis of the revolutionary leadership.”, wsws

The driving forces behind the upsurge in the class struggle are the contradictions of the world capitalist system. The problems driving workers into struggle in any given country are primarily of an international rather than a national character. The globalization of economic life within the constraints of capitalist private ownership of the means of production and the nation-state system has produced ever greater financial parasitism, social inequality, poverty, war and the breakdown of democracy.

These conditions are a historical verification of the characterization of the epoch provided by the greatest revolutionary figure of the 20th century, Leon Trotsky, who wrote of the “death agony of capitalism” in the founding program of the Fourth International, the Transitional Program. Writing in 1938, one year before the eruption of World War II, Trotsky explained that the objective preconditions for socialist revolution had matured. The historical crisis of mankind, he declared, “is reduced to the crisis of the revolutionary leadership.”

At the time, Trotsky was writing against the Stalinist, social democratic and labor bureaucracies that devoted all their energies to blocking socialist revolution. The result of their betrayals was a series of devastating defeats of the working class, fascism and world war.

The mass struggles of today have once again brought to the fore the crisis of revolutionary leadership in the working class. The objective conditions for socialist revolution are emerging rapidly. But the problem of political leadership equal to the demands of a new revolutionary epoch remains to be solved....

The lessons of these critical experiences must be drawn not only in Egypt, but throughout the world. In the struggle to develop a genuine revolutionary leadership in the working class, basing itself on the historical lessons of the 20th century and the opening years of the 21st century, certain basic conceptions of Trotsky’s Theory of Permanent Revolution must be stressed:

* There is no country in the world, least of all the oppressed ex-colonial countries, where any section of the capitalist class or its political representatives has a progressive role to play.
* The fundamental revolutionary force in all countries is the working class, which alone can fight without compromise to implement and defend a democratic program. The fight for democracy merges with the revolutionary struggle for socialism and workers’ power.
* The struggle in any country must be guided by an international strategy

7---Will Rising Mortgage Rates Halt The Housing Rebound?, WSJ

Could rising mortgage rates derail the housing market’s slow healing? Economists in the latest Wall Street Journal survey are divided on the question. Among those surveyed, 40% said the rise “won’t have a noticeable effect,” 35.6% warned “it will slow sales” and 24.4% said “it will slow home-price gains.”

There’s no doubting the housing market’s contribution to the overall recovery. Federal Reserve Chairman Ben Bernanke, in starting two days of congressional testimony, on Wednesday told lawmakers that  “housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy.” The Fed chief seemed to place himself within the no “noticeable effect,” camp, but added, “Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully.”

In the Fed’s periodic report on regional economic conditions, issued Wednesday, the central bank sounded a relatively upbeat note, saying “Residential real estate activity increased at a moderate to strong pace in most Districts.” The beige book continued, “Most Districts reported increases in home sales.”

Interest rates on 30-year fixed-rate mortgages have jumped in the recent months, climbing in the most recent week to 4.37%, up more than a percentage point from the 3.35% level of early May. However, even with the climb, rates are lower than they have been in decades.

8---"Going forward I expect a fairly sharp drop in prices.  That’s because the lions’ share of the reported “unnatural appreciation” comes from the distressed resales". Mark Hanson (on the Calif market

DataQuick reported today that “June” NorCal sales were plunged 7.5% MoM and 9.4% YoY….we have not seen a credible double-threat in many months.  In fact, house sales never fall from May to June.  This correlates very well with our internal CA MLS surveys.
What’s most alarming about this is that “June” existing sales are actually from “contracts and price decisions” made in April and May when rates were at HISTORIC LOWS.

This tells me the market — underpinned for 18 months by investors and “distressed supply” — was already exhausted before the historic rate “surge”.   Historic, artificially low rates for so long filled so much pent-up demand, pulled so much demand forward, and caused institutional investors to buy so much blindly that years of housing market activity was shoved through the eye of a needle.
From DataQuick this morning:
“A total of 7,897 new and resale houses and condos were sold in the Bay Area in June. That was down 7.5 percent from 8,541 the month before, and down 9.4 percent from 8,721 for June a year ago. A May-to-June decline is atypical for the season. Sales usually increase between those two months – by 4.1 percent, on average. Since 1988, when DataQuick’s statistics begin, June sales have varied from 7,118 in 1993 to 15,735 in 2004. Last month’s sales were 20.9 percent below the June average of 9,993 sales.”
This supports my call for significant weakness in near-term housing market reports.  It’s also very menacing for July (and beyond) sales AND PRICES, as the rate “surge” finally gets factored into the housing market.

What this is all pointing to…the housing market was getting ready for an ‘exhaustion break’ — I call it a “stimulus hangover” — in the action after 18 months of the most incredible, direct stimulus in history being shoved down its’ throat for so long.   Unfortunately, at the exact time the market was beginning a ‘hangover phase’ the mortgage market and rates blew up.   And surging rates have the power to turn a hangover into something much more pronounced.

As you are aware, all my post-”surge” research over the past 6 weeks has been pointing to a significant credit-related housing market “event” set to occur reminiscent of the sunset of the Homebuyer Tax Credit.  However, it’s happening a month earlier than my expectations.

9---More on Abe's victory, IFR

Abe’s plan to revive the economy has so far rested on reforms that do not require legal tinkering. The main move was to open the money taps wide, pledging to end chronic deflation by doubling the monetary base in two years. The yen has weakened 22% against the US dollar in the past year, giving a big boost to Japanese exporters.

What’s crucial now is new investment. That will occur only when Japanese companies, which pay 38% of their profits in taxes, get either the lawmakers’ nod for lower rates or rebates for adding fresh capacity. Lower corporate levies will prop up the economy next year when higher consumption taxes drag on GDP growth.

More controversial legislation will include lowering import tariffs on farm produce and preventing the government’s budget from ballooning uncontrollably as ageing pushes up health-care costs. Similarly, new laws are needed to make the energy industry more competitive – Japanese manufacturers pay among the highest power charges of all countries in the Organization for Economic Co-operation and Development – and to loosen up a rigid labour market that discriminates against women and part-time workers and protects salarymen with long-term contracts.

10--QE ineffectiveness is playing out on banks' balance sheets, sober look
Cash holdings are an increasingly large component of US commercial banks' balance sheets. This demonstrates the fact that thus far the Fed's monetary expansion is not producing the "optimal" result. Banks are not growing the non-cash portion of their balance sheets fast enough to offset these rising reserves. A more optimal policy would be able to take that into account....
In fact the latest data shows that the non-cash component is declining.

Source: FRB (click to enlarge)

For those who are interested, the Fed recently published a technical paper (here) indicating that a massive QE program in the face of a "large and persistent adverse demand shock" is suboptimal. The data on credit expansion (above) seem to support that argument.

Sunday, July 21, 2013

Today's links

1---Is This A 2007 Redux?, Street Talk Live


2---As Layoffs Rise, Stock Buybacks Consume Cash (archive), NYT 2011

share buybacks have not fulfilled their stated purpose of rewarding investors over the last decade, experts say. “It’s a symptom of a deeper problem, which is a lack of investment in the long term,” said William W. George, a Harvard Business School professor and former chief executive of Medtronic, a medical technology company. “If we’re not investing in research, innovation and entrepreneurship, we’re going to be a slow-growth country for a decade.”
Liberal critics insist the trend is another example of top corporate executives raking in an inordinate share of the nation’s wealth, even as their employees suffer.
“It’s an extraordinarily unimaginative way to use money,” said Robert Reich, a former secretary of labor under President Clinton who now teaches public policy at the University of California, Berkeley. After diving in the wake of the financial crisis, buybacks have made a remarkable comeback in recent years, with $445 billion authorized this year, the most since 2007, when repurchases peaked at $914 billion.
But spending on capital investments like new plants and infrastructure has stagnated more broadly in corporate America, confounding efforts by the Obama administration to spur economic growth. ...      
The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster

3---The Official Unemployment Rate Is Wrong, Says Guy Who Used To Calculate It, mark gongloff

You can't believe the government's numbers on employment. Take it from the guy who used to run the government's numbers on employment.

Keith Hall, the former head of the Bureau of Labor Statistics, which produces the federal government's monthly jobs report, told New York Post columnist John Crudele that the official unemployment rate of 7.6 percent is wrong and might be too low by 3 percentage points, according to Crudele's column on Thursday.

What he is saying is that the unemployment rate doesn't capture all of the people sitting on the sidelines in despair of finding a job. The employment-population ratio, the percentage of the working-age population actually working, sits at 58.7 percent, Hall notes, well below a peak of 63 percent before the recession and the lowest rate since the early 1980s. This suggests to Hall that there are a lot of people not showing up in the official unemployment rate.

I'd personally focus on the labor-force participation rate, which includes people working and looking for work. This has been at about 63 percent in recent years, well below the 66 percent that prevailed before the recession. That may not sound like a big difference, but that extra 3 percent would take the number of officially unemployed people up to about 18 million from 12 million.

And that would jack the unemployment rate up to about 11 percent. Which, yikes.

4---Richard Koo: Still no demand for funds, value walk

Abenomics may boost sentiment via asset prices, but is not creating demand for funds To summarize, the rise in general prices due to Abenomics is viewed as an unfavorable development by most people in Japan, but the increase in certain asset prices has clearly been a positive for the Japanese economy.
While sentiment has improved dramatically, however, the slump in private loan demand that has been the greatest bottleneck in Japan’s economy over the last two decades continues, as reported at a Bank of Japan branch managers’ meeting in July. Deposits at Japanese banks are increasing, but lending is not.
As long as the private sector is not borrowing money—and is in fact saving enthusiastically—at a time of zero interest rates, Japan cannot put the balance sheet recession completely behind it.

Richard Koo: Measures to boost private investment finally being considered In Japan

The second “arrow” of Abenomics, fiscal stimulus, which is needed when the private sector is saving but not borrowing, has already been released in the form of a supplementary budget early in 2013. While this has not received as much attention as the BOJ’s monetary accommodation, I think it has contributed significantly to the overall improvement in the economy and sentiment
Germany is currently running the largest trade surplus in the world, while the deficits of peripheral Europe are being squeezed down through unemployment – which is certain to remain high for many more years. ...
The graph makes it pretty clear that the surge in European surpluses, which was largely matched before the crisis by the surge in deficits in peripheral Europe, is expected to be maintained even as surpluses in China and Japan, the other leading surplus nations, have dropped dramatically, but since these northern European surpluses can no longer be counterbalanced by deficits within peripheral Europe given how indebted and troubled are their European trade partners, the hope is simply to force them abroad. In a world with weak demand and deteriorating trade relationships, in other words, the northern Europeans have decided that rather than boost domestic demand they will resolve their domestic problems by absorbing far more than their share of global demand, to the tune of 2-3% of Europe’s GDP.

This is absurd. If they succeed it will only be temporarily and at the expense of their already-suffering trade partners, and as a consequence it will just be a question of time before global trade relationships get even nastier than they have been. Of course if trade relationships deteriorate enough, and so force the imbalances back onto Europe, the result will be a surge in German unemployment with no corresponding relief in unemployment in the periphery.

Away from Europe the US continues slowly to adjust but I worry that this adjustment will be derailed by a weaker external sector. Meanwhile Japan is still struggling with its debt burden and seems to have no real way of resolving it except by forcing down the currency and interest rates, both of which mean that household sector is expected to reduce consumption to support the debt burden without, it seems, any corresponding increase in investment. In China the good news is that the rebalancing process seems to have become more determined than ever before in the past, although as of yet there has been minimal rebalancing at the expense of a significant reduction in growth rates. This I expect will continue to be the case, but European trade policies are going to put additional pressure on China’s adjustment.

6--Understanding Earnings, dash of insight

7--The 4 recession indicators, doug short

8---Sell signal from key market indicator, Marketwatch
Commentary: Famous ‘High Low Logic Index’ is no longer bullish

9--Lend to spend: China loosens grip on interest rate regime, RT

10--China's US Treasury Holdings hit record $1.3 trillion, RT

11---Hugo Chavez, Postcards from the Revolution

Hugo Chavez was beloved by millions around the world. He changed the course of a continent and led a collective awakening of a people once silenced, once exploited and ignored. Chavez was a grandiose visionary and a maker of dreams.

An honest man from a humble background who lived in a mud hut as a child and sold candies on the streets to make money for his family, Chavez dreamed of building a strong, sovereign nation, independent of foreign influence and dignified on the world scene. He dreamed of improving the lives of his people, of eradicating the misery of poverty and of offering everyone the chance of a better life – the “good life” (el buenvivir), as he called it.

President Chavez made those dreams come true. During his nearly fourteen years of governance, elected to three full six-year terms but only serving two due to his untimely death, Chavez’s policies reduced extreme poverty in Venezuela by more than 75%, from 25% to less than 7% in a decade. Overall poverty was reduced by more than 50%, from 60% in 1998 when Chavez first won office to 27% by 2008. This is not just numbers, this translates into profound changes in the lives of millions of Venezuelans who today eat three meals a day, own their homes and have jobs or access to financial aid.

But the dreams don’t stop there. Chavez dreamt of a nation filled with educated, healthy people, and so he established free, quality public education from preschool through doctoral studies, accessible to all. In fact, for those in remote areas or places without educational facilities, schools were built and mobile educational facilities were created to bring education to the people. Chavez also created a national public health system offering universal, free health care to all, with the help and solidarity of Cuba, which sent thousands of doctors and medical workers to provide quality services to the Venezuelan people, many who had never received medical care in their lives.

To strengthen and empower communities, Chavez propelled policies of inclusion and participatory governance, giving voice to those previously excluded from politics. He created grassroots community councils and networks to attend to local needs in neighborhoods across the nation, placing the power to govern in the joint hands of community groups. His vision of diversifying his nation and developing its full potential transformed into railways, new industries, satellite cities and innovative transport, such as MetroCable Cars soaring high into the mountains of Caracas to connect people with their steep hillside homes and the bustling city.

The centuries-old dream of Independence hero Simon Bolivar to build a unified “Patria Grande” (Grand Homeland) in South America became Chavez’s guiding light and he held it high, illuminating the path he paved. Chavez was a driving force in unifying Latin America, creating new regional organizations like the Union of South American Nations (UNASUR), the Bolivarian Alliance for the Peoples of Our America (ALBA) and the Community of Latin American and Caribbean States (CELAC). These entities have embraced integration, cooperation and solidarity as their principal method of exchange, rejecting competition, exploitation and domination, the main principles of US and western foreign policy.

Chavez inspired a twenty-first century world to fight for justice, to stand with dignity before bullying powers that seek to impose their will on others. He raised his voice when no others would and had no fear of consequence, because he knew that truth was on his side.

Chavez was a maker of dreams. He recognized the rights of the disabled, of indigenous peoples, all genders and sexualities. He broke down barriers of racism and classism and declared himself a socialist feminist. He not only made his own dreams come true, but he inspired us all to achieve our fullest potential.

Don’t get me wrong, things are not perfect in Venezuela by any stretch, but no one can honestly deny that they are much better than before Hugo Chavez became President. And no one could deny that President Hugo Chavez was larger than life.

The first time I flew on President Chavez’s airplane he invited me to breakfast in his private room. It was just me and him. I was nervous and felt anxious and rushed to tell him about the results of my investigations into the United States government role in the coup d’etat against him in 2002. After all, that’s why I was on the plane in the first place. I had been invited to participate in his regular Sunday television show, Alo Presidente (Hello Mr. President) to present the hundreds of declassified documents I had obtained from US government agencies through the Freedom of Information Act (FOIA) that exposed US funding of coup participants. The date was April 11, 2004, exactly two years after the coup that nearly killed him and sent the nation into spiraling chaos.

As I began pulling out papers and spreading documents on the table that separated us, he stopped me. “Have you had breakfast yet”, he asked. “No”, I said, and continued fiddling with the revealing paper before me. “We can discuss that later”, he said, “for now, tell me about yourself”. “How is your mother”, he asked me, as though we were old friends.

A flight attendant came through the door of his private room with two trays and placed them on the table. I quickly gathered up the documents. “Let’s eat”, he said. I started to protest, trying to explain that his time was so limited I wanted to take advantage of every minute. He stopped me and said, “This is a humble breakfast, a breakfast from the barracks, what I most love”. I looked at the tray for the first time. On it was a small plate with an arepa, a typical Venezuelan corn patty, a few shreds of white cheese, a couple of pieces of cantaloupe and some anchovies. Beside the plate was a small cup of black coffee. No frills and not what you would expect on a presidential airplane.

“After all, I am just a soldier”, he added. Yes, Chavez, you are a soldier, a glorious soldier of a dignified, proud and kind people. And you are a maker of dreams for millions around the world.