Friday, July 12, 2013

Today's links

1---Consumer Credit Year Over Year, warren mosler

(No sign of credit growth, just "seasonal" factors)
I keep looking for domestic credit expansion, to fill the ‘spending gap’ left by the tax hikes and sequesters.

The headline uptick in consumer credit looked promising, but seems there’s some kind of ‘seasonal’ factor at work, as it’s done this every year for the last three years, so the year over year change isn’t showing any signs of life.

Nor is mortgage debt outstanding or any other measure of lending that I’ve seen showing any material growth.

I’m now hearing Q2 GDP growth estimates are down to +1 to + 1.5% or so. This is to be expected when the federal deficit reduction measures aren’t being ‘offset’ by domestic credit expansion and/or increased net exports. In fact, the higher than expected trade deficit was the latest thing to pushing down GDP estimates.

Worse, with a bit of a lag, lower GDP growth = lower sales growth= lower job growth (presuming ‘productivity’ doesn’t collapse) and then the lower job growth feeds back into lower sales, etc.
So yes, more jobs mean more income for those working, but without sales and earnings growth their paychecks reduce corporate incomes which then drives ‘negative adjustments’ in hiring policy, etc.
The answer, as always, is quite simple- cut taxes and/or increase govt spending, depending on one’s politics.

Unfortunately govt- and not just our govt, but all govt that I know of- is still going the other way and continuing to make things worse.

2---Mother Of All Bubbles Pops, Mess Ensues , wolf richter  "This is the insidious backside of the asset bubbles the Fed has blown."

Mortgage REITs are highly leveraged. They borrow short-term in the repo market at near-zero interest rates, thanks to the Fed, then turn around and buy long-term government-guaranteed mortgage-backed securities issued by bailed-out Fannie Mae, Freddie Mac, and Ginnie Mae. Along the way, they issue more stock and borrow even more. By distributing 90% of their profits, they avoid having to pay income taxes. Hence double-digit dividends. A phenomenal business model. Instead of getting their hands dirty in the real economy, they manufacture dividends, fees, and all sorts of goodies for insiders – while the party lasts....

Now the swoon has set in. Yet, the Fed hasn’t even begun tapering its bond purchases of $85 billion a month, including $40 billion in mortgage backed securities. It’s only talking about it. And when the Fed actually stops buying those securities and allows long-term rates to go back to normal? Last time a bubble burst, so from 2007 to 2008, REITs caved nearly 70%, and some, such as New Century Financial, American Home Mortgage Investment, or Luminent Mortgage, went bankrupt.

Bond-fund investors yanked $60 billion out of their funds in June alone, the largest monthly redemptions ever [my take.... Retail Investor Nightmare: The Bond Fund Rout]. But REITs don’t face that flood of redemptions; investors have to sell their shares, at plunging market prices. Where REITs get in trouble is when the prices of mortgage-backed securities decline, and when loan terms change. Then they get margin calls. And they have to dump their assets.

That happened massively, Bloomberg reported, citing JPMorgan Chase: in just one week in June, they “needed to sell about $30 billion” in agency debt “to maintain the amount of borrowing relative to their net worth.” Forced sales aggravated the hemorrhaging in the mortgage-bond market, “which had the worst quarter since 1994

3---The Largest and Most Rapid Shift in Expected U.S. Monetary Policy since 1994. The Largest and Most Rapid Contractionary Shift since 1981, Delong

Not since 1994--or possibly 1982-3--have we had such a large and rapid shift in the market's beliefs about what the Federal Reserve's reaction function is. Not since 1991 have we had such a large and rapid contractionary shift in the market's belief about what the Federal Reserve's reaction function is:
Screenshot 7 10 13 11 30 AM
When ten-year expected inflation falls and ten-year real interest rates rise alongside, that is a shift toward monetary contraction--a Federal Reserve that is now expected to respond according to a reaction function with lower tolerance for inflation in the future.

4---Vulture Investors Frustrated in Dublin Weigh Irish Exit, Bloomberg

Dublin, where commercial property values dropped 65 percent during Western Europe’s worst real estate crash, should be a feasting ground for distressed investors. Instead, frustrated buyers are competing for a dearth of properties that’s inflating prices and discouraging other funds from entering the market.
When Kennedy-Wilson Holdings Inc. (KW) and Vaerde Partners Europe Ltd. offered 306 million euros ($399 million) for 16 Irish properties in May, the bid was 22 percent higher than an October valuation and beat out five competitors. Even so, bondholders attempted to veto the deal to hold out for more. ...

“There is a bit of a feeding frenzy over a few assets when they come to the market,” said Jewell, whose firm is an asset-management unit of France’s Natixis (KN) SA and has bought office buildings in Berlin and the EDF Tower in Paris.

5---Obama administration urges federal employees to spy on each other to avoid leaks, RT
Obama Administration: The most paranoid ever

6---How the banks blacklisted honest appraisers, William Black

Everyone should read and understand the implications of these two sentences from the 2011 report of the Financial Crisis Inquiry Commission (FCIC).
“From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers…it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011: 18).
Those two sentences tell us more about the crisis’ cause, and how easy it was to prevent, than all the books published about the crisis – combined.  Here are ten key implications.
  1. The lenders are extorting the appraisers to inflate the appraisal.
  2. No honest lender would inflate an appraisal, the lender’s great protection from loss.
  3. The lenders were overwhelmingly the source of mortgage fraud.
  4. The lenders were not only fraudulent, but following the “recipe” for ”accounting control fraud.”  They were deliberately making enormous numbers of bad loans.
  5. This had to be done with the knowledge of the bank CEOs
7---Robert Samuelson: Wrong again, CEPR

That is what readers of his column on the state of the world economy will conclude.  He told readers:
"Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations."

Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It's amazing that Samuelson somehow missed the crisis.

In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.

There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about "costly welfare states," the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countires with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.

8---Ben Bernanke Takes Credit For Stopping Market Bubble , Mark Gongloff

The Federal Reserve Chairman on Wednesday responded to criticisms that the Fed had caused turmoil in financial markets by warning investors of its plans to slow down its extraordinary stimulus measures later this year. Bernanke said the Fed had done us all a favor, actually, by preventing the buildup of a dangerous market bubble.

"I would suggest that, notwithstanding some volatility we've seen in the last six weeks, that speaking now and explaining what we're doing may have avoided a much more difficult situation at another time," Bernanke said in a question-and-answer session after a speech at the National Bureau of Economic Research....

The rise in rates has been so violent that Bernanke admitted on Wednesday it had created a potential headwind for the economy. That was still preferable, he suggested, to the trouble the economy might have faced had the Fed chosen not to reveal its plans to taper bond purchases.

"Suppose we had said nothing and time had passed and market perceptions had drifted away from our own perceptions," he said. "During that time, it's very likely that more highly levered risk-taking positions might build up, reflecting some expectation of an infinite asset-purchase program."

Fed critics often accuse the central bank of letting dangerous speculative bubbles inflate all over the world with its money-printing. The Fed has acknowledged that it's aware of the dangers, and Bernanke himself has spoken recently of the need for central bankers to keep an eye on developing bubbles. The Fed seems to think its QE program might not be worth the risks any more, which may be one reason it's eager to dial it back.

9---Rate on 30-year mortgage hits 2-year high, USA Today

The average U.S. rate on the 30-year fixed mortgage rose this week to 4.51%, a two-year high. Rates have been rising on expectations that the Federal Reserve will slow its bond purchases this year.
Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan jumped from 4.29% the previous week. Just two months ago, it was 3.35% — barely above the record low of 3.31%.

Chairman Ben Bernanke has said the Fed could slow its bond purchases this year if the economy strengthens. The purchases have kept rates low. The yield on the 10-year Treasury, which mortgage rates typically track, has been rising.
Even with the gains, mortgage rates remain low by historical standards. Low rates have helped fuel a housing recovery that is helping to drive economic growth this year.
The annual sales pace of previously occupied homes topped 5 million in May for the first time in 3.5 years. And sales of new homes rose at the fastest pace in five years.
Greater demand, along with a tight supply of homes for sale, has pushed up home prices. It also has led to more home construction, which has created more jobs

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