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.

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