Wednesday, September 18, 2013

Today's links

1---New York Times on Syria: All the propaganda fit to print, wsws
(WMD redux)

2---F and F sales will kill the market for MBS, Bloomberg

Fannie Mae and Freddie Mac are set to auction as much as $17 billion of mortgage bonds they acquired before the real estate collapse to meet a regulatory directive, potentially straining demand at the same time the Federal Reserve considers a stimulus pullback...

The two companies hold $163 billion of privately issued mortgage bonds, guarantee another $4.3 trillion of mortgage debt and own almost $370 billion of those securities or Ginnie Mae-backed notes. They’ve been paring the investments after the Federal Housing Finance Agency gave executives a goal in March of selling at least 5 percent of illiquid holdings this year. ...

Issuance in non-agency securities tied to new home loans totals about $12 billion this year, up from $3.5 billion in all of 2012, while commercial-bond sales exceed $52 billion, compared with about $40 billion, according to data compiled by Bloomberg. (non-agency securities have never bounced back from crisis)

3---HELOC Armageddon approaches; Wave of delinquent junior liens in the pipeline send up red flags, MND

For example the QM standard establishes an ability-to-repay safe harbor, but it does not address other relevant underwriting criteria such as loan-to-value (LTV) or credit history, key drivers of long-term loan performance....

The performance of junior liens is another concern.  Delinquencies here have remained relatively steady however they may soon move sharply upward as a significant number of HELOC loans reach the end of their draw period and monthly payment requirements will increase as amortization kicks in. ...

Benhart said in summary, the condition of mortgage lending is a mixed bag:  improvements in first-lien performance, some growth on the horizon, but significant headwinds from growing risk associated with junior liens, elevated delinquencies and higher interest rates.

4---Janet Yellen Urged Glass-Steagall Repeal And Social Security Cuts, Supported NAFTA , Zach carter

("Progressives" throw support behind neoliberal sociopath)

in the 1990s, Yellen and Summers both served in the Clinton administration, and pursued many of the same policies. Yellen began serving as Chair of President Bill Clinton's Council of Economic Advisers in 1997, and publicly endorsed repealing Glass-Steagall's separation between traditional bank lending and riskier securities trading during her Senate confirmation hearing. Yellen referred to deregulating banking as a way to "modernize" the financial system, and indicated that breaking down Glass-Steagall could be the beginning of a process allowing banks to merge with other commercial and industrial firms.

"I do believe it's important to modernize the financial system at this time," Yellen said in response to a question from then-Sen. Lauch Faircloth (R-N.C.). "And on the issue of commerce and banking, I would begin by saying that I am not philosophically opposed to mixing banking and commerce. On the other hand, it seems to me that we have a lot more experience and knowledge about financial activities, and that most of the synergies are probably between banking and other lines of business that are financial in nature. I would think that that's an appropriate first step."

5---In fourth year of Obama “recovery”---US Census report shows entrenched poverty and declining living standards, wsws
A US Census Bureau report released Tuesday, entitled “Income, Poverty and Health Insurance Coverage in the United States: 2012,” makes a mockery of President Barack Obama’s claims to be restoring “security and opportunity for the middle class” in the wake of the 2008 financial breakdown.

The report provides a snapshot of a society in immense crisis. Poverty is at a near-generation high of 15 percent, close to the high point since the 1965 War on Poverty, the 15.2 percent rate reached in 1983. According to Tuesday’s report, 46.5 million Americans, including 9.5 million families, live in poverty.

Some 20.4 million people live on an income less than 50 percent of the official poverty line, 7.1 million of these being children under 18. More than 48 million remain without health insurance.
More than 31 percent of the population experienced some period of impoverishment during the years 2009-2011. Median household income, at $51,017, was slightly lower than in 2011, and down by 8.3 percent from 2007. The number of people 65 and older living in poverty increased from 3.6 million to 3.9 million between 2011 and 2012.

Despite more than four years of so-called “recovery,” American society remains plagued by mass deprivation and entrenched poverty. The “recovery” under Obama is limited to the wealthy and the super-rich, who have recovered all of the losses they suffered in the immediate aftermath of the Wall Street crash of September 2008 and grown richer than they were before the financial crisis. Social inequality has deepened as a result of policies designed to further redistribute wealth from the bottom of society to the top.

6---Inflation expectations have risen. Let the Taper begin!, sober look

(Deflation soon to follow)

7---The “lost generation” and the failure of capitalism, wsws

A basic measure of the viability of a political and social system is the position of the youth. A society that holds out for the younger generation prospects that are worse than those held out to their parents and grandparents is a society that has ceased to progress and begun to regress—one that has lost any claim to historical legitimacy.

How does contemporary capitalism measure up to this standard? Five years after the economic collapse of 2008, young people have suffered a decline on a global level that in many ways is without historical precedent. By every measure—employment prospects, income, home ownership, indebtedness—conditions are far worse today than at any time since the 1930s. And there is no prospect of recovery.

7---Obama seeks safetynet cuts, wall street Examiner

This Sunday, September 15, 2013, Obama went on ABC News and while denouncing the sequestration agreement that he insisted be included in the 2011 budget austerity deal went out of his way to state his desire to reach an agreement with the Republicans to cut the safety net.

Obama still wants his legacy to be reaching agreement with the Republicans to slash the safety net.  He admitted in the ABC interview that virtually all the benefits of the weak recovery have gone to the Top 1 percent.  He admitted that the result was the spread of grinding poverty to millions of additional Americans.  His “solution” is to invite the Republicans to join him in betraying the public by cutting Social Security and Medicare for the elderly, Medicaid for the young, and food stamps for the poorest Americans.   If Obama is able to commit the Grand Betrayal he will further weaken the recovery and hand control of the Senate to the Republicans in 2014.

8---Teacher crackdown in Mexico, counterpunch

These have been the largest public protests to shake Mexico since President Peña Nieto won a fraud-drenched election in July 2012. The PRI, of course, is no stranger to suppressing popular dissent. As columnist Cesar Alan Ruiz Galicia wrote in national daily La Jornada on Saturday, the party’s tactic for controlling social movements during its 71-year rule could be summed up as: “Marginalize, co-opt, threaten and repress.”

With his movie star looks and soap actress wife, Peña Nieto was brought in to put a new face on the party after its twelve-year absence from power. His administration has thus far been defined by an ambitious neoliberal reform agenda. Labor, education and banking reforms have already passed; energy and fiscal reforms are next in line. Each one has been met with resistance and there will be plenty more to come.

For all the hype about Mexico’s economic resurgence and booming middle-class, even studies by the OECD and World Bank show a widening wealth gap that the new reforms are almost certain to exacerbate. 50% of the workforce toils in the informal sector; over 8 million young people neither study nor have jobs. It’s very much a case of the “Two Mexicos” – the haves and have-nots – going head to head.

What started out as a strike over education reform is likely to blossom into more general protests against both inequality and the heavy-handed response from the Peña Nieto administration. In that sense, the protests in Mexico can be seen as cousins of the recent demonstrations in Spain, Egypt, Turkey and Brazil – saying no to neoliberalism and the accompanying suppression of dissent.

9---To Taper or not to Taper, marc to market

The global capital markets have been feeling the effect for several months and now the cause is at hand. The Federal Reserve is set to decide whether to continue at the same pace the purchases of long-term assets or slow those purchases.

We have argued that if the Fed does taper, it is not because the economy is overheating.  Nominal growth during this recovery has been, and continues to be, weak compared with other recovery periods.  Prices pressures remain low, and the Fed seemed to give this fact greater emphasis at the last FOMC meeting.  Unemployment has comes down, but this is due to an undesirable decline in the participation rate.  This year's average monthly job growth is slightly slower than last year's.  

Polls in recent weeks have been fairly consistent, with roughly two-thirds expecting the Fed to taper. Many of the remaining third expect the tapering decision to be announced in Oct.   There is a segment of the investment community that has never been in favor of QE; does not think it is effective, and is happy to see it end, at the earliest possible opportunity.  There is another segment that understands that QE was meant to shove the economy forward, not nurse it, and that it has fulfilled this function, as much as it can.  

The most compelling argument for the Fed to taper is that the market is giving it to them. This gift can be seen in the US 10-year yield that has risen from 1.6% to 3%.  Indeed, our base case is that US Treasuries can rally on a tapering announcement.  That is the gift.  Of course, guidance from the Federal Reserve, despite criticism of its communication, was instrumental in facilitating the gift, though it is probably a larger gift than it might have anticipated.  

Expectations of the size of the tapering have themselves been tapered.  The consensus appears to be for $15 bln (split $10 bln less Treasuries and $5 bln less MBS).  The road map Bernanke has sketched out calls for the Fed to be able to stop QE entirely around the middle of 2014.  However, it is not clear that the new Chairman (and for that matter, the new Federal Reserve, as several governors are likely to step down and at least one regional president that was to rotate on to the FOMC as a voting member next year has already resigned) is obligated to that time frame.  

The tapering could become a slightly more drawn out process, especially if our suspicions are right, that the economy remains highly dependent on low debt servicing costs since the household debt level remains largely the same when one makes allowances for foreclosures.   The impact of the rise in market rates in the US appears to already be adversely impacting the housing market.  New homes sales can be volatile, but the 13.4% decline in July, warrants closer attention going forward. Mortgage applications have falling in fifteen of the past 18 weeks.  Five year lows were seen earlier this month.   The other key interest rate sector, autos, are holding in better, but is likely be closely watched.
(WSJ) If you asked most stock investors months ago where the market would be as the Fed started reducing its bond purchases, the current level would not have been the most likely answer.
The Dow Jones Industrial Average has been hovering near record levels, around 15,500. The S&P 500 is stradding 1,700.
Bond yields have responded much more clearly, of course, with the 10-year Treasury yield moving from around 2% in May to around 3% in recent weeks.
What will they look like at the end of the day? That's why we've got two awesome interactive charts on this page, so you can follow along.

10--Shadow Banking: Bigger than ever,(roughly $100 trillion),

Their conclusions are revealing. They say that the shadow banking system is vastly bigger than anyone had imagined before. And although its size dropped dramatically after the financial crisis in 2008, it has since grown dramatically and is today significantly bigger than it was even then....

The Board estimated the size of the shadow banking system to be just over $60 trillion in 2007, the year before the great financial crash. This figure dropped a little in 2008 but rose again to $67 trillion in 2011. That’s more than the total GDP of the 25 countries from which the figures are obtained.....

the shadow banking system is significantly bigger than previously thought. Fiaschi and co estimate that in 2007, the year before the financial crisis, it was worth around $90 trillion. This fell to about $70 trillion in 2008 but has since risen sharply to be worth around $100 trillion in 2012. 

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