Thursday, October 17, 2013

Today's links

1---Consumers’ Outlook for U.S. Economy Plunges to Two-Year Low, Bloomberg

Americans in October were the most pessimistic about the nation’s economic prospects in almost two years as concern mounted that continued political gridlock will hurt the expansion.
The monthly Bloomberg Consumer Comfort Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago. The weekly measure of current conditions fell to minus 34.1 in the period ended Oct. 13, the weakest since March.

The government shutdown has resulted in a startling decline in consumer sentiment and likely business sentiment that will result in a much slower pace of consumption and capital expenditures in the current quarter,” said Joseph Brusuelas, a senior economist for Bloomberg LP in New York. “Should lawmakers kick a decision into early 2014, it is likely that consumer sentiment will keep deteriorating...

The monthly expectations gauge showed 47 percent of respondents said the economy was going to get worse, up 13 points from September. That was the biggest surge since October 2008, the month after Lehman Brothers was brought down by the financial meltdown as the housing bubble burst. Back then, the negative reading surged by 30 points to 82 percent.....

All three components of Bloomberg’s weekly gauge dropped. The index tracking Americans’ views of their personal finances fell to minus 0.1, the first negative reading in five weeks, from 4.7. The buying-climate measure declined to minus 36.9 from minus 33.5 the week prior. A gauge of the current state of the economy decreased to minus 65.3, the worst in a year, from minus 60.2 the week before.
As Americans turned more downbeat about the economy and the state of their finances, retailers are bracing for a possible drag on holiday sales. Companies including Wal-Mart Stores Inc. (WMT), the world’s largest retailer, are watching to see how the fiscal uncertainty may affect consumer spending in the weeks ahead.

2---RICHARD KOO: Forget Hyperinflation — The Fed Is Now Facing The True Cost Of Quantitative Easing, Business insider

The yield on the 10-year U.S. Treasury note rose as high as 3.0% in the weeks before the Fed announced its decision not to taper.
"Instead of falling back to 2.0% or lower following the Fed’s decision to delay tapering, the 10-year Treasury yield has settled at around 2.5%, which means the next rise in rates could easily take the 10-year yield into 3.0%-plus territory," says Koo. "I worry that this kind of intermittent increase in rates threatens the recoveries in interest- rate-sensitive sectors such as housing and automobiles. That could lead to renewed hesitance at the Fed and prompt it to temporarily shelve or postpone tapering."

That's how the vicious cycle starts.
While rates might then decline, reassuring the markets for a few months, talk of tapering would probably re-emerge as soon as the data showed some improvements, pushing rates higher and serving as a brake on the recovery," says Koo. "Then the Fed would again be forced to delay or cancel tapering. In my view, recent events have greatly increased the likelihood of this kind of 'on again, off again' scenario, something I warned about in my last report. To be honest, I did not expect it to occur so soon."....

"Amid all the talk of ending QE, I think hyperinflation is a less likely outcome than a QE 'trap'," says Koo. "As soon as the economy picks up a bit, the authorities begin to talk about tapering, which sends long-term rates sharply higher and nips the recovery and inflation in the bud, effectively preventing them from winding down the policy. In this kind of world the economy never fully recovers because businesses and households live in constant fear of a sharp rise in long-term rates."

3--Pure Idiocy: VAT Increase Backfires in Spain, Supermarket Sales Plunge 7.2% , Mish

4---Real property report, property radar

California single-family home and condominium sales fell 16.8 percent in September from August, but were nearly unchanged from a year ago. An 18.7 percent monthly drop in distressed property sales drove the decline in September sales. ...

Dividing sales into their distressed and non-distressed components, distressed property sales fell 47.7 percent in the past 12 months while non-distressed sales jumped 40.2 percent. Though distressed property sales declined in September, they still accounted for 24.2 percent of total sales, which is historically very high.  In six of California’s largest counties — Stanislaus, Solano, San Joaquin, San Bernardino, Kern and Fresno — distressed property sales represented 32 to 35 percent of total sales....

September 2013 investor purchases fell 18.0 percent from August. Investor purchases are defined as a market or third party purchase at a trustee sale by a limited liability corporation (LLC) or a limited partnership (LP). In general, investor purchases have been trending lower since peaking in October 2012 and are now 54.9 percent below that peak.  This is being driven primarily by the increase in purchase prices.  As prices increase, the potential return on investment (ROI) for holding properties as rentals decrease, making it less attractive to investors. .....

September foreclosure sales fell to their lowest level in seven years.  California Notices of Default fell 21.6 percent in September, the largest one-month decline since March, and are down 56.1 percent for the year. Meanwhile, Notices of Trustee Sale dropped 20.3 percent for the month and fell 61.5 percent for the year. Foreclosure sales gained 1.8 percent for the month but remain near their lowest levels since January 2007....

For the second consecutive month, September sales and median prices fell simultaneously as the California real estate market responded to the increase in mortgage interest rates, the decline in cash sales and investor purchases, and an increase in unsold inventory.

As we predicted last month, Fed Chairman Ben Bernanke chose to keep QE3 bond purchases at current levels to support the housing market.  The violent mid-June bond market reaction to Bernanke’s mere mention of slowing QE3 bond purchases caught the Federal Reserve by surprise.  The 100-basis-point jump in 30-year mortgage interest rates was enough to send the Federal Reserve scampering for cover and postpone any further talk of tapering to 2014.   As a result, mortgage interest rate volatility declined and fear-based real estate buying and selling retreated into the background.  While sales have retreated slightly in response to higher borrowing costs, lower prices and increased inventory is welcome news for homebuyers who have been shut out of the market.

5---Blackstone's Fink: Fundamentals still weak", NYT 

The company’s chief executive, Laurence D. Fink, said in a statement that the growth came despite the hesitation investors have had in putting new money to work, given all the uncertainty out of Washington on the government’s fiscal situation.

“Fundamentals continue to be outweighed by policy decisions and global growth is dictated more by central bankers and elected officials than business leaders,” Mr. Fink said.

6---What A Drag, NYT

As many people have been pointing out, the economic costs of GOP attempts to rule by extortion didn’t begin with the shutdown/debt crisis, and haven’t ended with the (temporary?) resolution of that crisis. The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the “fiscal drag” of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs...

The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.

In other words, we’d be looking at a vastly healthier economy if it weren’t for the GOP takeover of the House in 2010.

7---Exortionist Fellow-Travelers, NYT

8---A Look at Bank Loan Performance, NY Fed

9---Shadow Banking, NY Fed

The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation. Within the market-based financial system, “shadow banks” have served a critical role. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs). Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. Our description and taxonomy of shadow bank entities and shadow bank activities are accompanied by “shadow banking maps” that schematically represent the funding flows of the shadow banking system.

10---Home Shoppers Kicking the Tires, But Delaying Deals, WSJ

Potential home buyers continue to look at properties for sale but are submitting far fewer offers, the latest sign that real estate activity has cooled from the white hot pace seen during spring and summer, according to a recent report by Redfin, and online real estate brokerage.

The number of offers by Redfin customers fell 11.8% in September from August — the biggest decline the brokerage has seen all year. In September 2012 — when the market was still in the early days of recovery — offers were up 4.5% during the same period.

11---Business Executives Slash Hiring Expectations, WSJ

Uncertainty from Washington is taking its toll on business executives: For the first time in more than a year, expectations for adding headcount have dropped among executives of large firms, according to a preliminary look from a quarterly business survey.
Only 29% of executives believe they expect their headcounts will expand over the next 12 months, according to early results from the fourth-quarter Business Barometer, a report by CEB released to the Wall Street Journal. That is down from 38% in the third quarter, and the first decline since the third quarter of 2012.

The partial government shutdown, which started Oct. 1, “is adding to the uncertainty” of executives, said Michael Griffin, executive director at CEB, the member-based advisory firm.

“That does, at least at the margin, have an impact on resource-allocation decisions,” he said. “That’s some of what we’re seeing going on with the hiring outlook.”

12---21.4%: Share of corporate cash holdings held in, well, cash., WSJ
U.S. nonfinancial companies has $1.8 trillion in cash on their books at the end of the second quarter, according to the Federal Reserve’s quarterly “flow of funds” report (now known formally as the “Financial Accounts of the United States”). But that figure includes a lot of assets that most people wouldn’t consider “cash” in their day-to-day lives, such as treasury securities, mutual fund shares and commercial paper. Use a narrower definition of cash –just checking-account deposits and literal currency — and companies had about $386 billion on hand, or a bit more than a fifth of their total liquid assets.

Until a few years ago, this was fairly unimportant distinction. For companies, “cash” was anything they could quickly convert into cash when needed. From the 1970s through the mid-2000s, the share of liquid assets held in literal cash fell as more financial options became available. In 1970, companies held about 60% of their liquid assets in cash. By 2007, the share had stabilized at around 10%....

Then the financial crisis hit, and all of a sudden a lot of “liquid assets” — money-market funds, in particular — turned out to be far less liquid than they had once seemed. With financial markets frozen, companies were forced to rely on literal cash: In a single quarter, corporate cash holdings fell by nearly three quarters, from $53 billion in the third quarter of 2008 to $14 billion at the end of the year.
Corporate executives appear to have learned their lesson. In less than a year, they had more than rebuilt their cash holdings, and they didn’t stop there. In absolute terms, cash holdings are at an all-time high, even after adjusting for inflation. As a share of liquid assets, holdings of cash and checkable deposits are back to where they were in 2000, though they ticked down in the second quarter.

The sharp rise in holdings of hard cash doesn’t appear to reflect a broader caution among executives. The $1.8 trillion in liquid assets — the line item most people are referring to when they talk about “corporate cash” — accounted for 5.4% of all assets held by nonfinancial corporations in the second quarter, down from 6% in 2009 and pretty much flat for the past two years.

That narrative is pretty different from the “cash on the sidelines” storyline that dominated a couple years ago. Back then, Fed data showed companies holding more than $2 trillion in cash and other liquid assets, accounting for more than 7% of total assets. But a massive data revision last year wiped away nearly half a trillion dollars of that hoard. Based on the new data, it looks like companies rebuilt the liquid assets they’d lost (or spent), but little more than that.
Companies, in other words, aren’t holding more liquid assets. They’re holding more of their liquid assets in cash.

13---US budget deal sets stage for intensified assault on social programs, wsws (Today's "must read")

Behind the appearance of partisan gridlock and mutual recrimination, the crisis provided the means for the Obama administration and the Democratic Party to move ahead with their own agenda of savage cuts in social programs upon which tens of millions of working people depend. To the extent there was a conflict, it was over means and tactics, not goals. At issue was how best to escalate the onslaught against the working class.

The Democratic-controlled Senate voted 81 to 18 to accept a deal that raises the debt ceiling through February 7, 2014 and funds the operations of the federal government until January 15. The bill mandates the formation of a conference committee headed by the chairs of the budget committees in the Senate and House to forge a bipartisan budget agreement by mid-December that will reduce the deficit and the national debt. This is to be achieved by implementing long-term “reforms” in basic entitlement programs such as Social Security, Medicare and Medicaid and extending cuts in “discretionary” social programs such as education, housing, nutrition, the environment, health and safety and infrastructure maintenance.
At the same time, both the White House and congressional Republicans are insisting that any budget agreement include sweeping cuts in corporate tax rates.

Later Wednesday evening, the Republican-controlled House of Representatives passed the bill by a vote of 285 to 144, with 87 Republicans joining all 198 Democrats in voting to approve. President Obama signed the bill into law early Thursday morning.

Significantly, the bill extends the automatic across-the-board “sequester” cuts that began last March into the new year. This means the $85 billion in cuts enacted in 2013 will not be restored and the budget negotiations in the coming weeks will take as their starting point the $1 trillion in cuts over the next eight years mandated by the sequestration process. It is to be expected that the Democrats will, in the name of “ending” or “reforming” sequestration, seek to continue the cuts in discretionary social programs while restoring funding for the military, the intelligence agencies and the Homeland Security Department....

Obama has already made it clear that he favors unprecedented cuts in Medicare and Social Security, including raising the eligibility age and introducing means testing for Medicare and slashing cost-of-living increases for Social Security beneficiaries.

The so-called “Tea Party” Republicans, who provoked the shutdown by demanding that funding for government operations for the new fiscal year and any raising of the debt ceiling be tied to defunding the administration’s health care overhaul, dropped that demand in favor of calls for the gutting of Medicare and other social programs. This reflects the broad support for Obamacare within the corporate elite, which recognizes that the program will enable firms to slash corporate health care costs, dump workers onto Obama’s health care exchanges, and increase their profits.

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