Monday, October 7, 2013

Today's Links

1--US budget and debt talks to focus on cutting Social Security, Medicare, wsws-

Spokesmen for the Obama administration and congressional Republicans indicated Sunday they were preparing to shift the focus of the ongoing Washington budget and debt discussions to the major entitlement programs, Social Security and Medicare.
Both the Democrats and the Republicans are using the partial shutdown of federal government operations and the looming October 17 deadline for raising the federal debt ceiling, to create a crisis atmosphere to justify cuts that are overwhelmingly opposed by the American people
....
“Let’s look at what’s driving the problem,” he said. “10,000 baby-boomers like me retiring, every single day. 70,000 this week. 3.5 million this year. And it’s not like there’s money in Social Security or Medicare. The governments, over the last 30 years, have spent it all.”
“We know these programs are important to tens of millions of Americans,” he continued. “But if we don’t address the underlying problems, they are not sustainable.”
In the Orwellian language favored in Washington, making programs “sustainable” means, not providing the funds required to pay guaranteed benefits, but slashing benefits, cutting eligibility, raising the retirement age and effectively destroying Social Security and Medicare in the name of “saving” them.
At the same time, Boehner flatly rejected even a penny in additional taxation on the super-rich, although the accumulation of wealth in the hands of the billionaires has reached unprecedented levels. “Very simple,” he declared. “We’re not raising taxes

2---If Shutdown Isn’t Resolved, Stocks Could Fall 20-30%, Big Picture (video)

“It turns out the market really doesn’t care much if [the shutdown] is a day or a couple of weeks,” says Barry Ritholtz, chief investment officer of Ritholtz Wealth Management. “Where it becomes a concern…is if weeks turn into months. If it goes past three or four weeks, that could take a big chunk off GDP, effect consumer confidence and really have an impact on earnings.”

3---After Snatching Olympics, Japan Suddenly Admits Fukushima Not “Under Control,” Begs For International Help , Testosterone Pit
(Olympics to be held in nuclear graveyard)

4---Bloomberg joins "default" fearmongers, Bloomberg

A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen...

Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse. ....

In the event of a default, Treasuries might no longer be eligible as collateral for repo agreements, according to James Kochan, Wells Fargo Funds Management LLC’s chief fixed-income strategist. The cheap funding for the holdings lowers the yields demanded on the investments, and unwinding the positions could amplify losses for lenders and borrowers. .....

China, Japan
China is the largest holder of U.S. Treasuries, with $1.3 trillion in July, according to Treasury data. Japan follows with $1.1 trillion.
Even if Treasury prices aren’t affected by a default, the damage in other markets could be devastating. U.S. stocks fell 7 percent in one day when Congress rejected the government’s bank-rescue package in 2008, before passing it a few days later.
The market shocks would be enough to tip the U.S. back into recession and drag the world economy down, according to Desmond Lachman, a fellow at the Washington-based American Enterprise Institute. The event could prove to be the trigger that reverses a weak and fragile recovery, said William Cunningham, head of credit portfolios for the investment arm of Columbus, Ohio-based Nationwide Mutual Insurance Co. Lehman’s collapse was a similar spark, he said.
“Is this the straw among other things that tips an economy without drivers of growth back down into a negative spiral?” Cunningham said

5---Default results: Higher rates or deflation?, sober look

Those who argue that longer term rates will fall believe that the economy and the equity markets (as well as other risk assets) will take such a hit, a severe deflation will ensue. Under such a scenario treasuries will become similar to JGBs, with nominal yields collapsing even as real yields stay positive.

The other group however believes that such an event will shake investor confidence in treasuries so much - by delaying payments indefinitely - that investors, particularly foreigners, will dump the paper in unprecedented amounts. The dollar will take a tremendous hit and longer term rates would spike.

Neither scenario is particularly appealing

6--Housing remedy: Landbanks?, salon

At the center of the vacant property renaissance is the land bank, a city authority that can take control over thousands of abandoned homes and turn them into something the community needs, housing or otherwise. Michigan has dozens of land banks. In Cleveland, the Cuyahoga Land Bank demolished its 2,000th property last month. Chicago and Philadelphia are on the verge of having land banks of their own.
“In the past 24 months alone, five states have enacted comprehensive land bank legislation,” says Frank S. Alexander, a professor at Emory Law School in Atlanta who helped write those laws. The land bank concept has an appeal that transcends geographic and economic borders. ”New York, Pennsylvania, Georgia, Missouri, Nebraska. What do those states have in common? Absolutely nothing

7---Falling demand in US to impact world, Bloomberg

The rising American economy isn’t lifting all boats -- and may even sink some.
As the U.S. looks set to accelerate, economists from Bank of America Corp. to Morgan Stanley predict it will provide less oomph abroad than it once did, partly because of changes wrought by the financial crisis and recession. The new-look America is focused on greater demand and production at home and taps more of its own energy, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999...

A healthier U.S. even could come at the expense of emerging markets if it turns into more of a competitor than consumer by boosting manufacturing. Developing countries also risk being hurt once the Federal Reserve withdraws its monetary stimulus, driving their cost of borrowing up and their currencies down against a resurgent dollar.
“There are signs that U.S. pulling power may not be as strong as experienced in recent years,” said Gustavo Reis, a senior international economist at Bank of America in New York. “If we want to see stronger global growth, we need the U.S. to grow but others to rebound, too.”

8---Inventory of Homes for Sale: What It Tells Us, Keith Jurow, oc housing

In numerous articles over the last two years, I have emphasized the importance of the huge decline in the number of homes for sale. Let me explain.
Since early 2010, servicing banks around the country have been sharply cutting back on foreclosing seriously delinquent homes and placing foreclosed properties on the market. Lately, they have also reduced the number of short sales which they approve.
I can’t repeat this often enough. The lack of foreclosures is not caused by a lack of delinquent borrowers to foreclose upon. It’s entirely due to bank policies that permit long-term squatting.
In nearly all major markets, this has caused a tremendous plunge in the number of homes for sale. The following table — using statistics from the online brokerage firm, Redfin – shows just how dramatic the drop in listings has been.
Take a good look at the collapse in active listings in Los Angeles and San Francisco. With such a huge decline, it is easy to see why buyers have bid up prices in those markets which have had the largest drop in homes for sale. In numerous articles written over the past two years, I have tried to show that this does not mean those markets have returned to a healthy state. Far from it.
In the metro markets described by the media as “hot,” the decline in foreclosed homes (REOs) placed on the market has been the greatest.
For example, the percentage of home sales which were REOs in Phoenix plunged from over 66% in the spring of 2009 to less than 6% in August 2013. Since foreclosed homes are normally the least expensive in any market, the median sale price had nowhere to go but up. This artificial constriction of the supply of homes for sale does not indicate that a normal market has returned....

The Looming Shadow Inventory
At some point, the pundits will have to recognize the existence of the shadow inventory. It is very real, enormous, and still growing...

Let me give you the most important example. Through the end of the second quarter, servicing banks have sent 307,800 pre-foreclosure notices to delinquent owner-occupants in NYC since early 2010. How many of these properties were foreclosed and taken into REO by the banks in 2012? A total of 162. Check out this chart from the Furman Center at NYU if you don’t believe me.
Those numbers are difficult to get your mind around. Keith’s resource for pre-foreclosure notices is reliable. The State of New York requires a loan servicer to notify the State any time a loan goes more than 30 days delinquent. There’s been over 300,000 notices but less than 3,000 foreclosures. That’s truly remarkable

9---Stephen Roach On Why Abe's Aggression Won't Save Japan,  (archive), zero hedge

QE’s impact has been strikingly asymmetric. While massive liquidity injections were effective in unfreezing credit markets and arrested the worst of the crisis – witness the role of the Fed’s first round of QE in 2009-2010 – subsequent efforts have not sparked anything close to a normal cyclical recovery.
The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.

The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles – property and credit – fueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.

Indeed, notwithstanding an unprecedented post-crisis tripling of Fed assets to roughly $3 trillion – probably on their way to $4 trillion over the next year – US consumers have pulled back as never before. In the 19 quarters since the start of 2008, annualized growth of inflation-adjusted consumer spending has averaged just 0.7% – almost three percentage points below the 3.6% trend increases recorded in the 11 years ending in 2006.

Nor does the ECB have reason to be gratified with its strain of quantitative easing. Despite a doubling of its balance sheet, to a little more than €3 trillion ($4 trillion), Europe has slipped back into recession for the second time in four years.

Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.

Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations. Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.

US authorities have succumbed to the same Japanese-like temptations. From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment. As a result, America has created its own generation of zombies – in this case, zombie consumers.

Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.

The same is true of Europe. The ECB’s ├╝ber-aggressive actions have achieved little in the way of bringing about long-awaited structural transformation in the region. Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.

Is this the “cure” that Abe really wants for Japan? The last thing that the Japanese economy needs at this point is backsliding on structural reforms. Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.

Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.

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